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Wednesday, July 17, 2024 | Back issues
Courthouse News Service Courthouse News Service

Problems Alleged in Charter School Bonds

DETROIT (CN) - Wells Fargo and six other entities that purchased $7.1 million in bonds claim the charter schools that issued the bonds cheated them of at least $3.9 million. They claim the Crescent Academy and Doctor Charles Drew Academy claimed they would pay off the bonds through state funding, but issued statements that were riddled with misrepresentations, inflated enrollments, "egregious and irreconcilable conflicts of interest," and other problems.

The federal complaint states: "The plaintiffs are municipal bond mutual funds that collectively purchased the entire face amount of the bonds in reliance upon the disclosure contained in a Preliminary Official Statement ('POS') and Official Statement ('OS') (collectively the 'Official Statements') which included the 2006 audited financial statements for Crescent Academy (the 'Financial Statements') and a financial forecast (the 'Financial Forecast').

"As alleged in more detail below, the Official Statements, Financial Forecast and Financial Statements contain misrepresentations of material facts and failures to disclose material facts relating to the illegality of the bond issue, violations of the Crescent Academy Charter Contract, the involvement of Drew Academy as a conduit issuer without the approval of its chartering authority, egregious and irreconcilable conflicts of interest, inflated actual student enrollment, inflated maximum student enrollment, the inflated price being paid for the school building, and the use of so-called 'equipment leases' to conceal historic cash flow problems at Crescent Academy. Each of the defendants made and is responsible for some or all of the misrepresentations and failures to disclose material facts.

"The entity which chartered Crescent Academy, Bay Mills Community College ('Bay Mills'), became aware of, among other things, the illegality of the bond issue, violations of Michigan law and breaches of the Crescent Academy Charter Contract after the issuance of the bonds. In April 2007, Bay Mills issued a 'Notice of Intent to Revoke' Crescent Academy's Charter Contract. Revocation of the Charter Contract would result in a complete failure of Crescent Academy with the sale of the school building being the only security left to pay the bonds. The school building, however, was worth only about $3.2 million - or about 45% of the outstanding par amount of bonds.

"Crescent Academy issued a 'Plan of Correction' directed at eliminating the effects of the wrongdoing that resulted in the issuance of the bonds and the purchase of the school building. A key component of the Plan of Correction was Bay Mill's requirement that the bonds be 'unwound' by canceling the $7,090,000 in bonds. Ultimately, the bonds were 'unwound' by a separate $3,200,000 bond financing completed by Crescent Academy in 2008. This resulted in out-of-pocket damages to the Funds of approximately $3,890,000."

Plaintiffs demand damages for federal and state securities violations, common law fraud, aiding and abetting common law fraud, and negligent misrepresentation. They are represented by Robert Kent with Kitch Drutchas Wagner.

Plaintiffs are Wells Fargo Advantage National Tax Free Fund; Wells Fargo Fund Trust; Wells Fargo Advantage Municipal Bond Fund; Lord, Abbett Municipal Income Trust-Lord, Abbett High Yield Municipal Bond Fund; Pioneer Municipal High Income Advantage; Pioneer Investment Management Inc.

The defendants are Helicon Associates Inc.; Darnell and Meyering PC; Foley and Robinette PC; Herbert Sims and Company Inc., a New York corporation; Municipal Capital Markets Inc., a Texas corporation; Dorsey and Whitney LLP, a Minnesota LLP; Michael Witucki; Jeremy Gilliam; and Kevin Foley.

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