COSTLY CLASSROOM: Lawsuit to recover millions of taxpayer dollars from virtual charter schools far from resolution

        Photo Illustration by The Indiana Citizen

The following report was written by Indiana journalist Steve Hinnefeld for The Indiana Citizen.

August 10, 2023

Two years ago, Indiana Attorney General Todd Rokita sued to recover up to $154 million that he said had been misappropriated by operators of two virtual charter schools and their associates.

“This massive attempt to defraud Hoosier taxpayers through complex schemes truly boggles the mind,” he said in a July 2021 news release.

Since Rokita filed a complaint in Hamilton County Superior Court to recover the funds, multiple motions have been filed in the case, State of Indiana v. Indiana Virtual Education Foundation, et al. (29D01-2107-PL-004821). Questions and answers have been submitted. Lawyers have repeatedly asked for more time. And the dispute is likely a long way from being resolved, with at least one state lawmaker doubtful that the money will be recovered, or that accountability will improve.

Such a delay is not surprising in a dispute with over two dozen defendants, said Zac Kester, an Indianapolis attorney who specializes in nonprofit law and is not involved in the case. “In a case where there are this many parties, I would expect the litigation to take a long time,” he said.

How long? Kester cited another dispute over public funds as an example of how litigation can drag on. In 2010, Indiana and IBM Corp. sued each other over a system for managing state welfare benefits. It took until 2019 – nine years — before a judge ruled IBM had to pay the state $78 million and appeals were exhausted.

In the virtual charter schools case, Rokita scored a preliminary win in January 2022 when Hamilton County Superior Court Judge Michael A. Casati rejected motions from several defendants to dismiss the suit. More recently, the judge dismissed counterclaims in which defendants tried to shift blame to other parties.

The attorney general’s press office and B.J. Brinkerhoff of Jeselskis Brinkerhoff and Joseph LLC in Indianapolis, lead attorney for key defendants, declined to comment on active litigation. 

Rokita said when he sued that the matter had also been referred to state and federal authorities. Two defendants claimed in motions filed in October 2021 that they were or might be subjects of a federal criminal investigation. Percy Clark, who was superintendent of the virtual schools, and Travis Lynch, their information technology director, argued the case should be dismissed or delayed until the investigation was completed. The judge rejected their motions.

Steven Whitaker, spokesman for the U.S. attorney’s office for the region, declined to comment on whether there has been a criminal investigation. Greg Garrison, who became Hamilton County prosecutor this year, wasn’t aware of one by his predecessor.

Padded enrollment, improper payments

Rokita’s complaint, filed July 8, 2021, targets the defunct online charter schools Indiana Virtual School and Indiana Virtual Pathways Academy along with their operators, officers and businesses that they paid for services. It draws on the findings of a 2020 investigation by the State Board of Accounts.

The complaint alleges the schools, which operated from 2011 to 2019, overbilled the state by more than $68 million by padding their enrollment reports. It says they received funding for students who didn’t enroll, didn’t complete credits, didn’t log on for classes, moved out of state, and – in one case – had died. It also says the schools improperly spent more than $85 million, paying claims without invoices or without adequate information and directing payments to businesses controlled by the schools’ founder, his family members or other school officials.

The lawsuit is said to be Indiana’s largest-ever effort to recover misspent or misappropriated public funds identified by an SBOA investigation.

“A hundred and fifty-four million dollars. I mean, that is a lot of money, period, that is not accounted for,” said Rep. Greg Porter, D-Indianapolis, ranking Democrat on the budget-writing House Ways and Means Committee.

The defendants deny wrongdoing and claim state regulations hamstrung their efforts to manage enrollment. In court filings and other documents, they say the virtual schools created positive options for students who weren’t succeeding in traditional school settings.

Creating options aligns with Indiana legislators’ rationale for expanding “school choice.” In 2011, they created more pathways for opening charter schools, which are publicly funded and usually privately operated. Virtual charter schools, operated entirely online, started to appear.

Former state Sen. Luke Kenley, R-Noblesville, who chaired the Senate Appropriations Committee before retiring in 2017, supported expanding school choice but had qualms about some of the particulars.

 “I kept saying we don’t have enough accountability for the charter school authorizers,” he said, “and particularly we don’t have enough accountability for these virtual schools.”

From a handful of students to over 7,000

At the heart of the case is Thomas Stoughton, a central Indiana entrepreneur with no background in K-12 education, who launched Indiana Virtual School in 2011. His wife, Rhonda Stoughton, and his son, Tom Stoughton, are also defendants in the lawsuit; both were allegedly owners or officers of vendors that received payments from the virtual schools.

For the first few years, Indiana Virtual School enrolled only a handful of students. But then interest in online education took off. In 2015-16, the school had more than 1,000 students. The next year, it had nearly 3,000.

Enrollment doubled again in 2017-18, topping 6,000 students. In 2018-19, there were over 7,000. Indiana Virtual Education Foundation, the nonprofit that operated the school, opened a second virtual charter school, called Indiana Virtual Pathways Academy. Some students, especially high school students who were “credit-deficient” and unlikely to graduate on time, were shifted there.

The schools’ revenue, nearly all of it from state funding, grew from $5.9 million in 2015 to $30.8 million in 2017, according to IRS filings by Indiana Virtual Education Foundation.

Stoughton and his associates also courted political support. They contributed tens of thousands of dollars to Republican campaigns for the legislature and governor, much of it coming from their businesses, Indiana campaign finance records show. The schools paid over $300,000 for lobbying, according to the state investigation. 

They paid Sen. Travis Holdman, R-Markle, a monthly retainer for business and legal consulting. Holdman told the Fort Wayne Journal-Gazette in February 2020 that he “tried to keep an arm’s-length business relationship” from the schools but was “terribly embarrassed” to be linked to them. He declined to say how much he was paid.

The Indiana saga tracks with virtual school problems in other states, said Carol Corbett Burris, executive director of the Network for Public Education, which monitors charter school scandals.

“Online charter schooling is a very lucrative business,” she said. “What you have is a system where large sums of money are coming in, but there’s no overhead. The industry tends to attract grifters, and there’s really not a nicer way to put that.”

Burris said it’s rare for anyone to be found personally responsible when things go awry with virtual schools. “Some of the money is clawed back,” she said, “but what you find is, those involved in these scandals rarely face serious consequences.”

In the case of California’s A3 virtual schools, for example, the state recovered over half the $400 million that the schools were paid. Two leaders of the schools pleaded guilty to criminal offenses, but both got credit for being under house arrest and spent no time in prison.

‘Lack of meaningful oversight’ by authorizer

At Indiana Virtual School, the first sign that something was amiss came with a Chalkbeat Indiana investigation in October 2017. “One of Indiana’s largest high schools ended this past school year with almost 5,000 students, but no desks and no classrooms,” Chalkbeat’s Shaina Cavazos wrote. “The school also had very few graduates — 61 out of more than 900 seniors graduated last year.”

Indiana Virtual School spent just 10% of its budget on instruction, compared to more than 60% at other virtual schools, Chalkbeat reported. Its student-teacher ratio was over 200-to-1.

Most charter schools in Indiana are authorized, or chartered, by the Indianapolis mayor’s office, the Indiana Charter School Board, or colleges and universities. Indiana Virtual School took a different route. It worked with a small, rural school district, Daleville Community Schools, which served as its authorizer.

A State Board of Accounts “special compliance report” in March 2020 said a “lack of meaningful oversight and monitoring” by Daleville may have contributed to the schools’ problems. It said Daleville received $3.3 million in authorizer fees and should refund the state $2.2 million.

Daleville, via the Lewis & Kappes law firm, pushed back forcefully in a 20-page response that is included with the compliance report. The response says Daleville “provided near constant oversight, monitoring, and feedback.” The district revoked the virtual schools’ charters in August 2019 because of their “violations of agreements,” including the Daleville-approved charters.

The first Indiana Virtual School superintendent was David Stashevsky, who also was, and still is, the Daleville assistant superintendent. He left Indiana Virtual School after a year and sued its operator, alleging he hadn’t been paid. The lawsuit was settled in 2016.

In court filings, the Stoughtons have blamed Daleville and state education authorities for the problems the schools encountered. In a counterclaim and complaint for defamation, they accused officials of lying about the schools and said Stashevsky submitted cherry-picked data to get them in trouble. “These false and defamatory statements have caused the Stoughtons to be continually threatened by individuals in the community,” their complaint said.

Casati dismissed the countersuit and defamation claims after a hearing, ruling that parts were barred by the statute of limitations and others weren’t supported by the available evidence.

Lessons learned? Or not.

While court proceedings have played out quietly, Rokita has kept himself in the headlines with provocative statements about abortion, gender-affirming care for minors, gun rights and other culture-war issues. But even his critics say he’s right to try to recover the virtual school funds.

“In this one instance, I wish the attorney general well,” said Rep. Ed DeLaney, D-Indianapolis. “I think the case should be pursued. I hope it’s being pursued well.”

DeLaney was skeptical the money would be recovered, however. “There were a lot of players, some very complex family and business interrelations,” he said. “Trying to understand that, and to both find who’s responsible, who profited, and then to collect, is a very difficult task.”

Could the defendants come up with $154 million if they’re found responsible? At one point in the proceedings, the attorney general’s office tried to block Thomas and Rhonda Stoughton from selling two homes — one in Carmel, valued by Zillow at $1 million, and the other on Syracuse Lake in Kosciusko County, valued at $878,000 — and two 2019 Cadillacs. Later, the parties filed an agreement that Thomas and Rhonda Stoughton would refrain from selling valuable property and would limit their expenses to $20,000 a month.

Aside from recovering funds, the case can have a positive outcome if Indiana learns from the experience, said Preston Green, an education law professor at the University of Connecticut.

“The outcome is that they improve their oversight,” said Green, who has likened lax regulation of some charter schools to the Enron energy-trading scandal. “I think, going forward, the state should be aware that these things can happen, and take steps to prevent them from reoccurring.”

The General Assembly did approve legislation in 2019 aimed at better regulating virtual schools. It requires the schools to develop attendance and student engagement policies and share them with new families via an “onboarding” process. Also, it limits the authorizing of virtual charter schools to statewide authorizers: colleges and universities and the charter school board.

Was that enough? Rep. Jeff Thompson, who chairs the Ways and Means Committee, declined to comment, citing the ongoing virtual charter schools litigation. Rep. Bob Behning, chairman of the House Education Committee, did not respond to requests for comment.

But DeLaney, who serves on the House Ways and Means and Education committees, doesn’t think lawmakers have been diligent enough about charter schools.

“There has been a choice made by the legislature that, when we give money to traditional public schools, there is virtually endless monitoring, supervision and accountability,” he said. “But when we give it to charter schools, much of that oversight is just not there.”

Today, Indiana has one large online charter school: Indiana Connections Academy, authorized by Ball State University, with nearly 6,000 students. Some established Indiana-based charter chains have started to open small virtual charter schools. But the state’s biggest virtual K-12 school is not a charter school but is part of Union School Corp., a tiny, rural district near Muncie. It enrolls almost 7,000 students in a statewide “digital learning school” operated by Stride Inc., a giant for-profit provider of online learning based in Reston, Virginia.

The legislature, meanwhile, has sharpened its focus on the state’s growing voucher program, which pays for students to attend private schools. This year, it expanded the program to families that make up to four times the limit for reduced-price school meals: $220,000 for a family of four. The state expects to spend $1.1 billion on vouchers in the next two years.

Private schools, unlike charter schools, aren’t subject to public audits, and their board meetings, budgets and business relationships don’t have to be open to public scrutiny.

“We know what happened with virtual schools,” said Porter, the Indianapolis legislator. “And now we’re spending a billion dollars for vouchers, and there’s no accountability for that.”

Parties in the lawsuit

State of Indiana ex rel Todd Rokita Attorney General of Indiana v. Indiana Virtual Education Foundation, Inc., Indiana Virtual School, Pathways Academy et al., 29D01-2107-PL-004821

PLAINTIFF
State of Indiana – represented by Indiana Attorney General Todd Rokita

DEFENDANTS
Thomas H. Stoughton – board member and president of Indiana Virtual School and Indiana Virtual Pathways Academy. Director of schools and CEO/COO of IVS. Incorporator of AlphaCom LLC.

Merle Bright – owner or officer of multiple businesses that were paid to provide services to IVS and IVPA. Authorized to sign checks for Indiana Virtual Education Foundation.

Greg Bright – business manager/CFO of IVEF. Owner of Pay Pros/Bright Financial, which received payments from IVEF.

David Stashevsky – superintendent of IVS from 2011-12. Assistant superintendent of Daleville Community Schools.

Graham Clark – IVS employee in 2012-13. (Dismissed as a defendant April 10, 2023).

Percy Clark – IVS superintendent, 2014-19; IVPA superintendent, 2017-19.

Lou Moonshower – board member and president of IVS and IVPA and treasurer of IVS.

Phillip Holden – administrative director and treasurer of IVS and IVPA.

Thomas “Tom” Stoughton – son of Thomas H. Stoughton, officer of A Simple Reminder.

Rhonda Stoughton – spouse of Thomas H. Stoughton, officer of A Simple Reminder and Center for Leadership Development LLC, which received payments from the schools.

Lora Feeser – principal of IVS and IVPA, 2016-19.

Travis Lynch – head of IT for IVS and IVPA.

Adam Carlsen – data analyst for Eightbit Designs, reported the schools’ student data to the state.

Patrick Gar Hoover – board member of IVS, teacher at the school, consultant for vendor American Pathways Academy.

Business Consulting Inc. – nonprofit that initially operated IVS.

Indiana Virtual Education Foundation – nonprofit that took over IVS, operated IVPA.

Indiana Virtual School – online charter school that operated from 2011-19.

Indiana Virtual Pathways Academy – online charter school that operated from 2017-19.

A Simple Reminder LLC – vendor paid for consulting services.

AlphaCom LLC/Alpha Consolidated – vendor paid for administrative and consulting services, including facilities, security, maintenance and technology.

American Pathways Academy – vendor paid for administrative, technology and support services, including HR, background checks, student enrollment and internet content.

Choice Academies – vendor paid for consulting and administrative services, including security, maintenance and communications.

Cyber Educational Services – vendor paid for consulting, web design, grant writing and fundraising.

Eightbit Designs LLC – vendor paid for software design, programming and other services.

Institutional Investigators LLC – vendor paid for employee background searches.

Institutional Recruiters LLC – vendor paid to recruit and interview teachers.

Bright Financial Services (aka Pay Pros) – vendor paid for accounting and tax services.

Professional Consultants of Florida LLC – vendor paid as liaison with professional contractors.

PS Risk Management LLC – vendor paid to consult on insurance and safety policies.

Specialty Leasing Services LLC – vendor paid to lease unspecified assets.

THIRD PARTY DEFENDANTS

Paul Garrison – superintendent of Daleville Community Schools (retired).

Daleville Community Schools – authorizer of IVS and IVPA.

Indiana Department of Education

Indiana State Board of Education

A pattern of problems

“The phrase that comes to mind is, it’s déjà vu all over again.” That’s what Carol Corbett Burris, executive director of the Network for Public Education, said about the Indiana Virtual School story. Here are a few other controversies involving online charter schools.

A3 Charter Schools: At least 11 people were charged in a scheme that netted $400 million, according to California authorities. A network of 19 online charter schools enrolled tens of thousands of students, many of whom didn’t do any class work or meet with a teacher. The schools’ leaders pleaded guilty to conspiracy charges but didn’t serve jail time. The state recovered approximately $240 million.

Epic Charter Schools: Three founders of the Epic Charter Schools chain in Oklahoma were charged with embezzlement, racketeering and other offenses after a decade-long investigation. The men were accused of inflating enrollment, charging excessive fees and diverting money to their own businesses. The state auditor called it “the Enron of public education.” A court hearing is set for October.

PA Cyber Charter School: The founder and former CEO of Pennsylvania Cyber Charter School was sentenced to 20 months in prison after pleading guilty to a federal charge of tax conspiracy. Using connected for-profit and nonprofit entities, he siphoned $8 million in school funds and used some of it to buy a Florida condo and houses for his mother and girlfriend, prosecutors said.

California Virtual Academy: The online charter school, known as CAVA and with 13 branches, agreed to pay $8.5 million to settle charges that it engaged in false advertising, misled parents and provided inadequate instruction. Officials said the school partnered with cash-strapped rural districts that relied on authorizing fees. Vice President Kamala Harris led the investigation as California attorney general.

Electronic Classroom of Tomorrow: The Ohio virtual charter school, known as ECOT, closed abruptly after the Ohio Department of Education determined it had been inflating the number of its students and demanded that it repay the state $80 million. The school had grown to become Ohio’s largest online charter school. A state audit last year said it owed Ohio $117 million.

Timeline of events related to Indiana Virtual School, et al.

                                 2011

2011 – Thomas Stoughton launches Indiana Virtual School, operated by nonprofit Business Consulting Inc.

June 6 – Daleville Community Schools authorizes charter for Indiana Virtual School.

                                 2012

September  – IVS opens with reported enrollment of nine students.

                                 2014

Jan. 3 – David Stashevsky, former IVS superintendent, sues Business Consulting Inc. for nonpayment of salary.

                                 2015

July 22 – Daleville extends IVS charter for five years.

Sept. 9 – Thomas Stoughton creates Indiana Virtual Education Foundation to operate IVS.

                                 2016

April 19 – Stashevsky lawsuit is settled on undisclosed terms.

September – IVS enrollment grows to 1,320.

                                 2017

Aug. 7 – Daleville authorizes charter for Indiana Virtual Pathways Academy.

September – IVS enrolls 2,947 students.

Oct. 13 – “Chalkbeat Indiana” publishes investigation of Indiana Virtual School.

                                2018 

September – IVS enrolls 3,374 students; IVPA enrolls 2,958.

                                2019 

July – State Board of Education determines IVS and IVPA inflated enrollment, reduces funding by 50%, orders the schools to cease operations.

Aug. 26 – Daleville Community Schools board revokes the schools’ charters.

                               2020

Jan. 29 – State Board of Accounts investigation alleges IVS and IVPA misspent or were overpaid $154 million.

March 11 – State Board of Accounts report alleges “lack of meaningful oversight and monitoring” of charter schools by Daleville Community Schools.

Aug. 19 – Indiana Virtual Education Foundation and its schools are administratively dissolved. 

                                 2021

July 8 – Indiana Attorney General Todd Rokita files complaint to recover public funds in Hamilton County Superior Court.

Aug. 25 – Following a motion for change of judge, Hamilton County Superior Court Judge Michael Casati assumes jurisdiction. 

                                2022

Jan. 31 – After court hearing, Casati denies defendants’ motions to dismiss lawsuit.

March 10 – Defendants file counterclaim and defamation suit against state education and Daleville officials.

July 12 – Judge approves agreement preventing Stoughton parties from disposing of property.

Oct. 16 – Judge dismisses defendants’ counterclaims and defamation claims after hearing.

                               2023

April 10 – Former IVS employee Graham Clark dismissed as defendant.

Aug. 8 – Judge issues discovery order regarding disclosure of protected information

Steve Hinnefeld is a freelance writer based in Bloomington. He formerly was an adjunct instructor at the Media School at Indiana University, a media specialist at Indiana University and reporter for the Bloomington Herald-Times.

Dwight Adams, a freelance editor and writer based in Indianapolis, assisted in editing this article. He is a former content editor, copy editor and digital producer at The Indianapolis Star and IndyStar.com, and worked as a planner for other newspapers, including the Louisville Courier Journal. 

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