SEC – Charter School CEO Settle Muni Bond Charges
The Commission resolved its second action arising out of undisclosed conflicts tied to a municipal bond offering used to fund construction for charter schools. SEC v. Rangel, Civil Action No. 1:16-cv-06391 (N.D. Ill. Filed June 21, 2016). Defendant Juan Rafael Rangel began work at United Neighborhood Organization of Chicago or UNOC as Director of Programs. UNOC is a non-profit that provides management services to UNO Charter School Network, Inc., the operator of 16 charter schools in Chicago. It is the largest operator of charter schools in the state. In March 1996 he became UNOC’s CEO and President of UCSN. He was also a member of the board of UNOC and UCSN. Through his position Mr. Rangel was involved in every aspect of the management of the schools.
UNO became involved with charter schools in the late 1990s when its first school was opened. Between 2005 and 2009 the firm developed a network of charter schools. Increasingly, the firm needed more space. UNO lobbied the state of Illinois for school construction grants. In 2009 the state appropriated $98 million to fund the construction of charter schools for UNO. The next year UNO entered into a grant agreement with the Illinois Department of Commerce and Economic Opportunity or IDCEO. A second grant followed. The grants were for the construction of three schools.
Each grant agreement contained a provision regarding conflicts involving the officers and directors of the firms and their family members. In part the provisions prohibited conflicts which might give the appearance of “being motivated by a desire for private gain . . . for themselves or others, particularly those with whom they have family business . . .” Each agreement also stipulated that there were no existing conflicts and that IDCEO would be notified if one arose. Each concluded by providing that if there was a violation of the conflict provisions, the Agreements were suspended and the grant funds could be recovered in which case there would be no other source of funds for the construction. At the time of the grants Defendant was the CEO of UNOC, President of UCSN and a member of the UNOC and UCSN boards. UNO’s COO was Senior Vice President/Chief Operating Officer for UNOC. Defendant was a good friend of UNO’s COO and his family.
In connection with the construction of three schools a Window Subcontractor and Owner’s Representative were engaged to work on the projects. The Window Subcontractor was owned by a brother of UNO’s COO. The Owner’s Representative was owned by another brother of UNO’s COO. IDECO was not notified in writing as required by the agreements.
In October 2011 Charter School Refunding and Improvement Revenue Bonds were issued in the principal amount of approximately $37.5 million. The Official Statement that informed investors about the “Conflicts Policy.” That policy, investors were told, was more robust than required. The conflict regarding the Owner’s Representative was disclosed. The conflict regarding the Window Subcontractor was not. Investors also were not told that IDCEO had not been advised about the agreements. Nor were they told that IDCEO could recoup the grant money, effectively ending the construction and any ability to repay the bonds. The statement was signed by Defendant.
In February 2013 the Chicago Sun-Times published an article concerning the use of state grant funds. That article alleged violations of the conflict provisions of the grant agreements. UNO disputed the conflict allegations but noted that it decided to terminate its employment relationship with UNO’s COO, suspend its contract with the Owner’s Representative and authorized the retention of a retired federal judge to head an inquiry. Two months later IDCEO sent a letter stating that the grant agreements would be temporarily suspended and that additional payments would be withheld until further notice.
The complaint alleges violations of Securities Act Section 17(a)(2). Mr. Rangel resolved the action by consenting to the entry of a permanent injunction based on the Section cited in the complaint and by agreeing to be barred from participating in municipal bond offerings except for his own account. He also agreed to pay a civil penalty of $10,000. See Lit. Rel. No. 23578 (June 21, 2016).
The initial action based was resolved with defendants UNOC and UCSN agreeing to undertakings to improve their internal procedures and training. An independent monitor was also appointed. SEC v. United Neighborhood Organization of Chicago, Civil Action No. 1:14-cv-04044 (N.D. Ill. Filed June 2, 2014).