Upcoming fraud trial for school operator hangs over charter school industry

Optometrist and businessman Steven Ingersoll founded Smart Schools Management company and two Michigan charter schools based on his theory of Integrated Visual Learning

Traverse City businessman Steven Ingersoll had a vision.

An optometrist by profession, he developed a theory that improved “visual thinking” helps improve learning. So in 1999, he founded Grand Traverse Academy, the first of what is now four Michigan charter school campuses. He developed the curriculum for the school ‒ called integrated visual learning ‒ and started a management company to run the school. Ingersoll then borrowed money to build facilities and recruited like-minded optometrists for the school board.

With easy access to Grand Traverse Academy’s taxpayer-funded budget, his management company advanced itself fees from the school’s account, then promised to give back some of his fees when needed to balance the school’s budget.

The budget balanced each year, the school performed at state averages. Meanwhile, neither the school’s board nor Lake Superior State University, the authorizer of the charter school, nor the Michigan Department of Education found anything illegal in the school’s audits.

It was not until lawyers for the school began asking questions that the tangled financial relationship between Ingersoll's management company and the charter he founded began to unravel, culminating in the most significant federal criminal case in the history of Michigan’s 20-year-old charter school industry. Ingersoll, who started Smart Schools Management, Inc., stands accused of illegally diverting construction loan money for another charter school to his private account, in part to pay back money he had taken from the Grand Traverse charter. His hand-picked members on the school board knew he had advanced himself money from Grand Traverse, but had no problem with the arrangement, school records show.

Ingersoll will go on trial next month on seven criminal charges of bank fraud and tax evasion. The allegations of financial self-dealing and cozy relations between Ingersoll, his associates and board members could not come at a worse time for the Michigan charter movement. The state’s powerful, mostly for-profit charter school industry has found itself on the defensive since the Detroit Free Press published a devastating series last June chronicling how charters receive nearly $1 billion a year in state taxpayer money with little accountability or transparency on how that money is spent. The series detailed how board members at some charter schools were forced out when they pushed to learn more about finances from management companies, and how state law failed to prevent self-enrichment by those operating some low-performing charter schools.

The series prompted state schools Superintendent Mike Flanagan to threaten to suspend charter school authorizers that do a poor job of overseeing their charter schools. Lake Superior State University oversees charters founded by Ingersoll, Bay City Academy and Grand Traverse Academy, and is one of 11 authorizers that Flanagan has said he is considering suspending.

In December, the National Association of Charter School Authorizers rated Michigan's charter school law lowest in accountabililty among states with numerous authorizors. NACSA also derided Michigan’s charter school law for not requiring the closure of charter schools that don’t meet minimum state academic standards.

Dan Quisenberry, president of the Michigan Association of Public School Academies, a charter school advocacy group, said the NACSA study has it all wrong and Michigan’s laws allow more oversight and accountability than in traditional public schools.

“It’s important to look at behavior,” Quisenberry said. “Our closure rate (for low-performing charter schools) in Michigan is higher, way above the national average. That’s healthy. I think there are checks and balances for providing consequences.”

One loan feeds another

The criminal charges stem from Ingersoll taking out a $1.8 million loan in 2010 to convert a church to house the Bay City Academy charter school in Bay City. His federal indictment says he diverted $934,000 of it through several channels into his personal bank account and used part of that to repay money he had advanced to himself from the Grand Traverse Academy.

The federal investigation led Smart Schools and Grand Traverse Academy to cut the financial relationship, leaving Grand Traverse Academy with a shortfall of $365,000, and landing it on the state's growing list of 55 school districts in deficit.

“Smart Schools is a poster child for bad management,” said state Rep. Charles Brunner, D-Bay City, a former teacher and longtime critic of the state’s charter school system. “If this happened in public schools, the public would be up in arms. We need legislation to say what charter schools have to do to conform. I’m so frustrated.”

Since Ingersoll’s indictment last spring, Brunner co-sponsored legislation that would require more transparency and accountability from charter management companies.

Brunner is critical not only of the financial misconduct alleged in the Ingersoll indictment but also of the academic performance of many charters. While Grand Traverse has performed relatively well, Bay City Academy in Brunner’s district, is among the state’s worst-performing schools.

Jan Geht, Ingersoll's attorney, does not contest the fed’s portrayal of how money flowed between the school and Ingersoll's company. Geht argues, however, that the transactions did not violate any laws. He also notes that neither the authorizer, Lake Superior State University, intermediate school district, nor the Michigan Department of Education found any problems with the way the school's finances were handled since its inception in 1999.

"They all reviewed the financial statements; no one thought there were any issues with it," Geht said. "Our position is that there was nothing improper. It was permitted and allowable."

Grand Traverse falls into deficit

The Grand Traverse Academy in Traverse City faces a budget deficit after writing off money allegedly owed it by founder Steven Ingersoll

Ingersoll began planning the Grand Traverse Academy in 1996, co-signing for the mortgage and equipment leases, and depositing money to help keep the school afloat over the years, according to a statement released by the school board in response to the indictment.

Grand Traverse Academy does some things "a little differently than other schools," according to the school's website. The curriculum is based in part on Integrated Visual Learning, a learning concept that Ingersoll himself created through his background in eye care.

According to an organization Ingersoll founded, integrated visual learning uses visual and light therapy to help students’ “visual thinking” to treat learning disabilities and maximize the capacity to learn.

Ingersoll has traveled to discuss his learning technique but it has not been scientifically reviewed, accredited or endorsed by educational experts or institutions. IVL is used only in schools affiliated with Ingersoll.

In 2011, Ingersoll obtained a $1.8 million line of credit from Chemical Bank to convert a church into a second charter school, the Bay City Academy, according to the indictment. Ingersoll and his partners, wife, and brother (a subcontractor on the project), are accused of funneling $934,000 of that construction loan to the Ingersolls’ personal joint bank account, part of which was to pay off money he owed the Grand Traverse Academy “from advances Steven Ingersoll had made to himself.”

Audits of the Grand Traverse charter school show that Smart Schools Management had been permitted to prepay itself fees from Grand Traverse Academy at the beginning of each year, before the contemplated services were rendered. The board allowed these prepayments to the management company, explaining that the arrangement was reasonable given that Smart Schools had taken on debt to start the school.

Over the years, the school spent more than it took in, so Ingersoll would promise to “rebate” - or give back - some of his management fees and make a lease contribution so the school could show a balanced budget at the end of the year. The prepayments, rebates and contributions resulted in conflicting claims about how much the company owed the school in promised rebates and how much the school owed the company in management fees.

In June 2013, an attorney for the school sent a demand letter to Ingersoll claiming he owed the school $3.5 million. An audit for the 2013 fiscal year accused Smart Schools of "abuse" for prepaying itself with the school's money and said the management fees were more than the school could afford. Ingersoll’s attorneys responded with claims that the school owed Smart Schools $2.2 million.

In 2014, the school had expected to get $1.6 million from Smart Schools Management to help balance the books, but the school board said it would write off the money owed as a loss when the school severed its ties with the company about a month before Ingersoll was indicted. As a result, the school recorded a deficit of roughly $365,000 in June.

The Grand Traverse Academy board continues to support Ingersoll even though its business dealing with Ingersoll left the school school in deficit. The school board and current management company say they are thankful to Ingersoll for keeping the school afloat for so many years and insist the deficit does not mean there were problems with accountability or oversight at the school.

The school board’s continued support for Ingersoll is perhaps not surprising. Over the years, the board has been populated by other optometrists who admired Ingersoll.

Grand Traverse’s new school board president, Bradley Habermehl, an optometrist in Flint, called the April indictment "old news" and said the school was able to avoid cuts and keep class sizes small due to Ingersoll’s management.

“The board was definitely appreciative of Steve’s philanthropy and help staying out of deficit,” Habermehl said in an interview. “This school was his baby, not a Ponzi scheme or way of ripping off money. He certainly wasn’t trying to get rich by scamming the school. Whatever the school owed the company or the company owed the school is no longer at issue.” The school doesn’t expect the company to pay up and has no plans to pay Ingersoll’s company anything further.

“All deals are off,” Habermehl said.

Associates take the baton

Optometrist Mark Noss helped Ingersoll develop the curriculum for the school and was the school board president for about five years. Ingersoll founded the Excel Institute in Traverse City, a clinic that specializes in Integrated Visual Learning that is now owned by Noss and another former board member.

The Excel Institute touts a non-peer-reviewed study by Ingersoll that says integrated visual learning is a treatment for learning disorders such as Attention Deficit Hyperactivity Disorder. As a result of the learning technique, "90% of the 54 students taking physician prescribed Ritalin for behavior, learning and attention problems were weaned off the drug and found success in the classroom among their peers," the study stated.

Just before Ingersoll was indicted, Noss started Full Spectrum Management and was given a no-bid contract to be the new management company for Grand Traverse Academy.

In an interview, Noss also remains supportive of Ingersoll, saying that Ingersoll’s management had allowed Grand Traverse to avoid cuts, maintain quality, continue teachers’ annual raises and keep class sizes at 21 students. He said that if there was a problem that the audits correctly pointed out, it was the prepayments. The school should not have allowed the management company to prepay itself at the beginning of each year before the management services were rendered, Noss said. That practice was discontinued after the 2013 audit, he said.

Noss said even though he and Ingersoll developed the curriculum for the school, it was not a conflict of interest for him to be a board member responsible for overseeing Ingersoll’s management of the school through Smart Schools. The school paid Smart Schools for management and also paid a fee for use of the curriculum.

“I don’t view that as a conflict of interest,” Noss said. “We never owned a business together. I was not getting financially compensated.”

Nick Oshelski, executive director for the Lake Superior State University charter school office that oversees Grand Traverse Academy, said the exchange of money between the school and management company was never an issue because the audits were problem-free each year until 2013. After the 2013 audit that found the board was prepaying more fees than the school could afford, the authorizer asked the department of education if the process was illegal.

The Department of Education questioned the board’s judgment but did not conclude that anything was illegal in the payment arrangement.

Lake Superior State said it is waiting to see if the trial reveals illegal activity at the charter school. The authorizer doesn’t know the particulars about how the money flowed between the Grand Traverse Academy and Ingersoll’s company or why the school and the company each said the other owes it money, Oshelski said.

“I really can’t give you an answer as to how that happened. We try to watch to make sure these things aren’t going to happen. We’re human and sometimes things slip through the cracks,” he said. “Naturally we’re going to be even more vigilant, not only with Grand Traverse Academy, but our other academies to make sure this doesn’t happen again.”

MDE: Out of our hands

Ingersoll's trial starts Feb. 10 in Bay City. Ingersoll's wife, brother and two others also were indicted. If convicted, they could be required to repay proceeds from the alleged scheme or forfeit property. The bank fraud charges carry a maximum penalty of 30 years in prison.

The charges and potential penalties make it the most serious federal criminal case involving a Michigan charter school since the state legalized charter schools in 1994, according to the Michigan Department of Education.

Under current Michigan law, MDE has no legal authority to investigate or correct financial transactions at Grand Traverse Academy or prevent any for-profit company from sinking a charter school into deficit. The state superintendent can only suspend the charter’s authorizer, Lake Superior State, from opening more charter schools if oversight is poor.

"It's my understanding that the authorizer (Lake Superior State) is engaged in this (oversight) process. I don't know what they're doing because they don't have to tell us," said Mark Eitrem, supervisor of the the Michigan Department of Education's charter school office. "We're waiting to see what the authorizer does to address the issue.”

Quisenberry, of MAPSA, said the response from the Grand Traverse board and authorizer when audit questions were raised shows that Michigan already provides sufficient charter oversight.

“From what I understand the checks and balances have worked. The board took action, the authorizer took action and there have been charges,” Quisenberry said. “We need to let the laws and accountability in place through those laws work. ... he could be innocent.”

Geht, Ingersoll's attorney, said the problem with Michigan's charter school law is that it does not allow charters to seek funding from taxpayers for buildings. As a result, schools contract with private firms that acquire facilities, assume risk and expect to be compensated.

The school would not have had a building, would have recorded deficits in prior years and likely would have closed if Ingersoll had not taken on debt and rebated the management fees, he said.

Through it all, the school continues to enroll more than 1,200 students in grades K-12. It ranks in the 44th percentile (which means 56 percent of schools rank higher). Its third-grade reading and ACT composite scores are roughly the same as state averages, though it has 23 percent low-income students compared with 48 percent statewide.

Cindy Evans, 36, of Traverse City, and her husband, Brent, chose Grand Traverse Academy in 2010 for their daughter based on recommendations from people at their church. They liked the fact that the school had uniforms, the classes integrated children from different grades, and the teachers are dedicated.

Though satisfied with the school environment and teachers, Evans said she started asking questions and attending board meetings after Ingersoll’s case hit the media. She said she was shocked by the financial transactions and hopes the school won’t have to close or cut teachers as a result of the deficit.

“These prepayments, missing money, conflicts of interest, and lack of transparency is what gives (charter schools) a bad name,” she said.