In 1999, C. Steven Cox founded the California Charter Academy (CCA).
The CCA received its first charter from the Snowline Joint Unified School
District (Snowline) and was granted charter #262. The second CCA charter,
#297, was granted by the Orange Unified School District
(OUSD) in July 2001.
Two additional CCA charter schools were established in July 2001 when
Snowline granted CCA charter #377 and the Oro Grande Elementary School
District (OGESD) granted CCA charter #387.

As a result of multiple indications of irregularities at the CCAs, the state
Superintendent of Public Instruction... initiated an investigation of the CCA.

Lack of Fiscal Oversight

In March 2000, Mr. Cox created the Educational Administrative
Services Corporation (EASC), a for-profit company, to provide
administrative services to charter schools.

All four CCA charter schools signed operating agreements...Mr. Cox served
as chief executive officer (CEO) of all four CCA charter schools and as the
CEO of EASC. These contracts granted Mr. Cox the authority to expend CCA
funds and enter into contracts on behalf of the CCA charter schools.

The CCA boards did not exercise adequate oversight. For example, board
policy and the contract with EASC provided EASC with the authority to enter
into contracts without the review or approval of the CCA boards.

Despite the large number of questionable expenditures and contracts
identified by the audit team, a review of the board minutes revealed
few instances in which CCA board members questioned expenditures
or contracts using CCA funds.

Because significant amounts of CCA funds were redirected to EASC and
others, the CCAs spent less of their charter school funding on teaching than
the average California school district, and more on non-teaching expenses.

The four CCA charter schools, along with other charters, formed
in December 2001 a joint powers agency (JPA) known as the
American Public Agency Authority (APAA) for the provision of
insurance coverage. Mr. Cox also served as CEO of APAA.

...The purpose of APAA was to pool the CCA charter schools’
resources and jointly establish, operate, maintain, and fund a
self-insurance plan.

The audit team found a number of irregularities involving the
APAA, including:

•Significantly inflated insurance costs charged to members.
•Insurance policies financed twice, generating a significant
influx of cash.
•$233,000 transferred from CCAs’ accounts without the approval
of their boards.
•Questionable contracts and expenditures totaling $435,000.
•Failure to pay insurance premiums, resulting in the
cancellation of insurance for which some charter schools had
already paid APAA...

Under Mr. Cox’s control, APAA funds were expended for a
variety of purposes unrelated to the provision of insurance to its
members. APAA financed the payment of insurance premiums
through loans.

Ultimately, APAA failed to make payment on these loans, with
the result that CCA employees were left without health
insurance coverage.

As a result of Mr. Cox’s serving simultaneously as CEO of the
CCA charter schools, APAA and the management company
(EASC), there was a lack of le
gal and functional separation
between these entities.

... This resulted in an inability to establish and maintain
adequate internal controls over cash transfers among
the charters and between the charters, the JPA and
EASC...


Conflicts of Interest/Related Party
Transactions
The California Government Code and CCA board policy prohibit CCA board
members, officers, and employees from participating in decisions and
transactions that constitute a conflict of interest. A conflict of interest arises
when a board member, officer, or employee is in a position to influence a
decision from which he or she could benefit personally.
As CEO of the CCA charter schools, Mr. Cox had a fiduciary responsibility with
respect to the funds of the charter schools, obligating him to keep, manage
and expend those funds solely for the interest of the CCAs. As CEO of EASC,
Mr. Cox had a similar but separate fiduciary responsibility to the private
corporation. Finally, as CEO of APAA, he had a further, separate fiduciary
responsibility to the joint powers agency.
Mr. Cox’s service as CEO of all four CCAs and APAA, while concurrently
serving as the CEO of EASC, created an inherent conflict of interest. In these
multiple positions, he had the opportunity to direct millions of dollars of CCA
funds to benefit himself, his corporation, his family, and his friends and
associates. He took advantage of that opportunity.
For example, Mr. Cox and his company, EASC:

Misappropriated $3.5 million transferred from the CCA accounts to EASC
without approval of the CCA governing boards.

Inappropriately directed more than $920,000 of CCA funds to one of his
subsidiary companies.

Used $1.2 million of CCA funds to employ members of his family and grant
them generous retroactive pay increases.

Charged the CCAs high administrative service fees, thereby redirecting
millions of dollars from the CCA instructional program to EASC.

Increased the CCAs’ administrative costs by charging the CCAs for certain
administrative costs that should have been covered under the administrative
service fees paid to EASC.

Used $1.2 million in CCA funds for questionable contracts and expenditures
without competitive bids and without sufficient evidence that the goods and
services were actually received, including payments to firms owned by former
EASC employees and CCA board members.
California Charter Academy
4 EXECUTIVE SUMMARY

Used $375,000 of CCA funds to pay one staff person who provided few
measurable services.

Transferred EASC employees to the CCA payroll without justification.
Some CCA board members developed legal and/or ethical conflicts of interest
during their tenure on the CCA boards that could have influenced their
decisions and the depth of their oversight. For example:

Two board members served on CCA boards that funded programs that the
board members administered.

Three board members accepted political campaign contributions from Mr. Cox
and/or EASC while serving on CCA board that oversaw Mr. Cox and EASC.

One board member sold her family business to Mr. Cox and EASC while
serving on a board that oversaw Mr. Cox and EASC.

One board member received a contract from three of the CCAs while sitting
on the board of a fourth CCA.

Seven board members served in incompatible offices by concurrently serving
on more than one CCA board.
Inappropriate Claiming of State Funds
Education Code Section 47605 limits charter schools to operating school sites
within the boundaries of the school district granting the charters. Contrary to
the Education Code, the CCA operated 15 sites outside the boundaries of the
authorizing district and inappropriately received at least $8.3 million in charter
school funds. In addition, Education Code Section 47602 prohibits the
conversion of a private school to a charter school. Contrary to the Education
Code, the CCA operated eight schools that were private school conversions
for which the CCA improperly claimed $14.8 million in charter school funds.
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