The leaders of two now-closed Indiana online charter schools are accused in a new lawsuit of defrauding the state of more than $150 million by padding their student enrollments and inappropriately paying money to a web of related businesses.
The lawsuit announced Monday by the Indiana attorney general’s office comes nearly two years after Indiana Virtual School and Indiana Virtual Pathways Academy shut down amid a state investigation that found the two online schools improperly claimed about 14,000 students as enrolled between 2011 and 2019, even though they had no online course activity.
The lawsuit seeks repayment of about $69 million it claims the schools wrongly received in state student enrollment payments. It also seeks $86 million that officials say the schools improperly paid to more than a dozen companies linked to them by common business officers or relatives and did so with little or no documentation.
“This massive attempt to defraud Hoosier taxpayers through complex schemes truly boggles the mind,” state Attorney General Todd Rokita, a Republican, said in a statement.
A state audit linked much of the misspending to Thomas Stoughton, who headed the online schools from 2011 to 2017, and who owned or had business associates that operated about a dozen companies that received school payments. An attorney for Stoughton, BJ Brinkerhoff, declined to comment on the lawsuit.
It is unclear how much of the money the state could recover. Shortly after the two schools, which had a shared administration, closed in August 2019, a notice from their then-attorney to creditors taped to the Indianapolis office door for the schools said they had “no funds and no assets.”
The lawsuit, however, casts a wide net with a total of 13 venders and 14 people who were officials at the schools named as defendants.
“The State’s claims arise from systematic violations of a position of trust … misappropriation and diversion of public funds,” the lawsuit said.
The attorney general’s office said it had referred the case to federal and state agencies for possible criminal violations. A federal grand jury subpoena to the schools was included in documents released in 2019, but FBI spokeswoman said Monday she could not comment. The U.S. attorney’s office in Indianapolis didn’t immediately reply to a request for comment.
Indiana Virtual School was formed in 2011 soon after a Republican-driven state education overhaul that expanded the availability of charter schools, which are privately operated but receive taxpayer funding, and launched the state’s private school voucher program.
Republicans who dominate the state Legislature rejected complaints from Democrats after the fraud allegations emerged that responsibility rested with lax state regulations. GOP leaders argued it was difficult to legislate against “criminal intent.”
Democratic Rep. Ed DeLaney of Indianapolis said he was only surprised by the scale of the apparent fraud and that he had little hope of the state recovering much money. He said the state had provided “flimsy” supervision.
“We need to learn from this,” DeLaney said. “You know if you give vast sums of money to people who are allowed to act outside of public view, they might take advantage of it.”
The schools reported an enrollment of about 7,200 students before state education officials cut off funding in 2019 based on preliminary audit findings of the enrollment padding.
Officials in Indiana have disagreed about oversight responsibilities between the State Board of Education, the state Department of Education and the Daleville Community Schools, a district of about 1,000 students near Muncie, which was the charter authorizer for the two online schools.
State auditors cited the Daleville district for a lack of meaningful oversight and monitoring. District officials, however, maintained the district played no role in the erroneous enrollment reports and didn’t have access to data about the online schools’ students until 2018 because of concerns about federal student privacy laws.
In a statement, the district said it was “heartened by efforts to hold accountable parties responsible for alleged improprieties,” but was “disappointed to learn of the decision by Indiana Attorney General Todd Rokita to include current Daleville Community Schools Assistant Superintendent David Stashevsky as a defendant in the civil action.” District officials said it Stashevsky who played a key role in bringing the irregularities to the attention of State Board of Education officials in the first place.