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By Marilyn Odendahl

The Indiana Citizen

January 29, 2024

The federal indictment filed against the owners and administrators of Indiana Virtual School and Indiana Virtual Pathways Academy comes as the state of Indiana continues to try to recoup $154 million that it says was “fleeced” from Hoosier taxpayers by the virtual schools.

Thomas H. Stoughton, who owned IVS and IVPA; Phillip Holden, director of IVS; and Percy Clark, superintendent of IVS and IVPA; are named as defendants on the federal indictment filed in the U.S. District Court for the Southern District of Indiana.

According to the indictment, the defendants submitted inflated student enrollment numbers to the Indiana Department of Education resulting in IVS and IVPA receiving more than $44.6 million in state funding. The indictment says the defendants then funneled money through for-profit companies that were controlled or operated by Stoughton and paid out millions to Stoughton, his family members, Clark and others.

Stoughton and others used the money to buy gold coins, a Cadillac, a boat, jewelry and pay for tuition at Park Tudor School, an Indianapolis private school, according to the indictment.

The named defendants have been charged with conspiracy to commit wire fraud, wire fraud, and money laundering. The Indiana Citizen contacted the attorneys representing the defendants but did not receive a response.

A fourth defendant, Christopher King, has entered a plea of guilty to conspiracy to commit wire fraud, according to the U.S. Attorney for the Southern District of Indiana.

Indiana Attorney General Todd Rokita’s office filed a complaint in Hamilton County Circuit Court in July 2021 against IVS and IVPA and 25 other defendants, including Stoughton, Clark and Holden. Like the federal indictment, the state’s lawsuit alleges the defendants counted students not participating in classes or not enrolled in order to get more public funds.

The case is continuing in state court with the latest motion having been filed Jan. 16.

The attorney general’s office said the federal indictment will not impact the state’s case.

“Our case is civil in nature to recoup the misappropriated state taxpayer funds. The criminal case is to punish the wrongdoers’ behavior, though there may be a restitution component,” the attorney general’s office said. “We may be amending our complaint in the future, but the criminal indictments do not affect what we have pled to date. We won’t be dropping our civil case, but will continue to fight to protect taxpayers.”

An audit finds problems

An investigation by Chalkbeat in 2017 raised questions about Indiana Virtual School’s enrollment figures and the amount of state dollars it was receiving.

A subsequent audit of the books, records and accounts of IVS and IVPA by the State Board of Accounts increased the concerns over the charter schools’ finances. According to the state’s complaint, the SBOA’s report issued in February 2020, found that public funds were, among other things, illegally received, illegally retained, and obtained by fraud.

Rokita said, in a press release from July 2021, that the state’s lawsuit was seeking the largest amount of monetary damages ever sought by the attorney general’s office following an SBOA investigation.

“This massive attempt to defraud Hoosier taxpayers through complex schemes truly boggles the mind,” Rokita said in the press release. “This case demonstrates once again that public servants must remain ever vigilant in our work to safeguard the public treasury from opportunists.”

A hint that the U.S. attorney’s office was doing its own investigation was dropped into motions filed by Clark and Travis Lynch, IT director for the virtual schools, in October 2021 in response to the state’s allegations. They asked the trial judge for a reprieve from the state’s case, because they were, or might be, subjects of a federal criminal investigation.

Funding based on enrollment reports

The state formula for school funding is based on the number of students enrolled and attending the school. The higher the enrollment figures, the more funding public and charter schools receive.

According to the federal indictment, the defendants “falsely represented” the enrollment of the virtual schools by inflating the number of students who actually were attending. The defendants are also accused of preventing employees from disenrolling students who had not participated in class for months. They also directed the employees to enroll students who had filed an incomplete application and to reenroll students who had stopped logging onto IVS and IVPA but had not transferred to another school, the indictment says

At the same time, according to the indictment, the defendants sought to reduce costs by linking the IVS teachers’ pay to the number of students who actually logged on and attended classes. When IVS was in danger of losing its charter and its funding, Stoughton, Clark, Holden and King “induced Daleville Community Schools to authorize the creation of IVPA,” the indictment states.

After IVPA was created, the defendants and others transferred hundreds of students who had not been attending classes at IVS to IVPA to continue to count and receive money, according to the indictment. This also protected IVS from “being held accountable for the students’ non-performance,” the indictment states.

Holden and Clark, in March 2017, fired an employee who alerted the Indiana Department of Education of the “fraud that was occurring at IVS,” the indictment says.

The millions of dollars of public funds flowing into the IVS and IVPA accounts were transferred by Stoughton and Clark into the accounts of multiple companies and bank accounts that they controlled, according to the indictment. That money was then transferred to themselves and others, the indictment states.

Charter school oversight questioned

The federal indictment, USA v. Stoughton et al., 1:24-cr-00014, was filed in federal court Jan. 17 but the office for U.S. Attorney for the Southern District of Indiana Zachary Myers  did not publicly announce the indictments until Jan. 25.

In the interim, state Rep. Ed DeLaney, D-Indianapolis, issued a statement Jan. 23, calling attention to the indictment and linking the alleged crimes to lax oversight of charter schools.

“As is demonstrated in this indictment, we have created education policies that are subject to abuse,” DeLaney said. “Instead of depending upon elected school officials, the state has decided to depend on charter schools that use outside contractors who are not under close supervision and lack public accountability. We export our management and oversight responsibilities to people who choose not to perform the function. In the end, the taxpayers lose out.”

Dwight Adams, a freelance editor and writer based in Indianapolis, edited 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.