Is This Securities Fraud?
An Exploration of the Modern Timeline of the Foster School
I read a great Substack written by this M&A guy, Matt Levine, called Money Stuff, where he writes about all sorts of arcane topics in finance. I’ve modeled my newsletter and style of writing off of his blog. One running joke is that in the world of finance, “everything is securities fraud” - that investors sue public companies all the time under securities law for all sorts of inane stuff that has nothing to do with securities (getting hacked, bad management, etc).
This is a little different, but not that different. I want to talk about the lease certificate that the District 65 Board signed in March 2022. This lease certificate is a mortgage, in a way, and there are bond holders out there on Wall Street, who own it, probably as part of some municipal bond fund. It’s a financial security that gave District 65 $40 million dollars, in return for annual $3.25 million dollar debt payments.
The lease certificate contains some statements that are false, but to get there, we have to roll back the clock a little bit.
July 29, 2021
In this Board Meeting, the District 65 Board discusses funding mechanisms for a new school. Raymond James, the District’s financial advisor, presents some slides at this meeting, including the following.
Note the $2,000,000 number. This will come up again. You can also view the Meeting Minutes and Youtube Link. There is no audio on the video, so it’s not clear exactly what was said, however the minutes note an extensive conversation about bus savings.
August 10, 2021
Dr. Horton sends an email to parents titled, “Student Assignment Update & School Funding Option.” In the email, he writes the following, referring to the prior month’s meeting;
The district could use the potential savings in transportation costs along with operating savings to pay back approximately $2.3 million annually in lease payments over the 20 years life of the lease certificate. This figure is based on the assumption that a new school total cost is approximately $36M.
He continues to note that there is no recommendation.
Please note that there is currently no recommendation to build a new school in District 65. Potential funding options are only in the exploratory phase should a new school be recommended as part of the student assignment and master facility planning processes.
Yet, within six months…
March 14, 2022
The District 65 Board formally signs a lease certificate (Meeting Minutes, Resolution, Youtube Link, Presentation made by Raymond Jame) to build the new school.
In slides presented by Raymond James, you may note a familiar slide. It is the slide presented from a year ago in July 2021, except the Transportation number has increased by a million dollars and they’ve added “Source: D65 Business Office”
The origin of this increase is not known. I have submitted FOIA requests for this information and had it denied as predecisional.
The lease certificate contains the following language;
Proceeds of the Certificates will be used to pay for the Project. The Project includes building and equipping a new K-8 school building in the Fifth Ward and improving the site thereof. The District expects the new school building to begin serving students in the 2024-2025 school year. The new school building will place most students within walking distance of a neighborhood school, resulting in significant transportation cost savings. The District estimates savings of approximately $3,250,000 in each fiscal year. The District currently intends to use the transportation savings to pay the Certificates.
In the video, you can watch the presentation from Raymond James. At one point around 3:38:00, the Representative from Raymond James adds
But for these savings in transportation you would not have the cash flow necessary to issue $40 million in lease certificates to build the new school. I just wanted to make that clear.
April 2022
According to an October 2023 memo from Dr. Turner, at this time, District Administration was aware of the following budgets for construction.
An April 2022 budget of $55,892,034 for a 108,649 square foot building or an alternative design and cost of $46,522,603 for a 103,395 square foot building.
This budget is well over the $40 million they received via the lease certificate only a month prior. As far as I can tell, this was not disclosed to the Board.
May 16, 2022
Dr. Horton sends an email to the community formally announcing the new school;
The estimated cost of construction is approximately $40 million. We are pleased that costs will be fully covered through the issuance of Lease Certificates and without raising taxes or putting a financial burden on our community. Lease Certificates are long-term financial commitments exclusively used for funding new construction and they must be repaid from the district’s operating budget (use of existing funds for the repayment of the debt).
According to information we know now (Dr. Turner’s memo), Dr. Horton should’ve been aware of cost increases at this time - his email says $40 million but only a month prior he had been presented different numbers!
December 2022
The ISBE awards a “Those Who Excel” award to the District 65 finance team. You can read the nomination letters here: (Sergio Hernandez, Andalib Khelghati, Sarita Smith). In Board President Sergio Hernandez’ letter, he notes savings of approximately $5 million a year, a full $3 million more than they were discussing in July 2021!
This would create a savings of approximately $5 million a year in transportation costs. The Finance Team worked with investment bankers and attorneys so it could issue a lease certificate
The source of that number is not known.
February 2023
According to a 2023 memo from Dr. Turner, the Administration was aware of a February 2023 budget of $56,229,984 for a 115,615 square foot building.
Dr. Horton gave a presentation to the community on the new school at this time. In this meeting, Dr. Horton said the following;
“We can only do so much, and I would challenge the people in this room, and our families in this Fifth Ward, to understand that we have broken a 55-year issue. We found dollars to build a school,” Horton said.
At this time, the District had $40 million in the lease certificate fund, yet according to Turner’s memo, he should have been aware of a $56 million budget.
April 4, 2023
Dr. Horton announces he is leaving District 65 and is a finalist in DeKalb Georgia. In his resume with Dekalb, he a major accomplishment of his time in Evanston;
We launched a redistricting task force that found a way to fund a school in a community that has not had one since 1968. This was accomplished without a referendum, spending of reserves, ESSER or fundraising.
He gets the job and makes $325,000 as the Superintendent of Dekalb, more than the $262,500 he made as the Superintendent in District 65.
June 20, 2023
The Board gives Dr. Horton an award in an empty field. His last day is June 30, 2023.
August 7, 2023
District 65 CFO Obafemi steps down from his position and takes a job in Oswego, Illinois.
October 16, 2023
At an Emergency Board meeting, Dr. Turner presents a memo detailing her knowledge of the timeline for the new school. I’ve written about this extensively. In this meeting it was revealed that the bus savings were approximately $750,000 (compared to the $3.0 million on the lease certificate) and that the budget was blown, so the process would have to restart.This was a big deal and I was in the meeting - there was an audible gasp in the audience when she announced this.
The Board decides to move forward on the plans for a smaller school, with a budget of $48 million dollars.
November 2023 - April 2024
There are a series of Board meetings where the Board makes decisions for the school. However, in particular, the budget for the school does seem to remain mostly constant at around $48 million for a smaller K-5 school. You can view the resolution passed by the Board during this time.
July 15, 2024
Groundbreaking for the new school. Mayor Biss was there. It was miserably hot outside but the District organized a nice event. This was the also the day the Board approved the first set of bid packages for the project, which as I’ve noted - came in under budget.
I was optimistic on the project at this point, because it seemed like they could pull it off - the District at this time had (in theory) about $20 million in reserves from 2017 plus about $42 million in the lease certificate fund. It would be close but seemed feasible because they retained some optionality because of 2017 reserves and building closures.
July 30th, 2024
In a surprise announcement - for fiscal year 2024, District 65 was about $10 million dollars in the red. I wrote about it here. This was a genuine surprise, I don’t think anyone saw this coming and there weren’t any warnings from administrators leading up to this meeting that things were quite this bad.1
August 15, 2024
District 65 published a budget for fiscal year 2025, showing another $8 million dollar deficit (technically $20 million if you consider capital outlays). The budget comes with a letter from Dr. Robert Grossi, D65’s financial consultant. In this letter, Dr. Grossi alleges some serious financial impropriety on behalf of prior district administrations, including the following (bold is mind)
These actions are irregular and not consistent with best practices. The Board of Education and community deserve fidelity in the data that is presented. Had the Board received accurate information on the cost and savings generated from the Fifth Ward School, I believe their decision making related to the new building would have been different, at least in scope and these real expenditure reductions would have started sooner. I also believe that the deficit reduction plan would have been accelerated.
This is quite extraordinary to read and really the first time I’ve seen the District Administration (or Board for that matter) suggest that there was impropriety beyond just general incompetence. 2
I leave it to you, my readers to answer the question: given all this evidence, is this securities fraud?
Subsequently, if you pore through the budget documents in every meeting you can kind of piece together that things weren’t going well. But honestly, that’s not the job of the citizens to do!
I’m actually quite concerned for the state of the new school now - they had very little buffer for error before and now it’s debatable if they even have enough cash on hand to complete the project as is.
I want to point out another Horton lie that was true then and is true now - the lease certificates were never meant to cover the full cost of construction. They can only be used on “hard construction costs” which means all the other stuff - interest, architects and consultant fees, third party reports, legal fees and the fixtures and furnishings in the school - have to be paid for with outside funds. This amounts to $7 million on the latest budget. It’s something that really bugs me bc no one ever questioned it then and we allowed this guy to just run his mouth and tell lies. It also serves to show the lack of financial oversight this board and admin have provided. This money will likely be funded with the 2017 referendum funds or at least what’s left of it. That’s $7 million that could help balance the budget. $7 million that was levied on taxpayers to NOT build a school. That was not part of the plan. I am furious that referendum proceeds are being used to build a school that should only be constructed had a new referendum been passed. It’s all so sleazy and should be illegal and is a major reason the school should not be built.
There are certainly lies-a-plenty in the lease certificates and indeed in the entire process of getting this project going. But that was what Horton needed to get the next, bigger, better job, so here we are.
There will be no complaints from the investors who at least nominally are the victims of the fraud - they are still going to get paid. The real victims in this will be an entire generation of D65 students who will have $3M+ less each year while the lease certificates are being paid from operating funds that should be used to provide a quality education because the bus savings was fiction. The other set of victims will be the teachers and staff who are going to lose their jobs due to cuts to make up for the utter financial malpractice of the last several years, of which this fiasco is only a part. The list could go on ....
There is a saying that if it seems to good to be true, it probably is. The fact that no one gave this scheme serious scrutiny before greenlighting it is a crying shame. This community will be paying dearly for the Boards failure to do so for a long time.