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Originally published February 22, 2011 at 11:30 PM | Page modified February 23, 2011 at 9:23 AM

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Seattle Public Schools spending targeted in criminal probe

Seattle Public Schools spent up to $1.8 million on contract work that was never done or didn't benefit the district, triggering a secret criminal investigation into allegations of financial fraud. At the same time, the School Board has launched a sweeping review of who should be held accountable, up to and including Superintendent Maria Goodloe-Johnson.

Seattle Times staff reporters

The state audit's findings

• Seattle Public Schools incurred losses of $280,005 by paying for services it didn't receive and for services that benefited a private company.

• The district paid $1.5 million for services with a "questionable" public purpose, in which documentation lacked sufficient detail to determine the validity of charges; or for services that did not benefit the district directly or could have been performed by district personnel.

• The city of Bellevue lost $39,873 by paying for services it did not receive and for a real-estate broker commission on a lease deal broken by the district's program manager.

Seattle Public Schools spent up to $1.8 million on contract work that was never done or didn't benefit the district, triggering a secret criminal investigation into allegations of financial fraud.

At the same time, the School Board has launched a sweeping review of who should be held accountable, up to and including Superintendent Maria Goodloe-Johnson.

"This is an extraordinarily serious event," School Board President Steve Sundquist said Tuesday. "From my perspective, it is unacceptable and it will be damaging to public confidence."

Details of the alleged fraud only now are emerging, more than seven months after a single suspicious transaction led to multiple, overlapping investigations implicating people inside and outside the district. The district's internal auditor resigned in December as the district prepared to fire him in connection with a special state audit, and another district manager reportedly has disappeared as investigators have sought to question him.

The irregularities center on a school-district program that helped small businesses, primarily female- and minority-owned companies, compete for contracts with the district and other government agencies, according to the state audit obtained Tuesday by The Seattle Times.

The program, which started several years ago and operated until it was shut down last fall, became a loosely run operation where outside contractors were paid for services that weren't provided and where, as the district scaled back the program, its manager allegedly diverted district funds into a privately run organization offering similar services, the recently completed audit found.

The audit singled out former executive facilities director Fred Stephens, now working at the U.S. Department of Commerce, for failing to properly supervise program manager Silas Potter. Potter was one of the people who set up the private organization where funds allegedly were diverted, according to the audit.

The audit mainly concentrated on the district's losses. To determine who should be held accountable, the School Board has hired a private attorney to report what Goodloe-Johnson or other top administrators knew about the problem, or if they should have been aware of it.

Sundquist would not comment on what actions the board might take.

Goodloe-Johnson issued a written statement Tuesday night, saying the district requested the investigation by the state auditor "as soon as we were alerted that fraudulent financial activity may have occurred."

She said the loss also was reported to the Seattle Police Department.

"Their investigation is ongoing, and they have our full cooperation," Goodloe-Johnson said.

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Goodloe-Johnson said she was outraged by what has been found and that a number of corrective measures have been taken.

Sundquist said the district agrees with the auditor's findings and will carry out all his recommendations to improve its oversight, recover lost money and take steps to bolster its whistle-blower program.

Board to meet Tuesday

The board plans to meet Tuesday in private executive session to review the private attorney's report and the auditor's findings before considering its next step. The board has held a number of executive sessions on the matter, including a lengthy session last week, Sundquist said.

The district went to state Auditor Brian Sonntag in June to investigate why a $35,000 check from the Tacoma School District that was meant for Seattle Public Schools ended up in the bank account of the private organization that Potter helped establish.

Potter returned the money after the Seattle district filed a police report, the auditor said.

Auditors ultimately found a series of suspicious payments that were serious enough that the School Board hired Seattle attorney Patricia Eakes in December to conduct the internal review.

According to the audit, some of the vendors may have knowingly participated in wrongdoing while others thought they were involved with legitimate dealings with the district.

At the same time, Sundquist said he, board member Michael DeBell and the district general counsel went on behalf of the board to the King County Prosecutor's Office to report possible criminal conduct.

The Prosecutor's Office since has opened a secret investigation into the payments, using a special-inquiry judge to obtain information, according to a source familiar with the investigation.

Senior Deputy Prosecutor Scott Peterson declined to comment Tuesday on the grand-jurylike investigation.

Sonntag said he had provided a copy of his audit to the Prosecutor's Office.

Final report coming

Eakes said Tuesday that she expects to submit her final report to the board by the end of this week.

"I think the facts will speak for themselves, as to who had knowledge and who should have known," she said, declining to discuss specific findings.

Eakes said she has interviewed Goodloe-Johnson, other district employees and Stephens, who left his job as the district's executive director of facilities in July to join the Obama administration as deputy assistant for Commerce Secretary Gary Locke.

Stephens, who couldn't be reached for comment Tuesday, served as deputy chief of staff under Locke during his time as Washington's governor.

Stephens told state auditors that Potter "should have been providing the oversight" of the small-business program and that he managed Potter "just like everybody else" who reported to him.

Eakes said she has not been able to find Potter, who resigned from the district in June and then worked for a short time under a contract with the district. Sonntag said his office also had not been able to locate Potter.

Staffers who worked in the small-business program, Regional Small Business Development Program, told state auditors that Potter awarded work to vendors, some of whom provided little work, in part because he "wanted support from prominent members of the community" who received contracts, according to the audit.

The auditor concluded the district lost at least $280,000 for services it didn't receive and that provided no public benefit.

Included was $163,000 paid to an organization to teach small-business classes that never were held.

As the school district was scaling back the program, Potter started his own private organization, which he named the Regional Small Business Development Program, the same name as the district's program. Potter's program diverted district funds into that new organization and charged the district for services provided to the private group, the audit stated.

Other organizations were partners in the district's program and some of them, including the city of Bellevue, also were allegedly misled by Potter into thinking they were working with the district, when they really were giving money to his group. The audit says Bellevue paid $39,000 to support Potter's group, including a $25,000 membership fee.

The auditor also questioned an additional $1.5 million in a variety of payments to outside organizations and individuals for services that included $75,000 in training materials copied from other sources and a $25,000 database that didn't work.

This special audit follows two others over the past year that also have been critical of how well the district oversees public funds.

In its formal response to the audit, Sundquist and Noel Treat, the district's general counsel, wrote that they agreed the district management "failed on several fronts, including lack of employee oversight, failure of internal controls, failure of the internal audit function, and lack of an adequate means for employees to raise their concerns."

Internal auditor gone

The district already has forced out internal auditor Kariuki Nderu, who resigned in December as the district was preparing to fire him over what the special state audit uncovered.

The auditors found, among other things, that Nderu allegedly played a role in the $35,000 deposit into Potter's private organization.

Nderu told The Seattle Times in December that he didn't know where the check was supposed to be deposited, and that he was being targeted by administrators to hide the fact that his supervisor ignored his warnings about financial problems that the auditor raised in July.

The auditors say they believe Nderu was going to be hired by Potter's organization as a certified public accountant.

Steve Miletich: 206-464-3302 or smiletich@seattletimes.com

Linda Shaw: 206-464-2359 or lshaw@seattletimes.com

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