Friday, March 3, 2017
Preston Green, Bruce Baker and Joseph Oluwole have forthcoming paper in the Indiana Law Journal. The title speaks for itself: Are Charter Schools the Second Coming of Enron?: An Examination of the Gatekeepers That Protect against Dangerous Related-Party Transactions in the Charter School Sector. The abstract offers this summary:
In 2001, Enron rocked the financial world by declaring bankruptcy due to the effects of an accounting scandal. Special purpose entities (SPEs) were instrumental to Enron’s demise. Enron parked assets in the SPEs to improve its credit rating.
Enron violated accounting principles by not revealing that its SPE partnerships were related-party transactions. Andrew Fastow, who was Enron’s CFO, made millions of dollars by managing the SPEs. He also used these illegal proceeds to invest in other ventures. Enron’s gatekeepers failed to protect against this accounting fraud.
Related-party transactions are now posing a threat to the charter school sector. Similar to Fastow, individuals are using their control over charter schools and their affiliates to obtain unreasonable management fees and funnel public funds into other business ventures.
In this article, we discuss how some charter school officials have engaged in Enron-like related-party transactions. We also identify several measures that can be taken to strengthen the ability of charter school gatekeepers to protect against this danger.
This article is divided into four parts. Part I describes how Fastow used his management of Enron and the SPEs to obtain illegal profits. Part II discusses why financial sector gatekeepers failed to stop these related-party transactions. Part III shows how charter school officials are benefitting from their control over charter schools and their affiliates in a manner similar to Fastow. Part IV analyzes pertinent statutory and regulatory provisions to identify steps that can be taken to increase the gatekeepers’ ability to protect against harmful related-party transactions.