Charter School Must Pay California Millions

The operator of 14 online charter schools in California must pay the state $8.5 million, provide $160 million in debt relief and reform itself to resolve charges of false advertising and using misrepresentations to increase its taxpayer funding.

The settlement should end a July 8 lawsuit the attorney general filed against Virginia-based K12 Inc. and its 14 California schools, and a 2012 whistleblower lawsuit against K12 and its California Virtual Academy @ Los Angeles.

The profit-seeking K12 and its "virtual," or online, schools, misrepresented their students' achievements, test scores, class size, individualized instruction and parent satisfaction, the state says in its Superior Court complaint.

All 14 California defendants are named a variation of "California Virtual Academy": California Virtual Academy @ San Mateo, California Virtual Academy @ Los Angeles, and so on. All 14 are organized as, or operated by, nonprofit California Public Benefit corporations.

"K12 'provides substantially all of the management, technology and academic support services in addition to curriculum, learning systems and instructional services' for the virtual school defendants," the attorney general says in the lawsuit, without specifying what she is quoting in the interior quotes.

The complaint continues: "The virtual school defendants receive funds from the State of California every year to pay for the education of the approximately 13,000 students attending these schools. Pursuant to the agreements, the virtual school defendants pay significant management and technology fees to K12 based on a percentage of the total funding the virtual school defendants receive.

The fees include the cost of using K12's software to take the Internet classes, for which students must pay, despite the defendants' offer of a free education, according to the state.

Also, K12 et al. advertised that graduates would qualify for the University of California and California State University campuses, though they did not offer classes in several areas required for UC admission, according to the complaint.

At K12's direction, the 14 schools inflated their daily attendance to collect unjustified funding from the state Department of Education: They credited students with a full day at school for logging in to class for as little as one minute, according to the whistleblower lawsuit.

"All children deserve, and are entitled under the law, to an equal education," Attorney General Kamala Harris said in a statement. "K12 and its schools misled parents and the State of California by claiming taxpayer dollars for questionable student attendance, misstating student success and parent satisfaction, and loading nonprofit charities with debt."

Harris put the total value of the settlement at $168.5 million because the agreement requires K12 to expunge about $160 million in so-called "balanced budget credits" the company provided the online schools under their contracts. Harris called the $160 million debt relief.

But in an angry retort, K12's CEO said the company never sought or expected to collect on the credits, which he called subsidies, not debts.

"The attorney general's claim of $168.5 million in today's announcement is flat wrong," Stuart Udell said in a statement. "Despite our full cooperation throughout the process, the Office of the Attorney General grossly mischaracterized the value of the settlement just as it did with regard to the issues it investigated."

Udell put the value of the settlement at only $2.5 million: the amount K12 will pay to resolve claims it inflated attendance figures. It will pay another $6 million to cover the costs of the attorney general's investigation and to fund other "enforcement cases to protect the rights of children" by the office, according to the main settlement document.

K12's attorneys, Timothy Hatch with Gibson, Dunn & Crutcher in Los Angeles and Peter Wald with Latham & Watkins in San Francisco did not respond to requests for comment. Neither did the attorney for the charter schools, Paul C. Minney, with Young, Minney & Corr in Sacramento.

K12 did not admit wrongdoing or liability in the settlement, but it had been under fire for some time. In addition to the attorney general's months-long probe, the California Department of Education was monitoring it, and the San Jose Mercury News published a series of investigative stories on it this spring.

The case began with a whistleblower lawsuit filed under seal in 2012 by a teacher from the California Virtual Academy @ Los Angeles. Susie Kaplar claimed she had been fired for refusing to pad her attendance figures. Because she filed the suit on behalf of the state, the attorney general's office was able to take it over and bring its own suit.

The settlement agreement for her lawsuit includes the $2.5 million payment on attendance data. Under state law, Kaplar should collect an undisclosed portion of the settlement. She also will receive $80,000 in damages and attorneys' fees.

Kaplar's attorney, J. Mark Moore in Canoga Park, did not return a call seeking comment.

The California Charter Schools Association, which usually supports charter operators, praised the attorney general's actions.

"CCSA condemns the predatory and dishonest practices employed by K12, Inc. to dupe parents using misleading marketing schemes, siphon taxpayer dollars with inflated student attendance data, and coerce [the nonprofit schools] into dubious contracting arrangements," the association said in a statement.

It also endorsed legislation pending in Sacramento to prevent for-profit companies from controlling or operating charter schools.

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