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The senator tasked with overseeing federal antitrust enforcement is urging the U.S. Department of Justice to investigate whether a Texas-based company’s price-setting software is undermining competition and pushing up rents.
“We are concerned that the use of this rate setting software essentially amounts to a cartel to artificially inflate rental rates in multifamily residential buildings,” the letter said. It encouraged the DOJ to “take appropriate action to protect renters and competition in the residential rental markets.”
In mid-October, a ProPublica investigation documented how real estate tech company RealPage’s price-setting software uses nearby competitors’ nonpublic rent data to feed an algorithm that suggests what landlords should charge for available apartments each day. Legal experts said the algorithm may be enabling violations of antitrust laws.
ProPublica detailed how RealPage’s User Group, a forum that includes landlords who adopt the company’s software, had grown to more than 1,000 members, who meet in private at an annual conference and take part in quarterly phone calls. The senators raised specific questions about the group, saying, “We are concerned about potential anticompetitive coordination taking place through the RealPage User Group.”
RealPage did not immediately respond to a request for comment.
RealPage has said that the company “uses aggregated market data from a variety of sources in a legally compliant manner” and that its software prioritizes a property’s own internal supply and demand dynamics over external factors such as competitors’ rents. The company has said its software helps reduce the risk of collusion that would occur if landlords relied on phone surveys of competitors to manually price their units.
The DOJ declined to comment on the letter.
The department five years ago reviewed RealPage’s plan to acquire its biggest competitor in pricing software, but federal prosecutors declined to seek to block the merger, which doubled the number of apartments RealPage was pricing.
The senators noted that transaction, saying RealPage has made more than 10 acquisitions since 2016. They said in data-intensive industries, “the ability to acquire more data can result in the algorithms suggesting higher prices and can also increase the barriers to entry” for other competitors. The lawmakers encouraged the department “to consider looking back at RealPage’s past behavior to determine whether any of it was anticompetitive.”
The letter follows two others sent by lawmakers urging the DOJ or Federal Trade Commission to investigate RealPage. Since ProPublica’s investigation was published, three lawsuits have been filed on behalf of renters alleging that the software is artificially inflating rents and facilitating collusion. RealPage has denied allegations in a lawsuit filed in San Diego, and it has not responded to calls for comment about the other two legal actions, filed in federal district court in Seattle.
This story was first published by ProPublica, a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.
A new legal filing by New York’s attorney general this week accused former President Donald Trump’s company of misleading lenders about the financial health of its landmark downtown Manhattan skyscraper, 40 Wall Street, while seeking to renew the building’s mortgage.
Though the Trump Organization called 40 Wall Street “one of the great success stories post 2008,” lender Capital One found the company’s estimates of the building’s worth so unbelievable that the bank declined to refinance the tower’s loan in 2015, the filing alleges.
“Capital One harbored great skepticism regarding the Trump Organization’s valuations,” says the filing, which was submitted by Attorney General Letitia James in response to Trump’s efforts to block her from questioning him and his children as part of an ongoing investigation by her office.
The new accusations offer startling details about possible financial fraud involving 40 Wall Street — one of the subjects of a 2019 ProPublica story that highlighted conflicting financial documents the Trump Organization had filed for the building.
ProPublica’s story documented how income, expense and occupancy numbers cited in the eventual refinance for 40 Wall Street and another Manhattan building sometimes didn’t match those the company had filed with city tax authorities. A lower valuation for the city would produce a lower tax bill, while a higher valuation for lenders would make it easier to get a new mortgage.
One expert said it appeared like the Trump Organization was keeping “two sets of books.”
“It feels like a set of books for the tax guy and a set for the lender,” said Kevin Riordan, a financing expert and real estate professor at Montclair State University, at the time.
In her filing, James asserts that Trump Organization employees, including Trump’s children, took part in a pattern of deception in which they misled lenders, insurers and the Internal Revenue Service by vastly overstating values for 40 Wall Street and a host of other Trump properties, including golf courses in Scotland, Los Angeles and Westchester and his buildings on Fifth and Park avenues.
The Trump Organization on Thursday lashed out at James, a Democrat, via a statement emailed by a spokesperson, saying, “The only one misleading the public is Letitia James.
“She defrauded New Yorkers by basing her entire candidacy on a promise to get Trump at all costs without having seen a shred of evidence and in violation of every conceivable ethical rule,” the organization’s statement said. It asserted that James “has no case” and that the “allegations are baseless and will be vigorously defended.”
Alan Futerfas, a lawyer for Trump’s children Donald Jr. and Ivanka Trump, also criticized James, accusing her of making “repeated threats to target the Trump family” and ignoring legal protections for “the very people she is investigating.”
James is seeking to compel testimony and obtain documents from Trump, Donald Jr. and Ivanka, who she said have not cooperated with her investigation.
The filing says that property valuations formed the heart of statements of financial condition that the Trump Organization used to demonstrate its net worth. The statements, which James said contained inaccuracies, were compiled by an outside accounting agency from a data spreadsheet and backup material provided by the Trump Organization.
Trump’s personal guarantees to some banks and insurers required him to certify that his financial statements were correct, according to James’ filing. The documents say her office has evidence Trump was “personally involved in reviewing and approving” the statements.
If the company or its employees are found to have deliberately provided misleading valuations, they could face civil or criminal penalties. The company is under investigation by both James and Manhattan District Attorney Alvin Bragg.
With its classic Gothic Revival style and signature green spire, 40 Wall Street gave Trump a presence in the most famous financial district in the world. His company doesn’t own it, but rather purchased in 1995 the right to act as the landlord for its office and retail space. Finding tenants for that space, however, particularly in the building’s narrow tower, proved a challenge, especially after 9/11, when occupancy sagged and the entire financial district struggled, the ProPublica investigation found.
James’ filing says that as early as 2009, Capital One, which held the mortgage on the property, “raised substantial concerns about cash flow” at 40 Wall Street, prompting in-person meetings with Trump, longtime Trump Organization Chief Financial Officer Allen Weisselberg and others. Donald Trump Jr. was also involved in the discussions, the filing says.
The conversations led to a loan modification in 2010, with bank personnel harboring doubts about the Trump Organization’s representations of the building’s financial standing. During those discussions, the Trump Organization provided the bank with profit numbers for 2010 of $12.3 million, which bank personnel described as “very optimistic.”
More startling were the differences between valuations that appeared on Trump’s statements of financial condition and those prepared by appraisers for Capital One. The Trump Organization set the value of the building at $601.8 million in 2010, while the appraisals for Capital One done by Cushman & Wakefield set it at just less than one-third of that, $200 million.
Weisselberg shared one of the company’s higher valuations for the building with the bank in early 2015, boasting of “considerable capital investment” and “a much improved cash flow.” He wanted Capital One to restructure its loan and waive a principal payment of $5 million due in November.
But Capital One declined to refinance the mortgage, referencing its own internal estimate that the building was only worth $257 million in the fall of 2014.
That year, 40 Wall Street’s $160 million mortgage was a thorn in Trump’s side, representing his then-largest single debt as he launched his campaign for the presidency.
After Capital One’s rejection, the Trump Organization turned to Ladder Capital Finance, where Weisselberg’s son Jack was a director. Ladder commissioned its own appraisal. Though Ladder used the same Cushman & Wakefield team that had estimated the building was worth $220 million in 2012, the team this time more than doubled the value to $540 million, legal filings said. Ladder approved the refinance.
James’ filing said that evidence her office obtained suggests the 2015 Cushman valuation “appears to have used demonstrably incorrect facts and aggressive assumptions” to arrive at the higher estimate, which the document said “did not reflect a good faith assessment of value.”
On Thursday, Cushman & Wakefield defended its practices, saying it took “great issue with mischaracterizations concerning the work performed and believe they are not supported by the evidence.
“The referenced Cushman & Wakefield appraisals were undertaken and completed in good faith based upon the material information made available,” the company said in a statement emailed by a spokesperson. “We stand behind the appraisers and the referenced appraisals which reflect fair valuations based upon the underlying facts and market dynamics.”
In 2015, the Trump Organization’s statement of financial condition listed the value of the building as $735.4 million.
Ladder Capital and Capital One did not immediately respond to requests for comment Thursday. Allen Weisselberg and Jack Weisselberg could not immediately be reached.
ProPublica’s 2019 story found several instances of the Trump Organization reporting much lower expenses to its lender, Ladder Capital, than to city tax authorities — including 40 Wall Street’s insurance costs and ground lease. Jack Weisselberg declined to comment at the time on Ladder’s loans or his relationship with the Trump Organization. Executives with Ladder also declined to be quoted for the story then.
In 2019, former Trump lawyer Michael Cohen testified before Congress that the Trump Organization inflated valuations at times to appear more profitable and deflated them to achieve a lower real estate tax bill.
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After the news broke in May of last year that government-sponsored lending agency Freddie Mac had agreed to back $786 million in loans to the Kushner Companies, political opponents asked whether the family real estate firm formerly led by the president's son-in-law and top adviser, Jared Kushner, had received special treatment.
“We are especially concerned about this transaction because of Kushner Companies' history of seeking to engage in deals that raise conflicts of interest issues with Mr. Kushner," Sens. Elizabeth Warren, D-Mass., and Tom Carper, D-Del., wrote to Freddie Mac's CEO in June 2019.
The loans helped Kushner Companies scoop up thousands of apartments in Maryland and Virginia, the business's biggest purchase in a decade. The deal, first reported by Bloomberg, also ranked among Freddie Mac's largest ever. At the time, the details of its terms weren't disclosed. Freddie Mac officials didn't comment publicly then. Kushner's lawyer said Jared was no longer involved in decision-making at the company. (He does continue to receive millions from the family business, according to his financial disclosures, including from some properties with Freddie Mac-backed loans.)
Freddie Mac packaged the 16 loans into bonds in August 2019 and sold them to investors. But Kushner Companies hadn't finished its buying spree. Within the next two months, records show, Freddie Mac backed another two loans to the Kushners for an additional $63.5 million, allowing the company to add two more apartment complexes to its portfolio.
A new analysis by ProPublica shows Kushner Companies received unusually favorable loan terms for the 18 mortgages it obtained with Freddie Mac's backing. The loans allowed the Kushner family company to make lower monthly payments and borrow more money than was typical for similar loans, 2019 Freddie Mac data shows. The terms increase the risk to the agency and to investors who buy bonds with the Kushner mortgages in them.
Moreover, Freddie Mac's estimates of the Kushner properties' profitability — a core element of any decision to back a loan — have already proven to be overly optimistic. All 16 properties in the firm's biggest loan package delivered smaller profits in 2019 than Freddie Mac expected, despite the then-booming economy. The loan for the largest property lagged Freddie Mac's profit prediction by 31% last year.
U.S. taxpayers could be responsible for paying back much of the nearly $850 million in Freddie Mac financing if Kushner Companies defaults and its properties drop significantly in value. Freddie Mac said that's unlikely. But during the last real estate crash, taxpayers had to bail out the agency and its larger sibling, Fannie Mae, to the tune of $190 billion as the agencies plunged into the government equivalent of bankruptcy. (The agencies ultimately repaid the money and more.)
The involvement of Jared's sister Nicole Kushner Meyer adds to questions about whether the family sought to exploit its political influence. Meyer, who shares her brother's slight build, porcelain features and dark chestnut hair, lobbied Freddie Mac in person on behalf of Kushner Companies in February last year, a timeline of the deal obtained by ProPublica shows. She has previously drawn criticism for invoking her brother's name while doing Kushner Companies' business.
In a statement, Freddie Mac said it does “not consider the political affiliations of borrowers or their family members." It called ProPublica's analysis “random, arbitrary and incomplete" and asserted that the Kushner loans “fit squarely within our publicly-available credit and underwriting standards. The terms and performance of every one of these loans is transparent and available on our website, and all the loans are current and have been consistently paid."
A spokesperson for Kushner Companies did not respond to calls and emails seeking comment. Emails to the White House seeking Jared Kushner's comment were not returned.
There's no evidence the Trump administration played a role in any of the decisions, and Freddie Mac operates independently. But Freddie Mac embarked on approving the loans at the moment that its government overseer, the Federal Housing Finance Agency, or FHFA, was changing from leadership by an Obama administration appointee to one from the Trump administration, Mark Calabria, Vice President Mike Pence's former chief economist. Calabria, who was confirmed in April 2019, has called for an end to the “conservatorship," the close financial control that his agency has exerted over Freddie Mac and Fannie Mae since the 2008 crisis.
The potential for improper influence exists even if the Trump administration didn't advocate for the Kushners, said Kathleen Clark, a law professor at Washington University specializing in government and legal ethics. She compared the situation to press reports that businesses and associates connected to Jared Kushner and his family were approved to receive millions from the Paycheck Protection Program. Officials could have acted because they were seeking to curry favor with the Kushners or feared retribution if they didn't, according to Clark. And if Kushner Companies had wanted to avoid any appearance of undue influence, she added, it should have sent only nonfamily executives to meet with Freddie Mac. “I'd leave it to the professionals," Clark said. “I'd keep family members away from it."
The Freddie Mac data shows that Kushner Companies secured advantageous terms on multiple points. All 18 loans, for example, allow Kushner Companies to pay only interest for the full 10-year term, thus deferring all principal payments to a balloon payment at the end. That lowers the monthly payments but increases the possibility that the balance won't be paid back in full.
“That's as risky as you get," said Ryan Ledwith, a professor at New York University's Schack Institute of Real Estate, of 10-year interest-only loans. “It's a long period of time, and you're not getting any amortization to reduce your risk over time. You're betting the market is going to get better all by itself 10 years from now."
Interest-only mortgages, which notoriously helped fuel the 2008 economic crisis, represent a small percentage of Freddie Mac loans. Only 6% of the 3,600 loans funded by the agency last year were interest-only for a decade or more, according to a database of its core mortgage transactions.
Kushner Companies also loaded more debt on the properties than is usual for similar loans, with the loan value for the 16-loan deal climbing to 69% of the properties' worth. That compares with an average 59%, according to data for loans with similar terms and property types that Freddie Mac sold to investors in 2019, and is just below the 70% debt-to-value ceiling Freddie Mac sets for loans in its category. “What we generally have seen from Freddie and Fannie," said Andrew Little, a principal with real estate investment bank John B. Levy & Company, “is they will do 10 years of interest-only on lower-leveraged deals."
Loans right at the ceiling are “not very common," Little said, adding that “you don't see deals this size that commonly."
Meanwhile Freddie Mac and its lending partner overestimated the profits for the buildings in the Kushners' 16-loan package by 12% during the underwriting process, according to the agency's data. Such analysis is supposed to provide a conservative, accurate picture of revenue and expenses, which should be relatively predictable in the case of an apartment building.
But the level of income anticipated failed to materialize in 2019, financial reports show. The most dramatic overstatement came with the largest loan in the deal, $120 million for Bonnie Ridge Apartments, a 960-apartment complex in a suburban part of Baltimore. In that case, realized profits last year were 31% below what Freddie Mac had expected.
“That's definitely a significant amount," said John Griffin, a University of Texas professor who specializes in forensic finance and has studied mortgage underwriting. He co-authored a recent paper highlighting as worrisome loans in which projected profits exceeded actual profits by 5%. “It's a problem when underwritten income is inflated or overstated," he said. “That is a key metric that determines the safety of the loan."
Griffin's paper found that 28% of all loans examined had projected profits that were 5% or more greater than what the properties actually earned in their first year. Some instances of underperformance could be caused by bad luck, the paper acknowledged, but “such situations should be relatively rare." Yet in the case of Freddie Mac's estimates in the Kushner deal, 13 of the original 16 loans met or exceeded the 5% threshold — many by a considerable amount.
Freddie Mac said it followed normal underwriting guidelines in assessing the Kushner buildings, including securing an independent appraisal and looking at historical property performance. It said investors who examined the riskiest portion of the debt also expressed no concerns.
If the underwriting had been on target, and reflected lower expectations, the loans would still have been within Freddie Mac's credit parameters, data shows. But the resulting analysis would have suggested the Kushner Companies has a smaller cushion to sustain its loan payments. It could also have affected the interest rate the company pays. Thinner margins accompanied by relatively high rates of debt provide less wiggle room if the properties, or the economy, run into trouble. As Kushner Companies has seen before, that wiggle room can disappear quickly.
Freddie Mac's main business has historically been buying bundles of home loans from the lenders that originated them, then selling them to investors as securities. The arrangement takes the debt off banks' balance sheets, freeing them to make more loans. Freddie Mac and Fannie Mae are privately owned, but they have been financially backstopped by the federal government and are required to meet goals for lending on affordable housing.
Single-home loans are still Freddie Mac's primary business, but since the 2008 economic crisis, the agency has greatly expanded its financing of apartment complexes.
Apartment complexes have been the specialty of the Kushner family, whose real estate holdings have spanned the mid-Atlantic and Midwest in recent years, with thousands of units scattered across suburbia. The company sold off 17,500 apartments in 2007, after the family's patriarch, Jared's father, Charles Kushner, returned from prison for convictions on illegal campaign contributions, tax evasion and witness tampering.
After Jared became CEO in 2008, the company turned its ambitions to high-profile commercial properties in New York City, a foray that turned sour. In 2018, the company gave up control of its marquee $1.8 billion building and headquarters, 666 Fifth Avenue, after being unable to keep up with its loans. Another piece of prime Kushner Companies Manhattan real estate, retail space in the old New York Times building near Times Square, was headed for a potential default in 2019, and foreclosure. (The New York Times reported in August that the foreclosure action was put off at the last minute, so negotiations with a lender could continue.)
Kushner Companies eventually resumed its residential focus and began bulking up its apartment portfolio. In the eight years before Trump entered the White House, the company and its partners secured a total of $581 million in Freddie Mac financing, according to data from the firm Real Capital Analytics first published by Bloomberg. By the end of 2018, Kushner Companies had amassed 21,000 apartment units.
Some of those loans didn't fare well. They included a series of supplemental loans, or second mortgages, taken out on properties in Maryland that Kushner Companies owned in partnership with others (the size of the Kushner share was not clear). Landlords often use such second loans as a way to extract large amounts of cash from their holdings.
A lender had originated 10 such loans to Kushner Companies and its partners in 2015, and Freddie Mac planned to sell them to investors, or securitize them, once the properties demonstrated income consistently high enough to cover the debt payments. For four of the properties, however, profits dipped in 2016, and two more were in little better shape. Freddie Mac still hadn't securitized the six loans, for $40 million, by inauguration day in 2017.
Mortgage industry experts say poor profits at underlying properties can lead Freddie Mac to delay selling off the loans as bonds, fearing they will be rejected by investors. By the time Freddie Mac offloaded the last of Kushner's second mortgages in April 2017, they had racked up above-average lag times between their origination and securitization, compared with other loans in their debt packages, data shows. (Freddie Mac said the wait time was normal.)
Within 10 months of the sale of the loans to investors, one of the complexes landed on the servicer's watchlist for mortgages at a heightened risk for default. Another soon followed, and another the year after that. All 10 complexes, which were built in the early 1970s or earlier, exhibited upkeep issues alarming enough to earn a flag in Freddie Mac data for “deferred maintenance" problems. (A Freddie Mac spokesman said the issues identified were almost all related to exterior asphalt and concrete, with one instance of an exterior drainage system in need of repair.)
At one property, a representative of Kushner Companies and its partners blamed residents of the nearby neighborhoods, who are primarily Black and low-income, for its declining profits and a rash of evictions: “The main driver is the client base in the area," the servicer reported the borrower as saying, Freddie Mac records show.
Kushner Companies had other problems, too. In 2017, ProPublica reporter Alec MacGillis documented the company's practice of charging aggressive, and what some tenants' lawyers called illegal, fees to occupants of some of those complexes. Tenants also claimed Kushner Companies' property management arm, Westminster Properties, at times neglected basic repairs and allowed the property condition to deteriorate, including raw sewage flowing out of one kitchen sink.
The complaints spurred a lawsuit filed in October 2019 by the attorney general of Maryland, Brian Frosh. Frosh accused the management company and its partners of charging “illegitimate fees" and having “rented apartments and townhomes to consumers that are distressed, shoddily maintained, and have conditions that can adversely impact consumers' health and well being." (Westminster has defended its conduct in legal filings for the suit, which remains active.)
Kushner Companies first approached Freddie Mac in August 2018 through Berkadia Commercial Mortgage, then abandoned its application without explanation in mid-October of that year. Berkadia did not return messages seeking comment.
In February 2019, Berkadia approached Freddie Mac again and informed the agency that Kushner Companies wanted to move forward. It's not clear what explains the renewed interest. But two things had changed in the interim. The rates on 10-year Treasury bonds had dropped, a circumstance that typically fuels borrowing and the securitized lending that Freddie provides. And the Obama appointee in charge of the FHFA was gone, leaving an interim Trump appointee in place.
Six days after rekindling its interest, Nicole Kushner Meyer and two Kushner Companies executives, President Laurent Morali and Chief Operating Officer Peter Febo, met with Freddie Mac officials, along with representatives of Berkadia and an advisory firm, documents show. The records don't say which Freddie Mac officials attended. The meeting covered the “business plan for assets, track record and general overview of the Kushner Companies." Meyer followed up, documents say, sending multiple emails to a senior Freddie Mac official, who was not identified.
Meyer has been serving as a principal at Kushner Companies since 2015, according to her LinkedIn profile. She caused a stir in 2017, when she invoked her brother on a trip to China to pitch potential investors for a Kushner Companies development in Jersey City, New Jersey. The company was seeking investors to participate in a government program known as EB-5, which grants visas to foreigners who make high-dollar investments intended to create jobs in struggling areas.
Freddie Mac said Meyer did not mention Kushner by name during the meeting. The agency also said no one connected to the White House asked that the deal be done.
But the political sensitivity was obvious to Freddie Mac, whose officials emailed each other in the weeks after the meeting, expressing a desire to minimize press coverage of the deal, according to a person with knowledge of the situation. They also took the unusual step of notifying FHFA, their regulator, of the transaction, the timeline shows. Freddie Mac and FHFA both declined to say why Freddie made the notification except to say that it was necessary as part of the agency's conservatorship. (One source suggested deals above a certain dollar amount require such notification.)
In March, Kushner Companies was able to move fast to lock in a favorable interest rate, documents show. It submitted a financing application, which is needed to request a lock on a component of its interest rate. Freddie Mac's website says that single loans are eligible for such a procedure, but that groups of loans must obtain additional approval. The day after Kushner Companies submitted its application, documents show, Freddie locked the rate for all 16 mortgages.
Through a spokesman, Freddie Mac said that such locks are an important part of its business model, and that timing is at the borrower's discretion.
Kushner Companies' full-term interest-only loan proved exceptional in another way: Freddie Mac had granted Lone Star Funds, a private equity firm managing $85 billion in global investments, interest-only terms for only the first three years of its seven-year mortgages when it had acquired the same apartment complexes in 2015. As a result, Lone Star had been able to borrow more money. But it soon faced a sharp hike in its monthly payments, when it added principal to interest.
(Freddie Mac said full-term, interest-only loans are more common when the pool of mortgages examined is restricted to larger, conventional loans. Nonpublic data shows they made up roughly 20% of such loans over the last three years, the agency said.)
Freddie Mac completed its due diligence for the Kushner Companies deal and on May 22 of last year, Kushner Companies and its partner, Torchlight Investors, took ownership of the 16 properties, with $785,803,000 in loans pledged. Torchlight did not respond to questions.
The properties were largely in the Washington, D.C., and Baltimore suburbs. Their average construction date was 1980, almost a decade older than the other properties Freddie approved for similar loans in 2019.
From a profit standpoint, the 16 properties were a mixed bag. Appraisers pegged their value as having increased 2% overall in the previous four years. Four of the properties lost value, according to the analysis.
The Kushners also benefited from another provision that increased the deal's risk. Groups of loans are often cross-collateralized, meaning that if one defaults, the lender can seek to seize others to recoup their losses. The strategy provides an extra hedge against risk for the lender. The Lone Star properties were cross-collateralized under their previous loan. But not those for Kushner Companies. (A Freddie Mac spokesman said cross-collateralization is not required and each of the company's loans met credit parameters without it.)
Another curious phenomenon emerged in the disclosures for the new loans: The reported profits for seven of the Kushner buildings in 2017 were higher than those listed for the same buildings and same year in prior loan documents. For some properties, the difference was slight. But for others, it was more substantial. At one Kushner complex, for example, the Apartments at Cambridge Court in suburban Baltimore, the 2017 net operating income was nearly 6% higher in the new loan filing than it had been for the same year in an old disclosure.
In May, ProPublica reported a pattern of similar discrepancies in bonds that hold mortgages across the commercial real estate industry. And the paper by Griffin, the University of Texas finance professor, and his colleague Alex Priest also found a pattern of such profit alterations, suggesting multiple institutions are manipulating historical financials to downplay risk and bolster more aggressive lending.
Financial data on how the 18 Kushner properties are faring in this year's economic slump is not yet available.
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A decade ago, loan filings showed Trump Tower in New York City had a reported profit of about $13.3 million. But when the tower refinanced its debt soon after, the profits for the same year — 2010 — somehow appeared higher. A new lender listed the profits as $16.1 million, or 21% more than they had been recorded previously.
The next year’s earnings for the building also “improved” between the two filings. Profits for 2011 were listed as 12% higher under the new loan than the old, according to reports by loan servicers and data provider Trepp.
ProPublica uncovered the Trump Tower discrepancies by examining publicly available data for mortgages that are packaged into securities known as commercial mortgage-backed securities, comparing the same years in reports for different CMBS. If a bank had held onto the loan, instead of selling it to investors, such information would have been kept private. No evidence has emerged that the Trump Organization was involved in changing the profit figures.
Alan Garten, the Trump Organization’s chief legal officer, said: “Not only were the numbers provided to the servicer accurate, but Trump Tower is considered one of the most underleveraged commercial buildings around.”
The discrepancies in the tower profits match a pattern described in a whistleblower complaint filed with the Securities and Exchange Commission, which ProPublica revealed this month. The complaint accuses commercial lenders of fraudulently inflating the income numbers underlying loans in many CMBS.
The complaint named seven servicers and 14 lenders, including two of the country’s biggest issuers of CMBS — Ladder Capital and Wells Fargo. Both were involved in the more recent Trump Tower loan, one as the lender, the second as the financial institution that packaged the loan into a CMBS. The complaint does not say which entities altered specific numbers and does not address whether borrowers were involved in, or knew about, the alleged fraud.
Wells Fargo declined to comment. Ladder Capital did not respond to questions about Trump’s signature Fifth Avenue tower. Ladder did respond to questions for ProPublica’s earlier article; it acknowledged it had altered historical numbers for two other loans ProPublica asked about, to remove expenses that were not recurring in the future. The lender said its actions were appropriate. (Ladder is a publicly traded commercial real estate investment trust with more than $6 billion in assets. It employs Jack Weisselberg, the son of the Trump Organization’s longtime CFO, Allen Weisselberg, as an executive director whose job is to make loans. Jack Weisselberg declined to comment.)
When the Trump Organization refinanced its loan for Trump Tower in 2012, it increased the size of its loan from $27.5 million to $100 million, extracting $67.9 million in cash. The interest-only loan originally represented about 8% of the more than $1 billion in mortgages assembled into the CMBS. (Only the commercial part of the tower — with retail tenants such as Gucci and offices, including for the Trump Organization — served as collateral for the loan.)
For both 2010 and 2011, data shows the discrepancies in net operating income between the old and new loans for Trump Tower were largely due to the new loan reporting lower expenses. The prospectus for the more recent loan stated that “the historical expenses exclude security associated with Donald J. Trump’s personal services” — though it did not specify dollar amounts for the change. Greater revenues were cited for both years under the new loan, too, but the prospectus did not explain why.
The whistleblower complaint, filed by a CMBS-industry insider named John Flynn, concerns the nearly $600 billion CMBS market. It accuses lenders and servicers of manipulating historical cash flows, failing to report misrepresentations, changing names and addresses of properties, and “deceptively and inaccurately” describing loan representations. The complaint asserts that Flynn has found overstatements in $150 billion worth of CMBS since 2013.
The misrepresentations allowed properties to qualify for loans they wouldn’t have otherwise, Flynn asserts, while leaving investors in the dark.
The SEC has not taken any public action in response to Flynn’s complaint; the agency declined to comment.
Altering past profits without providing an explanation is “highly questionable,” John Coffee, a professor at Columbia Law School and an expert in securities regulation, told ProPublica for its earlier article on CMBS.
As hotels, retail and office properties face unprecedented difficulties due to the virus that has shuttered much of the country, Flynn says the manipulations have increased the likelihood and potential severity of a crash.
Last year, ProPublica revealed another set of income discrepancies at Trump Tower and other company-owned buildings, ones that seemed to hark to the testimony of former Trump lawyer Michael Cohen, who testified that Trump would inflate income figures when seeking a loan and deflate the figures when filing taxes. Other Trump Organization properties investigated by ProPublica reported higher profits in the CMBS filings than they did in tax filings. A Trump Organization spokesperson said at the time that “comparing the various reports is comparing apples to oranges” because reporting requirements differ.
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The Trump Organization paid bribes, through middlemen, to New York City tax assessors to lower its property tax bills for several Manhattan buildings in the 1980s and 1990s, according to five former tax assessors and city employees as well as a former Trump Organization employee.
Two of the five city employees said they personally took bribes to lower the assessment on a Trump property; the other three said they had indirect knowledge of the payments.
The city employees were among 18 indicted in 2002 for taking bribes in exchange for lowering the valuations of properties, which in turn reduced the taxes owed for the buildings. All of the 18 eventually pleaded guilty in U.S. District Court in Manhattan except for one, who died before his case was resolved.
No building owners were charged, though the addresses of some of the properties involved became public. Trump Organization buildings were not on that list. No evidence has emerged that Donald Trump personally knew of or participated in the alleged bribery.
Trump denied any wrongdoing at the time, and the Trump Organization reiterated that position in response to questions for this article. “To be clear, at no time did the Trump Organization or any of its employees or principals ever pay anyone for the purpose of unlawfully obtaining a lower tax valuation,” Alan Garten, the Trump Organization’s chief legal officer, wrote in a statement. “This was corroborated by multiple investigations which found no evidence of any wrongdoing by the company or any of its principals. ... If anything, the Trump Organization was a victim of the scandal.”
Asked to provide evidence or name the agencies that allegedly cleared the company, Garten did not provide additional details, saying, “I was referring to the different investigations conducted by the state and federal authorities at the time.” (Here is the company’s full statement.)
The moment that corrupt assessors told their co-conspirators that the Trump Organization had agreed to pay bribes was memorable, said Frank Valvo, a former city assessor who served a year and a half in prison for his role in the scheme.
The excitement was palpable in the office, Valvo recalled, as one of the assessors broached the news. “He says, ‘We got Trump!’” Valvo recalled. “Wow. Holy Smokes.”
Two former city employees, speaking on the condition of anonymity, told ProPublica and WNYC that they accepted money from middlemen representing the Trump Organization to lower assessments on 40 Wall St. after Trump took over the skyscraper in 1995.
The assessors’ scandal burst into the news just months after the Sept. 11 attacks, revealing deep-seated corruption in the city’s sprawling bureaucracy with potential fallout for some of Manhattan’s wealthiest landholders. A joint city and federal investigation found that the assessors took more than $10 million in bribes over 35 years and changed the assessed value of at least 562 properties.
Valvo told ProPublica and WNYC, “I’m guilty of what I did. I’m not going to hide that.” He said he’s speaking because he’s now 88, and he “wants the truth to come out” about the property owners. (To hear more from Valvo, listen to this week’s episode of “Trump, Inc.”
The two employees of the assessors office who said they personally received bribes for Trump properties said they met with middlemen, or bag men, for various property owners, who would hand them envelopes of cash. In exchange, the city employees treated the middleman’s clients favorably when calculating the buildings’ tax assessments. One such middleman, they said, was a tax consultant, Thomas McArdle, whose name later surfaced in connection with the bribery scheme.
One of the two assessors recalled receiving a list of about 20 properties from McArdle; 40 Wall St. was on it, he said.
Another said that at one meeting, he looked in the envelope and asked for more money. The middleman responded by telling him that Donald Trump thought the employee should be making the assessment changes for free.
Apart from the two employees who say they took bribes, and Valvo, a fourth former assessor said he could confirm that Trump Organization property was involved but declined to provide additional details. A fifth former assessor said he remembers Trump Organization properties being talked about in the office as among those whose assessments were lowered in exchange for bribes.
Another convicted assessor, Joe Iovino, said he “did not know of any Trump Properties” paying bribes. The remaining living assessors either declined to comment or did not respond to multiple requests for interviews.
The former Trump Organization employee said that when he worked at the company, Donald Trump arranged for an employee to meet with McArdle, the alleged middleman. (The extent of Trump’s knowledge, if any, as to the ultimate purpose of this alleged meeting is unknown.)
During the subsequent alleged meeting, which Trump did not attend, McArdle received a check, and the employee passed along what the former employee said he knew to be “bogus information” to McArdle. The false information was intended to be passed on to the assessors, according to the former employee, to give them a pretext to lower the tax valuation for the Plaza Hotel, which the Trump Organization then owned.
McArdle, who was a cooperating witness in the bribery case, died in 2013 and was never charged. When the scandal erupted, according to the former Trump Organization employee, Trump expressed concern that he had signed checks payable to McArdle. His staff told him not to worry because executives of the Plaza had signed the checks, the employee said.
On Tuesday evening, the Trump Organization’s Garten sent an email stating, “We reviewed our accounting records and we have no record of any payment ever being made to Tom McArdle.”
ProPublica asked whether the records search included those from the Plaza Hotel, as well as whether the records indicated if the company had paid McArdle’s firm rather than McArdle personally. Garten replied, “Regarding Trump Plaza, as I said, we have no records of any payments to Mr. McArdle.”
Historical tax assessment data for the Plaza shows its valuation dropping noticeably during the Trump Organization’s seven-year ownership. But it’s hard to discern whether the changes in valuation were due to any assessors’ scheme or changes in market conditions — or both. The Plaza’s valuation dropped by about 40% over two years, for example, but that also coincided with the hotel’s 1992 entry into bankruptcy. The assessments began rising again on its 1994 tax bill, when the hotel was back on the market. It sold in 1995.
In the case of 40 Wall St., the assessment also dropped. The decrease actually began before Trump took control of the building, which was then in distress, after he retroactively appealed the tax bill for what the Trump Organization said were fully legitimate reasons. The valuation stayed low, then climbed markedly beginning in 2000 — the same year the investigation into the bribery scheme began gaining traction.
The Trump Organization, in its statement for this article, attributed the Plaza’s rise to fluctuations in the city’s economy at the time. At 40 Wall St., the rise in valuations in the 2000s occurred after the building was renovated and signed a slew of new deep-pocketed tenants, which would be expected to drive up the assessment.
In 2007, Trump was questioned under oath about McArdle in an unrelated deposition for a lawsuit he filed against journalist Timothy O’Brien. Here’s the full exchange between a lawyer for O’Brien and Trump, according to a transcript of the deposition:
Q. Ever heard the name McCardle?
A. No. Who is McCardle?
Q. Thomas McCardle.
A. It sounds vaguely familiar, but I don’t remember.
Q. Former New York City tax assessor’s office, then tax consultant?
A. I don’t know the name.
Q. Was caught up in a scandal in the early 2000s regarding tax assessors?
A. I think he is a man that represented many, many real estate people in New York. He represented some of the biggest real estate companies in New York. I don’t know if he represented us or not, but I don’t remember that.
Q. Did you ever make any payments to Mr. McCardle?
A. I don’t even remember ever — I don’t even know that name. I think I read the name because there was some kind of tax scandal going on, and he was involved with various real estate people. I don’t know the name. I don’t know that we ever used him.
Q. Do you recall —
A. He was a consultant of some kind.
A. No, I don’t remember ever having used him. But he was used by many major real estate companies in New York.
Prosecutors never pursued property owners over the bribes. One of the alleged architects of the scheme, an 85-year-old former assessor named Albert Schussler, who had become a middleman between assessors and owners, had a fatal stroke the night before he was scheduled to talk to prosecutors. His death hampered the case against owners, lawyers said.
“You’d love to follow the rainbow to the very end and get every person along the way who has been committing crimes, but unfortunately it’s not possible,” said Sharon McCarthy, the assistant U.S. attorney who led the prosecution of the case, in an interview with academic researchers in 2014. “The person who dealt directly with the property owners is Albert Schussler, and he passed away, so we lost the ability to go after anyone else.”
McCarthy told ProPublica and WNYC that she could not discuss any part of the case that isn’t in the public record.
After the devastation wrought in lower Manhattan by the 9/11 attack, fighting terrorism became the urgent focus. City Hall, worried about lower Manhattan, tried to prop up developers.
The federal and state statutes of limitations for bribery have expired, so no property owners face any risk of prosecution.
After the indictments, two Trump entities sued New York City, claiming that he had not paid bribes to lower assessments and thus the Trump World Tower near the United Nations was unfairly valued by assessors higher than it should have been.
The entity that owned the Trump World Tower separately sued the city seeking a tax break for creating affordable housing, and the city ultimately settled both suits together. Trump’s company received a tax break worth more than $100 million. The 13-page agreement did not mention or address the merits of Trump’s claims that the Trump World Tower suffered because of Trump’s asserted unwillingness to pay any bribes.
The assessors each pleaded guilty and most of them served between one to three years in prison. The Finance Department said that they had deprived the city of $160 million in tax revenue over the four years prior to the indictments and millions more in the decades before that. They are still paying restitution.
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New York Mayor Bill de Blasio said Friday that he had asked Manhattan’s district attorney to investigate discrepancies ProPublica and WNYC revealed last fall between what President Donald Trump’s company reported in filings to city tax officials and what it reported in loan filings. The discrepancies made his properties seem more profitable to a lender and less profitable to the city’s tax authorities.
After ProPublica published its findings, de Blasio said Friday, the city decided to examine the issues. That process resulted in one matter being turned over to the district attorney in November. De Blasio said he made the referral “because there is a possibility of a criminal act having been committed.” The referral related to Trump’s historic downtown skyscraper at 40 Wall Street, a city spokeswoman added.
De Blasio’s comments came during a conversation with WNYC reporter and “Trump, Inc.” podcast co-host Ilya Marritz on the “Ask the Mayor” segment of “The Brian Lehrer Show.” De Blasio, who ended a presidential bid in September, said Trump’s efforts to avoid taxes have gone beyond the measures taken by most wealthy Americans. He “consistently has believed he was above the law, even before he was president,” de Blasio said. “So this is a real problem, and I think there could be some real exposure here.”
In an emailed statement, a Trump Organization spokeswoman blasted de Blasio for “using the power of his office to try and launch an investigation into his political opponent.” The statement called the allegations “unfounded and clearly motivated by politics.”
A mayoral spokeswoman said that “the Manhattan DA is the proper jurisdiction to investigate these claims, as the city can only review what is directly reported to us. The DA has the jurisdiction to take appropriate steps if they find wrongdoing.” The city’s Department of Finance could also pursue back taxes if it concluded Trump’s company had underpaid, but such information is confidential, according to a spokesperson for the department.
A spokesman for Manhattan District Attorney Cyrus Vance Jr. declined to comment.
For its October article, ProPublica used New York’s Freedom of Information Law to request records from Trump’s property tax appeals for four buildings, among them 40 Wall Street, Trump Tower and the Trump International Hotel and Tower. ProPublica compared those records with loan documents that became public when Trump’s lender, Ladder Capital, sold the debt on his properties as part of mortgage-backed securities. Both sets of records list multiple real estate and financial metrics, including occupancy, income and expenses.
In the case of 40 Wall Street, for example, documents intended for investors showed a striking rise in occupancy, illustrating the sort of “leasing momentum” that lenders and investors like to see. The company had told a lender that 40 Wall Street was 58.9% leased on Dec. 31, 2012, rising to 95% a few years later. But in filings with tax officials, the company reported it was already 81% leased as of Jan. 5, 2013.
A refinancing occurred in 2015, but as of 2018, the building had not met underwriters’ profit expectations, spending three months on a servicer’s “watch list” in 2016 because of lagging profit.
The story also found that in the lender’s reports, the building cited lower expenditures for property insurance and a ground lease than it did in filings made to tax officials some years. That made 40 Wall Street appear more profitable to lenders than it did to tax authorities.
A subsequent ProPublica story found that Trump Tower’s tax and loan filings also exhibited inconsistencies, even as to how much space the Trump’s company occupied in Trump Tower. The tower’s overall occupancy rate during three consecutive years appeared 11, 16 and 16 percentage points higher in filings to a lender than in reports to city tax officials, records showed.
Trump Organization attributed the discrepancies to differences in the reporting requirements for preparing tax submissions and loan submissions.
The city’s Tax Commission, which handles property tax appeals, also reviewed submissions by Trump’s company for space it owns in the Trump International Hotel and Tower, a person knowledgeable about the commission said. Trump’s company had failed to report income from antennae it rents on the roof. The commission’s examination, according to the person, found no problem.
Last year, former Trump lawyer Michael Cohen, who is now in prison, testified before Congress that Trump sometimes boosted the value of his assets in documents given to lenders in order to secure loans and reduced those values to lower their tax value. The Trump Organization and Trump himself are fighting multiple subpoenas for financial and tax records.
Documents show the president’s company reported different numbers — higher ones to lenders, lower ones to tax officials — for Trump’s signature building. Last month, ProPublica revealed a similar pattern in two other Trump buildings.
Donald Trump’s business reported conflicting information about a key metric to New York City property tax officials and a lender who arranged financing for his signature building, Trump Tower in Manhattan, according to tax and loan documents obtained by ProPublica. The findings add a third major Trump property to two for which ProPublica revealed similar discrepancies last month.
In the latest case, the occupancy rate of the Trump Tower’s commercial space was listed, over three consecutive years, as 11, 16 and 16 percentage points higher in filings to a lender than in reports to city tax officials, records show.
For example, as of December 2011 and June 2012, respectively, Trump’s business told the lender that 99% and 98.7% of the tower’s commercial space was occupied, according to a prospectus for the loan. The figures were taken from “borrower financials,” the prospectus stated.
In tax filings, however, Trump’s business said the building’s occupancy was 83% in January 2012 and the same a year later. The 16 percentage point gap between the loan and tax filings is a “very significant difference,” said Susan Mancuso, an attorney who specializes in New York property tax.
A spokesperson for the Trump Organization said that “comparing the various reports is comparing apples to oranges” because reporting requirements differ.
Trump had much to gain by showing a high occupancy rate to lenders in 2012: He refinanced his share of Trump Tower that year and obtained a $100 million loan on favorable terms.
The vast majority of the gap between occupancy figures could be explained by diverging reports on how much space the Trump Organization used in Trump Tower. In loan documents, the company said it and its affiliates occupied 74,900 square feet in mid-2012, or 31% of the building. But tax reports from the January before and after listed the company and related parties as occupying 41,600 square feet — or about 18% of the tower.
“I cannot give you an explanation,” said Kevin Riordan, a financing expert, former accountant and real estate professor at Montclair State University who reviewed the tax and loan records for Trump Tower at ProPublica’s request.
More than a dozen tax and finance experts, presented with ProPublica’s earlier findings, also said they could not decipher a reason for the differences. As with Trump Tower, the discrepancies made the two properties — a skyscraper located at 40 Wall Street and the Trump International Hotel and Tower near Columbus Circle — appear more profitable to the lender and less so to property tax officials.
Those discrepancies were “versions of fraud,” according to Nancy Wallace, a professor of finance and real estate at the Haas School of Business at the University of California-Berkeley. The penalties for false filings can include fines or criminal charges.
The diverging numbers match a pattern described by Michael Cohen, Trump’s former lawyer, in congressional testimony this year. Cohen said Trump at times inflated assets’ value in documents submitted to lenders in an effort to secure loans. In reports to tax officials, Cohen testified, Trump would lower the value to reduce what he owed.
The focus on Trump’s business and personal financial records has been particularly intense of late. Manhattan District Attorney Cyrus Vance Jr. has subpoenaed a wide array of Trump financial records to investigate claims that the Trump Organization falsified records of hush-money payments to pornographic film actress Stormy Daniels, who said she and Trump had a sexual encounter. (He has denied the affair.)
Congressional lawmakers are seeking Trump’s personal tax returns, as well as other financial information, as part of their investigation into potential foreign influence on the presidency. Two federal courts have affirmed lawmakers’ right to enforce the subpoenas, and Trump has appealed to the U.S. Supreme Court.
ProPublica used New York’s Freedom of Information Law to obtain property tax filings for four of Trump’s Manhattan buildings, including Trump Tower. The income and expense statements Trump filed when repeatedly appealing the city’s valuation of his property are public under the law. We then compared information in the tax reports to loan data made public when Trump’s debt became part of pools of loans sold publicly as bonds known as commercial mortgage-backed securities.
Information in tax and loan filings can differ for legitimate reasons, experts said. A small portion of the occupancy gap at Trump Tower did appear to have an explanation: About 2.5 percentage points of the discrepancy in 2012 consisted of an instance where the Trump Organization treated newly leased, but still empty, space as full in its loan documents (which Trump’s lender disclosed) but not in tax documents.
The Trump Organization refinanced Trump Tower in 2012, replacing its existing $27 million in debt with a loan for $100 million. That allowed Trump to extract about $68 million in cash. The same institution that handled the refinancing, Ladder Capital, refinanced 40 Wall Street and the Columbus Circle property a few years later.
Occupancy, along with cash flow, is a factor used by lenders and ratings agencies to assess the riskiness of a loan. Trump secured relatively favorable terms: an interest-only loan that allowed him to avoid paying monthly principal. The Trump Tower loan received coveted AAA and Aaa ratings, respectively, from credit agencies Fitch and Moody’s. (The company has continued making payments.)
When it comes to reporting property taxes in New York City, there’s a potential incentive for owners to minimize how much space they’re renting to themselves. The city’s Tax Commission, which handles property tax appeals, tends to treat owner-occupied space as if it’s being rented at full market price, which increases the value the tax commission assigns to the building, and thus increases the tax bill. But the commission often won’t assign such income to vacant space, said Mancuso, the New York property tax expert.
The Trump Tower filings showed smaller discrepancies when it came to income. (New York City assessors consider income when calculating the taxable value of commercial properties, making New York property tax filings resemble those of income taxes more than property tax filings typically do in other parts of the country.)
Trump Tower, however, fell shy of expectations for profit set out by underwriters working for Ladder Capital during the refinancing, tax and loan records show. They had pegged net operating income at roughly $20.4 million a year. In the years after the loan was made, the building hasn’t come close.
New York City real estate observers have suggested that the tight security needed at the tower because of the presidency has cut into Trump’s ability to make money from the building. This year, China’s biggest bank, Industrial & Commercial Bank of China, made plans to reduce its space in Trump Tower when its lease ran out, according to Bloomberg News.
The financial institution that arranged the Trump Tower refinancing, Ladder Capital, is a publicly traded real estate investment trust that reports more than $6 billion in assets. It has a close Trump connection: Jack Weisselberg, an executive in loan origination, is the son of the Trump Organization’s longtime chief financial officer, Allen Weisselberg. Allen Weisselberg is under investigation by the Manhattan DA for his role in the Daniels payments.
Documents obtained by ProPublica show stark differences in how Donald Trump’s businesses reported some expenses, profits and occupancy figures for two Manhattan buildings, giving a lender different figures than they provided to New York City tax authorities. The discrepancies made the buildings appear more profitable to the lender — and less profitable to the officials who set the buildings’ property tax.
For instance, Trump told the lender that he took in twice as much rent from one building as he reported to tax authorities during the same year, 2017. He also gave conflicting occupancy figures for one of his signature skyscrapers, located at 40 Wall Street.
Lenders like to see a rising occupancy level as a sign of what they call “leasing momentum.” Sure enough, the company told a lender that 40 Wall Street had been 58.9% leased on Dec. 31, 2012, and then rose to 95% a few years later. The company told tax officials the building was 81% rented as of Jan. 5, 2013.
A dozen real estate professionals told ProPublica they saw no clear explanation for multiple inconsistencies in the documents. The discrepancies are “versions of fraud,” said Nancy Wallace, a professor of finance and real estate at the Haas School of Business at the University of California-Berkeley. “This kind of stuff is not OK.”
New York City’s property tax forms state that the person signing them “affirms the truth of the statements made” and that “false filings are subject to all applicable civil and criminal penalties.”
The punishments for lying to tax officials, or to lenders, can be significant, ranging from fines to criminal fraud charges. Two former Trump associates, Michael Cohen and Paul Manafort, are serving prison time for offenses that include falsifying tax and bank records, some of them related to real estate.
“Certainly, if I were sitting in a prosecutor’s office, I would want to ask a lot more questions,” said Anne Milgram, a former attorney general for New Jersey who is now a professor at New York University School of Law.
Trump has previously been accused of manipulating numbers on his tax and loan documents, including by his former lawyer, Cohen. But Trump’s business is notoriously opaque, with records rarely surfacing, and up till now there’s been little documentary evidence supporting those claims.
That’s one reason that multiple governmental entities, including two congressional committees and the office of the Manhattan district attorney, have subpoenaed Donald Trump’s tax returns. Trump has resisted, taking his battles to federal courts in Washington and New York. And so the question of whether different parts of the government can see the president’s financial information is now playing out in two appeals courts and seems destined to make it to the U.S. Supreme Court. Add to that a Washington Post account of an IRS whistleblower claiming political interference in the handling of the president’s audit, and the result is what amounts to frenetic interest in one person’s tax returns.
ProPublica obtained the property tax documents using New York’s Freedom of Information Law. The documents were public because Trump appealed his property tax bill for the buildings every year for nine years in a row, the extent of the available records. We compared the tax records with loan records that became public when Trump’s lender, Ladder Capital, sold the debt on his properties as part of mortgage-backed securities.
ProPublica reviewed records for four properties: 40 Wall Street, the Trump International Hotel and Tower, 1290 Avenue of the Americas and Trump Tower. Discrepancies involving two of them — 40 Wall Street and the Trump International Hotel and Tower — stood out.
There can be legitimate reasons for numbers to diverge between tax and loan documents, the experts noted, but some of the gaps seemed to have no reasonable justification. “It really feels like there’s two sets of books — it feels like a set of books for the tax guy and a set for the lender,” said Kevin Riordan, a financing expert and real estate professor at Montclair State University who reviewed the records. “It’s hard to argue numbers. That’s black and white.”
The Trump Organization did not respond on the record to detailed questions provided by ProPublica. Robert Pollack, a lawyer whose firm, Marcus & Pollack, handles Trump’s property tax appeal filings with the city, said he was not authorized to discuss the documents. A spokeswoman for Mazars USA, the accounting firm that signed off on the two properties’ expense and income statements, said the firm does not comment on its work for clients. Executives with Trump’s lender, Ladder Capital, declined to be quoted for the story.
In response to ProPublica’s questions about the disparities, Laura Feyer, deputy press secretary for New York Mayor Bill de Blasio, said of the Trump International Hotel and Tower, “The city is looking into this property, and if there has been any underreporting, we will take appropriate action.”
Taxes have long been a third rail for Trump. Long before he famously declined to make his personal returns public, a New York Times investigation concluded, Trump participated in tax schemes that involved “outright fraud,” and that he had formulated “a strategy to undervalue his parents’ real estate holdings by hundreds of millions of dollars on tax returns.” Trump’s former partners in Panama claimed in a lawsuit, which is ongoing, that Trump’s hotel management company failed to pay taxes on millions in fees it received. Spokespeople for Trump and his company have denied any tax improprieties in the past.
In February, Cohen told Congress that Trump had adjusted figures up or down, as necessary, to obtain loans and avoid taxes. “It was my experience that Mr. Trump inflated his total assets when it served his purposes,” Cohen testified, “and deflated his assets to reduce his real estate taxes.”
The two Trump buildings with the most notable discrepancies shared a financial trait: Both were refinanced in 2015 and 2016 while Trump was campaigning for president. The loan for 40 Wall Street — $160 million — was then the Trump Organization’s biggest debt.
The fortunes of 40 Wall Street have risen and fallen repeatedly since it was constructed in 1930. Once briefly in the running to become the world’s tallest skyscraper (before being eclipsed by the Chrysler Building and then others), the 71-story landmark had an illustrious history before falling into disrepair as it changed hands multiple times.
Trump says in his book “Never Give Up” that he took over 40 Wall Street for $1 million during a down market in 1995. Others have reported the price as $10 million. Trump gave the property his signature treatment, decking out the lobby in Italian marble and bronze and christening it “The Trump Building.” Tenants such as American Express moved in.
But the rent rolls suffered when big-name tenants fled to Midtown in the years after the Sept. 11 attacks. Less blue-chip operations replaced them. In recent years, there were more setbacks. About two years ago, for example, high-end food purveyor Dean & Deluca canceled plans to locate an 18,500-square-foot emporium on the higher-priced first floor. The space remains empty.
The building at 40 Wall was underperforming, charging below-market rents, according to credit-rating agency Moody’s. Its profits were lagging.
Trump’s company, which has sometimes struggled to obtain credit because of his history of bankruptcies and defaults, turned for relief to a financial institution where Donald Trump had a connection: Ladder Capital, which employs Jack Weisselberg, the son of the Trump Organization’s longtime CFO, Allen Weisselberg. Ladder is a publicly traded commercial real estate investment trust that reports more than $6 billion in assets. In 2015, and still today, Jack Weisselberg was an executive director whose job was to make loans.
Trump and Jack Weisselberg had history together. Jack was at UBS, in its loan origination department, in 2006, when the Swiss bank loaned Trump $7 million for his piece of the Trump International Hotel and Tower. Allen Weisselberg had bought a condo from Trump in one of his buildings for a below-market price of $152,500 in 2000. He deeded it to Jack three years later for about $148,000. Jack sold the unit for more than three times as much in 2006. (Jack Weisselberg declined to comment on Ladder’s loans or his relationship with the Trump Organization.)
Even with a sympathetic lender, the struggles at 40 Wall Street would normally raise questions. Trump’s representatives needed to demonstrate signs of the building’s financial health if they wanted a new loan with a lower interest rate.
They had a compelling piece of data, it seemed. Trump’s team told Ladder that occupancy was rebounding after registering a lackluster 58.9% on Dec. 31, 2012. Since then, Trump representatives reported, the building had signed new tenants. Income from them hadn’t fully been realized yet, largely because of free-rent deals, they said. But after 2015, they predicted, revenues would surge.
“That’s a selling point for people in the business,” said Riordan, who was previously the executive director of the Rutgers Center for Real Estate. Borrowers “want to show tremendous leasing momentum.” The steepness of such a rise in occupancy at the Trump building was unusual, Riordan and other experts said.
Documents submitted to city property tax officials show no such run-up. Trump representatives reported to the tax authorities that the building was already 81% leased in 2012.
“What is bizarre is that you have these tax filings that are totally different,” Riordan said. A gap of at least 10 percentage points between the two occupancy reports persisted for the next two years, before the figures in the tax and loan reports synced in January 2016.
The portrayal of a rapid rise in occupancy, and the explanation that income would soon follow, were critical for the refinancing. Indeed, Ladder’s underwriters were predicting that 40 Wall Street’s profits would more than double after 2015. Having reviewed Trump’s financial statements and rent roll, they estimated the building would clear $22.6 million a year in net operating income.
Ladder needed credit ratings agencies like Moody’s and Fitch to endorse its income expectations and give the loan a favorable rating, which would in turn make it easier for the next step of the plan: to package the loan as part of a bond, a so-called commercial mortgage-backed security, and sell it to investors. Without the expected rise in income, Riordan said, the loan size or terms would likely have needed to be renegotiated to satisfy the ratings agencies and investors, which would mean less favorable terms for Trump and Ladder. “There was a story crafted here,” Riordan said. “It’s contradicted by what we see in the tax filings.”
Wallace, the University of California professor, added: “Especially in underwriting loans, you are supposed to truthfully report.” Both the lender and the borrower are required to supply accurate information, she said.
Moody’s and Fitch analysts found the underwriter’s projections slightly too rosy, but Fitch conferred an investment-grade rating on the loan, allowing it to proceed as planned. Trump ultimately received a 10-year loan with a lower interest rate than the building previously had as well as terms that would allow him to defer paying off much of the principal until the end of the loan.
Once granted, the loan to 40 Wall Street ran into trouble: The year after it went through, the loan servicer put it on a “watch list” because of concerns that the building wasn’t making sufficient profit to pay the debt service with enough of a margin. It stayed on the list for three months. (Trump’s company has continued making payments.)
As of 2018, the most recent year available, the building had never met the underwriters’ profit expectations, trailing by more than 8%, according to data from commercial real estate research service Trepp. Experts say that, given the amount of research underwriters do, a property typically meets their expectations fairly quickly.
The 40 Wall Street documents contain discrepancies related to costs as well as to occupancy. Generally, there are “more opportunities to play games on the expense side,” said Ron Shapiro, an assistant professor at Rutgers Business School and a former bank senior vice president, “particularly because there are many more kinds of expenses.”
Comparing specific expense items in both sets of records is challenging, because accountants may group categories differently in reports to tax and loan officials. But some differences on 40 Wall Street documents elicit head-scratching.
For example, insurance costs in 2017 were listed as $744,521 in tax documents and $457,414 in loan records.
Then there was the underlying lease. Trump technically doesn’t own 40 Wall Street. He pays the wealthy German family that owns the property for the right to rent the building to tenants. In 2015, both Trump’s report to tax authorities and a key loan disclosure document asserted that Trump’s company paid $1.65 million for these rights that year. But a line-by-line income and expense statement, which Trepp gathered from what the company reported to the loan servicer, reported the company paid about $1.24 million that year.
“I don’t know why that would be off,” said Jason Hoffman, who is chair of the real estate committee for a professional association of certified public accountants in New York state. Like other experts, he said there are legitimate reasons why tax and loan filings might not line up perfectly. But Hoffman said the firm where he works makes sure the numbers match when it prepares both tax and loan documents for a client — or that it can explain why if they don’t.
Financial information for the Trump International Hotel and Tower raises similar questions. Trump owns only a small portion of the building, which is located on Columbus Circle: two commercial spaces, which he rents out to a restaurant and a parking garage. Trump’s company told New York City tax officials it made about $822,000 renting space to commercial tenants there in 2017, records show. The company told loan officials it took in $1.67 million that year — more than twice as much. In eight years of data ProPublica examined for the Columbus Circle property, Trump’s company reported gross income to tax authorities that was typically only about 81% of what it reported to the lender.
Trump appeared to omit from tax documents income his company received from leasing space on the roof for television antennas, a ProPublica review found. The line on tax appeal forms for income from such communications equipment is blank on nine years of tax filings, even as loan documents listed the antennas as major sources of income.
Trump has an easement to lease the roof space; he doesn’t own it. But three tax experts, including Melanie Brock, an appraiser and paralegal who has worked on hundreds of New York City tax cases, told ProPublica that the income should still be reported on the tax appeals forms.
It’s hard to guess what might explain every inconsistency, said David Wilkes, a New York City tax lawyer who is chair of the National Association of Property Tax Attorneys. But, he added, “My gut reaction is it seems like there’s something amiss there.”
Tax records for Trump personally and for his business continue to be subjects of contention in multiple investigations. The Justice Department has intervened in the investigation by the Manhattan district attorney, whose office has sought Trump’s personal tax returns. Congressional lawmakers investigating his business dealings have sought documents from his longtime accountant, Donald Bender, a partner at Mazars. Trump is fighting the subpoenas in court. (Bender did not respond to requests for comment.)
Rep. Elijah Cummings, D-Md., chairman of the House Oversight Committee, has said the committee is seeking to determine if Cohen’s testimony about Trump inflating and deflating his assets was accurate. Cummings asked for Mazars’ records related to Trump entities, as well as communications between Bender and Trump or Trump employees since 2009.
Such communications, the subpoena stated, should include any related to potential concerns that information Trump or his representatives provided his accountants was “incomplete, inaccurate, or otherwise unsatisfactory.”
The owners of a 70-story Panama City hotel tower formerly managed by President Donald Trump’s companies are accusing them of stiffing the Panamanian government.
In a legal filing Monday in an ongoing lawsuit in Manhattan federal court, private equity manager Orestes Fintiklis and the company he leads, Ithaca Capital Partners, claimed that two Trump companies failed to pay Panamanian taxes equal to 12.5% of the management fees they drew from the hotel.
The Trump entities were allegedly supposed to withhold those fees in advance and pay them to the government regardless of whether the property was profitable or not. Instead, the Trump companies simply kept the money, the suit claims, “thus intentionally evading taxes.” That and other financial irregularities exposed Fintiklis and the companies he represents “to millions of dollars in liability,” according to the suit, which also claims Trump companies sought to cover up their actions. The filing does not say whether a tax penalty has been levied by Panamanian authorities.
Fintiklis declined to comment.
The Trump Organization did not immediately respond to a request for comment. In prior legal pleadings, the Trump entities have denied wrongdoing. The Trump Organization also countersued last year, accusing Fintiklis and Ithaca of a “fraudulent scheme” that breached Trump’s 20-year management contract.
The dust-up is the latest fallout from Trump’s foreign business entanglements. Trump projects in Canada, Mexico, India, Azerbaijan and elsewhere have also come under scrutiny. And he has spent nearly his entire presidential tenure seeking to dismiss or downplay his dealings with Russians related to a plan to build a Trump Tower in Moscow. His former lawyer Michael Cohen is serving a prison term in part for lying to investigators about that project.
In recent years, Trump has typically licensed his name to other players — selling the right to put his name on the building but not investing his own money. He often also seeks to manage the building once it’s built. Like many other projects, the Panama development is a hotel-condo arrangement, where buyers purchase hotel rooms that are then rented out by the management company.
Ithaca Capital’s suit, filed originally in January last year and amended Monday, is seeking at least $17 million in damages, alleging that Trump companies mismanaged the hotel and let it fall into disrepair. The suit claimed that the hotel sat “virtually empty,” with portions going uncleaned for years.
Led by Cypriot businessman Fintiklis, Ithaca Capital bought 202 of the 369 hotel-condo units at what was then called the Trump Ocean Club in 2017. The next year, Ithaca evicted Trump Organization employees from the sail-shaped waterfront structure, which also houses a casino and shops. Trump employees and security personnel tried to block the effort, resulting in shoving matches that attracted international headlines.
Trump’s company tried unsuccessfully to convince Panamanian President Juan Carlos Varela to intervene on Trump’s behalf. When Fintiklis’ group eventually took control, it found walls had been hastily built to obstruct access to certain areas — one was in the middle of a hallway, another in front of an elevator bank — including inner offices. Trump employees also shredded hotel documents, Fintiklis’ group alleged.
Trump’s name was scraped from a stone wall in front of the tower, which is now the JW Marriott Panama. It was one of several properties that have removed Trump’s name in recent years.
In its complaint, Ithaca Capital also claims Trump’s son Eric and employees misled Ithaca when it was performing due diligence before buying into the hotel. The claims echo similar complaints made in other projects involving Trump businesses. ProPublica in October detailed how Trump and his children engaged in deceptive practices — including in Panama — while promoting at least a dozen development projects in the U.S. and abroad.
At an August 2016 meeting, Eric Trump allegedly told Fintiklis and two other Ithaca board members that the hotel was outperforming the market in Panama, a claim the suit asserts was false. After the meeting, Trump companies sent Ithaca two brochures that reiterated his statements about the hotel “maintaining a leading market share” in Panama.
Trump representatives repeated the statements to Ithaca in early 2017, the new legal filings say. At a February 2017 Trump Tower meeting that included Donald Trump Jr., Trump employees again said the hotel was outperforming the market. Ithaca Capital leaders relied on these statements when deciding to make the purchase, the suit said, adding that “these representations were false and designed to mislead Ithaca into believing that the Hotel was performing better than its peers.”
The suit said the false representations were made to other owners, too. In a December 2017 letter to hotel owners other than Ithaca, it said, Eric Trump wrote, “Over the last three years, the hotel has outperformed the market by a wide margin — as much as 20 percent — by virtually every measure.”
Trump companies also “artificially deflated” the hotel’s expenses and underreported Trump’s management fees in financial statements presented to Ithaca, the suit alleged, leading the hotel to appear to be in a better financial position than it was.
The suit alleged other improper financial behavior, saying that instead of making the necessary distributions to hotel room owners, “Trump hoarded their cash.” It said Trump companies failed to make appropriate financial disclosures and drained reserve accounts to pay operational costs, “all the while Trump lined its pockets with ill-gotten management fees.”
The suit said Ithaca wouldn’t have bought the hotel if it had known about the tax and social security problems and other financial irregularities.
An earlier suit filed by Trump Ocean Club condo owners also objected to the Trumps’ management practices. The plaintiffs accused Trump employees of overspending and taking excessive bonuses, as well as mishandling the building’s finances. Owners said they saw a steep increase in fees. Trump responded by suing those owners, too, demanding $75 million for wrongful termination. That litigation was settled in 2016.
Whispers of money laundering have swirled around Donald Trump’s businesses for years. One of his casinos, for example, was fined $10 million for not trying hard enough to prevent such machinations. Investors with shady financial histories sometimes popped up in his foreign ventures. And on Sunday, The New York Times reported that anti-money-laundering specialists at Deutsche Bank internally flagged multiple transactions by Trump companies as suspicious. (A spokesperson for the Trump Organization called the article “absolute nonsense.”)
The remarkably troubled recent history of Deutsche Bank, its past money-laundering woes — and the bank’s striking relationship with Trump — are the subjects of this week’s episode of the “Trump, Inc.” podcast. The German bank loaned a cumulative total of around $2.5 billion to Trump projects over the past two decades, and the bank continued writing him nine-figure checks even after he defaulted on a $640 million obligation and sued the bank, blaming it for his failure to pay back the debt.
“Trump, Inc.” isn’t the only one examining the president’s relationship with the bank. Congressional investigators have gone to court seeking the kind of detailed — and usually secret — banking records that could reveal potential misdeeds related to the president’s businesses, according to recent filings by two congressional committees. The filings were made in response to a highly unusual move by lawyers for Trump, his family and his company seeking to quash congressional subpoenas issued to Deutsche Bank and Capital One, a second institution he banked with. Trump’s lawyers have contended that the congressional subpoenas “were issued to harass” Trump and damage him politically.
Earlier today, a federal judge in New York declined to issue a preliminary injunction to block the subpoenas. During the hearing in which he delivered that ruling, U.S. District Judge Edgardo Ramos said Congress is within its rights to require the banks to turn over Trump’s financial information, even if the disclosure is harmful to him.
For their part, the filings for the House Financial Services and Intelligence committees say they are “investigating serious and urgent questions concerning the safety of banking practices, money laundering in the financial sector, foreign influence in the U.S. political process, and the threat of foreign financial leverage, including over the President.” The inquiry includes investigating whether Trump’s accounts were involved in two large schemes involving Deutsche Bank and Russian clients.
The committees want to determine “the volume of illicit funds that may have flowed through the bank, and whether any touched the accounts held there by Mr. Trump, his family, or business.” Links to Russia will get a particularly close look. “The Committee is examining whether Mr. Trump’s foreign business deals and financial ties were part of the Russian government’s efforts to entangle business and political leaders in corrupt activity or otherwise obtain leverage over them,” the filing stated.
The podcast explores some eyebrow-raising Trump-related moves by the bank:
Deutsche Bank’s private wealth unit loaned Trump $48 million — after he had defaulted on his $640 million loan and the bank’s commercial unit didn’t want to lend him any further funds — so that Trump could pay back another unit of Deutsche Bank. “No one has ever seen anything like it,” said David Enrich, finance editor of The New York Times, who is writing a book about the bank and spoke to “Trump, Inc.”
Deutsche Bank loaned Trump’s company $125 million as part of the overall $150 million purchase of the ailing Doral golf resort in Miami in 2012. The loans’ primary collateral was land and buildings that he paid only $105 million for, county land records show. The apparent favorable terms raise questions about whether the bank’s loan was unusually risky.
To widespread alarm, and at least one protest that Trump would not be able to pay his lease obligations, Deutsche Bank’s private wealth group loaned the Trump Organization an additional $175 million to renovate the Old Post Office Building in Washington and turn it into a luxury hotel.
Like Trump, Deutsche Bank has been scrutinized for its dealings in Russia. The bank paid more than $600 million to regulators in 2017 and agreed to a consent order that cited “serious compliance deficiencies” that “spanned Deutsche Bank’s global empire.” The case focused on “mirror trades,” which Deutsche Bank facilitated between 2011 and 2015. The trades were sham transactions whose sole purpose appeared to be to illicitly convert rubles into pounds and dollars — some $10 billion worth.
A spokesperson said Deutsche Bank has increased its anti-financial-crime staff in recent years and is “committed to cooperating with authorized investigations.” The bank said it has policies in place to address the potential for conflicts of interest, including “special measures with respect to clients that hold public office or perform public functions in the U.S.”
The bank was “laundering money for wealthy Russians and people connected to Putin and the Kremlin in a variety of ways for almost the exact time period that they were doing business with Donald Trump,” Enrich said. “And all of that money through Deutsche Bank was being channeled through the same exact legal entity in the U.S. that was handling the Donald Trump relationship in the U.S. And so there are a lot of coincidences here.”
For many years, the federal government has required banks, brokerages and even casinos to take steps to stop customers from using them to clean dirty money.
Yet one major part of the financial system has remained stubbornly exempt, despite experts’ repeated warnings that it is vulnerable to criminal manipulation. Investment companies such as hedge funds and private equity firms have escaped multiple efforts to subject them to rules meant to combat money laundering.
The latest attempt, which began in 2015, appears to have ground to a halt, according to sources familiar with the process.
“You’ve got several trillion dollars, the management of which nobody is required to ask any questions about where that money is coming from,” said Clark Gascoigne, deputy director of the Financial Accountability and Corporate Transparency Coalition. “This is very problematic.”
The Financial Action Task Force, an intergovernmental organization that seeks to combat money laundering around the world, characterized the lack of anti-money laundering rules for investment advisers, such as those who manage hedge funds and private equity funds, as one of the United States’ most significant lapses in a report two years ago.
The push to regulate hedge funds and similar investment firms took off after the Sept. 11 attacks, when Congress passed the Patriot Act. Among other things, the law required federal agencies to take new steps to keep illicit money out of the U.S. financial system. The Treasury Department exempted investment firms at the time, planning to return to them after tackling other sectors. “Eighteen years ago, the Patriot Act required investment companies to install their own AML [anti-money laundering] programs,” said Elise Bean, a former staff director of the U.S. Senate investigations subcommittee who supports the proposed rule. “But Treasury has yet to enforce the law,” she said.
The Treasury Department, through its Financial Crimes Enforcement Network, or FinCEN, initially proposed rules in 2002 and 2003 requiring firms like hedge funds and their investment advisers to adopt anti-money laundering measures. That attempt languished as FinCEN waited for the Securities and Exchange Commission to retool its approach, said Alma Angotti, who wrote the original proposal while at FinCEN and is now co-head of global investigations for the consulting firm Navigant. So much time passed that FinCEN withdrew the proposed rules in 2008. FinCEN then launched its second attempt to impose such regulations seven years later.
That second attempt is the one that has now crawled to a virtual stop. “It’s the kind of thing that should have taken two to three years, not 17,” said Joshua Kirschenbaum, senior fellow focusing on illicit finance at the nonpartisan think tank the German Marshall Fund and a former supervisor in FinCEN’s enforcement division.
Hedge funds and private equity funds can be attractive to big-dollar launderers who prize the funds’ anonymity, the variety of investments they offer and, in some cases, their use of off-shore tax and secrecy havens, experts say. After 2001, the number of annual hedge fund launches surged more than threefold, according to one report, and investments by high net worth individuals exceeded those of institutional investors.
“They’re a black box to everyone involved,” Kirschenbaum said. “They’re sophisticated and can justify moving hundreds of billions.”
Money launderers seek to hide illicit proceeds by making it appear they come from legal sources. Laundering hides crimes as diverse as drug dealing, tax evasion and political corruption. Experts say the massive, untracked streams of cash it creates can fuel more illegal activity, including terrorism.
That’s one reason banks are required to implement protocols aimed at identifying and reporting dodgy transactions to authorities, and verifying that customers are who they say they are.
FinCEN’s latest proposed rule targets investment advisers who manage funds for clients such as hedge funds. The rule would apply primarily to the largest advisers with $100 million or more in assets under management, who are required to register with the SEC.
“As long as investment advisers are not subject to AML program and suspicious activity reporting requirements, money launderers may see them as a low-risk way to enter the U.S. financial system,” the proposed rule states, noting that in 2014, 11,235 advisers registered with the SEC reported roughly $61.9 trillion in assets for their clients.
Foreign political corruption is one of the money laundering risks for investment advisers, Angotti said. Instead of needing quick access to their money, the ultra-wealthy involved in such graft often want to park their illicit profits somewhere safe, making them more tolerant of fund rules that can delay withdrawals for a year or more.
Having federal anti-money laundering protocols is no panacea. Regulators periodically conclude that certain banks and brokerages are not abiding by various aspects of the rules. Last year, for example, regulators announced more than $2 billion in penalties against Morgan Stanley Smith Barney, Charles Schwab & Co., UBS Financial Services, CapitalOne Bank and others, according to a company that tracks such enforcement. (The companies neither admitted nor denied the allegations against them.)
Experts say it’s impossible to quantify how much money may be laundered through hedge funds. And prosecutors retain the right to charge such a fund if it is proven to have participated in money laundering; but without the FinCEN rules, regulators cannot fine the fund’s managers for, say, not taking steps to prevent abuse.
There are multiple reasons the attempts to adopt rules have bogged down. The principal ones include the financial industry’s cascade of requests for modifications to the rule and inertia among federal bureaucracies, according to people familiar with the process.
The industry has tended to proclaim that it favors the principle of anti-money laundering rules — while simultaneously contesting many of the specifics. Several industry groups contend that the proposed rule overstates the risk that private equity funds will be used for illicit finance.
“We’re very supportive of having an aggressive AML regime,” said Jason Mulvihill, general counsel of the American Investment Council, which represents private equity funds. But, he added, “if you were trying to launder money, the last place you’d want to put it is in a private equity fund” because of the industry’s standard practice of requiring investors to leave their investments in place for 10 years. And, he added, most private equity firms already have some anti-money laundering policies in place, just in case.
Mulvihill’s organization has proposed that FinCEN exclude advisers who require investors to hold their investment for more than two years — a carve-out included in the original FinCEN proposal — which effectively would allow most private equity funds to remain exempt from the anti-money laundering rule.
The Investment Adviser Association also supports the goal of the regulations, said Karen Barr, the group’s president and CEO. But it worries that some advisers will need to implement costly changes that aren’t warranted. Those include advisers who also have clients for whom they provide recommendations, not money management. “We think investment advisers are a low risk because they don’t hold assets,” she added. More than half have 10 employees or fewer, she said, and “the sort of cumulative effect of all these regulations on small shops is really burdensome.”
In response to a request for an interview, a spokesman for the Managed Funds Association, which represents hedge funds, referred to a letter the group sent FinCEN in 2015, in which it stated that it “strongly supports adoption of the Proposed Rule.” The letter also included 25 pages of “background,” suggestions and requests for clarification.
Industry concerns were not the only reason for the rule’s stasis, said former FinCEN employees who spoke with ProPublica. They said staffing, competing agency priorities and other factors also contributed. The Trump administration’s general slowdown in rule-making added to delays, they said.
The rule’s implementation would also require coordination with the SEC, whose job it would be to make sure investment advisers are complying. Policing advisers has not been a major priority for the agency, which five years ago examined only 8 percent of registered advisers. The agency increased the number to 15 percent in 2017.
FinCEN and Treasury spokespeople did not return calls or provide answers to questions about the proposed rule that ProPublica sent by email. Many Treasury employees are not working because of the government shutdown. A spokesman for the SEC said the agency could not answer questions about the rule until the shutdown ended.
Seeing the rule flounder is vexing for Angotti. Some firms may be effectively executing their own anti-money laundering measures, she said. But without more scrutiny, she said, “who knows?” Such steps are expensive “and it requires them to turn away business,” Angotti said. “Without strong enforcement, it’s hard to get businesses to do this stuff.”
In October 2014, less than two months after entering North Augusta High School in Aiken County, South Carolina, Logan Rewis paused to drink from a fountain in the hallway between periods. As he straightened up, water fell from his mouth onto the shoe of his social studies teacher, Matt Branon, who was standing nearby. Logan says it was an accident, but Branon thought Logan had spat at him.
“My bad,” the 15-year-old with bushy sandy-brown hair and blue eyes says he told Branon after the teacher confronted him.
Branon, who is also the school’s baseball coach, was incensed. “Freaking disgusting,” he shouted at Logan as the teen walked away. Branon pursued Logan and grabbed the freshman by his backpack.
“Get your freaking hands off me,” Logan recalls yelling. School officials say he used a different “f” word.
Though Branon had arguably escalated the conflict, he wasn’t disciplined — but Logan was. In a decision that changed the course of his education and life, the school district banished Logan to its alternative school, the Center for Innovative Learning at Pinecrest.
The word “alternative” implies a choice. But in an era when the freedom to pick your school is trumpeted by advocates and politicians, students don’t choose the alternative schools to which districts send them for breaking the rules: They’re sentenced to them. Of 39 state education departments that responded to a ProPublica survey last year, 29, or about three-quarters, said school districts could transfer students involuntarily to alternative programs for disciplinary reasons.
Like Logan, thousands of students are involuntarily reassigned to these schools each year, often for a seemingly minor offense, and never get back on track, a ProPublica investigation has found. Alternative schools are often located in crumbling buildings or trailers, with classes taught largely by computers and little in the way of counseling services or extracurricular activities.
The forced placements have persisted even though the Obama administration in 2014 told schools they should suspend, expel or transfer students to alternative schools only as a last resort — and warned them that they risked a federal civil rights investigation if their disciplinary actions reflected discrimination based on race. Federal data shows that black and Hispanic students are often punished more than white students for similar violations.
Moreover, despite legal protections afforded students with disabilities, a disproportionate number of those exiled in some districts have special education plans — like Logan, who had been diagnosed with attention deficit hyperactivity disorder and other learning problems.
School administrators “hang these children out to dry,” says Logan’s mother, Lisa Woodward. “They don’t want nothing else to do with them.”
Now, the Trump administration is being pressed to view such removals more favorably. In November, a group of teachers and conservative education advocates met with aides to Education Secretary Betsy DeVos to express concerns about the 2014 guidance. The group said the Obama-era approach made schools less safe, allowing disruptive students to hijack classrooms.
That meeting has raised fears among civil rights advocates that the Trump administration will rescind the guidance, prompting schools to increase the number of children excluded from regular classrooms. “We’re deeply concerned this administration is not committed to protecting the civil rights of students,” says Elizabeth Olsson, senior policy associate for the NAACP Legal Defense Fund. She cited reports that DeVos may scrap a rule aimed at preventing schools from unnecessarily placing minority students in special education.
A federal education spokesman on Nov. 29 declined to comment on the issue.
To be sure, many students are sent to alternative schools for major offenses involving drugs, alcohol, weapons or violence. But others are forced to go for reasons that include rudeness, using their cellphones at inappropriate times, or — in about half of the states ProPublica surveyed — nondisciplinary problems such as bad grades. In states like Florida, students who fall academically have been pushed to transfer to alternative schools as a way to game the state’s accountability system. Pennsylvania law lets school officials relegate students to that state’s Alternative Education for Disruptive Youth program for showing “disregard for school authority.” In Aiken, about 40 percent of transfers in 2014-2015, the year Logan was reassigned, were for lesser offenses, including 13 for using profanity, 27 for truancy, 28 for not following an adult’s instructions and 18 for showing disrespect.
AASA, The School Superintendents Association — which has at times fiercely defended local administrators’ discretion in handling disruptive students — says alternative schools should not typically be used as a disciplinary placement for non-serious offenses.
“We don’t want to send a student there because they didn’t take their hat off or they drank poorly from the water fountain, or they’re not as mannered as we’d like them to be,” says Bryon Joffe, the association’s project director for education and youth and development. “What we don’t want our alternative schools to be is a place to put kids we’d rather not have in class.”
Aiken County Schools attorney William Burkhalter Jr. says that, under the direction of a new superintendent, Sean Alford, the school system reduced its expulsions, suspensions, and involuntary alternative school transfers in recent years. Still, district officials were acting within their rights in Logan’s case, he says. “He denies it but he spit a huge amount of water on this teacher,” says Burkhalter, who didn’t witness the incident himself. “His shoes, pant legs, whatever. It was gross.” (During a disciplinary hearing, a district official described the incident by saying: “The student spit water on a teacher's shoe as he left the water fountain.”)
Burkhalter says Branon has worked for the district since 2012 without receiving any write-ups or reprimands. “The principal has had no problems and says he is a team player, a willing participant in anything he is asked to help with and a solid guy,” Burkhalter wrote in an email. He quoted the principal as saying, “‘I love having him on the staff.”
Branon did not respond to emails or phone messages from ProPublica.
Discipline wasn’t the original mission of alternative schools. They emerged in the late 1960s as less competitive, more child-centered learning environments that aimed to offer flexible instruction for kids who weren’t thriving in traditional classrooms. But within two decades, their role evolved as school districts began to see them as places to warehouse students who had broken zero-tolerance policies. Under those policies, which were based on the notion that schools could only keep order by refusing to tolerate any potentially unsafe behavior, even first-time or minor incidents were more likely to result in an expulsion or suspension. When students challenged their removal, some courts ordered schools to find a place to educate them — fueling a proliferation of alternative classrooms through the 1990s and 2000s. Even as zero-tolerance policies have fallen out of fashion, involuntary placements in alternative schools for disciplinary reasons have persisted, with districts such as Miami recently introducing “success centers” for students who otherwise might have been suspended.
Tasked with educating roughly half a million of the nation’s most vulnerable students, alternative schools generally lack academic rigor. Barbara Fedders, a law professor at the University of North Carolina at Chapel Hill who has studied the schools, says some districts assign their worst teachers to alternative classrooms, and students may not even receive textbooks. “They aren’t given anything that makes schools schools,” Fedders says. “There’s no clubs, no sports.”
Many students become discouraged and drop out. While just 6 percent of regular schools have graduation rates below 50 percent, ProPublica’s analysis found, nearly half of alternative schools do.
“There is an enormous change in the quality of education that the student has a shot at when they’re moved from regular school to alternative school,” says Derek Black, a University of South Carolina law professor who wrote a book on school discipline.
A middle child, Logan grew up with two sisters in North Augusta, a few miles from the Georgia border. When he was a toddler, his mother and father split up, and she married his stepfather. She worked in customer service at a car dealership; his stepfather was in construction, later taking a job as an automotive technician.
Logan had little contact with his father, and his relationship with his stepfather was turbulent. When he wasn’t in school, he enjoyed swimming in nearby lakes or the Savannah River and displayed a knack for hands-on tasks. For a time, he and a friend liked to fix up and re-paint old bicycles. As he became a teenager, he wore shirts with the Polo insignia, an ever-present baseball hat and a wide smile that hinted of mischief.
Because of his ADHD, which was diagnosed in third grade, Logan struggled to focus on schoolwork. He had difficulty reading and sometimes acted impulsively. He could get boisterous, wasn’t great at following directions and mouthed off to adults who called him out in front of peers. He took medicine for his attention disorder for several years, but Woodward stopped it when he was in seventh grade because she thought the side effects made him act up more.
He was repeatedly disciplined for outbursts in class, disrespect, swearing, silliness and horsing around with other students. As the incidents piled up, Logan became acquainted with the district’s alternative school, the Center for Innovative Learning at Pinecrest. Located a couple of miles from downtown Aiken, the low-slung brick building has long grass, a chain-link fence and a “No Trespassing” sign out back. With a fluctuating enrollment that sometimes exceeds 200 students in grades three and up, the center sits in a neighborhood beset by crime, with pockets of boarded up homes and unkempt yards.
In sixth grade, school officials sent Logan to Pinecrest for more than two months after he was accused of pushing another student. The next year, he returned for about a month for repeatedly forgetting his gym clothes. His grades suffered each time.
For high school, his mother thought he should go to a small charter school, where he could receive individualized attention, rather than North Augusta. One of Aiken’s larger high schools, North Augusta has 1,500 students and a sprawling campus in an older subdivision dotted with midcentury brick ranch homes. But Logan assured her he would be fine. He was already planning to pursue a vocational track after his freshman year and had his eye on a welding program. As he left middle school, educators created an Individualized Education Program for him that, among other things, said teachers at North Augusta should first remind him of the rules and give him a chance to comply before issuing a citation and should avoid embarrassing him by criticizing him in public.
Logan’s first couple of months at North Augusta went relatively well. He made B’s in Algebra 1 and mostly kept out of trouble. He did rack up tardies, repeatedly failing to get from one end of the school to the other in time for class. Another teacher chastised him for saying he didn’t have a book when he actually did. But his mother had met with his teachers and they all talked with Logan about hurrying up. He promised to.
Then came the water fountain incident. Afterwards, an assistant principal called Woodward, telling her Logan had spat on a teacher and could be arrested for assault if charges were pressed. “I was like, ‘What in the world has happened to my child?’” she recalls. “Because it’s not out of character for him to mouth off at somebody, but for him to spit on somebody, that was out of character.” She was so upset she hardly spoke to Logan on the drive home. That night, he fled from the house and wandered their working-class neighborhood alone, while she anxiously waited up.
When they finally talked over what happened, Woodward says she was crestfallen. “It broke my heart that I had reacted the way I did,” she says.
The school referred Logan’s case to a disciplinary tribunal, a group of retired educators who determined punishment for violations of the district’s code of conduct. Branon went to great lengths to bolster his account, collecting statements from nine students about the incident. Most agreed that Logan spat on the shoe of “Coach Branon,” but couldn’t say for sure whether it was intentional.
At a hearing a few days later, Woodward pleaded for leniency.
“He has progressively gotten better,” Woodward told tribunal members, according to a recording of the hearing obtained by ProPublica. “He's not a bad kid, he's a good kid.” But the chairwoman told Logan his behavior would not be tolerated. “You ain't never going to win being disrespectful to people in charge,” the chairwoman told Logan. The preponderance of evidence supported that he spat and cursed at the teacher, she said as the hearing closed, but even “if you didn't, then it's a lesson that giving the impression that you did sometimes can be just as painful as if you did it. You got it?” She warned him that if he came back before the tribunal for another offense, it would likely expel him.
The panel sentenced him to a short-term stint at Pinecrest, which is usually four to five weeks. However, while Woodward was registering him at the alternative school, she says school officials at his old high school met to talk about his IEP without her. At this meeting, despite the tribunal’s recommendation, school officials decided Logan should stay at Pinecrest longer — for at least nine to 10 weeks. “He was doing so good, then because of this little incident that they blew out of proportion, they basically kicked him while he was down,” Woodward says.
School administrators “did not feel the mother ever understood what they were putting up with and how much they wanted Logan to succeed,” attorney Burkhalter says.
Pinecrest was much smaller than North Augusta High, and Logan knew some of the other students there. His mother usually drove him, even though the route took her an hour out of her way and she feared jeopardizing her job at the dealership.
The Center for Innovative Learning was anything but. While the small classes at Pinecrest took pressure off Logan, he wasn’t learning much. His computer-based courses in social studies and science required him to absorb screens and screens of text. “There was a lot of stuff to read and I wasn’t really good at reading,” he recalls. Some kids figured out a way to get around the school’s academic software to surf outside websites, such as Facebook, he says. Other classes taught by teachers were too easy for a high school freshman, he says — his math class spent the period doing multiplication with calculators.
“They didn’t teach me anything at all,” Logan says. His grades in the computer-based courses tanked.
States and school districts have created a patchwork of rules on who should attend public alternative schools and why. Some set a higher bar than others. In Delaware, students must face expulsion or “seriously” violate the district discipline code before being sent to alternative programs. In Austin, Texas, students who commit one of a list of offenses — including felonies, assaults with injuries and marijuana or alcohol possession — must be transferred to alternative classrooms.
Miami-Dade County Public Schools turned to alternative schools after facing pressure from parents and activists to reduce the number of students it suspends and expels. In 2015, the district opened 10 “Student Success Centers” for students who in the past would have been sent home on suspension. Under the district’s plan, such students would report to the centers and receive schoolwork from their teachers — so they didn’t fall behind — along with character education and counseling, if needed. The move dramatically reduced the number of off-campus suspensions. But news media and civil rights advocates soon reported that many students weren’t showing up at the success centers or, if they did, schoolwork from their current classes often didn’t arrive. “Student Success Centers are out-of-school suspensions by another name,” the Advancement Project and a student advocacy group said about their findings in an October report.
A Miami-Dade district spokesman said the centers have improved as a result of recommendations from a task force that includes administrators, teachers, counselors and parent-teacher groups. “We will continue to use feedback from all stakeholders to inform decisions,” the spokesman wrote in an email.
Regardless of the formal eligibility rules for alternative schools, local officials are commonly afforded wide discretion. That, critics say, allows bias to creep in.
In Pennsylvania, a complaint filed by education advocates with the U.S. Department of Justice’s Civil Rights Division in 2013 alleges the state’s alternative schools are substandard educationally and disproportionately composed of students who have disabilities or are African American. The percentage of students with disabilities sent to the state’s alternative programs was nearly triple the state average — making up 44 percent of the alternative population in the 2012 school year, according to the complaint, which is pending. In 82 Pennsylvania school districts, disabled students made up half or more of the alternative population, with one district assigning only disabled students to the programs. Between 2008 and 2011, African-American students were placed in alternative programs at a rate more than double that of the general student population.
Charges of bias in alternative placements have also surfaced in the largest school district in Mississippi — DeSoto County Schools just south of the Tennessee border. Cynthia Lewis says that her daughter A’riauna McMillian’s involuntary transfer to an alternative school last school year in DeSoto County was an unduly harsh punishment that set the African-American teen back academically.
Toward the end of her freshman year, A’riauna told ProPublica, she took out her cellphone while in the ladies’ room to use the Snapchat app. Then she dangled the phone over a stall she thought was occupied by a friend she had been goofing around with. The phone’s light flashed as a warning that it was about to start recording. A’riauna’s friend noticed it and yelled that she was in a different stall. A’riauna says she snatched her phone back and started hitting delete, just in case. When the girl in the stall, who was white, came out, A’riauna let her look at the phone — and scroll through A’riauna’s Snapchat feed — to check that nothing was posted or saved. The girl complained to administrators anyway.
A’riauna was a good student who had never been in trouble before. The school not only suspended her for three days but also referred her to a disciplinary hearing to consider additional punishment. The hearing officer ordered A’riauna to spend 30 school days in the district’s alternative school for “acts which threaten the safety or well-being of others,” “possession or use of obscene, immoral, or offensive materials” and three lesser offenses, including having a cellphone. Lewis says the district’s code doesn’t recommend an alternative placement for a first offense on such a charge. “I felt like they were railroading her,” says Lewis, who has worked as a bus driver and substitute teacher for the district. She worried her daughter would fall behind in biology and English — classes that had mandatory state tests that spring.
When A’riauna entered the DeSoto County Alternative Center that fall, she was scared. “It was like, ‘Oh my God Ma, it’s like they’re in prison,’” she told Lewis. She was subjected to pat-downs each morning that included being required to shake her bra to show she wasn’t carrying contraband. She told her mother that on most days she would do worksheets and spend much of the rest of her time coloring pictures with crayons and markers. When her stint at the alternative center was over, her mother moved her to another high school, fearing that her old one wouldn’t treat her fairly. A’riauna found she needed extra help from teachers to get back on track. The transition was difficult. “She was very depressed in the beginning,” her mother says. With teachers’ help and hard work, she managed to raise her grades, Lewis says.
Working with the Advancement Project, the same group that criticized the Miami Success Centers, Lewis and other DeSoto parents have filed complaints with the U.S. Department of Education’s Office of Civil Rights. “The punishments A’riauna received were harsher than and inconsistent with those allowed by District policy,” her mother wrote in the complaint. The parents say DeSoto’s overwhelmingly white administration and school board have routinely meted out harsher punishments to black students than white students who commit similar offenses. The complaints are pending.
Katherine Nelson, a spokeswoman for the school district, which has about 34,000 students, declined to discuss A’riauna’s experience or the parents’ complaints about bias. “We cannot discuss student discipline issues,” she said.
There’s little available data comparing how often students of different races are sent to alternative schools for the same offense. But federal data from 2012 documents racial bias in suspending students for lesser offenses, according to Joffe, of the superintendents’ association. In the 5 percent of offenses that would be considered most serious — when punishments were mandatory under state law or rule because they involved drugs, alcohol, weapons or violence — students of different races were treated similarly, Joffe says. But in the larger pool of offenses, for which officials had more discretion in deciding whether to suspend students, their decisions revealed vast racial disparities. “We know children of color face discipline more often and, more importantly, more harshly for the same sorts of infractions than their white and Asian peers,” Joffe says.
The Obama administration has told educators to avoid overly punitive responses to misbehavior by disabled students, too. In a letter to educators in 2016, it said that repeated disciplining of children with disabilities may signal that they are not receiving appropriate support in school.
Regular schools should have “release valves” for students who disturb classes — such as sending them to a guidance counselor’s office or giving them in-school suspension — that don’t involve removing them from regular school, Joffe says. Alternative schools should be reserved for students who need services beyond what a regular school can offer, he says — such as substance abuse treatment, anger management or trauma counseling.
In recent years, facing criticism for excluding students, some schools have turned to gentler approaches for managing disruptive behavior. One method, called “positive behavior supports,” involves coaching students to improve behavior through rewards, encouragement and changes in their environment and routines. Restorative justice, in which students make amends for bad behavior in lieu of harsh punishment, has also gained proponents.
The Aiken school district — which serves roughly 25,000 students, about a third of whom are African American — has not formally adopted either positive behavior supports or restorative justice. But the district has reformed both its code of conduct and the tribunal system in the past two years, with Superintendent Alford telling parents discipline should be instructive and not simply punitive. Because of the changes, fewer offenses result in automatic referrals for severe punishment. And school administrators now must first document what they did to try to help a child correct misbehavior before referring them for expulsion, suspension or an alternative school transfer. The district hired a full-time hearing officer, who has taken the place of the tribunal and has more flexibility in working with families after a disciplinary incident. The goal, Burkhalter says, was to reduce expulsions, decrease the number of hearings and appeals and give school administrators and teachers more discretion in handling discipline problems “with a view toward trying to get students back on track and not trying to push them out the door.”
While the number of students in Pinecrest has remained about the same, Burkhalter says, more of them arrive as a result of negotiated agreements between parents and the district after a disciplinary incident. Overall, he says, students are spending fewer days out of school altogether for disciplinary reasons — resulting in fewer lost instructional hours.
When he returned to North Augusta after 13 weeks at Pinecrest, Logan found himself far behind peers. “I don’t know any of this, you are way further ahead of me,” he told his math teacher. “I wasn’t doing anything like this in alternative school.” A few weeks later, Logan got caught taking his cellphone out of his pocket twice on one day — though students were supposed to leave it in their locker or a car. This time, the school recommended expulsion and held a special hearing to decide whether the violations stemmed from his disability — which would have precluded the drastic punishment. Though his mom argued that taking out his cellphone was an impulsive act directly connected to his ADHD, staff disagreed. Woodward and her son didn’t bother presenting their case at the tribunal. They had had enough. Feeling defeated, Logan dropped out of high school in the spring of 2015, at age 15.
At the time, Logan told himself and his mother that he’d just get an equivalency diploma or attend a special school for at-risk kids in Columbia. Instead, he started working right away, moving down to south Georgia to build chicken houses for his uncle’s company, which supplies them to farms. After a few months, he moved back home, taking another job repairing heating and air conditioning units — and sometimes working 55- to 60-hour weeks. His family moved across town to a subdivision, where they live in a neat brick home with a manicured lawn at the end of a cul-de-sac. Logan contributed $100 of his pay each week to household expenses.
On his days off, he shot skeet or hunted deer with family and friends or went down to the drag strip to watch the races. He reached out to his father, who had fallen on hard times. The two met and started to develop a relationship. But this time, his mother says, Logan tried to be the role model, urging his father to face his problems.
“He fell into adulthood,” Woodward says. “He’s just taken it and run with it.”
In late November, Logan decided to move back to South Georgia and join his uncle’s company, repairing the equipment in the chicken houses. He is living with his cousin near rural Reidsville, making $14 an hour. “He’s a hard worker, I think that’s what he’s got going for him,” his aunt, Dawn Floyd, says. “We couldn’t wait for him to get to us.”
Woodward says she’s proud of her son’s determination since he left school, but she still grieves that he will likely never hold a traditional high school diploma and missed out on high school rituals like the class ring ceremony, graduation and prom. “I think it hurts me more than it hurt him,” she says.
The weekend he left South Carolina for Georgia was emotional. Afterward, his mother sent him a text, telling him his younger sister missed him.
It wasn’t easy for him either, Logan texted back, but he was determined to succeed, for all their sakes. “I’m going to be a millionaire,” he wrote, so that “we won’t have to struggle ever again.”
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Lyla Elkins transferred to North Nicholas High School in Cape Coral, Florida, in 2016 with hopes of sailing through its computer-based courses and graduating early. She didn’t realize the for-profit charter school would also be a source of income: a $25 gift card each time she persuaded a new student to enroll.
“I referred almost all of my friends,” said Elkins, 17, who earned three gift cards. She also won a Valentine’s Day teddy bear in a raffle for sharing one of the school’s Facebook posts.
Such incentives are rampant among for-profit operators of public alternative high schools like North Nicholas, which serves students at risk of dropping out. These schools market aggressively to attract new students, especially during weeks when the state is tallying enrollment for funding purposes. They often turn their students into promoters, dangling rewards for plugs on social media, student referrals or online reviews, a ProPublica-USA Today investigation found. Some also offer valuable perks simply for enrolling.
The schools’ reality is often less inspiring than their promotions. While they face a daunting mission of salvaging students who struggled elsewhere, they’re characterized by high absenteeism, low graduation rates, little instruction from teachers and few extracurricular activities or elective classes. Their intensive recruitment, when coupled with poor outcomes, “is wrong on so many levels,” said Samuel E. Abrams, a professor at Columbia Teachers College and author of a 2016 book on for-profit education. “It’s not addressing the pedagogical needs of these kids.”
It’s legal for schools to provide gift cards to students for referrals, and free electronic devices, such as tablets or computers, to newcomers. And students are free to express their opinions on their schools. But advertisements have less protection under the First Amendment, and some for-profit school promotions involving online posts or reviews may violate federal consumer safeguards.
According to the Federal Trade Commission, companies that use students and other groups as social media marketers should instruct them to disclose publicly that they expect to be paid. In settlements with the FTC, companies that failed to encourage such disclosures have agreed to follow the law — or face a potential penalty of up to $40,000 per transgression. Those instances didn’t involve students.
Even a series of seemingly small awards should be acknowledged to help viewers assess the credibility of an online endorsement, said Mary Engle, FTC associate director for advertising practices. “Our advice is to err on the side of disclosure,” she said.
More companies are using “micro influencers” like students for marketing, because they are inexpensive and effective at targeting consumer groups, said Bonnie Patten, executive director of the nonprofit watchdog Truth in Advertising.
“Basically, the law says if it’s an ad, consumers need to be able to clearly and conspicuously see it’s an ad,” she said. “For a group of unsophisticated teenage kids, the onus is definitely on the company to require them to disclose this material connection.”
During its “Share the Love Facebook Contest” in February, North Nicholas offered raffle prizes such as the bear Elkins won, a $50 gift card grand prize, $25 gift cards, flowers and chocolates. To enter, students needed only to “Like, Comment AND Share” a post from the charter school’s Facebook page. Charter schools are publicly funded, but independently run.
“Remember to share a post every day for more chances to win!” the school urged. It didn’t say on the post, or tell Elkins separately, that students should disclose that they hoped to be rewarded.
Angela Whitford-Narine, president of the for-profit company that runs North Nicholas, Accelerated Learning Solutions, said schools handle their own social media pages and ALS does not believe it is obligated to make disclosures in individual schools’ online posts. But, she said, the company will consult its attorneys in response to ProPublica’s inquiry.
North Nicholas’ promotion took place during a week when Florida education officials require schools to count heads to determine how much money they should receive. At least 17 states, including Florida, use this “snapshot” method to allocate public education dollars. Whitford-Narine said ALS hosts social events throughout the year — not just during count weeks.
Those weeks are busy recruitment periods for other for-profit chains too. One alternative school in St. Lucie County, Florida, managed by Acceleration Academies, used Facebook to encourage students not to “miss out on the food, fun and raffles” between Jan. 30 and Feb. 10 — a period that overlapped with the state’s enrollment count. It touted “Pizza Monday” and “Pizza Thursday,” “Taco Tuesday,” and “Wing Wednesday.”
David Sundstrom, chairman of the board for Acceleration Academies, which is based in Chicago, said in an email that such social events take place year-round and are not just a way to drum up enrollment. “Bottom line,” he wrote, “we don’t use pizza parties etc. as a mercenary means to exploit the kids we serve, or to make money.”
Another Acceleration Academy offered a pricey incentive to new students — free electronics. “As a graduation candidate at Polk Acceleration Academy, you’ll receive your own Kindle Fire HD to access your course content,” the school’s 2014 Facebook post said. Acceleration schools no longer provide Kindle Fires for newcomers, Sundstrom said, although some give away technology devices to students for achieving academic goals.
Refer-a-friend programs like the one at North Nicholas are common in the sector. “Bring a friend into Mavericks!” said one 2015 Facebook post for a Palm Springs school in the for-profit Florida charter chain. “They will get help getting their diploma and you will get a gift card.” The post promised a $5 gift card for each referral as part of the “Friends & Family Club,” as long as the recipient had acceptable attendance and no disciplinary problems.
Mavericks’ new parent company, EdisonLearning, hands out Walmart gift cards for student referrals at its “Bridgescape” schools in Illinois and Ohio. It posted pictures on Facebook this past spring of students displaying their prizes. EdisonLearning officials said the gift cards enable low-income students to buy essentials.
In some cases, schools have offered rewards to students for online reviews. In April, Invictus High School in the Cleveland suburb of Parma Heights promised students a $25 gift card for a review on Yelp, an arrangement it promoted on Facebook. Invictus, which was run by a for-profit manager until November 2016, didn’t instruct students to disclose the benefit.
Joe Palmer, the school’s principal, said it didn’t end up paying any students for reviews. This year, it’s changing its advertising strategy. “We’re moving away from any recruitment strategies that aren’t focused on driving students through word of mouth,” he said.
New York City’s public schools are among the most segregated in the country – a fact that flies in the face of the city’s history as a bastion of progressivism. For this podcast, I spoke with former ProPublica reporter Nikole Hannah-Jones, now a New York Times Magazine staff writer, about her decision to delve deeply and personally into that paradox.
Hannah-Jones wrote about the public school her daughter attends in New York City, PS 307. The school is populated by poor children of color from nearby housing projects. It also became the site of community tension when predominantly white and well-off parents living nearby were pushed into its school zone to ease crowding at another school.
Hannah-Jones has spent much of the past four years chronicling how official actions and policies perpetuate racial and economic segregation in our nation’s housing and schools. For this story, she focused on the painful choices she and other parents have to make in the absence of official efforts to right past wrongs.
Here are some highlights from our conversation:
On why she decided to write a personal story about her family’s experience in a school already in the headlines:
Hannah-Jones: I just felt that there was a story that wasn't being told. That a lot of the history and, understandably, because newspaper reporters, as in TV reporters, have very short time to turn around something, they don't have a lot of space. They have to move on to other things. I felt like we were writing about all of these tensions and this difficulty without giving any context about why we were here, and what was making this so hard, and why, in this very liberal city, we were grappling race no better than anywhere else.
About her struggle with deciding to allow her daughter’s photograph to be on the cover of The New York Times Magazine:
Hannah-Jones: In the end, I thought, if they can see this little girl, a girl that they can relate to more for class reasons, or for whatever reasons, will they then be able to finally relate to all these children who are suffering for our decisions? Who adults are making decisions for and about, and putting them in situations they don't deserve. Ultimately, that was the reason why I finally said, "Okay." I felt the small sacrifice of her anonymity as worth it if people could make a connection to all of these other children through her.
On why she chose the chilling end to her piece that she did:
Hannah-Jones: I needed to end with a gut punch, really. I needed to end with something that would stick with you, and you wouldn't walk away from this story feeling like, ‘Yeah. This was really sad, but whatever.’ It was really important for me to end with that – in the end bring it back to the reality that all these 10,000 words are about these children.
THREE YEARS AGO, it looked like the Florida agency that oversees care for children and adults with disabilities had finally had enough.
It filed a legal complaint that outlined horrific abuse at Carlton Palms, a rambling campus of group homes and classrooms near the small town of Mount Dora.
A man called “R.G.” was punched in the stomach, kicked and told “shut your fucking mouth,” the complaint said. “R.T.” was left with a face full of bruises after a worker hit him with a belt wrapped around his fist. A child, “D.K.,” who refused to lie face down so he could be restrained, was kicked in the face and choked until, eyes bulging, he nearly passed out.
State officials wanted to bar Carlton Palms from accepting new residents for a year.
“[A] moratorium on admissions,” wrote a lawyer with the Agency for Persons with Disabilities, “is necessary to protect the public interest and to prevent the continuance of conditions that threaten the health, safety and welfare of Carlton Palm’s (sic) residents.”
Two months later, the state backed down.
Carlton Palms’ owner, the for-profit company AdvoServ, had deployed a Tallahassee lawyer and lobbyist who counted a former governor among his clients. The company admitted no wrongdoing and paid no fines when it settled with the state. It did agree to install more cameras to monitor workers.
The state of Florida — and its public schools — then went right back to sending Carlton Palms new clients.
AdvoServ’s homes and tens of thousands of facilities like them were supposed to be an antidote to the ills of institutional care for society’s most vulnerable: children and adults with profound disabilities like severe autism. Tucked away in neighborhoods across the country, the homes are often a last resort for overwhelmed families and schools, as well as state officials who shuttered their public asylums over concerns about mistreatment.
But the sprawling system of privately run residential programs is quietly — and with few repercussions — amassing a record as grim as the institutions it replaced, a ProPublica investigation found.
Particularly haunting are the deaths of children in residential facilities, often far from their homes. At least 145 kids have died from avoidable causes in such facilities over the last three decades, a ProPublica review of news accounts found.
In one group home, a worker strangled a teenaged resident during a struggle; at another, a boy died of an infection after employees taunted him and accused him of faking illness. Other children suffocated while workers held them down.
AdvoServ’s Carlton Palms is one of a dozen residential programs nationwide where two or more children have died in separate incidents from potentially preventable causes. Most recently, a 14-year-old girl died there after a night during which she was tied to a bed and chair. She’d entered the program just six months after the state dropped its call for a year-long moratorium.
A deep examination of AdvoServ — a veteran industry player now owned by a private equity firm — shows how a powerful, well-financed provider can exploit a fractured system, using its deep pockets to beat back sanctions, bully regulators and shape the very rules it plays by.
The company’s ascension reveals, too, the fraught marriage of convenience that binds the growing ranks of private providers to the public agencies that rely on them, sometimes paying upwards of $350,000 a year in taxpayer money for each resident’s care.
Officials with Florida’s disabilities agency said the state sees itself as partnering with, as well as policing, Carlton Palms.
“Our approach has been very, very aggressive in working with Carlton Palms,” said Tom Rankin, a top official with the agency. “It’s also been very, very collaborative.”
State and federal officials often give operators like AdvoServ wide latitude on key decisions such as figuring out how to control unruly patients, meet medical needs and staff homes. When problems occur, the limits of regulators’ power can become starkly clear.
One infamous program for instance, the Judge Rotenberg Educational Center outside Boston, has been condemned for its use of electric shocks to halt residents’ undesirable behaviors. At least two states tried and couldn’t get Rotenberg to stop. The facility continues to receive more than $60 million a year in mostly public money to care for 240 people with developmental, intellectual or emotional disabilities.
Calls for federal action have failed. A bill first introduced in 2008 would have required the federal government track abuse complaints and create a website listing residential providers for kids nationwide. It has gone nowhere.
Even some in the industry say more oversight is needed. “We definitely support regulation because bad things have happened to kids in residential programs, and not just 10 years ago,” said Kari Sisson, executive director of the American Association of Children’s Residential Centers, which promotes best practices. “They happen to kids today.”
Florida’s aborted effort to sanction AdvoServ surprised few who knew of its nearly five decades of dealings with regulators. The company cares for roughly 700 people with intellectual and developmental disabilities and behavioral problems in Delaware, where it is headquartered, as well as New Jersey and Florida.
“I always got the feeling they were pretty untouchable,” said Kevin Huckshorn, a national behavioral health consultant.
AdvoServ executives say there is no pattern of abuse in its facilities and that employees who mistreat residents are disciplined. “In a program like ours in which we serve individuals with significantly challenging behaviors, incidents are going to be inevitable,” said Robert Bacon, the company’s chief operating officer and a 29-year AdvoServ veteran.
“We acknowledge we are not perfect,” CEO Kelly McCrann told ProPublica. “But what we do does not allow perfection.”
In a written statement, top officials at AdvoServ also said they are proud of the company’s record and that they “responsibly” address problems when they arise. AdvoServ supports strong oversight and clear standards, the statement said, “because they help us deliver the highest quality care.” (Read the full statement.)
The parents of five teenagers and adults living at AdvoServ homes praised the company, which provided ProPublica their contact information.
“We have had nothing but unbelievably good experiences with Carlton Palms,” said Ginny Robinson of Kennesaw, Georgia, whose son Jonathan has an intellectual disability and can have violent tantrums. He first entered the program 19 years ago. “I truly believe had we not found them he would be either in jail or dead.”
But a more troubling picture emerges from thousands of pages of public records reviewed by ProPublica, as well as from the accounts of current or former residents laid out in lawsuits and in interviews with relatives. Many complaints have centered around the company’s aggressive use of mechanical restraints, such as leather cuffs, chairs with straps, and a “wrap mat” akin to a full-body straight-jacket. Such tactics, records show, have resulted in broken arms, collarbones and jaws, knocked-out teeth and cuts needing stitches.
In late June 2013, Carlton Palms’ staff members assured Paige Lunsford’s parents in emails that their daughter, a waifish girl with brown eyes, “was having a nice day in class today” — even though she had begun vomiting and clashing with staff just days after arriving. Lunsford had autism, was bipolar and schizophrenic, and couldn’t speak. She struggled with compulsions to bite her skin or bang her head. Workers tied her down when she ran from them, threw things or tried to hurt herself.
A Carlton Palms doctor saw her but, despite her worsening condition, chose not to send her to the hospital. The next morning a 911 call brought medics to Lunsford’s bedroom, where they found her dead of dehydration brought on by her stomach illness.
The sole concession Florida regulators wrung out of AdvoServ after dropping the admissions moratorium — that the company improve video monitoring — did little to bring about accountability.
When detectives went to examine video from cameras where Lunsford lived, they discovered all but an hour or so was gone. Company officials said the footage was mistakenly erased.
In recent decades, states have largely outsourced the day-to-day care of people with developmental and intellectual disabilities. Group homes are now overwhelmingly run by private organizations, and while nonprofits rule the sector, for-profit investors have increasingly taken interest. AdvoServ founder Kenneth Mazik was at their vanguard.
Mazik opened the Au Clair School for autistic children in 1969 in a stern-looking 28-room mansion in Bear, Delaware. A broad-shouldered University of Delaware graduate who had worked at a state institution, he said a particularly gruesome encounter had inspired him: A boy he was counseling had pulled out his own eye. “So, following my usual pattern, I overcompensated,” he told a reporter at the time. “I threw myself into autism - which was what was wrong with the boy.”
He took in castaways — his first patients were teenage boys who had been kicked out of another program — and Au Clair soon had 30 children. It received national attention in the early 1970s when “Silk Stockings,” a racehorse owned by Mazik and his then-wife, started winning harness-style races, infusing the school with prize money. The media loved the tale of how the horse saved the little school for autistics.
Another source of cash for Au Clair appeared when Congress mandated in 1975 that public schools take responsibility for educating all children with disabilities. Local classrooms still sometimes couldn’t handle children with the most serious impairments, so families implored local officials to pay tuition for special private schools. Mazik’s Au Clair, and schools like it, took the cases no one else would.
But signs of trouble began soon after the glow from Silk Stockings’ wins faded, when former workers said they had witnessed children being beaten at Au Clair as part of their treatment.
Articles in the Wilmington News-Journal in 1979 described children hit with plastic bats and dunked in a dirty swimming pool. Mazik himself, the newspaper said, had repeatedly whipped a 16-year-old boy with an intellectual disability across his backside with a riding crop.
Mazik acknowledged in the story that he had struck the boy, but said it didn’t constitute abuse. The employees who complained were disgruntled, he said.
Delaware officials considered shutting down the school, but instead chose to work with it to improve conditions.
The company continued to grow, opening a second Au Clair in 1987 in Florida, northwest of Orlando. That school — later rechristened Carlton Palms — took root on the isolated lakeside campus of a former retirement community, tucked between orange groves.
The company had told local officials the school would house 20 to 30 children, ages seven to 18. But within three years, it had grown to 48 students coming from 28 states.
Keeping large numbers of disabled children under one roof was exactly the model the country was moving away from. The goal was to replace big institutions with a network of community-based homes.
But in Florida, a lobbyist for the company urged legislators to carve out an exception for “transitional” programs with tiered levels of care and more people living together than was typically allowed. The change — which only benefited Au Clair — also later helped justify higher rates of pay from the state than what other programs received.
By 1997, Au Clair had changed its name to AdvoServ and expanded to about 130 children at schools in Delaware and Florida. That year, it faced two crises.
On April 2, Mazik telephoned relatives of a 14-year-old student to tell them the boy had died of an apparent seizure at Carlton Palms.
A caller to the state’s abuse hotline a few months later reported that the boy, Jon Henley, hadn’t received immediate medical care for the seizure, and that staff had neglected him.
Investigators from the county sheriff’s office and state Department of Children and Families discovered a roommate had told staff that Henley was shaking their bunk bed early that morning, but workers had done nothing to help him. One staffer said she just told the boy — who was face down — to be quiet because she thought he was masturbating. Workers were supposed to check on his wellbeing every 15 minutes all night. But he was found dead at wake-up time, 7:30 a.m., still face down.
Henley had autism and took medication to prevent convulsions. But an autopsy found it present in his blood at levels far below the “therapeutic range” typically needed to control seizures.
Ultimately, despite signs of potential lapses in care, the sheriff’s office did not file criminal charges and state investigators closed their inquiry with no finding of mistreatment. The facility faced no repercussions.
Henley, a joyful child whose loved ones called him “Prince Jon Jon,” had gone to Carlton Palms because his St. Thomas, Virgin Islands, school district wasn’t equipped to teach him. “If they had the accommodations on the island for him we would have never sent him there,” his aunt Laurice Simmonds-Wilson recalled.
When he died, she said, Carlton Palms officials said the company would pay for a casket and arrange to return his body to St. Thomas.
Family members only recently learned through ProPublica’s inquiries about the state investigation and allegations that Henley had not received proper care. The family didn’t even know an autopsy was conducted. “We feel we were lied to and fooled for all of these years,” Simmonds-Wilson said. “Jon Jon deserved justice. Period.”
A former staffer said Carlton Palms administrators had offered little information about what happened to the well-liked student, even to workers. “I was confused,” said Susan Knoll, who was a behavior analyst there at the time. “They didn’t tell us, which seemed strange.”
AdvoServ officials, in a statement, said Carlton Palms cooperated with the investigations, which found no wrongdoing, and that “[w]hen incidents like this occur, we responsibly address them.”
Just a month after Henley’s death, the next crisis hit: The New York Times published a scathingstory on Mazik’s schools and his influence on federal welfare reform.
The story — which didn’t mention Henley’s death — revealed New York inspectors had once discovered children at the Delaware Au Clair school living in trailers that smelled of urine and feces. One weeping deaf boy, the story said, had been confined for hours in a wrap mat that had cut off his circulation.
“I cried all the way back on Amtrak,” a New York official told the Times.
The story also detailed how Mazik had maneuvered to dip into a stream of foster care funding by urging federal lawmakers to strike the word “non-profit” from a section of the 1996 welfare reform legislation signed by Bill Clinton.
Mazik quickly sent a letter to Delaware officials blasting the story. “Because of your involvement,” he wrote a top licensing official, “I want to provide you with some facts to help alleviate any discomfort you may feel as a result of the Times piece.”
But any worries Mazik might have had proved unfounded. The company experienced no major fallout and proceeded with plans to enter a new market. AdvoServ would soon become the largest provider of group homes for developmentally disabled adults in New Jersey.
Mazik’s circumstances seemed to reflect the company’s growing prosperity. He kept homes in Delaware and Florida, shuttling between them in his private plane. He collected fine art, cigars and wine and increased his real estate holdings. He also developed other business ventures, launching a video surveillance company that supplied his group homes and schools.
AdvoServ’s expanding portfolio of programs routinely used mechanical restraints, such as the wrap mat or cuffs — which other operators were abandoning — to manage agitated residents. The company battled fiercely to fend off any limits on such measures.
In 2003, New Jersey lawmakers introduced a state bill to curtail restraints in residential programs, particularly those serving people with developmental disabilities or brain injuries. The measure was inspired by Matthew Goodman, a 14 -year -old who had died of pneumonia after being repeatedly restrained while living at another operator’s group home.
At an assembly committee hearing on the bill, then-AdvoServ CEO Judith Favell passionately defended the tactics. “I believe that restraints should be used to assist in decreasing a behavior problem,” she said. “In my experience, the abuses involved in restraint are, indeed, rare.”
Favell also met with the committee’s chairwoman, Democrat Loretta Weinberg. Two weeks later, one of Mazik’s companies donated $2,200 to Weinberg’s campaign. Mazik gave another $25,000 to the state Democratic Party’s senate political action committee — the first installment of nearly $125,000 he would give the party over the next four years.
Weinberg’s assembly committee went on to pass a weakened version of the measure with fewer limits, and a restraint bill did not gain traction in the state senate.
Weinberg, now a state senator, told ProPublica she agreed to the compromise bill not because of AdvoServ, but because she didn’t think stronger legislation could pass and had heard from parents who supported restraints. “I have never in my 20-some years in public life sold a vote,” she said.
In the end, the company got its way: The effort at reform fizzled.
A few years later, the restraint issue resurfaced — this time on the national level. In 2009, Congressional lawmakers introduced the first of what would become a series ofbills to restrict the use of restraints on public school children.
AdvoServ pushed back, using heavyweights such as former HealthSouth lobbyist Eric Hanson — who was later joined by former Congressman Jerry Weller. The company has paid the lobbyists’ firm nearly $1 million over the past decade.
The legislation was reintroduced repeatedly but stalled, never achieving significant Republican support.
Two opponents of the restrictions were the most vocal, a former Senate staffer said: One was the controversial Rotenberg Center. The other was AdvoServ.
AdvoServ has proven as adept at working over the state agencies that deliver it clients — and the millions of dollars that follow them — as it has the political process. The company’s relentless advocacy in Delaware kept a stream of residents flowing to its facilities even after two sets of regulators raised alarms about children hurt in its care.
In 2011, Delaware’s agency for foster care and children’s mental health took a bold step: It decided to stop sending kids to AdvoServ.
Agency officials objected to mechanical restraints and thought kids were staying too long in what should have been short-term placements. AdvoServ had also resisted even telling regulators about all restraints — a move that one official in an email called an effort “to prevent any oversight of their practice.”
AdvoServ leaders responded to the agency’s decision with “intense outreach,” emailsshow, urging it to reconsider and promising the company was making improvements. But state workers saw no such improvements.
“I have checked with others here in the Kids Department, who have been on site there in recent months,” wrote Vicky Kelly, director of the agency’s family services division, in 2012, “and they don’t report evidence of these changes.”
Even the state psychiatric center for adults was cutting back on restraints at federal officials’ insistence. But AdvoServ was “unbending” in its commitment to them, another of Kelly’s emails from that year said. “So the state is in a precarious position right now,” she wrote, “in agreeing that restraint is prohibited for adults, yet still allowed for youth with serious disabilities.”
As foster care officials continued to avoid placing kids with AdvoServ, Delaware lawmakers took up a bill to prohibit using mechanical restraints on public school students and limit holds with bare hands.
That posed a problem for AdvoServ because Delaware public schools referred more children to the company’s homes than the state’s child welfare agency did, sending about 20 boarding students and 10 day students a year. Each student brought in substantial revenue: Six-figure bills are typical and, for one AdvoServ student, the state and local agencies paid a combined $383,000 per year.
AdvoServ — whose Delaware lobbying firm was led by prominent former state Rep. Bob Byrd — pushed for a loophole in the restraint measure involving schoolchildren: The company wanted providers to be able to seek waivers if they thought mechanical restraints were needed for a particularly challenging resident.
A state lawmaker told an education official that because of AdvoServ’s intervention, the bill would go nowhere without the waiver provision, according to state school officials and the director of the state Developmental Disabilities Council.
In June 2013, the restraint bill passed with the exception AdvoServ had sought. (It has not, to date, sought a waiver.)
Soon after it won that battle, the company faced a new one with state education officials. They, too, had objected strongly to mechanical restraints on students, which the company was phasing out. While officials hadn’t barred schools from sending kids to AdvoServ, company executives perceived a downtick in the number of schoolchildren referred to the company’s program in 2013.
AdvoServ responded by ramping up pressure on state bureaucrats.
“One of my clients represents AdvoServ,” former Delaware Controller General Russell Larson wrote in an email to top education leaders in August 2013. “I would love to meet with you to find out if there’s anything I can tell my client to help them improve their service.”
Education officials told him they were already talking with AdvoServ directly. Unsatisfied, AdvoServ brought its concerns to Gov. Jack Markell’s office two months later — threatening to leave the state if school referrals didn’t pick up, emails show.
As AdvoServ tried to muscle state leaders into line, rank-and-file staffers at Delaware’s education department expressed frustration.
“They HAVE gotten new referrals,” one education official wrote to another after learning of the company’s complaints to Markell. “I wish they would own the problems they caused for themselves and acknowledge the inordinate amount of time we have devoted to them to help them remain open!”
Amid the wrangling between the company and school officials, a rash of complaints about mistreatment in AdvoServ homes rolled in, with seven landing between November 2013 and July 2014. “It is out of control,” a state licensing official lamented to another.
In one case, an AdvoServ worker threw scalding water on a resident, causing first-degree burns. Employees, including a supervisor who had left the home to play video games with a friend, sought to cover up what happened by claiming a cup of hot water had fallen off a dresser when the resident was trying to injure herself, records show. Workers didn’t take her to a doctor right away. Instead, they popped her burn blisters and falsified an injury report.
They later told authorities what they had done was “typical” behavior at AdvoServ. The workers resigned or were fired. The company said they lacked credibility.
In another case, a Delaware worker covered a boy’s face with a folded-up pillowcase to prevent him from spitting, leaving him gasping for breath. That led to one of three citations from the state last year for improper restraints.
In August 2014, the state education department approved keeping AdvoServ on the list of places public schools could send schoolchildren for the next three years.
Education officials said last week the decision was based on improvements the company had made, as well as parents’ and school districts’ positive comments.
After the scalding incident and other problems, Delaware’s foster agency gave one AdvoServ school a “warning of probation,” an action two steps before license suspension. The agency required AdvoServ officials to hire a consultant to help it improve safety at all its Delaware facilities.
Though the agency still wasn’t referring kids there, AdvoServ met all the requirements. This past May, state licensing authorities lifted their warning.
AdvoServ was, once again, a residential school in good standing.
While AdvoServ largely succeeded in smoothing over conflicts in Delaware, it faced what looked like a greater threat in Florida: 14-year-old Paige Lunsford had died from a treatable medical condition and state investigators wanted to know why.
A tip to the state’s abuse hotline five days after Lunsford’s death on July 6, 2013, implicated Lunsford’s care at Carlton Palms, as well as workers’ use of restraints on her.
The caller said Lunsford had been in “too much restraint for longer than necessary” and that the restraints may have made her underlying medical problems worse. Records of her care, the caller said, went missing the morning after she died.
Carlton Palms hadn’t notified the agency of Lunsford’s death, though it was supposed to immediately report any incident where abuse or neglect was suspected.
Child welfare investigators and detectives descended on the remote campus to interview employees. They discovered a tangle of conflicting accounts.
Lunsford’s parents said Carlton Palms’ doctor, Dr. Robert Lynch, had initially told them she was rushed to the hospital, where she collapsed and died, state records show. Yet medics said that when they arrived at Carlton Palms, she was already dead.
Tom Shea — the center’s director — told investigators that overnight, Lunsford had rocked herself to sleep in the restraint chair and staffers carried her to her bed.
But workers said Lunsford had endured multiple mechanical restraints on her last night while vomiting as many as 25 to 30 times — “like water out of a sink,” one staffer told investigators. Workers tied her arms and legs to a bed while she lay on her back.
Then, in one of the night’s most harrowing moments, they decided to move her to a restraint chair in the hallway. They said Lunsford, down to 69 pounds, fought back so hard it took six of them to wrestle her into the chair — where she was bound in six places. They said she never slept.
Her caregivers said they sought help from the program’s top nursing and behavioral staff, but no one directed them to call an ambulance.
After a nearly eight-month investigation, state child protection officials cited Carlton Palms for medical neglect and for inadequately supervising Lunsford, singling out Lynch and head nurse Bonnie Clugston.
“[W]rongful death due to medical neglect is probable,” one state report concluded.
The state health department found Clugston, the facility’s head nurse, had violated state law by failing to get Lunsford emergency medical help. (The department has not made a similar finding for Lynch.)
In its statement, company leaders said they “fundamentally disagree” with the child protection agency’s conclusions and are awaiting the health department’s determination in Lynch’s case. AdvoServ also said it stands by Shea’s account of Lunsford’s last night and that the video deletion was accidental.
“Paige’s death was very tragic and heart-wrenching for us all, and it still hurts quite a bit,” said Bacon, AdvoServ’s chief operating officer. He declined to answer specific questions about Lunsford.
Clugston and Lynch resigned, the company said. Shea retired in the spring. Lynch did not return messages left at his office. Clugston could not be reached.
Lunsford’s parents filed a lawsuit in May 2015 against Carlton Palms and certain staff members, alleging negligent medical care.
The job of figuring out what sanctions, if any, should be levied against Carlton Palms fell to the Agency for Persons with Disabilities, the same department that had sought, then dropped, a year-long moratorium.
As before, officials there chose not to halt admissions or levy fines.
“[A]s my staff previously discussed with you, the Agency is willing to forego the imposition of administrative fines at this juncture and allow your facility to apply those resources instead to complying with the expectations outlined herein,” the agency’s director, Barbara Palmer, wrote in a letter to AdvoServ almost 10 months after Lunsford’s death.
The state required more upgrades to the facility’s video monitoring, including letting regulators call in for access to remote feeds, and an overhaul of how the program managed medical cases. Officials also mandated that the company retrain workers on restraints and that company officials meet regularly with regulators.
Three months after Palmer’s letter, as the Miami Herald prepared to publish a story about Lunsford, another alarming incident took place at Carlton Palms.
A boy broke his arm while staffers were restraining him in a wrap mat, according to state records. They didn’t take him to the hospital for five hours. He had surgery to insert pins in his upper arm, then landed back in the hospital days later with an infection after Carlton Palms workers didn’t properly care for the wound.
The Agency for Persons with Disabilities finally imposed an informal moratorium, pledging not to refer any residents to Carlton Palms.
The ban lasted five months, during which the state agency still allowed the facility to admit an out-of-state resident, according to the company.
“It is important to understand that the moratorium was not a punitive measure, it was done out of an abundance of caution to allow the agency and AdvoServ to work through any potential issues,” the company’s statement said. “We fully support the process.”
AdvoServ also paid a $10,000 penalty, the maximum allowed by law.
Today, AdvoServ appears poised for more growth. The company is expanding into Virginia.
In 2009, Mazik sold a majority share in the company to California-based GI Partners — which recently sold the company again to another private equity firm, Wellspring Capital Management in New York. AdvoServ says Mazik no longer has any ownership stake in the company.
Mazik did not respond to questions sent to him. In a letter, his lawyer said that since the 2009 sale, Mazik “has had no operational or managerial role regarding day to day operations” of the company.
Critics of Carlton Palms worry it has grown so big that regulators can’t effectively oversee it. The facility cares for nearly 30 percent of all Floridians who need such services. Finding so many beds elsewhere would be difficult.
When the Agency for Persons with Disabilities filed its complaint asking for a moratorium in 2012, it acknowledged a concern that suspending or revoking Carlton Palms’ license “could unnecessarily disrupt the lives of the existing residents.” The agency shut down two residential providers for people with similar disabilities to those at AdvoServ in the past year. But Carlton Palms dwarfs them in size and influence.
In a statement, the Agency for Persons with Disabilities objected to the idea that it is unable to properly oversee Carlton Palms. It said, however, “closure of a facility is always the Agency’s last resort … and is only done in cases where a provider is either unwilling or unable to correct identified problems.”
When AdvoServ executives gave me a tour of Carlton Palms last summer, the placid campus gave no indication of the previous year’s turmoil.
We traveled in a golf cart over wide grassy lawns past skinny palms and live oaks draped in Spanish moss, visiting tidy classrooms and silent halls in dorm-style buildings. Only about 20 of the facility’s roughly 200 residents were in view.
Company officials said the rest of their clients were at vocational assignments or off-campus trips such as to a bowling alley. About 80 residents do landscaping and janitorial work for minimum wage at sites, it turns out, that include buildings owned by Mazik’s leasing company in downtown Mount Dora.
The golf cart rolled past a chapel by a fountain, a field where residents play flag football, and a squat modular unit that serves as the administrative building. We saw teenage boys listening to a lesson about managing money, and, in another building, girls with more severe physical impairments doing crafts.
We didn’t stop at the site where Lunsford’s parents had been told Carlton Palms would plant a tree in her memory, just as it had planted one for Henley.
Schools in Massachusetts will be subject to new limits on physically restraining or isolating public school students under reforms ushered in late last year.
School staff members will no longer be permitted to pin students face-down on the floor in most instances and will need a principal's approval to keep children in a "time out" away from class for more than a half-hour. The changes -- which will be phased in this fall and officially take effect in January 2016 -- also require state officials to collect comprehensive data on how often schools restrain or seclude students and how often someone is hurt as a result.
Massachusetts' reforms were shaped, in part, by a June story by ProPublica and NPR that showed physical holds and isolation remain common in public schools across the country. Our analysis of federal data revealed these techniques were used more than 267,000 times in the 2012 school year, with some schools employing them dozens – or even hundreds – of times.
There's a growing awareness that, in some cases, children can suffer serious injuries and lasting trauma from such treatment. At least 20 children have died while being held down or left alone in seclusion rooms.
Spurred by tougher state and federal regulations, as well as professional standards, psychiatric and health care institutions have worked diligently over the past decade to limit their use of restraints and seclusion.
But rules governing public schools have remained more scattershot. The U.S. Department of Education issued restrictions, but made them voluntary. State and local authorities passed a patchwork of regulations that left dangerous techniques illegal in some places but perfectly acceptable in others. For instance, some states don't let schools use restraints that can restrict breathing – such as face-down "prone" restraints –on any children. But others do.
Massachusetts followed few of the half-dozen best practices for safe use of restraints and seclusion outlined in the federal guidelines and a proposed national reform bill, ProPublica's reporting showed. The Disability Law Center, an advocacy group, pointed out in a white paper submitted to officials reexamining Massachusetts' rules that the state compared poorly to its New England neighbors.
James DiTullio, the state's undersecretary of education, said former Gov. Deval Patrick's administration and education officials felt the rules were "long overdue for a very serious and thorough review."
The state sought advice from parents, students, public schools and private schools that serve public school students to determine what needed to change. ProPublica's report "very much played a helpful and informational role as that process got off the ground," DiTullio said.
The state's proposal was not without controversy, drawing 130 comments.
Representatives of several private and public schools said they opposed banning prone restraints outright, which the state initially proposed. Some of the actions prohibited by the new rules are needed to ensure students' safety, warned the Providers' Council, an industry group for private providers of health and human services. In the end, the state agreed to continue to permit prone restraints – with a doctor's approval – in rare circumstances.
The Massachusetts Association of School Superintendents was glad to see the exemption, said Christine McGrath, the group's director of operations.
The group was less pleased, she said, with new requirements for reporting and reviewing restraints, which superintendents will likely find burdensome, and also with limits on "time outs." "The reality," McGrath said, "is sometimes it takes more than 30 minutes for a child to de-escalate and to regroup."
Still, others, including advocates for the disabled and some parents, applauded the changes.
One parent told education officials how her son had suffered during prone restraints, saying the reforms should go further. "I told them I couldn't breathe and they just said you can breathe if you can talk," the son recounted, according to a summary of comments submitted. "They don't understand. I have a very short neck and I am very large and I get panicked when I am afraid I cannot breathe."
Rick Glassman, director of advocacy for the Disability law Center, said the center has heard many such stories from Massachusetts parents and children.
One child was so traumatized by being held face-down on a soiled carpet that he went home and barricaded himself in his room with furniture, refusing to return to the school, Glassman said. Another child was treated for post-traumatic stress disorder as a result.
Massachusetts' new rules also increase training requirements for school staff members and mandate that schools convene a team to come up with a plan for any student restrained multiple times in a single week.
One of the most significant new requirements is that schools report all restraints and restraint-related injuries to the state. In the past, only some were: Numbers reported in Connecticut, which requires schools to tally all restraints, suggest that as many as 90 percent of Massachusetts' holds were going unreported, Glassman said.
DiTullio said the new data collection provision will provide educators with a critical tool.
"We will learn so much more about how these restraints are being used, who they are being used on, how often they are being used," he said. "Good data leads to better outcomes."
The Judge Rotenberg Center, a Boston-area school for kids with severe developmental disabilities and behavior disorders, has earned national notoriety for a long record of brutal techniques to keep children in line.
But New York City kids are still being sent there. Indeed, nearly 90 percent of the school’s students — 121 of 137 kids — are from New York City, including 29 who enrolled this year. New York’s taxpayers send the Center $30 million a year.
The flow has continued despite records obtained by ProPublica showing the Center has repeatedly violated New York state rules, including by tying children down with leg and waist straps to punish them. The Center has received a string of warning letters from New York State and has been subject to two state inquiries over the past five years — neither of them previously disclosed to the public.
City education officials insist they never recommend the school and fight requests by parents to place children there. Families simply enroll their kids and then take the city to court to force it to pay tuition, officials say.
But Judge Rotenberg officials told ProPublica that Mayor Bill de Blasio’s administration has made it easier for New York City kids to go to school at the Center.
“I’ve seen a change since Mayor de Blasio came on board,” says Glenda Crookes, the Center’s executive director. City lawyers appear to be settling a lot of the cases, she said, adding, “It doesn’t seem like the parents have to go to hearings anymore.”
A de Blasio spokesman confirmed the Center is benefiting from a new policy in which the city doesn’t fight cases involving special needs kids in which it “is unlikely to prevail.” The change was part of an effort the city unveiled earlier this year streamlining the process for the city to cover the cost of private school or services for special needs children. Such cases have been fraught with conflict and litigation in recent years.
“The city still reserves the right to oppose families’ claims for schools that are not appropriate for the child’s need,” spokesman Wiley Norvell says.
Councilman Vincent Gentile, a longtime critic of the Rotenberg Center, says the issue goes beyond de Blasio. “I’ve said long ago that State Ed and New York City Department of Education have to take a stand on this,” Gentile says, “and up to now, they’ve been unwilling.”
“The city’s department of education is not putting up a big fight to keep kids out,” Gentile says.
Once kids are at Judge Rotenberg Center — with or without the city paying — it becomes almost impossible for the city to remove a child if the family doesn’t agree.
Many of the students Rotenberg accepts have tried to hurt themselves or others. In caring for them, the Center eschews psychotropic drugs and, for decades, has relied instead on so-called “aversive” therapy, using pain or other negative stimuli to change behavior. Its signature approach is to apply a two-second electric shock to students’ skin.
The Center cites case studies to defend the effectiveness of the shocks, but many mental health specialists don’t support their use. Dr. Gregory Fritz, the President-Elect of the American Academy of Child and Adolescent Psychiatry, says electric shocks and restraint holds can lead to lasting trauma and provide no more than a temporary fix for behavior problems.
“The problem with most of those aversive things is that you can never stop it,” Fritz says. “As soon as the aversive system is removed or tapered, they could go back to the problematic behavior.”
After a 2006 investigation found a variety of abuses including kids being shocked for minor infractions, such as swearing, yelling, and refusing to follow directions, New York State enacted rules against aversive therapy and the Center agreed to scale back their use. The school said it would only use shocks when a court approved them for a specific child. (Two New York students currently have such court orders.) The rules also require court approval of restraints, except for emergencies.
But three years later, New York officials found that the Center was still using so-called “mechanical” restraints — which can include devices that use straps or cuffs — on children it shouldn’t have. Officials briefly ordered the Center to stop accepting New York students. After the Center fought the prohibition, the state settled and allowed admissions to begin again.
Then, in 2011, Edward Placke, a former Assistant Commissioner of New York’s Education Department, was shaken by an encounter with a New York City teenager during a visit to the school. The girl was anxious, but she spoke deliberately, even though a Rotenberg staff member watched over their meeting. Get me out, she said. Take me home.
“She said she was shackled to a chair,” recalls Placke, now superintendent of a cluster of New York special needs high schools. “She said she was incredibly hungry and she was being provided the very minimum.”
Placke’s complaint triggered a probe by New York investigators. They pulled the files of 10 students, reviewed hours of video, and discovered “significant and serious” violations. Kids were still being bound as a way to punish them, the records show.
One child who wasn’t supposed to be restrained was left in waist and leg straps for nearly 10 hours.
Staff members had also altered reports about restraints or failed to record them altogether. Investigators also concluded that Rotenberg was not providing adequate schooling to students who were suspended, and that the school was suspending kids too often.
This time, state officials didn’t suspend the school. The state is keeping a close watch through occasional site visits, say officials.
“We understand the issues with the school. But we have to catch them at serious misconduct. We have to be able to uphold a decision to revoke,” says Richard Trautwein, counsel to the New York State Education Department.
In a written statement, the Rotenberg Center said it “did not agree with the findings of the NYSED in the report, but responded by adjusting policies and procedures in order to make it clearer to NYSED that it was in compliance.” It promised in a 2012 letter to state officials not to use restraint as punishment.
The Center has long fought states’ efforts to regulate it. It has won nearly everymajor court case and has spent substantial amounts on lobbying.
State and federal filings show the Center has employed Bracewell & Giuliani, former Mayor Rudolph Guiliani’s firm, as well as Albany powerhouse Malkin & Ross. Since 2010, the nonprofit school has spent about $770,000 lobbying officials in Washington D.C., Massachusetts and New York, including an effort to counter further restrictions on the use of aversive therapy by New York’s education department.
To recruit students, the Center runs radio ads and has a toll-free number, reaching parents who are desperate for help. “We get a lot of cold calls from parents,” Crookes, the executive director says. About 90 percent of the school’s kids are minorities.
The Rotenberg Center has also worked with an advocacy agency, Joan A. Harrington & Associates, that is listed on a city website as a resource for parents of special needs children.
The advocates are supposed to be independent experts, tasked with helping parents navigate government bureaucracy to find the best services for their child, yet Harrington acknowledged to ProPublica that she has previously been paid by the Rotenberg Center.
In an interview at her Brooklyn office, Harrington said she couldn’t remember how much she was paid or for what specific work. “I imagine it was for referrals and things, like everybody else is,” Harrington said. She said her last case involving the Judge Rotenberg Center was before she became ill in 2013.
Harrington also shares an office and administrative staff with attorney Anton Papakhin, who is paid by the Rotenberg Center to represent parents embroiled in court battles to send their children to the school, keep them there or get behavioral interventions approved by courts. He has received an average of $470,000 a year from the Rotenberg Center over the last five years, according to tax filings.
In a case this year involving a Rotenberg placement, New York City lawyers argued that Papakhin’s relationship with the Center posed a conflict of interest, potentially influencing him and another lawyer to recommend placements at the Center that weren’t appropriate. The judge on the case said there was no evidence that had occurred.
Papakhin represented the parents of most of the 29 New York City students who were enrolled at Rotenberg in 2014, the Center said. Papakhin says he also works with other schools and that there is no conflict.
“I represent the parents and only the parents,” Papakhin told ProPublica. “At any point of time, they change their mind and they decided to place their child in any other school, I can do that for them.”
Papakhin and Harrington work together “from time to time,” as Papakhin puts it.
Harrington says, "It wouldn’t be unusual for me to walk out the door and say, ‘I have this case and look at what they’re doing,’ or for him to come in and say, he has a case, ‘do you know where I could put this child?’”
Other educational advocates recommended by the city say they don’t refer parents to the Judge Rotenberg Center. We “don’t recommend [the school] as a matter of course,” says Kim Sweet, executive director of Advocates for Children, one of the largest advocacy organizations in the city.
New York City’s Department of Education did not respond to our questions about why a city list directs parents to an office shared by a lawyer who works with the Rotenberg Center.
Cheryl McCollins, a Brooklyn mother whose son is a former Rotenberg student, views the city as partially to blame for her son’s treatment. “They are the ones that referred me to this asylum,” she says. The city recommended the Massachusetts facility in 2001 after her son had been through numerous residential centers that weren’t right for him, she says.
A year later, her son was strapped spread-eagled to a restraint board and shocked multiple times while screaming for staff to stop, surveillance videos showed. The shocks were her son’s punishment for not taking his coat off in class. McCollins pulled her son, then 18 years old, out of the Center soon after and eventually sued the school, settling for an undisclosed sum.
Over the years, McCollins has repeatedly contacted the city to ask why the school was still an option for New York students. “Why are you giving them money to torture disabled children who can’t fend for themselves?” she recalled asking one city official.
While families of former students have filed several lawsuits against the Center alleging mistreatment, other parents continue to be the school’s most outspoken supporters.
“If it wasn’t for Judge Rotenberg Center, my daughter would be dead,” says Marcia Shear, whose daughter Samantha, 21, has been at the school for nearly a decade. When Samantha came to the school, her parents saw it as a last resort. Samantha had just been kicked out of yet another treatment center for children with behavioral issues after she hit her own head so many times she dislocated both of her retinas, leaving her almost blind.
The Center was the only school that would take her. Within a few months, the school introduced the electronic skin shock device into Samantha’s treatment plan — with Shear’s support.
“You see the kid is killing themselves, you have nothing to lose,” Shear says. “Until you have lived in our shoes and seen your kid practically blind themselves, you can’t judge.”
Federal investigators have faulted two Virginia schools for pinning down and isolating disabled students improperly, saying the schools used the practices routinely as a "one-size fits all" response to disruptive behavior despite evidence they didn't work.
Rather than focusing on specific incidents, the investigators found a systematic breakdown in how educators at the schools employed restraints and seclusions. The school-wide scope of the findings signals that the federal education department's Office of Civil Rights expects schools to pay close attention to how they are implementing the potentially dangerous tactics.
"It says our default response to misbehavior can't be restraint and seclusion," said Angela Ciolfi, a lawyer with the Virginia Legal Aid Justice Center, which worked on the complaint that prompted the investigation.
ProPublica reported in June that students nationwide were restrained or secluded more than 267,000 times in the 2012 school year. Our analysis of federal data revealed that despite a near-consensus that the risky practices should be used rarely, some schools rely on them regularly — even daily — to control children.
Hundreds of students have been injured — some seriously — as a result.
The civil rights office's July 29 findings come at a time when federal action on the issue appears to be otherwise in a holding pattern. Congressional bills to limit the practices have stalled amid opposition from some school groups and Republicans.
The complaint that started the investigation was filed by a teenager who was sent to PACE East in Prince William County southwest of Washington, D.C., because of unruly behavior. The boy — referred to as M.C. in the complaint — had "significant" mental health problems that included depression and anxiety, said his lawyer, Bill Reichhardt. His family, who is Hispanic, spoke limited English.
Instead of providing the services the boy needed, Reichhardt said, PACE East staff often responded to relatively minor infractions — such as refusing to follow directions — with harsh measures such as physically restraining him.
"In many cases staff put their hands on him," Reichhardt said. "And that escalated very quickly."
One confrontation with staff was so volatile police were called in. The boy said an officer "busted his lip" while handling him, according to the original complaint.
Reichhardt said he noticed while looking into the boy's case that other students had encountered a similar pattern of routine restraints and seclusions — including at PACE East's sister school, PACE West. The two schools function as "last stops" before institutional care for district students with serious emotional and behavioral problems.
Staff got into the habit of regularly using the tactics as a way of controlling children's behavior, Reichhardt said. "That is extremely problematic and, in my opinion, dangerous."
The schools' records contained no evidence of injuries to children. But the decision said restraint and seclusion were "widespread" and "repeated" at the schools, with no indication that staff tried less restrictive alternatives first.
As much as 40 percent of the student body at PACE West experienced a restraint or seclusion in the 2012 school year, according to the federal decision, amounting to 219 uses. PACE East records showed 33 students were restrained or secluded 144 times that year.
Despite the frequent use of restraints and seclusion, the two schools and the district had reported zero instances of either practice to federal data collectors, investigators noted. The schools also failed to "consistently and adequately notify" parents when their children had been subjected them to the techniques.
Children missed out on academics while stuck for hours in a time-out area and more restrictive padded seclusion room, or while being placed in holds, investigators found. The schools often failed to properly evaluate students' behavior and develop plans to prevent the sort of crises that often bring on restraints or seclusions, investigators found.
Furthermore, administrators and staff viewed school policies differently. The district's director of special education, for instance, told investigators a student screaming threats was not enough to justify restrictive techniques like restraint or seclusion; staff, however, said screaming was disruptive enough to warrant using them.
As a result, the federal investigators found, the schools denied students a proper education. The school district has agreed to a corrective plan in which the district will re-evaluate every student who had been restrained or secluded more than twice over two years. The district will provide additional educational or other types of services to any students who need it.
Prince William County Schools spokesman Phil Kavits said that the district does not agree with everything in the investigators' findings. He declined to offer specifics, and he said the district will make the changes requested.
"Our plan is to move forward by taking a look at a range of cases and ensure that we are indeed following the appropriate procedures," he said. "Our goal is to make sure we are giving students the proper educational and therapeutic services."
The boy at the center of the investigation settled his complaint with the school district and is receiving the services he needs, Reichhardt said.
Through a statement her lawyers translated, the mother of the boy said the decision will help other students who are mistreated — including those who neither speak English nor understand their rights. She said she was happy "knowing that other children will not have to go through what we did."
Few would dispute that school staffers should physically restrain children rarely and should tell parents when they can't avoid doing so.
But turning this proposition into the law of the land has proven surprisingly difficult.
Even as awareness has grown about the frequency with which schools use restraints — and about the injuries that can result from such practices — federal bills to curtail the use of restraints have stalled. As ProPublica detailed last week, public schools put children in restraints or so-called seclusion, holding them in a room against their will, at least 267,000 times in just one school year.
Teachers, high school principals and the U.S. Department of Education have all endorsed the idea of limiting the use of restraints to emergencies.
"We've had young people die in restraint and seclusion," U.S. Rep. George Miller, D-Calif., told ProPublica. "I don't know how much more serious it has to get."
But lobbies representing school district leaders and boards have combined with congressional Republicans to stymie such legislation.
Prominent Republicans say that even if restraints should be limited, the federal government shouldn't be in the business of setting school policy and the matter should be left up to state and local leaders. Of the House bill's 41 co-sponsors, just three are Republicans.
Among the opponents is Rep. John Kline, R-MN, the chairman of the House's education committee. ProPublica's calls to Kline's office were not returned. But back in 2012, a spokeswoman for Kline told ABC News, "Chairman Kline believes state officials and school leaders are best equipped to determine appropriate policies that should be in place to protect students and to hold those who violate those policies accountable."
Two school lobbies — school district leaders and school boards — also oppose the bill. The administrators have long been among the bills' most vocal opponents.
"AASA refuses to accept the idea," the American Association of School Administrators wrote in a 2012 position paper it still supports, "that public school employees are over-using seclusion and restraint and/or using it inappropriately."
The administrators association and the National School Boards Association issued a joint statement this past February blasting the current Senate bill as "a federal overreach" that "fails to recognize the need for local school personnel to make decisions based on their onsite, real-time assessment of the situation."
In addition to banning restraints except to prevent serious physical harm, the bills would require schools to notify parents and bar educators from using "mechanical" restraints such as ropes or belts. Seclusion would be prohibited in the Senate bill or limited to emergencies in the House version.
The administrators' group says the legislation would remove an option to help school personnel manage difficult students, and lead schools to send more disabled students to restrictive settings, such as residential institutions.
Furthermore, the group said in another position paper from 2012, the elimination of federal grants for training in crisis intervention has made it harder for districts to carry out more sophisticated behavior management programs. If the federal government wants to tackle the overuse of the practices, the association says, it should provide grants to districts that have unusually high numbers of them or that experience injuries to children or staff.
The Senate bill is "a classic example of how Washington politicians have chosen to mandate changes to school district practices that will not benefit most school districts," the report said.
The group has also warned the bill's restrictions would cause school staff injuries to rise.
Those concerns, however, have not borne out for one school system that eliminated restraints and seclusions more than two decades ago, Montgomery County, Va.
Officials there said their program for preventing and diffusing outbursts by children has made restraints unnecessary — and not led to more injuries, or more students sent to institutions. The district's approach, called Positive Behavior Interventions and Supports, is one the U.S. Department of Education and advocates say reduces the need for either practice.
Supporters of a federal law limiting restraints and seclusions say that many states and other school districts have not worked hard enough to replace restraints with better programs for managing bad behavior.
Many states and school districts have either no rules on restraints and seclusions or have permissive policies. In most states, public schools can still restrain kids even when physical danger doesn't exist — including, in many places, with holds that restrict breathing. (Related: See what the rules are in your state.)
And in many states, schools are not required to tell children's parents afterwards.
"In so many instances those policies are completely inadequate," Rep. Miller said. "More than half the states decided they're really not going to step in."
The U.S. Department of Education has issued guidance to districts that recommended creating policies in which restraints are barred except during emergencies and parental notification is standard. But the guidance is not mandatory.
The legislation has drawn endorsements from more than 200 organizations, most of which help people with mental or physical disabilities. The National Education Association, the largest teacher's union, at first supported the legislation, then reversed course, but has come to support the Senate bill again after a few changes.
One of the organizations opposing the bill, the school boards association, may also come around. Reggie Felton, interim associate executive director, said that sponsors of the bill have made concessions that addressed some concerns, giving school districts more flexibility. Still, a few sticking points remain — such as the House bill's ban on including restraints in plans about special education students' schooling. But Felton said his group could possibly support the bill after more changes.
"They continue to move in the right direction," he said.
To advocates, the issue is clearer. Pat Amos, a parent and advocate with the disabilities group TASH, said schools need a consistent rule on restraint and seclusion that doesn't vary from state to state. Now, the multitude of policies is confusing, she said.
"When you're dealing with the welfare and life a small child, you shouldn't have so many rules," she said. "There should be this one bright line set that says 'you can do this, you can't do that.'"
The room where they locked up Heather Luke's 10-year-old son had cinder block walls, a dim light and a fan in the ceiling that rattled so insistently her son would beg them to silence it.
Sometimes, Carson later told his mother, workers would run the fan to make him stop yelling. A thick metal door with locks—which they threw, clank-clank-clank—separated the autistic boy from the rest of the decrepit building in Chesapeake, Virginia, just south of Norfolk.
The room that officials benignly called the "quiet area" so agitated the tall and lanky blond boy that one day in March 2011, his mother said, Carson flew into a panic at the mere suggestion of being confined there after an outburst. He had lashed out, hitting, scratching and hurling his shoes. Staff members held him down, then muscled him through the hallway and attempted to lock him in, yet again.
But this time, the effort went awry. Staffers crushed Carson's hand while trying to slam the door. A surgeon later needed to operate to close the bleeding half-moon a bolt had punched into his left palm. The wound was so deep it exposed bone.
Carson's ordeal didn't take place in a psychiatric facility or juvenile jail. It happened at a public school.
For more than a decade, mental-health facilities and other institutions have worked to curtail the practice of physically restraining children or isolating them in rooms against their will. Indeed, federal rules restrict those practices in nearly all institutions that receive money from Washington to help the young—including hospitals, nursing homes and psychiatric centers.
But such limits don't apply to public schools.
Restraining and secluding students for any reason remains perfectly legal under federal law. And despite a near-consensus that the tactics should be used rarely, new data suggests some schools still routinely rely on them to control children.
The practices—which have included pinning uncooperative children facedown on the floor, locking them in dark closets and tying them up with straps, handcuffs, bungee cords or even duct tape—were used more than 267,000 times nationwide in the 2012 school year, a ProPublica analysis of new federal data shows. Three-quarters of the students restrained had physical, emotional or intellectual disabilities.
Children have gotten head injuries, bloody noses, broken bones and worse while being restrained or tied down—in one Iowa case, to a lunch table. A 13-year-old Georgia boy hanged himself after school officials gave him a rope to keep up his pants before shutting him alone in a room.
At least 20 children nationwide have reportedly died while being restrained or isolated over the course of two decades, the Government Accountability Office found in 2009.
"It's hard to believe this kind of treatment is going on in America," says parent and advocate Phyllis Musumeci. A decade ago, her autistic son was restrained 89 times over 14 months at his school in Florida. "It's a disgrace."
The federal data shows schools recorded 163,000 instances in which students were restrained in just one school year. In most cases, staff members physically held them down. But in 7,600 reports, students were put in "mechanical" restraints such as straps or handcuffs. (Arrests were not included in the data.) Schools said they placed children in what are sometimes called "scream rooms" roughly 104,000 times.
Those figures almost certainly understate what's really happening. Advocates and government officials say underreporting is rampant. Fewer than one-third of the nation's school districts reported using restraints or seclusions even once during the school year.
Schools that used restraints or seclusions at all did so an average of 18 times in the 2012 school year, the data shows. But hundreds of schools used them far more often—reporting dozens, and even hundreds, of instances.
School superintendents who defend the practices say they are needed to protect teachers and children when students grow so agitated that their behavior turns dangerous. They argue that if educators don't have the freedom to restrain and isolate children as they see fit, they will be forced to send more students to restrictive settings such as residential institutions.
"We believe the use of seclusion and restraint has enabled many students with serious emotional or behavioral conditions to be educated not only within our public schools, but also in the least restrictive and safest environments possible," the American Association of School Administrators wrote in a 2012 position paper.
Most critics of restraints agree they are sometimes unavoidable. But they say schools too often fail to try alternatives for calming students and use the tactics for the wrong reasons—because children failed to follow directions, for instance, or had tantrums. Indeed, in a recent survey, nearly 1 in 5 school district leaders approved of using restraints or seclusion as punishment.
"We have hundreds of examples of kids who are being restrained and secluded for behaviors that do not rise to the level of causing harm to themselves or others," says Cindy Smith, policy counsel at the National Disability Rights Network.
Only after Musumeci's son, Christian, who is autistic and has trouble speaking, started protesting when it was time to go to school—repeating, "No school, no school, no"—did she learn from school records how often he had been restrained.
School workers forced Christian, who they said had become aggressive and tried to hurt himself, to lie facedown on the floor in nearly one-third of the incidents. The prone position is particularly dangerous, because it can restrict breathing.
"I remember just sitting on the bed reading them and crying," Musumeci says, recalling her horror at what the records revealed. She said the school claimed to have notified her, but it hadn't. "If you did this at home," she says, "you'd be arrested."
More than four years ago, federal lawmakers began a campaign to restrict restraints and seclusions in public schools, except during emergencies. Despite a thick stack of alarming reports, the legislation has gone nowhere.
Opponents of the legislation say policy decisions about the practices are best left to state and local leaders. The federal government's role, they say, should be limited to simply making sure districts have enough money to train staff to prevent and handle bad behavior.
But states and districts have shown they won't create enough safeguards on their own, say advocates and other supporters of the legislation. Despite years of public concern about the practices, schools in most states can still restrain kids even when imminent danger doesn't exist.
This February, timed with the re-introduction of legislation to limit the practices, Senate staffers released a report concluding that dangerous use of restraints and seclusion is "widespread" in public schools. Neither practice, the report said, benefits students therapeutically or academically.
"In fact, use of either seclusion or restraints in non-emergency situations poses significant physical and psychological danger to students," it warned.
Rep. George Miller, D-Calif., who is pushing for legislation, doesn't stifle his anger when talking about what he sees as a need to enact basic protections for students.
"I'm just stunned that you can take an action of seclusion or restraint that turns out to be harmful in almost all instances to the student," he says, "and there's no notification to the parent."
"It's so fundamental: You don't traumatize children."
The day Carson was hurt, Luke was shopping at a toy store when her cellphone rang. There had been an accident, a school worker told her.
She found Carson sitting quietly in the nurse's office. His left hand was a swollen mass of black and blue wrapped in thick gauze. He had a bandage on his right foot.
His face had a gray pallor. Luke turned to the nurse and principal. "I believe my exact words were, 'What the hell happened here?' "
We had to take him to the quiet area, the principal told her, Luke recalls. He was being aggressive.
No one had called for medical assistance. Luke drove the boy to the emergency room. He underwent surgery to close the wound on his left hand and had casts put on it and on his foot, which was also broken. He spent the night in the hospital.
Donald Fairheart, executive director of the Southeastern Cooperative Education Program, known as SECEP, which oversaw Carson's school, declined to comment, saying the incident occurred before his tenure.
The Luke family had moved to Virginia two years before. Carson was the middle child of three whom Luke and her husband, a Navy officer, had adopted. The boy had been diagnosed with autism, anxiety and attention deficit hyperactivity disorder, and while he could speak, he struggled to communicate like other kids.
Misunderstandings easily frustrated him, and he was prone to outbursts that sometimes turned aggressive. Still, his previous school district in Maryland had managed his behavior well. He was in some regular classes and loved playing with kids his age.
In Virginia, however, Luke says Carson was shuffled between schools before landing at the regional public school for special needs children in Chesapeake. The building was rundown, with peeling paint, rotting wood and a leaky ceiling.
In Carson's class, autistic children were combined with others who had emotional and behavioral problems, Luke says. Children like Carson are easily bullied, she said, calling the mix "like putting together lighter fluid and a match."
Luke had tried to get Carson transferred out. But an episode of disruptive behavior had scuttled the plan. He was faring poorly at the school. "His behavior was tanking," Luke says. "He made little or no academic progress."
School staffers told Luke that Carson's behavior often worsened when he was brought into the hallway after acting out. She believes that was because he had been conditioned to expect the next step would be a trip to the cinderblock room.
"He said you can hear them do the locks, which is how I know there were three," Luke says. "There were times when they would put him in there, and he would be screaming. They would say, 'If you don't shut up, we're going to put the fan on.' " He hated the sound.
Both the school and Carson told Luke when he "went to the quiet area." But while Luke had noticed the dingy room when visiting the school, she hadn't realized that was what they were talking about. She also didn't understand the terror it caused Carson.
"This ate at me," she says. "I really struggled with the fact that I didn't know."
Carson's school reported using holds on children 177 times—an average of almost once a school day—and isolation 559 times in the 2012 school year, the federal data shows. Those numbers placed it among the top 50 schools in the country that reported using restraints and seclusions the most.
Fairheart, SECEP's executive director, says the numbers are higher than most other schools because the facility primarily serves students with emotional or behavioral disorders.
There is no national count of children who, like Carson, are injured during restraints or seclusions. But at least one state is keeping its own tally.
Connecticut schools reported 378 holds or isolations that resulted in injuries to children in the 2013 school year. Of those, 10 were classified as "serious" and required medical attention beyond basic first aid.
Restraints in Connecticut schools usually lasted less than 20 minutes, but nearly 200 of them continued for more than an hour. A quarter of the students who were restrained experienced six or more holds during the year. Nineteen students were restrained more than 100 times.
The state also found that 40 percent of disabled students who were restrained had an autism diagnosis. The same was true for half of those secluded.
Michigan mother Nicole Plater says her nonverbal, 9-year-old autistic son, Andy, regularly came home from public school with injuries during the past school year. She suspected that scuffles with the staff at Oxbow Elementary in White Lake—often during holds—were the cause of the scratches, fat lip, black eye, scrapes on his back and bruises shaped like fingerprints she discovered on his arm.
School officials told her that Andy's aggressive behavior has forced them to restrain him. But Plater says that when she asks about marks on her son's body, "half the time, they don't have a reason for me."
She grew alarmed in the fall when school staff said they sometimes strapped Andy down in an orthopedic chair that is supposed to be used only for children with physical disabilities, which he doesn't have. He hurt himself trying to wriggle free.
"For safety Andy was put in chair with lapbelt," an educator wrote Plater in a note. The boy had been kicking and hitting and "started going after other students," the note said. "After he went in the chair he was trying to slide out and the lapbelt left a mark on his stomach."
Plater says she asked school officials to stop using the chair, but they didn't agree to do so—until she hired an attorney. She began videotaping Andy in his underwear each morning before school and again after he came home, to document the injuries.
"It's like this school's dirty little secret," Plater says. "You tell somebody, and they say 'They don't do that!' Yes, they do."
A spokeswoman for the school district, Huron Valley Schools, Kim Root, says that without a privacy waiver from Plater, the district cannot discuss Andy's case. "We follow all state and federal guidelines as to what our staff can and cannot do in the classroom," she says. (Plater's lawyer advised her not to waive confidentiality as the family was waiting for a hearing on Andy's situation.)
Plater was so concerned about the marks and Andy's growing anxiety about going to school—he was throwing up regularly—that she kept him home for two months this spring. He wasn't aggressive at home. But she feared she'd get in trouble for truancy.
After she sent Andy back to Oxbow, pending the hearing, the school suspended him twice for aggressive behaviors such as scratching, which school workers told Plater led one staff member to seek medical attention. The school told her to keep him at home.
Plater has few options. She has two other children, and her husband is a welder out on disability for a serious back injury he suffered working at a steel plant. The school district has denied her request to send Andy to another regular school, instead insisting he go to an all-special-education facility—which his parents fear wouldn't be good for him.
"I just wish things were different for him," Plater says.
Critics of federal legislation to restrict restraints and seclusions warn such a law would cause staff injuries to rise because educators would be afraid to intervene when students were acting dangerously. But injuries have not been a problem in Montgomery County Public Schools in Virginia, which stopped using restraints and seclusion more than two decades ago, says Cyndi Pitonyak, a special education coordinator for the district.
"The chances of getting injured by trying to physically restrain somebody are so much greater than the chances of getting injured while trying to calm them down," Pitonyak says.
The district uses an approach called Positive Behavior Interventions and Supports, which involves identifying triggers for dangerous behavior by students most at risk for it. Educators then develop a detailed plan to prevent such behaviors and tell teachers and aides what to do if the plan fails. Over time, as students learn better ways to respond to frustration and grow comfortable with the school routine, they need fewer accommodations.
"If you are able to turn those kids around prior to the third grade," Pitonyak says, "then their chances of going on without needing a lot of behavioral support are hugely increased."
Advocates say that educators in schools without such programs often end up provoking students into escalating bad behaviors instead of calming them, leading to a cycle in which restraint or seclusion is used again and again. "People need to get out of the mindset that restraint and seclusion is a default," says Jessica Butler, a national advocate for children with autism.
Insurance company Munich Re issued a report in January warning school districts of liability risks associated with using restraints and seclusions. Under the heading "Minimizing the risk," the document suggested districts consider policies that ban restraints and seclusion except during emergencies, notify parents promptly, improve training and document each use.
In February, Sen. Tom Harkin, D-Iowa, reintroduced a bill that would permit restraints only to stop students from seriously hurting themselves or others. It would prohibit public schools from isolating children in rooms against their will. Families such as the Lukes are watching to see if it advances.
In the meantime, the Lukes have been infuriated by the fact that nobody seems to have been held accountable for their boy's broken hand and foot. Police and a social services worker interviewed Carson, but officials decided action wasn't warranted. Luke says she isn't aware that any disciplinary action has been taken against the school workers involved.
Carson finished the year at a private school before the family moved back to Maryland. He suffered some symptoms of post-traumatic stress disorder. "He was having unreal nightmares," says Luke, who now also works as an advocate for disabled children. "It would be things like 'I was at SECEP, and there was a monster chasing me down the hall.' "
Three years later, Carson is doing well at a private school that specializes in helping children with disabilities. He is never secluded and was physically escorted out of the classroom just twice this past school year, says Luke, who doesn't oppose using restraints to prevent injuries.
Carson talks about going to college and wants to open his own pet grooming and boarding business. But, she says, he hasn't slept through the night alone since the incident in Chesapeake.
"He has psychological damage," Luke says. "I do, too."
ProPublica data editor Jeff Larson contributed to this story.
Correction Jun. 19, 2014 5:27 p.m: An illustration on this story previously stated that Minnesota does not allow prone restraints on disabled children and that the state will ban the tactics in August 2015. In fact, Minnesota allows the use of prone restraints in an emergency, on disabled children aged five or older. Minnesota is currently enacting regulations to limit prone restraints, and it is uncertain changes in prone restraint regulations will occur by August 2015