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‘Minimize cost, maximize profit’: testimony in Epic Charter Schools hearing outlines multi-level concealment scheme

Former Epic encumbrance clerk and Epic Youth Services' CFO Josh Brock walks through the Oklahoma County District Court March 29, 2024, for the fifth day of a preliminary hearing in a case against Epic co-founders Ben Harris and David Chaney.
Beth Wallis
StateImpact Oklahoma
Former Epic encumbrance clerk and Epic Youth Services' CFO Josh Brock walks through the Oklahoma County District Court March 29, 2024, for the fifth day of a preliminary hearing in a case against Epic co-founders Ben Harris and David Chaney.

After five grueling days of preliminary hearing testimony, a decision on whether a case against Epic Charter Schools co-founders David Chaney and Ben Harris will go to trial is still over a month away.

But during Day 5 of the hearing Friday, insight from key witness Josh Brock pulled back the curtain on the trio’s profit-driven school management mindset. Brock served as the CFO for Epic Youth Services and the encumbrance clerk for the school

Chaney, Harris and Brock were arrested June 22, 2022 under the Oklahoma RICO Act. Brock took a deal to testify in the case in exchange for 15 years of probation and an undetermined restitution amount.

Chaney and Harris face 15 counts including racketeering, embezzlement, obtaining money by false pretenses, using a computer, system or network to execute a scheme to defraud, presenting false claims to the state, acquiring unlawful proceeds in excess of $50,000 and money laundering.

A brief background on Epic Charter Schools

Epic Charter Schools began as the state’s first virtual charter school in 2010. It now operates in two versions: Epic Blended, which uses a hybrid model of in-person and virtual school, and Epic One on One, which is solely virtual.

In 2014, OSBI opened a fraud inquiry into the school as requested by then-governor Mary Fallin. It was accused of falsifying records in order to receive fraudulent payments from the Oklahoma Department of Education.

In 2016, Epic opened another blended learning school in California, Epic California.

In 2019, OSBI alleged in a search warrant Epic illegally inflated enrollment numbers with “ghost students” to collect and embezzle millions more from the state.

In October 2020, State Auditor Cindy Bird released Part 1 of a special investigative audit requested by Gov. Kevin Stitt that alleged a history of concealing profits and improperly spending millions in what the state contends are public dollars.

Days later, the Oklahoma State Board of Education demanded Epic repay $11.2 million to the state based on the auditor's findings. $8.3 million came from misreported salaries, $2.7 million came from wrongful payments to the school’s educational management organization headed by Chaney and Harris, Epic Youth Services, and $203,000 was illegally moved to Epic California.

In light of the audit fundings, Epic’s sponsor, the Oklahoma Statewide Virtual Charter School Board, approved intent to terminate its contract with Epic One-on-One, which could have spelled the end for the virtual school system. However, it later decided to settle the termination threat with Epic in April 2021. The settlement outlines standards for better governance and transparency, and requires separation of all finances between Epic One-on-One and Epic Blended.

Epic terminated its relationship with Chaney, Harris and Brock in 2021. It is no longer managed by a private company.

In January of 2022, Epic Charter Schools was notified of an IRS investigation into its governance and finances.

That summer, the State Department of Education announced findings from its investigation, including major flaws in student attendance counts and massive administrative bonus payments. Later that year, the State Board of Education voted to downgrade Epic’s accreditation status to “accredited with probation,” which is one step above the school’s accreditation being dissolved.

In January of 2023, on Oklahoma Attorney General Gentner Drummond’s first day in office, Drummond took back control of the prosecution case against Harris, Chaney and Brock. His predecessor, John O’Connor, had relinquished control of the case in 2022.

Epic Youth Services and management of the Learning Fund

One main focus of the hearing centered around Epic Youth Services, the educational management organization for the school. EMOs contract with charter schools to manage operations. Epic Youth Services is a for-profit company that was also run by Chaney and Harris, with Brock overseeing finances as CFO.

Despite the state’s 5% statutory cap on administration expenses, EYS took 10% of the school’s revenue. EYS also collected and managed money for Epic’s Learning Fund, which set aside $800-$1,000 depending on the year for Epic students to spend on things like laptops, art kits and other educational supplies.

Throughout the hearing, Chaney and Harris’ defense lawyers argued once money flowed into EYS, it was no longer public money. However, the executives never reported those funds on tax returns, and investigators said they used the school’s tax-exempt status for purchases from the account.

Records show Chaney, his wife and assistants spent $817,000 in personal expenses with credit cards charged against the Learning Fund. Though he repaid some of that, investigators said $377,000 remains unpaid. Statements shown in court revealed purchases including StubHub, an Oklahoma City cigar bar and Men’s Wearhouse.

Required yearly financial audits from CBEW Professional Group, defense said, found no major issues. Those financial audits must come from an auditor from the state’s approved list and go to the Oklahoma State Department of Education, which publishes them.

But throughout questioning, state prosecutors pointed out the difference between annual financial audits and special investigative audits — such as the one completed by the State Auditor’s Office: financial audits are cursory examinations of whether the numbers are presented fairly, but investigative audits are comprehensive deep-dives, said witness Brenda Holt, the director of the State Auditor’s Forensic Audit Division.

The defense asked Holt why the annual financial audits contradict findings from the state investigative audit, and she responded the annual audit considered the Learning Fund to be private money, as it was managed by EYS, so it was not included in the audit. The state contends the Learning Fund money was still public and therefore, still subject to audit.

Brock testified Friday he, Chaney and Harris created a profit sharing agreement within EYS. Brock received 10% of EYS profits, and Chaney and Harris each received 45% of the remainder. Brock said through this arrangement, the trio received millions of dollars.

When a school prepares its financial reporting, it must assign expenses into certain coded categories designated by the Oklahoma Cost Accounting System. Some of those expenses, such as “food service management,” for Epic One-on-One, could not have been used for those purposes because the all-virtual school did not supply meals for students.

Brock testified they came up with a template that broke up expenses into certain OCAS categories that would then be used to justify the 10% EYS management fee.

For example, if the school was given a million dollars by the state for one month, EYS would take its 10% fee, which would be $100,000. For that month, they would input $100,000 into the template, and it would spit out false numbers to plug into reports based on predetermined percentages of the 10% fee.

In one example, the template contained OCAS coding categories like “certified salaries,” which was programmed to always equal 1.1% of the 10% fee, regardless of the actual cost. Brock said instead of inputting the real cost of certified salaries, the template would create a number that, combined with the other reported expenses from other coding categories, would ultimately add up to that month’s 10% fee to EYS.

Brock testified he knew the numbers were not accurate or representative of the actual cost of services, and the template itself was created by Harris and Brock with Chaney’s knowledge.

There were other ways Brock testified that EYS would “minimize cost, maximize profit,” such as using Epic Charter Schools to headquarter EYS instead of paying for its own office space, and having Learning Fund managers work for the school instead of EYS so they would be paid out of the school’s budget rather than out of the EYS management fee.

Brock also testified there were several ways the trio would accumulate money through how the Learning Fund was set up.

For one, a service fee that varied over time but eventually arrived at $85 was taken out of each student’s Learning Fund every year. The fee went to curriculum and shipping costs, even though EYS’ operating agreement tasks itself with developing curriculum.

Prosecutors asked, if EYS was supposed to develop the curriculum, why wasn’t it bought out of the 10% management fee? Brock agreed that would have resulted in less money that EYS could keep.

Brock also said upcharges allowed EYS to keep more money sitting in the Learning Fund. The fund was divided between two bank accounts, which were used by Harris and Chaney for personal purchases, according to bank statements. One such upcharge involved internet hotspots the school provided to its students. While some students had Verizon hotspots — about $40 — and some students had T-Mobile hotspots — about $30 — all students were charged $40 from their individual Learning Funds, resulting in numerous $10 overcharges that accumulated.

Students were also charged $250 every year from their Learning Funds for laptops — usually Chromebooks — even if they kept the same laptop each year. For example, if a student attended Epic for four years and kept the same laptop, a device that actually cost $250 would accumulate to $1,000 over four years — a profit of $750.

Laptops would also be reissued and reused once a student transferred or graduated, meaning other than the cost of potential repairs, students would pay the cost of a new laptop out of their Learning Funds every year but may receive one already in Epic’s inventory.

The way in which the Learning Fund was set up was also to maximize profit, Brock testified. The state calculates how much money a school will receive based on its first quarter statistical report, which is determined by how many students attend how many of the first 45 days of school. If students miss school during these first 45 days, the school’s count will be lower, meaning less state dollars flowing in.

But to calculate how much money would go into the Learning Fund every year, Epic used an “entire period student count,” which did not take into account how many days students were actually present.

The Learning Fund also accumulated leftover balances, Brock said, and did not return those excess monies to the school. If a student only used $500 of their $1,000 by the end of the year, that remaining $500 would sit in the fund.

Brock said practices such as multiple charges for laptops were made out of concern that demands on the Learning Fund could exceed its allotted balance for the year, and EYS was contractually on the hook for any deficit. Meaning, if there was not enough money in the Learning Fund for student expenses, EYS would have to pay for it.

Brock testified that during Epic’s early years, Harris told Chaney and him the leftover amounts in the Learning Fund could be used for retirement purposes. The state asked if Brock thought that was his, Harris’ or Chaney’s money to spend, and Brock answered it was not and agreed EYS was entrusted to be stewards of the money for the benefit of the students.

According to bank statements shown in court, between 2014 and 2021, there were 52 transfers from the Learning Fund to the EYS’ operating account. Auditors said those transfers totaled $3.2 million.

Other ventures: Epic California and EdTech

Epic California, Brock testified, was created “to expand profits.” But rather than California employees managing purchases on behalf of that school, some Oklahoma employees performed that work instead, resulting in Oklahoma tax dollars paying employees to manage a California school.

Epic co-founders Ben Harris and David Chaney wait at the entrance of the Oklahoma County District Courthouse for a preliminary hearing in an embezzlement case with defense lawyer Gary Wood.
Beth Wallis
StateImpact Oklahoma
Epic co-founders Ben Harris and David Chaney wait at the entrance of the Oklahoma County District Courthouse for a preliminary hearing in an embezzlement case with defense lawyer Gary Wood.

Brock said there was a practice of reimbursing Epic Oklahoma for using its employees, but Epic California only paid 1-3% of these salaries, despite the employees devoting 100% of their work to managing Epic California.

EdTech was created in 2020 as a technology vendor for EYS. Chaney and Harris owned EdTech 50/50. It did not have employees, and contracts were written between Chaney and Harris themselves.

Brock testified it was created in response to the passage of House Bill 1395 in 2019, which required more financial transparency from virtual charter schools. The bill required itemization of expenses, so payment to EdTech would be coded as “technology services.”

Brock testified EdTech and EYS had a payment agreement based on student count. EYS received about $500 per student in its management fee and paid EdTech $400 per student, effectively concealing 80% of per-student funds. Brock said EdTech’s vendor status made it a layer removed from the school, meaning financial records would not have to be turned over to the state.

A stacked school board

Brock testified many Epic school board members were acquaintances of Harris or Chaney and selected by them, then voted on by the board. Traditional public schools hold elections for school boards.

He said if Harris or Chaney wanted something to be placed on an agenda for the board’s consideration, they would do it themselves. “Very rarely,” he said, did the board ever vote against agenda items placed by Harris or Chaney, especially in the early years of the school.

Board family members were also involved in making money from Epic. A company run by Greg Scott, the brother of board chair and childhood friend of Harris and Chaney’s, Doug Scott, eventually signed a $2.5 million contract with Epic in 2021 for software licensing.

Doug Scott testified Monday another board member, Liberty Mitchell, had no ties to Harris or Chaney. But Brock testified Friday Harris and Chaney knew her father, political media analyst Scott Mitchell. He said Mitchell used Epic’s administration building as free office space and received donations from EYS “related to different activities he had.”

Early board member Travis Burkett, a mutual friend of Brock and Harris, also requested donations from EYS to his foundation. Brock said Burkett received somewhere between $5,000-$10,000.

Former chair Bobby Stem served on the board from 2011-2014. The day he resigned from the board, he became a contracted lobbyist for EYS and Epic through his company Capital Gains. Brock said Stem’s retainer fee for the lobbying work was originally $5,000 per month and eventually increased to $7,000 per month.

A state prosecutor asked Brock if he would be surprised to learn Stem made $520,000 from the agreement, and Brock responded he was not.

After testimony from eight witnesses throughout the week, the hearing ended on a cliffhanger Friday, as prosecutors indicated they needed more time with Brock. Chaney and Harris’ defense team will get their turns with Brock as well. Oklahoma County District Judge Jason Glidewell set May 7 and 8 as the final days of the hearing.

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Beth reports on education topics for StateImpact Oklahoma.
StateImpact Oklahoma reports on education, health, environment, and the intersection of government and everyday Oklahomans. It's a reporting project and collaboration of KGOU, KOSU, KWGS and KCCU, with broadcasts heard on NPR Member stations.
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