K12 Inc. Sued Over For-Profit Education Company's Tax-Subsidized Funding Manipulation

For-Profit Ed Company Slammed With Lawsuit For Manipulating Tax Dollars

This piece comes to us courtesy of a partnership between WHYY/NewsWorks and the Philadelphia Public School Notebook.

Dozens of former employees claim that K12 Inc, a for-profit education company, used dubious and sometimes fraudulent tactics to mask astronomical rates of student turnover in its national network of cyber charter schools.

K12 manages Agora, the second largest cyber charter in Pennsylvania. The company is also involved in pending applications to open two new cybers in the state. The Pennsylvania Department of Education is expected to decide on the proposals later this month.

The former employees allege that K12-managed schools aggressively recruited children who were ill-suited for the company's model of online education. They say the schools then manipulated enrollment, attendance and performance data to maximize tax-subsidized per-pupil funding.

These claims by anonymous "confidential witnesses" are spelled out in court documents filed last June as part of a class-action lawsuit by the company's investors.


Many of the allegations come from people who worked for the Agora Cyber Charter School, based in Wayne, Pa. With more than 8,000 students, Agora enrolls roughly a quarter of the 32,000 Pennsylvania students that have opted to attend cybers, which are independently managed schools providing mostly online instruction.

In one example, a former Agora teacher said in court documents that the school continued to bill the home school district of one special education student who was absent for 140 consecutive days.

Pennsylvania requires that cyber charter students who miss 10 straight days be reported as withdrawn.

"What Agora does is keep the kid in inactive limbo and keep billing," said the anonymous former teacher in court documents.

The class action suit against K12, Inc. and its executives was filed last January, shortly after a critical article about the company appeared in the New York Times. The investors allege that the company committed securities fraud when senior officials, including CEO Ronald J. Packard, "concealed from the market" information about high rates of student withdrawal and poor academic performance.

"The core omission behind the Defendants' fraudulent success story was that K12 students were dropping out at staggering rates," reads the complaint.

An amended version of the complaint filed last June contains the allegations by the company's former employees.

The U.S. District Court in the Eastern District of Virginia has denied a request from K12 to dismiss the case.

A trial could take place this spring.

Jeff Kwitowki, K12's senior vice president of public affairs, said the company won't respond to every claim contained in the litigation, but is "vigorously defending" itself against the investor claims.


Based in Herndon, Va., K12 is the nation's largest for-profit operator of online schools.

The company's 59 full-time schools enroll more than 100,000 students in 29 states.

The vast majority of the company's $522 million in 2011 revenues came from "turnkey" management contracts with those virtual public charter schools.

In Pennsylvania, that arrangement involves a non-profit board of directors holding the legal responsibility for the charter school. The nonprofit then contracts with K12 to provide management services ranging from providing curriculum to hiring school personnel.

K12's revenues vary according to the enrollment of the schools it manages. In Pennsylvania, cybers bill each of their student's home districts for the full per-pupil amount that would have otherwise been spent to educate that child.

That averages out to just over $11,000 per student, making Pennsylvania one of the most lucrative states in the nation for cybers to operate.

At the beginning of the 2010-11 school year, the K-12 managed Agora Cyber Charter enrolled 5,353 students.By the end of that year, the school's enrollment had increased to 6,475.

The overall increase masked a high "churn rate." Almost 2,400 students withdrew from Agora during the school year, but were replaced by newly recruited students.

Almost 2,700 students dropped out of Agora during the 2009-10 school year.

This piece has been truncated. To read the rest of the story, visit Newsworks.

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