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Democracy Prep’s Fiscal Tottering

May 2, 2021

In March 2019 and October 2019, Democracy Prep charter chain founder and former employee Seth Andrew stole a total of $218K from three Democracy Prep escrow accounts. He was able to do so because two years after leaving Democracy Prep (in 2017), Andrew still had access to his school email account and could falsely portray himself as still associated with the charter chain. Andrew also still had access to the escrow accounts because he remained listed on documentation related to those accounts. Finally, given that Andrew was able to steal funds from the third escrow account five months after he depleted the first two accounts, it is obvious that Democracy Prep officials failed to adequately monitor all of the chain’s bank accounts.

In my May 01, 2021, post on the situation, I surmised that Andrew may have believed that Democracy Prep would not competently monitor its finances, thereby causing him to believe that he could get away with the theft. Indeed, the complaint against Andrew details the passage of 14 months from the first thefts (March 2019) to the maturing of a six-month certificate of deposit (CD) that Andrew purchased using the stolen funds (May 2020).

To lock that stolen money up for six months and patiently wait for it to mature demonstrates a level of certaintly that no one would be coming for that stolen cash.

Examination of Democracy Prep’s tax forms from 2007 to 2018 shows that the charter chain struggled to manage its money and to keep a positive balance across years even as it continued to open more schools.

Democracy Prep Public Schools (originally known as Democracy Builders) was granted nonprofit status in June 2007. Andrew is named on the organization’s FY 2007 tax return (July 2007 to June 2008). (On the FY 2007 return, the name of Democracy Builders is also connected to the name Democracy Preparatory Charter School. Furthermore, the full name of the organization is listed as “Democracy Builders Mr. Seth Andrew,” though Andrew himself is not named in any specific capacity on the tax form, not even among board members.

Prior to its receiving nonprofit status, in FY 2006, Andrew is not mentioned; the organization name is only “Democracy Builders,” with “program achievements” simply listed as, “Funding and educational service center for a charter school.” FY 2006 revenue was $336K, overwhelmingly from “direct public support.” In FY 2007, additional revenue was only $39K.

In FY 2008, the organization name returned to “Democracy Builders,” and Andrew was added as a board member. Up to this point, no one is listed as receiving compensation. The same was true in FY 2009, with total revenue at $437K and total expenses at $541K, yielding end-of-year net assets of $340K.

Then came FY 2010. Total revenue was $2.1M, with most of it ($1.8M) identified as “program service revenue” for “charter school management services to three charter schools.” Democracy Builders changed its name to Democracy Prep Public Schools, with this mission: “The organization manages and operates high-performing charter schools.” Andrew was given the title of “superintendent” and compensated a modest total of $76K.

In FY 2011, total revenue rose to $3M, and Andrew’s superintendent compensation rose to $263K (50 hrs/wk). By the end of FY 2011, Democracy Prep listed six schools in New York.

FY 2012 saw yet another rise in total revenue, to just over $4.8M. However, expenditures exceeded $5M, so Democracy Prep had to dip into its previous end-of-year balance of $708K, leaving $499K in the bank, so to speak, at the close of FY 2012. Andrew was working more (65 hrs/wk) and receiving less (total compensation: $255K). By the end of FY 2012, Democracy Prep was operating an additional three schools, for a total of nine schools (including one in New Jersey).

FY 2013 had Andrew working 65 hrs/wk as “founder” (no more “superintendent” title because he was actually working in the US Department of Education, USDOE, under the Obama administration), and his pay decreased yet again ($227K) even as the Democracy Prep board expanded to seven non-compensated individuals and eight compensated (including Andrew). Total revenue was up to $8.1M, but again, total expenses ($8.4M) put Democracy Prep in the red, and that $499 end-of-year fund balance in FY 2012 became a mere $126K in FY 2013. Even so, Democracy Prep was slated to open a school in DC in fall 2014, and it advertised its expansion region plan on its website (archived May 2014):

In the fall of 2012 Democracy Prep Public Schools received a generous grant from the U.S. Department of Education to expand the network to 25 schools. For the 2013-14 school year we will operate eight schools in Harlem and one in Camden, NJ. Probable openings for the 2014-15 school year include schools in New York, New Jersey and Washington, DC. Possible expansion regions beyond 2014 include Louisiana, Tennessee, Delaware and Massachusetts.

Note that Democracy Prep’s receipt of a charter school expansion grant predates Andrew’s time with the Obama administration USDOE (2013-16). But back to the roller coaster:

By FY 2014, all seemed fiscally righted at Democracy Prep. Total revenue was just over $14M, and, more importantly, total expenses were $13.4M. After adjusting for total liabilities, Democracy Prep ended FY 2014 with an increase in its end-of-year fund balance relative to FY 2013: $503K. The organization listed a new superintendent, Lindsay Malanga. Founder Seth Andrew was still on the books, reportedly working 65 hrs/wk for $213K in total compensation (Andrew was being compensated through Democracy Prep though still at USDOE– see the complaint for more info on this pay arrangement).

What goes up….

FY 2015 was the worst yet. Total revenue was $12M, which was $2M less than the previous year, with expenses over $13.4M. So, in the hole we go, with end-of-year net assets at -$712K. Nine individuals listed as working 65 hrs/wk, including Andrew, and this charter chain is in serious fiscal trouble. For this year, founder and “former officer” Andrew is compensated a total of $213K (continuing at USDOE until around November 2016).

The fiscal waffling continued in FY 2016. Total revenue $14.8M. Total expenses $14.5M. End-of-year net assets “improved” to -$369K. Andrew returned as superintendent from his time at USDOE (40 hrs/wk for a total of $220K.) The eight other individuals working 65 hrs/wk in FY 2015 were reduced to five.

And that was it for Andrew. In FY 2017, he is no longer listed on the Democracy Prep tax form, having made his exit (see the complant). Total revenue almost doubled from the previous year ($14.8M to $27.2M), but again, Democracy Prep overspent ($29.4M) and dug a deeper hole (end-of-year fund balance: -$2.5M).

FY 2018 (July 2018 to June 2019) had Democracy Prep generating $28M in total revenue and only spending $26.5M, thereby reducing its end-of-year deficit from -$2.5M to -$920K. The organization (finally?) experienced a change in CEO and CFO.

Given the tumultuous fiscal history of Democracy Prep, and given that its most recent tax filing (FY 2018) has the organization still almost a million dollars in the red, I am sort of amazed that Andrew could use his former connections with Democracy Prep as suitable scam material. I say “sort of” because I understand that the considerations of employment stability for refinancing purposes do not usually include an investigation into the fiscal stability of the employer.

At the time that Andrew cleaned out two of the three escrow accounts (March 2019), Democracy Prep had an interim CFO (chief financial officer), who assumed the helm, so to speak, after the previous year’s whopper negative end-of-year fund balance of -$2.5M.

As founder and former superintendent, Andrew had to know Democracy Prep’s unstable financial history, and he stole from it anyway. He stole from the children he supposedly worked to serve, children who already attend schools managed and operated for years by a fiscally-precarious nonprofit.

As of this writing, Democracy Prep operates 23 schools:

  • 7 Elementary Schools (3 in NY; 1 in NJ; 1 in TX; 1 in NV, and 1 in LA)
  • 9 Middle Schools: (5 in NY; 1 in NJ; 1 in TX; 1 in NV, and 1 in LA)
  • 7 High Schools (5 in NY; 1 in NJ, and 1 in NV)

How long any and all of its schools will be able to continue to operate depends upon whether Democracy Prep will be able to confront those ballooning, end-of-year negative fund balances.

Having a founder with no qualms about stealing from children certainly has not helped.


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