Alameda County Office of Education – Tri-Valley Learning Corporation Report

Alameda County Office of Education regarding the Tri-Valley Learning Corporation AB 139 Extraordinary Audit June 8, 2017 Joel D. Montero Chief Executive Officer Fiscal crisis & ManageMent assistance teaM June 8, 2017 L. Karen Monroe, Superintendent Alameda County Office of Education 313 West Winton Avenue Hayward, CA 94544 Dear Superintendent Monroe: On December 8, 2016, the Fiscal Crisis and Management Assistance Team (FCMAT) and the Alameda County Office of Education entered into a study agreement to provide an Assembly Bill 139 extraordinary audit of the Tri-Valley Charter Schools located in Livermore. Specifically, the agreement states that FCMAT will: 1. Review charter schools’ source and use of bond proceeds and transactions, including any other debt instruments, and support documentation related to the source and use of these funds as considered necessary. The review of revenue and expenditure transactions shall cover the time period from 2010 through 2016. 2. Determine if any of the Tri-Valley charter schools local public officials, designated employees or “consultants to the organization who makes, participates in making, or acts in a staff capacity for making governmental decisions” as defined in the Political Reform Act (PRA) of 1974 (Government Code Sections 81000-91014) violated any conflict of interest disclosure regarding California conflict of interest laws. Review applicable PRA Form 700 filings for the time period 2010 through 2016. 3. Review the charter schools’ internal control structure and applicable policies and procedures as necessary to test transactions related to bonds and other debt instru- ments to determine if adequate procedures are in place to safeguard assets. This final report contains the study team’s findings and recommendations in the above areas of review. FCMAT appreciates the opportunity to serve the Alameda County Office of Education, and extends thanks to all the staff of the Alameda County Office of Education and the Livermore Valley Unified School District for their assistance during fieldwork. Sincerely, Joel D. Montero Chief Executive Officer Fiscal crisis & ManageMent assistance teaM i TABLE OF CONTENTS Table of Contents About FCMAT .........................................................................................iii Introduction ............................................................................................1 Study Guidelines ............................................................................................1 Audit Fieldwork ..............................................................................................1 Study Team.......................................................................................................3 Background .............................................................................................4 Scope and Procedures .........................................................................5 Findings and Recommendation ......................................................7 Occupational Fraud .......................................................................................7 Internal Controls .............................................................................................9 Conflict of Interest .......................................................................................10 Diversion of Funds .......................................................................................37 Ethical Values and Fiduciary Duty ..........................................................60 Conclusion ......................................................................................................63 Recommendation ........................................................................................63 Subsequent Events ......................................................................................64 Appendices and Exhibits ..................................................................67 AlAmedA County offiCe of eduCAtion ii Fiscal crisis & ManageMent assistance teaM iii ABOUT FCMAT About FCMAT FCMAT’s primary mission is to assist California’s local K-14 educational agencies to identify, prevent, and resolve financial, human resources and data management challenges. FCMAT provides fiscal and data management assistance, professional development training, product development and other related school business and data services. FCMAT’s fiscal and manage- ment assistance services are used not just to help avert fiscal crisis, but to promote sound financial practices, support the training and development of chief business officials and help to create efficient organizational operations. FCMAT’s data management services are used to help local educational agencies (LEAs) meet state reporting responsibilities, improve data quality, and inform instructional program decisions. FCMAT may be requested to provide fiscal crisis or management assistance by a school district, charter school, community college, county office of education, the state Superintendent of Public Instruction, or the Legislature. When a request or assignment is received, FCMAT assembles a study team that works closely with the LEA to define the scope of work, conduct on-site fieldwork and provide a written report with findings and recommendations to help resolve issues, overcome challenges and plan for the future. FCMAT has continued to make adjustments in the types of support provided based on the changing dynamics of K-14 LEAs and the implementation of major educational reforms. Studies by Fiscal Year 90 80 70 60 50 40 30 20 10 0 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 AlAmedA County offiCe of eduCAtion seidutS fo rebmuN FCMAT also develops and provides numerous publications, software tools, workshops and professional development opportunities to help LEAs operate more effectively and fulfill their fiscal oversight and data management responsibilities. The California School Information Services (CSIS) division of FCMAT assists the California Department of Education with the implementation of the California Longitudinal Pupil Achievement Data System (CALPADS). CSIS also hosts and maintains the Ed-Data website (www.ed-data.org) and provides technical expertise to the Ed-Data partnership: the California Department of Education, EdSource and FCMAT. FCMAT was created by Assembly Bill (AB) 1200 in 1992 to assist LEAs to meet and sustain their financial obligations. AB 107 in 1997 charged FCMAT with responsibility for CSIS and its state- wide data management work. AB 1115 in 1999 codified CSIS’ mission. iv ABOUT FCMAT AB 1200 is also a statewide plan for county offices of education and school districts to work together locally to improve fiscal procedures and accountability standards. AB 2756 (2004) provides specific responsibilities to FCMAT with regard to districts that have received emergency state loans. In January 2006, Senate Bill 430 (charter schools) and AB 1366 (community colleges) became law and expanded FCMAT’s services to those types of LEAs. Since 1992, FCMAT has been engaged to perform more than 1,000 reviews for LEAs, including school districts, county offices of education, charter schools and community colleges. The Kern County Superintendent of Schools is the administrative agent for FCMAT. The team is led by Joel D. Montero, Chief Executive Officer, with funding derived through appropriations in the state budget and a modest fee schedule for charges to requesting agencies. Fiscal crisis & ManageMent assistance teaM 1 INTRODUCTION Introduction On November 17, 2016, the Fiscal Crisis and Management Assistance Team (FCMAT) received a request from the Alameda County Office of Education for an Assembly Bill (AB) 139 extraor- dinary audit of the Tri-Valley Learning Charter School and Livermore Valley Charter Preparatory School located in Livermore. The county office had received allegations of multiple fiscal irreg- ularities, questionable expenditures and inappropriate related-party transactions at the charter school. Upon review of these allegations, the county office was concerned that the charter school may have violated various government and education codes related to fraud and/or misappropri- ation of assets, and the county superintendent initiated an investigation to determine whether sufficient evidence of illegal activity exists to report the matter to the local district attorney’s office for further investigation. Under the provisions of Education Code Section 1241.5, FCMAT entered into a contract with the county office to conduct an AB 139 extraordinary audit. Study Guidelines FCMAT provides a variety of services to school districts and county offices of education upon request. Education Code Section 1241.5(b)(c) permits a county superintendent of schools to review or audit the expenditures and internal controls of any school district or charter in that county if he or she has reason to believe that fraud, misappropriation of funds, or other illegal fiscal practices have occurred that merit examination. The Education Code provides for a review or audit conducted by the county superintendent focused on the alleged fraud, misappropriation of funds, or other illegal fiscal practices to be conducted in a timely and efficient manner. In addition, Education Code Section 47604.4(a) states as follows: In addition to the authority granted by Sections 1241.5 and 47604.3, a county superintendent of schools may, based upon written complaints by parents or other information that justifies the investigation, monitor the operations of a charter school located within that county and conduct an investigation into the operations of the charter school. Therefore, FCMAT focused on the allegations of misappropriation of assets, questionable contracts with third-party vendors and conflict of interest to determine whether Tri-Valley Learning Charter and/or its personnel were involved in or may have committed fraudulent activities. Audit Fieldwork Investigating allegations of fraud requires several steps that include interviewing potential witnesses and assembling evidence from internal and external sources. The FCMAT study team conducted initial county office and school district interviews from January through April 2017 including visits to the Tri-Valley Learning Corporation elementary campus located in Livermore to conduct interviews, collect data and review documents. Additional documents were obtained and interviews were conducted in person and by telephone in Hayward, Livermore and Orange County with individuals that had significant knowledge of financial transactions, financial records and/or other information pertinent to this investigation. Specifically, FCMAT reviewed, analyzed and tested records that included official bond docu- ments, lease documentation, intercompany bank records, financial records, audited financial statements, support documentation, board meeting minutes, the charter petitions, the memo- AlAmedA County offiCe of eduCAtion 2 INTRODUCTION randa of understanding, emails, contracts, payroll records, attendance records and other docu- mentation from independent third-party and other governmental sources. The investigation also included interviews with the former and current executive director, the current executive director’s team, current and former charter school employees, audit committee members, former and current board members, the current and former back office service providers and the independent auditor to evaluate information concerning any alleged misman- agement, fraud, or conflict. The fieldwork focused on determining whether there is sufficient evidence to indicate that fraud, misappropriation of federal and state funds, conflict of interest (particularly with related-party transactions), or self-dealing through other nonprofit public benefit and for-profit corporations by management and key employees of Tri-Valley Learning Corporation may have occurred. This audit focuses on the former and current executive directors of the charter management organiza- tion (CMO); the former director of finance (a later interim CEO); other professionals integral to the issuance of state and federal bond documents, subsequent amendments to these documents and/or property acquisition; and close business associates. Although there are many different types of fraud, a conflict of interest and breach of fiduciary duty exists when officers or employees of the organization have a personal financial interest in a contract(s) or transaction(s), or it is reasonably foreseeable that an economic interest results from utilizing their managerial influence in decision-making during the time of the individual’s public employment, which is a form of misappropriation of assets. Fraudulent disbursements are typically the most frequent form of asset misappropriation. This form of misappropriation includes check tampering, cash or check register disbursement, billing, expense reimbursement and payroll schemes. This report documents numerous instances of potentially fraudulent disbursements including: mischaracterized expenditures, commingling and transferring public school funds between accounts of private or other nonprofit and for profit accounts, and charging personal credit card purchases to the charter school accounts. All fraud has common elements including the following: • Knowingly making an untrue representation or a false claim of a material fact • Intent to deceive, or concealment of the act • Reliance on untrue information • Damages or a loss of money or property This report is the result of the investigation described and is divided into the following sections: • Introduction • Background • Scope and Procedures • Findings • Occupational Fraud • Internal Controls • Conflict of Interest • Political Reform Act — Disclosure, Conflicts of Interest and Enforcement Fiscal crisis & ManageMent assistance teaM 3 INTRODUCTION • California Corporations Code Section 5233 • Related-Party Transactions, Significant Influence Self-Dealing • Related Parties, Affiliates, and Conflicts of Interest • Entities and Individuals Involved in Tri-Valley Learning Corporation Transactions • Related Parties Defined by the 2015 Bonds Tax Certificate • California School Finance Authority Educational Facilities Revenue Bonds (Tri-Valley Learning Corporation Project), Series 2012A • California Municipal Finance Authority Taxable Educational Facilities Bond Anticipation Notes, Series 2014 and Other TVLC Short-and Long-Term Borrowings • California Statewide Communities Development Authority Educational Facilities Revenue Bonds (Independence Support, LLC Project), Series 2015 • Ongoing Disclosure Obligations • Diversion of Funds • Diversion of Assets — Use of Public Funds and Public Entities for Private School Gains • Related-Party Transactions • Diversion of Public Funds and Gift of Public Funds • Foreign Exchange Program • Significant Deficiencies in Internal Controls • Ethical Values and Fiduciary Duty • Subsequent Events • Findings and Recommendation • Recommendation Study Team The FCMAT study team was composed of the following members: Deborah Deal, CICA, CFE Michael W. Ammermon, CPA, CFE, CRFAC FCMAT Intervention Specialist FCMAT Consultant Los Angeles, California Laguna Niguel, CA Laura Haywood Jennifer Noga FCMAT Technical Writer FCMAT Intervention Specialist Bakersfield, CA Bakersfield, CA Each team member reviewed the draft report to confirm its accuracy and to achieve consensus on the final recommendation. In writing its reports, FCMAT uses the Associated Press Stylebook, a comprehensive guide to usage and accepted style that emphasizes conciseness and clarity. In addition, this guide empha- sizes plain language, discourages the use of jargon and capitalizes relatively few terms. AlAmedA County offiCe of eduCAtion 4 BACKGROUND Background Following the closure of two neighborhood magnet schools by Livermore Valley Joint Unified School District (the district), a group of parents who had students in these schools submitted a charter school petition in 2004 as the district struggled with declining enrollment and finan- cial stability. When the district denied the charter petition and the Alameda County Office of Education denied the appeal, the State Board of Education (SBE) approved the petition on November 10, 2004 for the following school year through June 30, 2008. The renewal application was submitted to the district in November 2007 and, following a public hearing on December 11, 2007, the district denied the charter renewal on January 8, 2008. Subsequently, the SBE approved the charter through June 30, 2013 on appeal. Initially, Tri-Valley Learning Corporation (TVLC) had one school, Livermore Valley Charter School (LVCS), serving grades K-8. On July 9, 2009, SBE approved a second school, Livermore Valley Charter Preparatory High School (LVCP) serving grades 9-12, which commenced operations in the 2009-10 school year. In addition to the two Livermore schools, TVLC, a 501(c)(3) nonprofit public-benefit corporation acting as the CMO for all the charter schools, eventually operated three more charters located outside Alameda County: Acacia Elementary and Middle charter schools located in Stockton, and Old Town Charter School located in San Diego. On October 2, 2008, William Batchelor, a former investment banker, was hired as TVLC’s chief operating officer, and later served as the chief executive officer (CEO) until his resig- nation. According to Fair Political Practices Commission Form 700, Batchelor indicated “leaving office” on June 30, 2015; however, FCMAT obtained payroll records for Batchelor dated August 27, 2015. Upon the expiration of the second petition period for LVCS by the SBE, on November 27, 2012, the district’s governing board approved the elementary school to start July 1, 2013, and two years later TVLC petitioned the district to approve the high school for the 2015-16 school year, each with a five-year term. While under the oversight of SBE, TVLC issued 2012 Series A bonds totaling $27.5 million through the California School Finance Authority that generated $24,813,000 in Phase I project funds. An additional $15 million was set aside for Phase II authorized through Qualified School Construction Bonds (QSCBs), a component of the American Recovery and Reinvestment Act of 2009. This federally sponsored program designed to stimulate the American economy during the great recession had several programs available for school districts and charter schools. Charter school applicants that met specific criteria could qualify for QSCBs. The bonds provide federal tax credits issued by the United States Treasury to bondholders in lieu of interest payments primarily through qualified tax credits that reduce an issuer’s cost of borrowing and would otherwise be taxable. Shortly before the issuance of a second bond in 2015 with a principal balance of $25,540,000 through the California Statewide Communities Development Authority, the district authorizer and several Livermore community members raised serious objections and concerns to the Alameda County Board of Supervisors. They questioned the validity of the student and financial information, particularly the ability of TVLC to support additional debt beyond that incurred by the 2012 Series A Bonds. The Alameda County Board of Fiscal crisis & ManageMent assistance teaM 5 SCOPE AND PROCEDURES Supervisors held a Tax Equity & Fiscal Responsibility Act public hearing on May 5, 2015 and unanimously authorized the issuance of $25.5 million in tax-exempt bonds for a joint venture of TVLC and Batchelor’s private school, California Preparatory Academy (CPA). Shortly before and following the resignation of Batchelor as executive director of TVLC, TVLC experienced fiscal distress and severe cash flow issues, causing it to file for Chapter 11 Bankruptcy protection on November 8, 2016. In November 2016, the new executive director contacted the Alameda County Office of Education expressing concerns regarding conflict of interest and self-dealing by Batchelor as well as other close privately held business associates and a network of companies that either partici- pated in or were party to bond transactions, loans and lines of credit. The executive director was concerned about the involvement of Batchelor and potential financial mismanagement, misap- propriation of funds and conflict of interest regarding the issuance and expenditure of publicly issued tax-exempt bond funds. Based on these concerns, the county office conducted a preliminary investigation in conjunction with the district. After review of the allegations and its initial investigation, the county office requested FCMAT on November 17, 2016 to study specific aspects of alleged fraud, misappro- priation of funds and possible illegal activity involving the TVLC organization. Education Code Section 1241.5(c) requires the following action by the county superintendent following a “review or audit of the expenditures and internal controls of any charter school in his or her county if he or she has reason to believe that fraud, misappropriation of funds, or other illegal fiscal practices have occurred that merit examination”: The county superintendent shall report the findings and recommendations to the governing board of the charter school at a regularly scheduled meeting, and provide a copy of the information to the chartering authority of the charter school, within 45 days of completing the review, audit, or examination. The governing board of the charter school shall, no later than 15 calendar days after receipt of the report, notify the county superin- tendent and its chartering authority of it proposed response to the recommendations. Scope and Procedures The fraud investigation consisted of gathering adequate information on specific allegations, establishing an audit plan, and performing various audit test procedures to determine whether fraud may have occurred, and if so, evaluate the loss and determine who was involved and how it occurred. During interviews, FCMAT study team members asked questions pertaining to levels of authority to enter contracts, governing board oversight, financial management internal controls, job duties and responsibilities. Questions also were asked specifically regarding the related-party transactions between the former executive director and companies he initiated, managed, controlled or was closely affiliated with where bond transactions occurred and property or buildings were acquired and transferred. The primary focus of this review is to determine and report to the county office whether there is reasonable assurance, based on the testing performed, that TVLC has adequate management controls for its reporting and monitoring of financial transactions and whether fraud, misap- propriation of funds or other illegal fiscal activities may have occurred. Management controls include the processes for planning, organizing, directing, and controlling program operations, including systems for measuring, reporting, and monitoring performance. AlAmedA County offiCe of eduCAtion 6 SCOPE AND PROCEDURES The FCMAT study team utilized fraud risk assessment checklists for conflict of interest by senior management and key employees in addition to conducting sample tests of financial transactions, other data and contracts to determine if fraud, misappropriation of funds or other illegal fiscal activities may have occurred. Testing for this review is based on sample selection and does not include the testing of the complete list of all transactions and records for this period. Sample testing and review results are intended to provide reasonable but not absolute assurance as to the accuracy of the charter organization’s transactions and financial activity. To accomplish this audit’s objectives, several audit test procedures were developed to provide an in-depth analysis and understanding of the allegations and potential outcomes. The team had limited access to the general ledger records, including supporting documentation provided by school personnel, the back-office provider and the independent auditor in addition to third-party and publicly accessible documents. Several boxes of TVLC’s original records are housed at New Jerusalem School District and were not provided to TVLC upon request for FCMAT inspection. FCMAT performed audit tests and sampling of bank records, electronic bank transfers, loans, lines of credit, general ledger transactions, payroll records, credit card transactions, and other documents including the following: • Governing board meeting minutes and audio recordings. • Notice of Violations by the district and another authorizer along with Batchelor and TVLC responses. • Available general ledger records from 2011-12 through December 2016. • Select payroll records and employment contracts. • Support documentation including proper authorization for bond disbursements, lease agreements, contracts and intercompany financial transactions. • International and domestic travel, meal receipts, and credit card transactions. • Related-party transactions and payments. • Supporting documentation for financial transactions. • Banking records. • Bond disclosure documents for the 2012A and 2015 bonds. • Preliminary filings for the issuance of tax-exempt bonds through the California School Finance Authority and California Statewide Communities Development Authority (education facilities revenue bonds). • Requisitions to the bond trustee for the release of bond funds. • Property records, deeds of trust and agreements between TVLC and various other for-profit companies. • Master contracts with the charter management organization and other vendors. • Independent financial audits for the fiscal years 2012 through 2015. • International student tuition and host family payments. • Chapter 11 Bankruptcy proceedings and other subsequent events. In addition to the appendices referenced in the body of this report and attached hereto, several exhibits also are attached for the reader’s reference. Fiscal crisis & ManageMent assistance teaM 7 OCCUPATIONAL FRAUD Findings and Recommendation Occupational Fraud An organization’s owners, executives, managers or employees may commit occupational fraud utilizing schemes related to asset misappropriation, corruption, and/or financial statements. Asset misappropriation fraud includes cash skimming, falsifying expense reports and/or forging company checks. Corruption schemes involve an employee(s) using his or her influence in busi- ness transactions to obtain a personal benefit that violates that employee’s duty to the employer or the organization; conflicts of interest fall into this category. Financial statement fraud includes the intentional misstatement or omission of material information in the financial reports. Occupational fraud is one of the most difficult types of fraud and abuse to detect. However, the most common method of detection is receiving tips by telephone, email or online forms, accounting for three times the number of any other fraud prevention method for this type of scheme, and for 39.1% of detection methods overall. According to the 2016 Report to the Nations on Occupational Fraud and Abuse preparedby the Association of Certified Fraud Examiners, Inc., corruption schemes accounted for 35.4% of all occupational fraud cases reported, with a median loss of $200,000. Based on this study, the perpetrator’s position and authority in the organization have a direct correlation with the losses incurred. Approximately 40.9% were employees; 36.8% were managers; 3.4% other categories, and 18.9% were owner/executives. Although the second lowest percentage is from owner/executives, this group generated the largest median loss of $703,000 in the 2,410 cases reported worldwide between January 2014 and October 2015. Essential elements of fraud must be present for a perpetrator’s unethical behavior to occur. The fraud triangle (Cressey, 1953) includes three factors: Incentive/pressure/motivation, opportunity, and rationalization/attitude. An extension of the fraud triangle is the fraud diamond, which adds capability to the mix (Wolfe and Hermanson, 2004). Incentive or Pressure Fraud Opportunity Capability Diamond Rationalization/ Attitude AlAmedA County offiCe of eduCAtion 8 OCCUPATIONAL FRAUD To commit fraud, the perpetrator needs to have: • Incentive/Pressure/Motivation: Needs to get something accomplished, self-promoting, has financial pressures or personal reputation to protect. • Opportunity: In a position of authority, or provides an essential function within the organization. • Capability: Able to understand the systems (financial/accounting) and can override internal controls. • Attitude/Rationalization: Confident that fraudulent behavior will go undetected. This report focuses on the ability of the former executive director, Batchelor, to influence and control major financial transactions from which he personally benefitted to purchase real estate for his private tuition-based schools by issuing tax-exempt bonds. The bonds were issued in a series of complex and creative bond financing structures intended for the acquisition of public charter school facilities that ultimately provided the financing necessary to secure real estate now owned by private investors of a limited liability company for which he is the manager. The lack of internal controls coupled with financing schemes designed to divert millions of dollars by Batchelor and others through relationships fostered between board members, close associates and other professionals with his nonprofit public and private companies created an environment that made it possible for the essential elements of fraud to occur. Through the establishment of a CMO, TVLC’s CEO created shell companies to separate nonprofit public benefit corporations and/or for-profit limited liability companies to gain access to public taxpayer facility dollars and purchase property that was converted to private ownership. These purchases were made possible through two separate tax-exempt bond issuances including a Qualified School Construction Bond totaling more than $67 million in a three-year span. Shortly after the second issuance, the TVLC fell into bankruptcy owning little more than one administration building for the first bond issuance, and a ground lease on the second bond issu- ance. The first property contains 15 other buildings, and foreign and private investors appear to be in possession of the property and all the buildings except the one building described above. The Subsequent Events section of this report describes the continuance of financing structures following the financial collapse of TVLC during bankruptcy proceedings to assume control of assets including buildings, property and other capital assets. A recent report titled Spending Blind, published by In the Public Interest (a research and policy center), reports on the necessity of taxpayer-supported conduit bonds in localities where an abundance of classroom space is available. The report describes deficiencies with the current regu- lations that have allowed millions of dollars to be vested in private limited liability companies and CMOs by funneling the funds through public charter schools and eventually converting those dollars into private real estate holdings. The full report, which also includes references to Tri-Valley Learning Corporation, can be found at: https://www.inthepublicinterest.org/wp-con- tent/uploads/FINAL_ITPI_SpendingBlind_April2017.pdf Fiscal crisis & ManageMent assistance teaM 9 INTERNAL CONTROLS Internal Controls Internal controls are among the most important aspects of any fraud prevention program. Managers in a position of authority have a higher standard of care to establish the ethical tone and serve as examples to other employees. Employees with administrative responsibility have a fiduciary duty to the organization in the course of their employment to ensure that activities are conducted in compliance with all applicable board policies, laws, regulations, and standards of conduct. Management personnel are entrusted to safeguard assets and ensure that internal controls function as intended. Internal controls include policies, procedures, checks and balances to ensure reliance on financial information, and that the information provided to management for decision-making is in compliance with laws and regulations. While the governing board and all employees in TVLC have some responsibility for internal controls, the former executive director, director of finance, governing board and other key management personnel including TVLC’s internal legal counsel have a higher ethical standard, fiduciary duty and responsibility to safeguard the assets of TVLC and fully disclose all relat- ed-party or affiliated organizations and companies to the school’s auditor and the district charged with oversight responsibility. Examination of the accounting records, processes and procedures revealed significant material deficiencies in the organization’s internal controls, which allowed management personnel to circumvent internal controls designed to safeguard assets and prevent fiscal mismanagement. The current structure, with limited personnel and board member involvement, exposes the organiza- tion to significant risk of fraud and material misstatement of the financial statements. AlAmedA County offiCe of eduCAtion 10 CONFLICT OF INTEREST Conflict of Interest A conflict of interest exists when an individual has a private financial interest in the outcome of a contract or a public decision and does either of the following: 1. Participates in the decision-making process 2. Influences, or attempts to influence, others making a contract or decision Statutes that govern conflict of interest include the Political Reform Act, Government Code 1090, Government Code 87100, and Corporation Code Section 5233 for nonprofit organiza- tions. Governing board members and administrators should abstain from all discussions, negoti- ations and votes related to a contract in which they have a personal financial interest by removing themselves from the meeting and ensuring that the abstention and departure are recorded in board minutes. A conflict of interest can still exist with subsequent action on the contract, such as authorizing payment, negotiating disputes or contract terms; therefore, the governing board member or administrator should abstain from all discussions, negotiations and/or votes related to the contract in which he or she has a personal interest. This report demonstrates that conflict of interest exists at the TVLC, with Batchelor as a public official participating in the decision-making process and exercising considerable influence, signif- icant control and involvement without full disclosure of his business interests to the charter’s governing board and others that relied on information he provided. Evidence demonstrates that multiple transactions involved self-dealing with Batchelor’s nonprofit public benefit corporations and for-profit corporation that allowed Batchelor, his close associates and outside professionals with considerable expertise in real estate and investments to gain financially from these decisions. These individuals participated in subsequent amendments to contracts, including signatory authority representing both the charter school and Batchelor’s privately held company, and approval of payments on behalf of the charter school to those orga- nizations. Article V of the TVLC Bylaws prohibits the net earning, properties, or assets of the corporation “shall inure to the benefits of any private person or individual, or to any director or officer of the Corporations.” Supporting documentation gathered during FCMAT’s fieldwork shows the former CEO is in direct violation of the TVLC Article V Bylaws. This report reveals how the former CEO of TVLC was directly involved with two separate bond issuances and the creation of a complex chain of companies for the sole purpose of obtaining tax-exempt bonds sold to investors under the guise that the funds would be utilized to acquire facilities to expand TVLC facilities for the Livermore charter schools. Although both bond issuances are problematic, the 2015 issuance shows that the former CEO signed official documents as both the principal or managing member of the companies he owns or manages, and as the CEO of TVLC during his employment at TVLC. Bond and lease docu- ments establish that during his tenure as CEO of TVLC Batchelor: • Created the limited liability company that is the borrower listed in the official bond documents of the property. • Was the manager of Goldstone United Investments (GUI), seller of the buildings and owner of the land purchased with public bonds. Fiscal crisis & ManageMent assistance teaM 11 CONFLICT OF INTEREST • Was the owner of two private schools, California Preparatory Academy and San Francisco Bay Preparatory Academy (SFBAPA), which were co-tenants that leased back the building and property with TVLC. • Signed a ground lease agreement on behalf of TVLC and CPA during his employment with TVLC. Political Reform Act – Disclosure, Conflicts of Interest and Enforcement The Political Reform Act (PRA) was enacted by Proposition 9 in June 1974 and revised in 2015 resulting in several significant changes to the conflict of interest rules that are effective November 17, 2016. The stated intent of the act was to establish a process for most state and local officials as well as certain designated employees to publicly disclose their personal income and assets as follows: [a]ssets and income of public officials which may be materially affected by their official actions …[are] disqualified from action in order that conflicts of interest may be avoided. The PRA provisions are enforced by the Fair Political Practices Commission (FPPC) and supported by Government Code requiring every state and local governmental agency to adopt a conflict of interest code. The commission is the state agency responsible for interpreting the provisions of the law and issuing California Form 700 – Statement of Economic Interests. Because charter school governing board members are considered public officials and governing boards are considered legislative bodies, board members and certain designated individuals must file Form 700 annually, or when they take office or begin in a position, and upon leaving office. Usually, Form 700 must be filed by April 1 for the calendar year, and within 30 days of assuming or leaving office or the position unless an exception applies. Additionally, a consultant to the organization “who makes, participates in making, or acts in a staff capacity for making governmental decisions” may be required to complete a Form 700 in accordance with FPPC regulations. Amended PRA regulations in Cal. Code Regs., tit. 2, § 18700(d) provides a four-step versus an eight-step process to determine whether a public official has a prohibited conflict of interest under the Act. In accordance with the revised § 18700(a) Basic Rule: “A public official at any level of state or local government has a prohibited conflict of interest and may not make, participate in making, or in any way use or attempt to use his or her official position to influence a governmental decision when he or she knows or has reason to know he or she has a disqualifying financial interest. A public official has a disqualifying financial interest if the decision will have a reasonably foreseeable material financial effect, distinguishable from the effect on the public generally, directly on the official, or his or her immediate family, or on any financial interest described in subdivision (c)(6) (A-F) herein. (Sections 87100, 87101, & 87103.)” The following is the four-step FPPC process. Additional detail is available at the FPPC website (http://www.fppc.ca.gov): Step One: Is it reasonably foreseeable that the governmental decision will have a finan- cial effect on any of the public official’s financial interests? AlAmedA County offiCe of eduCAtion 12 CONFLICT OF INTEREST Step Two: Will the reasonably foreseeable financial effect be material? To ascertain materiality, a determination utilizing Regulation 18702 – Materiality Standards is applied. Step Three: Can the public official demonstrate that the material financial effect on the public official’s financial interest is indistinguishable from its effect on the public generally? Step Four: If after applying the three-step analysis and determining the public official has a conflict of interest, absent an exception, he or she may not make, participate in making, or in any way attempt to use his or her official position to influence the governmental decision. According to FPPC regulation Cal. Code Regs., tit.2, § 18700, subd. (a) “A public official at any level of state or local government has a prohibited conflict of interest and may not make, partic- ipate in making, or in any way use or attempt to use his or her official position to influence a governmental decision when he or she knows or has reason to know he or she has a disqualifying financial interest. A public official has a disqualifying financial interest if the decision will have a reasonably foreseeable material financial effect, distinguishable from the effect on the public generally, directly on the official, or his or her immediate family, or on any financial interest described in subdivision (c)(6) (A-F) herein.” Section (d) provides a four-step process for making a determination “whether a public official has a prohibited conflict of interest under the Act.” TVLC’s governing board originally adopted a conflict of interest policy on December 14, 2006, which was subsequently updated in 2008 and 2012. The most recent amendment was approved at the September 24, 2015 board meeting: Board Policy #100-007 Each designated employee, including governing board members and candidates for election and/or appointment to the governing board, shall file a Statement of Economic Interest (“Statement”) at the time and manner prescribed below, disclosing reportable investments, interests in real property, business positions, and income required to be reported under the category or categories to which the employee’s position is assigned in “Exhibit A.” All submitted Statement of Economic Interest documents shall be kept in the Corporation’s vital corporate documents file. The specific disclosure responsibili- ties assigned to each position are set forth in “Exhibit B.” Designated positions defined in TVLC’s policy include: • Members of the TVLC governing board • Candidates for member of the governing board • Chief executive officer of TVLC • Principal of any TVLC charter school • Director of development • IT director of any TVLC charter school • Corporate legal counsel • Accounting/HR manager • Consultants Fiscal crisis & ManageMent assistance teaM 13 CONFLICT OF INTEREST • Purchasing manager • Assistant business officer The policy states: The CEO may determine that a particular consultant, although a “designated position,” is hired to perform a range of duties that is limited in scope and thus not required to fully comply with the disclosure requirements in this section. Such written determina- tion shall include a description of the consultant’s duties and, based upon that descrip- tion, a statement of the extent of disclosure requirements. The CEO’s determination is a public record and shall be retained for public inspection in the same manner and location of interest code. The FPPC’s rules on conflict of interest codes state that a consultant to an organization “who makes, participates in making, or acts in a staff capacity for making governmental decisions” may be required to complete Form 700 if this provision is included in the organization’s conflict of interest code. Numerous consultants were involved in both the 2012 and 2015 bond issuances for TVLC and therefore should have been required to fully disclose all investments, business positions and interest in real property in accordance with these regulations. If the CEO determined that full disclosure was not required, his written determination is required to be available for public inspection. During FCMAT’s review, several requests were made for written determinations yet none were found by existing TVLC staffs. Therefore, various consultants that were engaged in financial transactions, including the 2012 and 2015 bond issu- ances, should have been required to fully disclose their financial interests per FPPC regulations. FCMAT requested TVLC’s Form 700 – Statement of Economic Interests – for each governing board member and designated employee working at TVLC for the calendar years 2010 through 2016. These forms include a cover page and, as applicable, schedules A-1, A-2, and B through E, as shown in the table below. FCMAT received no forms for 2010. Cover Page Name and address Section 1. Office, Agency, or Court Position Title Section 2. Jurisdiction of Office State, County, City, other Section 3. Type of Statement Annual, assuming or leaving office Section 4. Schedule Summary A-1, A-2, B, C, D, E Section 5. Verification Signature and date Schedule A-1 Investments Stocks, including those held in an IRA or a 401k Schedule A-2 Investments Business entities, sole proprietorships, partnerships, LLC, corporations, and trusts Schedule B Real Property Rental property in the jurisdiction Schedule C Income, Loans, & Business Positions Non-governmental salaries of public officials and spouse/registered domestic partner Schedule D Income – Gifts Gifts from businesses (ticket to various venues) Schedule E Income – Gifts Travel payments from third parties (not your employers) For the calendar years where Form 700 disclosures were received, the former CEO had these forms on file for the last five years; however, two separate filings were received for fiscal year 2012. A total of 71 Form 700 Statement of Economic Interest were provided, representing past and present board members as well as designated employees. FCMAT’s examination of the 71 forms reveal several forms did not meet the requirements prescribed by FPPC and TVLC’s conflict of interest code as adopted in board policy. FCMAT found that several forms were filed indicating no selection of reportable interests in Section 4 - Schedule Summary. AlAmedA County offiCe of eduCAtion 14 CONFLICT OF INTEREST Specifically, FCMAT found the following anomalies: Fiscal Year Description 2011 Fifteen forms were received for this calendar year. Three forms for designated employees – the former CEO, a principal and vice principal – left section four on the cover sheet blank. 2012 Only two forms were received for this fiscal year, even though many staff members remained employed from the prior calen- dar year in the subsequent year. 2013 Three forms for designated employees – two board members and the former CEO – and a program specialist left section four of the cover sheet blank. One employee did have schedules attached for the section left blank. Two forms for a designated employee left section three of the cover sheet blank. 2014 The former CEO had reportable interest in the prior two years, but reported no interest in this fiscal year. This information does not appear consistent with prior year filings or subsequent years’ filings. The former CEO failed to disclose any income received from California Preparatory Academy, San Francisco Bay Preparatory Academy or his international education pro- gram. 2015 Upon leaving office, the former CEO submitted the Form 700 with no reportable interest as of February 2015. However, a revised form was later submitted with a June 2015 signature date with reportable interest on Schedule A-1, A-2 & C. 2016 The 2016 disclosure period was not complete at the time of FCMAT’s review; however, no Forms 700 were provided to FCMAT for employees who left designated positions during the 2016 calendar year. Government Code 87302 requires em- ployees in designated positions who leave employment midyear to file a revised Form 700 within 30 days of the end of their employment. Batchelor’s Form 700 dated February 3, 2015, Statement of Economic Interests, Leaving Office covers a period from 1-1-15 through the date of leaving office and fails to disclose any business or financial interests outside of TVLC. Batchelor checked the box, “No reportable interests on any schedule.” Subsequent to the form dated February 3, 2015, Batchelor amended his Form 700, dated June 30, 2015 to include Form 700 Schedule A-1 and A-2, Investment disclosures and Schedule C, Income, Loans & Business Positions disclosures. • Schedule A-1 discloses stocks, bonds, and other interests with less than 10% ownership. Batchelor discloses Apple as the general description of the business in Schedule A-1. • Schedule A-2 is used for disclosures of Investments, Income, and Assets of Business Entities/Trusts of 10% or greater. Batchelor discloses SFBAPA and CPA in schedule A-2. • Schedule C discloses TVLC. The FPPC website at http://www.fppc.ca.gov/Form700.html states, “Every elected official and public employee who makes or influences governmental decisions is required to submit a Statement of Economic Interest, also known as the Form 700. The Form 700 provides transparency and ensures accountability in two ways: 1. It provides necessary information to the public about an official’s personal financial interests to ensure that officials are making decisions in the best interest of the public and not enhancing their personal finances. 2. It serves as a reminder to the public official of potential conflicts of interest so the official can abstain from making or participating in governmental decisions that are deemed conflicts of interest.” Transparency is important to disclosure and avoiding conflicts of interest. The 2015-16 Form 700 Reference Pamphlet further describes disclosures for leaving office: “Leaving Office Statement: Fiscal crisis & ManageMent assistance teaM 15 CONFLICT OF INTEREST Generally, the period covered is January 1, 2015, through the date you stopped performing the duties of your position. If the period covered differs from January 1, 2015, through the date you stopped performing the duties of your position (for example, you assumed office between October 1, 2014, and December 31, 2014, or you are combining statements), the period covered must be specified. The reporting period can cover parts of two calendar years. • Investments, interests in real property, business positions held, and income (including loans, gifts, and travel payments) received during the period covered by the statement must be reported. Do not change the preprinted dates on Schedules A-1, A-2, and B unless you are required to report the acquisition or disposition of an interest that did not occur in 2015.” (emphasis added) As described above, business positions are required to be disclosed regardless of percentage of ownership. Therefore, Batchelor’s business position as the “manager” of GUI required disclosure on Form 700. The reference pamphlet describes a business entity and conflict of interest as: Business Entity: Any organization or enterprise operated for profit, including a propri- etorship, partnership, firm, business trust, joint venture, syndicate, corporation, or association. This would include a business for which you take business deductions for tax purposes (for example, a small business operated in your home). Conflict of Interest: A public official or employee has a conflict of interest under the Act when all of the following occur: The official makes, participates in making, or uses his or her official position to influ- ence a governmental decision; It is reasonably foreseeable that the decision will affect the official’s economic interest; The effect of the decision on the official’s economic interest will be material; and The effect of the decision on the official’s economic interest will be different than its effect on the public generally. Even a small home-based business entity requires disclosure. Later this report describes Batchelor receiving $6,500 between December 2014 and June 2015. A Federal Form 1099 was not issued for $6,500 in income from TVLC for housing a foreign exchange student. TVLC’s Board Policy #100-007, Conflict of Interest Code, Section III at Designated Employees states: “Employees of TVLC, including governing board members…who hold positions that involve the making or participation in the making, of decisions that may foreseeably have a material effect on any financial interest shall be ‘designated employees.’” TVLC’s Board Policy #100-007, Conflict of Interest Code, Section VI, Statements of Economic Interests: Manner of Reporting at Business Position Disclosure states: “When reporting business positions, a designated employee shall list the name of each business entity not specified above in which he/she is a director, officer, partner, trustee, employee, or in which he/she holds any position of management; a description of the business activity in which the entity is engaged; and designated employee’s position with the business entity.” AlAmedA County offiCe of eduCAtion 16 CONFLICT OF INTEREST FCMAT reviewed the former CEO’s Form 700 filings, which reveal a significant lack of disclosure of numerous entities in which Batchelor represented both sides of contracts and lease agreements, which benefited him personally. Under the FPPC Political Reform Act, a public offi- cial has a disqualifying conflict of interest in a governmental decision if it is foreseeable that the decision will have a financial impact on his or her personal finances or other financial interests (FPPC Section 18702 (a) (1-5)). To avoid bias or the appearance of possible improprieties, the public official is prohibited from participating in the decision. Batchelor’s employment contract for the 2013-14 school year specifically approved Batchelor’s employment and board positions with the SFBAPA. However, board members interviewed by FCMAT were not aware of the depth of these financial arrange- ments with Batchelor’s other financial ventures – specifically, Batchelor’s involvement with GUI and the creation of Independent Support, LLC to qualify for tax-exempt bond financing for his private schools CPA and SFBAPA. The employment contract states that: “During the employment hereunder, the CEO will not, directly or indirectly, engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Corporation is now involved or becomes involved during the term of such employment, nor engage in any other activities that conflict with his obligations to the Corporation.” The following is an excerpt from board meeting minutes where the current CEO, John Zukoski, Jr. discussed how the organizations function together. TVLC REGULAR BOARD MEETING Thursday, February 25, 2016, 7:00 pm “June 25, 2015 “LVCP Exchange Student Program and California Preparatory Academies Pres. Hall explained that the purpose of this item is to clarify the relationship with CPA; and the exchange program. The CEO explained that the LVCP operates the exchange student program; CPA is completely separate. The exchange program issues I-17 one-year visas for students who want the experience and cultural immersion. CPA is a private school similar to Quarry Lane and other schools. Visas are for up to 4 years. Students are generally looking to enter top US universities. LVCP and CPA will be co-tenants in the 3090 building. Pres. and the CEO clarified that TVLC will not be running CPA and that they are completely separate. Other than sharing space at 3090, TVLC and CPA are separate entities, and there are no TVLC employees on the CPA payroll. Lessard asked about the distribution of exchange students and where do they go after they leave LVCP. Prin. Dillie said that most are sophomores and juniors who typically go to a private school when they leave LVCP. Lessard asked if LVCP will be a feeder school for CPA. Mr. Dillie stated that there have been no conversations about that. In the future, he plans to limit the number of exchange students to 50 students. Kohn asked about the role of CPA in recruiting of exchange students. The CEO explained that a former employee of TVLC is now the Designated Student Officer for CPA. As of now, she is still involved as the secondary contact. Bill Batchelor is still the primary contact. They are volunteering their time. TVLC is working toward severing the relationship, but TVLC doesn’t have the staff at this time. There is no expected date for when the relationship will end. Pres. Hall asked whether the relationship was hurting us. The CEO answered that, no, they are helping. Hall asked if a volunteer could take on the job. The CEO Fiscal crisis & ManageMent assistance teaM 17 CONFLICT OF INTEREST said that was possible. Goulart stated that the TVLC Board should clarify the differ- ences between the exchange program and CPA, especially given the media attention.” Even with a waiver by the TVLC governing board to sign certain agreements to lease building space, Batchelor continued to materially participate in subsequent decisions and did not disqualify himself from participating as both the CEO of TVLC and the manager of GUI and owner of CPA and SFBAPA and other business interests and still bound by conflict of interest statutes. Because these businesses were not properly disclosed in the Form 700 disclosures docu- ments, the governing board may or may not have been aware of Batchelor’s material and personal interests in these transactions. Batchelor had a fiduciary duty to fully disclose and recuse himself from self-dealing and failed to do so. California Corporations Code Section 5233 The purpose of California Corporations Code Section 5233 is to define self-dealing transactions where the corporation is a party “to which one or more of its directors has a material financial interest …” An extension of this code is included in new requirements in Part VI of the federal Form 990 entitled Governance, Management and Disclosure, which can lead to questions regarding the continuance of tax-exempt status. Regarding nonprofit governance, management and disclosures, the IRS states in its instructions for Form 990, Part VI: “…the IRS considers such policies and procedures to generally improve tax compliance. The absence of appropriate policies and procedures can lead to opportunities for excess benefit transactions, inurement, operation for non-exempt purposes, or other activities inconsistent with exempt status.” This report establishes that affiliated and related party relationships existed between the former CEO of TVLC and other nonprofit public benefit corporations and for-profit companies that created intertwined companies evidenced by bond documents, contracts, lease agreements and ownership records. Conclusive documentation supports that the former executive director and close associates exercised significant personal involvement and financial interest, violating conflict-of-interest statutes, California Corporations Code Section 5233 and TVLC’s board policy. Related-Party Transactions, Significant Influence, Self- Dealing The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 850-10-50 contains the disclosure requirements for related party relationships and transactions. The FASB ASC master glossary defines affiliate, affiliated entity, and immediate family as: Affiliate: A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity. Affiliated Entity: An entity that directly or indirectly controls, is controlled by, or is under common control with another entity; also, a party with which the entity may deal if one party has the ability to exercise significant influence over the other’s oper- ating and financial policies. AlAmedA County offiCe of eduCAtion 18 CONFLICT OF INTEREST Immediate Family: Family members who might control or influence a principal owner or a member of management, or who might be controlled or influenced by a principal owner or a member of management, because of the family relationship. In accordance with 850-10-50, related parties include: a. Affiliates of the entity. b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity. c. Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management. d. Principal owners of the entity and members of their immediate families. e. Management of the entity and members of their immediate families. f. Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. FASB identified disclosures include: a. The nature of the relationship(s) involved. b. A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements. c. The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of estab- lishing the terms from that used in the preceding period. d. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. e. The information required by paragraph 740-10-50-17. It is the responsibility of senior management of TVLC to fully document and disclose to the independent auditors, governing board and the oversight agency all potential related party trans- actions to comply with Generally Accepted Accounting Principles (GAAP). Failure to disclose related party transactions may be a departure from GAAP that could result in a qualified or adverse audit opinion and the potential for civil and criminal prosecution. Fiscal crisis & ManageMent assistance teaM 19 CONFLICT OF INTEREST Related Parties, Affiliates, and Conflicts of Interest The relationships associated with TVLC and several profit and nonprofit companies are intricate, complex and elaborate. Evidence shows that nonprofit and for-profit affiliated entities and related parties that have a material or significant common control and a material economic interest were created to use TVLC to obtain tax-free public bond money through two separate tax-exempt bond issuances: one in 2012, and the other in 2015. These organizations are affiliated and are related parties: Livermore Valley Charter School (LVCS) Livermore Valley Charter Preparatory High School (LVCP) Acacia Elementary Charter School (AECS) Acacia Middle Charter School (AMCS) Old Town Academy (OTA) This report provides sufficient evidence that affiliated or related party organizations may have been manipulated and/or created to divert tax-exempt bonds designated for the acquisition of real estate for TVLC schools. A complex network of companies and sophisticated real estate assignments were used to conceal the use of these funds from the oversight agencies, state agen- cies, district, bond holders, and all others that relied on the bond disclosure documents, financial statements and independent financial audits. Property at 3252 Constitution Drive, Livermore, to house the elementary campus was purchased with tax-exempt bonds and converted to private ownership by individuals that were the under- writers of the same transaction. Property at 3090 Independence Drive, Livermore, housing the charter high school and shared with the Batchelor’s private schools (CPA and SFBAPA) ultimately was transferred to a foreign held company, Goldstone United Investments, LLC where Batchelor is the managing member. These bond transactions are fully discussed later in this report. Related party relationships must be transparent and fully disclosed. The audited financial state- ments provide the oversight agency, investors, banks and other interested parties assurance that the information contained is accurate. By intentionally failing to disclose and fully inform the independent auditor about affiliated entities and how these parties were related, the auditor and oversight agency were prevented from performing their due diligence and fiscal oversight respon- sibilities, and concealed the true nature of the real estate purchased with public tax-exempt bonds from investors and state agencies. Affiliated and related parties are specific terms that are embedded in the framework and plain language of GAAP, Generally Accepted Auditing Standards (GAAS), the IRS, the Franchise Tax AlAmedA County offiCe of eduCAtion retrahC retneC gninraeL yellaV-irT ynapmoC tnemeganaM 20 CONFLICT OF INTEREST Board, Corporations Code, Business and Professional Code, Education Code and Government Code. It is crucial that audited financial statements are presented fairly and include properly disclosed information to provide full transparency to those that rely upon them. The following is a partial list of affiliated and/or related parties allegedly involved in converting and diverting public tax-exempt bond financing into the purchase of real property to house a private school. The individuals associated with each of these entities are identified later in this report: • Tri-Valley Learning Corporation (TVLC) • Montevina I and Montevina II (MI and MII) • Livermore Charter Zone Corporation (LCZC) • Independence Support, LLC (ISC) • California Preparatory Academy (CPA) • San Francisco Bay Preparatory Academy (SFBAPA) • Squaw Valley Academy Bay Area (SVABA) • Goldstone United Investments, LLC (GUI) The following entities were in existence at the time the 2015 bonds were sold for the acquisi- tion and improvement of 3090 Independence Drive, and were controlled to some degree by Batchelor. Property located at 3090 Independence Drive is the location of Batchelor’s interna- tional school, SFBAPA, and TVLC’s high school, LVCP. LVCP provided instruction to its charter and to foreign exchange students, which, according to TVLC’s current management, provided students to SFBAPA. The diagram below depicts the relationships between Batchelor and several, but not all, related entities. SFBAPA SVABA CPA GUI TVLC IS LCZC Batchelor MI & MII Fiscal crisis & ManageMent assistance teaM 21 CONFLICT OF INTEREST Entities and Individuals Involved in Tri-Valley Learning Corporation Transactions Tri-Valley Learning Corporation is a California public benefit nonprofit corporation that at the time of the issuance of the 2015 bonds operated five charter schools: Livermore Valley Charter Preparatory High School and Livermore Valley Charter School (both located in Livermore), Acacia Elementary Charter School and Acacia Middle Charter School (both located in Stockton), and at one time the Old Town Academy K-8 Charter School (located in San Diego). TVLC was previously known as Livermore Charter Learning Corporation. On October 1, 2012, TVLC entered into a sublease with the California School Finance Authority regarding educational facilities revenue bonds (Tri-Valley Learning Corporation Project), Series 2012A (tax-exempt bonds), whereby TVLC pledged to pay base rental payments out of TVLC revenues, including general purpose entitlements with respect to Livermore Valley Charter School (LVCS) and Livermore Valley Charter Preparatory High School (LVCP.) At the time of issuance of the 2012A bonds, Batchelor was designated as chief operating officer of TVLC. At that time, the TVLC Board of Directors consisted of these members: Len DiGiovanni, Neil Cowles, Rick Swiers, Dave Vopnford, John Zukoski, Sr., Jerry Mullins and Tim Hall. Subsequently, on April 1, 2015, TVLC entered into a lease, as co-tenants with CPA, to acquire facilities located at 3090 Independence Drive, Livermore (Independence Plaza), from Independence Support LLC. Independence Plaza was intended to be the location for LVCP and a private school to be operated by CPA. Connections between Batchelor and these companies will be described more fully later in this report. At the time of issuance of the 2015 bonds, Batchelor was the chief executive officer of TVLC, John Zukoski, Jr. was its director of finance and Tim Hall was TVLC board president. Together they executed various documents evidenced by their signatures relating to the financing while at the same time Batchelor was in a managing role for CPA. FCMAT searched various businesses, entities and individuals that were involved in TVLC transactions as signatories to documents referenced in the 2012 and 2015 bond descriptions; referred to in ancillary TVLC documents or proceedings; or located in other related and relevant materials. Companies and names were searched through various online legal and business services that provide reports that show registered agents, possible business associates, employers, UCC filings common addresses and more that allow FCMAT investigators the ability to draw possible connections between certain business entities and individuals. Some of the entities that follow share common addresses, staff and/or leadership. Others were business associates with businesses that were involved in TVLC bond transactions. Montevina Phase I, LLC and Montevina Phase II, LLC Just prior to the 2012A transaction, Montevina Phase I, LLC (MI) was the owner of the real property located in Livermore known as the Montevina Phase I property. Montevina Phase II, LLC (MII) was the owner of the real property located in Livermore known as the Montevina Phase II Property. Together, the Montevina Phase I and II properties consisted of 14 buildings. MI and MII each consist of the same two members, Tony Cone and Mark Holmstedt. Both men are also named partners of Westhoff, Cone & Holmstedt, the underwriter for the 2012A bonds. Prior to the transaction, PLF-XIII owned all interest in MI except for the Northstar Phase I deed of trust. PLF-XIV owned all interest in MII except for the Northstar Phase II deed of trust. AlAmedA County offiCe of eduCAtion 22 CONFLICT OF INTEREST During the course of the 2012 bond transaction, certain parcels of property were transferred from MI to MII according to the bond documents as part of an “intercompany transfer” to “provide adequate collateral in connection with certain loans.” As part of the 2012 bond transaction, MI leased the Montevina Phase I property to the California School Finance Authority, and the authority immediately subleased the property to TVLC, which was to acquire the facilities through this transaction. MI and MII have business addresses in Livermore, Danville, Pleasanton and Walnut Creek. One address associated with MI and II (4900 Hopyard Road, Pleasanton) is also associated with PLF-XI/PLF-XIII/PLF-XIV and ExTerra Realty Partners, LLC. Another address (500 Ygnacio Valley Road, Walnut Creek) is also associated with Westhoff, Cone & Holmstedt (WCH). Another address (3110 Constitution Dr., Livermore) is also associated with ExTerra Realty Partners, LLC. Individuals associated with MI and MII include: Michael Parker (president of MI and MII, owner/president of Montevina Phase I Owners Association and an executive/owner of ExTerra Realty Partners); David Clock (Danville); and Richard Norris (who is the registered agent for MI and MII and is an attorney at Archer Norris, located in Walnut Creek). The Montevina Group (as defined in the Membership Interest Purchase and Sale Agreement, dated October 4, 2012) included MI, MII, PLF-XIII, PLF-XIV, ExTerra and Michael Parker. Possible business associates of MI and MII include: ExTerra Realty Partners (Livermore, Pleasanton); N-Star Rel CDO VIII Grantor Trust, Series WW, and Westhoff, Cone & Holmstedt. A secured party of MI and MII is N-Star Rel CDO VIII Grantor Trust, Series WW (399 Park Ave Floor 18, New York, NY), which may be associated with NRFC WA Holdings II, LLC. NRFC WA Holdings II, LLC (Northstar) NRFC WA Holdings II, LLC (also referred to as Northstar) held an existing deed of trust on the Montevina Phase I property, which secured a loan to MI, and an existing deed of trust on the Montevina Phase II property, which secured a loan to MII. Northstar made construction loans to MI totaling $20,120,000 between 2007 and 2012, but this amount was reduced to $500 after the 2012 bond transaction and Northstar agreed to subordinate this debt to the 2012A bonds by way of a subordination agreement dated October 1, 2012. NRFC Sub-REIT Corp., a Maryland corporation, is the sole member of NRFC WA Holdings II, LLC. Westhoff, Cone & Holmstedt WCH is a financial services firm located in Walnut Creek. WCH provides investment banking and underwriting for various industries, including charter schools, and was the underwriter for the 2012 bonds transaction. Mark Holmstedt and Anthony Cone, both named partners of WCH, are also the members of Montevina Phase I, LLC and Montevina Phase II, LLC. FCMAT understands that Mr. Cone is deceased. Associated with WCH are also MI and MII. One of the business addresses associated with WCH (500 Ygnacio Valley Road, Walnut Creek) is also associated with MI and MII. Fiscal crisis & ManageMent assistance teaM 23 CONFLICT OF INTEREST PLF-XIII, LLC and PLF-XIV, LLC PLF-XIII owned the Montevina I Interest, except for the Northstar Phase I deed of trust. PLF-XIV owned the Montevina II Interest, except for the Northstar Phase II deed of trust. Name variations of these companies include PLF-XI, LLC; PLF-XIII, LLC; and PLF-XIV, LLC. Possible business associates of PLF-XIII/PLF-XIV include NRFC WA Holdings, LLC (Irving, TX) and ExTerra Realty Partners, LLC. PLF-XI, LLC is the sole member of Iowa Property Owners. Secured parties of PLF-XI/PLF-XIII/PLF-XIV are NRFC WA Holdings, LLC and NRFC WA Holdings II, LLC. The address associated with PLF-XI/PLF-XIII/PLF-XIV (4900 Hopyard Road, Pleasanton) is also associated with MI, MII and ExTerra Realty Partners, LLC. Michael Parker is the president of PLF-XIII and an executive/signatory for PLF-XI. ExTerra Realty Partners LLC ExTerra Realty Partners LLC are real estate agents and managers. One of the addresses associated with ExTerra Realty Partners, LLC (4900 Hopyard Road, Pleasanton) is also associated with MI, MII and PLF-XI/PLF-XIII/PLF-XIV. Several of the addresses associated with ExTerra Realty Partners, LLC (4900 Hopyard Road, Pleasanton; 3110 Constitution Dr., Livermore; 3152 Constitution Dr., Livermore) are also associated with MI and MII. The property located at 3152 Constitution Dr. is the subject of the 2012 bonds. Individuals associated with ExTerra include: David Clock (registered agent for Montevina Phase I Owners Association), Rick Kiper, Julie Parker, Michael Parker (owner/president of Montevina Phase I Owners Association; also associated with MI/MII; listed as an owner of ExTerra Realty Partners), and Tammy Dragotta. Possible business associates include: MI and MII; NRFC WA Holdings II, LLC; Tri-Valley Campus I, LLC. Mark A. Holmstedt and Anthony E. Cone Mark A. Holmstedt and Anthony E. Cone own Montevina Phase I & II, LLC. Both men are also named partners of the financial services firm Westhoff, Cone & Holmstedt. California Preparatory Academy California Preparatory Academy is a public benefit nonprofit corporation that along with TVLC (as co-tenants), entered into a lease dated April 1, 2015, with Independence Support LLC, to acquire facilities located at 3090 Independence Drive, Livermore (Independence Plaza). Independence Plaza was intended to be the location for LVCP and the San Francisco Bay Preparatory Academy, a private boarding high school. The Squaw Valley Academy Bay Area, a private boarding school, is now located at that address. Batchelor purchased Squaw Valley Academy Bay Area; the two may be separate entities or could have merged. Lease documents show CPA; however, either way both entities are owned by Batchelor. Batchelor is the owner/president of California Preparatory Academy. As mentioned above, he is also associated with San Francisco Bay Preparatory Academy that currently occupies that space. One of the addresses for California Preparatory Academy is listed as 3252 Constitution Drive, Livermore, the same address for Independence Support, LLC, and Livermore Charter Zone Corporation (this address was also part of the property subject to the 2012 bonds). Another address for California Preparatory Academy (7901 Stoneridge Drive, Pleasanton) is associated with Independence Oaks, LP; Goldstone/Acre, LLC; Goldstone United Investments, LLC; AlAmedA County offiCe of eduCAtion 24 CONFLICT OF INTEREST Squaw Valley Education Management and Squaw Valley Land, LLC. Another address associated with California Preparatory Academy is 3090 Independence Drive, Livermore, which was the subject of the 2015 bonds, and associated with Independence Support, LLC and Goldstone United Investments, LLC. A secured party of California Preparatory Academy (and Squaw Valley Land, LLC; Squaw Valley Education Management, LLC and Squaw Valley Academy, Inc.) is Greenlake Real Estate Fund, LLC, located in Pasadena. The registered agent for service is Julian Zegelman, who is also associated with Goldstone United Investments, LLC. Independence Support, LLC The California Statewide Communities Development Authority (the authority) loaned proceeds of the 2015 bonds to Independence Support, LLC to acquire Independence Plaza (3090 Independence Drive, Livermore). Independence Support’s sole member is the Livermore Charter Zone Corporation. Independence Plaza was leased from Goldstone United Investments, LLC free of rent for a 50-year term (plus a possible 25-year extension). Independence Support subleased the property to TVLC and California Preparatory Academy, which were jointly and severally liable for the obligations. The location is to be utilized for the LVCP (the charter school high school) and the San Francisco Bay Preparatory Academy, a private boarding high school. The address for Independence Support, LLC is listed as 3090 Independence Drive, Livermore (which is the same address as 3090 LLC and Squaw Valley Academy Bay Area); another address was 3252 Constitution Drive, Livermore (property subject to 2012 bonds). The registered agent for Independence Support is Derek Austin, attorney for TVLC. Livermore Charter Zone Corporation Livermore Charter Zone Corporation (LCZC) is a nonprofit public benefit corporation and the sole member of Independence Support, LLC. LCZC was initially formed in 2008 to own and operate a preschool and instructional daycare center; however, the bylaws were amended in 2011 to redefine LCZC to support TVLC. Individuals associated with LCZC include: John Zukoski, Jr. (director); Batchelor (initial agent for service of process; president/CEO); Rick Swiers (president, TVLC board member); Brenda Miller, and Cheryl Weaver. The address listed for LCZC is 3252 Constitution Drive, Livermore (property subject to 2015 bonds). Goldstone United Investments LLC Goldstone United Investments, LLC was the owner of Independence Plaza (3090 Independence Drive, Livermore), the 5.56-acre site that was acquired using the proceeds of the 2015 bonds. Previously, 3090 Independence Drive was owned by 3090 LLC, and sold to Goldstone United Investments LLC in 2013. Individuals associated with Goldstone United Investments include: Batchelor (executive); Xu Liu (executive); Julian Zegelman (also associated with California Preparatory Academy). The address for Goldstone United Investments is listed as 3090 Independence Drive, Livermore. Another address for Goldstone United Investments was listed as 7901 Stoneridge Drive, Pleasanton, which is the same address as Goldstone/Acre LLC. Fiscal crisis & ManageMent assistance teaM 25 CONFLICT OF INTEREST Goldstone/Acre LLC San Francisco Bay Preparatory Academy, which was to be located at Independence Plaza, along with Livermore Valley Charter Preparatory High School, was managed by Goldstone/Acre LLC. Goldstone/Acre LLC has the same address as, and was the sole member of, Goldstone United Investments, LLC, which owned Independence Plaza. Name variations of Goldstone/Acre LLC include Goldstone Acre Education Management, LLC, and Goldstone Acre Land, LLC. It is also associated with Squaw Valley Education Management and Squaw Valley Land LLC (all have the same address: 7901 Stoneridge Drive, Pleasanton). It may also be associated with Squaw Valley Academy Bay Area, and the Livermore International School (which is located at 3090 Independence Drive, Livermore). Individuals associated with Goldstone/Acre LLC include: Batchelor (executive of Goldstone Acre Land, LLC and associated with Squaw Valley Academy Bay Area). Independence Oaks LP Independence Oaks LP purchased Independence Plaza (3090 Independence Drive, Livermore) from 3090 LLC in 2013. Independence Oaks had been instrumental in developing the Independence Plaza and apparently advanced more than $2 million in purchase contract exten- sion payments to 3090 LLC in addition to the contract price. Independence Oaks then sold Independence Plaza to Goldstone United Investments LLC for $18,562,703. Goldstone United Investments then entered into a rent-free ground lease with the borrower, Independence Support, and sold the facilities to Independence Support for $16,247,503. All brokerage commissions were to be paid by Independence Oaks. The address of Independence Oaks is 7901 Stoneridge Drive, Pleasanton, which is the same address as Goldstone/Acre, LLC; Goldstone United Investments, LLC; Squaw Valley Education Management and Squaw Valley Land, LLC. It is also the same address as ACRE Cresta, LLC, the general partner of the borrower (Independence Oaks) of the 2014 Bond Anticipation Notes (BANs) that were never issued. ACRE Cresta was owned 50% by ACRE Investment Company, LLC, which is also listed at the same address. 3090 LLC 3090 LLC, an affiliate of Balch Enterprises, was the original owner of Independence Plaza (3090 Independence Drive, Livermore). This property was leased to TVLC and Bay Area Preparatory Academy Foundation pursuant to a lease dated February 22, 2013. 3090 LLC had apparently been under contract to sell Independence Plaza to Independence Oaks LP since 2013. Independence Oaks had been instrumental in development of the project and had advanced more than $2 million in purchase contract extension payments to 3090 LLC in addition to the contract price. The October 8, 2013 Addendum to Agreement noted TVLC/BAPAF was in default and had not paid rent since August 2013. The property was then purchased by Goldstone United Investments later in 2013. Balch Enterprises Inc. purchased 3090 Independence Drive in 2006 from Yang Bioscience, LLC. At that time, the assessed value of the property was $12,394,000. Other Individuals Involved or Associated with the Transactions Arising from the 2012 and 2015 Bonds Lynn Lysko: current TVLC CEO AlAmedA County offiCe of eduCAtion 26 CONFLICT OF INTEREST John Zukoski, Jr.: • TVLC – interim CEO, director of finance • Livermore Charter Zone Corporation – director, board member Michael Parker: • Montevina Phase I – prior owner • Montevina Phase II – prior executive • ExTerra Realty Partners – owner David Clock: Montevina Phase I, registered agent Richard Norris: Attorney from Archer Norris, associated with Montevina Phase I & II Richard Swiers: TVLC board member, original agent for service of Livermore Valley Charter School Batchelor: • Former TVLC CEO (until 8-27-15); chief operating officer, acting secretary of TVLC (during 2012) • Initial agent for service of process of Livermore Charter Zone Corporation • Executive of Goldstone Acre Land, LLC and associated with Goldstone/Acre, LLC, which operates San Francisco Bay Preparatory Academy • Owner of California Preparatory Academy • Associated with Squaw Valley Academy Bay Area, the Livermore International School located at 3090 Independence Drive, Livermore. • CFO and secretary of the board of San Francisco Bay Preparatory Academy Foundation in 2014 (SFBAPAF), and one of three board members in 2014. • Executive with Goldstone United Investments Many of the entities and individuals involved with both the 2012 and 2015 bond transactions have close relationships and were involved in the 2014 BAN transaction that was never consum- mated. Close relationships such as these raise the question of whether these transactions were truly arm’s-length and raise serious concerns about conflict of interest. The failure of a transaction to be negotiated and entered into in an arm’s-length setting can significantly contribute to defi- ciencies in the transaction’s framework. Related Parties Defined by the 2015 Bonds Tax Certificate The 2015 Bonds Tax Certificate Section 1.6, Definitions, describes a related person as: “(i) Any organization having common management and control with any organization described in Section 501(c)(3) of the Code. This would include any other 501(c)(3) organization if both organizations have (a) significant common purpose and substantial common membership, or (b) directly or indirectly, substantial common direction.” (emphasis added) A multitude of documents evidence Batchelor’s involvement with TVLC, LCZC, ISC, CPA, GUI and SVABA. Collectively, they had a common purpose, common membership and Fiscal crisis & ManageMent assistance teaM 27 CONFLICT OF INTEREST common direction. These relationships are so commingled that there are no boundaries of separa- tion, as evidenced by cash transfers between entities based on cash flow needs at any given time. This report depicts hundreds of cash transactions between these entities while Batchelor was CEO of TVLC and owner or manager of these other entities. The 2015 Tax Certificate also represents at Section 3.7 that the 2015 bonds are not an attempt to circumvent certain requirements of the Internal Revenue Code to enable any parties to the trans- action, or related persons to exploit the difference between tax-exempt and taxable interest rates to gain a financial advantage. Notwithstanding this representation, the existence of numerous related and unrelated parties to the 2015 transaction and its revenue raises the issue of whether the transaction resulted in an improper financial advantage for one or more of such parties. Signatories to the 2015 Tax Certificate include John Zukoski, Jr. on behalf of both Independence Support, LLC and Livermore Charter Zone Corporation; and William Batchelor on behalf of both Tri-Valley Learning Corporation and California Preparatory Academies. California School Finance Authority Educational Facilities Revenue Bonds (Tri-Valley Learning Corporation Project), Series 2012A The Series 2012A bonds were issued by the state of California’s School Finance Authority on September 25, 2012 under the authorization of the California School Finance Authority Act (Education Code Sections 17170 through 17199.6). The bonds are one component of a complex public finance and simultaneous complex real estate transaction. At the time of their issuance, the bonds were unrated. The principal amount of bonds issued, $27,500,000, generated $24,813,000 in project funds. Bond proceeds were loaned to the TVLC to finance charter school projects. The Bonds and the Underlying Project The limited offering memorandum for the bonds states that the projects financed from bond proceeds were to be used for the acquisition and improvement of land and buildings, along with playfields, to accommodate TVLC’s Livermore Valley Charter School (grades K-8) and the Livermore Valley Charter Preparatory High School (grades 9-12). The buildings to be acquired were part of the Montevina Office Park, owned in combination by Montevina Phase I, LLC and Montevina Phase II, LLC. The office park is located in the city of Livermore. The transaction included the acquisition by TVLC of 12 of the 14 buildings in the office park, referred to as Phase I along with the purchase of two remaining buildings and the acquisition of a vacant 12.4-acre parcel of property referred to as the Campus Lot, referred to as Phase 2. Together Phase I and Phase II in this report are called the projects or the 2012A projects. TVLC leased two additional buildings in the office park with an option to purchase. These two properties were acquired outside of the 2012A bonds transaction. Appendix A to this report is an excerpt from the offering memorandum that describes the 2012A projects in greater detail. At the time of acquisition, the 2012A projects, Phase I and Phase II, were appraised, in “fully constructed and functional form,” at $19,275,000 on May 18, 2011 according to the appraiser’s report. At the close of the 2012A bonds, the authority made a one-time, up-front rental payment from bond proceeds of $7.4 million for the Phase I Montevina buildings in exchange for the right to AlAmedA County offiCe of eduCAtion 28 CONFLICT OF INTEREST sublease the underlying property and the right to make improvements to the property. An addi- tional $15 million in bond proceeds was also set aside and utilized for costs relating to the Phase 2 acquisition and other project costs. Prior to the 2012A bond transaction, Montevina Phase I, LLC and Montevina Phase II, LLC, had entered into certain mortgage loans for portions of the properties that were later acquired with bond proceeds (described above). These mortgage loans remained due and payable at the time of issuance of the bonds. The loans were apparently restructured at the time the bonds were issued so that the amount paid from bond proceeds to purchase the properties was sufficient to pay off the pre-existing mortgages. At the time the bonds were issued, the offering memorandum represented that the projects had been approved by the city of Livermore for the school including improvement. FCMAT is not aware of any change to these circumstances. At the date of closing of the bonds, the ownership of Montevina Phase I, LLC and Montevina Phase II, LLC was transferred to Anthony Cone and Mark Holmstedt of the Westhoff, Cone & Holmstedt firm, also acting as the underwriter on the bonds. A portion of the bonds are in the form of QSCBs administered under a program overseen by the U.S. Treasury Department and the state of California. Such bond funds were made available to TVLC in the form of the subleases between the authority and TVLC. Repayment of the principal amount of the QSCB is due upon expiration of the subordinate subleases. Under the finance plan described in the offering memorandum, ownership to the buildings described in the bond documents is to be conveyed to TVLC provided that all payments due under the leases are made. Sources of Revenue for Repayment of the Bonds TVLC is contractually bound under the terms of the various contracts relating to the bonds to provide funds sufficient to repay the bonds along with other costs and expenses. There are primarily four sources of funds for repayment of the bonds. These include: 1. Intercept funds 2. Funds paid pursuant to the loan agreement 3. Funds received by the trustee pursuant to the sublease 4. Income derived from the investment of funds under an indenture The intercept funds are an initial source of funds for repayment of the bonds. These are funds derived from TVLC by way of the intercept notice. Education Code Section 17199.4 provides that upon instructions delivered to the State Controller in the form of the intercept notice by TVLC, the State Controller is authorized to apportion funds to the trustee on specific dates in amounts sufficient to repay the bonds. Funds made available by way of the intercept notice are derived from Section A funds of the state school fund. These funds are designated for apportionment as part of the charter school categorical block grant pursuant to Education Code Section 47634.2. There are two factors that can limit the payment of the apportionment under the intercept notice. First, limitations may be imposed on TVLC’s ability to receive these funds based on lack of enrollment, disqualification to operate, or bankruptcy. Second, the State Controller may reduce or eliminate the intercept payment as a result of state apportionment shortages at any time during the life of the bonds. Fiscal crisis & ManageMent assistance teaM 29 CONFLICT OF INTEREST Second and third sources of revenue for bond repayment are funds paid by TVLC under the loan agreement between the authority and TVLC, along with funds paid by TVLC under the subordinate obligation sublease. The sources for such funds are to be derived from TVLC’s gross revenues, which are defined as all revenues received by TVLC with respect to schools it operates, including revenue derived by way of the intercept notice. A fourth source of funds for bond repayment may be from investment earnings under the inden- ture for the 2012A bonds from the investment of funds held in various accounts. Investment earnings are to be deposited in the bond’s revenue fund and pledged under the indenture for the repayment of the bonds. The indenture provides further guidance on the sources of revenue available for repayment of the bonds. Under the terms of the indenture, payments in satisfaction of the bond obligation are assigned for this purpose, to the trustee for the benefit of the bondholders. Such payments are defined as revenue derived from the four sources described above. The term “gross revenue” is used in several contexts in the various agreements for the bonds. For example, both the loan agreement and the sublease limit the source of funds available for repayment of the bonds to gross revenues. Under the indenture, gross revenues are defined generally as revenues received by the Livermore Valley Charter School and Livermore Valley Charter Preparatory High School, along with any other revenues derived from the operation of any other “Tri-Valley at the Facility.” The phrase “Tri-Valley at the Facility” can reasonably be interpreted to mean any charter school operated by TVLC in the buildings that were acquired with proceeds from the 2012A bonds. However, revenues from TVLC operations elsewhere, such as in San Joaquin County or San Diego County, likely would be excluded as a funding source for repayment of the 2012A bonds. The agreements entered into as a part of the 2012A bonds transaction also include an intercept arrangement, as described above, under which TVLC effectively guaranteed the repayment of the bonds by instructing the State Controller’s office to make specified payments to the bond trustee from TVLC’s revenue sources pursuant to the Education Code. To the extent these revenue sources were to become insufficient to make lease payments under the bond terms, repayment of the bond would be inadequate. To further secure repayment of the 2012A bonds, Montevina Phase I, LLC executed a deed of trust creating a lien against its fee interests in the buildings. Under the deed, priority liens have been created and presumably recorded on the buildings in favor of the bond trustee, as further security for the bonds. Although FCMAT did not locate the liens for review, the liens would presumably convey foreclosure rights to the bond trustee over the buildings in the event of an uncured default in the repayment. The sale of the 2012A bonds was expressly limited to certain sophisticated buyers referred to as qualified institutional buyers by the Securities and Exchange Commission. The subsequent sale or transfer of the bonds to future bondholders may only be accomplished upon satisfaction of similar transfer restrictions. The relatively complex and potentially risky nature of the transaction contributed to this restriction on potential purchasers for the bonds. Optional or Mandatory Redemption Following Issuance of 2012A Bonds With respect to the Series 2012A term bond maturing on June 1, 2047, to comply with TVLC’s continuing disclosure obligations, event notices have been filed in connection with the manda- tory redemption payments due on each June 1 of 2014, 2015 and 2016. Of concern is that the transcript documents do not provide a mandatory redemption schedule for the Series 2012A AlAmedA County offiCe of eduCAtion 30 CONFLICT OF INTEREST term bond maturing on June 1, 2032. Furthermore, no event notices have been filed in connec- tion with the 2032 maturity. It is assumed for purposes of this report that mandatory redemption payments are not yet due on the 2032 maturity. Opinion of Bond Counsel and Tax Certificate The Orrick, Herrington and Sutcliffe firm served as bond counsel on the bond transaction and issued its opinion dated October 4, 2012, stating that interest on the bonds is excluded from gross income for federal income tax purposes. The opinion also states that the bonds are binding obligations of the authority, secured by apportionments from the State Controller’s office. Generally, an opinion of bond counsel in a finance transaction references the date of closing of the transaction. In other words, the opinion does not apply to circumstances that arise, or actions that occur following the closing of the bonds. It is never possible to predict with certainty the long-term success of a bond issue. The Orrick firm also prepared a tax certificate in support of the tax-exempt nature of the bonds. See Appendix C. That tax certificate includes certain representations regarding the bonds and specifically states that TVLC, the property sellers (Montevina Phase I, LLC or Montevina Phase II, LLC) or other sellers of the property are not “related persons” as that term is defined in the tax certificate. The tax certificate defines related persons as persons or organizations that directly or indirectly control other persons or organizations in the transaction. This representation would imply that the sale of the various buildings and property to TVLC in the 2012 transaction was an arm’s length transaction, according to the tax certificate. Nevertheless, as can be seen by the description of the parties to the transaction, there are numerous common names and other common elements between the individuals and entities that were involved in the 2012A bonds transaction and the related real estate transaction described above. This suggests that at least some of the transactions between the parties may not have been at arm’s length. Risk Factors and Bankruptcy The offering memorandum lists a variety of risk factors for bond purchasers to be aware of in evaluating the bonds. The risk factors clearly state that the bonds are not general obligations of the state of California, other than the authority, and are payable solely from the funds provided by way of the indenture and the various lease agreements among the parties, primarily the inter- cept arrangement as described above. The risk factors also list potential operational problems of TVLC that could affect repayment. Risk factors specifically stated include the potential failure of TVLC to attract a sufficient number of students to generate adequate levels of revenue, or the voluntary and/or involuntary bank- ruptcy filing by TVLC as possible risk factors for potential purchasers for the repayment of the bonds. In fact, bankruptcy was filed in November 2016 on behalf of TVLC in the United States Bankruptcy Court for the Northern District of California, and a case number has been assigned. See Appendix F. On or about December 1, 2016, a notice was filed by UMB Bank advising that interest has not been paid to certain owners of the 2012A bonds and that the bankruptcy proceedings described above (see Appendix G) have been filed. UMB Bank is currently the trustee on the bond trans- action. The Bank of New York Mellon provided notice dated November 1, 2013 that subsidy payments due under the bond transaction had not been received on their October 21, 2013 due date. It is unclear if either of these delinquencies has been cured. Charter schools are funded on current year average daily attendance but receive advance funding based on prior year enrollment until the California Department of Education receives attendance Fiscal crisis & ManageMent assistance teaM 31 CONFLICT OF INTEREST reports in December. Adjustments to funding based on the December data, high or low, occur in the apportionment payments due from February through June. During the current fiscal year, TVLC has experienced a sharp decline in enrollment, losing 35% of students with an estimated revenue loss of $4,140,179. This is a result of the continued turmoil between the parents and authorizers of the charter schools in both Stockton and Livermore. News of its bankruptcy filing in November 2016 only worsened the situation. As a result of this funding loss, the intercept scheduled payment did not occur and the 2012A bonds are now in default. The trustee for the bonds is entitled to pursue foreclosure and other remedy strategies on behalf of the bond owners. These strategies may include litigation brought by the trustee on behalf of the bond holders to enforce the payment requirements and other terms of the leases and related documents. TVLC’s status as a debtor in bankruptcy proceedings will have a direct impact on the trustee’s litigation options. California Municipal Finance Authority Taxable Educational Facilities Bond Anticipation Notes, Series 2014 and Other TVLC Short- and Long-Term Borrowings The Series 2014 Notes - BANS FCMAT obtained a copy of a preliminary limited offering memorandum for the Series 2014 Bond Anticipation Notes (BANS). The BANS described in the preliminary limited offering memorandum were anticipated to be dated May 1, 2014 and to remain outstanding until their repayment date of May 1, 2018. The BANS were initially to be repayable earlier than 2018, on each anniversary date leading up to May 1, 2018. The preliminary offering memorandum for the BANS states that the BANS were intended to raise funds on a short-term basis to undertake the projects that were later funded through the issuance of the California Statewide Communities Development Authority Series 2015 bonds. According to interviews with individuals intricately involved in the formation of this transaction, the failure of Batchelor and his investors to deposit funds to close the transaction prevented the issuance of the BANS. A review of the transcript documents for the Series 2015 bonds has no reference to the BANS, and no provision is made for repayment. In addition, the audited finan- cial statements for TVLC as of June 30, 2015 (the 2015 TVLC audit) makes no reference to the existence of BANS (see Appendix E). In addition to the references listed above, Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System (EMMA) makes no reference to the issuance of a BAN by the authority on behalf of TVLC, or the issuance by any other entity of a BAN on behalf of TVLC. From this review, FCMAT has determined the BAN referred to in the preliminary offering memorandum was never issued and sold. Other TVLC Short- and Long-Term Borrowings The team has also reviewed the 2015 TVLC audit (Appendix E) and has noted that the 2015 TVLC audit lists a $675,000 line of credit with Heritage Bank of Commerce, along with a Stand-by Letter of Credit with Heritage Bank for $200,000, in favor of California School Finance Authority. The authority was the issuer of the Series 2012A Bonds on behalf of TVLC. The 2015 TVLC audit also contains references to the Series 2012A bonds along with the Series 2015 bonds as long-term debt of TVLC. AlAmedA County offiCe of eduCAtion 32 CONFLICT OF INTEREST FCMAT learned from interviews that this was an attempt by Batchelor, his Chinese investors and a local real estate development company, Acre Investment Company, LLC, to issue private BANS for the 3090 Independence Drive project that was ultimately funded by the Series 2015 bonds. Acre Investment Company, LLC and its education real estate development arm, Acre Education, LLC (collectively Acre), were working together to purchase the project site and facility using nonpublic money for Batchelor’s private school, San Francisco Bay Preparatory Academy (SFBAPA), but the deal fell through when the foreign investment failed to fully materialize. An interviewee stated that Batchelor persuaded Acre that he and his Chinese investors could make the purchase of 3090 Independence Drive happen because the Chinese investors had already given Batchelor over $2 million. Based on this information, Acre investors pledged $4.5 million with the assistance of Oppenheimer & Co., Inc., an investment banker firm, to complete the taxable private bond issuance. According to those FCMAT interviewed, the escrow to purchase 3090 Independence Drive from 3090, LLC failed in 2012 and again in 2013 along with eight escrow amendments, and a third time in January 2014. Interviewees cited the Chinese investors’ inability or lack of desire to provide the large amount of funding. Meanwhile, extension payments totaling $1,304,400 were paid to 3090, LLC, the owner of the project site and facilities. FCMAT was unable to obtain escrow documents that disclosed each of the extension payments; however, several individuals claim these payments were made in March, May, July, August, and October 2014, with a final payment in March 2015. California Statewide Communities Development Authority Educational Facilities Revenue Bonds (Independence Support, LLC Project), Series 2015 The Series 2015 bonds dated May 8, 2015 were issued by the California Statewide Communities Development Authority under the authorization of the California Joint Exercise of Powers Act (Government Code Sections 6500 through 6599.3) and pursuant to an indenture between certain parties to the transaction. Similar to the 2012A bonds, the 2015 bonds represent one component of a complex and simultaneous public finance and real estate transaction. This transaction accomplished additional elements of a nonpublic school development plan that had previously been initiated with the issuance of TVLC’s Series 2012A bonds by the California School Finance Authority. The 2015 bonds were unrated at the time of their issuance. The prin- cipal amount of 2015 bonds issued was $25,540,000. The Bonds and the Underlying Project The project described in the limited offering memorandum for the bonds consists primarily of the acquisition and improvement of a building referred to as Independence Plaza, constructed in 2002. See Appendix B. Proceeds from the bonds were loaned by the development authority to Independence Support, LLC (ISC). With the loan, as further described below, ISC was able to acquire Independence Plaza and to then lease the building (through its sole member, the Livermore Charter Zone Corporation) to both TVLC for charter school purposes, and to the California Preparatory Academy (CPA) for the operation of a private school on the site. At the time of the closing of the bonds, certain proceeds of the bonds were utilized by Goldstone United Investments, LLC to acquire the site and its facilities from the former owner, 3090, LLC. Fiscal crisis & ManageMent assistance teaM 33 CONFLICT OF INTEREST The sale of the 2015 bonds, like the 2012A bonds, was expressly limited to qualified institutional buyers by the Securities and Exchange Commission. The subsequent sale or transfer of the bonds to future bondholders may only be accomplished upon satisfying similar transfer restrictions. The relatively complex and potentially risky nature of the transaction likely contributed to this restriction on potential purchasers for the bonds. At the time of acquisition, the 2015 project was appraised utilizing a cost approach to value. As a result, the values arrived at were $24 million for the facilities comprising the project and an addi- tional $2.2 million for the project site. Appendix B is an excerpt from the offering memorandum describing the 2015 project in greater detail. Optional or Mandatory Redemption Following Issuance of Series 2015 Bonds With respect to the Series 2015 term bond maturing on June 1, 2025, to comply with ISC’s, TVLC’s, and CPA’s continuing disclosure obligations, an event notice was properly filed in connection with the mandatory redemption payment due on June 1, 2016. Sources of Revenue for Repayment of the 2015 Bonds By way of the loan from the development authority to ISC, 2015 bond proceeds were used by ISC to fund project costs. ISC agreed to repay the loan from the proceeds of gross revenues, as described below. Separately, ISC entered into the lease with TVLC and CPA referenced above. That lease autho- rized TVLC and CPA to make use of the project’s facilities for their ongoing charter school and private school operations. Rent obligations under the lease agreement include funds necessary to repay amounts due under the loan, which are based in part on the debt service schedules for the bonds. TVLC’s obligations under the lease are payable from gross revenues. TVLC gross revenues under the indenture are defined as all funds received by TVLC from the operation of the charter schools that are legally available for the payment of TVLC’s obligations under the lease. However, specifically omitted as an income source for repayment of the 2015 bonds are (1) funds from the 2012 intercept arrangement used to secure the 2012A bonds (see description of 2012A bonds included in this report), (2) the subsidy payment as described below, and (3) certain other limited funds. The subsidy payment is defined in the indenture for the 2012A bonds as any payment of refund- able tax credit amounts payable under the federal government’s QSCB program. Such subsidy payment is applicable to that portion of the 2012A bonds issued as QSCBs. CPA’s obligations under the lease are payable from CPA gross revenues and are defined as all revenue received by CPA from the operation of its schools at the project as well as other activities of CPA at the site that result in revenue legally available for payment of rent. As additional security for repayment of the 2015 bonds, ISC, TVLC and CPA apparently executed deeds of trust creating liens against their interests in the Independence Plaza property. Under the deeds, liens have been created and presumably recorded on Independence Plaza in favor of the 2015 bond trustee, as further security for the bonds. FCMAT has not located the liens for review; however, they would likely convey foreclosure rights over Independence Plaza to the trustee in the event of an uncured default in the repayment of the bonds. Under a separate memorandum of understanding (MOU) between TVLC and CPA, the parties agreed to meet annually to determine their respective space and budget needs and then allocate between themselves their portions of the rent and other financial obligations due under the lease. AlAmedA County offiCe of eduCAtion 34 CONFLICT OF INTEREST The MOU also reiterates the joint and several responsibility of the two parties to pay rent and other expenses under the lease. According to the offering memorandum, TVLC will manage the charter school operation at the site, and CPA’s private school will be managed by Goldstone/Acre, LLC. Amounts payable by CPA to Goldstone/Acre LLC are subordinate to CPA’s obligations under the lease for the bonds. Rental payments under the lease described above are pledged as a source of revenue to repay the 2015 bonds. The offering memorandum states specifically as follows: “There can be no assurance that revenues generated by TVLC from the charter schools and by CPA from the private school will be sufficient to provide for the timely payment of all rent pledged for the repayment of the 2015 Bonds.” Opinion of Bond Counsel and Tax Certificate As described above, the Orrick, Herrington and Sutcliffe firm served as bond counsel on the 2015 bonds transaction and the 2012A bonds transaction. That firm issued its opinion dated May 8, 2015 stating that interest on the bonds is excluded from gross income for federal income tax purposes. The opinion further states that the 2015 bonds are binding obligations of the devel- opment authority, secured by amounts held in trust by the trustee, pursuant to the indenture. As previously stated, an opinion of bond counsel in a finance transaction speaks as of the date of closing of the transaction and does not apply to circumstances that arise, or actions that occur following the closing of the bonds. It is never possible to predict with certainty the long-term success of a bond issue. The Orrick firm also prepared a tax certificate in support of the tax-exempt nature of the 2015 bonds. See Appendix D. Similar to the firm’s tax certificate for the 2012A bond transaction, the tax certificate for the 2015 bonds represents that the parties to the transaction will not be exploiting the difference between tax-exempt and taxable interest rates to gain a material financial advantage. Nevertheless, it is clear that certain parties to the 2015 bond transaction had pre-existing and extensive business and professional relationships with other parties to the transaction and that as a result, the transaction provided financial benefits to not only the underlying charter school operator, but several other entities involved in the transaction. The 2015 limited offering memorandum contained several financial covenants made by the borrower, specifically that: The borrower covenants: • To maintain books and records separate from any other person • To maintain its accounts separate from any other person • Not to commingle assets with those of any other person • To conduct its own business in its own name • To pay its own liabilities out of its own funds • To observe all corporate formalities • Not to guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others, subject to the provisions of the Loan Agreement described within “– Additional Debt” under this subheading • Not to acquire obligations or securities of its partners, members, or shareholders Fiscal crisis & ManageMent assistance teaM 35 CONFLICT OF INTEREST • To hold itself out as a separate entity • To correct any known misunderstanding regarding its separate identity and • To maintain adequate capital in light of its contemplated business operations. The preliminary offering memorandum for the 2014 BANS (which were never issued) contained similar language to that of the 2015 limited offering memorandum and included an arm’s length provision that the 2015 issuance did not contain: The borrower covenants: • To maintain books and records separate from any other person or entity • To maintain its accounts separate from any other person or entity • Not to commingle assets with those of any other entity • To conduct its own business in its own name • To pay its own liabilities out of its own funds • To observe all corporate formalities • To maintain an arm’s-length relationship with its affiliates • Not to guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others • Not to acquire obligations or securities of its partners, members, or shareholders • To hold itself out as a separate entity • To correct any known misunderstanding regarding its separate identity and • To maintain adequate capital in light of its contemplated business operations. Both the 2014 transaction, which was never consummated, and the 2015 transaction contained financial covenants made by the borrower. However, the covenant to maintain an arm’s-length relationship was explicitly absent from the 2015 limited offering memorandum. Additionally, the 2015 limited offering memorandum notes there is no common ownership among 3090 LLC, Independence Oaks, Goldstone United Investments or Independence Support. However, based on the entities’ addresses and individuals involved, it appears there was at least overlap of some sort between Independence Oaks, Goldstone United Investment and Independence Support. Risk Factors and Bankruptcy In addition to other repayment risks described below in this report, the offering memorandum for the bonds makes the following specific disclosure: “The obligation to pay Base Rent is a joint obligation of the tenants. The private school (“CPA”) has no operating history, and management of TVLC anticipates that Tri-Valley Gross Revenues will be sufficient to provide for the payment of all base rent owed under the lease. However, there can be no assurance that Tri-Valley Gross Revenues, without any contribution from CPA from successful operation of the private school, will be sufficient to provide for the timely payment of base rent.” The offering memorandum specifically identified a voluntary or involuntary bankruptcy filing by TVLC as an additional risk to potential purchasers of the bonds. Indeed, a bankruptcy was filed AlAmedA County offiCe of eduCAtion 36 CONFLICT OF INTEREST in November 2016 on behalf of TVLC to the United States Bankruptcy Court for the Northern District of California, and a case number has been assigned. See Appendix F. On or about March 28, 2017, a notice was filed by U.S. Bank National Association, the trustee for the 2015 bonds, advising that TVLC and CPA, as tenants under the lease, failed to comply or perform in accordance with the lease, including, but not limited to, the failure to pay rent, the failure to provide evidence of insurance, and that TVLC has become a debtor as defined in an 11 U.S.C. § 101 bankruptcy proceeding. See Appendix G. It is likely the case that as a result of these facts, the trustee for the bonds is entitled to pursue foreclosure and other remedy strategies on behalf of the owners of the bonds. Just as the case with the 2012A bonds, strategies may include litigation brought by the trustee on behalf of the bond owners to enforce the payment requirements and other terms of the lease and related documents. TVLC’s status as a debtor in bankruptcy proceedings will have a direct impact on the trustee’s litigation options. Ongoing Disclosure Obligations In connection with the Series 2012A bonds, TVLC and The Bank of New York Mellon Trust Company, N.A., as dissemination agent, entered into a continuing disclosure agreement (the 2012A disclosure agreement). By way of the 2012A disclosure agreement, TVLC committed to assist the underwriter in complying with Securities and Exchange Commission Rule 15c2-12 for the benefit of the owners of the 2012A bonds. Under the 2012A disclosure agreement and in compliance with Rule 15c2-12, TVLC is obligated to file annual reports containing various financial information (as specifically identified in the 2012A disclosure agreement). In addition, should a significant event occur, as set forth in the 2012A disclosure agreement and Rule 15c2- 12, TVLC must also file a notice of such event. All filings made pursuant to the 2012A disclosure agreement may be found online at http://emma.msrb.org/Home/Index (EMMA). With regard to the Series 2012A bonds, evidence suggests that TVLC has filed its annual reports and event notices. Such event notices include notices of mandatory redemption payments, as well as a notice of nonpayment of interest, a notice of TVLC’s bankruptcy filing, and a notice of unscheduled draws on various funds under the indenture for these bonds. In connection with the Series 2015 bonds, ISC, TVLC, CPA and U.S. Bank National Association, as dissemination agent, entered into a continuing disclosure agreement (the 2015 disclosure agreement). Similar to the 2012A disclosure agreement, by way of the 2015 disclosure agreement, ISC, TVLC, and CPA committed to assist the underwriter in complying with Securities and Exchange Commission Rule 15c2-12 for the benefit of the owners of the 2015 bonds. ISC, TVLC, and CPA are each required to file annual reports with the contents as specified in the 2015 disclosure agreement. In addition, ISC is required to file significant event notices, as set forth in the 2015 Disclosure Agreement and Rule 15c2-12. With regard to the Series 2015 bonds, ISC, TVLC, and CPA have each filed annual reports. An event notice has been posted in connection with the mandatory redemption payment for the Series 2015 bonds. In addition, recently, a notice of default and breach of lease agreement was posted to EMMA. The notice provided that the defaults include failure to pay rent, failure to provide evidence of insurance, and TVLC becoming a debtor as defined in 11 U.S.C. § 101. Unlike the Series 2012A bonds, no event notice is posted for the Series 2015 bonds with regard to or concerning TVLC’s bankruptcy filing (other than the mention in the notice of default of TVLC’s status as a debtor). Fiscal crisis & ManageMent assistance teaM 37 DIVERSION OF FUNDS Diversion of Funds A May 2016 article by the Center for Popular Democracy, “Charter School Vulnerabilities to Waste, Fraud, and Abuse,” https://populardemocracy.org/sites/default/files/FraudandMismgmt5-3- 14%28FINALx3.0%29REV.pdf expressed concerns about charter spending practices, insufficient oversight and growing fraud in charter schools. While charter schools are subject to reporting requirements and monitoring by oversight bodies, the article states that inadequate monitoring systems and the failure of oversight agencies to properly monitor charter schools has led to more than $216 million in known “fraud, waste and abuse.” Funding for charter schools continues to rise and has now “reached over $30 billion annually.” The article cites accountability and transparency as critical elements to detect and deter fraud and cites a number of documented cases where charter operators have diverted school funds to support their private businesses. An April 2017 article, “Spending Blind” by In the Public Interest, discusses charter facility funding: “... no effective policy guidance – other than ensuring recipients are financially sound, competently managed, and legally compliant – for large sums of taxpayer dollars that annually pay for the lease, construction, and purchase of charter school buildings. In terms of educational policy, there effectively is no targeting for charter facilities funding. It’s as if legislators turned on a faucet of money and then just walked away.” Schemes that involve the diversion of funds generally require that the organization remove or interfere with effective oversight, and mislead or misinform the independent auditor. However, it was well publicized that significant related-party relationships existed between TVLC and Batchelor’s private school. District oversight agencies, both in Livermore and Stockton, issued numerous notices of concern and notices of violation, yet little could be done to stop the issuance of millions of dollars of bonds that exceeded the capacity of TVLC to effectively manage. Letters of concern by the district, parents and citizens expressed concern regarding the large debt load and questioned enrollment projections to sustain the debt repayment on the first bond issuance. Even after the district, parents and citizens filed written concerns with state agencies and the Alameda County Board of Supervisors, the California Statewide Communities Development Authority issued $25 million more for the benefit of TVLC’s charter high school in the 2015 bond issuance. Part of the standard annual audit process involves direct questions regarding related parties and internal controls. It is the responsibility of TVLC management to disclose pertinent information to the auditor regarding the true nature of related parties, and management failed in its fiduciary duty to disclose these relationships. Diversion of Assets – Use of Public Funds and Public Entities for Private School Gains The 2015 Bonds Tax Certificate and Agreement, dated May 8, 2015, is between the California Statewide Communities Development Authority and Independence Support, LLC – also known as Independence Support Corporation, LLC (ISC), LCZC, TVLC, and CPA. Batchelor created ISC for the sole purpose of issuing tax-exempt bonds following the collapse of the 2014 BANS. Batchelor stated in interviews that LCZC’s 501(c)(3) status was used until ISC could obtain a 501(c)(3) determination letter from IRS, thereby allowing the authority to issue AlAmedA County offiCe of eduCAtion 38 DIVERSION OF FUNDS tax-exempt bonds. ISC listed Batchelor as the registered agent and LCZC as the sole member of ISC. Batchelor controls ISC, which is named as the borrower to which he has an economic interest. ISC, LCZC, TVLC, and CPA are all related parties controlled by Batchelor at the time of the 2015 bond issuance. Authority Livermore Independence Charter Zone Support, LLC Corporation California Preparatory Academy CPA is Batchelor’s private school located at 3090 Independence Drive. The tax certificate defines Independence Oaks, LP as under contract to acquire the project site facilities for the purpose of transferring the property at a later date to TVLC, except that in the same paragraph, Independence Oaks, LP assigns its right to acquire the project site and facilities to Goldstone United Investments, LLC, which is controlled by Batchelor. There is no documentation to stipu- late that Goldstone will transfer the property to TVLC. Goldstone United Investments, LLC paid $2.2 million to 3090, LLC which is part of a $2,474,400 investment from Batchelor-affiliated Chinese investors seeking to support Batchelor’s private school catering to foreign exchange students predominantly from China. Of the $2,474,400, credited back to CPA in the Chicago Title closing statement, $2.2 million is Chinese investor funds for the purchase of the land. The following excerpts from the 2015 bond tax certificate describe the assignment of rights to acquire the project site to Goldstone United Investments, LLC. The excerpt also defines the extension payments and the lease agreement between Batchelor’s private school and TVLC. Section 1.5, Purpose for Bonds; Plan of Financing, states: “Independence Oaks, LP has been under contract to acquire the Project Site and Facilities since October 8, 2013, for purposes of transferring the property at some point to TVLC. Over that time, Independence Oaks, LP has invested its own funds and time with a fair market value as of the date hereof of at least $3,022,503.06 to develop the overall project for use as a school … Independence Oaks, LP will assign to Goldstone United Investments, LLC its right to acquire the Project Site and the Facilities from 3090, LLC for $3,022,503.06 … Goldstone United Investments, LLC has already paid to 3090, LLC, through Independence Oaks, LP, a total of $2,200,000 for sale contract Fiscal crisis & ManageMent assistance teaM 39 DIVERSION OF FUNDS extensions (including a portion of the aforementioned credit of $1,170,000) … Additionally, CPA has already paid to 3090, LLC, through Independence Oaks, LP, a total of $274,400 for sale contract extensions (all of which is included in the aforemen- tioned credit of $1,170,000) ... See Exhibits F and G for certifications of Independence Oaks, LP and Goldstone United Investments, LLC, respectively, relating to the real estate values and relationships” (emphasis added). Section 1.5, Purpose for Bonds; Plan of Financing, continues to describe that TVLC will enter into an operating lease as follows: “The Borrower will enter into a joint and several lease agreement with TVLC and CPA. The lease will be an operating lease to TVLC.” The Tax Certificate for Goldstone United Investments, LLC is signed William Batchelor, Manager. Under the lease terms, if CPA, Batchelor’s private school, should fail to pay rent to the borrower, Independence Support, LLC, TVLC is obligated for the entire lease payment. In contrast, TVLC, the CMO, could have created a subsidiary LLC to own the property with a leaseback option to the charter school. Instead this methodology provided that Batchelor and his foreign investors create Independence Support, LLC to broker state and federal facility dollars through a complex arrangement that purchased the land and building for a private school and provided a ground lease to the charter school, all paid with taxpayer dollars. It is clear that TVLC does not own the building or land located at 3090 Independence Drive. The lease of the buildings is not an asset for TVLC. Without TVLC and its charter schools along with LCZC, Batchelor could not have obtained the 2015 tax-exempt facility bonds to purchase the 3090 Independence Drive project site and facilities. Based on interviews and confirmed by the Chicago Title Company Estimated Buyer’s Statement, Escrow Number CTCC-2383-38319021, the buyer Goldstone United Investments, LLC advanced funds toward the purchase price totaling $1,170,000 and also paid another $1,304,400 to 3090, LLC/Balch as alleged extension payments. The following is based on the Chicago Title escrow documents dated May 8, 2015: Description Amount Applicable Deposit (Advance Payment) $1,170,000 Non-Applicable Payments $1,304,400 Total Paid to 3090, LLC/Balch $2,474,400 FCMAT learned during numerous interviews that Batchelor and his investors were unable to close escrow in earlier attempts to buy 3090 Independence Drive as a private purchase. Extension payments of $1,304,400 were made to keep the purchase agreement viable until Batchelor could secure tax-exempt bonds. As previously mentioned, the 2014 BANS were to be issued for purchase of 3090 Independence Drive but were not viable as a private taxable bond. Only then did Batchelor turn to using the existing LCZC and TVLC charter schools as the leverage to purchase the project site and facilities through tax-exempt facility bonds. To qualify for tax-exempt bonds, Batchelor needed a nonprofit with a 501(c)(3) status because Independence Support, LLC had not obtained such AlAmedA County offiCe of eduCAtion 40 DIVERSION OF FUNDS status. Since LCZC was operational as a 501(c)(3) for the existing after-school program, LCZC became the nonprofit and the sole member of Independence Support, LLC. The Tax Certificate, Section 2.2, Tax Exempt Status-Sole Member and Schools, states: “Each of the Sole Member and TVLC is an organization described in Section 501(c) (3) of the Code and is exempt from federal income tax … Further, each of the Sole Member and TVLC has been recognized by the Internal Revenue Service as an organi- zation described in Section 501(c)(3) of the Code and such recognition has not been modified, limited or revoked … The Sole Member covenants and represents that it has not, and will not … make an election to cause the Sole Member to be treated as other than a disregarded entity for federal tax purposes. As a disregarded entity, all assets, liabilities, revenue, expense and activities of the Borrower shall be treated as assets, liabilities, revenue, expense and activities of the Sole Member for federal tax purposes …” Making LCZC the sole member of ISC (the borrower) and GUI (the purchaser), Batchelor controls and has influence over LCZC, ISC, and GUI. FCMAT could not confirm if Independence Support, LLC’s application to be recognized as a tax-exempt organization was submitted or approved by the IRS. The Tax Certificate, Section 2.3, Ownership, states: “As noted above, it is anticipated that the sole membership interest in the Borrower will be transferred to ISC such that ISC will become the owner of the Project Facilities for federal income tax purposes.” In summary, ISC is the owner of the project facilities for tax purposes, yet GUI is the purchaser and actual owner of 3090 Independence Drive according to the Chicago Title escrow document. The TVLC June 30, 2015 audit report consolidates ISC and references the 2015 bond purchase of the 3090 Independence Drive project site and facility as an “asset of IS” (also referred to as ISC) in the consolidated TVLC audit report. Because management of TVLC may have failed to fully disclose all aspects of the related party relationships to the auditor, the auditor concluded the 2015 bond purchase of the project site and facility at 3090 Independence Drive was an asset of ISC and therefore an asset of TVLC on a consolidated basis. The auditor may not have been aware that Batchelor controlled both the leasing of the assets through ISC and project site and facility ownership through GUI. Related-Party Transactions Diversion of Public Funds and Gift of Public Funds Article XVI, Section 6 of the California Constitution describes gift of public funds as, “The Legislature shall have no power to give or to lend, or to authorize the giving or lending, of the credit of the State, or of any county, city and county, city, township or other political corporation or subdivision of the State now existing, or that may be hereafter established, in aid of or to any person, association, or corporation, whether municipal or otherwise, or to pledge the credit thereof, in any manner whatever, for the payment of the liabilities of any individual, association, municipal or other corporation whatever; nor shall it have power to make any gift or authorize the making of any gift, Fiscal crisis & ManageMent assistance teaM 41 DIVERSION OF FUNDS of any public money or thing of value to any individual, municipal or other corpora- tion whatever …” This prohibits the giving or lending of public funds to any person or entity, public or private, including aid, making of gift, pledging of credit, payment of liabilities, and the giving of monetary funds and anything of value to individuals and even companies or other nonprofit organizations. Diverting TVLC Public Funds to Independence Support, LLC To successfully divert assets, the auditor, oversight agency, and any others need to be misled by limiting or qualifying information given to them. If the auditor is not informed by TVLC management about all related party relationships or is led to believe the relationships are nonex- istent, then proper disclosure in the audited financial statements may not occur. The district relied on the audited financial statements of TVLC and was initially unaware that related-party relationships existed. Audit management representation letters are statements and assertions that management, typically the executive director, write and sign on the entity’s letterhead addressed to the auditor. In addition, part of the standard annual audit process involves direct questions of management regarding related parties and internal controls. It is the responsibility of management to disclose pertinent information to the auditor regarding the true nature of related parties. Based on the limited disclosure in the TVLC audit report, management failed in its fiduciary duty to disclose and misrepresented important and relevant facts to the independent auditors that resulted in the misstatement of the organization’s financial statements. The June 30, 2015 TVLC audit report discloses the MOU with CPA and TVLC regarding shared rents where Independence Support, LLC is named the lessor, and the tenants are CPA and TVLC. However, these entities are related parties and therefore the relationships between them should have been fully disclosed to the auditor. Both the CEO, Bill Batchelor, and director of finance, John Zukoski, Jr., for TVLC at the time had a fiduciary duty to fully disclose to the auditor that these entities were related. FCMAT requested clarification from Batchelor about the 2014-15 audit disclosure he signed. Batchelor responded in an email to FCMAT: “I had extensive conversations with the auditors regarding the my (sic) role and disclo- sures. I did not believe that their audit correctly presented the 2015 bond transaction, which led to an even more thorough discussion of my role and disclosures. This dialogue occurred as they were preparing the audit, which was very late, in February and March of 2016.” The purpose of management representation letters is to disclose potential issues in writing to the auditor. Batchelor, as CEO during this audit period, and the director of finance, John Zukoski, Jr. each had a fiduciary and ethical duty to fully disclose all related parties including Batchelor’s supervision, control, and influence over GUI, ISC, LCZC, SFBAPA, and SVABA. Included in the auditor work papers are off-book transactions totaling $2,128,202 to ISC, and $600,000 to CPA that were subsequently booked as receivable payments by auditors in TVLC’s books. The combined $2,728,202 represents public school funds diverted to ISC and CPA during a five-year period between 2010-11 and 2014-15, which was never disclosed and remained unpaid until after the discovery and subsequent demand letters from current TVLC management. AlAmedA County offiCe of eduCAtion 42 DIVERSION OF FUNDS Details of the auditor work papers show that TVLC paid $2,128,201.85 on behalf of ISC for oper- ating expenditures, supplies, and corporate project support of which LVCS paid $1,474,326.91 and LVCP paid $653,874.94. Corporate project support consisting of $1,473,254.06 represents wages and benefits. (Miscellaneous supplies makes up the difference of $1,072.85.) These payments reduced the cash flow and diverted resources from the charter schools to ISC and CPA without any agreements and repayment terms. These off-book transactions were diverted from TVLC and represent a gift of public funds. Once the auditor found these transactions, the audit firm prepared adjusting journal entries for the receivable and prepared a revised management representation letter dated February 23, 2016, for the year end June 30, 2015, signed by Batchelor approximately eight months after his resigna- tion, and by Zukoski. The management representation letter contains related party declarations from TVLC manage- ment to the auditor following the discovery of the off-book transactions as follows: • “We confirm, the best of our knowledge and belief, as of February 23, 2016, the following representations made to you during your audit.” • “Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with U.S. GAAP.” • “We have disclosed to you the identity of the Organization’s related parties and all the related-party relationships and transactions of which we are aware.” • “We acknowledge that we did not maintain sufficient internal controls that exposed us to the significant risk of material misstatement to the consolidated financial statements and fraud…” • “We acknowledge that we did not properly maintain the records in relation to the Common Core Implementation Funds…” • “We acknowledge the requirement to include the financial activity, assets, and liabilities of Independence Support, LLC in the consolidated financial statements due to the relationship, financial support and lease agreement in which we are jointly and severally liable for the entire payment. We confirm that we provided substantial financial support to Independence Support, LLC and can substantiate the receivable included in the consolidated financial statement in the amount of $2,128,202.” • “We acknowledge that we provided substantial financial support to California Preparatory Academy and that we have been repaid with the exception of $600,000, which is recorded as a receivable in the consolidated financial statements.” FCMAT obtained a letter from TVLC to CPA, dated June 30, 2015, which states: “As discussed and documented, Tri-Valley Learning Corporation has incurred $600,000 of reimbursable expenditures related to the 3090 Independence Drive project. We would greatly appreciate your expeditious processing of the reimbursement for these expenditures.” FCMAT obtained a letter from TVLC, dated May 8, 2015, to Independence Support, LLC, which states: “As discussed and documented, Tri-Valley Learning Corporation has incurred $2,128,201.85 of reimbursable expenditures related to the 3090 Independence Drive Fiscal crisis & ManageMent assistance teaM 43 DIVERSION OF FUNDS project. We would greatly appreciate your expeditious processing of the reimbursement for these expenditures.” Repayments occurred between July 6, 2015 and September 29, 2015 only after TVLC wrote demand letters for the return of the funds characterized as “reimbursable expenditures.” Internal controls were so weak that Batchelor was able to divert $2.7 million of public charter school funds without any support documentation between entities that he controlled and people that he managed covering a span of five years. TVLC’s charter school funds are considered public funds under a separate tax identification number and nontaxable status. These funds cannot be used to pay expenditures for a separate nonprofit corporation; this is prohibited by Article XVI, Section 6 of the California Constitution as a gift of public funds. An example of the commingled and related nature Batchelor holds is in the ISC, TVLC, and CPA lease agreement. On May 1, 2015, ISC, TVLC, and CPA entered into a lease agreement. The lease agreement is signed as follows: • John Zukoski, Jr., director of ISC, • William Batchelor, chief executive officer of TVLC, and • William Batchelor, manager of CPA. John Zukoski, Jr., the TVLC director of finance, reported directly to Batchelor. All three entities share the same address listed in the lease agreement (section 20.2) as 3090 Independence Drive, Livermore, CA 94551. All three entities are controlled by Batchelor, and Batchelor is Zukoski’s direct supervisor. TVLC Commingles Funds with LCZC FCMAT was unable to obtain detailed accounting records from LCZC; however, bank state- ments and transactions for LCZC were available to FCMAT. Cash transactions include transfers of funds between TVLC charter schools and LCZC that provide a picture of TVLC’s financial troubles and serious cash flow issues. Dragon Zone is the before- and after-school child care program that supports LVCS elementary school students and is operated by LCZC. Prior to the 2015 bonds, Dragon Zone was the only activity of LCZC and parent payments were the only source of revenue to LCZC until LCZC became the sole member of ISC. The table below summarizes the funds flowing between LCZC and TVLC following the issuance of the 2015 bonds in fiscal year 2015-16. Funds To LCZC Funds From LCZC 2015-2016 Debits No Credits No TVLC Acct. No. 9230 Trans. Acct. No. 9230 Trans. 010 CMO $ 2 0,000 2 $ 3,000 1 020 LVCP High 2 20,000 4 41,000 3 030 Acacia Elem 1 83,000 4 38,000 4 040 Acacia Mid 10,000 1 2,000 1 050 LVCS Elem 1,111,836 2 5 2,330,000 1 3 $ 1 ,544,836 3 6 $ 2,414,000 2 2 AlAmedA County offiCe of eduCAtion 44 DIVERSION OF FUNDS Thirty-six transactions totaling $1,544,836 represent funds flowing through several TVLC accounts to LCZC without support documentation. These transactions may be considered diverted public funds and may be a gift of public funds because the payments and purpose failed to be authorized by the governing board and documented in detail. Funds transferred to TVLC from LCZC totaling $2,414,000 should have adequate support documentation; however, a public school may receive money from many sources generally considered donations. FCMAT discussed these transactions with Batchelor. He described the net difference of $869,164 ($2,414,000 - $1,544,836) as “Reimbursement for 3090 related expenses processed and drawn through IS … Donations/support into LCZC from afterschool program and fundraising.” Batchelor’s statement discloses that these transfers represent 3090 Independence Drive related expenses commingled through TVLC charter school accounts. Diverting TVLC Public Funds to Independence Support, LLC - $40,000 Premiere Retail Services, Inc. was a tenant of ISC in the 3090 Independence Drive facility. On November 12, 2015, ISC and Premiere Retail Services, Inc. entered into a lease termination agreement. The terms of the agreement are that ISC agrees to pay Premiere Retail Services, Inc. $212,200 to return the space to ISC in accordance with the payment schedule. The payment schedule included $100,000 upon signing the agreement, $72,200 upon vacating the premises and $40,000 as a secured promissory note. In its review of TVLC’s accounting and banking records, FCMAT identified the following trans- actions: • Wire transfer number 201616200081, dated June 10, 2016, paid from LVCP directly to Premiere Retail Services, Inc., for $40,000. ISC did not make the $40,000 payment to TVLC. • $40,000 paid out of LVCP’s cash account number 9120-020, Cash in Bank(s), referencing “Wire Transfer – Premier Retail” and part of batch entry 864-1. • The same $40,000 recorded in LVCS account number 9200-050, Accounts Receivables, dated June 10, 2016, batch entry 864-1, with a reference memo stating, “Payment in behalf of Independent Support – Wire Transfer – P”. This indicates that ISC used TVLC public school money to pay for an lease termination fee that should have been the responsibility of ISC; used TVLC funds to pay the $40,000 directly to Premiere Retail Services, Inc. with no documentation to support what ISC did with the these funds; paid the funds from the charter high school bank account recording the funds as a receivable to the charter elementary school, and did all of this without any available authorizing documentation. TVLC Funds Diverted into LCZC as a Conduit Entity to Other Related and Unrelated Parties LCZC bank statements identify further commingling of funds beyond the funds transferred between LCZC and TVLC. Funds diverted to LCZC from TVLC may have been used as a conduit from TVLC through LCZC to support other related and unrelated parties. The table below shows wire transfers in and out of the LCZC bank account to CPA, ISC, and SFBAPA. All of these entities are under the control of Batchelor. Fiscal crisis & ManageMent assistance teaM 45 DIVERSION OF FUNDS Other wire transfers paid out from LCZC are to Blueline Associates Inc. a vendor who was owed money for construction related to 3090 Independence Drive, and four payments for bond/lease payments totaling $747,345.36. Date Amount Description Bank Code Category 8/25/15 (186,836.34)NCR OUTGOING DOMESTIC WIRE-201523700066;BNF U.S. Bank Trust N.A.;REF 9479389 General debit Bond/Lease Pmt 9/25/15 (186,836.34)NCR OUTGOING DOMESTIC WIRE-201526800492;BNF U.S. Bank Trust N.A.;REF 9487496 General debit Bond/Lease Pmt 11/18/15 (186,836.34)NCR OUTGOING DOMESTIC WIRE-201532200452;BNF U.S. BANK TRUST N.A.;REF 9504725 General debit Bond/Lease Pmt 11/25/15 (315,000.00)NCR OUTGOING DOMESTIC WIRE-201532900092;BNF Blueline Associates Inc.;REF 950655 General debit Blueline 11/25/15 (186,836.34)NCR OUTGOING DOMESTIC WIRE-201532900093;BNF U.S. BANK TRUST N.A.;REF 9506562 General debit Bond/Lease Pmt 12/7/15 (200,000.00)NCR OUTGOING DOMESTIC WIRE-201534100244;BNF Blueline Associates Inc.;REF 951017 General debit Blueline 12/11/15 (125,000.00)NCR OUTGOING DOMESTIC WIRE-201534500302;BNF Blueline Associates Inc.;REF 951150 General debit Blueline 2/8/16 (100,000.00)NCR OUTGOING DOMESTIC WIRE-201603900413;BNF BLUELINE ASSOCIATES INC;OBI partial General debit Blueline 3/4/16 (175,000.00)NCR OUTGOING DOMESTIC WIRE-201606400085;BNF CA PREPARATORY ACADEMIES;REF 9536095 General debit CPA 5/18/16 (190,000.00)NCR OUTGOING DOMESTIC WIRE-201613900537;BNF CA Preparatory Acadamies;OBI Attn: L General debit CPA 7/8/15 450,000.00 WIRE/IN-201518900388;ORG INDEPENDENCE SUPPORT LLC 3252 CONST;OBI CSCDA INDEP 201 INCOMING WIRE IS 7/22/15 186,836.34 WIRE/IN-201520300226;ORG S.F. BAY AREA PREPARATORY ACADEMY;OBI FUNDS INCOMING WIRE SFBAPA 8/14/15 450,000.00 WIRE/IN-201522600319;ORG INDEPENDENCE SUPPORT LLC 3252 CONST;OBI CSCDA INDEP 201 INCOMING WIRE IS 8/28/15 450,000.00 WIRE/IN-201524000349;ORG INDEPENDENCE SUPPORT LLC 3252 CONST;OBI CSCDA INDEP 201 INCOMING WIRE IS 8/28/15 150,000.00 WIRE/IN-201524000598;ORG WILLIAM BATCHELOR;REF 0000209240903439 INCOMING WIRE William Batchelor 9/15/15 250,000.00 WIRE/IN-201525800120;ORG INDEPENDENCE SUPPORT LLC 3252 CONST;OBI CSCDA INDEP 201 INCOMING WIRE IS 9/25/15 182,000.00 WIRE/IN-201526800485;ORG CA PREPARATORY ACADEMIES;REF 0065901268947551 INCOMING WIRE CPA 9/29/15 250,000.00 WIRE/IN-201527200337;ORG INDEPENDENCE SUPPORT LLC 3252 CONST;OBI CSCDA INDEP 201 INCOMING WIRE IS 11/17/15 170,000.00 WIRE/IN-201532100664;ORG CA PREPARATORY ACADEMIES;REF 0065901321277075 INCOMING WIRE CPA 11/24/15 500,000.00 WIRE/IN-201532800685;ORG CA PREPARATORY ACADEMIES;REF 0065901328928036 INCOMING WIRE CPA 12/23/15 2 ,193.59 WIRE/IN-201535700237;ORG INDEPENDENCE SUPPORT LLC 3252 CONST;OBI CSCDA INDEP 201 INCOMING WIRE IS Wire transfers in and out of LCZC described above are summarized below. 2015-2016 Incoming Outgoing Description Wires Wires CPA $ 852,000.00 $ ( 515,000.00) IS 1,852,193.59 SFBAPA 186,836.34 William Batchelor 150,000.00 Blueline - ( 740,000.00) Bond/Lease ( 747,345.36) Totals $ 3,041,029.93 $ (2,002,345.36) Batchelor and Zukoski, using accounts of LCZC, CPA, SFBAPA, and ISC, may have been using off-book clearing accounts to move money in and out of the TVLC organization beyond the reach of Livermore Valley Joint Unified School District’s oversight. FCMAT discussed these payments with Batchelor. He described the $747,345.36 in bond/lease payments as three of the four payments for “the Independence Support monthly bond payments (see the first three highlighted in yellow below). LCZC was the sole account for this purpose. Both tenants now process payments directly to the trustee.” The fourth payment is “a full monthly payment made by CPA/SFBAPA.” Batchelor provided the following descriptions and clarifications of the payments based on FCMAT’s request and added two additional transactions at the bottom of the table for monies that were allegedly returned for payroll advances by CPA: AlAmedA County offiCe of eduCAtion 46 DIVERSION OF FUNDS Date Amount Bill Batchelor's Description Category 8/25/15 (186,836.34)These Payments are for the Independence Support Monthly Bond Payments. Bond/Lease Pmt 9/25/15 (186,836.34)These Payments are for the Independence Support Monthly Bond Payments. Bond/Lease Pmt 11/18/15 (186,836.34)These Payments are for the Independence Support Monthly Bond Payments. Bond/Lease Pmt 11/25/15 (315,000.00)Construction payment from IS bond draw Blueline 11/25/15 (186,836.34)This is a full monthly bond payment made by CPA/SFBPA Bond/Lease Pmt 12/7/15 (200,000.00)Construction payment from IS bond draw Blueline 12/11/15 (125,000.00)Construction payment from IS bond draw Blueline 2/8/16 (100,000.00)Construction payment from IS bond draw Blueline 3/4/16 (175,000.00)Partial return of 9/25/2015 payroll loan ($182,000 - see below) CPA 5/18/16 (190,000.00)Return of 4/28/2016 payroll loan of $190,000 - see incoming below. CPA 7/20/16 (150,000.00)Partial return of 6/29/2015 payroll loan ($167,000 - see below) CPA 7/8/15 450,000.00 Trustee draw for reimbursement/payment processing IS 7/22/15 186,836.34 This is a full monthly bond payment made by CPA/SFBPA SFBAPA 8/14/15 450,000.00 Trustee draw for reimbursement/payment processing IS 8/28/15 450,000.00 Trustee draw for reimbursement/payment processing IS 8/28/15 150,000.00 donation William Batchelor 9/15/15 250,000.00 Trustee draw for reimbursement/payment processing IS 9/25/15 182,000.00 This was a payroll loan from CPA CPA 9/29/15 250,000.00 Trustee draw for reimbursement/payment processing IS 11/17/15 170,000.00 These payments are for the Independence Support Monthly Bond Payments. CPA 11/24/15 500,000.00 This was a donation tagged to cover all TVLC international department expenses CPA 12/23/15 2 ,193.59 Trustee draw for reimbursement/payment processing IS Additional Transactions Added By Bill Batchelor From CPA 4/28/16 $190,000.00WT FED#09810 HERITAGE BANK OF C /FTR/BNF=Tri Valley Learning Corporation SRF# 00556671195re5t6u4rn7e8d T 5R/N18#/1260014628095603 RFB# 6/29/16 $167,000.00WITHDRAWAL MADE IN A BRANCH/STORE CASHIERS CHECK TO TVLC FOR PAYROLL partially returned 7/20/2016 Batchelor explained to FCMAT that from his perspective, TVLC received more money from CPA than it paid out and that he donated his own money to TVLC and the other entities. Batchelor stated that the August 28, 2015, $150,000 incoming wire was his personal donation. Batchelor described these amounts as representing transfers of funds back and forth for payroll loans and repayments: March 4, 2016, $175,000; May 18, 2016, $190,000; July 20, 2016, $150,000 and September 25, 2015, $182,000. The November 24, 2015, $500,000 wire into LCZC is described as “a donation tagged to cover all TVLC international department expenses.” In practice, TVLC, CPA, ISC, and SFBAPA are essentially one organization sharing revenue and expenses as needed. LCZC’s American Express Credit Card Payments FCMAT found payments to an unknown American Express account in the LCZC bank state- ments totaling $26,036.84. The eight electronic payments are shown below. Date Amount Description Bank Code 8/21/15 $ (3,653.41) AMEX EPayment ACH PMT V9854 ACH DEBIT 10/21/15 (4,257.96) AMEX EPayment ACH PMT V1904 ACH DEBIT 10/6/15 (3,258.80) AMEX EPayment ACH PMT V1960 ACH DEBIT 12/2/15 (2,383.45) AMEX EPayment ACH PMT V3250 ACH DEBIT 12/23/15 (3,481.88) AMEX EPayment ACH PMT V0792 ACH DEBIT 1/27/16 (3,801.21) AMEX EPayment ACH PMT V2778 ACH DEBIT 2/24/16 (2,563.32) AMEX EPayment ACH PMT V3758 ACH DEBIT 3/25/16 (2,636.81) AMEX EPayment ACH PMT V9796 ACH DEBIT Total $ ( 26,036.84) Fiscal crisis & ManageMent assistance teaM 47 DIVERSION OF FUNDS FCMAT discussed these credit card transactions with Batchelor, who stated that “This credit card is used exclusively for expenses related to the bingo and/or aftercare program that LCZC operates/heads … I have never seen the invoices nor had access to the card.” Foreign Exchange Program Attendance FCMAT examined foreign exchange program attendance report data by student name, parents’ names, and state student number. A total of 115 foreign students were identified in the atten- dance records. The attendance software has excluded all 115 foreign students from state atten- dance apportionment funding. FCMAT reviewed records for 20 individual foreign students to determine if they were placed with host families by tracing student names on check stubs paid to host families. All 20 students were confirmed to be with host families and were excluded in the attendance software from state attendance apportionment funding. Based on the results of sample attendance testing, FCMAT concludes there is sufficient docu- mentation to support that TVLC did not receive state attendance apportionment funding for foreign exchange students included in its attendance reports. Program Subsidized by TVLC; Noncompliance with Federal Law TVLC’s 2015-16 accounting records document that host families received $558,071.24 in payments to house foreign exchange students. IRS Form 1099s issued to host families were not available and/or not filed with the IRS, thus failing to comply with federal requirements to report independent contractor payments. FCMAT obtained a vendor report from TVLC’s accounting system and found that Batchelor was also a vendor receiving host family payments, as shown on the following page. AlAmedA County offiCe of eduCAtion 48 DIVERSION OF FUNDS Tri Valley Learning Corporation Vendor History Detail Report 5/25/17 4:09 PM Vendor: Bill Batchelor; Begin Date: 7/1/2010; End Date: 1/10/2017 Object Type Object Number Change Number Invoice 011015 Line NumberQuantity Units Item Description Account Code 1099 Tax RatUe n(%it )Price Line Total 1 1 ea Check Request- Host Family Payment Jan 2015 Howard 8699-02-0000-00N2o-00009-0.0-000$0 0 500.00 $ 500.00 Object Type Object Number Change Number Invoice 020615 Line NumberQuantity Units Item Description Account Code 1099 Tax RatUe n(%it )Price Line Total 1 1 ea Check Request:Host Family Payment Feb 2015 Howard 8699-02-0000-00N2o-00009-0.0-000$0 0 1,000.00 $ 1,000.00 Object Type Object Number Change Number Invoice 022615 Line NumberQuantity Units Item Description Account Code 1099 Tax RatUe n(%it )Price Line Total 1 1 ea Check Request- Host Family Payment March 2015 Howard 8699-02-0000-00N2o-00009-0.0-000$0 0 1,000.00 $ 1,000.00 Object Type Object Number Change Number Invoice 032615 Line NumberQuantity Units Item Description Account Code 1099 Tax RatUe n(%it )Price Line Total 1 1 ea Check Request- Host Family Payment Apr 15 Howard 8699-02-0000-00N2o-00009-0.0-000$0 0 1,000.00 $ 1,000.00 Object Type Object Number Change Number Invoice 042815 Line NumberQuantity Units Item Description Account Code 1099 Tax RatUe n(%it )Price Line Total 1 1 ea Check Request- Host Family Pymt May 15 Howard 8699-02-0000-00N2o-00009-0.0-000$0 0 1,000.00 $ 1,000.00 Object Type Object Number Change Number Invoice 060515 Line NumberQuantity Units Item Description Account Code 1099 Tax RatUe n(%it )Price Line Total 1 1 ea Check Request- Host Family Pymt June 15 Howard 8699-02-0000-00N2o-00009-0.0-000$0 0 1,000.00 $ 1,000.00 Object Type Object Number Change Number Page 1 of 2 In total, according to TVLC’s accounting records, Batchelor received $6,500 in host family payments between December 2014 and June 2015. The 1099 field in the report is set to “No” in the vendor report. If the CEO of TVLC received host family payments that were not properly disclosed on federal Form 1099, this is a significant internal control deficiency. The governing board and CEO of TVLC set the tone for the organization. TVLC’s current management told FCMAT that host families were never issued 1099s. FCMAT discussed the host family 1099 issue with Bill Batchelor, who stated: “All host families were treated as non-employee volunteers of the nonprofit, as such John Zukoski determined that form 1099msc should not be distributed pursuant to IRS instructions on expense reimbursements. I have attached the current years instruc- tions with the relevant sections highlighted.”(sic) Batchelor cites page 8 of the IRS 2017 Instructions for federal Form 1099-MISC, Payments Not Reported in Box 7, stating that IRS lists “Expense reimbursements paid to volunteers of nonprofit organizations ...” as non-reportable payments. FCMAT considers host family payments as reportable 1099 income. Reimbursement payments would be based on receipts for expenditures paid on behalf of the students. A sample of payments to host families FCMAT examined show consistent monthly payments of $1,200 per student as Fiscal crisis & ManageMent assistance teaM 49 DIVERSION OF FUNDS described further below. TVLC was unable to provide FCMAT documentation to support host family expense reimbursement claims specific to the monthly housing payment. Further inquiries by FCMAT revealed that no financial reports or analysis exist to support the foreign student program accounting. In fact, TVLC management explained the foreign exchange program was discontinued because the program was not making money and was most likely costing the charter school money. Management also claimed that this program was developed by Batchelor to send students to Batchelor’s private school and caused great difficulty for TVLC with continued notices of concern and/or violation by the oversight agencies and a complaint from the Western Association of Schools and Colleges (WASC). The WASC website, http://www.acswasc.org states that “… WASC accreditation is an ongoing six-year cycle of quality whereby schools demonstrate the capacity, commitment, and competence to support high-quality student learning and ongoing school improvement.” The district issued a notice of violation to TVLC dated March 22, 2017 based on written decla- rations of LVCP teachers. Page 6 of the notice of violation at section D states: “During the 2013-2014 school year, LVCP taught international students who were enrolled in the San Francisco Bay Preparatory Academy (SFBAPA), a private school for international students. (Exhibit H, and all facts stated therein; Exhibit E, para. 6.) LVCP also had 8-10 international students from China attend a history class for approximately 3 weeks even though they were not on the class rolls.” The Exhibit H declaration of a teacher states: “During the 2013-2014 school year, international students who were not enrolled in the school attended LVCP classes, and were also pulled out and taught in separate classes by an SFBAPA teacher…During the 2015-2016 school year, LVCP, Principal … informed me that a substantial number of students from Nanjing, China would be coming to LVCP to join my class and other classes for approximately a three-week period. During this period, I had 8-10 extra students in my AP World History class who were not on the class rolls. It was disruptive to have these extra students join the class for an extended period of time during the term.” The Exhibit E declaration of a teacher states: “While I worked at TVLC, the San Francisco Bay Preparatory Academy (SFBAPA), a private school, operated on the TVLC campus and served international students. Initially the teachers of SFBAPA held separate staff meetings and did not participate in LVCP staff meetings or trainings. Over time, however, the SFBAPA teachers were gradually absorbed into LVCP’s organizational structure and participated in LVCP staff meetings and trainings. Often, exchange students from abroad, whom I understood to be enrolled in SFBAPA, were placed in our classes for us to teach for portions of the year.” FCMAT’s review of TVLC’s records did not support cost sharing arrangements between SFBAPA and LVCP for teacher salaries and benefits, LVCP training, or overhead to ensure that LVCP charter school only paid for school related expenditures. FCMAT was provided student fee income and host family payment information. Commingling foreign exchange students from the SFBAPA private school into the LVCP public school and using public school resources is a gift of public funds. AlAmedA County offiCe of eduCAtion 50 DIVERSION OF FUNDS Shifting SFBAPA-enrolled private students into the LVCP public school enriched the private school to the detriment of the public school because the teachers were paid by LVCP, a cost the private school did not incur. Furthermore, because private foreign exchange students were allegedly placed into LVCP classes without enrollment documentation, and detailed accounting records are not maintained or available, the true cost of the exchange program at LVCP may be higher. Those interviewed by FCMAT described that foreign student families paid $30,000, of which $3,000 was paid to an agent as a commission, $10,000 was for student education, $12,000 was for student housing with host families, and $5,000 stayed with TVLC. FCMAT’s review of check copies paid to host families found that host families were receiving $1,200 per month per foreign student. Of the host family payments sampled, a few host families were paid for hosting even two or three foreign students. This means that if a host family housed two foreign students, the host family received a monthly check of $2,400 ($1,200 per student per month). For example, if a student stayed 10 months, $1,200 over 10 months is $12,000 to the host family. Another host family hosted three students and received a check for one month of $3,600. If they hosted all three students for 10 months they would earn $36,000. FCMAT was not presented with and could not locate documents or analysis to support $5,000 per foreign student subsidizing TVLC. The district’s notice of violation to TVLC dated February 3, 2016, page 2, “Operation of Private School at LVCP,” states: “During the 2015-2016 school year, the District learned that TVLC/LVCP was operating a foreign exchange program that offered enrollment in LVCP to students from China … TVLC/LVCP’s promotional material showed the Charter School was charging the following to families participating in the program: a. Tuition: $15,300/year b. Room and Board: $16,000/year c. Health Insurance: $884/year” The total of the tuition, room and board, and health insurance is $32,184. Page 4 of the February 3, 2016 notice of violation states TVLC has referenced the cost of foreign exchange student charges ranging from $31,500 to $33,000 in other documents. Because TVLC produces conflicting foreign exchange charges of $30,000, $31,500, $32,184, and $33,000, and because little financial documentation is available supporting these costs and foreign exchange students may be placed in LVCP classroom as unenrolled students, it is unlikely TVLC or LVCP knows the true program cost. FCMAT analyzed the LVCP foreign exchange program based on the information available at TVLC. FCMAT used a conservative approach to analyze and project program costs. This approach is least likely to overstate the true cost of the foreign exchange program. Using this approach, FCMAT found that TVLC’s foreign student program was not profitable and could not subsidize TVLC. To analyze the program revenue, costs, and overhead, FCMAT examined TVLC financial data specific to LVCP high school. The analysis presented in the table below results in the LVCP foreign exchange student program conservatively losing $34,608 during the 2015-16 school year. Fiscal crisis & ManageMent assistance teaM 51 DIVERSION OF FUNDS 2015-2016 LVCP Foreign Exchange Student Program Amount Hosted Student Fee Income $ 1,064,599 Program Costs: Host family payments 558,071 Program placement commissions 106,459 Teachers salaries and benefits 300,000 Foreign travel 29,994 Allocated overhead 104,683 Total program costs 1,099,207 Foreign exchange student program loss $ (34,608) The foreign exchange student program analysis was as follows: • Hosted student fee income of $1,064,599 and host family payments of $558,071 were available in the TVLC accounting records. • FCMAT was told that if a student paid $30,000 to participate in the program, the commission to the agent was $3,000, which is 10% of the $30,000 student payment. Ten percent of $1,064,599 in hosted student fee income is $106,459. • Teachers’ salaries are determined from the 115 students the attendance records listed as enrolled in the foreign exchange program. Whether an exchange student was enrolled all school year or partially during the year, and in a class full of exchange students or in a mixed classroom, TVLC management indicated the student-to-teacher ratio for a full class may be 23-to-1. Management stated one teacher was dedicated to the exchange program and the other students were absorbed among all other classes. • To calculate equivalent teachers, FCMAT assumed 115 students divided by 23 students per class, representing five full time equivalent teachers. Full time equivalent teachers mean if all 115 students were not spread out among many teachers with a few students in each class, five full time teachers would be needed to teach all 115 students. Using a lower threshold FCMAT reduced the number of teachers and teacher costs to four full time equivalent teachers, or 29 students per class for the 115 exchange students. TVLC agreed that an average of teacher salary and benefits is approximately $75,000 per year; therefore, four teachers at $75,000 per year is $300,000 allocated for salaries and benefits. • Foreign travel of $29,994 is based on First National Bank Visa credit card transactions. • Overhead of $104,683 was determined by summarizing many LVCP costs attributed to education and operations such as books and supplies, back office service provider costs, legal, rent, consulting, and other expenditures. Since total education and operations costs for LVCP were $1,395,776, FCMAT reduced this by 50% to $697,888 to be conservative. A percentage of the discounted overhead of $697,888 was reduced by the percentage of students in the program compared with the total student population. • The LVCP attendance records identify 115 exchange students out of a total population of 630 students, which is 18.25% exchange students. This was further reduced to 15% to be conservative. Applying 15% to the reduced overhead amount of $697,888 results in AlAmedA County offiCe of eduCAtion 52 DIVERSION OF FUNDS $104,683 of LVCP overhead attributed to the foreign exchange program, or $910.28 per exchange student for overhead costs. After reducing the number of teachers and overhead attributable to the foreign exchange program, the program lost $34,608. If the number of full time equivalent teachers and overhead costs is not discounted, the financial loss of the program increases. And, as described above, if foreign exchange students were placed in LVCP teachers’ classes unenrolled and without reimbursement from SFBAPA, the number of exchange students would be greater than 115; therefore, the costs and losses to LVCP would increase further. FCMAT’s conservative analysis and LVCP teacher statements of additional undocumented exchange students attending LVCP classes upholds TVLC’s current management’s explanation that the foreign exchange program did not subsidize TVLC. FCMAT’s determination that the foreign exchange program lost money indicates that LVCP charter school subsidized the exchange program, which is a gift of public funds. Significant Deficiencies in Internal Controls Proper internal controls are the foundation of safeguarding of assets and producing financial transactions and reports that fully disclose the financial activities of an organization and present fairly the organization’s financial position. In addition to attendance, FCMAT examined and sampled TVLC transactions including wire transfers, inter-charter transfers, credit card and other expenditures. Deficient Internal Controls - Overall State of Books and Records When FCMAT arrived to begin fieldwork on site at TVLC, only three employees remained that managed the TVLC organization overseeing personnel, accounting and all other supervisory functions. All three had limited knowledge of the accounting records. A search throughout TVLC buildings and storage areas produced limited accounting records. TVLC management and staff indicated they did not know where accounting records were located, or what records may be missing. One possibility was that some records may have been lost during a relocation or remained behind inadvertently. Eventually, FCMAT learned that some records are in the possession of New Jerusalem School District with the superintendent, who refused to return the records to TVLC management following a request and pending the FCMAT audit. Records for the 2015-16 school year had been shipped to the prior back office service provider in Temecula. FCMAT made arrangements with the prior back office service provider to take custody of 17 boxes of records and transported those records to TVLC’s current back office service provider in Los Angeles. FCMAT reviewed TVLC’s 2015-16 accounting records at the Los Angeles service provider’s place of business. Noticeably missing were documentation for credit card transactions and bank wire transactions. Numerous receipts were found scattered within the boxes or in unlabeled envelopes without support documentation. Many credit card statements were in the original unopened envelopes. TVLC has a Financial Policy and Procedure Manual with policies and procedures for managing accounting records and proper authorization. FCMAT observed that other than employee expense reimbursements, most transactions lacked proper authorization, including wire transfer Fiscal crisis & ManageMent assistance teaM 53 DIVERSION OF FUNDS payments and First National Bank Visa credit card transactions for the expenditures listed in the credit card statements. The TVLC independent auditors report for the fiscal year ending June 30, 2015 disclosed the following: Finding 2015-01, “The Organization did not prepare the reconciliation of the following accounts on a timely basis: cash, accounts receivables, prepaid expenses, deposits, fixed assets and accrued liabilities. Based on the timeline of events, it does not appear that sufficient internal controls were in place in order to detect errors and deter fraud … The Organization was exposed to significant risk of material misstatement of the financial statements and fraud because sufficient internal controls were not in place … Reconciliations were not prepared timely. There was a change in the personnel resulting in delayed reconciliations and lost accounting records.” FCMAT’s examination of the condition of accounting records for 2015-16 and 2016-17 finds that TVLC continues to have significant and material deficiencies in internal controls and may be exposed to significant risk of fraud and material misstatement of the financial statements. Evidence of the continued disarray of the accounting records is a sample of emails between June 14-16, 2016 from the former back office service provider and TVLC staff identifying concerns over TVLC credit card reconciliations, payments and Batchelor’s use of a TVLC credit card. Back office provider: June 14, 2016, 3:31 PM: “I am having problems reconciling the payments debited from Heritage Bank Accounts against the payments noted in the credit card statements. In the attached worksheet, the ones highlighted (yellow) matched with what is shown in the statements. All others in the bank statement I can’t find anywhere in the credit card statements and payments on the credit card statements I can’t find in the bank statements ... That is assuming you don’t have any other credit cards that I am not aware of.” TVLC responded: June 15, 2016, 4:17 AM: “Most of the card payments were lumped together. Everybody’s card was paid for out of the lvcs/TVLC bank account except for Eric. Most of the time entire balances were paid off … In some cases there was only enough money in the bank to make minimum payments.” Back office provider: June 15, 2016, (no time stamp): “Am still not able to reconcile the payments … Attached is a worksheet of all the Bank Debits (Paid to 1st Bankcard) and all the payments recorded in the credit card statements … The total debit from the bank is also greater (by approx. … $69K) than the total credit card payments … Section C-is the variance between what was debited from the bank against the total payments in all the credit card statements … Does anyone have any idea?” TVLC’s response on June 16, 2016, 6:30 AM: “… the account ending in 3130 is for Bill’s TVLC only account. Let’s include that in the Excel worksheet to see where we land. The other statement is for a different entity and was paid for out of Bill’s Wells Fargo account – ie, not TVLC Funds. Baker’s statement may not show on the website because his account was closed. However, TVLC may have kept hard copies of the statements.” This email exchange indicates that Batchelor has a personal credit card in the name of TVLC several months following his resignation. Either the credit card ending in 3130 is a TVLC credit card with off-book transactions, or Batchelor has a credit card in TVLC’s name holding himself AlAmedA County offiCe of eduCAtion 54 DIVERSION OF FUNDS out as a TVLC employee. In either case, off-book transactions or using the name of TVLC for personal purposes is a mischaracterization of expenses, a misuse of TVLC resources, possible embezzlement, and/or a gift of public funds. Deficient Internal Controls – TVLC Credit Card Transactions TVLC credit cards were issued to management. FCMAT reviewed credit card statements and found that receipts were not attached to the statements and could not be found. Except for one credit card issued to Batchelor, transactions were small because balances were limited to $2,000. Batchelor had two First National Bank Visa credit cards under the name Tri-Valley Learning Corporation. The first, ending in 5313, was in the name of Bill Batchelor until November 2015, when the name was changed to John Zukoski. The second TVLC credit card, ending in 4688, was in the name of William Batchelor. Bill and William Batchelor are the same individual. In September 2015, account 4688’s balance was transferred to account 3130. In October 2015, account 3130 was renamed in care of John Zukoski, the director of finance at the time. Even though the emails above explain credit card account 3130 is “Bill’s TVLC only account” and “The other statement is for a different entity and was paid for out of Bill’s Wells Fargo account – ie, not TVLC Funds,” both the Bill and William Batchelor credit cards are in the name of TVLC, are First National Bank Visa cards, and have TVLC’s address of 3252 Constitution Drive, Livermore, CA 94551-7567. It remains unclear if TVLC paid both credit card accounts. FCMAT relied on available documentation to audit transactions. TVLC, CPA, ISC, GUI, and LCZC are related and controlled by Batchelor. Based on the emails above, Batchelor had in his control a TVLC credit card that may or may not be tied to his personal Wells Fargo bank account. It cannot be determined how much of TVLC’s charter school public funding or use of the TVLC name and goodwill may have been commingled among Batchelor’s personal interests and control. Analysis of the available credit card statements in Batchelor’s name identified significant foreign travel. FCMAT interviews identified Batchelor was actively involved in developing his own private school foreign exchange student program in China. TVLC’s foreign exchange student program is also primarily in China and was developed by Batchelor. The tables below show transactions from Batchelor’s TVLC credit cards associated with developing foreign exchange programs in China. Fiscal crisis & ManageMent assistance teaM 55 DIVERSION OF FUNDS Credit Card 5313 TVLC Bill Batchelor First National Bank Visa Credit Card …5313: Acct. No. Trans. Date Transaction Description Amount Category 5313 7/24/15 HN Air $ 3,959.80 Travel 5313 7/28/15 SQ *Oriente Lux Limo Serv 178.80 Travel 5313 8/5/15 HN Air 295.00 Travel 5313 8/17/15 SQ *Oriente Lux Limo Serv 166.80 Travel 5313 9/6/15 Beijingshichaoyangquoo 393.12 Travel 5313 9/6/15 Cash Advance Fee 19.65 Fee 5313 9/6/15 Fgn Tran Fee Cash 11.79 Fee 5313 9/7/15 Fgn Tran Fee Pur 60.76 Fee 5313 9/7/15 Beijingxiangjiangcaifu 2 ,025.45 Travel 5313 9/10/15 Shanghai Bi Sheng Ke Youx 42.03 Travel 5313 9/10/15 Fgn Tran Fee Pur 1.26 Fee 5313 9/10/15 Ctrip Sh Huacheng Travel 115.43 Travel 5313 9/10/15 Fgn Tran Fee Pur 3.46 Fee 5313 9/12/15 Jian Guo Bin Guan Shanghai 703.44 Travel 5313 9/12/15 Fgn Tran Fee Pur 21.10 Fee 5313 9/11/15 NO439 N Caoxi Road Shangh 313.67 Travel 5313 9/11/15 Cash Advance Fee 15.68 Fee 5313 9/11/15 Frgn Tran Fee Cash 9.41 Fee 5313 10/29/15 Hainan Glob 3 ,299.19 Travel 5313 11/7/15 Beijingshichaoyangquoo 393.69 Travel 5313 11/7/15 Cash Advance Fee 19.68 Fee 5313 11/7/15 Frgn Tran Fee Cash 11.81 Fee 5313 11/10/15 Minimum *Finance Charge* 1.75 Fee 5313 11/10/15 Beijingxiangjiangcaifu 1 ,823.03 Travel 5313 11/10/15 Frgn Tran Fee Pur 54.78 Fee 5313 11/10/15 Dong Fang Hang Kong 330.23 Travel 5313 11/10/15 Frgn Tran Fee Pur 9.90 Fee 5313 11/13/15 Xin Yuan Su Can Yin Gu Shanghai 146.76 Travel 5313 11/13/15 Frgn Tran Fee Pur 4.40 Fee 5313 11/13/15 Xin Yuan Su Can Yin Gu Shanghai 18.84 Travel 5313 11/13/15 Frgn Tran Fee Pur 0.56 Fee 5313 11/14/15 Radisson Hotel Shanghai 904.44 Travel 5313 11/14/15 Frgn Tran Fee Pur 27.13 Fee 5313 11/16/15 Sunrise Duty Free (China) 85.79 Travel 5313 11/16/15 Bj Xj Fortune Htl Ltd. DCC Beijing 583.34 Travel 5313 11/13/15 Nanxi Branch Shanghai 313.92 Travel 5313 11/13/15 Cash Advance Fee 15.69 Fee 5313 11/13/15 Frgn Tran Fee Cash 9.41 Fee 5313 11/19/15 Mayflower Restaurant (Dim Sum) Dublin, CA 6 ,707.00 Entertainment 5313 12/5/15 Jian Guo Bin Guan Shanghai 263.08 Travel 5313 12/5/15 Frgn Tran Fee Pur 7.89 Fee 5313 12/5/15 NO439 N Caoxi Road Shangh 312.64 Travel 5313 12/5/15 Cash Advance Fee 15.63 Fee 5313 12/5/15 Frgn Tran Fee Cash 9.37 Fee 5313 12/7/15 Guangdongnongkenyanlin 76.21 Travel 5313 12/7/15 Frgn Tran Fee Pur 2.28 Fee 5313 12/9/15 Beijingshichaoyangquoo 389.90 Travel 5313 12/9/15 Cash Advance Fee 19.49 Fee 5313 12/9/15 Frgn Tran Fee Cash 11.69 Fee 5313 12/11/15 Bj Xj Fortune Htl Ltd. DCC Beijing 994.84 Travel 5313 12/13/15 Beverages & More Danville CA 1 ,111.29 Entertainment 5313 1/7/16 Mayflower Restaurant (Dim Sum) Dublin, CA 701.01 Entertainment 5313 Total Foreign Related Expenses $ 27,013.31 AlAmedA County offiCe of eduCAtion 56 DIVERSION OF FUNDS Credit Card 4688 TVLC William Batchelor First National Bank Visa Credit Card …4688: Acct. No. Trans. Date Transaction Description Amount Category 4688 7/30/15 Beijingshichaoyangquoo $ 4 02.67 Travel 4688 7/30/15 Cash Advance Fee 20.13 Fee 4688 7/30/15 Frgn Tran Fee Cash 12.08 Fee 4688 8/7/15 Grand Millenniuim Hotel Beijing 483.13 Travel 4688 8/7/15 Frgn Tran Fee Pur 14.49 Fee 4688 8/7/15 Grand Millenniuim Hotel Beijing 724.69 Travel 4688 8/7/15 Frgn Tran Fee Pur 21.74 Fee 4688 8/7/15 Grand Millenniuim Hotel Beijing 132.15 Travel 4688 8/7/15 Frgn Tran Fee Pur 3.96 Fee 4688 8/7/15 Grand Millenniuim Hotel Beijing 36.67 Travel 4688 8/7/15 Frgn Tran Fee Pur 1.10 Fee 4688 8/7/15 BJ Xiang Jiang Fortune HT Beijing 1 ,095.11 Travel 4688 8/7/15 Frgn Tran Fee Pur 32.85 Fee 4688 Total Foreign Related Expenses $ 2,980.77 5313 and 4688 Total Foreign Related Expenses $ 29,994.08 Credit Cards 5313 ad 4688 Expenses Summarized: Credit Cards 5313 and 4688 Summarized Fee $ 4 70.92 Travel 21,003.86 Credit Cards 5313 and 4688 Expenses Summarized: Entertainment 8 ,519.30 Fee $ 4 70.92 Total Expenses Summarized $ 29,994.08 Travel 21,003.86 Entertainment 8 ,519.30 Total Expenses Summarized $ 29,994.08 FCMAT discussed these credit card transactions with Batchelor. He explained that “While these trips were in fact to benefit LVCP, 100% of these expenses were paid directly by CPA. While both of these accounts had TVLC listed on the names, they were in fact opened with my ss#, using my personal credit.” Batchelor provided a spreadsheet of three payments totaling $31,657.97, stating: “Payments processed, pulled directly from CPA account online. Reference pulled directly from the account.” Based on the documentation available, Batchelor may have commingled $29,994.08 of charter school funds between CPA and TVLC to develop the foreign exchange programs, as depicted above. Cash Transfers An analysis of the TVLC bank accounts reveals 475 cash transfers among six separate accounts. FCMAT was not provided with transfer authorizations or documentation supporting the reason for the transfers. FCMAT questioned a long-time staff member familiar with the accounting and operations of TVLC and the former director of finance about the purpose behind the cash transfers and was told that money was transferred to the individual schools based on their need for cash on any given day. Fiscal crisis & ManageMent assistance teaM 57 DIVERSION OF FUNDS Credit Card 4688 2015-2016 Debits Credits No Cash Transfers Cash-In Cash-Out Transfers TVLC William Batchelor First National Bank Visa Credit Card …4688: 9120-010 CMO $ - $ - Acct. No. Trans. Date Transaction Description Amount Category 9120-020 LVCP High 2,510,413 1,051,302 83 4688 7/30/15 Beijingshichaoyangquoo $ 4 02.67 Travel 9120-030 Acacia Elem 2,901,591 2,188,407 107 4688 7/30/15 Cash Advance Fee 20.13 Fee 9120-040 Acacia Mid 606,291 450,000 51 4688 7/30/15 Frgn Tran Fee Cash 12.08 Fee 9120-050 LVCS Elem 5,586,524 5,158,296 197 4688 8/7/15 Grand Millenniuim Hotel Beijing 483.13 Travel 9123-010 CMO LOC 169,200 802,515 37 4688 8/7/15 Frgn Tran Fee Pur 14.49 Fee Totals $ 11,774,019 $ 9,650,520 475 4688 8/7/15 Grand Millenniuim Hotel Beijing 724.69 Travel 4688 8/7/15 Frgn Tran Fee Pur 21.74 Fee In addition to cash transfers, transactions within intercharter location accounts titled “Due from 4688 8/7/15 Grand Millenniuim Hotel Beijing 132.15 Travel Other Locations” account 9310, and Intercompany Accounts Payable account 9610, experienced 4688 8/7/15 Frgn Tran Fee Pur 3.96 Fee unusually high levels of activity shown in the table below. 4688 8/7/15 Grand Millenniuim Hotel Beijing 36.67 Travel 4688 8/7/15 Frgn Tran Fee Pur 1.10 Fee Net Due From Net Intercompany 4688 8/7/15 BJ Xiang Jiang Fortune HT Beijing 1 ,095.11 Travel 2015-2016 Other Locations No Accounts Payable No 4688 8/7/15 Frgn Tran Fee Pur 32.85 Fee Inter-Charter Activity Acct. No. 9310 Trans. Acct. No. 9610 Trans. 4688 Total Foreign Related Expenses $ 2,980.77 010 CMO $ - $ 4 ,876,941 2 50 020 LVCP High 2 ,873,095 4 3 2,698,929 2 63 5313 and 4688 Total Foreign Related Expenses $ 29,994.08 030 Acacia Elem 1 ,573,191 2 1 2,656,334 1 17 040 Acacia Mid 613,259 1 33 1,178,376 8 5 050 LVCS Elem 3 ,742,887 6 9 5,448,616 2 25 Credit Cards 5313 ad 4688 Expenses Summarized: $ 8,802,432 2 66 $ 16,859,196 9 40 Credit Cards 5313 and 4688 Summarized Fee $ 4 70.92 Travel 21,003.86 Credit Cards 5313 and 4688 Expenses Summarized: Transferring funds and resources back and forth without authorization and documentation is a Entertainment 8 ,519.30 Fee $ 4 70.92 sign that the entire organization is in poor financial health and internal controls are significantly Total Expenses Summarized $ 29,994.08 Travel 21,003.86 deficient. Accounts payable with 940 transactions totaling $16,859,196 is a clear indication that Entertainment 8 ,519.30 TVLC was approaching financial collapse. Total Expenses Summarized $ 29,994.08 Deficient Internal Controls, Robert A. Daly Living Trust - Loan $600,000 Another example of related parties commingling financial transactions with and through TVLC FCMAT discussed these credit card transactions with Batchelor. He explained that “While is the $600,000 Robert A. Daly Living Trust (Daly) loan. FCMAT obtained emails that describe these trips were in fact to benefit LVCP, 100% of these expenses were paid directly by CPA. a transfer of $87,150 from SFBAPA to LVCS requesting Batchelor’s approval. The email from the While both of these accounts had TVLC listed on the names, they were in fact opened with director of finance, dated January 2, 2015 at 10:35AM, stated: my ss#, using my personal credit.” Batchelor provided a spreadsheet of three payments totaling “Hi … -can you please transfer $87,150 from SFBAPA (sic) to Acacia Elementary? Hi $31,657.97, stating: “Payments processed, pulled directly from CPA account online. Reference Bill-can you please approve?” pulled directly from the account.” TVLC was unable to provide any loan documents associated with the $87,150 transfer; however, Based on the documentation available, Batchelor may have commingled $29,994.08 of charter TVLC’s former back office service provider was familiar with the amount and provided a spread- school funds between CPA and TVLC to develop the foreign exchange programs, as depicted sheet that isolated the original loan and subsequent payments. above. The SFBAPA Facebook pages states, “The San Francisco Bay Preparatory Academy is a private, Cash Transfers international high school in the hills of the San Francisco East Bay.” Batchelor controls SFBAPA An analysis of the TVLC bank accounts reveals 475 cash transfers among six separate accounts. located at 3090 Independence Drive, the same address as LVCP high school. FCMAT was not provided with transfer authorizations or documentation supporting the reason TVLC’s former back office service provider had information that showed $87,150 as part of the for the transfers. FCMAT questioned a long-time staff member familiar with the accounting $600,000 Daly loan. The analysis of the loan provided by the former back office service provider and operations of TVLC and the former director of finance about the purpose behind the cash shows that $600,000 was loaned to AECS on February 28, 2014. According to the loan analysis, transfers and was told that money was transferred to the individual schools based on their need the $600,000 was wired from Daly by wire confirmation number 0228B1QGC08C017154. for cash on any given day. AlAmedA County offiCe of eduCAtion 58 DIVERSION OF FUNDS This loan was not disclosed in TVLC’s June 30, 2014 audit report. Payments on the loan dated January 5, 2015 ($87,125) and April 29, 2015 ($60,000) were not disclosed in the June 30, 2015 audit report. Since the TVLC June 30, 2014 and 2015 audit reports contain no loan refer- ence, it is possible the loan was not disclosed to the auditor. Review of TVLC’s 2015-16 accounting records found loan account number 9642-030 had no beginning balance. The 030 is the account location code for AECS. If the loan had been previ- ously recorded in TVLC’s accounting records, a balance would have been carried forward for the loan. The $600,000 loan was not reported in TVLC’s accounting records in the 2013-14 school year although the loan payments were made. The detail notes in the loan account constructed by TVLC’s former back office service provider notes the Daly loan as “Un-booked PY,” which means the loan was never recorded in the prior year(s). The former back office service provider’s loan analysis under the heading of “Who Paid” includes the following: • $87,125 in interest paid by SFBAPA to Acacia Elementary School, and Acacia Elementary School paid Daly. • $325,000 from SFBAPA to LVCS, $60,000 from LVCS to Acacia Elementary, and $60,000 from Acacia Elementary to Daly. • $250,000 from LVCS to Acacia Elementary then paid to Daly. The loan principal and interest payments flowed through SFBAPA and TVLC charter schools, ending August 20, 2015 with the final payment. The final payment to Daly from AECS was $335,367.36, wire number 201523200080, dated August 20, 2015. The total interest paid from February 28, 2014 through August 20, 2015 is reported as $132,492.36. The total interest paid on the loan as a percentage of the loan equals 22.08% ($132,492.36 / $600,000 = 22.08%); however, interest would have decreased over the 18 months of the loan and should be calculated based on payment dates whereby each payment contains an interest and principal component. FCMAT conservatively calculates the loan interest rate paid by the charter school as 15.03%. Transferring funds between charter school accounts and other entities represents moving money without proper documentation by Batchelor, with an investment banker background, and the director of finance, with extensive background in finance who should have known with their professional backgrounds and experience proper accounting procedures. FCMAT observed missing accounting and financial records, little or no authorization of transactions moving money throughout all of the TVLC entities and a total disarray of those records. Absent internal controls allowed charter school money to be transferred to other entities, credit cards to be used for international travel and other non-school related expenses, and allowed Batchelor and others free access to cash and assets of the TVLC family of schools. Deficient Internal Controls, $675,000 Heritage Bank Loan and $800,000 Line of Credit Internal controls were significantly deficient. Batchelor and Zukoski had complete discretion to move money wherever it was needed. Transfers for purposes other than school related expenditures created cash shortages and the inability for TVLC to fund payroll and retirement benefits timely, or make payments to vendors. Although not part of this report, FCMAT notes that extremely large rents totaling more than $86,000 per month for the Acacia school property in Stockton contributed to the unavailability of TVLC cash. This rent lease was negotiated by Fiscal crisis & ManageMent assistance teaM 59 DIVERSION OF FUNDS Batchelor and Bianchi Impact 1, LP, formed as a special purpose entity by general partner ACRE Cresta, LLC. TVLC needed loans and lines of credit to survive. With their line of credit exhausted, Batchelor and Zukoski converted the $675,000 line of credit to a promissory note dated October 1, 2015 with Heritage Bank of Commerce, loan number 8398000103 because TVLC was unable to pay the line of credit when it came due. The interest rate for this four-year loan is 4.75%, in sharp contrast to the Daly loan at 15.03%. With the line of credit converted to a loan, cash shortages continued, causing Zukoski to enter into a second line of credit with Heritage Bank for $800,000, loan number 8398000102, dated October 1, 2015. The line of credit matured one year later on September 30, 2016, but by that time Batchelor and Zukoski had resigned and new management was unaware of the second line of credit. This financial pressure, including insufficient cash and the loss of enrollment attributable to district and community upheaval around the bonds and the private school, significantly contrib- uted to TVLC in Chapter 11 bankruptcy in early November 2016. AlAmedA County offiCe of eduCAtion 60 ETHICAL VALUES AND FIDUCIARY DUTY Ethical Values and Fiduciary Duty A properly functioning internal control environment includes ethical values and integrity displayed by the governing board and management. The tone set by management through its words and actions should demonstrate to others that dishonest or unethical behavior will not be tolerated. An atmosphere in which employees feel safe to communicate concerns is a funda- mental component of strong and effective internal controls. The control environment provides the foundation for other internal controls to be effective in achieving the goals and objectives of the organization, and to prevent and/or deter fraud or illegal acts. Regular external audits are a strong deterrent to mismanagement and fraud, but they cannot serve as the only method of ensuring accountability. When the oversight agency and independent auditors are misled by acts of concealment and misrepresentation of financial relationships and transactions by senior management and others, there is a complete breakdown of internal controls that makes it easy for the diversion of funds to occur. Questionable ethical values and tone set by the TVLC governing board members and manage- ment are illustrated in a string of emails between board members and management. The emails discuss project costs and analysis of the 3090 Independence Drive construction project: Tim Hall, Board Member: February 29, 2016, 9:40AM “Thanks for the pie chart. I think it is very helpful. I’d like to see the spreadsheet and the pie chart on the same page. Is $26M the total of the bond financing? Is the pie chart just showing where the bond money went? Have we spent more than what’s shown? Where are the construction costs that we still owe? Where are the additional expenditures we need to make before we can move in?” John Zukoski, Jr., Director of Finance: February 29, 2016, 5:24 PM “The $26.3m is the total of the bond financing ($24.8m) plus $1.5m in prepayments and borrower contributions. The table and chart reflect how these sources were budgeted for the project. “Our actual outlays were $27.6m - $1.3M more than what was generated as part of the financing. We still owe Blueline the $1.3m that we had to divert to other outlays plus the estimated $1m for the LVCS parking lot and access road. The parking lot and access road were not part of the 3090 project budget. “In total we need to come up with $2.3M more before we can move in.” This email demonstrates board member and management discussions about diverting money owed to a vendor for “other outlays.” It is unknown how TVLC paid for these expenditures, or the nature of so-called other outlays described in this email exchange. Tim Hall, Board Member: March 1, 2016, 9:48 AM “Thanks ... Do we actually have $2M in a reserve account? Where is that money? Is it shown in our TVLC & LVCP budgets and financial statements? “What does ‘$1.5M in prepayments and borrower contributions’ mean? “Where are extortion (sic) payments to Balch shown? “I’d like to see the sources of the $26.3M shown in a table. Have we actually spent $27.6M? Where did the additional $1.3M come from? Fiscal crisis & ManageMent assistance teaM 61 ETHICAL VALUES AND FIDUCIARY DUTY “Let’s have a table showing what we owe plus the estimated cost of the parking lot & access road. In other words, the $2.3M we need to come up with before we can move in. “I would like for this to be presented and discussed at this Thursday’s meeting, as part of our response to the LVCP School Council letter. Are you concerned that such a detailed disclosure could cause problems at this point?” “Extortion payments” referenced above are the additional monies paid to Balch to extend the purchase offer on 3090 Independence Drive following the collapse of the 2014 BANS. These extension payments are described earlier in this report totaling $1,304,400. John Zukoski, Jr., Director of Finance: March 1, 2016, 5:04 PM “Hi … - Independence Support, LLC has the $2M in a US Bank Trustee account. It’s included in the cash and cash equivalents balance on page 4. “The $1.5m in prepayments and borrower contributions was a combination of ‘appli- cable deposits’ that CPA made towards the purchase of the 3090 building (the portion of the Balch extortion (sic) funds that actually applied to the purchase) plus extra funds that CPA came in with at closing. “The non-applicable extortion payments to Balch aren’t shown in the ‘Uses’. Could be risky to call that out if folks see that Balch extracted more than $1m of funds that didn’t benefit the schools. “We’ve only spent the $26.3M - we need to get the additional $1.3M from other sources. “I am concerned that if we come out with the $2.3M figure now - parents will wonder where the other $1.3M is coming from and who is still owed the money...and then we would potentially need to publicly disclose that we owe our general contractor $1.3M. “We’ll probably need to disclose this at some point anyways ... so should we just take our lumps now?” There is a consistent theme from TVLC board members and management regarding concerns about what “folks” and “parents” might find out rather than full and transparent disclosure. The email confirms Balch payments of $1,304,400 “didn’t benefit the schools.” John Zukoski, Jr., Director of Finance: March 3, 2016, 11:00 AM “Hi … - how does this version look?” Scott Lessard, Board Member: March 3, 2016, 11:10 AM “… If this is what you think is best we can go with that. “For me it is getting a muddled (sic) with CPA income etc. “Simple is better. “… are the constructions change orders (overruns) included in the construction costs do we have a nondisclosure agreement with Balch? “Was the parking lot ever ment (sic) to be included with the bond funding?” This email shows continued concern that Balch be kept silent with a nondisclosure agreement. Tim Hall, Board Member: March 3, 2016, 11:59 AM AlAmedA County offiCe of eduCAtion 62 ETHICAL VALUES AND FIDUCIARY DUTY “This looks good to me. I like seeing all of the costs listed, and all of the sources of funds. “Where are ‘rent’ payments to Balch included? “… - I’m not sure what you mean by muddled, but I feel we need to explain where the funds have been coming from. Would you rather have CPA’s prepayments lumped together under some other descriptor? Then how do we explain it if asked? “I don’t have answers to all of this, I’m just asking.” Tim Hall, Board Member: March 3, 2016, 12:03 PM “I’m leaning towards as much disclosure as possible, although I don’t want to jeopardize our financial standing in a manner that might inhibit the refinance of the Acacia facility. “As … asked, are we bound by a non-disclosure with Balch. Do we risk facing legal action if we disclose the extortion payments?” Ethical concerns are raised by board members discussing with management how much disclosure they are willing to provide as long as it does not jeopardize financial standing that might influ- ence the Acacia facility. Based on these emails, considerable effort was spent to keep information from the public and financial institutions about the true construction costs and the financial condition of TVLC charter schools. John Zukoski, Jr., Director of Finance: March 3, 2016, 12:18 PM “We don’t have a non-disclosure with Balch. However, CPA covered most of the extor- tion (sic) payments directly or reimbursed TVLC for the amounts that we paid .... so it could be a little muddy explaining how the money flowed and why...” This email segment reveals that CPA and TVLC both paid for the extension payments that had no benefit to the charter school. These activities clearly diverted public funds from the charter school purpose, commingled funds, and are a gift of public funds. Based on the evidence presented to FCMAT, there is sufficient documentation to demonstrate that fraud, mismanagement and misappropriation of the charter school funds and assets may have occurred. A significant material weakness exists in the charter school’s internal control envi- ronment, which increases the probability of fraud and/or abuse. Fiscal crisis & ManageMent assistance teaM 63 CONCLUSION AND RECOMMENDATION Conclusion FCMAT’s analysis concludes that management of TVLC may have: • Filed incomplete FPPC Form 700 conflict of interest forms • Failed to fully disclose affiliated or related parties to the district and TVLC’s auditor • Concealed the true nature of related-party relationships • Misled independent auditors • Converted the use of tax-exempt public bonds totaling over $67 million to purchase land and buildings under the pretext that the acquisition was for a public charter school • Diverted $2,728,202 of public school funds as off-book transactions • Diverted and commingled funds with ISC, CPA and LCZC • Diverted $40,000 of public school funds to a tenant of ISC • Used LCZC as a conduit entity • Failed to file IRS Form 1099s for host family payments • Contributed to an environment of significantly deficient internal controls It is imperative that the Alameda County Office of Education, the district, and the TVLC governing board review the findings and recommendations of this audit report and act within their respective authority as needed to limit the risk of fraud and/or misappropriation of assets. In accordance with Education Code Section 1241.5(c), the county superintendent shall do the following: The county superintendent shall report the findings and recommendations to the governing board of the charter school at a regularly scheduled meeting, and provide a copy of the information to the chartering authority of the charter school, within 45 days of completing the review, audit, or examination. The governing board of the charter school shall, no later than 15 calendar days after receipt of the report, notify the county superintendent and its chartering authority of it proposed response to the recommendations. Recommendation The county superintendent should: Notify the governing boards of Alameda County Office of Education, Tri-Valley Learning Corporation, Livermore Valley Joint Unified School District, the State Controller, the Superintendent of Public Instruction, and the local district attorney that fraud, misappropriation of assets or other illegal activities may have occurred. AlAmedA County offiCe of eduCAtion 64 SUBSEQUENT EVENTS Subsequent Events After FCMAT completed fieldwork and resulting from or related to FCMAT’s audit of TVLC, the following events occurred: 1. To date, the June 30, 2016 independent audit report has not been issued. 2. Batchelor deposited approximately $350,000 on March 11, 2017 to TVLC who was desperate to issue employee payroll while Batchelor, the current CEO, board president Lessard and bankruptcy attorney Lucas collectively worked out a “Term Sheet.” 3. According to TVLC’s current CEO, Board President Lessard, working with Batchelor and Lucas, is attempting to restructure the 2012A bonds to “save TVLC.” Batchelor told FCMAT investigators that he intends to convert the existing LVCS property into a private school on the same property with the elementary charter school - LVCS. If TVLC ceases to exist, Batchelor will have control over the property and assets of TVLC, paid for with public taxpayer dollars and converted to private ownership. 4. The following was prepared by Batchelor’s public relations firm and current TVLC board president Lessard in a cooperative effort with TVLC’s bankruptcy attorney, Lucas, to take over the 2012A bonds in an attempt to keep TVLC from imminent closure: Fiscal crisis & ManageMent assistance teaM 65 SUBSEQUENT EVENTS [EXPLANATORY NOTE TO JIM TIEMSTRA ET AL: TVLC as a reporting entity under SEC Rule 15c2-12 will need to file a summary of this release with EMMA as public disclosure affecting security and sources of payment for the outstanding bond issues. The changes in this version are meant to avoid non-compliance with SEC Rule 10b-5 disclosure requirements.] CONTACT/EMBARGO INFO HERE FORMER CEO BILL BATCHELOR COMMITS $1.4 MILLION OF FUNDING TO LIVERMORE CHARTER SCHOOLS KEEPING THEM FROM CLOSING Batchelor Commitment Will Be Used As a Platform for TVLC to Exit Bankruptcy LIVERMORE – Today Tri-Valley Learning Corporation, which runs Livermore Valley Charter School and Livermore Valley Charter Preparatory School, announced that an investment group run by Tri-Valley’s former CEO, Bill Batchelor (CEO of Tri-Valley until 2015), has committed funding that will be used to keep open the schools and provide a way to exit bankruptcy. “We’ve worked extremely hard for more than a year to ensure that our schools have the resources they need to continue providing a high-quality education to Tri-Valley fami- lies,” said Dr. Scott Lessard, president of TVLC’s board of directors. “Bill’s investment group’s funding commitment is a significant step forward in the restructuring process and gives our families the confidence that the resources will be there for the foreseeable future.” During the past year, the Livermore schools experienced a drop in enrollment that adversely affected the schools’ operating revenue and caused financial problems. Tri-Valley commenced a chapter 11 bankruptcy case for the purpose of preserving the schools, stabilizing operations, and implementing a new business plan through a financial and operational reorganization that is aimed at restoring student enrollment, regaining accreditation, and providing the platform Tri-Valley needs to continue providing high- quality education to students in the Tri-Valley. A nonprofit managed by Mr. Batchelor, California Preparatory Academy/ Squaw Valley Academy Bay Area (“SVABA”), and an investment group run by Mr. Batchelor have committed to fund Tri-Valley through its immediate fiscal challenges. The investment group is committing to fund Tri-Valley’s revenue shortfall for the next three months up to $1.4 million and address the long-term obligations of Tri-Valley’s bond related debt service, according to Mr. Batchelor. Tri-Valley’s acceptance of the commitment is subject to bankruptcy court approval. “We are very grateful to Bill for his support of the schools,” said Dr. Lessard. “We expect this financial commitment will provide a solution aimed to keep our doors open.” Because of the $1.4 million financial commitment proposed by Mr. Batchelor, Dr. Lessard said the company can now prepare a reorganization plan that will address: (1) AlAmedA County offiCe of eduCAtion 66 SUBSEQUENT EVENTS long-term financial sustainability, (2) payments to creditors, (3) position the schools in a better position to regain accreditation, and (4) restructure the schools’ operations to best ensure the continued success of their students. “With the court’s approval, we hope to exit bankruptcy having made significant strides toward reaching these critical goals,” Dr. Lessard added. Since leaving Tri-Valley in 2015, Mr. Batchelor has focused on private schools. SVABA currently shares a campus with Livermore Valley Charter Preparatory School, and Dr. Lessard noted that SVABA already pays more than 90 percent of the rent showing his commitment to the Livermore charter schools. Batchelor said he is pleased to help the Livermore charter schools stay open and provide a path to exit bankruptcy. “Even though I haven’t been involved in the Livermore charter schools since 2015, I helped start them, we share a campus, and I care about the students.” said Batchelor. “The financial commitment reflects my belief in the organization, the important educa- tional choices they provide, and gives the schools a new lease on life that is aimed to ensure the success of programs I have supported from their inception.” (NOTE TO INVESTORS: As part of its bond disclosure responsibilities, Tri-Valley expects to prepare and file an official summary of this news release on the EMMA system at www.msrb.org. This release is not a substitute for the official summary. Owners and prospective investors in the bonds must read the official summary in connection with any decision to buy, hold or sell bonds.) Fiscal crisis & ManageMent assistance teaM 67 APPENDICES AND EXHDIRBAITFST Appendices and Exhibits Appendix A: Project Description from the Offering Memorandum, Series 2012A Bonds Appendix B: Project and Facilities Description from the Offering Memorandum, Series 2015 Bonds Appendix C: Tax Certificate and Agreement between California School Finance Authority and Tri-Valley Learning Corporation, dated October 4, 2012, relating to Series 2012A Bonds Appendix D: Tax Certificate and Agreement Among California Statewide Communities Development Authority, Independence Support, LLC, Livermore Charter Zone Corporation, Tri-Valley Learning Corporation and California Preparatory Academies, dated May 8, 2015, relating to Series 2015 Bonds (including Exhibits F and G thereto) Appendix E: Audited Financial Statements for Tri-Valley Learning Corporation as of June 30, 2015 Appendix F: Statement of Financial Affairs for Non-Individuals Filing for Bankruptcy, dated January 13, 2017 (Form 207) Appendix G: Declaration under Penalty of Perjury for Non-Individual Debtors dated January 13, 2017 (Form 202) Appendix H: Study Agreement Exhibit 1: Summary of California School Finance Authority’s Series 2012A Bonds and QSCBs Exhibit 2: Summary of Series 2014 Bond Anticipation Notes and Other TVLC Short and Long Term Borrowings Exhibit 3: Summary of California Statewide Communities Development Authority’s Series 2015 Bonds Exhibit 4: Subsequent Refinancing of Bonds Exhibit 5: Ongoing Disclosure Obligations Exhibit 6: Status of Tri-Valley Learning Corporation Bankruptcies on Bonds and Other Debt Exhibit 7: Entities and Individuals Involved in Tri-Valley Learning Corporation Transactions AlAmedA County offiCe of eduCAtion 68 DARPPAEFNTDICES AND EXHIBITS Fiscal crisis & ManageMent assistance teaM APPENDIX A: Project Description from the Offering Memorandum, Series 2012A Bonds 47598v1 / PRIVATE.575.1 THE PROJECT General At present, the Borrower operates two charter schools at leased facilities from the Livermore Valley Joint Unified School District pursuant to Proposition 3 9. · The "Projecf' consists of the acquisition, leasing, construction, improvement and equipping of the Facilities and (including, but not limited to, the improvement of certain of the existing buildings into classrooms administrative spaces and the construction of hard courts. arid a multiple purpose field for athletic and extracurricular use), which will house the Liverniore Valley Charter School ("LVCS;'), grades K-8, and athletic f~cilities for LVCS and Livermore Valley Charter Preparatoi:y High School ("LVCP"), grades 9~12. See "APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER" herein for more information. Upon completion of construction, LVCS will vacate the current facility located on Sonoma Avenue in the City of Livermore and will move to the new site described below. LVCP wUl remain at its present location at 2451 Portola A venue in the City of Livermore. See the Location Map on page 5 for more infopnatio:n, about the location of these sites. the Borrower-intends to acquire or lea;;e or sublease 16 office buildings totaling 98,400 square feet on 9.88 acres (tqe "Campus Buildings") and the adjoining vacant 11.4-acres parcel (the "Cl}lllpus Lof') located on North Canyons Parkway at its intersection with Constifunon Drive in the City of Livermore (collectively, the "Montevina Campus"); The owner of 14 of the 16 Campus Buildings (the "Montevina Buildings") and the entirety of the Campus Lot have agreed under the Site Lease aJ].d the Limited Obligation Site Lease, dated as of October 1, 2012 (the "Subordinate Site Lease"), between Montevina Phase II, LLC and the Authority, to lease such Facilities to the Authority, who Will sublease such Facilities to the Borrower pursuant tq the Sublease and the Subordinate Sublease, ·dated as of October 1, 2012 (the "Subordinate Sublease"), between the Authority and. the Borrower. "Phase I" consists of the lease and sublease of 12 of the 14 Montevina Buildings (the "Phase I MonteVina Buildings"). "Phase II" consists of the lease and sublease of the remaining tWo Montevina Buildings (the "Phase II Montevina Buildings") and the Campus Lot. After the term of such leases, the current owner will convey fee title in the Facilities, free and clear at the end of the 23-year lease term (the term length allowed under the Qualified School Construction Bond ("QSCB") rules). The Site Lease, the Subordinate Site Lease, the Sublease and the Subordinate Sublease are collectively referred to herein as the "Montevina Leases." As further described below, the Borrower intends to acquire fee title to the 15th Campus Building (the "Administration Building"), With proceeds· of the Bonds, and to lease the remaining 16th Campus Building (the "Rental Building") from its owner, which lease will not be financed with proceeds of the Bonds. The Campus Buildings located on the Montevina Campus comprise one and two-story office buildings to ranging in size from 3,600 13,200 square feet, averaging 6,560 square feet per building. The MonteVina Buildings to be leased and subleased pursuant to ·the Montevina Leases have never been sold .and . are in shell condition 'v.ith no interior walls, finished ceilings, bathrooms, or floor coverings, but the electrical panels ·and roof mounted HVA C units have been installed. Four of the Montevina Bujldings are two-stories with installed elewtors. The Admi!J.istration Building, located at 3252 Constitution Drive, Will be acquired by the Borrgwer through financing with proceeds of the Bonds. The Rental Building, located at 3110 Constitution Drive, will be leased by the Borrower from such building's owner. Such lease of the Rental Building will not be :financed With proceeds of theBonM.. · · The Bon;ower acquired a conditional use permit for use as a sch.col on the Montevina Campus on February l, 2011. The required construction permits Will be acquired by the City of Livermore upon the closing of this financing and payment to the contractors. At the date of delivery of the Bonds, Montevina Phase I, LLC and Montevina Phase II, LLC will be owned in their e:n,tirety by Anthony Cone and Mark Holmstedt, who are principals of Westhoff, Cone & Homstedt, the underwriter of the Bonds. APPENDIX B: Project and Facilities Description from the Offering Memorandum, Series 2015 Bonds 47598v1 / PRIVATE.575.1 APPENDIX C: Tax Certificate and Agreement between California School Finance Authority and Tri-Valley Learning Corporation, dated October 4, 2012, relating to Series 2012A Bonds 47598v1 / PRIVATE.575.1 APPENDIX D: Tax Certificate and Agreement among California Statewide Communities Development Authority, Independence Support, LLC, Livermore Charter Zone Corporation, Tri-Valley Learning Corporation and California Preparatory Academics, dated May 8, 2015, relating to Series 2015 Bonds (including Exhibits F and G thereto) 47598v1 / PRIVATE.575.1 TAX CERTIFICATE AND AGREEMENT Among CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY, INDEPENDENCE SUPPORT, LLC, LIVERMORE CHARTER ZONE CORPORATION, Till-VALLEY LEARNING CORPORATION and CALIFORNIA PREPARATORY ACADEMIES Dated as of May 8, 2015 Relating to $25,540,000 California Statewide Communities Development Authority Educational Facilities Revenue Bonds (Independence Support, LLC Project) Series 2015 OHSUSA:76205221 0.5 (cid:9)(cid:9)(cid:9) TAX CERTIFICATE AND AGREEMENT The California Statewide Communities Development Authority (the "Authority"), Independence Support, LLC (the "Borrower"), Livermore Charter Zone Corporation (the "Sole Member"), Tr-Valley Learning Corporation ("TVLC"), and California Preparatory Academies ("CPA" and, together with TVLC, the "Schools") hereby enter into this Tax Certificate and Agreement (together with the Exhibits attached hereto, the "Tax Certificate and Agreement") in connection with the issuance by the Authority of its Educational Facilities Revenue Bonds (Independence Support, LLC Project), Series 2015, in the initial aggregate principal amount of $25,540,000 (the "Bonds"). The representations of facts and circumstances and covenants of the Authority made herein are in furtherance of the covenants of the Authority set forth in the Indenture, dated as of April 1, 2015 (the "Indenture"), by and between the Authority and U.S. Bank National Association, as trustee (the "Trustee"), and are in part made pursuant to Treasury Regulations Section 1 .148-2(b)(2)(i). The representations of facts and circumstances and covenants of the Borrower, the Sole Member, and the Schools (together, the "School Group") are in furtherance of the covenants of the Borrower set forth in the Loan Agreement, dated as of April 1, 2015 (the "Loan Agreement"), between the Authority and Borrower. The Sole Member is making its representations and covenants on its own behalf and on behalf of the Borrower, a limited liability company of which it is the sole member. Each School is making its respective representations and covenants as a lessee and sublessee under the Lease (as hereinafter defined) and user of the Project Facilities (as hereinafter defined). Capitalized terms not defined herein shall have the respective meanings set forth in the Loan Agreement unless the context requires otherwise. I.(cid:9) In General 1.1(cid:9) Purpose of Tax Certificate and Agreement. The Authority, the Borrower, the Sole Member and the Schools are delivering this Tax Certificate and Agreement to Orrick, Herrington & Sutcliffe LLP ("Bond Counsel"), with the understanding and acknowledgment that Bond Counsel will rely upon this Tax Certificate and Agreement in rendering its opinion that interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code"). 1.2(cid:9) Delivery of the Bonds. The Authority is delivering the Bonds to Oppenheimer & Co. Inc. (the "Underwriter") on the date hereof in exchange for good funds. 1.3(cid:9) Reliance. The expectations of the Authority and the Borrower concerning certain uses of the proceeds of the Bonds and the use and operation of the Project and other matters are based in whole or in part upon representations and certifications of other parties set forth in this Tax Certificate and Agreement; provided, however, the Authority, in making the representations and certifications herein, is relying and has relied exclusively on the representations and certifications of the School Group contained herein, except as specifically set forth in Sections 1.4, 2.10, 2.13, 2.15, 2.16 and 4.2. None of the Authority or any of the School Group is aware of any facts or circumstances that would cause it to question the accuracy or reasonableness of any representation or certification made in this Tax Certificate and Agreement. OHSUSA:762052210 .5 (cid:9)(cid:9) 1.4(cid:9) Authorization; Status of Authority. The Authority is a constituted authority and is executing and delivering the Bonds on behalf of one or more Political Subdivisions. The Authority hereby certifies, represents, covenants and warrants that (i) the Authority has been created pursuant to the laws of the State of California; (ii) the Authority was created for a public purpose; (iii) the Authority is governed by a body ultimately controlled by one or more Political Subdivisions; (iv) the Authority is authorized to issue obligations, such as the Bonds, for the purposes for which the Authority was created; (v) the earnings of the Authority will not and cannot inure to the benefit of any private person; and (vi) upon dissolution of the Authority, title to all of the Authority's assets will revert to one or more Political Subdivisions of the State of California. 1.5(cid:9) Purpose for Bonds; Plan of Financing. The Bonds are being issued for the purpose of providing funds which, together with other funds, will be used to: (a) acquire all of the real property improvements located on a 5.56-acre site in Livermore, California called Independence Plaza (the "Project Site"), including a 79,270 square-foot, two-story office building that was constructed in 2002 (the "Facilities"), and pay costs incurred in connection with such acquisition; (b) furnish improvements to the Facilities; (iii) make the required deposit to the Reserve Account; and (iv) pay certain costs of issuance (together, the "Project"). The Project Site and the Facilities are referred to herein in the aggregate as the "Project Facilities." Attached hereto as Exhibit C is a detailed breakdown of the expected allocation of Proceeds of the Bonds to the Project Facilities. The acquisition and development of the Project Facilities is pursuant to a detailed plan of financing that involved many parties actively participating over a long time period. CPA and Independence Support Corporation ("ISC') will shortly apply to the Internal Revenue Service for status as organizations described in Section 501(c)(3) of the Code. ISC is not presently involved in the transaction, and CPA's use of the Project initially is restricted. Upon receiving such status, it is intended that the sole membership interest in the Borrower will be transferred to ISC for no consideration, and the limitations described herein on the amount of CPA's use will be removed. Those changes will all occur only upon receipt of certain opinions from counsel to such entities. Prior to the date hereof, the Project Site and the Facilities were owned by 3090, LLC, an affiliate of Balch Enterprises. Independence Oaks, LP has been under contract to acquire the Project Site and the Facilities since October 8, 2013, for the purpose of transferring the property at some point to TVLC. Over that time, Independence Oaks, LP has invested its own funds and time with a fair market value as of the date hereof of at least $3,022,503.06 to develop the overall project for use as a school, including dealing with land use and permitting issues and providing other real estate development, brokerage and structuring services. Independence Oaks, LP will assign to Goldstone United Investments, LLC its right to acquire the Project Site and the Facilities from 3090, LLC for $3,022,503.06. Goldstone United Investments, LLC will then acquire the Project Site and the Facilities directly from 3090, LLC for $12,019,015.65 (which equals the contract sale price of $13,225,000.00 less credits of $1,170,000.00 for certain payments already by Goldstone United Investments, LLC and CPA to 3090 LLC) and less credits of $35,984.35 for existing tenant deposits. Goldstone United Investments, LLC has already paid to 3090, LLC, through Independence Oaks, LP, a total of $2,200,000 for sale contract extensions (including a portion of the aforementioned credit of $1,170,000.00), which OHSUSA:762052210.5(cid:9) 2 amount is capitalized to the acquisition cost for a total acquisition price of $17,241,518.71. Additionally, CPA has already paid to 3090, LLC, through Independence Oaks, LP, a total of $274,400.00 for sale contract extensions (all of which is included in the aforementioned credit of $1,170,000.00), which amount will be reimbursed to CPA by the Borrower and is not included in the aforementioned acquisition price. Based in part upon an appraisal, the Project Site value is $2,200,000. The purchase price for the Project Site and the Facilities is not more than fair market value. 3090, LLC, Independence Oaks, LP and Goldstone United Investments, LLC are entirely independent and unrelated. The sale price to Goldstone United Investments, LLC will not be more than the appraised value. See Exhibits F and G for certifications of Independence Oaks, LP and Goldstone United Investments, LLC, respectively, relating to the real estate values and relationships. Goldstone United Investments, LLC is entering into the Ground Lease, dated as of May 1, 2015 (the "Ground Lease"), a ground lease with the Borrower and is selling the Facilities to the Borrower for $15,041,518.71 (the aggregate purchase price paid by Goldstone United Investments, LLC, less the value of the Project Site). The Ground Lease will be rent free (i.e., a donation from Goldstone United Investments, LLC to the Borrower). The Ground Lease will have an initial term of 50 years and an extension term, at the option of the Borrower, for an additional 6 years also with no rent obligation. The Borrower will enter into a joint and several lease agreement with TVLC and CPA. The lease will be an operating lease to TVLC. CPA will prepay rent in the amount of $1,492,779.62 (by way of a cash payment of $1,300,000.00 and a contribution of Project assets of $192,779.62), which is rent relating to approximately 6.4% of the facilities as finally improved. The Borrower will use the rent prepayment from CPA along with proceeds of the Bonds to acquire the Facilities. The Facilities do not include the portion of the acquisition price paid with the prepayment amount. CPA will not be directly or indirectly reimbursed from proceeds of the Bonds or any other source for the rent prepayment amount. CPA obtained the prepayment amount through a donation, and CPA has no debt obligations outstanding. TVLC will be obligated to pay the remaining periodic rent, but that rental obligation will be offset by actual periodic payments from CPA based on CPA's actual use of the project. Unless and until CPA and ISC get exempt status and ISC becomes the sole member of the Borrower, CPA will not be able to use more than 2.5% of the Project (in addition to the approximately 6.4% facilities allocable to CPA's rent prepayment). 1.6(cid:9) Definitions. Unless the context otherwise requires, the following capitalized terms have the following meanings for purposes of this Tax Certificate and Agreement: Bona Fide Debt Service Funds means, to the extent the requirements of Section 3.4.4 hereof are satisfied, the Revenue Fund (including the Interest Account and the Principal Account), the Redemption Fund (including the Optional Redemption Account and the Special Redemption Account) and the Gross Revenue Fund (to the extent used to make transfers to the Revenue Fund). Bond Year means the period beginning on the Closing Date and ending on the first anniversary of the Closing Date (unless the Borrower selects an earlier date) and each succeeding one-year period (with the last Bond Year ending on the first date that none of the Bonds remain outstanding for federal tax purposes). The Borrower may (prior to the fifth anniversary of the OHSUSA:762052210.5(cid:9) 3 Closing Date) select any date prior to the first anniversary of the Closing Date in lieu of the first anniversary of the Closing Date as the end of each Bond Year. Closing Date means May 8, 2015, the date of issuance and delivery of the Bonds. Expenditure Exception Gross Proceeds means the Gross Proceeds properly allocable to the Bonds, including pro rata amounts of the costs of issuance, except for amounts (i) held in the Bona Fide Debt Service Funds, (ii) that, as of the Closing Date, are not reasonably expected to become Gross Proceeds but that become Gross Proceeds after the date six months after the Closing Date (in the case of the Six-Month Expenditure Exception; see Section 5.3.2 hereof) or eighteen months after the Closing Date (in the case of the Eighteen-Month Expenditure Exception; see Section 5.3.3 hereof); (iii) representing Sale Proceeds or Investment Proceeds derived from payments under the Loan Agreement; or (iv) representing repayments of grants (as defined in Treasury Regulations Section 1.148-6(d)(4)) financed by the Bonds. Gross Proceeds has the meaning used in Treasury Regulations Section 1.148-1(b), and generally means all proceeds derived from or relating to the Bonds, including Investment Proceeds, amounts pledged to pay debt service on the Bonds, and amounts expected to be used to pay debt service on the Bonds. Investment Proceeds means investment earnings on (i) the investment of Sale Proceeds and (ii) the reinvestment of Investment Proceeds. Investment Property means any security or obligation (other than a Tax-Exempt Obligation), any annuity contract or any other investment-type property. Minor Portion means any amount of Gross Proceeds not greater than $100,000 invested at an unrestricted yield pursuant to Code Section 148(e). Net Sale Proceeds means the amount of Sale Proceeds less the portion of the Sale Proceeds deposited to the Reserve Account or invested as the Minor Portion. Nonpurpose Investment means any Investment Property in which Gross Proceeds are invested other than the Loan Agreement. Opinion of Counsel means an opinion of counsel nationally recognized in the area of municipal finance to the effect that an action or inaction will not result in the inclusion of interest on the Bonds in gross income for purposes of federal income taxation. Preliminary Expenditures means architectural, engineering, surveying, soil testing, costs of issuing the Bonds, and similar costs paid with respect to the Project in an aggregate amount not exceeding $4,966,499.29 (i.e., no more than 20% of the issue price of the Bonds). Preliminary Expenditures do not include land acquisition, site preparation or similar costs incident to the commencement of construction. Private Use has the meaning given thereto in Section 2.4 below. OHSUSA:762052210.5(cid:9) 4 Rebate Requirement means the amount of rebatable arbitrage earned with respect to Gross Proceeds which do not qualify for an exception from the requirements of Section 148(f)(2) of the Code as described in Section 5.3 of this Tax Certificate and Agreement, computed as of the last day of any Bond Year pursuant to Section 1.148-3 of the Treasury Regulations. Related Person means: (i) Any organization having common management and control with an organization described in Section 501(c)(3) of the Code. This would include any other 501(c)(3) organization if both organizations have (a) significant common purposes and substantial common membership, or (b) directly or indirectly, substantial common direction. (ii) In the case of a corporation, other than a 501(c)(3) organization, (A) an individual who owns directly or indirectly more than 50% in value of the outstanding stock of the corporation; (B) a partnership, if any partner owns both more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership; (C) another corporation, if that corporation owns more than 50% of the voting power or value of the corporation; (D) another corporation, if more than 50% of the voting power or value of its stock is owned by the corporation; (E) another corporation, if five or fewer individuals own stock possessing more than 50% of the voting power or value of both that corporation and the corporation; (F) an S corporation, if the same individual owns more than 50% in value of both the S corporation and the corporation; or (G) a trust or its grantor, either of which owns more than 50% in value of the outstanding stock of the corporation. (iii) In the case of a partnership, (A) a partner that owns directly or indirectly more than 50% of the capital interest or the profits interest in such partnership; (B) another partnership, if the same person or persons own directly or indirectly more than 50% of the capital interest or the profits interest in both that partnership and the partnership; or (C) an S corporation, if the same person or persons own more than 50% of the capital interest or the profits interest in the partnership. (iv) In the case of an individual, (A) members of the individual's family (including the individual's spouse, brothers, sisters, ancestors and lineal descendants); (B) a corporation more than 50% in value of the outstanding stock of which is owned directly or indirectly by or for such individual; (C) a partnership, if the individual owns directly or indirectly more than 50% of the capital interest or the profits interest in such partnership; or (D) a trust as to which the individual is either grantor or beneficiary, or which has the same grantor as a trust to which the individual is beneficiary. Sale Proceeds means the amount received from the sale of the Bonds ($24,832,496.45) being the par amount of the Bonds ($25,540,000) less original issue discount on the Bonds ($707,503.55). Tax-Exempt Obligation means any obligation the interest on which is excludable from gross income under Section 103(a) of the Code, any interest in a regulated investment company the income of which is at least 95% excludable to the holder under Section 103(a) of the Code, and any certificate of indebtedness issued by the United States Treasury pursuant to the Demand OHSUSA:762052210.5 (cid:9)(cid:9)(cid:9) Deposit State and Local Government Series program, but does not include any interest in a "specified private activity bond" within the meaning of Section 57(a)(5)(C) of the Code. Three-Year Temporary Period means, as set forth in Treasury Regulations Section 1.148-2(e)(2), the three-year temporary period exception to the yield restriction requirement of Code Section 148(a), which exception applies to the Bonds only to the extent that the Borrower reasonably expects that (i) 85% of the Net Sale Proceeds is to be allocated to expenditures on capital projects by the end of the three-year period following the issue date; (ii) the Borrower will within six months of the issue date incur a substantial binding obligation to a third party to expend at least 5% of the Net Sale Proceeds on capital projects; and (iii) the allocation of the Net Sale Proceeds to expenditures will proceed with due diligence. 1.7(cid:9) Separate Issue/Single Issue. The Bonds are the only obligations of the Borrower or any other member of the School Group that were sold within the 31-day period beginning 15 days before May 5, 2015 (the "Sale Date") pursuant to the same plan of financing as the Bonds and that are reasonably expected to be paid from substantially the same source of funds as the Bonds. All of the Bonds were sold on the Sale Date pursuant to the same plan of financing and is reasonably expected to be paid from substantially the same source of funds. IL(cid:9) General Tax Matters 2.1(cid:9) Private Activity Bonds. All of the proceeds of the Bonds will be used by the members of the School Group, none of which is a state or a political subdivision of a state. 2.2(cid:9) Tax Exempt Status Sole Member and Schools. Each of the Sole - Member and TVLC is an organization described in Section 501(c)(3) of the Code and is exempt from federal income tax under Section 501(a) of the Code or corresponding provisions of prior law. Further, each of the Sole Member and TVLC has been recognized by the Internal Revenue Service as an organization described in Section 501(c)(3) of the Code and such recognition has not been modified, limited or revoked. Each of the Sole Member and TVLC is in compliance with the terms, conditions, and limitations, if any, of its status as a Section 501(c)(3) organization, and the facts and circumstances that form the basis of the Internal Revenue Service's recognition of its status as a Section 501(c)(3) organization continue substantially to exist and no other material facts or circumstances have arisen which could adversely affect such status. The Borrower is a single member limited liability company the sole member of which is the Sole Member. The Borrower is treated as a disregarded entity for federal tax purposes pursuant to Section 301.7701-3 of the Treasury Regulations unless the Sole Member makes an election to cause the Borrower to be treated as a corporation. The Sole Member covenants and represents that it has not, and will not for so long as the Bonds are outstanding, make an election to cause the Sole Member to be treated as other than a disregarded entity for federal tax purposes. As a disregarded entity, all assets, liabilities, revenue, expense and activities of the Borrower shall be treated as assets, liabilities, revenue, expense and activities of the Sole Member for federal tax purposes, including for purposes of Section 501(c)(3) of the Code (and therefore for purposes of Schedule K reporting). CPA is organized as a California nonprofit public benefit corporation and is in the process of seeking recognition from the Internal Revenue Service of its status as an organization described in Section 501(c)(3) of the Code. Each of the Sole Member, TVLC, and CPA (assuming 501(c)(3) status is OH5USA:7620522 10.5 granted) at all times shall, until the Bonds has been paid or redeemed, maintain its status as an organization described in Section 501(c)(3) of the Code and its exemption from federal income tax under Section 501(a) of the Code or corresponding provisions of future federal income tax laws. No proceedings are pending or threatened in any way affecting the status of any of the Sole Member, TVLC or CPA (assuming 501(c)(3) status is granted) as an organization described in Section 501(c)(3) of the Code, or which would subject any income of such respective entity to federal income taxation to such extent as would result in the loss of its tax-exempt status under Section 501(a) of the Code or the loss of the exclusion from gross income of interest payable with respect to the Bonds for federal income tax purposes under Section 103 of the Code. None of the Sole Member, TVLC, or CPA is under examination or audit by the Internal Revenue Service, nor has any such entity received notice, oral or written, from the Internal Revenue Service of a proposed examination or audit thereby, with respect to any fiscal year of such entity. 2.3(cid:9) Ownership. The only property which will be financed with the proceeds of the Bonds is the educational facilities composing the Project Facilities. The Project Site will be leased to and the Facilities will be acquired by the Borrower from Goldstone United Investments, LLC, a California limited liability company (the "Land Owner"). The Facilities will be purchased by the Borrower from the Land Owner and the Project Site will be leased to the Borrower free of rent for an approximate 50-year term, plus a six-year extension term at the option of the Borrower, from the Land Owner pursuant to the Ground Lease. The useful life of the Project Facilities have been determined to be substantially shorter than the term of the Ground Lease. The Borrower will lease the Facilities and sublease the Project Site to TVLC and CPA pursuant to a Lease Agreement, dated as of May 1, 2015 (the "Lease"), by and between the Borrower and the Schools. The Borrower owns the Project Facilities for federal tax purposes. No portion of the Project Facilities is expected to be sold or otherwise disposed of, in whole or in part, except due to normal wear, tear, and obsolescence, before payment in full of the Bonds. As noted above, it is anticipated that the sole membership interest in the Borrower will be transferred to ISC such that ISC will become the owner of the Project Facilities for federal income tax purposes. Such transfer will not occur until (i) ISC obtains a favorable determination letter as to its 501(c)(3) status from the Internal Revenue Service, (ii) counsel to ISC delivers an opinion that ISC is an organization described in Section 501(c)(3) of the Code and that ISC activities relating to the Project are not unrelated trade or business activities under Section 513(a) of the Code, and (iii) such transfer is approved by an Opinion of Counsel. 2.4(cid:9) Qualified 501(c)(3) Bonds. (a) At least 95% of the Net Proceeds of the Bonds, including investment earnings thereon, will be used to provide for activities directly related to the exempt purposes of the School Group. For this purpose, Net Proceeds of the Bonds used to pay costs of issuance are not treated as used for the exempt purposes, of the School Group. (b)(cid:9) The School Group does not expect to and shall not perform any act, enter into any agreement, or use or permit more than 5% of the Net Proceeds of the Bonds or more than 3% of the Project to be used in any manner by an entity other than a state or local government or another 501 (c)(3) organization (but only to the extent such 501 (c)(3) organization is using the Project exclusively in activities directly related to the exempt purposes of such organization), or for any trade or business unrelated to the exempt purposes (as defined in Section 513(a) of the Code) of the Sole Member or TVLC (together, a "Private Use"), unless the OHSUSA:762052210,5(cid:9) 7 School Group and the Authority receive an Opinion of Counsel with respect to such act, agreement or use. CPA has applied for status as an organization described in Section 501(c)(3) of the Code. Any use of the Project by CPA in advance of (i) CPA obtaining a favorable determination letter as to its 501(c)(3) status from the Internal Revenue Service, (ii) counsel to CPA delivering an opinion that CPA is an organization described in Section 501(c)(3) of the Code and that CPA activities relating to the Project are not unrelated trade or business activities under Section 513(a) of the Code, and (iii) expanded use by CPA being approved by an Opinion of Counsel, shall be considered a Private Use. 2.5(cid:9) Management Contracts. Each member of the School Group represents, warrants and covenants that it and any related party (within the meaning of Section 1.150-1(b) of the Treasury Regulations) will not enter into, and has not entered into, any agreement (a "Management Contract") with any person or organization (a "Management Company") that provides for such Management Company to manage, operate or provide services with respect to any portion of the Project unless such Management Contact satisfies the requirements described in this Section 2.5. Such rules shall not apply to contract for the janitorial, machine repair, billing services, or other incidental services. (i)(cid:9) Fees-General Requirements. With respect to compensation for the management services under any Management Contract: (A) Reasonable Compensation. The total compensation provided may be no more than reasonable compensation for the service performed. (B) No Share of Net Profits. None of the compensation may be based on a share of net profits (or similar amount). For this purpose, reimbursement of a Management Company for actual and direct expenses paid by such Management Company to unrelated parties is not by itself treated as compensation. Further, compensation based on a percentage of gross revenues or a percentage of expenses (but not both) will generally not be considered as based on a share of net profits. (C) Term Requirements. The fee arrangements and contract terms with regard to the Management Contract must satisfy the requirements set forth in either subsection (iii), (iv), or (v) hereof. For this purpose, amounts paid to reimburse a manager for amounts paid to parties unrelated to the manager, are not treated as fees paid to the manager. For this purpose, except on the advice of Bond Counsel, the member of the School Group shall not treat amounts paid to reimburse a manager for amounts paid to the manager's employees as paid to unrelated parties. (D) Productivity Awards. A productivity reward for services in any annual period during the terin of the contract generally also does not cause the compensation to be based on a share of net profits of the financed facility if (a) the eligibility for the productivity award is based on the quality of the services provided under the management contract rather than increases in revenues or decreases in expenses of the facility; and (b) the amount of the productivity award is a stated dollar amount, a periodic fixed fee, or a tiered system of stated dollar amounts or periodic fixed fees based solely on the level of performance achieved with respect to the applicable measure. OHSUSA:762052210 .5 (cid:9) R (ii)(cid:9) Relationship of the Member of the School Group and Management Company. In the event that (i) voting power in the governing body of the member of the School Group is vested in the Management Company, its directors, officers, shareholders or other employees, or (ii) voting power in the governing body of the Management Company is vested in the member of the School Group, its directors, officers or employees, the member of the School Group will treat the Management Contract as giving rise to Private Use unless it consults with Bond Counsel and is advised that such vested voting power does not result in the Management Contract giving rise to private business use. (iii)(cid:9) 5 Year Contracts. All of the compensation for services is based on a stated amount; periodic fixed fee; a capitation fee; a per-unit fee; or a combination of the preceding. The compensation for services also may include a percentage of gross revenues, adjusted gross revenues, or expenses of the facility (but not both revenues and expenses). The term of the contract, including all renewal options, does not exceed five years. Such contract need not be terminable by the member of the School Group prior to the end of the term. For purposes of this section 2.5(iii), a tiered productivity award as described in section 2.5(i)(D) will be treated as a stated amount or a periodic fixed fee, as appropriate. (iv)(cid:9) 80 Percent Periodic Fixed Fee Arrangements. (A) Fees. At least 80 percent of the compensation for each annual period during the term of the Management Contract is based on a periodic fixed fee. The remainder of the compensation arrangement may consist of any formula that does not result in the Management Company receiving a fee that in the aggregate consists of a share of net profits. For purposes of this section 2.5(iv), a tiered productivity award as described in section 2.5(i)(D) will be treated as a stated amount or a periodic fixed fee, as appropriate. (B) Term of Contract. The term of the Management Contract, including any renewal option periods, does not exceed a period often years. (v)(cid:9) 95 Percent Periodic Fixed Fee Arrangements. (A) Fees. At least 95 percent of the compensation for each annual period during the term of the Management Contract is based on a periodic fixed fee. The remainder of the compensation arrangement may consist of any formula that does not result in the Management Company receiving a fee that in the aggregate consists of a share of net profits. For purposes of this section 2.5(v), a tiered productivity award as described in section 2.5(i)(D) will be treated as a stated amount or a periodic fixed fee, as appropriate. (B) Term of Contract. The term of the Management Contract, including any renewal option periods, does not exceed a period of fifteen years. 2.6(cid:9) $150,000,000 Limit. The School Group and all Related Persons to the School Group do not and will not have allocated to them as direct or indirect borrowers of tax- exempt bond proceeds or users of tax-exempt bond-financed assets Tax-Exempt Obligations in an amount that exceeds $150,000,000. OH5USA:762052210.5 (cid:9)(cid:9)(cid:9) 2.7(cid:9) Not Residential Rental Property for Family Units. None of the facilities financed with proceeds of the Bonds contains any units with complete facilities for living, sleeping, eating, cooking, and sanitation, other than residential units for students of the Schools. 2.8(cid:9) Useful Life. The average maturity of the Bonds does not exceed one hundred twenty percent (120%) of the average reasonably expected economic life of the Project Facilities determined as of date such assets were expected to be placed in service. 2.9(cid:9) Prohibited Facilities. None of the proceeds of the Bonds will be used to finance or refinance any airplane, skybox or other private luxury box, facility primarily used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. 2.10 Public Hearing and Approval. The Authority caused to be published on April 7, 2015 (the "First Notice"), in The Inter-City Express, a newspaper of general circulation within the area where the Project is located, notice of a public hearing to be held by the County of Alameda (the "County") on April 21, 2015 regarding the Authority's issuance of the Bonds to finance the Project. The County is a member and an applicable elected representative of the Authority. On April 21, 2015, the County's Board of Supervisors was scheduled to hold the aforementioned hearing but decided during the meeting to continue the hearing until the next meeting of the County's Board of Supervisors on May 5, 2015. At the meeting of the County's Board of Supervisors no persons other than representatives of the Authority and the School Group expressed an interest in providing testimony with respect to the Project or the Bonds. The Authority caused to be published on April 27, 2015 (the "Second Notice") in The Inter-City 5th Express notice of the continued hearing by the County on May The Second Notice was published as soon as practical after the continuance of the April 21s' meeting. Copies of the 1h notices are attached hereto as Exhibit B. At the hearing on May 5 all interested persons were invited and given a reasonable opportunity to comment upon the nature and location of the Project Facilities and the financing thereof by the Bonds. On May 5, 2015, the County's Board of Supervisors, as the "applicable elected representative," approved the issuance of the Bonds for the purpose of financing the Project. Until the earlier of (i) the first date on which none of the Bonds are outstanding or (ii) the end of the expected useful life of the Project, each component of the Project will be located at the street address or addresses listed, or at the locations and in the manner otherwise described, in the notices of public hearing referenced in Exhibit B. 2.11 Costs of Issuance. The Borrower will not expend more than 2 percent of the Sale Proceeds to pay costs of executing and delivering the Bonds, including the Underwriter's discount. The Borrower is applying at least $453,627.08 of funds received as a rent prepayment from CPA (the "COlEqufty Contribution") to pay the portion of the costs of executing and delivering the Bonds that exceeds 2 percent of the Sale Proceeds of the Bonds. 2.12 Registered Form. The Bonds is being executed and delivered in registered form. 2.13 No Federal Guarantee. Neither the Authority nor the Borrower will, directly or indirectly, use or permit the use of or otherwise invest any proceeds of the Bonds or OHSU5A:76205221 0.5(cid:9) 10 any other funds of the Authority or the Borrower or take or omit to take any action that would cause the Bonds to be "federally guaranteed" within the meaning of Section 149(b) of the Code. In furtherance of this representation, warranty and covenant, neither the Authority nor the Borrower will allow the payment of the principal or interest represented by the Bonds to be guaranteed (directly or indirectly) in whole or in part by the United States or any agency or instrumentality thereof. Neither the Authority nor the Borrower will, except as provided in the next sentence, use five percent (5%) or more of the proceeds of the Bonds to make loans the payment of the principal or interest with respect to which are guaranteed (directly or indirectly) in whole or in part by the United States or any agency or instrumentality thereof, nor will the Authority or the Borrower invest five percent (5%) or more of the proceeds of the Bonds in federally insured deposits or accounts. However, proceeds of the Bonds held in the Bona Fide Debt Service Funds that are allowed to be invested at an unrestricted yield pursuant to Section 3,4.4 hereof may be invested without regard to the limitation in this section. 2.14 Refunding Status. None of the proceeds of the Bonds will be used directly or indirectly to make principal, interest or premium payments with respect to any obligation other than the Bonds. 2.15 Information Reporting. Each of the Authority and the members of the School Group certifies that it has reviewed the Internal Revenue Service Form 8038 to be filed in connection with the execution and delivery of the Bonds and believes that all of the information contained in the Form 8038 is true and complete. Such Form 8038 will be filed as directed in the instructions to the form no later than the fifteenth day of the second calendar month following the close of the calendar year quarter in which the Bonds is executed and delivered. 2.16 No Pooling. Neither the Authority nor the Borrower will use the proceeds of the Bonds directly or indirectly to make or finance loans to two or more ultimate borrowers. 2.17 No Hedge Bonds. The School Group reasonably expects that more than 85% of the Net Sale Proceeds of the Bonds will be expended for the governmental purpose of the Bonds before the date that is 3 years after the Closing Date. No more than 50% of the Net Sale Proceeds of the Bonds will be invested in investment securities with a yield substantially guaranteed for 4 years or longer. 2.18 Allocations; Expenditures. For purposes of this Tax Certificate, Gross Proceeds will be treated as spent when they are: (i) used to pay the costs of issuing the Bonds, (ii) used to pay capital expenditures relating to the Project Facilities, (iii) used to pay interest expense on the Bonds for a period not exceeding three years, or (iv) used for miscellaneous expenditures described in Treasury Regulations Section 1. 148-6(d)(3)(ii). All allocations of Sale Proceeds to expenditures will occur not later than 18 months after the date of the expenditure or 18 months after the date the facility to which the expenditure relates is completed and actually operating at substantially the level for which it was designed, but in all events not later than 60 days after the fifth Bond Year (or 60 days after none of the Bonds are outstanding, if earlier). Such final allocation will be consistent with the representations made in Section 1.5 above. 2.19 Retention of Records. The School Group covenants to maintain all records relating to the requirements of the Code and the representations, certifications and OH5U5A:762052210.5(cid:9) 11 covenants set forth in this Tax Certificate until the date three years after the last outstanding Bonds have been retired. If any of the Bonds are refunded by Tax-Exempt Bonds (the "Refunding Obligations"), the School Group covenants to maintain all records required to be retained by this Section 2.19 until the later of the date three years after the last outstanding Bonds have been retired or the date three years after the last Refunding Obligations have been retired. The records that must be retained include, but are not limited to: (a) Basic records and documents relating to the Bonds (including this Tax Certificate and the opinion of Bond Counsel); (b) Documentation evidencing the expenditure of Bond Proceeds; (c) Documentation evidencing the use of the Project Facilities by public and private sources (e.g., copies of management contracts, research agreements, leases, etc.); (d) Documentation evidencing all sources of payment or security for the Bonds; and (e) Documentation pertaining to any investment of proceeds of the Bonds (including the purchase and sale of securities, SLGS subscriptions, yield calculations for each class of investments, actual investment income received from the investment of proceeds, guaranteed investment contracts, and rebate calculations). See also Section 5.3 hereof regarding records required to be kept for purposes of calculating the Rebate Requirement. 2.20 Post-Issuance Compliance Undertaking. The Borrower and the members of the School Group have each covenanted in the Loan Agreement and herein, respectively, to comply with certain requirements of the Code. Each member of the School Group acknowledges that the Internal Revenue Service mandates certain filing requirements with respect to post-issuance tax compliance, private use and/or unrelated trade or business use, including the proper method for computing whether any such use has occurred under Section 145 of the Code. Each member of the School Group further covenants that it will undertake to determine (or have determined on its behalf) the information required to be reported on the IRS Form 990 (Schedule K) Supplemental Information on Tax-Exempt Bonds on an annual basis and will undertake to comply with the aforementioned filing requirements and any related requirements that may be applicable to the Bonds (collectively, the "Post-Issuance Requirements"). Further, each member of the School Group covenants that it has adopted, or, if not, will promptly adopt, management practices and procedures to ensure its compliance with the Post-Issuance Requirements with respect to the Bonds and that such procedures will include all of the requirements of the Authority, as set forth in the Authority's post-issuance compliance procedures attached hereto as Exhibit D. 2.21 Retention of Post-Issuance Compliance Expert. The School Group initially has designated John Zukoski to be responsible for supervising certain post-issuance tax compliance services that may be required from time to time with respect to the Bonds. OHSUSA:7620522 10.5(cid:9) 12 (cid:9)(cid:9)(cid:9)(cid:9) Ill. Arbitrage 3.1(cid:9) Reasonable Expectations. This Article ITT sets forth the reasonable expectations, statements of fact and representations of the Authority and the Borrower with respect to the amount and use of the proceeds of the Bonds and certain other funds. 3.2(cid:9) Sale Proceeds. The total Sale Proceeds to be derived from the sale of the Bonds is equal to $24,832,496.45, the par amount of the Bonds less original issue discount of $707,503.55. Of this amount, $446,950.00 will be retained by the Underwriter as Underwriter's discount. The remaining Sale Proceeds and other amounts are expected to be needed and fully expended as follows: 3.2.1 Costs of Issuance Fund. Proceeds of the Bonds in the amount of $49,699.92 will be deposited into the Bonds Proceeds Account, together with the COT Equity Contribution in the amount of $453,627.08, and will be applied to pay certain costs of executing and delivering the Bonds, including the fee of the Authority. 3.2.2 Project Fund; Title Company, A total of $22,318,096.53 of Sale Proceeds will be deposited in the Project Fund and applied to pay costs of the Project Facilities ($7,199,316.78) or transferred to Chicago Title Company for acquisition of the Facilities ($15,118,779.75). In addition to Sale Proceeds, $846,372.92 of rent prepayment funds of CPA will be deposited in the Project Fund to pay costs of the Project Facilities allocable to CPA's portion of the Sublease (the "CPA Lease Prepayment"). It is anticipated that CPA will be paid $421,607.54 from the Project Fund for Project expenditures paid by CPA that are not being contributed to the Borrower. See Exhibit C. 3.2.3 Reserve Account. A total of $2,017,750.00 of Sale Proceeds will be deposited in the Reserve Account. 3.3(cid:9) No Overissuance. The total proceeds to be received from the execution and delivery of the Bonds and anticipated investment earnings thereon, do not exceed the total of the amount necessary to finance the government purposes for which the Bonds is executed and delivered as described above. 3.4(cid:9) Funds and Accounts. 3.4.1 General. The following funds and accounts relating to the Bonds have been or will be established: Project Fund Costs of Issuance Fund Revenue Fund Interest Account OHSUSA:7620522 10.5(cid:9) 13 Principal Account Redemption Fund Optional Redemption Account Special Redemption Account Reserve Account Gross Revenue Fund (created under the Master Indenture) Rebate Fund 3.4.2 Project Fund. Funds deposited in the Project Fund will be used to pay the capital costs of the Project Facilities. No moneys in the Project Fund shall be used to pay Costs of Issuance or interest accruing on the Bonds. Any Sale Proceeds or Investment Proceeds remaining unspent on or after May 8, 2018, shall be invested either in (i) Investment Property with a yield not exceeding the yield on the Bonds, (ii) assets that are not treated as Investment Property (e.g., Tax-Exempt Bonds), or (iii) assets that satisfy the requirements for qualified yield reduction payments set forth in Treasury Regulations Section 1.148-5(c), subject to the limitation set forth in Section 1.148-10(b)(1)(ii). The Borrower expects to spend at least 85% of the Sale Proceeds deposited in the Project Fund within the 3-year period following the Closing Date. A substantially binding obligation to third parties to expend at least 5% of the Net Sale Proceeds of the Bonds will be incurred within 6 months of the Closing Date, and the completion of the Project Facilities (and the allocation of such Sale Proceeds to expenditures on the Project Facilities) will proceed with due diligence. Sale Proceeds deposited into the Project Fund may be invested at an unrestricted yield for the three-year period following the Closing Date but will be subject to the arbitrage rebate requirements of Section 148(f) of the Code. 3.4.3 Costs of Issuance Fund. The entire amount in the Costs of Issuance Fund shall be used solely for payment of the costs of issuance with respect to the Bonds. No later than 180 days after the Closing Date or upon the earlier request of the Borrower, any amounts remaining in the Costs of Issuance Fund shall be transferred to the Project Fund. Such amounts may be invested without regard to yield, but will be subject to the arbitrage rebate requirements of Section 148(f) of the Code. 3.4.4 Bona Fide Debt Service Funds. (a)(cid:9) Revenues. The Bonds are limited obligations of the Authority payable from Revenues (as defined in the Indenture). Revenues consist principally of amounts received by the Authority or the Trustee pursuant or with respect to the Loan Agreement, and income derived from the investment of amounts held in any fund or account established pursuant to the Indenture. OHSUSA:76205221 0.5(cid:9) 14 (b) Revenue Fund; Interest Account and Principal Account. Revenues shall be deposited in the Revenue Fund which the Trustee shall establish, maintain and hold in trust, except as otherwise provided in Section 5.07 of the Indenture and except that all moneys received by the Trustee and required to be deposited in the Redemption Fund shall be promptly deposited in the Redemption Fund. In accordance with the Bond Indenture, the Trustee will promptly deposit all Revenues sufficient to pay the principal and interest components of Loan Repayments to the Interest Account, then to the Principal Account and then to the Reserve Account. Upon Request of the Borrower, any moneys remaining in the Revenue Fund after the foregoing transfers shall be transferred to the Borrower. Revenues are expected to equal or exceed debt service on the Bonds during each payment period. (c) Redemption Fund. The Trustee is directed to deposit into the Redemption Fund, and in the Optional Redemption Account and the Special Redemption Account therein, such amounts as are required or permitted to be deposited therein pursuant to the Bond Indenture. Such amounts shall be used by the Trustee solely for the purpose of redeeming Bonds in accordance with Article IV of the Bond Indenture. (d) Bona Fide Debt Service Funds. The Bona Fide Debt Service Funds used to make payments under the Loan Agreement are used primarily to achieve a proper matching of revenues and debt service within each Bond Year. Such funds and accounts are depleted at least once each Bond Year except for a carryover amount not to exceed the greater of the prior Bond Year's earnings on such funds or accounts or one-twelfth of the prior Bond Year's debt service. Amounts contributed to such funds and accounts will be spent within thirteen months after the date of such contribution, and any investment earnings (net of losses) received from the investment or reinvestment of moneys held in such funds will be expended within one year after the date of accumulation thereof in such funds. Such amounts may be invested without regard to yield and will not be subject to the arbitrage rebate requirements of Section 148(f) of the Code to the extent such amounts satisfy the requirements of Section 5.3.1 of this Tax Certificate 3.4.5 Reserve Account. The Trustee shall establish and maintain, so long as any of the Bonds are outstanding, a separate account to be known as the "Reserve Account" as an account in the Revenue Fund. The Underwriter has advised that the Reserve Account is reasonably required in that it was a material factor in selling the Bonds at the lowest possible yield (given other characteristics of the Bonds) without regard to any benefit from positive net investment earnings on amounts held in the Reserve Account, and that it is reasonable and customary in marketing similar issues of governmental obligations. See Exhibit A hereto. The aggregate amount held in the Reserve Account cannot exceed the least of (i) an amount equal to 10% of the original proceeds of the Bonds; (ii) maximum amount of principal and interest which shall be payable during the current or any succeeding Bond Year on the Bonds then outstanding; or (iii) 125% of average annual debt service with respect to the Bonds (the "Reserve Account Requirement"). Except as provided in the Bond Indenture, moneys on deposit in the Reserve Account shall only be used to make up any deficiencies in the Interest Account or the Principal Account. Interest, profits and other income received from the investment of moneys in the Reserve Account shall be deposited when received in the Revenue Fund provided that the Reserve Account Requirement is met at the time of transfer. Amounts in the Reserve Account that do not exceed the Reserve Account Requirement may be invested at an OH5U5A:7620522105(cid:9) 15 (cid:9)(cid:9) unrestricted yield for the three-year period following the Closing Date but will be subject to the arbitrage rebate requirements of Section 148(f) of the Code. 3.4.6 Rebate Fund. The Authority and each member of the School Group jointly covenant not to use moneys on deposit in any fund or account in connection with the Bonds in a manner which will cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Code. To that end, the Rebate Fund is hereby created. The Borrower shall calculate the rebate obligation on the Bonds and direct the Trustee to make the appropriate deposit to the Rebate Fund based on such calculations. The Borrower has covenanted not to use moneys on deposit in any fund or account in connection with the Bonds in a manner which will cause the Bonds to be arbitrage bonds within the meaning of Section 148 of the Code. Within 55 days after the close of each Bond Year, the Trustee shall deposit into the Rebate Fund any payments received in accordance with this Tax Certificate for purposes of ultimate rebate to the United States. The amount required to be held in the Rebate Fund at any point in time is determined pursuant to the requirements of the Code, including particularly Section 148(f) of the Code and the regulations applicable thereto. Moneys in the Rebate Fund are neither pledged to nor expected to be used to pay debt service on the Bonds. Sale Proceeds and investment proceeds of the Bonds are not expected to be held in the Rebate Fund. Amounts in the Rebate Fund may be invested without regard to yield and will not be subject to the arbitrage rebate requirements of Section 148(f) of the Code unless the Rebate Fund is funded with Gross Proceeds of the Bonds. 3.4.7 No Other Sinking or Pledge Fund. Other than the Bona Fide Debt Service Funds and the Reserve Account, there are no funds or accounts of the Borrower or any Person who is a Related Person to the Borrower established pursuant to the Bond Indenture, or otherwise, which are reasonably expected to be used to pay debt service on the Bonds or which are pledged as collateral for the Bonds and for which there is a reasonable assurance that amounts therein or the investment income earned from such funds or accounts will be available to pay debt service on the Bonds in the event that the Borrower encounters financial difficulties. 3.5(cid:9) Investment Restrictions. Unless otherwise authorized by an Opinion of Counsel, any amounts which are required to be invested at a yield not in excess of the yield on the Bonds as provided in this Section shall be invested in either (i) assets that are not treated as Investment Property, (ii) Investment Property with a yield not exceeding the yield on the Bonds, or (iii) in assets that satisfy the requirements for qualified yield reduction payments set forth in Treasury Regulations Section 1.148-5(c), subject to the limitation set forth in Section 1. 148-lO(b)(1)(ii). 3.6(cid:9) No Replacement. 3.6.1 No Replacement Proceeds. No portion of the proceeds of the Bonds will be used directly or indirectly to replace funds of the Authority or the Borrower or any Persons who are Related Persons to either the Authority or the Borrower that are intended to be used for the purpose for which the Bonds are issued and used directly or indirectly to acquire Investment Property reasonably expected to produce a yield higher than the yield on the Bonds. OHSUSA:76205221 0.5 (cid:9) 16 (cid:9)(cid:9)(cid:9) 3.6.2 No Other Replacement Proceeds. The average weighted maturity of the Bonds is no longer than is reasonably necessary for the governmental purposes of the Bonds. The weighted average maturity of the Bonds does not exceed 120% of the average reasonably expected economic life of the Project Facilities. 3.7(cid:9) No Abusive Arbitrage Device. The Bonds are not and will not be part of a transaction or series of transactions that (i) attempts to circumvent the provisions of Section 148 of the Code (or any successor thereto) and related regulations, enabling the Authority, the School Group, or any Persons who are Related Persons to either the Authority or any member of the School Group to exploit the difference between tax-exempt and taxable interest rates to gain a material financial advantage, and (ii) increases the burden on the market for tax-exempt obligations in any manner, including, without limitation, selling bonds that would not otherwise be sold, or selling more bonds, or issuing them sooner, or allowing them to remain outstanding longer, than would otherwise be necessary. IV.(cid:9) Yield And Yield Restriction 4.1(cid:9) Yield With Respect to the Bonds. 4.1.1 Generally. For purposes of this Tax Certificate and Agreement, yield is calculated as set forth in Code Section 148(b) and Treasury Regulations §1.148-4 and 1.148-5. Thus, yield generally means that discount rate which when used in computing the present value of all unconditionally payable payments representing principal and interest with respect to an obligation and the cost of qualified guarantees (if any) paid and to be paid with respect to such obligation produces an amount equal to the issue price of the obligation. The yield on the Bonds shall be determined on an aggregate basis by treating all payments of principal and interest with respect to the Bonds as if paid with respect to a single obligation issued on the Closing Date for an amount equal to the issue price of the Bonds. For purposes hereof, yield shall be calculated on a 360-day year basis with interest compounded semi- annually. The yield on the Bonds has been calculated to be 7.056892%. 4.2(cid:9) Acquisition of Acquired Program Obligations. The proceeds from the sale of the Bonds will be used in accordance with the program of the Authority created to assist health care and educational institutions to obtain tax-exempt financing for their respective projects (the "Program"). The Program involves the acquisition of acquired program obligations, at least 95% of which, by amount of cost outstanding, are evidences of loans to an organization described in Section 501(c)(3) of the Code and exempt from tax under Section 501(a) of the Code. At least 95% of all of the amounts received by the Authority with respect to acquired program obligations shall be used for one or more of the following purposes: to pay the principal of or interest on or otherwise service the debt on the Authority's obligations related to the Program; to reimburse the Authority, or to pay, for administrative costs of executing and delivering or delivering such obligations; to reimburse the Authority, or to pay, for administrative and other costs and anticipated future losses directly related to the Program; to make additional loans for the same general purposes specified in the Program; or to redeem or retire such obligations of the Authority at the next earliest possible date of redemption. Pursuant to this section, any person or any person who is a Related Person to the Authority from whom the Authority may, under the Program, acquire acquired program obligations, shall not, pursuant OH5U5A: 762052210.5(cid:9) 17 (cid:9)(cid:9)(cid:9)(cid:9)(cid:9) to an arrangement (either formal or informal), purchase the Authority's obligations in an amount related to the amount of the acquired program obligations from such person by the Authority. 4.3(cid:9) Yield on Acquired Program Obligations, Payments of principal and interest by the Borrower to the Authority under the Loan Agreement will be made in the same amounts as the principal and interest coming due with respect to the Bonds and will be held by the Trustee for the account of the Borrower until applied to its payment with respect to the Bonds. The Borrower also is required to pay or reimburse the Authority for certain administrative expenses, including the costs of executing and delivering the Bonds but excluding general expenses or administrative overhead of the Authority. The present value of these payments to the Authority will not exceed the present value of the administrative costs paid by the Authority. The yield on the Loan Agreement is not expected to be greater than one and one- half percentage points more than the yield on the Bonds. V. Rebate 5.1(cid:9) Undertakings. The Authority and the Borrower have covenanted to comply with certain requirements of the Code relating to the Rebate Requirement as discussed in this Article V. The Authority and the Borrower acknowledge that the United States Department of the Treasury has issued regulations with respect to certain of these undertakings, including the proper method for computing whether any rebate amount is due the federal government under Section 148(f) of the Code. The Authority and the Borrower covenant that they will undertake to determine precisely what is required with respect to the rebate provisions contained in Section 148(f) of the Code and said regulations from time to time and will comply with any requirements that may be applicable to the Bonds. Except to the extent inconsistent with any requirements of the Code or the regulations or future regulations, the Authority and the Borrower will undertake the methodology described in this Tax Certificate and Agreement. 5.2(cid:9) Rebate Fund. A special fund designated the "Rebate Fund" will be established by the Borrower as required. To the extend established, the Authority and the Borrower have agreed to keep the Rebate Fund separate and apart from all other funds and moneys held by either of the Authority or the Borrower. 5.3(cid:9) Recordkeeping. The Authority and the Borrower shall maintain or cause to be maintained detailed records with respect to each Nonpurpose Investment attributable to Gross Proceeds of the Bonds, including: (a) purchase date; (b) purchase price; (c) information establishing fair market value on the date such investment became a Nonpurpose Investment; (d) any accrued interest paid; (e) face amount; (f) coupon rate; (g) periodicity of interest payments; (h) disposition price; (i) any accrued interest received; and (j) disposition date. Such detailed recordkeeping is required to facilitate the calculation of the Rebate Requirement. 5.4(cid:9) Exceptions to the Rebate Requirement. 5.4.1 Bona Fide Debt Service Funds. Subject to the representations and certifications made in Section 3.4.4 of this Tax Certificate and Agreement, no rebate calculations will need to be made with respect to any moneys in the Bona Fide Debt Service Funds. OHSUSA:7620522 10.5(cid:9) 18 5.4.2 Six-Month Expenditure Exception. Except for Gross Proceeds deposited in the Bona Fide Debt Service Funds, if on or before the date six (6) months after the Closing Date, at least 95% of the Expenditure Exception Gross Proceeds are expended, and any remaining Expenditure Gross Proceeds are spent on or before the date twelve months after the Closing Date, the Rebate Requirement shall be treated as having been satisfied with respect to such Expenditure Exception Gross Proceeds. 5.4.3 Eighteen-Month Expenditure Exception. The Borrower will be treated as having satisfied the Rebate Requirement with respect to the Expenditure Exception Gross Proceeds allocated to expenditures for a governmental purpose of the Bonds in accordance with the following schedule (the "Eighteen-Month Expenditure Schedule"), measured from the Closing Date: End of first six months(cid:9) 15% End of first year (cid:9) 60% End of first 18 months(cid:9) 100% In addition, the eighteen-month expenditure exception requires that the Rebate Requirement be satisfied with respect to all amounts not required to be spent pursuant to the Eighteen-Month Expenditure Schedule (other than earnings on the Bona Fide Debt Service Funds). All of the Expenditure Exception Gross Proceeds will be treated as expended after 18 months if the remainder is a "reasonable retainage" as required or permitted by construction contracts with the Borrower's contractors and such remainder is spent within 30 months of the Closing Date. 5.4.4 Two-Year Construction Exception. The Available Construction Proceeds of the Bonds may not be subject to the Rebate Requirement. The Borrower reasonably expects that at least 75% of the Available Construction Proceeds will be expended for construction expenditures with respect to property that will be owned by the Borrower. For purposes of this Section 5.3.4, "construction expenditures" include costs for construction, reconstruction and rehabilitation, but do not include costs of acquisition of interests in land or other existing real property. All of the Available Construction Proceeds will be deposited or are expected to be deposited in the Project Fund. The portions of the Available Construction Proceeds required to be spent at the end of each 6-month period are as follows: End of first six months(cid:9) 10% End of first year (cid:9) 45% End of first 18 months(cid:9) 75% OHSUSA:76205221 05(cid:9) 19 End of second year (cid:9) 100% The requirement that 100% of the Available Construction Proceeds be expended within two years of the Closing Date will be met if at least 95% of the Available Construction Proceeds is spent by such time, if the remainder is a "reasonable retainage" as required or permitted by construction contracts with the Borrower's contractors, and if such remainder is spent within the three years of the Closing Date. In determining Available Construction Proceeds as of any date, there shall be included the amount of investment earnings reasonably expected after such date along with investment earnings actually received or accrued as of such date. 5.5(cid:9) Rebate Requirement Calculation and Payment. 5.5.1 The Borrower will prepare or cause to be prepared an annual calculation of the Rebate Requirement consistent with the rules described in this Section 5,5. (The interim calculations not falling at the close of the periods referred to in Section 5.5.3 below may be made as of the close of the Bond Years involved or as of other dates more convenient to the Borrower and such dates shall be treated as the close of Bond Years for purposes of this Section 5.5.) The Borrower will complete the annual calculation of the Rebate Requirement within 55 days after the close of each Bond Year and within 55 days after the first date on which no portion of the Bonds is outstanding for federal tax purposes. Concurrent with the preparation of such calculation, the Borrower shall deposit in the Rebate Fund an amount which when added to amounts already on deposit therein will equal the Rebate Requirement or, if appropriate, decrease the sum held in the Rebate Fund to the Rebate Requirement. 5.5.2 For purposes of calculating the Rebate Requirement (i) the aggregate amount earned with respect to a Nonpurpose Investment shall be determined by assuming that the Nonpurpose Investment was acquired for an amount equal to its fair market value (determined as provided in § 1 .1 48-5(d)(6) of the Treasury Regulations as applicable) at the time it becomes a Nonpurpose Investment, and (ii) the aggregate amount earned with respect to any Nonpurpose Investment shall include any unrealized gain or loss with respect to the Nonpurpose Investment (based on the assumed purchase price at fair market value and adjusted to take into account amounts received with respect to the Nonpurpose Investment and earned original issue discount or premium) on the first date when no portion of the Bonds is outstanding for federal tax purposes or when the investment ceases to be a Nonpurpose Investment. 5.5.3 The Borrower shall pay to the United States Department of the Treasury from the Rebate Fund, not later than 60 days after the end of the fifth Bond Year and each succeeding fifth Bond Year, an amount equal to 90 percent, and not later than 60 days after the first date when the Bonds is no longer outstanding for federal tax purposes, an amount equal to 100 percent of the Rebate Requirement (determined as of the first date when the Bonds is no longer outstanding for federal tax purposes) plus any actual or imputed earnings on such Rebate Requirement, all as set forth in 1. 148.'3 of the Treasury Regulations. § OHSUSA:762052210.5(cid:9) 20 5.5.4 Each payment required to be made pursuant hereto shall be filed with the Internal Revenue Service Center, Ogden, Utah, on or before the date such payment is due, and shall be accompanied by Form 8038-T. The Borrower shall retain records of the calculations required by this Section 5.5 until 6 years after the retirement of the entire Loan. 5.6(cid:9) Investments and Dispositions. 5.6.1 General Rule. No Investment Property may be acquired with Gross Proceeds for an amount (including transaction costs, except as otherwise provided in §1.148-5(e) of the Treasury Regulations) in excess of the fair market value of such Investment Property. No Investment Property may be sold or otherwise disposed of for an amount (including transaction costs, except as otherwise provided in §1.148-5(e) of the Treasury Regulations) less than the fair market value of the Investment Property. 5.6.2 Fair Market Value. In general, the fair market value of any Investment Property is the price at which a willing buyer would pay to a willing seller to acquire the Investment Property, with no amounts paid to artificially reduce or increase the yield on such Investment Property. This Section 5.6 sets forth certain safe harbors for determining fair market value. Other methods may be used to establish fair market value, provided, however, that such methods comply with the requirements of §1.148-5(d)(6) of the Treasury Regulations. 5.6.3 Arm's Length Purchase and Sale. If Investment Property is acquired pursuant to an arm's length transaction without regard to any amount paid to reduce the yield on the Investment Property, the fair market value of the Investment Property shall be the amount paid for the Investment Property (without increase for transaction costs, except as otherwise provided in §1.148-5(e) of the Treasury Regulations). If Investment Property is sold or otherwise disposed of in an arm's length transaction without regard to any reduction in the disposition price to reduce the Rebate Requirement, the fair market value of the Investment Property shall be the amount realized from the sale or other disposition of the Investment Property (without reduction for transaction costs, except as otherwise provided in §1.148-5(e) of the Treasury Regulations). 5.6.4 United States Treasury Securities State and Local - Government Series. If a United States Treasury obligation is acquired directly from or disposed of directly to the United States Department of the Treasury (as in the case of the United States Treasury Securities State and Local Government Series ("SLGS") obligations), such acquisition - or disposition shall be treated as establishing a market for the obligation and as establishing the fair market value of the obligation. 5.6.5 Investment Contracts. The purchase price of any Investment Property acquired pursuant to a guaranteed investment contract (within the meaning of Section 1.148-1(b) of the Treasury Regulations) shall be determined as provided in Section 1.148-5 of the Treasury Regulations. No investment contract shall be acquired with Gross Proceeds unless the requirements of Section 1.148-5 of the Treasury Regulations and this Section 5.6.5 are satisfied. With respect to any investment contract, the Borrower will obtain from the provider of the investment contract, broker thereof or other party, such information, certification or representation as will enable the Borrower to determine that these requirements are satisfied. OHSUSA:762052210.5(cid:9) 21 The purchase price of an investment contract will be considered to be fair market value if- (i) the Borrower has made (or has had made on its behalf) a bona fide solicitation for the investment contract; the solicitation must have specified the material terms of the investment contract (i.e., all the terms that could directly or indirectly affect the yield or the cost of the investment including the collateral security requirements for the investment contract) and, unless the moneys invested pursuant to such investment contract will be held in the Reserve Account, the Borrower's reasonably expected drawdown schedule for the moneys to be invested; the solicitation has a legitimate business purpose (i.e., a purpose other than to increase the purchase price or reduce the yield) for every term of the bid specification; (ii) all bidders have an equal opportunity to bid so that, for example, no bidder is given the opportunity to review other bids (a last look) before bidding; (iii) the Borrower solicits bids from at least three (3) investment contract providers with established industry reputations as competitive providers of investment contracts; (iv) the Borrower includes in the bid specifications a statement to potential bidders that by submitting a bid, the provider is making certain representations that the bid is bona fide, and specifically that 1) the bidder did not consult with any other potential provider about its bid, 2) the bid was determined without regard to any other formal or informal agreement that the potential provider had with the Borrower or any other person, and 3) the bid was not submitted solely as a courtesy to the Borrower or any other person for purposes of satisfying the requirements of Section 1.148-5 of the Treasury Regulations; (v) at least three bids meeting the qualification requirements of the bid solicitation (as set forth in (1) above) have been received from different providers of investment contracts that have no material financial interest in the Bonds (the following investment contract providers are considered to have a material financial interest in the issue: 1) a lead underwriter in a negotiated underwriting, but only until 15 days after the issue date of the issue, 2) an entity acting as a financial advisor with respect to the purchase of the investment contract at the time the bid specifications were forwarded to potential providers; and 3) any related party to a provider that is disqualified for one of the two preceding reasons); (vi) at least one of the bids received by the Borrower that meets the requirements of the preceding paragraph is from an investment contract provider with an established industry reputation as a competitive provider of investment contracts; (vii) the investment contract has a yield (net of any broker's fees) at least equal to the highest yielding of the qualifying bids received from the bidders that have no material financial interest in the Bonds; if the investment contract is not the OHSU5A:762052210.5(cid:9) 22 (cid:9)(cid:9) highest-yielding of the qualifying bids, the Borrower must have significant non-tax reasons, such as creditworthiness of the bidder, for failure to purchase the highest- yielding investment contract offered; (viii) if an agent for the Borrower conducts the bidding process, the agent does not bid; (ix) the provider of the investment contract certifies as to all administrative costs to be paid on behalf of the Borrower, including any fees paid as broker commissions in connection with the investment contract. 5.6.6 Certificates of Deposit. The purchase price of a certificate of deposit issued by a commercial bank that has a fixed interest rate, a fixed principal payment schedule, a fixed maturity, and a substantial penalty for early withdrawal will be considered to be fair market value if- (i) the yield on the certificate of deposit is not less than the yield on reasonably comparable direct obligations of the United States; and (ii) the yield on the certificate of deposit is not less than the highest published yield of the provider thereof which is currently available on comparable Loan of deposit offered to the public. 5.6.7 Broker Compensation. For purposes of computing the yield on any investment contract acquired through a broker, reasonable compensation received by such broker, whether payable by or on behalf of the obligor or obligee of such investment contract, may be taken into account in determining the cost of the investment contract (as provided in Section 1.148 5(e)(2)(iii) of the Treasury Regulations). Compensation is deemed reasonable if it does not exceed the lesser of (i) $39,000 or (ii) 0.2% of the amount reasonably expected, as of the date of acquisition of the investment contract, to be invested under the investment contract over its term, or $4,000 (if 0.2% of such amount reasonably expected to be invested under the investment contract over its term is less than $4,000). In addition, the total fees received by the broker with respect to the investment of any proceeds of the Bonds that are taken into account with respect to all investment contracts, at any time, may not exceed $110,000. All amounts referenced are to be adjusted for inflation after the Closing Date. 5.7(cid:9) Segregation of Proceeds. In order to perform the calculations required by the Code, it is necessary to track separately all of the Gross Proceeds. To that end, the Authority and the Borrower shall cause to be established separate subaccounts or shall cause the Trustee to take such other accounting measures as are necessary in order to account fully for all Gross Proceeds. 5.8(cid:9) Filing Requirements. The Authority and the Borrower will file or cause to be filed such reports or other documents with the Internal Revenue Service as is required by the Code. OHSU5A:762052210.5(cid:9) 23 (cid:9)(cid:9)(cid:9)(cid:9)(cid:9) 5.9(cid:9) Retention of Firm. The Authority and the Borrower hereby undertake to satisfy their obligation to perform the rebate calculations that may be required to be made from time to time with respect to the Bonds in the manner set forth in Exhibit E hereto. VI.(cid:9) Other Matters 6.1(cid:9) Expectations. The undersigned are authorized representatives of the Authority and the Borrower, respectively, and are acting for and on behalf of the Authority and the Borrower, respectively, in executing this Tax Certificate and Agreement. To the best of the knowledge and belief of the undersigned, there are no other facts, estimates or circumstances that would materially change the expectations as set forth herein, and said expectations are reasonable. 6.2(cid:9) Post-Issuance Compliance. The Authority and the Borrower have covenanted to comply with certain requirements of the Code including those relating to the Rebate Requirement as discussed in Article V and relating to private use and/or unrelated trade or business use as set forth in this Tax Certificate and Agreement. The Authority intends to comply with these requirements through the obligation and undertaking by the Borrower to comply with these requirements, including, if necessary, the retention of a qualified rebate analyst. A copy of the Authority's post-issuance compliance procedures is attached hereto as Exhibit D, which the Borrower hereby acknowledges and the Borrower covenants that its own post-issuance compliance is and will be substantially similar and may be more expansive. 6.3(cid:9) Amendments. Notwithstanding any provision of this Tax Certificate and Agreement, the Authority and the Borrower may amend this Tax Certificate and Agreement and thereby alter any actions allowed or required by this Tax Certificate and Agreement if such amendment is based on an Opinion of Counsel. 6.4(cid:9) Survival of Prepayment. Notwithstanding any provisions in this Tax Certificate or the Loan Agreement to the contrary, the obligation to remit the Rebate Requirement, if any, to the United States Department of the Treasury and to comply with all other requirements contained in this Tax Certificate shall survive the prepayment of the Bonds. OHSUSA:762052210.5(cid:9) 24 Dated as of the date first written above. I I]:44j I]IU1LS1Ii [Signature page Tax Certificate] - OHSUSA:762052210(cid:9) S1 By UAL L ~'-= Rohn Zukoski, Director MO CORPORATION FI-X in William Batchelor, Chief Executive Officer By William Batchelor, Chief Executive Officer [Signature page Tax Certificate] - S2 OHSUSA:76205221 0 EXHIBIT F CERTIFICATE OF INDEPENDENCE OAKS, LP All capitalized terms used in this Exhibit that are not otherwise defined in this exhibit have the meaning given thereto in the Tax Certificate and Agreement to which this Exhibit is attached. In connection with the real estate transactions facilitated by the issuance of the California Statewide Communities Development Authority Educational Facilities Revenue Bonds, (Independence Support, LLC Project), Series 2015, Independence Oaks, LP hereby certifies the following. Prior to the date hereof, the Project Site and the Facilities were owned by 3090, LLC, an affiliate of Balch Enterprises. Independence Oaks, LP has been under contract to acquire the Project Site and the Facilities since October 8, 2013, for the purpose of transferring the property at some point to or for the benefit of TVLC. Over that time, Independence Oaks, LP invested its own funds and time with a fair market value as of the date hereof of at least $3,022,503.06 to develop the overall project for use as a school, including dealing with land use and permitting issues and providing other real estate development, brokerage and structuring services. Independence Oaks, LP will assign its right to acquire the Project Site and the Facilities to Goldstone United Investments, LLC on the date hereof from 3090, LLC for $3,022,503.06. Goldstone United Investments, LLC will acquire the Project Site and the Facilities directly from 3090, LLC for $12,019,015.65 (which equals the contract sale price of $13,225,000.00 less credits of $1,170,000.00 for certain payments already by Goldstone United Investments, LLC and CPA to 3090, LLC and less credits of $35,984.35 for existing tenant deposits). Goldstone United Investments, LLC has already paid to 3090, LLC, through Independence Oaks, LP, a total of $2,200,000.00 for sale contract extensions (including a portion of the aforementioned credit of $1,170,000.00), which amount is capitalized to the acquisition cost for a total acquisition price of $17,241,518.71. Additionally, CPA has already paid to 3090, LLC, through Independence Oaks, LP, a total of $274,400.00 for sale contract extensions (all of which is included in the aforementioned credit of $1,170,000.00), which amount will be reimbursed to CPA by the Borrower and is not included in the aforementioned acquisition price. The fair market value of the Project Site is $2,200,000. The purchase price for the Project Site and the Facilities by Goldstone United Investments, LLC is not more than their aggregate fair market value. Independence Oaks, LP is entirely independent from and unrelated to either 3090, LLC or Goldstone United Investments, LLC. [Remainder of Page Intentionally Left Blank] OHSUSA: 762052210.5(cid:9) F-i Dated: May 8, 2015. INDEPENDENCE OAKS, LP By Allan Chandler, Manager OHSUSA:762052210(cid:9) F-2 EXHIBIT G CERTIFICATE OF GOLDSTONE UNITED INVESTMENTS, LLC All capitalized terms used in this Exhibit that are not otherwise defined in this exhibit have the meaning given thereto in the Tax Certificate and Agreement to which this Exhibit is attached. In connection with the real estate transactions facilitated by the issuance of the California Statewide Communities Development Authority Educational Facilities Revenue Bonds, (Independence Support, LLC Project), Series 2015, Goldstone United Investments, LLC hereby certifies the following. 3090, LLC, an affiliate of Balch Enterprises, will sell the Project Site and the Facilities to Goldstone United Investments, LLC for $12,019,015.65 (which equals the contract sale price of $13,225,000.00 less credits of $1,170,000.00 for certain payments already by Goldstone United Investments, LLC and CPA to 3090, LLC and less credits of $35,984.35 for existing tenant deposits). Goldstone United Investments, LLC has already paid to 3090, LLC, through Independence Oaks, LP, a total of $2,200,000.00 for sale contract extensions (including a portion of the aforementioned credit of $1,170,000.00), which amount is capitalized to the acquisition cost for a total acquisition price of $17,241,518.71. Additionally, CPA has already paid to 3090, LLC, through Independence Oaks, LP, a total of $274,400.00 for sale contract extensions (all of which is included in the aforementioned credit of $1,170,000.00), which amount will be reimbursed to CPA by the Borrower and is not included in the aforementioned acquisition price. The fair market value of Project Site is $2,200,000. The purchase price for the Project Site and the Facilities by Goldstone United Investments, LLC is not more than their aggregate fair market value. Goldstone United Investments, LLC is entirely independent from and unrelated to either . 3090, LLC or Independence Oaks, LP. Goldstone United Investments, LLC is entering into the Ground Lease with the Borrower and is selling the Facilities to the Borrower for $15,041,518.71. The Ground Lease will be rent free (i.e., a donation from Goldstone United Investments, LLC to the Borrower). [Remainder of Page Intentionally Left Blank] OHSUSA:762052210.5(cid:9) G-1 Dated: May 8, 2015, GOLDSTONE UNITED INVESTMENTS, LLC By— 7::i -~- William Batchelor, Manager OHSUSA:762052210.4(cid:9) 0-2 APPENDIX E: Audited Financial Statements for Tri-Valley Learning Corporation as of June 30, 2015 47598v1 / PRIVATE.575.1 APPENDIX F: Statement of Financial Affairs for Non-Individuals Filing for Bankruptcy, dated January 13, 2017 (Form 207) 47598v1 / PRIVATE.575.1 APPENDIX G: Declaration under Penalty of Perjury for Non-Individual Debtors, dated January 13, 2017 (Form 202) 47598v1 / PRIVATE.575.1 69 APPENDICES AND EXHDIRBAITFST Exhibits AlAmedA County offiCe of eduCAtion 70 DARPPAEFNTDICES AND EXHIBITS Fiscal crisis & ManageMent assistance teaM SUMMARY OF CALIFORNIA SCHOOL FINANCE AUTHORITY EDUCATIONAL FACILITIES REVENUE BONDS (TRI-VALLEY LEARNING CORPORATION PROJECT), SERIES 2012A DATED SEPTEMBER 25, 2012 The Series 2012A Bonds (the “Bonds” or the “2012A Bonds”) were issued by the State of California’s School Finance Authority (the “Authority”) under the authorization of the California School Finance Authority Act set forth at Education Code sections 17170 through 17199.6 (the “Act”). The Bonds are one component of a complex public finance and simultaneous complex real estate transaction. At the time of their issuance, the Bonds were unrated. The principal amount of Bonds issued, in the amount of $27,500,000, generated $24,813,000 in project funds. Proceeds of the Bonds were loaned to the Tri-Valley Learning Corporation (“TVLC”) to finance charter school projects. The Bonds and the Underlying Project The Limited Offering Memorandum (the “Offering Memorandum”) for the Bonds states that the projects financed by way of the Bonds were to be the acquisition and improvement of land and buildings, along with playfields, to accommodate TVLC’s Livermore Valley Charter School (grades K-8) and the Livermore Valley Charter Preparatory High School (grades 9-12). See Appendix A hereto. The buildings to be acquired were part of the Montevina Office Park owned in combination, by Montevina Phase I, LLC and Montevina Phase II, LLC. See Exhibit 7 hereto. The office park is located within the City of Livermore. The transaction included the acquisition by TVLC of 12 of the 14 buildings within the Office Park (Phase 1) along with the purchase of two remaining buildings and the acquisition of a vacant 12.4 acre parcel of property referred to as the Campus Lot (Phase 2). Phase 1 and Phase 2 in this memo are referred to hereinafter as the “Projects” or the “2012 Projects.” Two additional buildings within the Office Park were also leased by TVLC with an option to purchase. These two properties were acquired by TVLC outside of the 2012A Bonds transaction. Attached to this Report as Appendix A is an excerpt from the Offering Memorandum describing the 2012 Projects in greater detail. At the time of acquisition, the 2012 Projects were appraised, in “fully constructed and functional form,” at a value of $19,275,000. At the close of the 2012A Bonds, the Authority made a one-time, up-front rental payment from Bond proceeds in the amount of $7.4 million dollars for the Phase 1 Montevina buildings, in exchange for the right to sublease the underlying property along with the right to make improvements to the property. An additional $15 million dollars in Bond proceeds were also set aside and utilized for costs relating to the Phase 2 acquisition and other project costs. 1 45099v6 / PRIVATE.575.1 Montevina Phase I, LLC and Montevina Phase II, LLC, prior to the 2012A Bond transaction, had entered into certain mortgage loans for portions of the properties that were later acquired with Bond proceeds (described in the second paragraph above). These mortgage loans remained due and payable at the time of issuance of the Bonds. These mortgages were apparently restructured at the time the Bonds were issued so that the amount paid from Bond proceeds to purchase the properties was sufficient to pay-off the pre-existing mortgages. At the time the Bonds were issued, the Offering Memorandum represented that the Projects had been approved by the City of Livermore and that school use could be made of such improvements. We are not aware of any change to these circumstances. At the date of closing of the Bonds, the ownership of Montevina Phase I, LLC and Montevina Phase II, LLC was transferred to Anthony Cone and Mark Holmstedt of the Westhoff, Cone & Holmstedt firm, the underwriter on the Bonds. See Exhibit 7 hereto. Certain of the Bonds are in the form of Qualified School Construction Bonds (“QSCB”) administered under a program overseen by the U.S. Treasury Department and the State of California. Such bond funds were made available to TVLC in the form of the subleases between the Authority and TVLC. The repayment of the principal amount of the QSCB is due upon expiration of the subordinate subleases. Under the finance plan as described in the Offering Memorandum, once all payments due under the leases are made, ownership to the buildings described above is to be conveyed to TVLC. Sources of Revenue for Repayment of the Bonds TVLC is contractually bound under the terms of the various contracts relating to the Bonds to provide funds sufficient to repay the Bonds along with other costs and expenses. There are primarily four sources of funds for repayment of the Bonds. These include, as described in more detail below: (i) the intercept funds, (ii) funds paid pursuant to the Loan Agreement (as defined below), (iii) funds received by the trustee pursuant to the sublease, and (iv) income derived from the investment of funds under an indenture (the “Indenture”). As noted above, the intercept funds are an initial source of funds for repayment of the Bonds. These are funds derived from TVLC by way of the intercept notice (the “Intercept Notice”). Under Education Code section 17199.4, TVLC delivered instructions to the State Controller in the form of the Intercept Notice, to apportion funds to the trustee, on specific dates, in amounts sufficient to repay the Bonds. Funds made available under the Intercept Notice are only from so-called “Section A Funds” of the State School Fund, designated for apportionment 2 45099v6 / PRIVATE.575.1 as part of the charter school categorical block grant pursuant to Education Code section 47634.1, along with funds made available to charter schools for non-classroom based instruction under Education Code section 47634.2. There are potentially two factors that may limit the payment of the apportionment under the Intercept Notice. First, there may be limitations imposed on TVLC’s ability to receive these funds based upon such factors as lack of enrollment, disqualification to operate, etc. Second, the State Controller may reduce or eliminate funds as a result of state apportionment shortages at any time during the life of the Bonds. A second and a third source of revenue for Bond repayment are funds paid by TVLC under the loan agreement between the Authority and TVLC (the “Loan Agreement”), along with funds paid by TVLC under the so-called subordinate obligation sublease (the “Sublease”). The sources for such funds are to be derived from TVLC’s “Gross Revenues” which are defined as all revenues received by TVLC with respect to schools operated by TVLC, including revenue derived by way of the Intercept Notice. A fourth source of funds for Bond repayment may be derived from investment earnings under the Indenture for the 2012A Bonds. The Indenture permits the investment of funds held in various accounts and authorizes that proceeds from these investments are to be deposited in the Bond’s revenue fund and pledged under the Indenture for the repayment of the Bonds. The Indenture provides further guidance on the sources of revenue available for repayment of the Bonds. Under the terms of the Indenture, “payments” in satisfaction of the Bond obligation are assigned for this purpose, to the trustee for the benefit of the bondholders. Such payments are defined as revenue derived from the four sources described above. Further, the Indenture provides guidance for the definition of the term “Gross Revenue” which is used in several contexts in the various agreements for the Bonds. For example, both the Loan Agreement and the Sublease, limit the source of funds available for repayment of the Bonds to “Gross Revenues.” Under the Indenture, Gross Revenues are defined generally as revenues received by the Livermore Valley Charter School and Livermore Valley Preparatory High School, along with any other revenues derived from the operation of any other “Tri-Valley at the Facility.” The phrase “Tri-Valley at the Facility” can reasonably be interpreted to mean any charter school operated by TVLC within the buildings that were acquired with proceeds from the 2012A Bonds. It is also likely however that revenues from other TVLC operations elsewhere, such as in San Joaquin County or San Diego County, would be excluded as a funding source for repayment of the 2012A Bonds. The agreements entered into as a part of the 2012A Bonds transaction also include an intercept arrangement, as described above, under which TVLC effectively “guaranteed” the repayment of the Bonds by instructing the State Controller’s office to make specified payments to the trustee for the Bonds, from TVLC’s categorical block grant pursuant to the Education 3 45099v6 / PRIVATE.575.1 Code. To the extent these block grants were to become insufficient to make lease payments under the Bond plan, revenue for Bond repayment would be inadequate. To further secure repayment of the 2012A Bonds, Montevina Phase I, LLC executed a deed of trust creating a lien against its fee interests in the buildings. Under the deed, priority liens have been created and presumably recorded on the buildings in favor of the Bond trustee, as further security for the Bonds. Although we have not located the liens yet for review, they would presumably convey foreclosure rights to the Bond trustee over the buildings in the event of an uncured default in the repayment of the Bonds. The sale of the 2012A Bonds was expressly limited to certain sophisticated buyers referred to as “qualified institutional buyers” by the Securities and Exchange Commission. The subsequent sale or transfer of the Bonds to future bondholders may only be accomplished upon satisfaction of similar transfer restrictions. The relatively complex and potentially risky nature of the transaction contributed to this restriction on potential purchasers for the Bonds. Optional or Mandatory Redemption Following Issuance of 2012A Bonds With respect to the Series 2012A Term Bond maturing on June 1, 2047, in order to comply with TVLC’s continuing disclosure obligations (Exhibit 5), event notices have been filed in connection with the mandatory redemption payments due on each June 1 of 2014, 2015 and 2016. We note that the transcript documents do not provide a mandatory redemption schedule for the Series 2012A Term Bond maturing on June 1, 2032. We further note that no event notices have been filed in connection with the 2032 maturity. We assume that mandatory redemption payments are not yet due on the 2032 maturity. Opinion of Bond Counsel and Tax Certificate It should be noted that the Orrick, Herrington and Sutcliffe firm served as bond counsel on the Bond transaction. That firm issued its opinion dated October 4, 2012, stating that interest on the Bonds is excluded from gross income for federal income tax purposes. The opinion also states that the Bonds are binding obligations of the Authority, secured by apportionments from the State Controller’s office. Generally, an opinion of bond counsel in a finance transaction speaks as of the date of closing of the transaction. In other words, the opinion does not apply to circumstances that arise, or actions that occur following the closing of the bonds. It is never possible to predict with certainty the long term success of a bond issue. The Orrick firm also prepared a tax certificate in support of the tax-exempt nature of the Bonds. See Appendix C hereto. That tax certificate includes certain representations regarding the Bonds and specifically states that TVLC, the property sellers (Montevina Phase I, LLC or Montevina Phase II, LLC) or other sellers of the property are not “Related Persons” as that term 4 45099v6 / PRIVATE.575.1 is defined in the tax certificate. The tax certificate defines Related Persons, as persons or organizations that directly or indirectly control other persons or organizations in the transaction. This representation would imply that the sale of the various buildings and property to TVLC in the 2012 transaction was an arm’s length transaction, according to the tax certificate. Nevertheless, as can be seen by the description of the parties to the transaction (as set forth at Exhibit 7 of this Report) there are numerous common names and other common elements between the individuals and entities that were involved in the 2012A Bonds transaction and the related real estate transaction described above. This suggests that at least some of the transactions between the “parties” may not have been at arm’s length. Risk Factors and Bankruptcy The Offering Memorandum lists a variety of risk factors for Bond purchasers to be aware of when evaluating the Bonds. The risk factors clearly state that the Bonds are not general obligations of the State of California, other than the Authority and are payable solely from the funds provided by way of the Indenture and the various lease agreements among the parties, primarily the intercept arrangement referred to above. The risk factors also list potential problems in the operation of TVLC. In this regard, the factors specifically state that the failure of TVLC to attract a sufficient number of students may also impact the repayment of the Bonds. Further, a voluntary or involuntary bankruptcy filing by TVLC is also identified in the Offering Memorandum as a risk to potential purchasers. We understand that a bankruptcy filing has in fact recently been submitted on behalf of TVLC to the United States Bankruptcy Court for the Northern District of California and a case number has been assigned. See Appendix F hereto. On or about December 1, 2016, a notice was filed by UMB Bank advising that interest has not been paid to certain owners of the 2012A Bonds and that the bankruptcy proceedings described above (see Exhibit 6 and Appendix G hereto) have been filed. UMB Bank is currently the trustee on the Bond transaction. Earlier, by way of a notice dated November 1, 2013, The Bank of New York Mellon provided notice that subsidy payments due under the Bond transaction had not been received on their October 21, 2013 due date. We are unsure if either of these delinquencies have been cured. It is likely the case that as a result of these facts, the 2012A Bonds are in default and the trustee for the Bonds is entitled to pursue foreclosure and other remedy strategies on behalf of the owners of the Bonds. These strategies may include litigation brought by the trustee on behalf of the Bond holders to enforce the payment requirements and other terms of the leases and related documents. TVLC’s status as a debtor in bankruptcy proceedings will have a direct impact on the trustee’s litigation options. 5 45099v6 / PRIVATE.575.1 SUMMARY OF CALIFORNIA MUNICIPAL FINANCE AUTHORITY TAXABLE EDUCATIONAL FACILITIES BOND ANTICIPATION NOTES, SERIES 2014 AND OTHER TVLC SHORT AND LONG TERM BORROWINGS The Series 2014 Notes Our office has been provided with a copy of a Preliminary Limited Offering Memorandum for the above entitled Series 2014 Bond Anticipation Notes (“BANS”). The BANS described in the Preliminary Limited Offering Memorandum were anticipated to be dated May 1, 2014 and to remain outstanding until their repayment date of May 1, 2018. The BANS were initially to be repayable earlier than 2018, on each anniversary date leading up to May 1, 2018. The Preliminary Offering Memorandum for the BANS states that the BANS were intended to raise funds on a short term basis to undertake the projects that were later funded through the issuance of the California Statewide Communities Development Authority (the “Authority”) Series 2015 Bonds (see Exhibit 3 hereto). From our review of the transcript documents for the Series 2015 Bonds, we can find no reference to the BANS, nor can we find any provisions having been made for the repayment of the BANS. In addition, we have reviewed the Audited Financial Statements for Tri-Valley Learning Corporation as of June 30, 2015 (the “2015 TVLC Audit”) and note that it contains no references to the BANS (see Appendix E hereto). Finally we have reviewed the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System (“EMMA”) and can find no reference to the issuance of a BAN by the Authority on behalf of TVLC, or the issuance by any other entity of a BAN on behalf of TVLC. From this review, we have determined that it is highly unlikely that the BAN referred to in the Preliminary Offering Memorandum was issued and sold. The Preliminary Offering Memorandum may have been an effort on the part of TVLC or others, to evaluate the feasibility of a short term borrowing to pay costs related to the project that was ultimately funded on a long term basis by the Series 2015 Bonds (see Exhibit 3 hereto). 1 47586v2 / PRIVATE.575.1 Other TVLC Short and Long Term Borrowings We have also reviewed the 2015 TVLC Audit (Appendix E) and have noted that the 2015 TVLC Audit lists a $675,000 line of credit with Heritage Bank of Commerce, along with a Stand-by Letter of Credit with Heritage Bank in the amount of $200,000, in favor of California School Finance Authority. The California School Finance Authority was the issuer of the Series 2012A Bonds on behalf of TVLC (see Exhibit 1 hereto). The 2015 TVLC Audit also contains references to the Series 2012A Bonds along with the Series 2015 Bonds as long term debt of TVLC. 2 47586v2 / PRIVATE.575.1 SUMMARY OF CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY EDUCATIONAL FACILITIES REVENUE BONDS (INDEPENDENCE SUPPORT, LLC PROJECT), SERIES 2015 DATED MAY 8, 2015 The Series 2015 Bonds (the “Bonds” or “2015 Bonds”) were issued by the California Statewide Communities Development Authority (the “Development Authority”) under the authorization of the California Joint Exercise of Powers Act (Government Code sections 6500 through 6599.3) and pursuant to an indenture (the “Indenture”) between certain parties to the transaction. The Bonds are one component of a complex and simultaneous public finance and real estate transaction. This transaction accomplished additional elements of a non-public school development plan that had previously been initiated with the issuance by the California School Finance Authority on behalf of the Tri-Valley Learning Corporation (“TVLC”) of its Series 2012A Bonds (the “2012A Bonds”). The 2015 Bonds were unrated at the time of their issuance. The principal amount of 2015 Bonds issued was $25,540,000. The Bonds and the Underlying Project The project (the “Project” or the “2015 Project”) described in the Limited Offering Memorandum for the Bonds (the “Offering Memorandum”) consists primarily of the acquisition and improvement of a building referred to as Independence Plaza, constructed in 2002. See Appendix B hereto. Proceeds from the Bonds (the “Loan”) were loaned by the Development Authority to Independence Support LLC (“IS”). With the Loan, as further described below, IS was able to acquire Independence Plaza and to then lease the building (the “Lease”) (through its sole member, the Livermore Charter Zone Corporation) to both TVLC for charter school purposes, and to the California Preparatory Academies (“CPA”) for the operation of a private school (the “Private School”) on the site. At the time of the closing of the Bonds, certain proceeds of the Bonds were utilized by Goldstone United Investments, LLC (“Goldstone”) to acquire the site and its facilities from the former owner, 3090, LLC. See Exhibit 7 hereto. The sale of the 2015 Bonds was expressly limited to certain sophisticated buyers referred to as “qualified institutional buyers” by the Securities and Exchange Commission. The subsequent sale or transfer of the Bonds to future bondholders may only be accomplished upon satisfying similar transfer restrictions. The relatively complex and potentially risky nature of the transaction likely contributed to this restriction on potential purchasers for the Bonds. At the time of acquisition, the 2015 Project was appraised utilizing a cost approach to value. As a result, the values arrived at were $24,000,000 for the facilities comprising the Project and an additional $2,200,000 for the Project site. 1 45268v5 / PRIVATE.575.1 Appendix B to this Report is an excerpt from the Offering Memorandum describing the 2015 Project in greater detail. Optional or Mandatory Redemption Following Issuance of Series 2015 Bonds With respect to the Series 2015 Term Bond maturing on June 1, 2025, in order to comply with IS’s, TVLC’s, and CPA’s continuing disclosure obligations, an event notice has been filed in connection with the mandatory redemption payment due on June 1, 2016. Sources of Revenue for Repayment of the 2015 Bonds By way of the Loan from the Development Authority to IS referred to above, 2015 Bond proceeds were used by IS to fund Project costs. IS agreed to repay the Loan from the proceeds of gross revenues, as described below. Separately, IS entered in the Lease with TVLC and CPA referred to above. That Lease authorized TVLC and CPA to make use of the Project’s facilities for their ongoing charter school and private school operations. Rent obligations under the Lease include funds necessary to repay amounts due under the Loan which are themselves based in part upon the debt service schedules for the Bonds. TVLC’s obligations under the Lease are payable from so-called Tri-Valley Gross Revenues (“TVLC Gross Revenues”). TVLC Gross Revenues under the Indenture are defined as all funds received by TVLC from the operation of the charter schools that are legally available for the payment of TVLC’s obligations under the Lease. However, specifically omitted as an income source for repayment of the 2015 Bonds are (i) funds from the 2012 intercept arrangement used to secure the 2012A Bonds (see description of 2012A Bonds included in this Report), (ii) the subsidy payment as described below, and (iii) certain other limited funds. The subsidy payment is defined in the indenture for the 2012A Bonds as any payment of refundable tax credit amounts payable under the Federal Government’s Qualified School Construction Bond program (“QSCB”). Such subsidy payment is applicable to that portion of the 2012A Bonds issued as QSCBs. CPA’s obligations under the Lease are payable from so-called “CPA Gross Revenues” and are defined generally as all revenue received by CPA from the operation of its schools at the Project as well as other activities of CPA at the site that result in revenue legally available for payment of rent. As additional security for repayment of the 2015 Bonds, IS, TVLC and CPA apparently executed deeds of trust creating liens against their interests in the Independence Plaza property. Under the deeds, liens have been created and presumably recorded on Independence Plaza in 2 45268v5 / PRIVATE.575.1 favor of the 2015 Bond trustee, as further security for the Bonds. Although we have not located the liens yet for review, they would likely convey foreclosure rights over Independence Plaza to the trustee in the event of an uncured default in the repayment of the Bonds. Under a separate memorandum of understanding (the “MOU”) between TVLC and CPA, the parties agreed to a process whereby they are to meet annually to determine their respective space and budget needs and then allocate between themselves their portions of the rent and other financial obligations due under the Lease. The MOU also reiterates the joint and several responsibility of the two parties to pay rent and other expenses under the Lease. According to the Offering Memorandum, TVLC will manage the charter school operation at the site, and CPA’s private school will be managed by Goldstone/Acre LLC. Amounts payable by CPA to Goldstone/Acre LLC are subordinate to CPA’s obligations under the lease for the Bonds. Rental payments under the Lease described above, are pledged as a source of revenue to repay the 2015 Bonds. The Offering Memorandum states specifically as follows: “There can be no assurance that revenues generated by TVLC from the charter schools and by CPA from the private school will be sufficient to provide for the timely payment of all rent pledged for the repayment of the 2015 Bonds.” Opinion of Bond Counsel and Tax Certificate It should be noted that the Orrick, Herrington and Sutcliffe firm served as bond counsel on the 2015 Bonds transaction as well as the 2012A Bonds transaction. That firm issued its opinion dated May 8, 2015 stating that interest on the Bonds is excluded from gross income for federal income tax purposes. The opinion further states that the 2015 Bonds are binding obligations of the Development Authority, secured by amounts held in trust by the trustee, pursuant to the Indenture. Generally, an opinion of bond counsel in a finance transaction speaks as of the date of closing of the transaction. In other words, the opinion does not apply to circumstances that arise, or actions that occur following the closing of the bonds. It is never possible to predict with certainty the long term success of a bond issue. The Orrick firm also prepared a tax certificate in support of the tax-exempt nature of the 2015 Bonds. See Appendix D hereto. Unlike the firm’s tax certificate for the 2012A Bonds transaction, the tax certificate for the 2015 Bonds does not certify that parties to the transaction are unrelated parties. This may have been determined by the Orrick firm to not be necessary for the 2015 Bonds tax certificate, or that firm may have been unwilling or unable to cause the Development Authority and others to certify that the parties to the transaction were unrelated. It 3 45268v5 / PRIVATE.575.1 is clearly the case that certain parties to the 2015 Bonds transaction had pre-existing and extensive business and professional relationships with other parties to the transaction. However, business and professional relationships do not necessarily mean “related persons” as defined in the tax certificate. The tax certificate defines “Related Persons,” as persons or organizations that directly or indirectly control other persons or organizations in the transaction. The 2015 Limited Offering Memorandum contained several financial covenants made by the Borrower, specifically that: The Borrower covenants: • To maintain books and records separate from any other Person; • To maintain its accounts separate from any other Person; • Not to commingle assets with those of any other Person; • To conduct its own business in its own name; • To pay its own liabilities out of its own funds; • To observe all corporate formalities; • Not to guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others, subject to the provisions of the Loan Agreement described within “– Additional Debt” under this subheading; • Not to acquire obligations or securities of its partners, members, or shareholders; • To hold itself out as a separate entity; • To correct any known misunderstanding regarding its separate identity; and • To maintain adequate capital in light of its contemplated business operations. Interestingly, the Preliminary Offering Memorandum for the 2014 TRANs (which were never issued) contained similar language to that of the 2015 Limited Offering Memorandum, but included a provisions about arms’ length provision, which the 2015 issuance did not contain: The Borrower covenants: • To maintain books and records separate from any other person or entity; • To maintain its accounts separate from any other person or entity; • Not to commingle assets with those of any other entity; • To conduct its own business in its own name; • To pay its own liabilities out of its own funds; • To observe all corporate formalities; • To maintain an arm’s-length relationship with its affiliates; • Not to guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others; • Not to acquire obligations or securities of its partners, members, or shareholders; • To hold itself out as a separate entity; • To correct any known misunderstanding regarding its separate identity; and 4 45268v5 / PRIVATE.575.1 • To maintain adequate capital in light of its contemplated business operations. It appears that while both the 2014 transaction, which was never consummated, and the 2015 transaction contained financial covenants made by the Borrower. However, the covenant to maintain an arms’-length relationship was explicitly absent from the 2015 Limited Offering Memorandum. Additionally, the 2015 Limited Offering Memorandum notes that there is no common ownership among any of 3090 LLC, Independence Oaks, the Goldstone United Investments or the Independence Support. However, based upon the entities’ addresses and individuals involved, it appears that there was at least overlap of some sort between Independence Oaks, Goldstone United Investment and Independence Support. Risk Factors and Bankruptcy In addition to other repayment risks described below in this memo, the Offering Memorandum for the Bonds makes the following specific disclosure: “The obligation to pay Base Rent is a joint obligation of the tenants. The private school (“CPA”) has no operating history, and management of TVLC anticipates that Tri-Valley Gross Revenues will be sufficient to provide for the payment of all base rent owed under the lease. However, there can be no assurance that Tri-Valley Gross Revenues, without any contribution from CPA from successful operation of the private school, will be sufficient to provide for the timely payment of base rent.” The Offering Memorandum specifically identified a voluntary or involuntary bankruptcy filing by TVLC as an additional risk to potential purchasers of the Bonds. We understand that a bankruptcy filing has in fact been recently submitted on behalf of TVLC to the United States Bankruptcy Court for the Northern District of California and a case number has been assigned. On or about March 28, 2017, a notice was filed by U.S. Bank National Association, the trustee for the 2015 Bonds, advising that TVLC and CPA, as tenants under the Lease, failed to comply or perform in accordance with the Lease, including, but not limited to, the failure to pay rent, the failure to provide evidence of insurance, and TVLC’s becoming a “debtor” as defined in 11 U.S.C. § 101. See Exhibit 6 and Appendix G hereto. It is likely the case that as a result of these facts, the trustee for the Bonds is entitled to pursue foreclosure and other remedy strategies on behalf of the owners of the Bonds. These strategies may include litigation brought by the trustee on behalf of the owners of the Bond to enforce the payment requirements and other terms 5 45268v5 / PRIVATE.575.1 of the Lease and related documents. TVLC’s status as a debtor in bankruptcy proceedings will have a direct impact on the trustee’s litigation options. 6 45268v5 / PRIVATE.575.1 SUBSEQUENT REFINANCING OF BONDS At this time, TVLC is not able to exercise its option to redeem the Series 2012A Bonds, and the California Statewide Development Authority (upon a request by Independence Support, LLC) is not able to exercise its option to redeem the Series 2015 Bonds. Accordingly, no refunding bonds related to either the Series 2012A Bonds or the Series 2015 Bonds have been issued. 47525v1 / PRIVATE.575.1 ONGOING DISCLOSURE OBLIGATIONS In connection with the Series 2012A Bonds, TVLC and The Bank of New York Mellon Trust Company, N.A., as dissemination agent, entered into a Continuing Disclosure Agreement (the “2012A Disclosure Agreement”). By way of the 2012A Disclosure Agreement, TVLC committed to assist the underwriter in complying with Securities and Exchange Commission Rule 15c2-12 for the benefit of the owners of the 2012A Bonds. Under the 2012A Disclosure Agreement and in compliance with Rule 15c2-12, TVLC is obligated to file annual reports, containing various financial information (as specifically identified in the 2012A Disclosure Agreement). In addition, should a significant event occur, as set forth in the 2012A Disclosure Agreement and Rule 15c2-12, TVLC must also file a notice of such event. All filings made pursuant to the 2012A Disclosure Agreement may be found online at http://emma.msrb.org/Home/Index (“EMMA”). With regard to the Series 2012A Bonds, it appears that TVLC has filed its annual reports and various event notices. Such event notices include notices of mandatory redemption payments (see Exhibits 1 and 3 of this Report), as well as a notice of non-payment of interest, a notice of TVLC’s bankruptcy filing, and a notice of unscheduled draws on various funds under the indenture for the 2012A Bonds. In connection with the Series 2015 Bonds, IS, TVLC, CPA and U.S. Bank National Association, as dissemination agent, entered into a Continuing Disclosure Agreement (the “2015 Disclosure Agreement”). Similar to the 2012A Disclosure Agreement, by way of the 2015 Disclosure Agreement, IS, TVLC, and CPA committed to assist the underwriter in complying with Securities and Exchange Commission Rule 15c2-12 for the benefit of the owners of the 2015 Bonds. IS, TVLC, and CPA are each required to file annual reports with the contents as specified in the 2015 Disclosure Agreement. In addition, IS is required to file significant event notices, as set forth in the 2015 Disclosure Agreement and Rule 15c2-12. With regard to the Series 2015 Bonds, it appears that IS, TVLC, and CPA have each filed annual reports. An event notice has been posted in connection with the mandatory redemption payment for the Series 2015 Bonds (see Exhibit 3 of this Report). In addition, recently, a notice of default and breach of lease agreement was posted to EMMA. Such notice provided that the defaults include failure to pay rent, failure to provide evidence of insurance, and TVLC becoming a “debtor” as defined in 11 U.S.C. § 101. We note that unlike the Series 2012A Bonds, there is no event notice posted for the Series 2015 Bonds with regard to or concerning TVLC’s bankruptcy filing (other than the mention in the notice of default of TVLC’s status as a “debtor,” as described in the previous sentence). 47573v2 / PRIVATE.575.1 STATUS OF TRI-VALLEY LEARNING CORPORATION BANKRUPTCIES ON BONDS AND OTHER DEBT On or about January 13, 2017, Lynn Lysko, Ed.D., Chief Executive Office of TVLC, signed and submitted a Statement of Financial Affairs for Non-Individuals Filing for Bankruptcy (“Statement”). See Appendix F to this Report. The Statement lists TVLC as the debtor and is filed in the United States Bankruptcy Court for the Northern District of California, Case No. 16- 431112. The Statement is an initial step by TVLC to seek relief from the United States Bankruptcy Court regarding TVLC’s debts and other obligations. The Statement contains a schedule of existing debt, both paid and unpaid, along with the creditors and the status of the debt. The firm of Squar Milner is designated as the firm that has provided auditing services to TVLC between the dates of November 2014 to November 2016. The Statement specifically makes reference to the 2012A and 2015 bond transactions. The Statement will form the basis for the ongoing review of the financial capability of TVLC going forward, along with the nature and extent of the financial liabilities that are applicable to TVLC. In addition to the Statement, on or about January 13, 2017, Dr. Lysko on behalf of TVLC also signed and submitted a Declaration Under Penalty of Perjury for Non-Individual Debtors (“Declaration”). See Appendix G to this Report. The Declaration contains a series of schedules that describe TVLC assets, both real property and personal property. The schedules also include information regarding TVLC’s creditors with both secured and unsecured claims as well as information on contracts and leases that TVLC is subject to. The Declaration specifically makes reference to the 2012A and 2015 bond transactions. Similar to the Statement, the Declaration will also provide the initial data upon which the Bankruptcy Court, along with a trustee, will evaluate the capability of TVLC to operate going forward, as well as the nature and extent of financial liabilities applicable to TVLC. 47579V1 / PRIVATE.575.1 ENTITIES AND INDIVIDUALS INVOLVED IN TRI-VALLEY LEARNING CORPORATION TRANSACTIONS Tri-Valley Learning Corporation is a California public benefit non-profit corporation that at the time of the issuance of the 2015 Bonds operated five charter schools: Livermore Valley Charter Preparatory High School and Livermore Valley Charter School (both located in Livermore), Acacia Elementary Charter School and Acacia Middle Charter School (both located in Stockton), and at one time the Old Town Academy K-8 Charter School (located in San Diego). TVLC was previously known as Livermore Charter Learning Corporation. On October 1, 2012, TVLC entered into a sublease with the California School Finance Authority regarding Educational Facilities Revenue Bonds (Tri-Valley Learning Corporation Project), Series 2012A (Tax-Exempt Bonds) whereby TVLC pledged to pay base rental payments out of TVLC revenues, including general purpose entitlements with respect to Livermore Valley Charter School and Livermore Valley Charter Preparatory High School. At the time of issuance of the 2012A Bonds, William (“Bill”) Batchelor was designated as Chief Operating Officer of TVLC. At that time, the Board of Directors of TVLC consisted of the following members: Len DiGiovanni, Neil Cowles, Rick Swiers, Dave Vopnford, John Zukoski, Jerry Mullins and Tim Hall. Subsequently, on April 1, 2015, TVLC entered into a lease, as co-tenants with California Preparatory Academies, to acquire facilities located at 3090 Independence Drive, Livermore, CA (“Independence Plaza”), from and Independence Support LLC. Independence Plaza was intended to be the location for Livermore Charter Preparatory High School and a private school to be operated by California Preparatory Academies. At the time of issuance of the 2015 Bonds, Bill Batchelor was designated at the Chief Executive Office of TVLC, John Zukoski was designated its Director of Finance and Tim Hall, as TVLC Board President, executed various documents relating to the financing. Additionally, Bill Batchelor appears to have been in a managing role of California Preparatory Academies. The Series 2012A Bond Transaction Montevina Phase I, LLC and Montevina Phase II, LLC Just prior to the 2012A transaction, Montevina Phase I, LLC (“MPI”) was the owner of the real property located in Livermore, California, known as the “Montevina Phase I Property”. Montevina Phase II, LLC (“MPII”) was the owner of the real property located in Livermore, California, known as the “Montevina Phase II Property”. Together, the Montevina Phase I and II 1 47044V2 / PRIVATE.575.1 Properties consisted of 14 buildings. MPI and MPII each consist of the same two members, Tony Cone and Mark Holmstedt. Both men are also named partners of Westhoff, Cone & Holmstedt, the underwriter for the 2012A bonds. Prior to the transaction, PLF-XIII owned all interest in MPI, except for the Northstar Phase I Deed of Trust. PLF-XIV owned all interest in MPII, except for the Northstar Phase II Deed of Trust. During the course of the 2012 bond transaction, certain parcels of property were transferred from MPI to MPII as part of an “intercompany transfer” in order to “provide adequate collateral in connection with certain loans.” As part of the 2012 bond transaction, MPI leased the Montevina Phase I Property to the California School Finance Authority, and the Authority immediately subleased the Property to TVLC, which was to acquire the facilities through this transaction. MPI and MPII have business addresses in Livermore, Danville and Walnut Creek. One address associated with MPI/II (4900 Hopyard Rd, Pleasanton CA) is also associated with PLF- XI/PLF-XIII/PLF-XIV and ExTerra Realty Partners, LLC. Another address (500 Ygnacio Valley Road, Walnut Creek CA) is also associated with WCH. Another address (3110 Constitution Dr, Livermore CA) is also associated with ExTerra Realty Partners, LLC. Individuals associated with MPI and MPII include: Michael Parker (President of MPI and MPII, Owner/President of Montevina Phase I Owners Association and an executive/owner of ExTerra Realty Partners); David Clock (Danville); and Richard Norris (registered agent for MPI and MPII is Attorney, Archer Norris, Walnut Creek CA). The “Montevina Group” (as defined in the Membership Interest Purchase and Sale Agreement, dated October 4, 2012) included MPI, MPII, PLF-XIII, PLF-XIV, ExTerra and Michael Parker. Possible business associates of MPI and MPII include: ExTerra Realty Partners (Livermore, Pleasanton); N-Star Rel CDO VIII Grantor Trust, Series WW, and Westhoff, Cone & Holmstedt. A secured Party of MPI and MPII is N-Star Rel CDO VIII Grantor Trust, Series WW (399 Park Ave Fl 18, NY NY), which may be associated with NRFC WA Holdings II, LLC. NRFC WA Holdings II, LLC ("Northstar") NRFC WA Holdings II, LLC (also referred to as “Northstar”) held an existing deed of trust on the Montevina Phase I Property, which secured a loan to MPI and an existing deed of trust on the Montevina Phase II Property, which secured a loan to MPII. Northstar made construction loans to MPI in the amount of $20,120,000 between 2007 and 2012, but this amount 2 47044V2 / PRIVATE.575.1 was reduced to $500 after the 2012 bond transaction and Northstar agreed to subordinate this debt to the 2012A Bonds by way of a Subordination Agreement dated October 1, 2012. NRFC Sub-REIT Corp., a Maryland corporation, is the sole member of NRFC WA Holdings II, LLC. Westhoff, Cone & Holmstedt Westhoff, Cone & Holmstedt (“WCH”) is a financial services firm located in Walnut Creek, California. WCH provides investment banking and underwriting for various industries, including charter schools. WCH was the underwriter for the 2012 Bonds transaction. Mark Holmstedt and Anthony Cone, both named partners of WCH are also the members of Montevina Phase I, LLC and Montevina Phase II, LLC. We understand that Mr. Cone is deceased. Possible business associates of WCH are IOS Capital (located in Macon, GA) and Montevina Phase I and II. One of the addresses associated with WCH (500 Ygnacio Valley Road, Walnut Creek CA) is also associated with MPI and MPII. PLF-XIII, LLC and PLF-XIV, LLC PLF-XIII owned the Montevina I Interest, except for the Northstar Phase I Deed of Trust. PLF-XIV owned the Montevina II Interest, except for the Northstar Phase II Deed of Trust. Name variations of these companies include PLF-XI, LLC; PLF-XIII, LLC; and PLF- XIV, LLC. Possible business associates of PLF-XIII/PLF-XIV are listed as NRFC WA Holdings, LLC (Irving, TX) and ExTerra Realty Partners, LLC. PLF-XI, LLC is the sole member of Iowa Property Owners. Secured Parties of PLF-XI/PLF-XIII/PLF-XIV are NRFC WA Holdings, LLC and NRFC WA Holdings II, LLC. The address associated with PLF-XI/PLF-XIII/PLF-XIV (4900 Hopyard Rd, Pleasanton CA) is also associated with MPI, MPII and ExTerra Realty Partners, LLC. Michael Parker is the President of PLF-XIII and an executive/signatory for PLF-XI. 3 47044V2 / PRIVATE.575.1 ExTerra Realty Partners LLC ExTerra Realty Partners LLC are real estate agents and managers. One of the addresses associated with ExTerra Realty Partners, LLC (4900 Hopyard Rd, Pleasanton CA) is also associated with MPI, MPII and PLF-XI/PLF-XIII/PLF-XIV. Several of the addresses associated with ExTerra Realty Partners, LLC (4900 Hopyard Rd, Pleasanton CA; 3110 Constitution Dr, Livermore CA; 3142 Constitution Dr, Livermore, CA) are also associated with MPI and MPII. The property located at 3142 Constitution Dr, Livermore, CA is the subject of the 2012 Bonds. Individuals associated with ExTerra include: David Clock (registered agent for Montevina Phase I Owners Association, Rick Kiper, Julie Parker, Michael Parker (Owner/President of Montevina Phase I Owners Association; also associated with MPI/MPII; listed as an owner of ExTerra Realty Partners), and Tammy Dragotta. Possible business associates include: MPI and MPII, NRFC WA Holdings II, LLC, Tri Valley Campus I, LLC. Mark A. Holmstedt and Anthony E. Cone Mark A. Holmstedt, along with Anthony E. Cone, are the two men who make up Montevina Phase I & II, LLC. Both men are also named partners of the financial services firm Westhoff, Cone & Holmstedt. The Series 2015 Bond Transaction California Preparatory Academies California Preparatory Academies is a public benefit nonprofit corporation that along with TVLC (as co-tenants), entered into a lease dated April 1, 2015, with Independence Support LLC, to acquire facilities located at 3090 Independence Drive, Livermore, CA (“Independence Plaza”). Independence Plaza was intended to be the location for Livermore Charter Preparatory High School and the San Francisco Bay Preparatory Academy, a private boarding high school. The Squaw Valley Academy Bay Area, a private boarding school, is now located at that address. The owner/President of California Preparatory Academies is Bill Batchelor. As mentioned above, he is also associated with the private school that currently occupies that space. One of the addresses for California Preparatory Academies is listed as 3252 Constitution Drive, Livermore, the same address for Independence Support, LLC, and Livermore Charter Zone Corporation (this address was also part of the property subject to the 2012 Bonds). 4 47044V2 / PRIVATE.575.1 Another address for California Preparatory Academies (7901 Stoneridge Drive, Pleasanton) is associated with Independence Oaks LP, Goldstone/Acre LLC, Goldstone United Investments, LLC Squaw Valley Education Management and Squaw Valley Land LLC. Another address associated with California Preparatory Academies is 3090 Independence Drive, Livermore, which was the subject of the 2015 Bonds, and associated with Independence Support, LLC and Goldstone United Investments LLC. A secured party of California Preparatory Academies (and Squaw Valley Land LLC, Squaw Valley Education Management, LLC and Squaw Valley Academy, Inc.) is Greenlake Real Estate Fund LLC (located in Pasadena, CA). The registered agent for service is Julian Zegelman, who is also associated with Goldstone United Investments, LLC. Independence Support, LLC Proceeds of the 2015 Bonds were loaned by the Authority to Independence Support, LLC in order to acquire Independence Plaza (3090 Independence Drive, Livermore). Independence Support’s sole member is the Livermore Charter Zone Corporation. Independence Plaza was leased from Goldstone United Investments LLC free of rent for 50 year term (plus possible 25 year extension). Independence Support subleased the property to TVLC and California Preparatory Academies, which were jointly and severally liable for the obligations. The location is to be utilized for the Livermore Valley Charter Preparatory High School, a charter school, and the SF Bay Preparatory Academy, a private boarding high school. The address for Independence Support, LLC is listed as 3090 Independence Drive, Livermore CA (which is the same address as 3090 LLC and Squaw Valley Academy Bay Area); another address was 3252 Constitution Dr, Livermore CA (property subject to 2012 Bonds). The registered agent for Independence Support is Derek Austin (attorney for TVLC). Livermore Charter Zone Corporation Livermore Charter Zone Corporation (“LCZC”) is a nonprofit public benefit corporation and the sole member of Independence Support, LLC. LCZC was initially formed in 2008 to own and operate a preschool and instructional daycare center, but the bylaws were amended in 2011 to redefine LCZC to support TVLC. Individuals associated with LCZC include: John Zukoski (Director); Bill Batchelor (Initial agent for service of process; President/CEO); Rick Swiers (President, TVLC Board member); Brenda Miller, Cheryl Weaver. 5 47044V2 / PRIVATE.575.1 The address listed for LCZC is 3252 Constitution Dr, Livermore CA (property subject to 2015 Bonds). Goldstone United Investments LLC Goldstone United Investments LLC was the owner of Independence Plaza (3090 Independence Drive, Livermore, CA), the 5.56-acre site that was acquired using the proceeds of the 2015 Bonds. Previously, 3090 Independence Drive was owned by 3090 LLC, and sold to Goldstone United Investments LLC in 2013. Individuals associated with Goldstone United Investments include: Bill Batchelor (executive); Xu Liu (executive); Julian Zegelman (also associated with California Preparatory Academies). The address for Goldstone United Investment is listed as 3090 Independence Drive, Livermore, CA. Another address for Goldstone United Investments was listed as 7901 Stoneridge Dr, Pleasanton, CA, which is the same address as Goldstone/Acre LLC. Goldstone/Acre LLC San Francisco Bay Preparatory Academy, which was to be located at Independence Plaza, along with Livermore Valley Charter Preparatory High School, was managed by Goldstone/Acre LLC. Goldstone/Acre LLC has the same address as, and was the sole member of, Goldstone United Investments, LLC, which owned Independence Plaza. Name variations of Goldstone/Acre LLC include Goldstone Acre Education Management, LLC and Goldstone Acre Land, LLC. It is also associated with Squaw Valley Education Management and Squaw Valley Land LLC (all have the same address 7901 Stoneridge Dr, Pleasanton, CA). It may also be associated with Squaw Valley Academy Bay Area, the Livermore International School (which is located at 3090 Independence Drive, Livermore CA). Individuals associated with Goldstone/Acre LLC include: Bill Batchelor (executive of Goldstone Acre Land, LLC and associated with Squaw Valley Academy Bay Area ). Independence Oaks LP Independence Oaks LP purchased Independence Plaza (3090 Independence Drive, Livermore) from 3090 LLC in 2013. Independence Oaks had been instrumental in developing the Independence Plaza and apparently advanced more than $2 million in purchase contract extension payments to 3090 LLC (in addition to the contract price). Independence Oaks then 6 47044V2 / PRIVATE.575.1 sold Independence Plaza to Goldstone United Investments LLC for $18,562,703. Goldstone United Investments then entered into the rent-free Ground Lease with the Borrower, Independence Support, and sold the Facilities to Independence Support for $16,247,503. All brokerage commissions were to be paid by Independence Oaks. The address of Independence Oaks is 7901 Stoneridge Dr, Pleasanton, CA, which is the same address as Goldstone/Acre LLC, Goldstone United Investments, LLC Squaw Valley Education Management and Squaw Valley Land LLC. It is also the same address as ACRE Cresta, LLC, the general partner of the Borrower (Independence Oaks) of the 2014 TRANs which were never issued. ACRE Cresta was owned 50% by ACRE Investment Company LLC, which is also listed at the same address. 3090 LLC 3090 LLC, an affiliate of Balch Enterprises, was the original owner of Independence Plaza (3090 Independence Drive, Livermore, CA). This property was leased to TVLC and Bay Area Preparatory Academy Foundation pursuant to a lease dated February 22, 2013. 3090 LLC had apparently been under contract to sell Independence Plaza to Independence Oaks LP since 2013. Independence Oaks had been instrumental in development the Project and had advanced more than $2 million in purchase contract extension payments to 3090 LLC (in addition to the contract price). The October 8, 2013 Addendum to Agreement noted TVLC/BAPAF was in default and had not paid rent since August 2013. The property was then purchased by Goldstone United Investments later in 2013. Balch Enterprises Inc. purchased 3090 Independence Drive in 2006 from Yang Bioscience, LLC. At that time, the assessed value of the property was $12,394,000. Other Individuals Involved Lynn Lysko: current TVLC CEO John M. Zukoski: • TVLC – interim CEO, Board member • Livermore Charter Zone Corporation – Director, Board member, Director of Finance Michael Parker: • Montevina Phase I – prior owner 7 47044V2 / PRIVATE.575.1 • Montevina Phase II – prior executive • ExTerra Realty Partners – owner David Clock: Montevina Phase I registered agent Richard Norris: attorney from Archer Norris, associated with Montevina Phase I & II Richard Swiers: TVLC board member, original agent for service of Livermore Valley Charter School Bill Batchelor: • Former TVLC CEO (until 8/24/15); Chief Operating Officer, Acting Secretary of TVLC (during 2012) • Initial agent for service of process of Livermore Charter Zone Corporation • Executive of Goldstone Acre Land LLC and associated with Goldstone/Acre LLC, which operated SF Bay Preparatory Academy o Owner of California Preparatory Academies o Associated with Squaw Valley Academy Bay Area, the Livermore International School (which is located at 3090 Independence Drive, Livermore CA) o CFO and Secretary of the board of SF Bay Preparatory Academy Foundation in 2014 (“SFBPA”) (one of three board members in 2014 – other board members were Robert Stewart, Chairman/CEO/Headmaster and Neil Cowles, Director) Summary There appears to be close relationships between many of the entities and individuals involved with both the 2012 and 2015 transactions, as well as the 2014 transaction that was never consummated. Close relationships such as these raise the question of whether these transactions were truly “arms’-length.” The failure of a transaction to be negotiated and entered into in an arms’-length setting can significantly contribute to deficiencies in the transactions’ framework due to these less-than arms’-length relationships. 8 47044V2 / PRIVATE.575.1