Former school official in Chicago suburbs charged in case centered on bond proceeds

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CHICAGO – Criminal fraud charges were filed against the former superintendent of a suburban Chicago school district that has been under regulatory and criminal scrutiny.

Thursday's charges against Lawrence Wyllie accuse him of using bond proceeds to inflate the apparent fiscal health of Lincoln-Way Community High School District 210.

The U.S. Attorney’s office said the indictment was returned in federal court in Chicago. Wyllie’s attorney said he would fight the charges.

“As a result of the scheme, defendant Wyllie fraudulently caused Lincoln-Way to assume at least $7 million in additional debt by the fraudulent issuance of bonds, on which Lincoln-Way continue to pay interest, as well as suffer a loss of at least $80,000 in school district funds that were misappropriated and misused by Wyllie for his own personal benefit,” reads the indictment.

The indictment marks the first action by authorities stemming from the Lincoln-Way district's fiscal mismanagement, which has prompted a Securities and Exchange Commission inquiry and a federal grand jury probe. The SEC declined to comment on the status of its inquiry Thursday but the allegations in the indictment suggest securities fraud because Wyllie is accused of misleading investors.

“It was part of the scheme that defendant Wyllie fraudulently misused school district funds and resources, including by: making materially false statements and representations to the school board, the bond purchasers, and the public about the purpose and use of the 2009 bond proceeds so he could fraudulently conceal the school district’s true financial condition, and fraudulently misappropriating school district funds and resources for his own personal benefit,” the indictment says.

The SEC had previously said it would be working in tandem more with federal criminal prosecutors on cases, as underscored by charges both brought against officials of the town of Ramapo, N.Y. In such joint probes Justice typically acts first.

The former superintendent is also accused of fraudulently using at least $50,000 in district funds “to build and operate Superdog, a dog obedience training school that provided no benefit to the four high schools in the southwest suburban district,” the indictment says.

Wyllie, 79, also allegedly misappropriated at least $16,500 of school district funds by paying himself a retirement stipend and he received another $14,000 of school district funds by falsely describing it as compensation for unused vacation days. Neither was in his contract.

Wyllie, of Naperville, faces five counts of wire fraud and one count of embezzlement. He will be arraigned at a later date in the U.S. District Court for the Northern District of Illinois, Eastern Division.

The indictment was announced by Acting U.S. Attorney Joel Levin, FBI Special Agent-in-Charge Michael Anderson, and Kathleen Tighe, inspector general for the U.S. Department of Education. Each count of wire fraud is punishable by up to 20 years in prison. Embezzlement carries a maximum sentence of 10 years.

In a statement, Wyllie’s attorneys called him a model educator.

“Dr. Wyllie did not receive any funds or profit as a result of the bonds issued by the school district. All of the bond money referenced in the indictment was expended on school related issues. Dr. Wyllie looks forward to his day in court where he is confident he will be found not guilty,” said his attorneys Dan Webb and Bob Trevarthen. The statement also asserted that the Superdog project was on school grounds and benefited the schools, park district, and community.

Wyllie, who retired in June 2013, allegedly sought to bolster the district’s balance sheet because it was a factor in his ongoing employment and his contract was up for board renewal. In 2009, at the request of Wyllie and with board approval, the district sold $29 million of bonds.

Wyllie said $10 million of the debt was for capital expenditures, including construction or renovation of high schools “when in fact Wyllie knew that he would spend the money on the district’s general operating expenses and payroll,” federal documents said. The remainder refunded debt.

Wyllie transferred millions of dollars from a bank account where the district maintained its bond funds to a separate account that the district used for paying general operating expenses. That appeared to lower the district’s net operating expenditures and cost-per-pupil calculations.

Moody’s Investors Service in December cut the district to the junk rating of Ba1 after having slapped it with a five notch hit to Baa3 the previous April over its weak finances and use of short-term borrowing to deal with fallout from the improper accounting of past bond proceeds. The district has about $250 million of outstanding debt. The district is pressured by capital appreciation bonds that will drive debt service costs up substantially in 2021.

The district serves a population of about 104,000 in six southwest Chicago suburbs with a large and strong tax base. It has an enrollment of about 7,000.

In June 2016, the district disclosed that it had received a SEC subpoena ordering it to produce bond-related documents and communications, including statements related to its certification that the offering statements were materially correct. The SEC subpoena demanded documents related to the district's 2009 sale, 2013, and 2015 bond transactions. The SEC subpoena followed a May subpoena from a federal grand jury probing actions of the district and its former superintendent, including the use of bond funds, beginning in 2006.

The district has highlighted that it is cooperating and self-reported its accounting errors regarding the bond proceeds and has taken corrective actions. In a statement Thursday, the district again stressed its cooperation and self reporting.

“In July of 2016, the district hired a new director of finance. The director oversees day-to-day accounting operations and transactions. In June of 2017, the board approved the hiring of an experienced business manager to oversee all financial operations and budgeting services,” a statement from board of education president Joseph Kirkeeng said.

In 2015, the district hired Crowe Horwath to conduct a sweeping review of its accounting practices and use of proceeds from sales in 2006, 2007, and 2009 that helped finance the construction of two new high schools. Voters approved up to $225 million in borrowing in a 2006 referendum.

The report offered a stinging assessment of the management of bond proceeds. While it found that no proceeds were missing, it revealed some proceeds and interest earnings were improperly transferred among differing funds and spent on non-capital expenses. The district in May entered into a private placement on $4 million of tax anticipation warrants.

--Lynn Hume contributed to this story.

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Enforcement School bonds General obligation bonds Municipal disclosure Illinois