WASHINGTON — The Internal Revenue Service is auditing bonds issued in 2011 for a charter school operator in Chicago that settled securities fraud charges with the Securities and Exchange Commission in June.

The borrower, UNO Charter School Network, Inc., disclosed the audit in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system on Aug. 27.

The Illinois Finance Authority issued $36.78 million of tax-exempt bonds and $730,000 of taxable bonds in October 2011 for UNO Charter School Network.  The bonds were issued to repay a portion of loans incurred to finance and refinance capital projects, and to finance renovations to one of the network's campuses, according to the official statement. The audit only pertains to the tax-exempt bonds.

The IRS' letter informing the issuer of the audit said that the agency routinely examines bond issues but also suggested that the audit is targeted. The letter said these bonds were "selected for examination because of information we received from external sources or developed internally that causes a concern" that there may be tax-law violations, according to the event notice.

The event notice did not say exactly what concerns the IRS or what tax-law violations it thinks may have been committed. However, in June, the Securities and Exchange Commission charged UNO Charter School Network Inc., and the United Neighborhood Organization of Chicago, the bonds' guarantor, in federal district court in Illinois because they failed to disclose a transaction that presented a conflict of interest and said that its conflicted transactions could hurt its ability to repay the bonds.

The UNO entities settled the charges by agreeing to an injunction against engaging in any further "conflicted transactions" and by retaining an independent monitor to detect and prevent other conflicts of interest, according to court papers. The defendants neither admitted nor denied the charges. At the time the charges were filed, the SEC said it was continuing its investigation.

In the official statement for the 2011 bonds, UNO assured investors that its conflicts-of-interest policy was more robust than was required for nonprofits, and it disclosed that it agreed to pay a company that was owned by a brother of UNO's chief operating officer to serve as an owner's representative during construction for one of its schools. However, it did not disclose a much larger contract with a company owned by another brother of the COO to supply and install windows for the school, according to the SEC.

Additionally, UNO did not disclose in the OS or later documents that it had breached the conflict-of-interest provisions in grant agreements UNO had with the Illinois Department of Commerce and Economic Opportunity. UNO had entered into to grant agreements totaling $98 million in June 2010 and November 2011 to help finance the construction of three schools. Although, each grant contained a provision stating that the IDCEO had to be notified of any conflicts of interest that arose, but UNO did not notify IDCEO about its conflicts. If UNO breached the conflict-of-interest provisions in the agreements, IDCEO could suspend grant payments and recover grant funds already paid, but these consequences were not disclosed.

On Feb. 4, 2013, the Chicago Sun-Times published an article alleging UNO violated provisions of the grant agreements. Later that month, UNO disputed allegations that it had violated the agreements but decided to terminate the COO, suspend the smaller contract that had been disclosed, and retain a retired federal judge to spearhead an audit, the SEC said in court papers.

On March 27, 2013, UNO hosted an investor call regarding its previous year's financial results. During the call, a representative from Prudential asked UNO why it had entered into the contracts with the companies owned by the COO's brothers, since most charter schools prohibit conflict-of-interest transactions. In response, UNO's chief executive officer falsely stated the contracts were not prohibited because there were no conflict-of-interest guidelines in the grant agreements, according to the court papers.

On April 25, 2013, IDCEO notified UNO that it was temporarily suspending one of the grant agreements and withholding any further grant fund payments. Because of the suspension, UNO couldn't pay its construction contractors in a timely fashion, which resulted in liens being placed on one of the schools, the charging document said.

Robert W. Baird & Co. and Cabrera Capital Markets, LLC served as underwriter for the bonds, and Kutak Rock LLP served as bond counsel, according to the OS.

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