Christopher Cerf Conflict of Interest Investigation

8/7/2019 Christopher Cerf Conflict of Interest Investigation

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I--------\ CI T Y OF N E \ ^ . |Y O R K

T n e S p e c t e u C o M M l s s l o N E R o r l N v E s T { G ' A T t o N' F o n r u e N r w Y o n r C t r v S c H o o L D t s r n t c rE }O M AI DEN L A N E ' AOT H F L O O R

N EW YORK ' N EW YORK I OO3A

R I C H A R D J . C O N D O Ns P E C I& c o MMlSS lO N E R

TELEPHONE: (e_le)5 lo-1400FAX: (a la l s lo-1s50www.NYC5Cl.ORG

August22,2007Hon. Joel I. KleinChancellorNew York City Public SchoolsDepartment of Education52 ChambersStreet,Room314New York, NY 10007

Re:

DearChancellorKlein:An investigationconductedby thisoffice hasfoundthat ChristopherCerf,DeputyChancellorfor OrganizationalStrategy,HurnanCapital,andExternalAffairs of theDepartmentof Education("DOE"),solicitedcharitablecontributionsfiom executivesof

EdisonSchools,LLC ("Edison"),aDOEvendor,andLiberfyPartners,L.P.('LibertY'), aprivateinvestrnentfirm whichis themajorityownerof Edison.As a result,Cerf securedapledgefor a $60,000donationfromoneof the executives,the chairmanand chiefeiecutiveofficerof Liberty.Therequestedcontribirtionwouldhavebenefitedacharitablefoundationof whichCerfis a memberof the boardof directors.AccordingtoCerf, although the chairmanagreedto the $60,000 donation,he did nolpay it; Cerfwithdrew hii requestafterhe was askedalout it during the coursegli$gJg:"."11i9-ation,

ffiChristopherCerfSCI CaseNo.2007-0672

We Lave furlirei detenninedthatCerf,whoheidstockin Edison,relilOuj$gl$effi,ririiliililestigatio;mo-determinedthattheTEAMAcademyinNdwark,N.J.,for,whichCerfsen/esontheboardof directors,doesnotdo businesswiththeDOE, altiroughit is sponsoredby the samenatiorralorgatizationa-trjg$nolilors threeDOE chaser schools. Finallv, we determinedthat Cerfwhich he-H6iiitted atthe begiruringof

stockin February2007,


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Hon,J. L Klein August22,2.007

his DOE employmentcontainedsome inaccuraciesandomissionsquestionedabouttiremby inrrestigatorsandallowedto aThisir:vestigationwas initiated by the officeof the SpecialCommissionerofInvestigation("SCI") after media reportsappearedin February2007 statingthat Cerf haddivestedhirnselfof Edison stock on the day beforeaDOEpalents'group plannedto askhirn abcuthistiesto thecompany.l SCI investigatorsilterviewedCerf and #lwitnessesaffiliatedwith the DOE, Edison, undffitil;-and examinednumeroubdocumentsobtainedfrom those entities. In the courseof the investigation, this officediscoveredthe charitablesolicitations describedabo-v.q,.and.some media accounts whichconflictedwith the responseson Cerf s Wealso exarninedwhetherthere were any businessties betweenthe DOE and the TEAMAcademy,whereCerf is a member of the boardof directors.-*-B'gactof these mattersisdescribedbelow,

Cerf 's EdisonstockCe{ an afiorney,was appointed to his DeputyChancellorposition in December2AA6.FromMay 1997until April2005, hewasemployedby Edison in various executivepositions,includinggeneralcounsel and,ultimately,presidentand chief operating officer.Edison is theparentcompany of Newton Leamingwhich(alongwith other firms)providesSupplementalEducational Services("SES') to DOE studentsunder the FederalNo Child tift AenindAct.3 InzA03,Edison, which hadbepna iorporation whoseshareswerepublicly traded,was essentially acquiredby Libg$y, aprivate equity investmentfirm. Edisonwasconvertedfrom a publiclytraded companyto one whose stock wasprivately held. After the conversion, Liberty held approximately95 percent of the equityin Edison,andmost of the rernainderwas owned by ChrisWhittle, Edison's founder andchief executiveoffi cer.a

Cerfwasamongtire Edison executiveswho wasgrantedEdison stock and stockoptionswhenit wasa publicly-traded company. He andotherEdison shareholdersforfeitedthepublicly-tradedstock and optionsunderthe termsof Liberty's purchaseofthecompany.In retum,Liberfy gaveCerf andotherEdisonexecutivessharesin thenewlyformedprivately-heldEdison. Liberty grantedCerf20,000sharcsof ClassBcoulmonstockin Edison, Under the termsof Liberty'spurchaseof Edison, Cerf forfeited14,000sharesof theEdisonstock when he resignedfromthe companyin 2005.s Cerf

lnslt'ucliye Motnenl, irnes(ed.),Feb.10 ,2007,'rhFsFffiGffi aciidemichelp to students I dayan d is fundedby theTitle I allocationthatthe DOE recsivesfrom tlrefederalgovernment.Edisonand all SES providerscertifiedby theNew York StateEducationDepartnrentmayserviceDOE students.Although the DOEdoesnotselectSESpr.oviders,it pays them andmonitorstheirperformance.'See N. Schwartz,TheNineLiyes of Chris Whittle,Fortune,Oct.27,Z0A3.'Cerf continuedasa memberof Edison'sboardof directorsuntil2006.

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' SeeE.Gootman,SchoolsOfficialDeflectsQueryAboutS/oclrs,NewYorkTimes,Feb.9, 2AA7;An


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Hon.J. I. Klein August22,2007retainedthe remainipg6,000sharesof stockafterleavingEdison. The stock was notirujuUf, on any publiJ exchange,andthusit was'difficult to ascribe a nonetary valueto itat anyparticulartime'

By subpoena,SCI obtaineddocumentsfroni Edison and Liberty pertaining to thestockin tte privut"ly-held company.Accordingto Edison'soperatingagreementandifirnrution provicledto SCI by Edison'scounsel,beforeCerf could redeemhis Edisonshares,Liber.tywould have to sell thecompanyat aprofit- The aftorneyalso assertedthatCerfs Class6 shareswere worthless.He explainedthat in the event that Edison wassold,thecompany'scr.editorsandseveralcategoriesof ClassA shareholderswouldreceivepreferentialpaymentbeforeCerfs ClassB sharescor-rldbe redeerned'6'under

December20A6,from Cerf that his stock

6OnDecember22,2006, visedCerfbY e-mailthathi s000ClassB shares

a- J -


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Hon. J. L Klein August22,2007

ebruary 7th rf sent ane-mailocuments"that createor

of Edison:Effective imrnediatelyI inevocablyrelinquis! any andall equity interest in the' company. The only suchinterestis the "option like" sharesdescribedin greaterdetaii in the documentsweexchangedat the time of my deparfure. I would bemost grateful if you wereto make,entirely at your discretion,acharitablecontribution to the Danow Foundationin recognition of this voluntaryrelinquishmentof this interest.Best regards,ChrissTwohourslater,Cerfadvise'ilfiffflippO{ffiUy e-mailthathe"electedto takethepath of leastresistanceby relinquishing,in ruliting, atrYand all exitinginterest in Edison(which are in fact lirnited to theoneitem we have beendiscussing)."The messagemadeno mention of Cerf s requestfor contributionsto Danow.eCerf s messagerelinquishingtlieEdison shareswas senton theday beforeaffi 1'j;11?:3:i:X"J;::ii":iTi;*i:'i"#^:'illt:?;]'ffi*CPAC meetingindicatedthatCerfwouldbe askedabouthis interestin Edison. On the

8Cerfsenta certifiedletteronthesamedatetoffi#andffiat Liberrylcopyingi*|confirrrringhi se-n,ailan drepeatinghisrequestfor acontribution"t o theDarrowFoundation,whichrunsNorthern Canada. If of interest,I wouldbe to forward the particulars."

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wildernesscanoing[src]expeditionsfo rchildrenan dteenagers(manydesewingof sclrolarships)in


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Hon, J. I . Klein August22,2047eveningbeforethe.meeting,Cerfreeeivedane,rnailmessagetitled,"Word on thestreet,"frornffi, areporterfor the NeWYorkTines. Amongother things,.f f imbwrote:. .Thenrinutewespl i t , iheardwordonthestreet inBklynisthar[Chance}orKlein] madeyou give away your Edison interestto charityin responset#.

agenda."Approxirnately30 minutes later,Cerfe-rnaileda responseto[ChancellorKlein] didn't makeme do anything.Nor did heaskme to doanghing. Ridiculotrs.Where is this coming frorn? What is the 'street' you arerefering to? Is this out there in a way that you anticipatethat it will be thesubjectof a grillingtomon'ow?A pressinquiry.

to inquirewher:hislowingrnorning,writingthatheassumedthatCerfwasreferringto t; herefelredCerf to DOE HumanResources.

priorto thescheduledCPAC meeting,Cerff Edison,stating,"Per this email,Iany interestswith you areassociatedfrom any and all

reevening,Cerfe-rnailed,twasdueffireplied

sent an e-mail

At 9:55

obligationsarisingunderthedocumentexecutedon or aboutthedateof my dqpggSg.re."As with his earliermessagesto theLiberty andEdisonexecutives,crtf mk"'ffi toconsideracontributionto theDarrow Foundation.l0.-AccordingtoanewSpaperaccountoftlreFebruary8thCPACmeetinffi#fiffi askedCerfto describehis financial interestinbdison,to which h. "t"ffi,'

.'l'd be d"Iglttql todothat,'adding:'I

havenofrnancialinterestof any kind. Zero."'Askedb6ffiwhen hedivestedhimselfof Edisonstock,"... Cerfsaid he wouldbe'delighted'to acopyof hisfinancialdisclosurefonns ... . "Thatwillanswerall yourquestions,and that's what i'rn preparedto say."'l' Aftrt the meeting,Cerf acknowle-dgedto a reporter that he had relinquishedtheEdisonshareson thepreviousduy. 'tCerfappearedat SCI in May and July accompaniedby two attogreysand wasinterviewedunderoath. In his May testimony,he aclcnowledgedthe seriesof eventsdesmibedin thee-mailsandthe rnediaaccountdescribedabove.Cerf defendedhisdescriptionof his ClassB Edisonsharesas a "contingentequityinterest... which operatelike stockoptions."Cerf and his counselacknowledgedthatwhileullike stockoptions,

ttffi Ep]jd bye-nrailthefollowingday:"Chris..,.Gotit ,butdon'tentirelyknowwhatthismeans!Let'stalk!ffi"" E.cootrniriliipra.'' Id. ln respouseto anSC Isubpoerra,Edisonproduceda stockcertif icateirrdicating6,000sharesin Cerfsname;the certificatewasstamped"CANCELLED."


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Hon. J. L Klein August22,2407

ClassB shareiroldersneednot takeactionto obtaintheir shares,his descriptionwasneverthelessapplicable. He claimedthat it wasvalid becausein the event Edison wassold,ClassA shareholders- who invested$1i2 rnillionin the company- wouid be thefirst entitledto fr-rllreimbursementof their investment,plus annualinterest,beforetheremainingvalue,if any, was paid to ClassB shareholders.Ife addedthat the EdisonOperatingAgreenrentcategorizedthe ClassB sharesunderthe description,"ContingentShares."' '

CerfwasaskedabouthisFebruary7't.e.maitff iandhesaid+hatitpertainedtoadocurnentwlricffibreparedinc"o"Hrg!ionwithCerfsdeparturefrombdiron. Cerfsaidthat the documentwasdraftedUfffias a contractor an agreementconcerningCer{ and that the two haddiscussedit overseveralrnonths. Cerf wasshowntwo lettersdatedJanuary10, 2005 andMay I ,2A05obtainedby SCI from Edisonand he aclcnowledgedthattheyrverethe docurnentshe refered toThe letterswere onthe letterheadowere writtenIetteibont'aineda'iignature line indicating "AdT6pted"aboveCerf s typed name,butneitherletterbore his signature. Cerf testifiedthathe believed that he never signed thelettzu_inany form. The letterswere styled asa consultingagreementfor Cerfls servicestoffifot i.n y"*, after his departurefrom Edison. In return, Cerf.lyas to be paid thetesii lor$z'5mill ion,orfivepeicentofanyproceedsofthesai"orff i.ClassCandClassD stockin Edison. However,anypaymentsto Cerfwereto be madO"ffilyafter

Satisfied six specifiedfinancialobligations,includingoutstandingloans,a mortgage,andtaxobligationsto theIRS andtheStatesofNew York andTennessee.Ceif testifiedthathe d4!.gqtregardtheffiefiers asoperative,and explainedthattheywerean attemptUyffio makeamendsfor not includinga paymentto Cerfin the agreementto sell Edison to Liberty. Cerfsaidthathe consideredthe lettersas'lleaningless," that he never expectedto realizeanypaymentunder their terms, and thathe thereforeignored them. He statedthat for tlie ClassC and ClassD sharesto realizeanyvalue,Edison,which was soldto Libertyfor $112rnillion, would have to fetch morethan$700million in a futuresale,andthe C-lassA andClassB shareswor-lldreceivefirstpreference.Moreover,accordingto Cerf;ffinuA personaldebtsof rnore than$35

Askedwhat prompted hini to disposeof hisClassB Edisonshareson.!]l: daybeforethe CPACmeetin rf saidthatheknewhe would be aslce'd-d n, andhewa

ll Cerflsattorneysproducedthe referenceddocurnentto SCI.

rnillionwhichwould alsoreceive 'erencebeforeany paymentsto Cerf as set fortii in


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Hon, J. I. Klein August22,2007that he had no interestin Edison. Askedwhy he wrote toffiEregarding tf.tffiletters(which he regardedas"meaningless")on the morning of the CPAC meeting,Certstatedtirat he had awakenedlatethe previousnight (or early that morning) andrememberedthat thereexistedsomedocumentationof "an indeterminatenegotiation"withiltk*'o iJ" saidthat lie wasconcernedthat someonemight "tnakesomething"ofthe letteii,-inO to staveoff thispossibility,he decidedto relinquishany"purportedinterest"describedin tlreletLers.Solicitationsof contributionsfor thffiAs he disclosedin hi as he furtherdescribedin his testinronyat SCI,Cerf is a memberof the board of directorsof tire

contributionsto fromanyoneaffiliatedwith Edisonor Liberty.In his Mayinterviewat SCI,CerfsaidthatonapproximatelyMarch7,20A7, hehada conversationwitti f LibertY,in whiclr-heagama contributionto Darrow.'

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Darrow Foundation, a not-for-profit organizationwhich supportsajryjldernesscamp, andprovidesscholarshipsfor childrenandteenagersto attendthe carflF Cerf explairiedthatteginning in 2005,he took "a leadershiprole" in a eapitalcarnpaignto"save iltlffiIfrom extinction,"andsg,Leguestedcontributionsin hii February{007 ,-*uit tff$Hffiffiffi, and[*mb. Cerfaddedthat he hadnotpreviouslyso]icited

testifiedthat he AccordingtoCerf,ffi'specifically requesteda donation of$60,000,andtto Cerf, he undeLibertyor Edison.As of theMayinterviewat SCI,Cerf said not madeany payment toward his pledge,nor hadthey had any further communicationon thematter.

Soon afterCerf s May interviewat SCi, his counset*.t. to SCI alguing thathist for a donationfromf,ffirruas issible

Ceif s Counselstatedthat Celf was recusedfrom ln gconcerningEdison,includingits SEScontractwith its Newton LearnirqDivision.Counsel'pcitedauthority,however,limiteditself to solicitatrons

raCerf said that he.didnot havecopiesof the&. letters.

f f i"dnore,ponsestohisFebruarye-mailr .equests,andexcept |or. f f | f is*rehadnofurthercommunicationsv',ithEdisonor Liberfyemployeesonthe matter-


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Hon. J. I. Klein August22,2007

AfterCerfsMay testimonyat SCI,mornmg o Secondscheduledappearanceat SCI in July,' 'e-mailed#ffi

..,oqt-Sometimeagoyouwerekind enoughto offeragenerous.contributionto Darrow.'Camp,a not for profit wildernessfoundationon whichI am on the board. !Althoughwe haven'tspokenaboutyour offer in manymonths,I have nowconcludedthat it would bb the better coursenot to proceedwith the contribution.Again, I want to thank you immenselyfor your generousspirit. I hope all is well.Bestregards,Cluis.

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SSSS!1fi nancialcircumstances,


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Hon.J. L Klein -a - August22,2007ft/ ':.v .;'


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TEAM AcademySCI investigatorsinterviewedCerf concerninghr.^s-rnernbershipon the boardofdirectorsof theTEAM Academyin Newark ("TEAM").23 TEAM i, uo. rrrriitrrtiorrulPartner"of theKnowledge is powerprogram("Kipp"j, a nationalnot-ror_prontotganizationwhicli sponsorsandprovidestrainingandsupportto charlerschools. Tlu.eeNew York city charlerschoolsoverseenby the DoE areaiso institutio,.uipurtnersof theKIPP nationalorganization.'oAil IflPP charlerschoolspaya feeto theKIpp nationalorganization.The feedoesnot exceedthleepencentof eacl school,s,*""f pr.-pupilrevenlre,While TEAM andtlieCity KIPP schoolshavethis paymentobligation incommon,,TEAM doesnot haveanyfinancialrelationshipwiih it . nOg or"it, ftppcnanerscnools.

Hon. J. L Klein - i u - August22,2007

Cerf s, DOI andSCI investisatorsdiscoveredor lackofresponses)on hi

iehhe filed with th

23Cerf disclosedthison hisSCIobtaineddGffi;ffi frdr'it,. pOE pertainingto tlreDO E I(IPPschoolsan dth enationalorganizalion,

omissionsrnayresultin disciplinarypenalties,includingtqrrrinatiionof employmentandpossiblecr iminal

f,l:Tff:13',T;,.l,?T;TLfi:fl:T#ftffi::Hil:ffilililminterview,Cerfwasadvisedofmediaac"ountilffiHTuruy*a June2002,whiJstatedthat theUnitedStatesSecuritiesandExchangeCommission("SEC') had conductedaninquiry of Edison,andthat anumberof civil classactionlawsuitswe.efileJ ugulrrr,Edison and its off,rcers,and thatCerf wasnamedasa d.e-feJ.dantin someof the suits. Cerfhad not disclosedthis informationin his respons.r togffi5|t H. ;;k";wieiged thesematters,describedthe SEC inquiry as"infoimal," undtSiilned that it concernedarevelue recognitionmatterin whichEdisonfollowed the adviceof its accountinpfirm.Cerf saidthathe.lecailedthatEdisonslightly adjustedits statedrevenueto thesatisfactionof the SEC. Accordingly,Cerfchangedhis,responsefrom,,no,'to ,,yes,,toffiwhich;ri#ifpaisonha ,

t ' i t tfr"ontains cerf s notarizedsignatureabovea deqlarationtbatth e informationcontainedthereinwas full andcornpletetothe.bestof hi sknowledgean dinfonnation,an dthatfalsestaternentsor intentionalfuro.9ec$ton."Managedsuccessfulefforl to resolvi$b inquirywith no penalties"orfinoingof wrongdoing.,,

r c e n r r f i n -ierf i resurnewasaftacheoto ni#under thee'tr! describinghi sEdisonemployment,it stared,{anagedsuccessfulefforlto resolveSCinquirywithno penalties"orfindinsof wronodoino,,


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Hon. J. L Klein August22,2007With respectto the classactionsuits,Cerf testifiedthathehadnot beencalledasa witness,nor did he recallproducingany documentspefiaini4 wrrlrclr' trur LrrLrutr leuall prouuolng any documents pefiaining to the suits. He said thathe did not havea personalattorneyrepresentinghirn in thesematters,and thathe reliedthathe reliedon Edison'scounselandthe co 's iruurer. Cer.fthenchangedhisres from"no" to "yest' to questi

#.-f":L*y"._-anyinquiriesregardingtireabove,pleasecontactmeotheattorneyassignedto.thecase,ffian ber.u"h.autThankyou for yourattentionto this matter.Sincerely,

SpecialCornmissionerof Investigationfor theNew York City SchoolDistrict

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Christopher Cerf Conflict of Interest Investigation