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SEC charges UNO with defrauding investors, warns probe 'not done'

The United Neighborhood Organization defrauded bond investors by “making materially misleading statements” about charter-school construction contracts involving an UNO insider, federal authorities said Monday as they announced they had filed a civil complaint against the clout-heavy group.

The organization has agreed to settle the civil case, agreeing to oversight for a year by an outsider.

But an official with the U.S. Securities and Exchange Commission, which began investigating after reports in the Chicago Sun-Times revealed the insider dealings, said the case isn’t closed.

“We’re not done,” said Peter K.M. Chan, the SEC’s assistant regional director for the municipal securities and public pensions unit in Chicago. “With regard to other parties that may have contributed to UNO’s securities violations, the investigation continues. So charges against others, including individuals, are possible.”

Chan declined to comment on what the federal government might do next.

The SEC’s complaint, filed Monday in U.S. District Court in Chicago, points blame at Juan Rangel, the longtime leader of the Hispanic community group and its charter network. Rangel was ousted in the wake of the scandal, which cost the group millions of dollars in state funding.

Rangel was co-chairman of Mayor Rahm Emanuel’s 2011 mayoral campaign and also forged close relationships with Illinois House Speaker Michael Madigan (D-Chicago) and other political leaders. Legislation sponsored by Madigan and signed by Gov. Pat Quinn in 2009 promised $98 million for new UNO schools.

The SEC’s allegations center on state-funded contracts that UNO awarded to the window company owned by a brother of Miguel d’Escoto, who was the organization’s senior vice president under Rangel.

The Sun-Times reported in February 2013 that UNO had used millions of dollars out of its state grant to pay Reflection Window, owned by Rodrigo d’Escoto, and d’Escoto Inc., a construction-management company owned by another d’Escoto brother.

“The Sun-Times article raised high-profile allegations that called into question UNO’s principal source of funds . . . and raised the prospect of administrative and criminal investigations,” the SEC said in the civil complaint.

While the state taxpayer dollars were pouring in, the organization’s school network borrowed more than $37.5 million from Wall Street bond investors in 2011. Documents that the UNO schools issued for potential bond investors disclosed its dealings with d’Escoto Inc. but didn’t disclose that UNO had hired Reflection Window to contracts worth $11 million.

The SEC said bond investors should have been told about the contracts with Reflection. The terms of the state grant — believed to be the nation’s biggest subsidy for charter schools — required UNO officials to notify the state of deals that could create the appearance of a conflict of interest. They did not do that, and the state could have demanded UNO return tens of millions of dollars already spent for new schools.

“UNO would not have had the cash to repay the grants and therefore would have had to liquidate the very revenue-producing assets (i.e., its charter schools) essential for repayment of the bonds,” according to the SEC complaint.

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The Chicago Public Schools provide UNO’s charter network with about $50 million a year, money that’s used to operate the schools and repay the bonds, records show.

UNO agreed to settle the civil charges by promising not to engage in any future crony contracting and accepting the oversight of a federal monitor.

Left unclear is the fate of Rangel, who was forced out in December from his $250,000-a-year job as UNO’s chief executive.

The SEC noted in its complaint that Rangel approved the contracts with the d’Escoto brothers’ companies and signed the statement to potential bond investors on UNO’s behalf.

The complaint also accuses Rangel of making false comments during a March 2013 conference call with investors. Seeking to re-assure bond investors who expressed concern about the contracting scandal, Rangel said the state had provided “no guidelines.”

Rangel could not be reached for comment Monday.

The SEC’s Chan and a spokesman for the U.S. attorney’s office in Chicago wouldn’t say whether the SEC had referred the case to federal prosecutors.

UNO and its charter schools are represented in the case by Mary Pat Burns of Burke Burns & Pinelli Ltd., the law firm that also served as UNO’s counsel in the 2011 bond deal. She did not return calls Monday.

Aides to Madigan, Quinn and Emanuel declined to comment, as did a CPS spokesman.

The underwriters for the bond deal were Milwaukee-based Robert W. Baird & Co. and Cabrera Capital Markets LLC of Chicago.

Cabrera Capital Markets chief executive Martin Cabrera Jr. became UNO’s chairman a year ago, promising reforms. He quit less than three months later.