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CITY OF N E \ ^ . |Y O R K

Tne Specteu CoMMlssloNER '

E}OMAIDEN NEW YORK' LANE'

or

lNvEsT{G'ATtoN

Fon rue Nrw Yonr Ctrv ScHooL Dtsrntcr

AOTH FLOOR IOO3A NEW YORK

RICHARD sPECI&

J.

CONDON

5 TELEPHONE: (e_le) lo-1400 FAX: (alal slo-1s50 www.NYC5Cl.ORG

coMMlSSlONER

22,2007 August
Hon. Joel I. Klein Chancellor New York City Public Schools Department of Education 52 Chambers Street,Room 314 New York, NY 10007

ffi
Re: ChristopherCerf No. SCI Case 2007-0672 Klein: DearChancellor Cerf, Deputy by conducted this office hasfoundthat Christopher An investigation Affairs of the HurnanCapital,andExternal Strategy, Chancellorfor Organizational of fiom executives charitablecontributions ("DOE"),solicited of Department Education ('LibertY'), a a LLC ("Edison"), DOEvendor,andLiberfyPartners,L.P. EdisonSchools, private investrnent firm whichis themajorityowner of Edison. As a result, Cerf secured and chief the donation from oneof the executives, chairman a pledgefor a $60,000 contribirtionwouldhavebenefiteda eiecutive officer of Liberty. Therequested of charitablefoundation whichCerfis a memberof the boardof directors.Accordingto
to Cerf, although the chairmanagreed the $60,000 donation, he did nol pay it; Cerf withdrew hii requestafter he was askedalout it during the coursegli$gJg:"."11i9-ation,

relilOuj$gl$e in that Cerf,whoheidstock Edison, We Lave furlirei detennined

2007, stockin February ffi,ririiliililestigatio;mo-determinedthattheTEAMAcademyin with does Cerfsen/es theboardof directors, notdo business on Ndwark,N.J.,for,which orgatization the DOE, altiroughit is sponsored thesamenatiorral by a-trjg$nolilors three
DOE chaser schools. Finallv, we determinedthat Cerf which he-H6iiitted at the begiruring of

Hon, J. L Klein

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August22,2.007

and containedsome inaccuracies omissions his DOE employment by inrrestigators and allowedto a abouttirem questioned was initiated by the office of the SpecialCommissionerof This ir:vestigation 2007 stating that Cerf had ("SCI") after media reports appeared February in Investigation hirnselfof Edison stock on the day beforea DOE palents' group plannedto ask divested hirn abcuthis tiesto the company.l SCI investigators ilterviewed Cerf and #l examined numeroub affiliatedwith the DOE, Edison, undffitil;-and witnesses from those entities. In the courseof the investigation, this office obtained documents some the discovered charitablesolicitations describedabo-v.q,.and. media accounts which with the responseson Cerf s We conflicted the whetherthere were any businessties between DOE and the TEAM also exarnined of these mattersis Academy,whereCerf is a member of the boardof directors.-*-B'gact below, described Cerf's Edisonstock Ce{ an afiorney,was appointed to his DeputyChancellorposition in December 2AA6. FromMay 1997until April2005, he was employed Edison in various executive by positions,includinggeneral counsel and, ultimately, presidentand chief operating officer. Edison is the parentcompany of Newton Leaming which (along with other firms) provides Supplemental Educational Services("SES') to DOE studentsunder the Federal No Child tift AenindAct.3 InzA03,Edison, which had bepna iorporation whose shares were publicly traded,was essentially acquiredby Libg$y, a private equity investment firm. Edisonwas converted from a publiclytraded companyto one whose stock was privately held. After the conversion, Liberty held approximately95 percent of the equity in Edison,andmost of the rernainder was owned by ChrisWhittle, Edison's founder and chief executive cer.a offi Cerf was amongtire Edison executiveswho was grantedEdison stock and stock optionswhen it was a publicly-traded company. He andother Edison shareholders forfeited the publicly-traded stock and options underthetermsof Liberty's purchaseof the company.In retum, Liberfy gave Cerf and otherEdisonexecutives shares in the newly formedprivately-heldEdison. Liberty granted Cerf20,000sharcsof ClassB coulmonstockin Edison, Under the terms of Liberty'spurchase Edison, Cerf forfeited of 14,000shares the Edison stock when he resigned of from the companyin 2005.s Cerf
' SeeE. Gootman, AboutS/oclrs, York Times,Feb. 9, 2AA7; Schools OfficialDeflects An New Query lnslt'ucliye Motnenl, (ed.), Feb.10,2007, irnes

'rhFsFffiGffi

help to students aciidemic I dayand is fundedby the Title I allocation the DOE recsivesfrom tlre federalgovernment. that Edisonand all SES providers certifiedby theNew York StateEducation Departnrent may service DOE students.Although the DOE doesnot select SESpr.oviders, pays them and monitorstheirperformance. it 'See N. Schwartz, Nine Liyes of Chris Whittle,Fortune,Oct.27,Z0A3. The 'Cerf continued a member Edison's boardof directors as of until2006.

Hon. J. I. Klein

a -J-

22,2007 August

leaving Edison. The stock was not of the retained remainipg 6,000 shares stockafter and thusit was'difficult to ascribe a nonetary value to it , irujuUf on any publiJ exchange, at any particulartime' froni Edison and Liberty pertaining to the By subpoena,SCI obtaineddocuments operatingagreementand stockin tte privut"ly-held company. Accordingto Edison's before Cerf could redeem his Edison ifirnrution provicledto SCI by Edison'scounsel, that at aprofit- The aftorney also asserted Liber.tywould have to sell the company shares, that in the event that Edison was Cerf s Class6 shareswere worthless. He explained would of categories Class A shareholders and several sold,the company's cr.editors be B preferentialpaymentbefore Cerf s Class sharescor-rld redeerned'6 receive 'under

20A6, December
from Cerf that his stock

O n D e c e m b e2 2 , 2 0 0 6 , r 000 ClassB shares

visedCerf bY e-mailthat his

Hon. J. L Klein

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A u g u s2 2 , 2 0 0 7 t

ebruary 7th

rf sent an e-mail ocuments"that createor

of Edison: ' Effective imrnediatelyI inevocably relinquis! any and all equity interest in the "option like" sharesdescribedin greater company. The only suchinterestis the we detaii in the documents exchangedat the time of my deparfure. I would be most grateful if you wereto make, entirely at your discretion,a charitable contribution to the Danow Foundationin recognition of this voluntary relinquishmentof this interest. Best regards, Chriss

Two hourslater,Cerfadvise'ilfiffflippO{ffiUy

to e-mail he"elected takethe that

path of least resistanceby relinquishing, ruliting, atrYand all exiting interest in Edison in (which are in fact lirnited to the oneitem we have been discussing)." The message made no mention of Cerf s request contributions Danow.e for to Cerf s message relinquishing Edison shareswas senton theday before a tlie

ffi

CPAC meeting indicatedthat Cerfwould be asked abouthis interest Edison. On the in

1'j;11?:3:i:X"J;::ii":iTi;*i:'i"#^:'illt:i ?;]'ffi*

8 Cerf

senta certified letter thesame toffi#andffiat on date Liberry lcopyingi*| "to confirrrring e-n,ail repeating request a contribution theDarrow and his whichruns his Foundation, for

wildernesscanoing[src] expeditions children for (manydesewing sclrolarships) in and teenagers of Northern Canada. If of interest, wouldbe I to forward the particulars."

Hon, J. I. Klein

August 22,2047

titled,"Word on the street," Cerf the.meeting, reeeived e,rnailmessage an evening before a reporter the NeWYork Tines. Amongother things, for . f ffrornffi, te :..T h e n ri n u te w e s plit,ihear dwor donthestr eetinBklynisthar i m b w ro
to t#. [Chance}or Klein] madeyou give away your Edison interest charity in response Approxirnately30 minutes later, Cerf e-rnailed responseto agenda." a

Klein] didn't make me do anything.Nor did he ask me to do [Chancellor anghing. Ridiculotrs.Where is this coming frorn? What is the 'street' you are refering to? Is this out there in a way that you anticipate that it will be the subjectof a grilling tomon'ow? A pressinquiry.

re evening, Cerf e-rnailed,t wasdueffireplied that he assumed Cerfwasreferringto t that A t 9 :5 5

; he refelredCerf to DOE Human Resources.

to inquire wher:his lowingrnorning,writing

prior to thescheduled CPAC meeting, Cerf "Per this email,I sent an e-mail f Edison, stating, any interestswith you are associated from any and all obligations arising under document the executed or about dateof my dqpggSg.re." on the As with his earlier messages the Liberty andEdisonexecutives, mk"'ffi to crtf to considera contribution theDarrow Foundation.l0 to .-AccordingtoanewSpaperaccountoftlreFebruary8thCPACmeetinffi asked to describe financial interest bdison, which h. "t"ffi,' Cerf #fiffi his in to be d"Iglttql to dothat,'adding:'I haveno frnancialinterest any kind. Zero."' of .'l'd "... Askedb6ffiwhen hedivested himselfof Edison stock, Cerfsaid he wouldbe 'delighted'to a copyof his financial disclosure fonns ... . "Thatwill
answerall your questions, that's what i'rn prepared say."'l' Aftrt the meeting, and to Cerf acknowle-dged a reporter that he had relinquishedthe Edison shares on the to previous duy.'t Cerf appeared SCI in May and July accompanied two attogreysand was at by interviewedunderoath. In his May testimony,he aclcnowledged series of events the desmibedin the e-mailsandthe rnediaaccountdescribed above.Cerf defendedhis descriptionof his Class Edison sharesas a "contingent B equityinterest... which operate like stock options."Cerf and his counselacknowledged while ullike stock options, that

ttffi the day:"Chris Gotit,but ..,. don't entirely this knowwhat means! Ep]jd bye-nrail following Let's talk!ffi" " E. cootrniriliipra.
Id. ln respouse an SCI subpoerra, to Edisonproduceda stockcertificate irrdicating6,000 shares Cerfs in "CANCELLED." name;the certificate wasstamped ''

Hon. J. L Klein

August 22,2407

need not take action to obtaintheir shares,his description was B Class shareirolders in applicable. He claimed that it wasvalid because the event Edison was nevertheless A $1i2 rnillionin the company- wouid be the sold,Class shareholders who invested plus annual interest, before the first entitledto fr-rllreimbursementof their investment, Ife value,if any, was paid to ClassB shareholders. addedthat the Edison remaining under the description, "Contingent Agreenrentcategorizedthe ClassB shares Operating Shares."''

CerfwasaskedabouthisFebruary7't.e.maitffiandhesaid+hatit pertainedtoadocurnentwlricffibreparedinc"o"Hrg!ionwithCerfsdeparturefrom Ufffias a contractor an agreement wasdrafted bdiron. Cerf saidthat the document
it Cer{ and that the two had discussed over severalrnonths. Cerf was shown concerning January 10, 2005 and May I ,2A05 obtainedby SCI from Edison two lettersdated and he aclcnowledged theyrverethe docurnentshe refered to that The letters were on the letterheado a'iignature line indicating "AdT6pted"above Cerf s typed name, but Ietteibont'ained neitherletter bore his signature. Cerf testifiedthat he believed that he never signed the lettzu_inany form. The letters were styled asa consultingagreementfor Cerfls services toffifot i.n y"*, after his departurefrom Edison. In return, Cerf.lyas to be paid the

were written

tesiilor$z'5million,orfivepeicentofanyproceedsofthesai"orffi.ClassCand to Class stockin Edison. However,anypayments Cerfwereto be madO"ffilyafter D including financial obligations, outstanding loans,a mortgage, six specified Satisfied the States ofNew York andTennessee. andtax obligations the IRS and to the Ceif testifiedthat he d4!.gqtregard ffiefiers asoperative, and explained thattheywerean attemptUyffio make amends not includinga paymentto Cerf for
in the agreement sell Edison to Liberty. Cerf saidthat he consideredthe letters as to 'lleaningless," that he never expectedto realizeany payment under their terms, and that he thereforeignored them. He statedthat for tlie ClassC and Class D shares to realize anyvalue,Edison,which was sold to Liberty for $112rnillion, would have to fetch more than$700million in a future sale,and the C-lass andClassB shareswor-lldreceivefirst A preference. personaldebtsof rnore than $35 Moreover, accordingto Cerf; ffinuA 'erence rnillionwhichwould also receive beforeany paymentsto Cerf as set fortii in

Asked what prompted hini to dispose his ClassB Edison shareson.!]l: day of before CPAC meetin the rf said thathe knew he would be aslce'd-d n, andhe wa

ll Cerfls attorneys docurnent SCI. producedthe referenced to

Hon, J. I. Klein

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22,2007 August

tf.tffi that he had no interest in Edison. Asked why he wrote toffiEregarding "meaningless") the morning of the CPAC meeting, Cert on as letters(which he regarded the previous night (or early that morning) and statedtirat he had awakenedlate "an indeterminate negotiation" of rememberedthat thereexistedsomedocumentation that someonemight "tnake something"of lie was concerned iJ" saidthat withiltk*'o "purported the letteii,-inO to staveoff this possibility,he decidedto relinquishany in interest"described tlreletLers.

for of Solicitations contributions thffi

as he further in As he disclosed hi of the board of directorsof tire describedin his testinronyat SCI, Cerf is a member Darrow Foundation, a not-for-profit organizationwhich supportsajryjldernesscamp, and to for providesscholarships childrenandteenagers attendthe carflF Cerf explairiedthat "a leadership to"save iltlffiI role" in a eapital carnpaign teginning in 2005, he took

{007 ,-*uit tff$H in contributions hii February from extinction,"andsg,Leguested so]icited that and[*mb. Cerfadded he had not previously ffiffiffi, with Edisonor Liberty.In his May affiliated anyone from to contributions March 7,20A7 hehada conversation , interviewat SCI,Cerfsaidthaton approximately he f LibertY,in whiclr- agam witti

Cerf,ffi' a contributionto Darrow.' Accordingto a testifiedthat he specifically requested donation of

and $60,000, t
to Cerf, he unde

at Liberty or Edison. As of theMay interview SCI,Cerf said

not made any payment toward his pledge,nor had they had any further communication on the matter. Soon after Cerf s May interviewat SCi, his counset*.t. to SCI alguing that his

fromf,ffirruas t for a donation

issible

lng that Celf was recusedfrom stated Ceif s Counsel concerningEdison, includingits SEScontractwith its Newton LearnirqDivision. Counsel'pcited authority,however, limited itself to solicitatrons

ra Cerf said that he.did not havecopiesof the&.

letters.

ffi"dnore,ponsestohisFebruarye-mailr.equests,andexcept|or.ff|fis*rehadno v',ith on or employees the matterfurther communications Edison Liberfy

Hon. J. I. Klein

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August 22,2007

AfterCerf s May testimony SCI, at

mornmg o Second scheduled appearance SCI in July,' at '

e-mailed#ffi
. .,oqtSome ago werekind enough offera generous. time you to contribution Darrow.' to

Camp,a not for profit wildernessfoundationon which I am on the board. ! Although we haven'tspokenaboutyour offer in many months,I have now concludedthat it would bb the better coursenot to proceedwith the contribution. Again, I want to thank you immensely for your generous spirit. I hope all is well. Bestregards, Cluis.

fi circum stances, SSSS!1nancial

Hon. J. L Klein

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August 22,2007

ft/ ':.v .;'

Hon. J. L Klein

-i u-

August 22,2007

TEAM Academy SCI investigators interviewed Cerf concerninghr.^s-rnernbership board on the of directorsof the TEAM Academyin Newark ("TEAM").23 TEAM i, uo . rrrriitrrtiorrul Partner" of the Knowledge is power program ("Kipp"j, a national not-ror_pront otganizationwhicli sponsors providestraining and supportto charler and schools. Tlu.ee New York city charlerschoolsoverseen the DoE are aiso institutio,.uipurtners by of the KIPP national organization.'o IflPP charlerschools paya feeto Ail the KIpp national organization.The fee doesnot exceed thlee pencent eacl school,s,*""f pr.-pupil of revenlre, While TEAM and tlie City KIPP schoolshave this payment obligation in common,,TEAM doesnot haveany financialrelationshipwiih it . nOg or"it, ftpp cnanerscnools. Cerf s , DOI and SCI investisators discovered or lack ofresponses) hi on ieh he filed with th

f,l:Tff :13',T;,.l,?T;TLfi :fl:T#ftffi::Hil:ffi lililm

ffiwhich;ri#ifpaisonha

that the United StatesSecurities ExchangeCommission("SEC') and had conductedan inquiry of Edison,and that a numberof civil classactionlawsuitswe.e fileJ ugulrrr, Edison and its off,rcers, and that Cerf was named as a d.e-feJ.dant some of the suits. in Cerf had not disclosedthis information in his respons.r togffi5|t H. ;;k";wieiged these matters, describedthe SEC inquiry as "infoimal," undtSiilned that it concerned a revelue recognitionmatterin which Edison followed the advice of its accountinpfirm. Cerf saidthat he.lecailedthat Edisonslightly adjusted statedrevenue its to the satisfaction the SEC. Accordingly, of Cerf changed his,response from,,no,'to ,,yes,, to

interview, Cerfwasadvised ofmediaac"ountilffiHTuruy June2002,whiJ stated *a

23 Cerf disclosed on his this

cerf s notarized signature abovea deqlaration the information tbat contained therein was full andcornplete tothe.best hisknowledge of and infonnation, that falsestaternents intentional and or omissions rnayresultin disciplinary penalties, includingtqrrrinati no f e m p l o y m e n tn dp o s s i b l e r i m i n a l io a c r cenr rf in furo.9ec$ton. ierf i resurne aftacheo ni#under was to thee'tr! describing Edison his employment, it stared, "Managed {anaged successful successful to resolveSCinquiry efforl efforl resolvi$b inquirywithno penalties"or with no penalties"or findinsof wronodoino,, finoing wrongdoing.,,

organizalion, t'ittfr"ontains

SCI obtained dGffi;ffi frdr'it,. pOE pertaining tlreDOE I(IPP schoolsandthenational to

Hon. J. L Klein

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August 22,2007

4 wrrlrclr' trur LrrLr leuall prouuolng any documents pefiaini a witness,nor did he recall producingany documentspefiaining utr

With respectto the classactionsuits, Cerf testified that he hadnot beencalled as

to the suits. He said that

he did not have a personalattorney representing hirn in thesematters, and that he relied 's iruurer. on Edison'scounselandthe co Cer.fthen changed res his from "no" to "yest' to questi

inquiries regarding above, tire please contact meo #.-f":L*y"._-any

Thank you for your attentionto this matter.

theattorney assigned case,ffian ber.u"h.aut to.the

Sincerely,

SpecialCornmissioner of Investigation the for New York City School District