Many people in one of my home states — Arizona — seem to have no concept of a conflict of interest.

When charter schools were authorized in Arizona in the mid-1990s, it wasn’t long before a young woman “researcher” at the Goldwater Institute was appointed Chairperson of the State Charter School Board. And that very same Chairperson quickly issued a charter to a non-profit foundation — that was really an artifice created by K12 Inc. — that created the Arizona Virtual Academy (AVA), a huge cybercharter. Then Arizona Virtual Academy soon hired that very same Chairperson as its Director, who decided that all materials and services of the AVA would be purchased from K12 Inc. And before long and shortly after the Chairperson resigned from the State Charter School Board, K12 Inc. hired Chairperson into the position of Senior Vice President for Education, and Policy & External Affairs. So you see, this person is not only the director of one of the largest online Charter schools in the nation, but she also serves as a vice president of the company from which her charter school purchases nearly everything. (Incidentally, AVA is the cybercharter that got caught outsourcing essay grading to India.) Anybody have a problem with this? Not in Arizona.

One of the first brick-and-mortar charter schools in Arizona was named Citizen 2000. In the middle of its second year of operation, its 1,000 enrolled students showed up for class only to find a note of the door informing them that Citizen 2000 was closed for business. The Director was on her way to Chicago for good. She had been paying her divorce lawyer out of school funds, paying her mother’s mortgage, and had hired her sister as assistant director at an exorbitant salary. I was being deposed in a FOIA case by an Assistant Attorney General at about that time, and I asked whether the state had plans to pursue a case against the former Director of Citizen 2000. “No, we’re not interested.” Fine, so seemingly nobody in Arizona cares about conflicts of interest.

However, now and then the powers that be in Arizona will come down on some small fry in an attempt to prove that they are policing double dealing. Years ago, an assistant superintendent of public instruction got canned because he was running a textbook company on the side while subtlely suggesting to teachers and administrators that he knew where they could buy some really good textbooks. More recently, a school board member in a suburban Phoenix school district was nearly indicted when it was discovered that the board on which he sat was contracting with his HR company for some minor services.

Why then, is a blind eye turned to massive conflicts of interest in the charter school domain?

Consider the case of BASIS charter schools. If you have spent the last 15 years in Antarctica without internet access and no subscription to US News and World Report, then you probably haven’t heard of the BASIS charter schools. BASIS operates about a dozen charter schools, mostly in Arizona but also in San Antonio and Washington, D.C. BASIS is the creation of Michael Block, a retired econ professor from the University of Arizona. To read what the media write about BASIS, this econ prof has discovered the magic bullet, the secret to taking ordinary students and turning them into National Merit Scholars with their pick of any Ivy League college. But the truth is that BASIS charter schools — which claim to admit students only by lottery — put out a sales pitch that scares the bejeebers out of any parent whose kid isn’t already National Merit potential and then flunks out 90% of the students with a daunting gauntlet of tests from elementary grades right up to high school. By the time of graduation day at a BASIS charter, the elementary grades have been winnowed down from 200 to two dozen students. Based on graduates test scores and college acceptance rates, gullible outlets like US News and World Report rate a couple of BASIS schools in the top ten in the nation. Ridiculous, of course.

Some conflict of interest concerns have been raised about BASIS schools in the past. It was discovered that BASIS had been outsourcing bookkeeping services to Block’s wife’s relatives in the Czech Republic. Small potatoes. The really big potatoes are only now coming to light. BASIS has heretofore operated as a private corporation. Even though their revenues come almost exclusively from public money, they have refused to divulge even the most basic financial information. But for some unknown reason, BASIS Scottsdale — another one of the top ten high schools in the U.S. — has been operating as a non-profit for the first few years of its existence. Consequently, they must file an IRS Form 990 and report some financial information. IRS Forms 990 are publicly available. Voila!

And here’s what BASIS Scottsdale’s 990 Form looks like for fiscal year 2012. You can download a copy here.

It would take two accountants and three lawyers to decipher Form 990 for BASIS Scottsdale. But to an even moderately skeptical eye, a couple things stand out.

• BASIS Scottsdale took in more than $32,000,000 in taxpayer money, close to 93% of its total revenues.
• Roughly half ($18,593,866) of the revenues were paid as “Salaries & employee benefits.” The other half was paid for “Other expenses.”
• Then on page 38, one finds that BASIS Scottsdale charter school is purchasing its employees and “management services” from its parent company’s Director, Michael Block:

The $18,593,866 that BASIS Scottsdale paid their teachers is exactly the amount the school paid its Director Michael Block to lease employees from his private company. And in addition, Block received more than $7 million for “management fees.” (In the prior year, Block received $14.5 million for the “subject specialists” he leased to the school and $5.2 million for management.) How much managing does one little school of a couple thousand kids require?

So we see that more than $30,000,000 was paid out to a private vendor who happens to be the owner of the very charter school paying out the cash, and there is no transparency whatsoever on how that money was spent. Obviously, much of it went into the pockets of uncertified “subject specialists” (as BASIS prefers to call its teachers), and some of it went into the pockets of “managers.” How much of it went into Michael Block’s pocket will remain unknown. One can speculate that all the other BASIS charter schools are similarly leasing “subject specialists” from Michael Block Unincorporated and buying management services at the same store. We’ll never know.

Perhaps even doing business in the shadows is still too much accountability for BASIS schools, because their newest venture is a BASIS school in Silicon Valley which will be wholly private. Ironically, when BASIS Scottsdale was launched a few years back, it was advertised as a private school; but when the fall term came around and fewer than 10 students had enrolled, it quickly converted to charter school status. Crony capitalism is always safer than that nasty free market.