For more than a year, federal investigators pursued suspicions about Nicholas Trombetta, a high-flying educator with small-town origins who created the biggest, richest cyber school in the state.
From his Beaver County headquarters in Midland, Mr. Trombetta painstakingly built an elaborate money-making machine called Pennsylvania Cyber Charter School. Fueled by taxpayers, the school became wildly successful over the years -- more than 10,000 students and $100 million in revenue in 2012 -- and a savior for depressed Midland.
But Mr. Trombetta didn't stop there. He is accused of creating entity after entity, ultimately controlling what prosecutors said was an intricate web of interlocking businesses whose purpose was to enrich himself, his sister and various associates.
After months of conducting records searches and interviews, and wielding the power of the grand jury, investigators Friday revealed that they had finally peeled away enough layers of the proverbial onion to file 11 fraud and tax charges against Mr. Trombetta.
Prosecutors claim the educator and entrepreneur stole nearly $1 million.
"We allege this was a conscious, intentional scheme to steal money that was to be used to educate our children," U.S. attorney David Hickton said during a news conference Friday at the FBI field office on Pittsburgh's South Side.
J. Alan Johnson, a former U.S. Attorney who is now representing Mr. Trombetta, said his client will plead not guilty.
Mr. Johnson would not elaborate on Mr. Trombetta's defense, saying they will make that argument in court.
"As convinced as they are that they have a case, we're as convinced they do not," he said.
Detractors have been waiting years for Mr. Trombetta to get what they consider his comeuppance, especially after a state grand jury investigation several years ago seemed to fizzle out.
"Finally we got some results," said Mike Barney, an education entrepreneur and longtime Trombetta critic.
"So we've been vindicated then," said Karen D. Beyer, a former state Republican legislator who for years raised concerns about cyber charter school funding in general and Mr. Trombetta in particular. "I'm so delighted. Look, the taxpayers had an opportunity and the Legislature had an opportunity with that cyber charter bill to control this years ago, and they failed to act and now we're seeing the results of that."
The governor's office did not respond to a request for comment and instead issued a statement through the state Department of Education, saying Gov. Tom Corbett "renews his call for comprehensive charter school reform."
The department has cooperated with the investigation and said it will examine contracts between PA Cyber and other entities "to ensure they are for the sole benefit of students and not for personal gain."
Mr. Trombetta, the grand jury said, used diverted funds to pay for houses, a Florida condominium and a $300,000 twin-engine plane as well as more mundane items such as groceries and restaurant tabs.
The indictment alleges that the former wrestling coach and school superintendent formed businesses that billed for doing no work; masked his control of a corporation by naming straw owners; hid income from the IRS; took $550,000 in kickbacks on a laptop computer contract with Virginia-based NCS Technologies Inc.; and even "caused" employees to make $40,000 in individual payments to his favored political candidates before reimbursing them through one of his companies.
Although no such charges have been filed, there is a federal statute that prohibits making campaign contributions in the name of another person, or what are referred to as "conduit political contributions."
Also charged in the alleged tax conspiracy was Neal Prence, an accountant based in Koppel.
Mr. Prence's attorney, Stan Levenson, said he is out of town and had not yet read the indictment.
"We've been expecting this," he said. "This is no surprise.
"He has always denied he did anything illegal, and I'm anxious to see the government's case and read the indictment."
Prosecutors left open the possibility of additional charges and defendants.
The grand jury handed up its charges Wednesday. Mr. Trombetta and Mr. Prence surrendered Thursday to the FBI. Quietly -- and unbeknownst to the media -- they appeared before a federal magistrate and were released on $50,000 unsecured bond pending their arraignment next week.
In the 41-page indictment, the grand jury alleged Mr. Trombetta engineered a scheme to suck taxpayer dollars into his own pocket.
Money flowed from school districts to PA Cyber and then to a series of businesses formed by Mr. Trombetta, starting with the nonprofit National Network of Digital Schools Management Foundation (NNDS), which provided educational management services and curriculum.
A cyber charter school is a public school open to students from throughout the state. Local and state funds that would otherwise go to traditional public schools follow students to PA Cyber when they enroll there.
Struggling school districts have protested that the diversion isn't fair because teaching kids by computer doesn't cost nearly as much as educating them in schools.
Prosecutors allege that those taxpayer funds would flow from NNDS to Avanti Management Group, a for-profit that Mr. Hickton referred to as Mr. Trombetta's "savings account or retirement account." From there they would head to One2One Enterprises, what Mr. Hickton called Mr. Trombetta's "own personal MAC machine."
Most of the revenue from each of the entities stemmed from contracts with other entities controlled by Mr. Trombetta, according to prosecutors. One was the other's lifeblood, and all were controlled by one person.
Although Avanti is winding its business down, NNDS is still viable -- and remains intimately connected to PA Cyber. As of June, NNDS had revenue of nearly $58 million, 84 percent of which came from PA Cyber.
Mr. Trombetta, the indictment said, "also concealed his position as the direct beneficiary and recipient of funds generated by PA Cyber, the school wherein he held the position of CEO."
He is described by the grand jury as being "the controlling party on both sides of transactions" involving PA Cyber and NNDS, and then, NNDS and Avanti, and Avanti and One2One.
The indictment alleges that Mr. Trombetta stole $990,000 from the various entities, but that in all, $8 million in funds was diverted to Avanti for tax purposes.
According to the indictment, Mr. Trombetta conspired with his sister, Mr. Prence and others to conceal the true source and amount of his income, so as to pay the IRS less than was due. To do that, prosecutors said, he diverted that income to Avanti. Four straw owners selected by Mr. Trombetta held Avanti and intended to sell back their stake for $500,000 apiece.
Money from Avanti was then funneled into One2One, which was founded by Mr. Trombetta and his sister, Elaine Trombetta Neill, in January 2006. Ms. Neill was charged with filing a false tax return earlier this month and is expected to plead guilty Oct. 8.
Prosecutors have said that she had no experience or expertise in either business development or consulting, and that One2One functioned as a shell company from which Mr. Trombetta used money for his day-to-day expenses.
The indictment alleges that Mr. Trombetta directed transactions from Avanti and One2One that benefited his family members and others including his girlfriend, whose Mingo Junction, Ohio, home was bought for $73,000 in July 2009.
In collecting money from Avanti, Mr. Trombetta directed that monthly checks -- of up to $18,000 -- be written to One2One for "consulting fees," for nearly four years from August 2008 through June 2012.
One2One, the indictment said, provided no such services.
The grand jury accused Mr. Prence of taking income that should have been reported by Mr. Trombetta and moving it to the tax returns of his sister, as well as the four straw owners of Avanti.
The accountant is accused of filing false tax returns for Ms. Neill over a period of several years from 2007 through 2011.
The practice of Mr. Prence understating Mr. Trombetta's income continued from 2006 to 2011, prosecutors said.
According to Mr. Hickton, when the investigation into PA Cyber and the off-shoot groups began to intensify in July 2012, Mr. Prence and Mr. Trombetta created a new entity, Presidio Education Network LLC. The idea, the U.S. attorney said, was to drain money out of Avanti.
As soon as the charges were announced Friday morning, both PA Cyber and NNDS -- using the same spokeswoman -- quickly sent out statements distancing themselves from Mr. Trombetta and proclaiming their innocence.
Mr. Trombetta of East Liverpool, Ohio, retired last year and went to work as an administrator for Kuhn's Quality Foods.
"Even though the Department of Justice said from the outset that PA Cyber itself was not a target of the investigation, we conducted an internal evaluation and restructuring of our senior administrators to assure our school was performing in a manner that maintains its strong reputation among state education officials, the general public, and our students," PA Cyber CEO Michael J. Conti said.
The U.S. attorney was careful to not make Friday's announcement any kind of policy statement on the value of cyber education or its funding formulas -- a discussion for another day.
"Obviously, it costs more in a brick-and-mortar context to educate than online," Mr. Hickton said. "This is not an indictment of cyber education. Cyber education is here to stay."
For Mr. Barney, an education consultant who was hired, fired and sued by the school (and sued it in turn) the changes are not enough.
"I think this is the first step in correcting the corruption that was in place and what's needed now is the restructuring of PA Cyber," Mr. Barney said.
In his view, that corruption was personified by Mr. Trombetta.
"This is a behavioral condition for control of power and corruption," Mr. Barney said. "I think the behavior always existed. And what I believe is that as the money and power came through PA Cyber, the behavioral pattern became more of an addiction."
First Published August 23, 2013 11:30 AM