Minnesota State Auditor issues e-update to schools regarding criminal and civil proceedings against NSFF
The Minnesota State Auditor has issued an e-update to Minnesota schools regarding the ongoing criminal and civil proceedings against the National School Fitness Foundation (NSFF). For background on the NSFF meltdown and its impact on school districts, see the most recent item relayed in
Legal Clips, below; additional past reports are linked in turn to one another, starting from that page. NSFF is accused of having operated a "Ponzi" scheme in which it sold fitness equipment to school districts with promise to reimburse the cost of equipment from donations and grants. School Fitness Systems (SFS), NSFF's for-profit arm, took in the payments for equipment, but NSFF, the nonprofit arm, never obtained donations and grants from which to reimburse the districts. Rather the reimbursements came from re-circulated money that SFS collected from new equipment sales. The scheme began to unravel when the Minnesota Commerce Department launched an investigation after 20 Minnesota school districts signed contracts with NSFF. After a Minnesota federal district court temporarily froze NSFF's assets in May 2004, the group filed for bankruptcy in Utah in June. In July, federal criminal charges were filed in Minnesota against SFS, resulting in guilty pleas from SFS and one of its officers. In October, NSFF and two officers were indicted on federal charges in Minnesota. In January 2005, the trustee in the Utah bankruptcy proceeding proposed a liquidation plan conditioned on dismissal of the federal criminal cases against NSFF and SFS. This plan would require school districts to participate in a pro rata distribution of the amount ultimately available for unsecured creditors and would return to schools only a small portion of the money the schools lost. Also in January, the U.S. Attorney for Minnesota unsealed new criminal charges against NSFF. This superseding indictment seeks forfeiture of individual NSFF officers' property, with the proceeds going toward restitution for victims. The Utah bankruptcy trustee is challenging the federal government's ability to pursue this criminal case and the related forfeiture proceeding. According to the Minnesota auditor's update, the federal courts will ultimately decide what money will be available for restitution to the school districts and whether it will come from the Utah bankruptcy proceeding or the Minnesota criminal case. At any rate, in the auditor's opinion, "schools will probably see little return on their losses" because "[i]t appears that $1 million in professional fees, including attorney fees and the trustee's fees, may eat up a sizeable portion of the assets available in the bankruptcy proceeding."
[NSBA School Law pages on bankruptcy trustee's proposed plan]