Major Renter to Students to Pay Millions for Civil Fraud
By SAM DOLNICK
The founder of a nonprofit group that has rented affordable apartments to a generation of New York City college students siphoned millions of dollars from the agency through a shell company, using the group’s money to fly back and forth to a second home in Aspen, Colo., and to pay for a luxury penthouse in Brooklyn, an investigation by the state attorney general’s office has found.
George Scott, the founder of Educational Housing Services, along with his wife, Yun Suk Scott, and the group’s board of directors, agreed to a $5.5 million settlement to resolve the inquiry, the attorney general’s office said on Sunday. Investigators found that the group’s board had acted with what the attorney general called “stunning” negligence in allowing a shell company, which Mr. Scott created, to charge Educational Housing millions of dollars for unnecessary services. The board was also faulted for approving Mr. Scott’s salary: $718,032 in 2010 and as much as $1.4 million in 2007, amounts the attorney general called excessive.
Most of the settlement, which included no admission of wrongdoing, will go toward reducing the students’ rents and improving conditions of their rooms, the attorney general’s office said.
“Siphoning millions of dollars at the expense of college students is deplorable,” Attorney General Eric T. Schneiderman said in a statement. “We have no tolerance for officers and directors who treat a nonprofit organization as a vehicle for personal enrichment.”
Criminal charges were not expected because the attorney general’s office considered Mr. Scott’s actions a case of civil fraud that was approved by the board of directors.
Mr. Scott founded Educational Housing in 1987 and turned it into the city’s largest provider of student housing other than the colleges themselves, the attorney general’s office said. The group operates several residences in Brooklyn and Manhattan.
Mr. Scott resigned as president last month. His lawyer, Robert S. Wolf, denied any wrongdoing and said Mr. Scott had done much to improve student life in the city.
“No monies were siphoned from E.H.S. and in fact all relevant decisions were ratified by E.H.S.’s board of directors,” Mr. Wolf said in a statement.
In 2002, Mr. Scott created a separate company, Student Services Inc., to provide cable, phone and Internet services to Educational Housing’s dorm rooms.
But investigators found that Student Services was only a middleman between the nonprofit agency and real cable companies, and that it charged Educational Housing millions of dollars over the years for no meaningful work.
The attorney general’s office depicted the board of directors as a willfully negligent group that allowed Mr. Scott to carry out his ruse over many years. In 2008, the board approved a contract for Student Services, the shell company, to provide services to Educational Housing at “unreasonably high rates” for the next five years, Mr. Schneiderman said.
“The breakdown in corporate governance at Educational Housing Services was stunning,” Mr. Schneiderman said.
The board members were found to have received exorbitant salaries, and some had inflated consulting contracts from the company as well, the attorney general’s office said.
As part of the settlement, the five-member board agreed to resign and pay $1 million from their personal funds. They were barred from ever serving on the board of a New York charity.
Educational Housing has two months to propose new board candidates to the attorney general’s office for approval.