The United Neighborhood Organization’s charter-school network is facing possible new legal troubles, with an IRS audit of bonds issued for its Chicago schools.

The Internal Revenue Service audit involves nearly $37 million in bonds issued in 2011 for the UNO Charter School Network Inc., which has 16 campuses across the city that receive a total of about $50 million a year in funding from the Chicago Public Schools

The UNO charter network disclosed the IRS audit in a filing to bond investors Aug. 27.

Twelve days earlier, the IRS notified the Illinois Finance Authority — the state agency that issued the 2011 bonds on UNO’s behalf — it had opened an investigation. In the notification letter to the state, IRS officials said the 2011 bonds were “selected for examination because of information received from external sources or developed internally that caused a concern that the debt issuance may fail one or more provisions” of the federal Internal Revenue Code.

“The UNO Charter School Network has been notified by the U.S. Internal Revenue Service that the agency is examining bonds issued in 2011 to finance construction and expansion of UCSN charter schools by the United Neighborhood Organization,” a spokeswoman for the charter operator said Wednesday.

In June, UNO and its charter-school network settled a civil case filed by the federal Securities and Exchange Commission that accused them of defrauding investors who bought the bonds. The SEC accused UNO and its charter network of “making materially misleading statements” by failing to disclose a conflict of interest involving millions of dollars in state-funded school-construction contracts awarded to a company owned by a brother of the organization’s then-second-ranking executive, Miguel d’Escoto.

According to the SEC, those contracts threatened UNO’s ability to repay bond-holders because state officials could have demanded the return of tens of millions of dollars already spent on new UNO schools.

The Chicago Sun-Times revealed the insider deals in February 2013. State officials later froze $15 million in funding that hadn’t been paid out of a $98 million state grant but didn’t demand a refund of grant money that already had been paid.

The SEC said it learned of the deals from the Sun-Times investigation, which led to the ouster of d’Escoto and of Juan Rangel, the organization’s longtime CEO and co-chairman of Mayor Rahm Emanuel’s 2011 campaign.

UNO settled the SEC case by giving a federal monitor oversight of its contracting for a year and agreeing not to engage in future “conflicted transactions.”

At the time of the settlement, an SEC official also said, “With regard to other parties that may have contributed to UNO’s securities violations, the investigation continues. So charges against others, including individuals, are possible.”

UNO began in the 1980s as a Hispanic community activist group. Under Rangel, it moved into the lucrative charter-school business in 1998, expanding quickly with support from political figures including Illinois House Speaker Michael Madigan (D-Chicago), former Mayor Richard M. Daley and Emanuel.

Following the Sun-Times reports last year, UNO officials announced they had appointed new, separate boards of directors for the organization and for the charter-school network.

The board overseeing the schools recently voted to terminate its long-running management agreement with UNO, which had come to rely on the charter network for nearly all of its budget. UNO Charter School Network officials say they will manage the schools, which have more than 7,500 students.

Source: Chicago SunTimes

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