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T E L E P H O N E : ( e _ l e )5 l o - 1 4 0 0
RICHARD J. CONDON
FAX: (alal slo-1s50
sPECI& coMMlSSlONER
www.NYC5Cl.ORG

August22,2007

Hon. Joel I. Klein

Chancellor
New York City Public Schools
Department of Education
52 Chambers Street,Room 314
New York, NY 10007

ffi
Re: ChristopherCerf
SCI CaseNo.2007-0672

DearChancellorKlein:

An investigationconducted by this office hasfoundthat ChristopherCerf, Deputy

Chancellorfor Organizational HurnanCapital,andExternalAffairs of the
Strategy,
Departmentof Education("DOE"),solicitedcharitablecontributions fiom executivesof
EdisonSchools,LLC ("Edison"), a DOEvendor,andLiberfyPartners,L.P.('LibertY'), a
private investrnentfirm whichis themajorityowner of Edison. As a result, Cerf secured
a pledgefor a $60,000donationfrom oneof the executives, the chairmanand chief
eiecutive officer of Liberty. Therequested contribirtionwouldhavebenefiteda
charitablefoundationof whichCerfis a memberof the boardof directors.Accordingto
Cerf, although the chairmanagreedto the $60,000 donation, he did nol pay it; Cerf
withdrew hii requestafter he was askedalout it during the coursegli$gJg:"."11i9-ation,

relilOuj$gl$e
We Lave furlirei detenninedthat Cerf,whoheidstockin Edison,
stockin February2007,
ffi,ririiliililestigatio;mo-determinedthattheTEAMAcademyin
Ndwark,N.J.,for,whichCerfsen/es ontheboardof directors,doesnotdo businesswith
the DOE, altiroughit is sponsoredby thesamenatiorralorgatizationa-trjg$nolilors three
DOE chaser schools. Finallv, we determinedthat Cerf
which he-H6iiitted at the begiruring of
Hon, J. L Klein -2- August22,2.007

his DOE employmentcontainedsome inaccuraciesandomissions

questionedabouttiremby inrrestigatorsand allowedto a

This ir:vestigationwas initiated by the office of the SpecialCommissionerof

Investigation("SCI") after media reports appearedin February2007 stating that Cerf had
divestedhirnselfof Edison stock on the day beforea DOE palents' group plannedto ask
hirn abcuthis tiesto the company.l SCI investigatorsilterviewed Cerf and #l
witnessesaffiliatedwith the DOE, Edison, undffitil;-and examined numeroub
documentsobtained from those entities. In the course of the investigation, this office
discoveredthe charitablesolicitations describedabo-v.q,.and. some media accounts which
conflicted with the responseson Cerf s We
also exarninedwhetherthere were any businessties betweenthe DOE and the TEAM
Academy,whereCerf is a member of the boardof directors.-*-B'gact of these mattersis
described below,

Cerf's Edisonstock
Ce{ an afiorney,was appointed to his DeputyChancellorposition in December
2AA6. FromMay 1997until April2005, he was employedby Edison in various executive
positions,includinggeneral counsel and, ultimately, presidentand chief operating officer.
Edison is the parentcompany of Newton Leaming which (along with other firms)
provides SupplementalEducational Services("SES') to DOE studentsunder the Federal
No Child tift AenindAct.3 InzA03,Edison, which had bepna iorporation whose shares
were publicly traded,was essentially acquiredby Libg$y, a private equity investment
firm. Edisonwas converted from a publiclytraded companyto one whose stock was
privately held. After the conversion, Liberty held approximately95 percent of the equity
in Edison,andmost of the rernainder was owned by ChrisWhittle, Edison's founder and
chief executiveoffi cer.a

Cerf was amongtire Edison executiveswho was grantedEdison stock and stock
optionswhen it was a publicly-traded company. He andother Edison shareholders
forfeited the publicly-traded stock and options underthetermsof Liberty's purchaseof
the company.In retum, Liberfy gave Cerf and otherEdisonexecutivessharesin the
newly formedprivately-heldEdison. Liberty grantedCerf20,000sharcsof ClassB
coulmonstockin Edison, Under the terms of Liberty'spurchaseof Edison, Cerf forfeited
14,000sharesof the Edison stock when he resignedfrom the companyin 2005.s Cerf

' SeeE.
Gootman, OfficialDeflectsQueryAboutS/oclrs,
Schools NewYork Times,Feb. 9, 2AA7;An
lnslt'ucliye Motnenl, irnes(ed.),Feb.10,2007,
'rhFsFffiGffi aciidemichelp to students I dayand is fundedby the
Title I allocationthatthe DOE recsivesfrom tlre federalgovernment.Edisonand all SES providers
certifiedby theNew York StateEducation Departnrentmay serviceDOE students.Although the DOE
doesnot selectSESpr.oviders, it pays them and monitorstheirperformance.
'See
N. Schwartz,TheNine Liyes of Chris Whittle,Fortune,Oct.27,Z0A3.
'Cerf
continuedasa memberof Edison's boardof directorsuntil2006.
 a
-J- August22,2007
Hon. J. I. Klein

leaving Edison. The stock was not

retainedthe remainipg 6,000 sharesof stockafter
was'difficult to ascribe a nonetary value to it
irujuUf, on any publiJ exchange,and thusit
at any particulartime'

By subpoena,SCI obtaineddocuments froni Edison and Liberty pertaining to the

operatingagreementand
stockin tte privut"ly-held company. Accordingto Edison's
could redeem his Edison
ifirnrution provicledto SCI by Edison'scounsel,before Cerf
shares,Liber.tywould have to sell the company at aprofit- The aftorney also assertedthat
in the event that Edison was
Cerf s Class6 shareswere worthless. He explainedthat
sold,the company's cr.editorsand several categoriesof Class A shareholderswould
receivepreferentialpaymentbefore Cerf s ClassB sharescor-rldbe redeerned'6
'under
December20A6,
from Cerf that his stock

6 visedCerf bY e-mailthat his

O n D e c e m b e2r 2 , 2 0 0 6 ,
000 ClassB shares
Hon. J. L Klein -4- A u g u s2
t 2,2007

ebruary 7th rf sent an e-mail

ocuments"that createor

of Edison:

Effective imrnediatelyI inevocably relinquis! any and all equity interest in the
' "option like" sharesdescribedin greater
company. The only suchinterestis the
detaii in the documentswe exchangedat the time of my deparfure. I would be
most grateful if you wereto make, entirely at your discretion,a charitable
contribution to the Danow Foundationin recognition of this voluntary
relinquishmentof this interest.
Best regards,
Chriss

Two hourslater,Cerfadvise'ilfiffflippO{ffiUy e-mailthathe"electedto takethe

path of least resistanceby relinquishing,in ruliting, atrYand all exiting interest in Edison
(which are in fact lirnited to the oneitem we have been discussing)." The messagemade
no mention of Cerf s requestfor contributionsto Danow.e

Cerf s messagerelinquishing
tlie Edison shareswas senton theday before a

ffi 1'j;11?:3:i:X"J;::ii":iTi;*i:'i"#^:'illt:i
?;]'ffi*
CPAC meeting indicatedthat Cerfwould be asked abouthis interestin Edison. On the

8 Cerf
senta certifiedletteron thesamedatetoffi#andffiat Liberrylcopyingi*|
confirrrring
hise-n,ailandrepeatinghisrequest "to theDarrowFoundation,
for a contribution whichruns
wildernesscanoing[src] expeditions for childrenand teenagers(manydesewingof sclrolarships)
in
Northern Canada. If of interest,I wouldbe to forward the particulars."
 Hon, J. I. Klein August22,2047

eveningbeforethe.meeting, titled,"Word on the street,"

Cerf reeeivedan e,rnailmessage
. f ffrornffi, a te
i m b w rote :..T he n ri n u reporterfor the NeW
w esplit,ihear dwor Tines. Among
Yorkdonthestr other things,
eetinBklynisthar

[Chance}or Klein] madeyou give away your Edison interestto charity in responset#.
agenda."Approxirnately30 minutes later, Cerf e-rnaileda responseto

[Chancellor Klein] didn't make me do anything.Nor did he ask me to do

anghing. Ridiculotrs.Where is this coming frorn? What is the 'street' you are
refering to? Is this out there in a way that you anticipatethat it will be the
subjectof a grilling tomon'ow? A pressinquiry.

A t 9:5 5 re evening,Cerf e-rnailed,t to inquire wher:his

wasdueffireplied lowingrnorning,writing
thatCerfwasreferringto t
that he assumed
; he refelredCerf to DOE Human Resources.

prior to thescheduled CPAC meeting,Cerf

sent an e-mail f Edison,stating,"Per this email,I
any interestswith you are associatedfrom any and all
obligationsarisingunderthe documentexecutedon or aboutthedateof my dqpggSg.re."
As with his earliermessages to the Liberty andEdisonexecutives, crtf mk"'ffi to
considera contributionto theDarrow Foundation.l0

.-AccordingtoanewSpaperaccountoftlreFebruary8thCPACmeetinffi
#fiffi askedCerfto describehis financial interestin bdison,to which h. "t"ffi,'
'I
.'l'd be d"Iglttql to dothat,'adding: haveno frnancialinterest of any kind. Zero."'
Askedb6ffiwhen hedivestedhimselfof Edisonstock,"... Cerfsaid he wouldbe
'delighted'to
a copyof his financialdisclosure fonns ... . "Thatwill
answerall your questions,and that's what i'rn preparedto say."'l' Aftrt the meeting,
Cerf acknowle-dgedto a reporter that he had relinquishedthe Edison shares on the
previousduy.'t

Cerf appearedat SCI in May and July accompanied by two attogreysand was
interviewedunderoath. In his May testimony,he aclcnowledged the series of events
desmibedin the e-mailsandthe rnediaaccountdescribedabove.Cerf defendedhis
descriptionof his ClassB Edison sharesas a "contingentequityinterest... which operate
like stock options."Cerf and his counselacknowledgedthatwhile ullike stock options,

ttffi day:"Chris..,.Gotit,butdon'tentirely
Ep]jd bye-nrail
thefollowing knowwhatthismeans!
Let'stalk!ffi"
" E. cootrniriliipra.
''
Id. ln respouseto an SCI subpoerra,
Edisonproduceda stockcertificate
irrdicating6,000
sharesin Cerfs
name;the certificatewasstamped"CANCELLED."
Hon. J. L Klein August22,2407

ClassB shareirolders need not take action to obtaintheir shares,his description was
nevertheless applicable. He claimed that it wasvalid becausein the event Edison was
sold,ClassA shareholders - who invested$1i2 rnillionin the company- wouid be the
first entitledto fr-rllreimbursementof their investment, plus annual interest, before the
remainingvalue,if any, was paid to ClassB shareholders.Ife addedthat the Edison
OperatingAgreenrentcategorizedthe ClassB sharesunder the description, "Contingent
Shares."''

CerfwasaskedabouthisFebruary7't.e.maitffiandhesaid+hatit
pertainedtoadocurnentwlricffibreparedinc"o"Hrg!ionwithCerfsdeparturefrom
bdiron. Cerf saidthat the documentwasdraftedUfffias a contractor an agreement
concerningCer{ and that the two had discussed it over severalrnonths. Cerf was shown
two lettersdatedJanuary 10, 2005 and May I ,2A05 obtainedby SCI from Edison
and he aclcnowledged thattheyrverethe docurnentshe refered to
The letters were on the letterheado
were written
"AdT6pted"above Cerf s typed name,
Ietteibont'aineda'iignature line indicating but
neitherletter bore his signature. Cerf testifiedthat he believed that he never signed the
lettzu_inany form. The letters were styled asa consultingagreementfor Cerfls services
toffifot i.n y"*, after his departurefrom Edison. In return, Cerf.lyas to be paid the
tesiilor$z'5million,orfivepeicentofanyproceedsofthesai"orffi.ClassCand
ClassD stockin Edison. However,anypayments to Cerfwereto be madO"ffilyafter
Satisfied six specified financial including
obligations, outstandingloans,a mortgage,
the
andtax obligationsto the IRS and StatesofNew York andTennessee.

Ceif testifiedthat he d4!.gqtregardtheffiefiers asoperative,and explained

thattheywerean attemptUyffio makeamends for not includinga paymentto Cerf
in the agreementto sell Edison to Liberty. Cerf saidthat he consideredthe letters as
'lleaningless,"
that he never expectedto realizeany payment under their terms, and that
he thereforeignored them. He statedthat for tlie ClassC and Class D shares to realize
anyvalue,Edison,which was sold to Libertyfor $112rnillion, would have to fetch more
than$700million in a future sale,and the C-lass A andClassB shareswor-lldreceivefirst
preference.Moreover, accordingto Cerf; ffinuA personaldebtsof rnore than $35
'erence
rnillionwhichwould also receive beforeany paymentsto Cerf as set fortii in

Asked what prompted hini to disposeof his ClassB Edison shareson.!]l: day
beforethe CPAC meetin rf said
thathe knew he would be aslce'd-d n, andhe wa

ll Cerfls
attorneysproducedthe referenceddocurnentto SCI.
 -7- August22,2007
Hon, J. I. Klein
tf.tffi
that he had no interest in Edison. Asked why he wrote toffiEregarding
"meaningless") on the morning of the CPAC meeting, Cert
letters(which he regardedas
statedtirat he had awakenedlate the previous night (or "anearly that morning) and
rememberedthat thereexistedsomedocumentationof indeterminatenegotiation"
withiltk*'o iJ" saidthat lie was concerned that someone might "tnake something"of
"purported
the letteii,-inO to staveoff this possibility,he decidedto relinquishany
interest"describedin tlre letLers.

for thffi
Solicitationsof contributions
As he disclosedin hi as he further
describedin his testinronyat SCI, Cerf is a member of the board of directorsof tire
Darrow Foundation, a not-for-profit organizationwhich supportsajryjldernesscamp, and
providesscholarshipsfor childrenandteenagersto attendthe carflF Cerf explairiedthat
"a
teginning in 2005, he took leadershiprole" in a eapital carnpaignto"save iltlffiI
contributionsin hii February{007 ,-*uit tff$H
from extinction,"andsg,Leguested
ffiffiffi, and[*mb. Cerfaddedthat he had not previouslyso]icited
contributionsto fromanyoneaffiliatedwith Edisonor Liberty.In his May
interviewat SCI,Cerfsaidthaton approximately March 7,20A7, hehada conversation
witti f LibertY,in whiclr-he agam
a contributionto Darrow.' Accordingto Cerf,ffi'
testifiedthat he specifically requesteda donation of
$60,000,andt
to Cerf, he unde
Liberty or Edison. As of theMay interviewat SCI,Cerf said not made
any payment toward his pledge,nor had they had any further communication on the
matter.

Soon after Cerf s May interviewat SCi, his counset*.t. to SCI alguing that his
t for a donationfromf,ffirruas issible

Ceif s Counselstatedthat Celf was recusedfrom lng

concerningEdison, includingits SEScontractwith its Newton LearnirqDivision.
Counsel'pcited authority,however,limited itself to solicitatrons

ra
Cerf said that he.did not havecopiesof the&. letters.

ffi"dnore,ponsestohisFebruarye-mailr.equests,andexcept|or.ff|fis*rehadno
on the matter-
v',ithEdisonor Liberfyemployees
furthercommunications
Hon. J. I. Klein -8- August22,2007

AfterCerf s May testimonyat SCI,

'
mornmg o Secondscheduledappearanceat SCI in July,'
e-mailed#ffi
.
.,oqt-
Sometimeagoyouwerekind enough
to offera generous.
contributionto Darrow.'
Camp,a not for profit wildernessfoundationon which I am on the board. !
Although we haven'tspokenaboutyour offer in many months,I have now
concludedthat it would bb the better coursenot to proceedwith the contribution.
Again, I want to thank you immensely for your generousspirit. I hope all is well.
Bestregards,
Cluis.

fi nancialcircumstances,
SSSS!1
Hon. J. L Klein -a-
August22,2007

ft/ ':.v .;'

 Hon. J. L Klein -i u-
August22,2007

TEAM Academy
SCI investigatorsinterviewedCerf concerninghr.^s-rnernbership
on the board of
directorsof the TEAM Academyin Newark ("TEAM").23 TEAM i, uo .
rrrriitrrtiorrul
Partner"of the Knowledge is power program ("Kipp"j, a national
not-ror_pront
otganizationwhicli sponsorsandprovidestraining and supportto charler
schools. Tlu.ee
New York city charlerschoolsoverseenby the DoE are aiso institutio,.uipurtners
of the
KIPP national organization.'oAil IflPP charlerschools paya feeto
the KIpp national
organization.The fee doesnot exceedthlee pencentof eacl school,s
,*""f pr.-pupil
revenlre, While TEAM and tlie City KIPP schoolshave this payment
obligation in
common,,TEAM doesnot haveany financialrelationshipwiih it .
nOg or"it, ftpp
cnanerscnools.

Cerf s
, DOI and SCI investisatorsdiscovered
or lack ofresponses)on hi
ieh he filed with th

f,l:Tff
:13',T;,.l,?T;TLfi
:fl:T#ftffi::Hil:ffi
lililm
interview,Cerfwasadvisedofmediaac"ountilffiHTuruy
*a June2002,whiJ stated
that the United StatesSecuritiesand ExchangeCommission("SEC')
had conductedan
inquiry of Edison,and that a numberof civil classactionlawsuitswe.e
fileJ ugulrrr,
Edison and its off,rcers,and that Cerf was named as a d.e-feJ.dant
in some of the suits. Cerf
had not disclosedthis information in his respons.r togffi5|t
H. ;;k";wieiged these
matters, describedthe SEC inquiry as "infoimal," undtSiilned that
it concerned a
revelue recognitionmatterin which Edison followed the advice of
its accountinpfirm.
Cerf saidthat he.lecailedthat Edisonslightly adjustedits statedrevenue
to the
satisfactionof the SEC. Accordingly,Cerf changedhis,response
from,,no,'to ,,yes,,to
ffiwhich;ri#ifpaisonha ,

23
Cerf disclosed
this on his

SCI obtained
dGffi;ffi frdr'it,. pOE pertaining
to tlreDOE I(IPP schoolsandthenational
organizalion,
t'ittfr"ontains
cerf s notarizedsignatureabovea deqlaration tbatthe informationcontainedtherein
was full andcornpletetothe.bestof hisknowledgeand infonnation,
and that falsestaternents or intentional
omissionsrnayresultin disciplinarypenalties, includingtqrrrinati
i o no f e m p l o y m e natn dp o s s i b l ec r i m i n a l
r cenr rf in -
furo.9ec$ton.
ierf i resurne wasaftacheo to ni#under thee'tr! describing
"Managed hisEdisonemployment, it stared,
{anaged successful
efforl
successful
efforl to resolveSC
resolvi$b inquiry
inquirywith
with no penalties"or
no penalties"or findins
finoing of wronodoino,,
wrongdoing.,,
Hon. J. L Klein -11- August22,2007

With respectto the classactionsuits, Cerf testified that he hadnot

beencalled as
a witness,
4 nor did
wrrlrclr' trur LrrLrhe recall prouuolng
utr leuall producingany
any documents pefiaini
documentspefiaining to the suits. He said that
he did not have a personalattorneyrepresentinghirn in thesematters,and
's iruurer. that he relied
on Edison'scounselandthe co Cer.fthen changedhis
"no" res from
to "yest' to questi

#.-f":L*y"._-anyinquiriesregardingtire above,pleasecontactmeo
theattorney
assigned
to.thecase,ffian ber.u"h.aut
Thank you for your attentionto this matter.

Sincerely,

SpecialCornmissioner
of Investigationfor the
New York City School District