April 27, 2007
Inquiry Into Student Loan Industry Widens
By THE NEW YORK TIMES
Investigations by lawmakers into the student loan industry expanded yesterday as Representative George Miller, Democrat of California and chairman of the House education committee, sent a letter to the inspector general of the Education Department asking for a review of the department’s policies against conflicts of interest and the financial disclosure forms of employees overseeing the federal loan program.

Mr. Miller’s letter follows one sent Wednesday by Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Senate education committee, asking for “complete personnel files” for 27 department employees.

Mr. Kennedy has also begun to explore how student loan companies collect repayment.

In a letter, he said that two large lenders, Sallie Mae and Nelnet, may have made harassing phone calls to borrowers; tried to collect from elderly or disabled borrowers; and refused to negotiate with borrowers on repayment deferrals, among other tactics.

Tom Joyce, a spokesman for Sallie Mae, said that the company would cooperate with Mr. Kennedy’s investigation but criticized it for being conducted “through press releases.”

A Nelnet spokesman, Ben Kiser, said that the company was reviewing Mr. Kennedy’s letter and that it would cooperate.

UPDATE:
6 COLLEGES OK CUOMO LOAN CODE
May 1, 2007 -- ALBANY - Six more colleges have agreed to adopt the student-loan code of conduct developed as part of state Attorney General Andrew Cuomo's probe into what he called improper relationships between schools and lenders.
The latest schools to sign on to the code include Marist College, Pratt Institute, Lewis & Clark College, Manhattanville College, Mercy College and Texas Christian University, Cuomo announced yesterday. Texas Christian also agreed to reimburse students more than $13,000, said Cuomo.

Cuomo said he has found cases of colleges getting a percentage of loan proceeds - he calls them "kickbacks" - from lenders granted preferred status by the schools. And, according to Cuomo, some college loan officers receive trips to luxury resorts and gifts from lenders.

Twenty-one schools have so far agreed to operate under the code.

Lenders Sought Edge Against U.S. in Student Loans
By JONATHAN D. GLATER and KAREN W. ARENSON
New York Times, April 15, 2007

In a fierce contest to control the student loan market, the nation’s banks and lenders have for years waged a successful campaign to limit a federal program that was intended to make borrowing less costly by having the government provide loans directly to students.

The companies have offered money to universities to pull out of the federal direct loan program, which was championed by the Clinton administration. They went to court to keep the direct program from becoming more competitive. And they benefited from oversight so lax that the Education Department’s assistant inspector general in 2003 called for tightened regulation of lender dealings with universities.

At Indiana University in 2004, for example, Sallie Mae, the nation’s largest student lender, offered $3 million that the university could use for “opportunity loans” to some students if it left the direct loan program. Indiana left the direct loan program but said the $3 million was not the reason; Sallie Mae currently administers their loan program.

Bank of America, which won the University of Virginia’s student loan business, said in its 2002 proposal that certain possible incentives had “the potential to violate” federal law. The bank, which said such a discussion was normal in the bidding process, suggested that it discuss the issues with university officials “during the oral presentation phase of the process.”

All of this has helped give private lenders clear dominance of the $69 billion federal student loan industry. The lenders, who defend these practices, say they are winning business primarily because they offer lower interest rates than the government and often lower fees.

Advocates of the direct loan program say that it has been held back from offering more competitive rates and benefits, and that a very small percentage of students can take advantage of the private rivals’ advertised rates and incentives. They argue that private lenders cost the government vast amounts of money because they are subsidized and guaranteed against default.

President Bush’s budget reports that in 2006 for every $100 lent by private lenders, the cost to the government of subsidies, defaults and other items was $13.81, while the same amount lent through the direct loan program cost the government $3.85. The battle for dominance in the loan market has escalated as tuitions have soared and students have borrowed more. This is the context for many of the payments to universities and financial aid officials that have come to light as a result of recent investigations into student loan practices.

“What has happened is unbridled competition meets lack of oversight,” said Terry W. Hartle, senior vice president at the American Council on Education.

Part of what is generating the competition is that the government runs two loan programs — and universities usually choose to participate in one or the other.

Until the 1990s, the primary program was the federal guaranteed loan program under which private lenders like Citibank, Sallie Mae or Bank of America made the loans to students. They were given a helping hand from the government, which paid subsidies to the lenders and guaranteed them against default.

Bill Clinton campaigned for president on the notion of expanding the federal government’s role as student loan guarantor into a more central position as the direct lender. The idea was that this would prove cheaper and simpler for students and be less costly for taxpayers because borrowers would pay interest to the federal government instead of to the lenders.

The program went into effect in 1994. The Democrats expected it to become dominant. But unwilling to be muscled aside, private lenders began offering schools and students a variety of benefits like scholarship money and lower interest rates and fees.

Tom Joyce, a spokesman for Sallie Mae, said, “The private sector program has better prices, better product selection, better service and better technology.”

For a few years after direct lending went into effect, it grew quickly. But as student loan volume has risen, climbing above $85 billion in 2005-6 from just over $30 billion 10 years earlier, the government’s share as a direct lender has declined, and now amounts to less than a quarter of the total.

“When direct lending was created, the initial assumption was that the bank-based program would be quickly overwhelmed by the government program,” Mr. Hartle said. No one counted on the strength of the reaction from the lending industry, he and others said.

The Education Department fought back. Richard W. Riley, then the secretary of education, tried to make the direct lending program more competitive in 1999 and 2000 by reducing origination fees and interest rates. The private lenders sued, saying Mr. Riley had no authority to do this because these rates were set by Congress under the loan legislation. (Last year, lawmakers set the interest rate on new Stafford loans, one of the most popular federally guaranteed loans, at 6.8 percent; many private lenders offer to reduce that rate for borrowers who make payments on time or meet other goals.)

In response to the lawsuit, the Education Department argued that the public and private loan programs had the power to offer the same terms and conditions, and added that better loan terms would make loans more affordable and thus reduce defaults, benefiting taxpayers.

With the Bush administration more sympathetic to the private market, the lenders withdrew the lawsuit last year, and the direct loan program has offered some of the incentives used by its private rivals.

Katherine McLane, a spokeswoman for Education Secretary Margaret Spellings, said both federal loan programs were “a vital source of funds for student aid.” Ms. McLane said that “through these two programs we have improved students’ and families’ choices by increasing competition, upgrading customer service and lowering costs.”

The Bush administration took virtually no action as lenders offered special pools of money if universities would leave the direct loan program. Lenders, by law, are barred from offering inducements to gain loan applications. But what is an inducement is not entirely clear.

A review by the Education Department’s office of the inspector general in 2003 — prompted by an accusation that Sallie Mae was offering illegal inducements — found that the department had brought only one public action, a case involving Sallie Mae and a college of podiatric medicine in 1995, which an administrative law judge later struck down.

The assistant inspector general, Cathy H. Lewis, who conducted the examination, also noted that the Education Department had not given any updated opinions about what kind of inducements were barred since 1995, even though the competition for loan business had escalated sharply since then. Ms. Lewis expressed concern about “bargaining practices between schools and lenders.” She referred to both the guaranteed loan program and private loans, which like any consumer loan lack government backing. Students increasingly rely on private loans because of limits on borrowing through the federal program.

She wrote that the practices “should be addressed through statutory and regulatory changes or further department guidance.”

Ms. McLane said in an e-mail message that the department had offered no guidance to lenders because it believed it had “no authority over the private loan instruments and market and therefore no guidance could be provided.”

She said the department had begun examining whether there should be new regulations in December.

Republicans in Congress have issued a continuing stream of criticisms about the direct lending program and tried to restrict it in a variety of ways.

Just last year, they voted to give lawmakers the power to cut the budget of the Education Department office that oversees the student loan program — a looming if indirect threat to direct lending. They also made it more difficult for many borrowers with multiple loans to combine them into a single, larger direct loan, effectively making it harder for students to refinance their debts.

“The federal government should be in the business of student loans as the lender of last resort when private lenders can’t offer competitive opportunities,” said Senator Michael B. Enzi, a Wyoming Republican who is the former chairman of the Education Committee.

In the absence of any crackdown on inducements, banks and other lenders showered universities with incentives to leave the direct lending program.

Sallie Mae, for example, offered Pace University in New York City $4 million in loans for students who would not have otherwise qualified if it left the direct loan program, the university said. Pace turned the offer down, a spokesman said. But it did eventually leave the program.

Colleges in the direct lending program were increasingly concerned about its future in the face of growing Republican opposition.

Yvonne Hubbard, director of Student Financial Services at the University of Virginia, said that was one factor that prompted the school to leave the program, along with the better deals being offered by the private lenders.

The university invited lender proposals in 2002 and chose Bank of America for a five-year term. It was in this process that the bank warned that some services under discussion had “the potential to violate” regulations against inducements.

Ms. Hubbard said she had no memory of what that language might have referred to, and a Bank of America spokesman, Joe Miller, said that it was not unusual to use this language in responding to a request to bid for a contract.

Bank of America is the only lender the University of Virginia recommends. The bank handles about 95 percent of the federal student loans at the university. Under the agreement, students who take out subsidized loans through the bank pay no origination or guarantor fees.

Ms. Hubbard said that the university tried to make clear to families that they were free to borrow from anyone but that it also offered this advice: “Take the terms we have negotiated with Bank of America and use this as your baseline, and try get your vendor to at least match it. It’s a good deal.”

Along with the partisan battle over the lending programs has come a fierce argument over their relative costs to taxpayers. Lenders vehemently argue that the direct loan program is in fact more expensive.

With Democrats now in control of Congress, Senator Edward M. Kennedy, Democrat of Massachusetts, and Representative George Miller, Democrat of California, with some bipartisan support, are pushing legislation intended to bolster the direct loan program.

Many Republicans are determined to defend private lenders. “I don’t want a few problems to be the excuse for the Democrats to put the federal government in charge of all student lending in the United States,” said Representative Ric Keller of Florida, the ranking Republican on the higher education subcommittee.

Cuomo: School Loan Corruption Widespread
By Mark Johnson, Associated Press Writer , April 10, 2007
AP Interview: New York AG Andrew Cuomo Says Student Loan Corruption Widespread
LINK

ALBANY, N.Y. (AP) -- Cozy arrangements between colleges and the companies that lend their students billions of dollars are far more widespread than anticipated, New York Attorney General Andrew Cuomo told The Associated Press Tuesday, just as two more college financial aid officers were suspended amid a probe into the $85 billion industry.
Cuomo would not divulge where the burgeoning investigation is headed next, including whether more subpoenas are on the way. But he said the investigation could lead to criminal charges against high-ranking officials at both lending companies and universities.

"This is like peeling an onion," Cuomo said. "It seems to be getting worse the more we uncover. It's more widespread than we originally thought ... More schools and more lenders at the top end.

"We have demonstrated this is not just the exception," he said. "This is the rule."

Cuomo is investigating alleged kickbacks to school officials who steered students to certain lenders. His investigators say they have found numerous arrangements that benefited schools, financial aid officers and lenders at the expense of students.

Investigators found that many colleges have established "preferred lender" lists and entered into revenue sharing and other financial arrangements with those lenders. Some colleges have "exclusive" preferred lender agreements with the companies.

So far, six schools -- the University of Pennsylvania, New York University, Syracuse University, Fordham University, Long Island University and St. John's University -- have agreed to reimburse students a total of $3.27 million for inflated loan prices caused by revenue sharing agreements, Cuomo said. The schools will return money to students who took out loans during the time the revenue sharing agreement was in effect. Students will be refunded based on the amount they were loaned.

On Monday, a loan company that has been at the center of the investigation, CIT Group Inc., placed three top executives at its Student Loan Xpress division on paid leave following allegations of stock transactions with a high-level U.S. Department of Education official and college financial aid officers.

The Department of Education official who oversaw parts of the student loan industry was also placed on leave after it was reported that in 2003 he owned at least $100,000 worth of stock in Education Lending Group Inc., the former parent of Student Loan Xpress. The company was acquired by CIT in 2005.

A number of student loan officials at different schools have also been placed on leave pending the investigation.

On Tuesday, Widener University in Pennsylvania placed Walter Cathie, the dean of financial aid at Widener, on leave. Cuomo's office said Cathie was paid $80,000 by Student Loan Xpress since 2005. Investigators said they believed Cathie had an agreement with the company to market its services to graduate schools, receiving fees based on loan volume.

Also on Tuesday, Capella University, a Minneapolis-based online school, said it suspended its director of financial aid after he acknowledged accepting consulting fees from Student Loan Xpress.

Financial aid director Timothy Lehmann was put on paid administrative leave after Cuomo's office said he received more than $13,000 in fees from the company. Capella President Michael Offernan says Lehmann disclosed the payments last Friday.

The school is cooperating with Cuomo's office and doing an internal investigation as well, Offernan said.

"No one is even defending the situation anymore," he said.

Cuomo said he suspects "dozens" of financial aid officers around the country have similar arrangements that he has called deceptive, unethical and at times, illegal.

Last week, Cuomo sent subpoenas to SLM Corp., commonly known as Sallie Mae, requesting information on any current or former employees who had worked at the Education Department over the past six years.

In some cases, investigators said, lenders provided all-expense-paid trips for college financial aid officers to exotic locations. Financial aid officers at schools in some cases served on loan company advisory boards, Cuomo said.

Cuomo said the arrangements are particularly predatory because of the relationship between students and the colleges they pick.

"Ninety percent of the students take the 'preferred lender,'" he said. "Why? Because that's the nature of the relationship. You trust the school. The school is in a position of authority. The school is there to nurture you."

Cuomo said various officials have been examining the issue for about a year but his investigation was spurred after a lender came to him to complain about the domination of a few lenders in the lucrative market. Cuomo would not name the lender.

"The new lenders were saying because they weren't doing the conferences, they didn't have these relationships with financial aid offices, they weren't willing to do or hadn't been doing the financial aid incentive," Cuomo said. "They couldn't even compete."

The attorney general said he has talked with lawmakers in Washington -- including Sen. Edward Kennedy, D-Mass., who heads the Senate Health, Education, Labor and Pensions Committee, about new legislation to rein in the student loan industry.

"There hasn't been enough supervision," he said. "There hasn't been enough regulation."

Earlier this year, House Democrats in Washington introduced a bill that would ban gifts from lenders to college employees and would require lenders to disclose the terms of their arrangements with colleges and universities.

Education officials linked to lender
By MARK JOHNSON, Associated Press Writer, Fri Apr 6, 3:00 PM ET
LINK

What began as a probe into possible kickbacks to school officials for steering students to preferred lenders has widened to envelop a federal education official and the chancellor of New York's state university system.

New York Attorney General Andrew Cuomo started looking into the lucrative, $85 billion college loan industry shortly after his election in November. Cuomo's investigators say they have found numerous arrangements that benefited schools and lenders at the expense of students. In some cases, investigators said, lenders provided all-expense-paid trips to exotic locations for college financial aid officers who directed students to the lenders.

On Thursday, it was revealed that Matteo Fontana, who oversees all lenders and guarantee agencies that participate in the Federal Family Education Loan Program, owned about $100,000 worth of stock in a student loan company caught up in Cuomo's probe.

A September 2003 filing with the Securities and Exchange Commission shows Fontana held at least 10,500 shares of Education Lending Group Inc., the former parent company of Student Loan Xpress. The shares were valued around $9.50 each at the time, according to Cuomo's office.

Student Loan Xpress is now part of CIT Group Inc., one of several lenders targeted in Cuomo's probe.

Fontana joined the Education Department in November 2002, according to Higher Ed Watch, a part of the New America Foundation, which first reported his involvement with Education Lending Group. It was unclear whether Fontana told agency officials of his ownership in the stock before he sold it in 2003.

The Education Department did not immediately return a call from The Associated Press seeking comment. A spokeswoman, Samara Yudof, told the New York Times that the department will "provide the department's inspector general all relevant documents regarding this matter." Fontana did not immediately respond to an e-mail message seeking comment and his assistant said he was out of the office Thursday afternoon.

Also Thursday, the University of Texas put it's financial officer, Lawrence Burt, on paid leave and the University of Southern California did the same with it's financial aid officer, Catherine Thomas. Columbia University had already placed it's associated dean of student affairs, David Charlow, on leave while it investigates Cuomo's claims.

SEC records show Charlow owned 7,500 shares of Education Lending Group's stock and owned 2,500 stock warrants at the time of the stock prospectus. Cuomo's office said Charlow sold the 7,500 shares for about $9.50 each and in 2005 sold more of the securities for a total profit of more than $100,000.

Investigators said Charlow bought the securities for $1 a share in 2001. Cuomo's office believes others also got similar deals.

Columbia University on Thursday said it removed Student Loan Xpress from its list of preferred lenders and it believes Charlow was the only official at the school who owned stock in Student Loan Xpress' parent company.

The SEC records also show Thomas and Burt each owned 1,500 shares in the company.

Burt denied any financial arrangement between either himself or UT and the company and said his previous ownership of the shares had no connection to Student Loan Xpress' position on UT's preferred lender list. Burt sold the stock in 2003, he said. Based on the stock's price of $9.50 per share at the time of the sale, Burt made a little more than $14,000.

Cuomo's office issued a subpoena this week to the New Jersey-based CIT seeking information about stock transactions between Student Loan Xpress and financial aid officers at Columbia, UT and USC.

CIT said it acquired Education Lending Group in 2005, after the stock transactions took place.

"The reported transactions in securities of that company occurred several years prior to CIT's acquisition of the company," the company said in a statement. "We are currently seeking to determine the facts surrounding those transactions."

Cuomo spokesman John Milgrim said the subpoenas "clearly cover" all stock transactions between CIT and college officials.

Earlier Thursday, The Associated Press reported that John Ryan, chancellor of the 64-campus State University of New York system, serves on CIT's board of directors.

Ryan, who announced last month that he will step down at the end of May, has been a director at CIT since July 2003, according to the company's Web site. A company SEC filing shows Ryan earned about $146,000 last year in cash, stock and options for his service on the CIT board. He is paid $340,000 a year as chancellor.

Student Loan Xpress is also listed as a preferred lender at SUNY Maritime College, where Ryan served as president after retiring from the Navy and the Naval Academy in 2002.

"The chancellor stands by his service on the board of the CIT group, an approved outside activity, for which he received state Ethics Commission permission on July 2, 2003, while he was at SUNY Maritime, and July 20, 2005," SUNY spokesman David Henahan said in a statement.

Cuomo's office is investigating several other lenders, including the nation's largest student-loan provider, SLM Corp. — commonly known as Sallie Mae. Others include Nelnet Inc., Education Finance Partners Inc., EduCap Inc. and the College Board. Citibank on Tuesday agreed to put $2 million toward a national fund that would educate students and parents about the financial aid industry and is no longer being investigated by Cuomo.

Education dept. places official on leave
By Nancy Zuckerbrod, AP Education Writer | April 6, 2007

WASHINGTON --A Department of Education official who oversaw the student loan industry and owned at least $100,000 worth of stock in a student loan company has been placed on leave, a department spokeswoman said Friday.

Matteo Fontana, who keeps an eye on lenders and guarantee agencies that participate in the Federal Family Education Loan Program, was placed on leave with pay a day after his ownership of stock in Education Lending Group Inc. was disclosed by Higher Ed Watch, part of the New America Foundation, a nonpartisan think tank.

The case has been referred to the department's inspector general, John Higgins, said department spokeswoman Katherine McLane.

At issue is whether Fontana violated department conflict of interest rules.

McLane also said Education Secretary Margaret Spellings has asked for Lawrence Burt to resign from the department's Advisory Committee on Student Financial Assistance. That panel provides guidance to Congress and the secretary of education on student financial aid policy. (See study on "Empty Promises", 2002 - Ed)

Burt, associate vice president and director of student financial aid at the University of Texas at Austin, is under investigation by the UT System Office of General Counsel regarding allegations of impropriety.

Securities and Exchange Commission records indicated Burt also owned 1,500 shares in Education Lending Group Inc., the former parent company of Student Loan Xpress. The company was on UT's preferred lender list, but Burt, who sold the shares in 2003, denied that his stock ownership had any connection to that listing.

Student Loan Xpress is now part of CIT Group Inc., one of several lenders targeted by New York Attorney General Andrew Cuomo in his probe of the student lending industry.

Cuomo is investigating allegations of possible kickbacks to school officials for steering students to certain lenders. Cuomo's investigators say they have found numerous arrangements that benefited schools and lenders at the expense of students.

His office on Friday issued new subpoenas to CIT Group Inc. and Student Loan Xpress, seeking information on stock and gifts made by the company or its subsidiaries to federal or state government officials.

The office also sent subpoenas to SLM Corp., commonly known as Sallie Mae, for information on any current or former Sallie Mae employees who worked at the Education Department over the past six years, said Cuomo spokesman John Milgrim.

Cuomo's office has begun its own investigation into Fontana and is meeting with Department of Education investigators about the case next week, Milgrim said.

Fontana worked at Sallie Mae from 1994 to 2001, according to Sallie Mae spokesman Tom Joyce. Fontana did not respond to messages, and the Education Department's press office declined to make him available for comment.

Fontana, a career employee, has worked at the department since 2002. He is the general manager of Financial Partners, an office involved in overseeing the federal student loan program. In September 2003, Fontana worked as a deputy in that office.

SEC records show Fontana had at least 10,500 shares of Education Lending Group Inc. in September 2003. The shares were valued around $9.50 each at the time, according to Cuomo's office. The Education Department would not say whether Fontana still owns the stock.

Senate Education Committee Chairman Edward Kennedy, D-Mass., called Friday's action by the Department of Education swift and appropriate.

"With American families struggling to put their children through college, we owe it to them to end corruption and conflicts of interest when it comes to student loans," he said.

Kennedy has said he wants to trim federal subsidies to banks that make student loans. The subsidies are designed to guarantee lenders a rate of return that makes student lending profitable.

Michael Dannenberg, director of education policy at the New America Foundation, said the subsidies are excessive and the industry's stake in them led to some of the alleged conflicts.

"What's happening is the banks appear to be giving a taste of the corporate welfare in the system to some colleges, some college administrators and maybe even some people in the Department of Education in order to secure business," Dannenberg said.
Associated Press Writer Mark Johnson contributed to this report from Albany, N.Y.

...and a related story from the past (Ed.)

Suit alleges S.F. schools' kickbacks
It claims money was steered to district official
Chuck Finnie, Julian Guthrie, Chronicle Staff Writers, Saturday, November 17, 2001
LINK

The San Francisco Unified School District made a practice of steering contracting dollars to companies that then gave kickbacks to school officials, a company in a financial dispute with the district says.

In a lawsuit and interviews, Strategic Resource Solutions (SRS) of North Carolina said district officials told SRS to hire a particular subcontractor, Covenant Enterprises of Foster City, as part of a $30 million school facilities improvement deal.

Covenant's owner, Alpha Omega Bibbs III, then funneled some of the SRS money into a business venture of Timothy Tronson, a district official who had recommended his firm, according to the suit and an SRS spokesman.

"Funds . . . paid to Covenant . . . flowed into a venture involving Covenant's founder Alpha Bibbs and SFUSD employee Tim Tronson," SRS' suit says.

An attorney for Tronson said the school district's former Facilities Management Department chief did nothing wrong.

A deputy city attorney who represents the school district said the SRS suit is groundless.

Tronson's attorney, Joseph Wood, said Tronson was involved in a legitimate software development venture in which Bibbs had invested, but he said Tronson didn't tell SRS to hire Covenant and would have no way of knowing whether funds Bibbs invested with Tronson originated with SRS.

"This is a typical business situation where people know each other and decide to start a company together," Wood said. "Tim and Alpha like each other.

Tim says, 'Hey, we have this software that's in the early stages of development. It could go somewhere. Do you want to invest?' "

Bibbs did not return telephone messages seeking comment.

The district hired SRS in 1999 under an arrangement in which the funds to pay the company would be financed by money saved on energy and operating costs.

The savings were supposed to result from heat, light and power systems and management software SRS installed at dozens of district school and administrative sites.

The equipment upgrades were of the same type that were supposed to be carried out under school bond issues and tax increases approved by San Francisco voters in 1988, 1990, 1994 and 1997.

A Chronicle investigation published this week found the district had misspent and mismanaged tens of millions of dollars of the bond and tax funds and failed to complete many of the facility upgrades promised to voters.

The misspending and mismanagement of the bond and tax funds -- and the hiring of SRS -- occurred prior to new Superintendent Arlene Ackerman taking the helm of the school district in August 2000.

Ackerman referred the SRS contract to law enforcement authorities earlier this year after an auditor called in to examine facilities management operations questioned the contract's usefulness to the district.

The Chronicle reported in September that the San Francisco district attorney's office had initiated a criminal probe into suspected kickbacks involving the SRS contract.

Court records show the district attorney's investigators searched the Southern California home of Tronson's brother-in-law, Saeed Karimi, and were looking for evidence of business dealings between Tronson, Karimi, SRS, Covenant Enterprises and Bibbs.

On Nov. 9, SRS filed its lawsuit in San Francisco Superior Court. The suit portrays the firm as a victim of corrupt contracting practices at the district.

The suit says the district "had a practice and system in place whereby SRS was required to (hire) . . . preferred subcontractors chosen by SFUSD regardless of whether or not the preferred subcontractors provided resources and expertise useful to SRS in its performance of its contractual obligations."

It claims the school district insisted on the hiring of these preferred subcontractors "because SFUSD and its managers, employees and agents were receiving improper benefits from (them) . . . in exchange for the opportunity to perform work for SRS and other prime contractors."

By "improper benefits," according to Keith Poston, SRS' spokesman, the firm means "kickbacks and cash."

The suit says SRS was directed to hire Covenant Enterprises. According to Poston, that direction came from Tronson -- which Tronson's attorney denied -- and other district officials Poston did not identify.

Poston said Covenant was paid $1 million under the SRS contract for something called the Millennium Project, which was supposed to provide computers and technology training to underprivileged students.

According to Poston, SRS discovered Covenant didn't perform much of the work it was supposed to under its subcontract.

The suit says that unbeknownst to SRS the real purpose of the Millennium Project was "to provide political and other benefits to SFUSD managers and employees."

"It now appears Covenant was, for all intents and purposes, a front for other ventures and partnerships" involving Bibbs and Tronson, Poston said.

"We have come to believe this is the way business was done with the school district," he added.

SRS says it is still owed $7.5 million and the current school district administration is using the alleged improper conduct under investigation by the district attorney to renege on payment.

David Campos, a deputy city attorney who represents San Francisco Unified, said SRS' claims are "without merit."

"San Francisco Unified has very serious and real concerns about SRS' compliance with its contractual obligations," Campos said.

He added, "If they're angry with the district, it's because for the first time you have a superintendent who's holding their feet to the fire to ensure they comply with their contractual obligations."

E-mail the writers at jfinnie@sfchronicle.com and jguthrie@sfchronicle.com.

Danny Schechter on the Student Loan Scandal