Allentown charter school sues over embezzled payroll taxes

 

A Lehigh County charter school is suing the business management firm it hired to handle day-to-day accounting services after learning that a third-party company cost the school thousands in unpaid payroll taxes and fines.

Attorneys for the Executive Education Academy Charter School in Allentown filed a breach of contract lawsuit this week against the consulting and business management firm, Santilli and Thomson. The lawsuit seeks damages after school administrators learned that Executive Education fell prey to a payroll firm, hired by Santilli and Thomson, accused of embezzling employee tax withholdings.

The lawsuit filed in Lehigh County Court indicates that federal authorities indicted John Scholtz, the owner and operator of Innovative Payroll Services, in a multi-million-dollar scheme to embezzle employee tax withholdings for his own personal use. The U.S. Department of Justice notified the charter school in May 2016 that it had fallen victim to Scholtz's scheme.

An audit would later reveal the school lost more than $150,000 in unpaid taxes, interest and penalties.

Santilli and Thomson, based in Burlington County, N.J., could not be reached for comment. Executive Academy COO Stephen Favell declined comment on the matter, citing pending litigation.

In May 2014, the Allentown School District granted Executive Education Academy Charter School authorization to operate. In June, the school selected Santilli and Thomson to provide back office services such as accounting, budgeting, payroll management, cash management and financial reporting, according to the lawsuit.

As part of its contract with the school, Santilli and Thomson agreed to coordinate payroll processing with a provider and indemnify the school against any losses or expenses at the hands of a contractor, according to court papers.

School officials said Gerald Santilli, a principal in Santilli and Thomson, in June 2014 selected Innovative Payroll and recommended the firm, which handled payroll services for Santilli and Thomson's other charter school clients. As the charter school's consultant, Santilli and Thomson was responsible for payroll management, negotiating a contract with Innovative Payroll and overseeing the work it did.

In 2015, Executive Academy began receiving IRS notifications about the school's payroll taxes, which were forwarded to Santilli and Thomson. The lawsuit notes that the school had no contact with Innovative Payroll, and that officials with Santilli and Thomson "consistently and repeatedly assured" the school that it had handled anything related to the notices.

The lawsuit alleges that Santilli and Thomson never notified the school about any problems with the IRS, and that the firm gave school officials "erroneous" information about the IRS notices and services the payroll firm was providing.

In February 2016, Santilli and Thomson told the charter school it needed to "immediately" change payroll providers. When pressed for an answer why, school officials were told that the owner had been indicted for fraud and money laundering.

After learning from federal authorities that the school had been part of Scholtz's scheme, the administration opted for an outside, independent audit to determine the scope of the damage. The lawsuit alleges that an unhappy Santilli tried to control the audit process, recommending to the school board an accounting firm to conduct the audit.

The school alleges that the handpicked accounting firm had "close ties" to Santilli and his firm.

Shortly after learning the school hired an independent auditor, Santilli and Thomson reportedly notified Executive Education that it would be terminating its contract "perhaps realizing that EEACS's independent audit would not bode well for S&T and its agents," according to court papers.

School officials said Santilli and Thomson ended its contract because the school wouldn't give them a "seat at the decision making table" and because its role was "relegated to that of a bookkeeper rather than a controller."

Santilli and Thomson ended its contract 10 days later, and the school argues that the firm neither provided a valid reason for terminating the contract, nor provided the necessary 30 days notice. The lawsuit alleges Santilli and Thomson looked to jump ship in an effort to avoid any liability for failing to manage the school's payroll.

When the school began reviewing its payroll taxes for 2015 and 2016, officials said they discovered that its tax liabilities had not been paid despite assurances to the contrary. The owner of Innovative Payroll had embezzled the school's state and federal payroll taxes.

The school accuses Santilli and Thomson of failing other duties such as not making insurance payments on time and not filing quarterly grant reports with the federal government.

It's not clear from court records whether the school ever recouped the money, interest and penalties embezzled by Scholtz, and the school's attorney was not immediately available for comment.

But one of the two counts of breach of contract in the lawsuit is for Santilli and Thomson's failure to indemnify the school.

NJ.com reported in August 2017 that Scholtz had been sentenced to more than five years in federal prison after pleading guilty to single counts of wire fraud and transacting in criminal proceeds. A judge also ordered that he pay more than $9 million in restitution.