Three former administrators were arrested this week for an alleged scheme to defraud the Indiana Education Department by inflating enrollment at two troubled virtual schools.

The U.S. Attorney’s Office for the Southern District of Indiana announced the arrests at a press conference Thursday in Indianapolis. Thomas Stoughton, Percy Clark, and Phillip Holden were released after appearing in court this week.

The defendants helped run Indiana Virtual School and Indiana Virtual Pathways Academy, two online schools that closed abruptly in 2019 after allegations that they inflated enrollment.

The officials had an incentive to report as many students as possible to the state education department because Indiana funds schools based on enrollment.

U.S. Attorney Zachary Myers said the defendants reported more than 4,500 students to the state that they knew were not attending the schools between the summer of 2016 and 2018.

“The members of the conspiracy falsely claimed thousands of students were enrolled, even though those students were not attending classes or receiving services,” said Myers at the press conference.

If convicted, the defendants could face up to 10 to 20 years in federal prison for each count, Myers said.

Stoughton was charged with conspiracy to commit wire fraud, 16 counts of wire fraud, and 57 counts of money laundering. Clark was charged with conspiracy to commit wire fraud, 16 counts of wire fraud and 11 counts of money laundering. Holden was charged with conspiracy to commit wire fraud and 16 counts of wire fraud.

Attorneys for the defendants did not immediately respond to requests for comment.

Another person involved in the scheme pleaded guilty to conspiracy to commit wire fraud. Christopher King is the former manager of school operations for AlphaCom. The for-profit company that was hired to manage the schools, according to reporting from Chalkbeat. Myers declined to say whether King was cooperating with the prosecution.

The prosecutors allege that the schools received about $44 million more in state funding then they were entitled to because of the fraud. Myers said that if the defendants are convicted, the government could seek to recover the money.

“We’re able to use the same sorts of collection tools we would use elsewhere in the federal government and attempt to recoup as much of that money as possible to apply towards restitution,” Myers said.

The schools were charter schools, which are publicly funded and privately managed. They were authorized and overseen by Daleville Community Schools, a public school district.

Special agent Herbert Stapleton, head of the Federal Bureau of Investigation’s Indianapolis office, said that untangling the fraud was extremely complex.

“Hundreds of interviews had to be conducted, many of which included interviews of fraudulently enrolled students or their parents,” Stapleton said, “including in one particular instance, an interview of a student’s parents who was enrolled after that student had already passed away.”

Problems at Indiana Virtual School were public as far back as 2017, when Chalkbeat published an investigation into the troubled school. It revealed the school had only 1 teacher for every 222 students and spent a small fraction of its funding on instruction.

A 2020 State Board of Accounts investigation found the public schools reported students as enrolled when there was no evidence they attended the virtual classes.

In 2021, Indiana Attorney General Todd Rokita sued the schools, multiple vendors that provided services to them, and 14 individuals with ties to the schools or the companies that were inappropriately paid.

A spokesperson for Indiana Attorney General Todd Rokita’s office said in an email that the office is “pleased to see that criminal charges have been filed against some of the individuals involved in the misappropriation of tuition support through the misuse of Indiana Virtual School and Indiana Virtual Pathways Academy.”

The state lawsuit, which seeks over $154 million, is ongoing.

Contact WFYI education reporter Dylan Peers McCoy at dmccoy@wfyi.org.