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Originally published March 3, 2011 at 9:44 PM | Page modified March 4, 2011 at 7:24 AM

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Schools scandal: How did $163,000 end up at obscure nonprofit?

State auditors flagged $163,000 paid to the nonprofit Grace of Mercy as among the most suspicious expenditures uncovered in a Seattle School District financial scandal, calling the spending a waste of public money. The nonprofit's director said he gave some of the money back to a former school-district manager at the center of the alleged improprieties.

Seattle Times staff reporter

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Superintendent Goodloe-Johnson's contract (PDF)

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Interim Superintendent Employment Agreement (PDF)

Ron English's statement in response to Silas Potter (PDF)

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Eakes' report (PDF)

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Gallery | Seattle Superintendent Goodloe-Johnson ousted

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Raw video: School board members comment on financial scandal

Raw video: School board member Betty Patu speaks

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Asked about invoices to the Seattle School District that showed him teaching business classes that covered subjects from growth strategies to contracts to using Microsoft Word, David A. Johnson, head of the nonprofit Grace of Mercy, laughed.

"That's crazy. I'm computer illiterate," said Johnson in an interview Thursday.

State auditors flagged $163,000 paid to Grace of Mercy as among the most suspicious expenditures uncovered in a financial scandal that cost Superintendent Maria Goodloe-Johnson her job.

Auditors could not verify that the school district received services it paid the Tacoma nonprofit for, and called the spending a waste of public money. It was the single biggest loss tied to one vendor.

Johnson told The Times he gave half of the money back to Silas W. Potter Jr., the former manager of the school district's small-business center, who is at the center of alleged improprieties that have prompted a criminal investigation. Potter denies that claim.

Grace of Mercy, which was incorporated in 2005 to help homeless and battered women, billed the school district, often for $5,000 a month, for work on behalf of a program run by Potter aimed at attracting more minority and women contractors.

Johnson said Potter promised him a lucrative deal if Johnson returned the money. According to Johnson, Potter said he was going to expand his program to Oregon and would pay Johnson $300,000 to help him.

Johnson didn't consider the arrangement a kickback, he told The Times, because Potter also said he would get the school district to contribute some of the money to Grace of Mercy.

"I got duped," Johnson said. He cursed Potter and threatened to beat him if he found him. Johnson said he is depressed, struggling financially and facing foreclosure.

Potter vehemently denied that he asked for and received money back from Johnson.

"I never did a kickback to anyone. I didn't promise him a future job. I don't know why he would say that," Potter told a Times reporter who tracked him down in Florida.

District records show Johnson billed the schools at a $100-per-hour rate for working as an instructor, helping contractors with licenses, financial reporting and technology.

In six instances auditors identified, Johnson billed the district for teaching a class but instead attended as a student, according to auditors.

Johnson acknowledged in an earlier interview that he was a student in the classes and his real job was to round up other small-business owners for the training.

According to Johnson, Potter said: "I need you to get people to come to my classes. And I'm going to get the school district to give money to your foundation every month."

The billings of Grace of Mercy between 2007 and 2010 were so unusual that auditors appeared to wonder whether Potter had set up a phantom nonprofit organization. For example, Eddie Rye Jr., listed as a Grace of Mercy subcontractor, said auditors asked him if Johnson really was Potter.

Several factors triggered the auditors' suspicions.

School-district employees who worked with Potter said Johnson was the only personal-services contractor they never met.

And one school employee said Grace of Mercy was the only contractor whose invoices Potter hand-delivered. "This practice was unusual," auditors wrote. Potter also "constantly checked" to see if the invoices were paid, the employee told auditors.

Potter contends he hand-delivered about half the invoices because Johnson brought them to him. He says he checked on payment status only because Johnson nagged him.

Auditors and school lawyers were unable to interview Johnson, whose contact phone numbers were disconnected.

Johnson, 47, said he met Potter in 2006 when Johnson's for-profit company, Allstate Surveillance, was installing security cameras at Cleveland High School in Seattle. According to Johnson, Potter told him, "I like your style. I need your help."

Johnson said he rounded up a lot of people for the training classes, "black businesses, white businesses, lady businesses."

"I'm going to make it up to you when we open up Portland," Johnson recalled Potter saying.

"I took his word," Johnson told The Times, explaining that he was "kind of like a little puppy following" Potter. He said he couldn't explain why invoices from Grace of Mercy billed for instruction. Nor could he explain why signatures on some invoices looked very different from signatures on other Grace of Mercy documents, such as contracts and tax records.

He also couldn't explain why records showed Rye as a subcontractor for his nonprofit on four invoices. Johnson said he never met Rye. "Nobody worked for me. I was the only person," he said.

Johnson said he went looking for Potter last summer, trying to get the money he felt the school district owed him. But he learned that Potter had quit the school district, and so had Potter's boss, Fred Stephens, who is now a deputy assistant secretary at U.S. Department of Commerce.

On paper, Grace of Mercy no longer exists.

In 2009, the Washington secretary of state administratively dissolved Grace of Mercy for failing to file a list of officers. Yet eight months later, Potter awarded the nonprofit a $20,000 contract.

Bob Young: 206-464-2174 or Seattle Times staff reporters Christine Willmsen, Katherine Long, Susan Kelleher, Mike Carter and Jonathan Martin and news researcher David Turim contributed to this report.

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