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NAME AND TITLE: David Graff, general counsel and executive vice president AGE: 35 A LESSON IN SECURITIES LAW: If you’re a general counsel, a phone message from the U.S. Securities and Exchange Commission is almost guaranteed to ruin your day: You have to return the call, and it’s never good news. So it was on Feb. 10, 2002, for David Graff, GC for Edison Schools Inc., the controversial for-profit school-management firm. Graff knew what the SEC was calling about. A recent Bloomberg News story had criticized Edison’s revenue-recognition practices, questioning whether it was proper for the company to claim as revenue the salaries that client school districts paid directly to teachers in Edison-run schools. Edison claimed that under Generally Accepted Accounting Practices, or GAAP, the payments qualified as revenue, since the company was contractually responsible for salaries. The SEC wasn’t buying it, asserting that reporting these district-paid expenses — which constituted $154 million of $375.8 million in 2001 revenue — as “received” revenue was misleading to investors. The phone call from the SEC commenced an intense three-month period of nonstop 12- to 15-hour workdays for Graff, who met and telephoned SEC enforcement staff “dozens of times.” On May 14, this work culminated in a negotiated cease-and-desist order requiring Edison to restate its past revenues and hire a full-time internal auditor to review internal accounting methods. Although he still disagrees with this analysis, Graff gives the SEC staff high marks for their conduct in the expedited investigation and negotiation. “No one likes to get the call from the SEC, but I felt they were always accessible, and willing to meet and discuss with us the issues at any time. Eventually, we got to a place where we could all live,” he said. PRIVATE COMPANY/PUBLIC SCHOOLS: New York-based Edison Schools Inc. is a unique corporate creature: a for-profit, publicly traded school-management firm, specializing in running schools for low- and moderate-income children. Edison opened its first four schools in 1995, and now operates 150 schools in 23 states and Washington, D.C., serving about 80,000 students. School districts or individual charter schools contract with the 280-employee firm to operate the schools, manage teachers and other school personnel and implement a curriculum designed to boost the performance of low-achieving students. In return, Edison receives the tax funds that the district would have spent on the school, or charter school students’ tuition vouchers. For all the controversy it has engendered, Edison has so far failed to turn a profit, recording $86 million in losses in 2001, with a $160 million debt load. GRAFF’S GROUP: From his office in New York, Graff oversees an in-house staff of five lawyers and two paralegals. Edison’s in-house counsel deal with transactions, contracts, litigation oversight, employment law, real estate, students’ rights and state educational law. Most of Graff’s time is taken with securities work, including the SEC proceeding, and major transactions. LEARNING LITIGATION: On May 15, the day after the SEC announced its cease-and-desist order, Edison was hit with the first of 10 shareholder suits alleging that the company’s revenue statements were materially false and misleading. Graff said that he was prepared for this “completely predictable” flurry of litigation. “Plaintiffs’ law firms are very entrepreneurial. They read the newspapers, just like the SEC. Essentially what they did was cut and paste sections of the cease-and-desist order and the [SEC] press release, put it in a complaint and rush it to the courthouse.” In jockeying for the lucrative lead class counsel status, said Graff, plaintiffs’ firms race to file a complaint, with “any old plaintiff [and] then immediately issue a press release and essentially go trolling for other plaintiffs, saying, ‘Look, we’re the biggest, baddest law firm, and we get all this money for shareholders.’” Firms that hook the biggest shareholders then argue that theirs is the most representative plaintiff, he said. None of Edison’s large institutional investors agreed to be a plaintiff, said Graff. However, Milberg Weiss Bershad Hynes & Lerach of New York apparently won the prize for “biggest, baddest” law firm by landing the Hawaiian Electricians Fund. The plaintiffs have filed a joint motion to name Milberg as lead counsel and the fund as the lead plaintiff. Graff is confident that Edison will prevail in litigation, he said, asserting that its compliance with GAAP puts it in a strong position under securities case law. CLASSROOM FIGHTS: In addition to shareholder suits, Edison has faced litigation by teachers’ unions, parent groups and municipalities attacking the company’s right to run public or charter schools. The company has beaten back such challenges in Baltimore, Dallas, York, Pa., and Peoria, Ill. The most bitter fight has been in Philadelphia. After the state awarded Edison a contract to run 26 of Philadelphia’s lowest-performing schools, both the city and the teachers’ union sued Edison and the state in both state and federal courts to block Edison from running any Philadelphia schools. The federal case has been stayed and Edison has defeated preliminary injunction motions in state court. Despite the legal wrangling, Graff said Edison has a good working relationship with the Philadelphia school district and its teachers, and is complying with management’s duties under the collective bargaining agreement. KEEPING THE FAITH: Last year was tough for Edison, as reflected in stock prices that tumbled from a 12-month high of $21.68 to 14 cents — raising the prospect that Nasdaq might delist Edison for failing to maintain the exchange’s minimum share price of $1. The stock has since rebounded to nearly $2, and Graff said that he and other senior managers have assured major investors, clients and creditors that the company remains financially viable and that stock swings have had no effect on its operations. For his part, Graff remains a true believer in Edison and its mission of providing a quality education to good kids trapped in bad schools. “We are a company that is almost always in the line of fire. Dealing with the SEC, getting beat up in the press in Philadelphia, watching our stock price decline, having a lot of articles written saying that we’re about to go out of business when we knew that isn’t true, it’s demoralizing,” said Graff. “But we have to remember that the reason we exist is to try to provide a better academic program for children in this country who have not received the best that this country has to offer in terms of education.” PRINCIPAL OUTSIDE COUNSEL: Graff turns to Morgan, Lewis & Bockius for litigation and contracts, Los Angeles’ Gibson, Dunn & Crutcher for corporate and securities matters and New York’s Rains & Pogrebin for labor and commercial work. TO THE HEAD OF THE CLASS: The son of a surgeon father and a nurse mother, Graff attended public elementary and private high school in suburban Pittsburgh. After graduating from Brown University in 1989 with a double major in American and African studies, Graff worked in Washington, D.C., as a criminal investigator for the public defender’s office. While interviewing criminal defendants and their families, Graff confronted the manifest failures of the D.C. school systems, he said. “I’d interview a 17- or 18-year-old defendant accused of some horrible crime, and then go out and interview their 12- and 6-year-old cousins, and see the same pattern being laid down,” he said. After receiving his law degree in 1995 from the Georgetown University Law Center, Graff signed on as an associate at Shea & Gardner of Washington. He was hired by Edison in December 1998 as deputy general counsel, becoming the top lawyer in April 2000. PERSONAL: Graff and his wife, Dawn Porter, the director of business standards and practices at ABC News, are parents of 17-month-old Eli. LAST BOOK READ: “The Subject Steve,” by Sam Lipsyte.

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