DETROIT—A former Detroit Public Schools official once honored for his risk management work there is at the center of a scandal in which he is accused of bilking the school system of millions of dollars for himself, friends and business associates including several insurance brokers.

Stephen Hill, former executive director of the Detroit school system's risk management department, and Christina Polk-Osumah, former risk finance manager, were indicted late last month by a Detroit federal grand jury on charges they improperly diverted more than $3.2 million in school funds to pay a Detroit-based wellness vendor, Associates for Living, in exchange for more than $150,000 in kickbacks.

The former risk management executives also have been named in a civil suit the school system filed in 2008 in Wayne County Circuit Court. The two are accused of using improper wire transfers to divert more than $57 million to seven vendors, including Associates for Living, that provided little, if any, services to the school system.

Other providers named in the civil suit include insurance brokers Arthur J. Gallagher & Co. and Marsh & McLennan Cos. Inc., with which Mr. Hill worked during the time of the alleged fraud. The district alleges the brokers were paid millions in consulting and other fees for little in return.

Shortly after being named the 2005 Public Risk Manager of the Year by the Public Risk Management Assn., Mr. Hill left Michigan's largest school district to work in the Detroit office of Gallagher. Eight months later, in May 2006, he joined Marsh Inc., where he returned to the school district as its acting executive director of risk management until Feb. 1, 2007.

“Stephen Hill was chosen as the 2005 Public Risk Manager of the Year by a panel of his peers before any of these charges came to light. It is unfortunate that he is now involved in this scandal,” Lisa Lopinsky, PRIMA's executive director, said in an e-mail.

“A small percentage of the conduct alleged in the indictment occurred within the time period Mr. Hill was employed at Gallagher,” the Itasca, Ill.-based broker said in a statement. “Gallagher has conducted a full investigation and had no knowledge of Mr. Hill's alleged criminal conduct, nor does the indictment implicate Gallagher in any way.”

According to the indictment, rather than using competitive bidding, Mr. Hill hired Bond, White, Washington & Washington Inc., a Detroit-based wellness vendor that does business as Associates for Living, without a contract to conduct a health improvement and assessment pilot study for nearly 3,000 district employees from November 2005 through March 2006.

Associates For Learning proposed a $150,000 fee for its services, but sent invoices, per Mr. Hill's advice, totaling more than $3 million, for which either Mr. Hill or Ms. Polk-Osumah authorized wire transfers, rather than going through the district's accounts payable procedures. In return, Mr. Hill received more than $158,000 in kickbacks, prosecutors allege.

Sisters Sherry and Gwendolyn Washington, co-founders of Associates for Living, also were indicted.

The eight-count indictment alleges bribery, fraud, extortion and money laundering. Each count carries a maximum 20 years in prison if found guilty.

Trial on the charges has been set for July 6.

“Stealing funds from a public school in these times is particularly egregious, as it threatens to rob our children of their futures and ultimately compounds future crime problems,” U.S. Attorney Barbara L. McQuade said in announcing the indictments.

The investigation is ongoing, a U.S. Attorney's Office spokeswoman said.

“By bringing to justice those who have sought to enrich themselves at the expense of our children, we hope to send a message that the level of corruption that has been allowed to flourish in Detroit Public Schools in the past will no longer be tolerated,” Robert Bobb, emergency financial manager of the district, said in a statement. “We will continue to work quickly and aggressively to root out corruption wherever we find it.”

Attempts to reach the attorneys for Mr. Hill, Ms. Polk-Osumah and the Washingtons were unsuccessful.

In addition to Associates for Living, Gallagher and Marsh, other vendors alleged to have conspired with Mr. Hill and Ms. Polk-Osumah are Spectrum Financial Group Inc., New Bridge Multimedia Inc. and Long Insurance Services L.L.C., all based in Detroit; and eCare Solutions Inc., a division of Thiensville, Wis.-based Health & Wellness Solutions Inc.

Gallagher and Marsh specifically are alleged to have received millions of dollars from the district for services that were either not performed or were billed at inflated rates, the suit says.

In Gallagher's case, DPS alleges that between June and December 2005, Gallagher received $6 million in wire transfers for work on an emergency management information system, with no written contract between the two parties to perform such services. Furthermore, the district said Gallagher “failed to perform all or any of the services it promised to provide under any agreement or understanding (even if unauthorized) that may have been reached.”

According to the civil suit, Mr. Hill personally authorized three wire transfer payments to Gallagher for work on the EMIS—two of which totaled $1.7 million and were authorized days before he left to join Gallagher.

In a statement, Gallagher said: “DPS has previously confirmed in writing that Gallagher delivered everything it was supposed to provide to DPS. Gallagher is vigorously defending this case on the grounds that Gallagher performed its contract with DPS, and earned what was paid; did not violate any duties to DPS; and did not engage in any wrongful conduct.”

In Marsh's case, the district alleges that it paid the broker more than $17 million for insurance products and consulting services from June 2002 through June 2008, most by wire transfers. “In each such instance, the value, if any, of the products and/or services that the Marsh defendants provided was woefully inadequate in relation to the payments rendered,” the district alleges.

In addition, Mr. Hill, who at the time was working for the school district as a full-time Marsh employee, authorized a $450,000 wire transfer to Marsh on Aug. 30, 2006, as a prepayment for casualty consulting services for July 2006 through July 2007, for which the district says there was no written contract and that Marsh never intended to provide services equivalent to the value of what was paid.

A Marsh spokesman said the broker believes the allegations “are without merit” and has filed a counterclaim against the district seeking $300,000 in unpaid fees.

According to Marsh's February 2009 complaint, the district agreed to pay $450,000 in quarterly installments for brokerage services from July 1, 2007, to June 20, 2008, but never paid Marsh. As a result, Marsh resigned as the district's broker effective Feb. 28, 2008. Marsh says the district still owes it $300,000.

A trial on the Detroit district's civil suit is set for Oct. 4, said Jerome Watson of Miller, Canfield, Paddock & Stone P.L.C. in Detroit and the district's attorney.