The Communities Empowerment Network courted controversy in October last year after it helped two pupils appeal successfully against their exclusions from Glyn technology school in Surrey. The teenagers had made death threats to a PE teacher, prompting former education secretary Estelle Morris to intervene unsuccessfully.
The Community Fund, which allocates lottery money, told "The TES" this week that it was investigating the network, and considering making it refund the money. A team is to visit the network's south London offices to examine its records.
Boni Sones, the fund's head of public affairs, said it appeared that CEN should never have received lottery funding because it was neither a registered charity, nor did it have a "philanthropic or benevolent" constitution. She also expressed concern over anti-war comments on its website, But the network insists that its aims are benevolent because it provides support and legal help for people experiencing educational disadvantage, especially exclusion from school.
Gerry German, the network's director, a 74-year-old former headteacher, admitted that the organisation had not listed philanthropic aims in its constitution, but had now included them. In 2001, he helped 29 pupils overturn exclusions at appeals panels.
He said repaying pound;200,000 would bankrupt his organisation, cutting support for excluded pupils, a high number of whom are from ethnic minorities. "The assertion that we shouldn't be eligible for lottery funding is unfounded," he said. "It is a result of the press-led vendetta against the CEN and organisations like ours that try to benefit people from black communities, who are less fairly treated in exclusions."
The Community Fund is also investigating the Working Group Against Racism in Children's Resources, which was set up by Mr German but no longer involves him.
This group received pound;145,000 lottery funding in 1993, and campaigned successfully for the scrapping of the golly on Robertson's jam-jars. It now focuses on helping ethnic-minority parents get better education for their children.