Court documents in MACSA pension theft case

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 1   Bar No. 163589
 2   Bar No. 152199
 3   70 West Hedding Street
     San Jose, California 95110
 4   Telephone: (408) 299-7400

 5   Attorneys for the People


                                  SUPERIOR COURT OF CALIFORNIA
 9                                   COUNTY OF SANTA CLARA
10   PEOPLE OF THE STATE OF                            ) NO.
     CALIFORNIA,                                       )
11                                                     ) STATEMENT OF PROBABLE CAUSE
                                   Plaintiff,          ) IN SUPPORT OF ARREST WARRANT
12                                                     ) AND COMPLAINT
                            vs.                        )
13                                                     )
     OLIVIA SOZA-MENDIOLA and                          )
14   BENJAMIN TAN,                                     )
15                                 Defendants.         )

17          I, Michael Sterner, a Lieutenant in the Bureau of Investigation of the Santa Clara County

18   District Attorney's Office, believe that the facts described herein establish probable cause for the

19   arrest and pretrial detention of Defendants OLIVIA SOZA-MENDIOLA and BENJAMIN TAN for

20   the crimes charged in the attached complaint. Therefore, I request that the Court issue arrest

21   warrants for OLIVIA SOZA-MENDIOLA and BENJAMIN TAN that they might be dealt with

22   according to law.

23          I have been employed by the Bureau of Investigation since July 2008. Before that I was a

24   police officer in the San Jose Police Department until I retired at the rank of Captain after thirty-one

25   years of service.

26          For two and a half years, I have been investigating the Mexican American Community

27   Services Agency, a community-based social services organization with offices in San Jose and

28   Gilroy, commonly known as MACSA. Specifically, I have been investigating MACSA's failure to

     Statement of Probable Cause in Support of Arrest Warrant                             Page 1 079467
 1   make required payments to employee pension plans, including PERS and STRS for its teachers and

 2   school workers and 403(b) retirement plans for its other employees. I determined that the use of

 3   these unremitted retirement funds to pay other financial obligations of MACSA constituted theft by

 4   embezzlement of those funds and that the individuals responsible for this crime were MACSA's

 5   CEO OLIVIA SOZA-MENDIOLA and CFO BENJAMIN TAN. This statement is a recitation of

 6   the facts that establish probable cause for the arrest and pretrial detention of these two individuals

 7   for the crime of grand theft. These facts are based on the statements of witnesses that I interviewed

 8   as well as the documents that I obtained from MACSA, its pension plan providers, its outside

 9   auditor, its banks, its employees, and others. More details may be found in the attachments to this

10   statement, which include my reports of witness interviews, the report of an investigator from the

11   U.S. Department of Labor, and the report of a forensic accountant.

12                                              BACKGROUND

13          The Mexican American Community Services Agency, Inc. ("MACSA") is a non-profit

14   corporation that has been providing social services to the Latino community in Santa Clara County

15   since the mid-1960's. Over the years, MACSA's services expanded from simple outreach programs

16   for children, teens, adults, and seniors offered at local schools, libraries, and community centers to

17   the operation of charter schools and the construction of senior and low-income housing. As these

18   program offerings expanded, the number of MACSA employees increased as well, from less than a

19   dozen in the early years to well over fifty during most of the last decade. MACSA's operations

20   have been funded primarily with public money, including state school funding based on average

21   daily attendance ("ADA") and other state and local grants, but also with private donations and

22   generated income.

23           In 1988, MACSA began offering a pension plan to its employees. This plan was a profit-

24   sharing type of pension plan funded entirely by employer contributions. This plan was restated in

25   1997, when MACSA selected the Variable Annuity Life Insurance Company ("VALIC") to be the

26   pension plan provider. According to the documents and amendments establishing and describing

27   this profit sharing plan, "[t]he amount of contribution made by MACSA each plan year is totally

28   within its discretion and may be zero in some years." An employee had to have worked at least

     Statement of Probable Cause in Support of Arrest Warrant                             Page 2 079468
 1   1,000 hours during a single year of service before contributions would be made for the employee.

 2   Also, an employee had to have worked at least five years before his ownership of those employer

 3   contributions vested.

 4          In 1997, MACSA established a second pension plan, also held at VALIC, this one an

 5   employee-savings type of pension plan. According to those plan documents, each MACSA

 6   employee could elect to invest a portion of his or her salary in this retirement account consisting of

 7   variable annuities. As an incentive to participate, the plan also provided that MACSA would

 8   contribute an amount equal to 1% of the employee's salary as long as the employee contributed at

 9   least 1% of salary. In addition to this matching amount, the plan provided that MACSA could make

10   additional discretionary contributions. However, the plan documents also clearly provided that

11   none of these employer contributions, matching or otherwise, were mandatory. An employee's

12   ownership of the amounts deducted from his or her own salary vested immediately, but ownership

13   of any employer contributions did not vest until the employee completed five years of employment

14   atMACSA.

15          Over the years, MACSA made additional promises to its employees concerning their pension

16   benefits, which were never memorialized in the plan documents on file at VALIC. Because most

17   MACSA employees were represented by the Service Employees International Union ("SEIU"),

18   MACSA entered into a collective bargaining agreement ("CBA") that covered most of its employees.

19   The CBAs for the period from July 1, 2003 to June 30, 2009 described the VALIC pension benefits

20   as follows: "The Employer will contribute four per cent (4%) of salary of all eligible employees and

21   match employee contributions of up to an additional two per cent (2%)." Nothing in these CBAs

22   permitted MACSA to reduce, defer, or skip these employer contributions.

23          MACSA also offered a third type of retirement plan, which was available to teachers and

24   other charter school workers. In 2002, one year after opening its two charter schools, the MACSA

25   Board of Trustees voted to allow the teachers and other charter school employees to participate in

26   the Public Employees' Retirement System ("PERS") and the State Teachers' Retirement System

27   ("STRS"). PERS and STRS required regular contributions both from the employee participants and

28   from MACSA. In exchange, PERS and STRS promised to make regular payments to the employee

     Statement of Probable Cause in Support of Arrest Warrant                            Page 3 079469
 1   after retirement in an amount based on the employee's salary and years of service. Although

 2   teachers and school workers were not precluded from also making contributions to the VALIC

 3   pension plan, only a few employees participated in both plans.

 4          To participate in the VALIC pension plan, MACSA employees completed a form entitled

 5   "Section 403(b) Salary Reduction Agreement." This was essentially a contract between MACSA as

 6   the "Employer" and the individual "Employee." There were blank spaces for the employee to

 7   specify the amount of money to be withheld from the employee's pay and contributed to the VALIC

 8   retirement plan. The form stated: "The Employer shall pay the amount of the salary reduction to

 9   [VALIC] in the manner specified above for the purchase of a non-transferable annuity contract to

10   provide retirement benefits for Employee." There were also provisions about the timing of

11   contributions, the termination of the agreement, and the distributions of any excess contributions. At

12   the end of the form, there were blank spaces for the signatures of the employee and the employer.

13          The Salary Reduction Agreements were completed and signed in MACSA's human

14   resources office. Generally someone in that office signed those contracts on behalf of MACSA as

15   the employer. The same forms were also used to change an employee's contribution amount or to

16   stop contributions altogether. To change the contribution amount, the employee filled out a new

17   form with the new contribution amount and signed it. To stop contributions altogether, the

18   employee simply specified a contribution amount of zero and signed it. The executed Salary

19   Reduction Agreements were stored in the individual employee's file in the human resources office.

20          The Salary Reduction Agreements and the collective bargaining agreements refer to the

21   VALIC retirement plans as "Section 403(b)" plans, which is a type of tax-deferred retirement plan

22   that certain schools and nonprofits are able to offer their employees pursuant to Internal Revenue

23   Code section 403(b). These plans provide the same benefits and operate under roughly the same

24   rules as the 401(k) plans offered in the private sector and the 457(b) plans offered to government

25   employees. As with those other plans, there is a limit on the annual dollar amount of contributions

26   to a 403(b) account, depending upon such factors as the employee's age and length of service. The

27   primary benefit offered by all of these types of plans is that the contributions to the plan and any

28   earnings or capital gains are not taxed until the money is withdrawn, usually after retirement.

     Statement of Probable Cause in Support of Arrest Warrant                             Page 4 079470
 1          There is a large body of federal law known as ERISA (acronym for the Employee Retirement

 2   Income Security Act of 1974) that regulates most employee pension plans. An employer who wants

 3   to offer an employee pension plan that avoids ERISA's ambit must design the plan to conform to a

 4   federal regulation that requires very limited employer involvement. (29 C.F.R. § 251O.3-2(f).)

 5   When the plan includes employer contributions, however, the U.S. Department of Labor has opined

 6   that the plan cannot meet the safe harbor criteria set forth in that regulation, and would therefore be

 7   governed by ERISA. (See U.S. Dept. Labor, Advisory Opn. No. 97-05A (Feb. 12,1997) [1997 WL

 8   75230 at p. *2].) Because both of MACSA's VALIC pension plans included employer

 9   contributions, they were governed by ERISA. MACSA apparently recognized this because it often

10   filed the Annual Report Forms 5500 with the U.S. Department of Labor, as required by ERISA.

11          Under ERISA, certain pension administration and asset management duties arise, which may

12   or may not be spelled out in such documents as the CBA, the employee handbook, or other

13   documents that describe or evidence the plan. For example, numerous courts have held that when

14   employee pay is withheld for contribution to an ERISA plan, those funds are plan assets even if

15   they have not left the employer's general account, meaning that the employer holds those funds in

16   trust for the sole purpose of remitting them to the plan accounts. (See, e.g., United States v. Whiting

17   (7th Cir. 2007) 471 F.3d 792, 799; United States v. Eriksen (9th Cir. 2011) 639 F.3d 1138, 1150;

18   United States v. Grizzle (lith Cir. 1991) 933 F.2d 943,947; In re College Bound, Inc. (Bankr. S.D.

19   Fla 1994) 172 B.R. 399,403.) Moreover, under ERISA, anyone who "exercises any discretionary

20   authority or discretionary control respecting management of [an ERISA] plan or exercises any

21   authority or control respecting management or disposition of its assets" is a fiduciary with respect to

22   the plan. (29 U.S.C. § 1002(21)(A)(i).) Therefore, combining these ERISA legal principles with

23   California's law of theft by embezzlement, any person who controls funds withheld from an

24   employee's pay for contribution to an ERISA plan who fraudulently uses those funds for something

25   other than deposit into the plan account is guilty of embezzlement. (See Penal Code §§ 503, 506.)

26          MACSA employees were paid twice a month: on the 5th for the second half of the previous

27   month, and on the 20th for the first half of the month. Hourly employees were required to complete

28   timesheets and submit them to their supervisors, who approved them and turned them over to

     Statement of Probable Cause in Support of Arrest Warrant                             Page 5 07947l
 1   accounting. Salaried employees, such as teachers and managers, were required to turn in forms

 2   showing any sick leave or vacation leave used during the pay period.

 3          The MACSA accounting analyst in charge of payroll from 2004 until mid-2009 was Alberto

 4   Hernandez. When the timesheets were received, Mr. Hernandez, or a clerk under his supervision,

 5   entered each employee's hours into the computer. The computer then generated a payroll register

 6   based on previously entered information about the employee's pay rate, accrued leave, elective

 7   deductions, and tax withholdings. Mr. Hernandez printed out the paychecks (or direct deposit

 8   receipts) and entered the net pay in MACSA's general ledger. He then delivered the paychecks

 9   (with the paystubs attached) to be signed by MACSA's CEO OLIVIA SOZA-MENDIOLA.

10          Attached to every paycheck and direct deposit receipt was a paystub that summarized the

11   employee's payroll information both for the current pay period and for the year, showing gross pay,

12   net pay, sick pay, vacation pay, health and dental insurance deductions, retirement deductions,

13   employer paid benefits, payroll tax withholdings, and charitable contributions. An employee's

14   elective contribution to the VALIC pension plan was labeled "Tax Def' on the paystub under the

15   "Deductions" column. This amount was then subtracted from the employee's gross pay on the

16   paystub, reducing the net pay (and the taxable income) on the employee's paycheck. The MACSA

17   contributions to the VALIC pension plans were labeled "TaxDef 1-0" and "TaxDef 1-1" on the

18   paystub under the "Benefits" column, representing MACSA's 4% contribution and 2% matching

19   contribution respectively. These amounts were not subtracted from the employee's gross pay and

20   thus did not reduce the net pay on the employee's paycheck. Overall, the paystubs were uncluttered

21   and well-organized, so that anyone simply glancing at a paystub could see whether MACSA's

22   VALIC pension contributions were noted there and whether some of the employee's pay had been

23   withheld to make VALIC pension contributions.

24          Although Alberto Hernandez calculated payroll and printed the employee paychecks, he did

25   not make the payments to VALIC that were listed as deductions and benefits on the paystubs. That

26   job fell to Arasselli Vassallo, MACSA's accounts payable clerk. She was responsible for making

27   the payments to VALIC, as well as making all of the other payroll-related payments to government

28   agencies, financial institutions, and insurance companies.

     Statement of Probable Cause in Support of Arrest Warrant                          Page 6 079472
 1          As the accounts payable clerk, Ms. Vassallo kept track of MACSA' s financial obligations by

 2   entering into MACSA's computer system all invoices from vendors and any internal payment

 3   request forms. The payment request forms for VALIC were prepared by Alcides Martinez, an

 4   employee in the human resources office. Each pay period, Mr. Martinez prepared a spreadsheet

 5   listing all of the VALIC deductions and benefit payments shown on every employee's paystub.

 6   Mr. Martinez obtained this information from the payroll register, which was provided to him by

 7   Alberto Hernandez. The spreadsheet's purpose was to instruct VALIC how to allocate MACSA's

 8   payment among the various employees' retirement accounts. Once the spreadsheet was completed,

 9   Mr. Martinez filled out a payment request form for the total at the bottom of the spreadsheet and

10   forwarded both the form and the spreadsheet to Ms. Vassallo.

11          The payment request forms for the PERS and STRS payments were prepared by Alberto

12   Hernandez and forwarded to Ms. Vassallo. Mr. Hernandez also prepared the accompanying

13   paperwork that listed the MACSA employees who were to be credited for these payments.

14   MACSA's payments for the school workers' PERS and STRS pension plans were actually made to

15   the two school districts that sponsored the charter schools, the East Side Unified High School

16   District ("ESUHSD") and the Gilroy Unified School District ("GUSD"). These school districts, in

17   tum, forwarded MACSA' s payments and paperwork to the County Office of Education, which then

18   made the payments to CalSTRS and CaIPERS.

19          When bills and internal requests for payments were due, Ms. Vassallo did not make the

20   decision to pay them on her own. Rather, it was her regular practice to prepare an aged payables list

21   and present it to MACSA's CFO BENJAMIN TAN for review. At the same time, another MACSA

22   accountant, Reynaldo Foronda, kept BENJAMIN TAN apprised of MACSA's "actual cash

23   position," meaning the actual money available to make payments, accounting for checks shown on

24   MACSA's books but withheld for various reasons. With full knowledge of the cash available,

25   BENJAMIN TAN regularly reviewed the aged payable list and instructed Ms. Vassallo to make

26   certain payments and not to make others.

27          Acting on these instructions, Ms. Vassallo printed the approved payment checks and

28   presented them to CEO OLIVIA SOZA-MENDIOLA for signature. Sometimes BENJAMIN TAN

     Statement of Probable Cause in Support of Arrest Warrant                          Page 7
 1   instructed Ms. Vassallo to withhold certain checks even after they were printed and signed.

 2   Otherwise, the signed checks were mailed to the payees. Once the checks were mailed, Ms.

 3   Vassallo attached a remittance advice slip with the check information to its corresponding invoice

 4   or request for payment and filed this documentation in a folder labeled with the name of the vendor.

 5   When she mailed a check to VALIC, for example, she stapled the remittance advice to the

 6   spreadsheet and payment request prepared by Alcides Martinez and then filed all of these

 7   documents in a folder labeled VALIC.

 8          In light of the process as it was described to me, the only MACSA employees in a position

 9   to know whether MACSA was making the required payments to VALIC and PERS and STRS were

10   Arasselli Vassallo, BENJAMIN TAN, and OLIVIA SOZA-MENDIOLA, as well as anyone else in

11   the accounting office who happened to review financial records or overhear one of these other three

12   talking about it. No one at VALIC or CalPERS or CalSTRS knew whether the required payments

13   were being made because the plans were set up so that it was MACSA's burden to calculate, report,

14   and pay what was owed for their employees' pensions. Accordingly, no one at VALIC or CalPERS

15   or CalSTRS kept track of missed payments, sent demands, or notified employees if payments were

16   missed. Most MACSA employees had no way of knowing whether the contributions and

17   withholdings listed on their paystubs were actually remitted unless they carefully compared the

18   paystubs with the quarterly statements received from the pension plan providers. Because most

19   MACSA employees hardly glanced at their quarterly statements (as many admitted to me in

20   interviews), nearly all of them believed that MACSA was making the required retirement payments

21   as reported on their pay stubs.

22                                           INVESTIGATION

23          On February 26,2009, the Gilroy Dispatch newspaper published an article entitled "Charter

24   school skims retirement money," which stated that MACSA "used $400,000 of retirement funds

25   taken out of teachers' paychecks without telling them to pay operating costs." According to this

26   article, MACSA's CEO OLIVIA SOZA-MENDIOLA admitted that "MACSA took the money

27   teachers paid toward their retirement accounts and the money that the organization would have

28   contributed and instead used it to pay operating costs." Shortly afterward, she gave similar excuses

     Statement of Probable Cause in Support of Arrest Warrant                          Page 8 079474
 1   to the employees at agency and union meetings. The newspaper article quoted MACSA's CFO

 2   BENJAMIN TAN as admitting: "Technically, it's not legal."

 3          On March 3,2009, the District Attorney wrote a letter requesting that the Santa Clara

 4   County Office of Education ("SCCOE") undertake an audit of the charter school's finances. Six

 5   weeks later the SCCOE engaged the state's Fiscal Crisis and Management Assistance Team

 6   ("FCMAT") to conduct an AB 139 Extraordinary Audit of MACSA' s two charter schools in part

 7   "to determine if there is evidence of illegal fiscal practices or misappropriation of employee CalPers

 8   and CalSTRS payroll deductions." Ultimately, FCMAT's final report dated August 27,2009 did

 9   not divulge any significant new information and did not determine who was responsible for the

10   failure to make the required retirement payments. The FCMAT report did, however, provide the

11   total amounts owed to PERS and STRS as of April 2009 according to MACSA's books: $41,400

12   for the Gilroy charter school employees and $267,909 for the San Jose charter school employees.

13          On April 20, 2009, shortly after FCMAT began its audit, the Gilroy Dispatch published a

14   new article announcing that "MACSA could have skimmed up to an additional $400,000 from its

15   non-school employees." The article attributed this information to a source at VALlC and noted that

16   MACSA did not mention this nonpayment earlier when it came clean about the failure to make

17   required PERS and STRS contributions. FCMAT did not investigate these missing VALlC

18   contributions because they were outside the scope of its audit.

19          I began my interviews in this case a few weeks after the release of the FCMAT audit report.

20   Over the next year, I interviewed representatives from FCMAT, SCCOE, ESUHSD, GUSD, and

21   SEIU. I also interviewed MACSA teachers, employees, accountants, union stewards and board

22   members. By October 2010, I had developed probable cause to believe that evidence of

23   embezzlement of retirement funds would be found in MACSA's files and on MACSA's computers.

24   On October 14,2010, I led a team of investigators on a search of MACSA's premises pursuant to a

25   search warrant. We seized 143 boxes and 110 manila envelopes containing more than 400,000

26   pages of documents, as well as hard drives from 13 computers containing more than 5,000,000 files.

27          The organization, scanning, Bates-numbering, and review of the seized documents, and the

28   forensic examination of the 13 computer hard drives took approximately one year to complete.

     Statement of Probable Cause in Support of Arrest Warrant                           Page 9079475
 1   During this time, I also obtained another computer and tens of thousands of additional pages of

 2   documentation by serving search warrants on the pension plan providers, MACSA's bank, and

 3   MACSA's independent auditor. Valerie Reyes, an investigator with the U.S. Department of Labor,

 4   and Ed Fischer and Joseph Gavalis, forensic accountants with CTG & Associates, LLC, assisted me

 5   in reviewing this evidence and conducting some of the interviews. Investigator Reyes used this

 6   evidence to prepare a detailed report calculating the total amount that MACSA failed to remit to the

 7   403(b) pension plans during the period from January 2003 through January 2010. Mr. Fischer used

 8   this evidence to prepare a detailed forensic report of MACSA's finances during the calendar year

 9   2008 to determine whether MACSA in fact had the money available to make the 403(b) pension

10   plan payments as required. I used the seized evidence to conduct a final round of witness

11   interviews beginning in November 2011, refreshing their memories with the MACSA documents to

12   add dates and other details to the events they described.

13                                                FINDINGS

14          Analyzing the data from MACSA's computers, bank statements, and records obtained from

15   the pension plan providers, Investigator Reyes determined that during the period from January 2003

16   through January 2010, MACSA failed to remit $689,526 in employer contributions and $119,296 in

17   employee contributions to MACSA's 403(b) pension accounts. According to the spreadsheets

18   prepared by Investigator Reyes, MACSA stopped making nearly all payments to VALIC for

19   employer pension contributions in early 2004, began skipping payments to VALIC for employee

20   pension contributions in 2007, and stopped all payments to VALIC in January 2008. After January

21   2008, MACSA never made another payment to its 403(b) pension accounts until a new account was

22   established at Nationwide in March 2009. At all times, even when MACSA was not making the

23   required pension payments, the employees' pension contributions were still being deducted from the

24   employees' pay, and their paystubs still showed that both the employee and employer pension

25   contributions were being made.

26          The totals calculated by Investigator Reyes are consistent with (although not identical to) the

27   totals on a spreadsheet located among the documents seized from MACSA, which was apparently

28   created and maintained by accounts payable clerk Arasselli Vassallo as a summary of MACSA' s

     Statement of Probable Cause in Support of Arrest Warrant                          Page 10
 1   outstanding debt to VALle. According to Ms. Vassallo's spreadsheet, the amount owed by

 2   MACSA as of February 15, 2009 for employer contributions was $623,753.68, and the amount

 3   owed for employee contributions was $117,185.71.

 4          Although Arasselli Vassallo kept track of outstanding debt, recorded vendor bills and

 5   payment requests, and printed most checks, she was not responsible for deciding which bills to pay.

 6   The accounting clerks Alberto Hernandez and Reynaldo Foronda both told me that MACSA's CFO

 7   BENJAMIN TAN regularly instructed Ms. Vassallo to pay some bills and not pay others.

 8   Elaborating on this, Mr. Hernandez said that he knew by overhearing these conversations that the

 9   PERS, STRS, and VALIC payments were not being made. Ms. Vassallo herself also told me that

10   BENJAMIN TAN was usually the one who told her which bills to pay and which ones not to pay.

11   All three of these witnesses mentioned that BENJAMIN TAN sometimes instructed Ms. Vassallo to

12   hold back checks even after they had already been authorized, printed and signed. Corroborating

13   this, I've seen stubs of checks to VALIC dated as far back as 2002 and 2003 with handwritten notes

14   on them to hold the checks for months on BENJAMIN TAN's instruction. I have also seen emails

15   from BENJAMIN TAN instructing Ms. Vassallo to pay certain bills and not pay others.

16          Sometime in 2004, according to Ms. Vassallo, BENJAMIN TAN told her to start paying

17   only the employee contributions to VALle. BENJAMIN TAN told Ms. Vassallo that MACSA was

18   not obligated to pay the employer contribution. In order to pay only the employee contributions to

19   VALIC, Ms. Vassallo photocopied the paperwork provided to her by Alcides Martinez. One copy

20   of the paperwork was used to reflect the payment to VALIC for the employee contributions and was

21   ultimately filed in the VALIC "paid" folder. The other copy of the paperwork was used to record

22   the amount of the employer contribution that was left unpaid. This copy was filed in the

23   outstanding debt folder. The partial payments to VALIC were also noted in the computer, so that

24   the amount still owed to VALIC for the employer contribution was preserved in the system as

25   outstanding debt.

26          Ms. Vassallo, Mr. Foronda, and Mr. Hernandez all told me that they believed that the

27   retirement payments were not being made because MACSA did not have the money to make those

28   payments. According to several accounts, this was also the excuse that CEO OLIVIA SOZA-

     Statement of Probable Cause in Support of Arrest Warrant                        Page 11
 1   MENDIOLA gave at agency and union meetings when the problem came to light in early 2009. To

 2   further investigate this issue, Ed Fischer conducted a forensic analysis of MACSA's finances to

 3   determine whether MACSA truly did not have the money to make the required pension payments.

 4   Because of the large volume of transactions, Mr. Fischer limited his analysis to the calendar year

 5   2008, a year when MACSA made only two payments to VALIC. Those two payments were made

 6   in January 2008 for employee contributions withheld a year earlier in January 2007.

 7          After the first quarter of 2008, according to Mr. Fischer's forensic report, MACSA had more

 8   than enough money in its bank account at the end of each month to have made the required

 9   payments to VALIC for current employer and employee contributions. There were even months in

10   2008 when MACSA had the money to pay the current amount plus all of the past due employee

11   contributions to VALIC. Even during the first three months of 2008, when cash was tighter,

12   MACSA had the money to make the required VALIC payments, but instead paid less important

13   obligations, such as $1,000 for a YMCA membership, $7,000 for computers from Fry's Electronics,

14   $1,200 for FUTSAL tournament fees, more than $7,000 for food from local supermarkets, and more

15   than $13,000 for office supplies from Office Depot. During the year 2008, the total payments owed

16   to VALIC each month averaged no more than $15,000, only about $5,000 of which represented the

17   money withheld from the employees' paychecks. Thus, in 2008 at least, it was not true that

18   MACSA did not have the money to make the required VALIC payments. Rather, BENJAMIN

19   TAN elected to use this money, including money withheld from employees' paychecks, to pay for

20   other things, such as sports, food, computers, and office supplies.

21          The following table shows the money thatMACSA had available in the bank at the end of

22   each month in 2008:

                                                                   ADJUSTED FOR
24                     2008 MONTH          MACSABOOKS              WITHHELD AND
                                                                  EXPIRED CHECKS
                     JANUARY                     -$ 52,924.78              $ 12,202.40
                     FEBRUARY                    -$135,313.34              -$ 44,097.49
                     MARCH                       -$159,961.01              -$ 94,833.83

     Statement of Probable Cause in Support of Arrest Warrant                         Page 12
                     APRIL                       $   3,711.40            $ 91,642.72
                     MAY                         $   3,738.08            $ 14,405.93
                     JUNE                        $ 41,308.25             $ 52,907.14
                     JULY                        $ 47,993.91             $ 59,952.80
                     AUGUST                      $270,286.44             $285,337.83
                     SEPTEMBER                   $ 33,745.60             $ 45,487.06
                     OCTOBER                     $ 75,936.52             $ 87,768.98

 8                   NOVEMBER                    $136,492.36             $148,393.00

 9                   DECEMBER                    $359,052.07             $371,184.53


11   The center column of this table shows what MACSA' s own books listed as the cash available at the

12   end of each month. MACSA's books, however, did not reflect all the cash available, because many

13   checks listed as outstanding in MACSA's books were never actually mailed out. In fact, among the

14   seized MACSA records, Mr. Fischer found more than $50,000 worth of original checks printed and

15   signed in 2007 that were never actually detached from their stubs and sent out. These checks were

16   carried on MACSA's books in the first four months of 2008, making it appear that there was less

17   cash available than there really was. These withheld checks were not reversed out of the books

18   until May 2008. Additionally, there were other checks recorded in MACSA's books as outstanding

19   that were no longer negotiable because they were more than 180 days old. Mr. Fischer adjusted the

20   MACSA book balances to reflect these realities and reported MACSA's true end-of-month cash

21   positions in the column on the right. It should be noted that accounting clerk Reynaldo Foronda,

22   when interviewed, stated that he was aware of this very issue, and that he kept BENJAMIN TAN

23   regularly informed of MACSA' s true cash position, adjusting the book balances to reflect checks

24   that were issued but not mailed.

25          As CFO, BENJAMIN TAN had full control over the money in MACSA's bank accounts,

26   including that portion of the money withheld from the employees' paychecks each month to pay for

27   taxes, health benefits, union dues, and pension benefits. The employees agreed to reduce their

28   paychecks by these amounts because they trusted that those persons in control of MACSA' s money

     Statement of Probable Cause in Support of Arrest Warrant                        Page 13
 1   would make those payments timely and in full. BENJAMIN TAN was the one who decided which

 2   bills to pay and which not to pay, and it was he who instructed Arasselli Vassallo to not make the

 3   required payments to CaIPERS, CaISTRS, and VALIC. Although several witnesses suggested that

 4   BENJAMIN TAN may have stopped making these retirement payments because there was not

 5   enough money, the forensic examination of MACSA's finances shows that the payments were not

 6   made even when MACSA had plenty of available cash in the bank. Instead of making retirement

 7   payments, BENJAMIN TAN used this money, including money deducted from employees' pay, to

 8   pay other debts and buy other things for MACSA. Although BENJAMIN TAN declined to be

 9   interviewed for this investigation, when he was asked by the Gilroy Dispatch about the failure to

10   make required pension payments, he admitted, "Technically, it's not legal."

11          As CEO and the sole signer on the vast majority of MACSA checks, OLIVIA SOZA-

12   MENDIOLA had full control over the money in MACSA's bank accounts as well as supervisory

13   authority over CFO BENJAMIN TAN. The MACSA board meeting minutes disclose that OLIVIA

14   SOZA-MENDIOLA was present for almost all of MACSA's monthly board meetings from January

15   2004 until June 2009, when she resigned. Because she was the CEO, she received copies of the

16   board meeting packets whether she attended the meetings or not. The monthly board meeting

17   packets often included the monthly financial reports prepared by BENJAMIN TAN. Corroborating

18   this, I have seen an email dated as early as February 20,2004 from OLIVIA SOZA-MENDIOLA

19   asking BENJAMIN TAN to provide her with a hard copy of the January 2004 monthly financial

20   report that he had forwarded to her electronically. That particular financial report contained the

21   following note: "The agency's portion of the retirement funds is not being paid as well." This

22   exact note also appeared in the February, March, and April monthly financial reports, which I

23   believe were included in the board meeting packets for the March, April, and May 2004 board

24   meetings, respectively. Similar notes also appeared in other board meeting packets, such as the

25   February and April 2007 monthly financial reports. These notes about MACSA's failure to make

26   pension payments very likely appeared in many other monthly financial reports, but I could not

27   verify this because most board meeting packets were missing from the materials seized from

28   MACSA pursuant to the search warrant.

     Statement of Probable Cause in Support of Arrest Warrant                          Page 14 079480
 1          Although the notes in the financial statements mention only the employer portion of the

 2   pension payments, there is also evidence that OLIVIA SOZA-MENDIOLA knew that MACSA had

 3   stopped paying the employee portion as well. In fact, the evidence suggests that OLIVIA SOZA

 4   MENDIOLA knew this in advance because she suddenly stopped her own personal retirement plan

 5   contributions only months before MACSA completely stopped making payments to VALIC for

 6   employee pension contributions. Although OLIVIA SOZA-MENDIOLA did lose some of her own

 7   contributions to VALIC, due to a large lag time between the payments to VALIC and the related

 8   pay dates, she still managed to avoid tens of thousands of dollars in losses by getting out as early as

 9   she did. As CEO, her foreknowledge and failure to intervene, not to mention her self-protective

10   measures, clearly imply that she consented to the decision to stop remitting employee contributions

11   to VALIC.

12          MACSA's payroll records show that OLIVIA SOZA-MENDIOLA made payroll

13   contributions to the VALIC pension plan every pay period from 2003 until mid-2007, when she

14   suddenly stopped contributing anything. From April 2004 to December 2006, she contributed $566

15   per pay period, which is $1,132 per month. Starting in January 2007, she increased her contribution

16   to $833 per pay period, or $1,666 per month, which works out to $20,000 per year. In the year

17   2007, MACSA had long since stopped making employer pension payments to VALIC, but it

18   continued to make payments for employee pension contributions through August 2007, although

19   most were late payments for 2006 employee contributions. On June 28, 2007, OLIVIA SOZA-

20   MENDIOLA filled out the forms to reduce her personal VALIC pension contribution to $0. After

21   OLIVIA SOZA-MENDIOLA stopped her personal pension contributions, MACSA made only

22   sporadic payments to VALIC until January 2008 when MACSA stopped paying VALIC altogether.

23   After January 2008, MACSA never made another payment to VALIC despite the fact that VALIC

24   continued to be MACSA'~ pension plan provider until at least February 2009, when MACSA set up

25   a new plan at Nationwide. In fact, MACSA did not make payments to Nationwide either, until

26   August 2009, almost two months after OLIVIA SOZA-MENDIOLA resigned from MACSA.

27          Consistent with this circumstantial evidence, a number of witnesses told me that OLIVIA

28   SOZA-MENDIOLA confessed her involvement in the decision to stop remitting retirement

     Statement of Probable Cause in Support of Arrest Warrant                           Page 15 07948l
 1   contributions. Two SEIU representatives who represented MACSA employees told me that, in

 2   meetings in March and April 2009, OLIVIA SOZA-MENDIOLA admitted to those present that she

 3   and BENJAMIN TAN together had made this difficult decision. Aurora Cepeda told me that when

 4   she questioned this decision after the fact, OLIVIA SOZA-MENDIOLA told her, "Well I did not

 5   want to lay people off." Ms. Cepeda recalled the March meeting mentioned by the SEIU employees

 6   and said that OLIVIA SOZA-MENDIOLA told those present that she made the decision in order to

 7   keep people employed. Another MACSA employee told me about a February 2009 meeting of

 8   charter school workers at which questions were posed about the missing PERS and STRS

 9   contributions and OLIVIA SOZA-MENDIOLA responded that BENJAMIN TAN was not the only

10   one to blame-that it had been a uniform decision to keep the organization alive.

11          More troubling than the fact that OLIVIA SOZA-MENDIOLA knew and approved of the

12   decision to stop retirement payments is the fact that she personally benefited financially by stopping

13   her own withholdings without notifying the other MACSA employees so that they could do the

14   same. Although she declined to be interviewed for this investigation, OLIVIA SOZA-MENDIOLA

15   proclaimed to the newspaper and MACSA's employees that the employees' retirement money was

16   used to save programs. On the contrary, it appears that the employees' retirement contributions

17   were used in part to pay for raises that she received and the increase in her own net salary that

18   resulted when she stopped her contributions to VALle. By stopping her pension contributions,

19   OLIVIA SOZA-MENDIOLA caused her net pay to increase by $522 per pay period. She also

20   received two 3% pay raises during the time that MACSA was not remitting employee pension

21   contributions to VALIC: one effective July 1, 2007 and one effective July 1,2008. Because net

22   payroll was given the highest priority at MACSA, these increases to OLIVIA SOZA-MENDIOLA's

23   net pay were at least some of what was paid with the employee pension contributions that were

24   withheld but not remitted to VALle. It was not until November 1,2008, when the union and a few

25   individuals were beginning to grasp the extent of the pension problems, that OLIVIA SOZA-

26   MENDIOLA and other upper managers at MACSA finally took a 25% pay cut. By that time,

27   OLIVIA SOZA-MENDIOLA had already received at least $20,000 in extra take-home pay since

28   June 28, 2007 when she stopped her own pension contributions. During this time OLIVIA SOZA-

     Statement of Probable Cause in Support of Arrest Warrant                           Page 16
 1   MENDIOLA was aware, because she signed the paychecks with the paystubs still attached, that

 2   VALIC pension contributions were still being deducted from the pay of her fellow employees and

 3   that these unremitted employee pension contributions were helping to fund her extra take-home pay.

 4          It should be noted that MACSA's CFO BENJAMIN TAN suffered no personal financial

 5   loss due to the decision to stop making payments to VALle. Because BENJAMIN TAN was paid

 6   as an independent contractor, not an employee, he did not participate in the employee pension plans.

 7   In fact, BENJAMIN TAN negotiated a higher rate of pay for himself by pointing out that MACSA

 8   did not incur the cost of paying such benefits for him. BENJAMIN TAN ensured that MACSA

 9   paid his own invoices at this higher rate of pay even as he was instructing Arasselli Vassallo not to

10   make payments for benefits or for employee pension contributions. As a result, BENJAMIN TAN

11   was one person at MACSA who never lost any of his own pay even when money was tight.

12          Once I recognized the significance of OLIVIA SOZA-MENDIOLA's stopping her personal

13   pension contributions, I examined the records of some other MACSA employees to see whether any

14   others had terminated their personal pension contributions with suspiciously convenient timing. I

15   discovered that MACSA's human resources director Aurora Cepeda stopped her personal pension

16   contributions of $150 per pay period on November 30,2007. Ms. Cepeda regularly represented

17   MACSA management at labor-management meetings where problems with retirement payments

18   were often discussed. When interviewed, however, Ms. Cepeda denied that her decision to stop

19   contributing to the pension plan had anything to do with these retirement payment problems.

20   Although her denial is difficult to believe, there is no evidence that Ms. Cepeda controlled the

21   money in MACSA's bank accounts or that she participated in the decision to stop making

22   retirement payments.

23          The other MACSA management representative who attended most labor-management

24   meetings was COO Xavier Campos. According to several witnesses and MACSA records, Mr.

25   Campos also regularly attended meetings of the board of trustees and the executive team. The

26   board meeting minutes indicate that Mr. Campos took a lead role in the effort to sell real property

27   owned by MACSA in part to satisfy past due pension obligations. Thus, Mr. Campos was almost

28   certainly aware that MACSA had failed to make at least some pension payments.

     Statement of Probable Cause in Support of Arrest Warrant                          Page 17
 1          Two witnesses that I interviewed speculated that Mr. Campos must have participated in the

 2   decision not to pay VALIC because he was a member of MACSA's executive team and attended

 3   the executive team meetings. Apart from this speculation, however, I did not find any evidence that

 4   Mr. Campos actually participated in the decision to not make required pension payments. It also

 5   does not appear to have been his job at MACSA to make decisions about which bills to pay.

 6   Moreover, I noticed that Mr. Campos continued to have his personal pension contributions deducted

 7   from his pay for more than a year after OLIVIA SOZA-MENDIOLA stopped her deductions.

 8          Mr. Campos did not stop his own retirement contributions of $100 per pay period until

 9   August 2008, meaning that he personally lost $2,500 in unremitted pension contributions for pay

10   periods after June 28, 2007 when OLIVIA SOZA-MENDIOLA stopped her own contributions. At

11   around the same time that Mr. Campos stopped his contributions, several MACSA administrative

12   employees, including Arasselli Vassallo, Alberto Hernandez, Reynaldo Foronda, and Alcides

13   Martinez, also stopped their pension contributions. Moreover, it was only a month later that SEnJ

14   lodged a formal complaint about MACSA's failure to make payments to VALIC, which it did by

15   amending a June 2008 grievance about MACSA's failure to make PERS and STRS payments.

16   Thus, the timing of Mr. Campos' termination of his pension contributions suggests that he became

17   aware of the seriousness of the problem at about the same time as the union and these other

18   MACSA employees, which in turn suggests that Mr. Campos did not participate in the initial

19   decision, made a year earlier, to stop the required pension payments.

20          Lastly, I looked into whether any member of MACSA' s board of trustees is criminally liable

21   for the failure to make required pension payments. I interviewed several trustees and reviewed the

22   board meeting minutes looking for board action, or even discussion, concerning this issue.

23   Although one trustee admitted knowing as early as 2007 that MACSA was behind in making

24   pension payments, and I found financial reports in board meeting packets dated as early as 2004

25   mentioning this issue, I did not find evidence of any action taken by the board authorizing or

26   condoning MACSA's failure to make required pension payments. I did see board meeting minutes

27   indicating that as early as 2007 the board of trustees took action to explore the possible sale of

28   MACSA's buildings to payoff millions of dollars of debt, including missed payments to VALIC,

     Statement of Probable Cause in Support of Arrest Warrant                           Page 18
 1   STRS and PERS. However, these discussions and votes appear to have been the board's effort to

 2   correct past actions by MACSA's executive team, not an endorsement or approval of those prior

 3   actions. Because the board did not have direct control over MACSA's money and there is no

 4   evidence of any action taken to endorse or approve the decision to stop making retirement

 5   payments, it does not appear that the board members are criminally responsible for the actions taken

 6   byMACSA'sCEOandCFO.

 7             Based on all ofthe above evidence, there is probable cause to believe that BENJAMIN TAN

 8   and OLIVIA SOZA-MENDIOLA embezzled hundreds of thousands of dollars from the employees

 9   of MACSA and their pension plans between January 1, 2004 and June 30, 2009, in violation of

10   Penal Code section 487, subdivision (a). Accordingly, I request that the Court issue warrants of

11   arrest.

12             I declare under penalty of perjury that the foregoing is true and correct.


14                                    Date:

15                                    Place:














     Statement of Probable Cause in Support of Arrest Warrant                               Page 19 079485