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ACORN Kingsley Memorandum

VIEWS: 104 PAGES: 14

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HARMON, CURRAN, SPIELBERG
1720 f'l

,- EISENBERG LLP
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92&3500 (202) 328{916 fEr

ACORNBenefidialAssociation ACORN Housing Corporation ACORN Institute ACORN Votcs American Institute f,or Social Justice Association of Community Organizations for Reform Now Citlzens Consu lting, Inc. Citizens Services Inc. Communities Voting Together Pennsylvania Institute for Community Affairs, Inc, Project Votefr'oting for America, Inc. From: Elizabeth Kingsley

To:

Date:

Re: (

June 19, 2008 Initial Report on Organizational Review

INTRODUCTTON My firm was €ngaged to conduct a review of the operations and inter-retationships of the set of CO{JNC|L corporafions addressed on this rnemo, This is an initial report on my findings and
recornmendations.

The organizations addressed abov€ are parties to a joint defense agreement undor whieh we were reuinod to r€present the common interests of all of them in obtaining advice about legally appropriate ways of structuring their relationships. The iist includes a number of organizations directly affested by the enbezzlement incident of 1999-2000, plus a set of others that I rgcomffiended lncluding basod on my pre<xisting knorvledge of thcir activities and thE importance of their role in the overall operations. As you reac't to this initial report and begin to take actions in response, it may be appropriate to expand this group to include some ofi€r key entities.

A few key points, before we get into more technical specifics:
Corporate forms must be maintained and respected, OR a decision taken to combifte some of the allegedly distinct entities. This includes having real boards and a real principal staffperson/ED for each Appropriate lawyers must, if necessary, go directly to those boards if needed, cspecially if there ere concerns about the ED. Fences need to be erected to walloff types of election-related activity that rnusl be kept completely s€parate.

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Relative to both these first points, too many people are wearing too many hats, or perhaps the wrong hat cntirely. CCl, the nerve cent€r of the administrative functions, needs a real board, and a rcalistic sense of what functions it can be expected to serve, CCI's clients must have reasonable termination provisions in their contracts, and rcview those contracts regularly. CCI cannot expect to have a monopoly over this business. Boards of client organizations must be informcd of any problcms with

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CCI's performance, and where serious should be prepared to take some or all of thar work to a third-party vendor, or develop the capacity to cany out those services for thcmselves in-hour, The relationship between CCI and its clients must be canied out like any other business on arrns-length basis, Fees schedules need to be provided as promised, and reviewed to veriff that the clients are realll'getting a good (or reasonable) deal here. Unfolding facts about the events of 2000 raise major concerns about transparsogy and accountability. More investigation is needed into quesrions about the f,ailure to infonn the board, or possibly even the full exccutive comminee: rhe degree to s'hich legal counse I and upper manag€ment rnay have been atlirmatively misled; the identities and roles of those involved cteating and implementing the response to the embezzlement; and thg infer-corporate transf,ers rnade out of ccrtain funds in response to rhe loss. These key quirtions'd'rust be investigated, confronted, and disclosed to appropriate parties, In thp bisgpr piclqry, if !t ip, pq possible to invest substantially more tirne. aftention, and resources in the infrastructure ndiessarl, to suppon u hat this multi-faceted operation has grown into, it may be necessary to downsize, These organizations have grov!'n tremendously over the years, With maruritj must come som€ added disclpline.

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My concerns in this repofi fall into four major categories; respect for corporate integrity, the neees ary sapsfation between different types of political rv'ork, the niceties of 501(c)(3) tax compliance and accounting for trose funds, and a big-picture question about organlzatlonal
capacity,

ln some placos I cite specific examples to help illustrate a point, These should not be secn as pointing fingers at anyone, or suggesting'that rhese instances sre more egregious than others not cited, It is easiqst to drgw qn eliFrlplgs I happen to be familiar wittu and it can help to explain a theoretical point, but you should not think these specifiCs represent the extent of a probtem, or that only they should be of concern. In shon, I am not trying to single anyone out, but to poinr to s;,stem ic institutional concerns.

CORPORATE INTEGRITY
\ lany of the corporate entities in the COUNCIL world have not operated u ith suft-rc icnr r.'rmalities. Staffroles have not been clearly delineated, and in various insrances funJs hrre

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been raised and spent by people with no official relationship to a given corporation. Boards have not always becn maintained, much less rnet and exercised their governance role. Board meetings are not held, or if they are, minutes are not kept, or if minutes are kept, they ncver make it into the flles at CCL There is no point in having these different corporations in place if they are not respected. If not properly operated, they oeate difficulties (e.g., potential conflicts of interest for larvyers, non-trivialadministrative burden of state ftlings, and the appearance that someone is trying to hide som€thing under a byzantine oorporate structure) without generating the desired benefits, whatever those mey be,

This is the natural rcsult of thinking of all these different corporations as part of the family, or "us."l It is highlighted by a CCI organizational chart circulated at one point showing "Chief Organizer" at the top, although CCI has no chief organizer, nor any agreement with any other entity with such a person that would allow them to exercise such authority, lt is re flectod in having a "chief of staff' ofl no specified organization, There may have been an assumption that one p€rson could supervise the staff of some number of different corporations wirhout any formal agreements between the autonomous entities employing these different staffpeople. I should notc rhat there is I great dealof confusion surrounding dre Chief of Staffrole. I have not seen an explicit statement to indicate just which corporation the Chielof Staff is supposed to operate for, Some people have indicated it is a general role in all corporations, lvhile others suggest it is more limited- AHC specifically objectcd to what it saru presentod as an appointment of someone to supenise its staffwithout delegated authority frorn its board, a position it did not accede to, At a rninimum this seems to be more evidence of the need for clarity about staffing and corporate interrelationships, It may be possible to ci'eate such an arrangement by contraet, lndeed, I was considering whether some'of th'e personnelproblems generated by having employees of many different corporations all r"orking togcther in the same space on Canal Street could be addressed by a mutual agreemenl to hire or designate a shared human resources coordinator. A similar arrangement m!gh! F made to rvo* for a "chief of staff." The issues are tricky when there are 50l(c)(3) and other typds of organizations in the picture, but it might be workable. It has not, ho]vever, been donp. But i[, as some $uggg$l, it lvas assumed that ACORN's Chief Organizer can appoint a Chief of Stafffor all COUNCIL entitics without any lcgalagrcement or approval of their boards is a syrnptorn of this impreclqg thinhine nFpgt tqgql authority and boundaries.
Simuttaneously, COtfNCIL entities have rvanted to nraintain thot the)'are nor "affrliated" "related," or "controlled" by or with each other, for various legal purpo'i*, while allowing actual control to bc exercised in a highly cqnrdinated manner. It may b9 posslblg to cf-ellg qhg !ii1d of ' Sorneone rrcently said to me that qf soqsc {in thoir mind) conhacts between CSI and "internal" clientr were nat thc same as thoss legitimate arms-lenglh agrcements with outsidc clients. This is onty onc symptom of an organizstignnl eultulg 6rp1 fgsgnbllg g fgrnily businest more than an .'ccountable organizadon. Legal formalirics are nqljusr a question of lawyers generating paperl but ofall players on the scele under3unding and respecting the existence and role of different corporaae cntilies.

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inter-connectedness, contml and supervision that has been exercised among the corporations as a

practical matter, but it will bc nccessary to do so in a structured and thoughtfulway. lndeed it may bc time to oonsider whether direct governance control and/or acknowledged connections are appropriate, rather than trying to pretend that these groups are not connected to one another and create control mechanisms behind the scenes. The reality of authority should be mirrored in the paper and legal world.

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I recommend that each of the organizations involved in this review2 and every COUNCIL organization with staff immediatety constitute a board with cr least three mernbers, who should meet and be briefed ftlly on ttre corporation's operations, purposes, and financial and legal situation. Each board should designate a primary staffperson (Executive Director or the like) to lvhom it rvill delegate authority for the day-to-day operations of the organization. In some instanees it might be appropriate br corporations to share the sarne ED, but not in most. Such overlap should be closely examined. These boards should plan to me€t (in pennn or by phone) absolutely no less frequently than fwice a year, and preferably quarterly. They should recsive ihonthly financial and activity reports frorn staftl (This could be stretched to guarterly, but no further.) | and any other attorney repres€nting the corporation should have direct contact information for all board members (or a smaller group such as an Executive Comrnittee if the board is largc, as lor ACORN).
The boards of all corporations that file 990s and any other corporations with staffshould consider the memo from me and Steve Bachmann regarding adoprion of a set of corporate policies relating to the new Form 990, 990-filers will be required to anslver questions ebout these policies on their publicly-available tax return, and a "no" must be explained. ACORN does not file a 990 with the lRS, but somc states require it to eomplae one in order to solicit funds in their states. In any case, the policies proposcd are fundamertal pieces of good governance and accountability within an organiz.ation. The IRS says that it cares about governance because it finds good govemance linked to le gal colnpliance, and slip-shod or absent governance and internal accountability are red-flags for tu< and other legal problems. In this case, the IRS is right.
These policies are:

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Whistle blower policy [priority; CRITICAL] Document retention and destruction policy (simple version prohibiting illegal destruction

of documents) [priority: URCENT]
Conternporaneous documentation of Board and Committee me€tings [priority: URGENTJ Conflicts of interesr policy [prioriry: IMPORTANTJ

! This recommendation cenainly applies to the main opcrating organizations, The funds witb no staff and porsibly
no current r€soutcsr may nol need a designatcd soffpcnon, but thcy ell mrrt have functioning boards.
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Document€d process for detsrmining compensation for the CEO and any other officers or key employees [priority: IMFORTANT]

Also, though we have not created a draft policy at this point, all corporations with staffshould adopt an appropriate anti-nepotism policy, This is not to suggest a draconian policy that does not permit hiring of related people (as some organizations maintain). But a minimal responsible policy would probably require that immediate farnily members or people in a domestic partnership or dating relationship lrot be one another's direct supervisors, Whistleblower, sexual harassment, and other policies for rsponing complaints must provide an alternate cootact person if the person being complained about is related !o the usual p€rson rcports are given to. Critically, all staffmust be required to recuse themselves from any decisions relating to the employment of their relatives. (This is also covered under the conflict of intercst policy.)
Further, inter-corporate relationships need to be formalized. Where services of sraff are sharcd, or are provided on a contractual basis, the rElationship should be reduced to writing and reviewed by the board or primary staff person. Thme contracts should be policed to ensure that actual opsrations arc consistent with lvhat's on pap€r.

I have been rold, ficr instance, that ACORN's communicatlons director is on the payroll of AISJ, and another AISJ ernployee manages the building on Canal Street where many different corporations reside. This is not appropriate, although those people might, depending on circumstances, be able ro split their timc working for two or more corporations. The existing paymaster could lease services to the other entity for rvhich work is done. Every corporation with a payroll shoutd review a list of its staffto detcrmine whether they are actually providing services to ihat corporaiion. If thcy are also doing work for other organizations, their employer should enter into an agreernent for staff-sharing or fee-for-service hiring of thc staff. Alternatively, these relationships could be structured as in-kind contributions of stafftime to a different corporations, but the transactions must then be recorded as such.
CCI plays a crucialrole in promoting respect for corporate inregrity. It should immediately develop a list of the ofllcers and primary staff person for each corporation that it serves, and any other pcrson who is authorizgd by the board or the primary staff person to authorize expenditures. It must institute procedures to prevent any funds being disbursed without explicit authorization lrom one of those pcople, ln addition, the relationships rvith CCI should be foimalized and the formalities observed. The standard CCI confact allorvs fees to be set on an occasional basis. This process must be fbllowed, so that each client is provided with the schedule ai promised, once every six months. The board of each client organization must review that schedule when received, and should revielv CCI's performance on an annual basis to determine whether it rernains an appropiiate vendor for all the services it pmvides. Whcn new conhacts are irnplemented, the board of the

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ctient should adopt a resolution approving the CCI Dires'tor as Assistant Treasurer, as requircd by thc contraot. Officer positions should not !g handed out by contrast.
These contracts need to bc supportable as reasonable, arms.lenglh relationships. To this end, they should bc tcrminable with adequate notice every time a new Fe schedule is issued (or if not issued, that would be cause for termination). As written, CCI could jack its fees up through the theoretically have no recourse until th€ next annual roof for sorne or all clients, and thcy "vould renewal.

window for cancelling

Finally, there are a number of "building corporations" whose function (as I undersAnd it) is to ou/n or rent property that is then rented at cost to other like-minded entities, This is a sound legal approach to try to protect the reat estate asset fiom possible liability for actions of any of the groups operating out of the space. However, the governance structures for thcse corporations it ouiO be rcviewcd to ensurc thot they will continue to serve this intended function' Their boards must meet regularly and document thoss meetings, or there is a risk that the corporate form witl rot ssrve as the desired liability shield.

POLTTICAL WALLS

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u'walls" needed to cnsure that various types The political rvorld or ACORN lacks the prctective of aitivity are kept sufficiently separate. tt may be that activities are currently canied out with adequate independence, but without formal policies and separation of staff functions, there are potential liabilities and problems of proof

lVithin both CSI and ACORN, there needs to be a formal policy adopted and implemcnted and enforced that separates independent political activity from anything coordinated with a candidate or party, The outlines of such a policy are in the draft contract I proposcd for CVT and CSI. No tater than immediately, people rvho understand the vsrious staff functions within these entities must go over that policy and detsrmine who would be on which side of the "wall" for *re rcst of this cycle.i The policy shquld be in place by the end of this month, if at all possible - July at the tatest: The main concern here is with federal candidates, although to the extent a local ACORN or CSI oflice is active in I state or municipal or county racc and aiso doing nonpartisan voter engagement rvork or "independent." The same thing should happen within ACORN unless all partisan political work is going to be isolated within CSI and not contracted out or otherwise run through ACORN,
I drafted a Z-page guidance document fior field staffto let thcrn know rvhat they can do freely rvithout worrying about eleetion laws, and when they need to get further guidance, The
I I understand Jeff Robinson is working on the deraib olhow this pollcy would work widtin CSl. lVhgr he hEE devslop€d an appropri*s gtnrcture, it must bc profirptly reviewcd by legrl cgunsel, implcmerned enforced and
suppqfted,

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document also stated what is supposed to be the organizational policy and ihat any questions run through Marsha Green. That did not get distributed in Santa Fe as originally planned. lt needs to be gotten out !o the field ASAP to avoid inadvertent FEC problems. If the document requires edits or clarification, we can work on that.
The organizations also lack an adequately docurnented delineation of 501(cX3) from non501(cX3) work, lt is unquestionable that a large 501(cX3)-permissible voter registration and mobilizatisn program is canied out using 501(cX3) funds, I am not worried about the content of this program, i.e. the message delivercd, or the targeting choices within a given geographic arca" However, I cannot confirm that srategic dccisiom about which regions do 501(c)(3) venus non501(cX3) voter engogement work are not being made by the same person or people. At a minimum, thEre is not adequate demonstrable soparation betrween there functions, As a result, we may not bc able to prove that 501(cX3) resources are not being directod to speciftc rcgions based on impermissible partisan considerations, Rernember, it is the IRS that anfiorecs the rules for 50l(cX3)s. ln general the government has the burden of proving you have done sornething rvroli$, but wheii lt cornes to ta( compliance, thc burden is oar the organization to maintain records to document it has done things right.

Preliminary steps have been taken to address this situation, but the 501(c)(3)/non-(cX3) wall needs to be firmer, and the policies previously put in place rnust be en forced. For instance, Project Vote has on pap€r a procedurc to select regions where it will do votcr regisration, but I have heard reports in the past that in practice those dcoisions may bc communicated to PV from ACORN,4 I am told this has improved this cycle, but have not had time to interview enough srsffto determine for sure one way or the other. Project Vote (and PICA, the other voter registration corporation) needs to really be in charge of deciding where 501(cX3) resources witl be focused, Th€ PV and PICA Executive Dlrector(s) must be charged with implementing the procedures (or supervising that work) to.set strategic priorities for the organization without answering to any other entity or person.' Thsse corporstions and their chicf staff people must control their own funds; the ED must nepon only to herlhis own board, unless a formal, lcgally verted written agreement appropriately delegates that authority elsewhere, Arrd the ED must not be rvearing other"hsts" that jeopardize herability to act solely in the interest of these 501(c)(3)s. In addition, at the regional and state level, staffshould be educated about the need for separation at the strategic level. On severaloccasions (from diffcrent regions) I have scen funding proposals that combine 501(cX3) voter reg./engagement work with similar non-501(cX3) plans, rvhich suggests possible impermissible slrategic coordination,

This is nol to say that thc decisions rnade were substantively improper, just that procedures need to be followed in praciicc. ' An obvior.rs enforceyneni mechanism is to rigidty apply thc reguirernent that only projects gcnerated through the dosurncntcd epprovat process would be funded.

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A final, but major, concern is the "nonconnected" 527 organization, Communities Voting
Together, (For several months rve have been trying to get it to adopt and implement a name change to Community Voices Together, but to no avail, This problem relates to the discussion bclow regarding organizational capacity and responsiveness.) In at least one instancc, CVT may have boen treatsd like a pot of rnoney available to ACORN to carry out state-l€vel political work. Funds lvere committed and activities undertaken in its name without the knowledge of th€ CVT officcrs or key staffperson. (This incident no doubt oeeurred due to misundersunding of the rules fhat should apply, but that only highlights the nsed to institute and ehforce clear rules and proceduros.) I have no evidencs of CVT's ofTicers meding 9r re99iy!19 Fpolt! of !!F organization's activitiEs, rnuch less adopting any sort of plan for its future operations, though as of the time of drafting this rcport I have not yet had an opportunity to speak directly with CVT's ofices. This situation is complicated by thc fact that one of the two officers resigncd on June 16,
2008,

If CVI is not opcrated as a properly ilnonconneoted" organization, it will not legally be able o make cornmunications about federal candidates, as it has done in the past. lf it does so anyway, it will create tremendous liabitiry for itself, and tikely for both ACORN and ACORN Votes. One of the first lines of defense against this mistreatment lies with CCI, which must not allow any CVT funds to bc disbursed wlthout proper authorization. [f it does so, CVT should be rnoved out of CCI io prorect both it and ACORN.
501

(cX3) TAX COMPLTANCE

I have recently provided documents for AISJ to us€ governing its relationship with ACORN, There is an overall agreem€nt, and two transminal leners that csn be used lor specific types of funding. Similar documents should be used by Al, and any other 50l(cX3) that makes grants to

ACORN.
WE bElieve those documents have been or rvill be implernented. However, merely papering thc transfer of money is not sufficient. The c3s must be able to demonstrate that their funds rvere actually psed as intended, for c3 purposcs, Any grant to a non-50t(c[3) requires reporting back so the grantor can prove how its money was spent by the grentee. Historically, this has not hapiitn-ed. The new grant documents iequire this reporting, and if it does not happen, I would advise the Al and AISJ boards and key staffthat no f'urther trants should be made to any office that has outstanding reports on prwious grants.

All 501(cX3)s must also ensure that their funds are spsnt only with appropriate corporare approval. This does not mean that the board should approve every expenditure, Authoriry may be delegated to an appropriate staffperson, and may be further delegated by that person. Such delegation must be explicit and in writing. CCl, which controls the bank accounts, must be

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instructed not to disburse funds without appropriatc approval.6 lt mug be given copies of the written e.xpendirurc authority delegation, and maintain ligs of authorized individuals. Thc organizations must also inform CCI whe n a staff person leaves, moves, or otherwise should no longer be on the authorized list. They should have explicit wrinen revocation of e.xpenditure authoriry in their files. All staff must understand that CCI cannot disburse any fi.rnds whhout proper approval.

An e.rample where this comes up is when organizations have agreements to work jointly on a project, or for one to provide grant furdihg to thc other. A contract or grant letter is necessary to establish that relationship, but not suflicient to authorize a payment. Just as with outside parties, only a person with legal authority for a payor should disburse its funds. I have seen al least one instance whers that did not happen, although the payment was for a 501(cX3)-permissible Oroject, and one that apparently the 50l(cX3) in question was participating in. The point is fiat general agreem€nt to provide funding to a project is not the same &s making payments, and the other organization seeking funds should not be the one to control the making of payments, Othenrix, therc is danger that we cannot demonstrate that 50l(c)(3) firnds are always disbursed fbr 50 | (cX3lappropriate purposes.

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Another area of major concem for 501(c)(3) compliance is the widespread assumption that it is suffioient to substantiate the use of 501(c)(3) funding to state (as is no doubt true) that a large portion of the rvork of ACORN sould be done by a 501(cX3). This is the beginning of an analysis that could support using 501(c)13) funds, notthe end. As a cas€ in poinq I recently reviewed a proposed video project. The end result was a short film that highlighted ACORN and promoted it as an effectlve organization that people should fbel good about. Nothing in the film rvas inherently 50l(c)(3)-imperrnissible (i,e., no electoral politics). However, rhe entire point of it rvas to make people (fundors, members, the public) feel good about a non-501(c[3) entity, to bolster its goodwill and image, and thereby its capacity to raise funds and do all its work, including the non-501(cX3) politicalactivities. I belleve we may have reached an adequate resolution on this video, allocating the produclion costs on the bbsis of funds raised between ACORN and the c3s that suppod its work, But the point is that there was insuffrcient ftought or care given to this in advanie,'no written agreement, and little willingness to work through thc technical legal pieee needed to allow 501(cxl) funds to be usEd properly for the project.

FEDERAL FUNDS
I have nol tooked in-depth at the handling of federal grant funds, nor am I an expert in that area. Horvever, even with the little information I have. there are conccrns that must be raised.

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is erpecially

This appties to all the corporations, and is mentioned elsewhere in this rcport in connection rvith CCI criticel for thc 501(c;(J)s so merits special notice here.

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Howsver, it

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First md forernoct, any cntity recciving govemment funding should have in place a serious and enforced whistleblower policy. Any employee, or an employee of another organization, or a member of the public, who has any information about the rnisusc of grant funds or related conduct should have a clear avenue [o rs?on thc concern without fear of reprisal. There must be an alternate p€rson to report to, in case the problem originates with the primary reporting person. Any such allegations must be documented and investigated, although the extent of an investigation will depend on the nature and specificity of the complaint, and the evidence turned up in initial phases of the proces. Questions about the scope and depth of an investigation may need to be referred to legal counsel. The point her€ is not that every crnployee complaini is legitimate, but that serious complaints rnust be taken seriously. Anyone with a conflict of interest whethcr real or potential, should not be involved in resolution of any whistleblower mafter, In addition, any rcquired fedeml audis must be carried out completely and in a timely manfter for any organization with enough grants to trigger these requirem€nts, Any corporation required federalgrant funding should have a designated staffperson whose job includes nraking thesc things happen, and who can go directly to the board if necessary if they are not.

Any corporation with federal grant funds should have an ongoing rclationship rvith legal counsel with appropriate expertise ln these matters. This counsel should always revierv any transaction that involves using federal money to hire (or sub-grant r) any other corporation, Expert legal advice is also necessary for any Froject that anticipates eombining grant-firnded activitlcs wlth pther goals, such as ACORN member recruitment. [t may be possible to handle thosc re'lationships by obtaining in-depth general guidance that would allow grantcc organizations to adopt standards that can !g implementcd on any given grant,

CAPACITY
Allthese entities must facs a uitical issue of organizationalcapacity. The combined budget of all the COUNCIL entities has grown trtmendously in recent years, and it is not clear that the
administrative or managemgnt capacity har kept pasr.

Looking only u my personal experiences, I can site any number of instances where follorvthrough has been inadequate. This is partly, and perhaps mostly, a CCI phenomenon,T but it crops us elsewhere. possibly as a symptom of inadequatc irnportance given to legal technicalities. Contracts are requested, drafted, sent out for comment or execution, then
t This reporr raises a lot of conccrns about CCI's capocity and performance, which mrnt be considcred seriousty, dono(wantanyofthistobetakenascriticismofCCl'ssaff,individualtyorasawhole. lllyrevicwwasnotof
rndividual slaffperformance, and those I have worked with dircctly have been responsive, cngaged, end'hardare more systemic and institutional, Thcre is only so much any hard-working group of peoplc can do with limited resources.
I

wo*ing. The problems

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disappear into a void. I spent literally hours trying to get someone to respond !o requests for a signature on a simple form that would allow me lo malce the necessary filings with the FEC recently. Sornetimes it geems that no one is mlnding th€ shop, or at lsast that requests for dealing rvith papenvork do not get to the right person, someone who is both interested in following up and speaks with enough authority to get a response out of sorne fairly senior staffpeopte. There is always a bit of a tension between the community organizer who just wants lo get the job done and the lawyers and accountants who want to do everything by the book, dot all i's and cross all t's. This is natural, and probably heatthy, Bul it can be taken too ftr, and wfren a group of organizations grows to a size like this has, infrastrucrure has to be scaled up and capacity has to be expanded far beyond adding a couple extra staff in accounting. Recent administrative problems relating to ERISA and IRS filings and payments further indicare the need to call in outside vendors, expand capacity, or rcthink CCI's role,

CCI's client organizations rvill have to give serious consideration to its eapacity to provide the services they need. CCI itself needs to put a real Board in place ASAP. That Board must evaluate CCI's operations, identi[ arcas of weaknesq determinc whethcr they can be ff.xed and if so figure out I game ptan for doing so. Although my general advice above is that each corporation should have a minimum of 3 directors, but for CCI 5 is preferable. lt is a critical part of legal and fltnancial compliance and accountability for all the COUNCIL organizations who lvill soon be faced with some very important decisions. Eventually, depending on CCI's role going firrward, a slightly largcr boaid might be advisable (in the rangc of 8- l 5).
In the long fun, there must first be a decision about what can and should be erpecred lrom CCI, rhen an appropriate goverRance structurc implemented. Rather than trying to pretend that CCI is an entirely allgnomolts q.erviga provi{-e1, gonsider ackno'*ledging the reality of relationships and lirnctions. CCI exisrs to service a set of corporatioirb; there ii-no reasens those entities, or the largert of them, should not have a sest on the board. ln the short term, this may just mean identiffing key people from a few CCI clients to be added to rhe board, bul evenrually there should be consideration of providing some explicit client representEtiqn pn lhp CCI bqard, !t would also be good to have some "outside," or at least less "inside" directors as n'ell, CCI, like most corporations, would benefit from the voice of a friendly yet indepcndent critic. For instance, there is going to be a need to make big decisions about the incoming cash payment to buy offDale Rathke's note to CCl. dvailable aash al.ways generales pres.sure to use it Io cover current needs, especially in light of some of the extraordinary bills being generared by current eFfirrts. But Cel has rnajor debts to othcr entities, and it w,ill be crucial to have some directorg
overseeing the use ofthe cash and decisions about the debts rvho are not subject to any conflict of interest, such as cornpeting fiduciary duties to potentia{ recipients of the funds or CCIclients.

10/31/2004 02:16

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HARMON, CURRAN, SPIELBERG EISENBERG LLP
ATTORNTEY.C LIENT COMMUNI CATION

PRMLECED AiTD
June 19,2008

CONIIDENTIAL

Sensitive Report - Do Nol Distribute Bcyood Initisl Recipient List
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CRISIS

2OOO AhTD 2OOE

I understood my mandate for this project to be to provide analysis of the overallcorporatc struQture and relationships arnong certain entities, and make recommendations to improve legal compliance and reduce risk for furure operations. Inevitably, horvevet, I have also looked specifically at the embezzlement of 1999-2000 and events following its discovery. I have been briefed as well on some of the issues facing the current pension firnd (Council Beneficiat Association, or CBA) and health plan (Council Health Plan, or CHP). These arc not rnatters I can advise on, bul the issues are connected to the general operations I rvas asked to review. I have by no means conductEd a complete investigation of either matter, and they are not included in the main report above or my recommendations for fonvard-looking opcrations. What I have learned to dage indicates thet serious questions need to be asked on a lot of fronts. A full analysis of potential liability will require a coosultation with a knowledgeable white+ollar criminal
attorney.

Prior to my visit to New Orleans (June 8- 10, 2008), I knew thg there was contradictory information about who af the board level had been told about the embezzlement and proposed handling of it in 2000. Thc menagement council may have been totd that thc informstion was shared rvith the entire executive committee when in fact only the Presidenr had been informed,t There should be further investigation to determine rvho was told, and what repres€ntatioru the management council relied on in taking action. The board itself will no doubt have some very hard questions to put to staff about the decision not to inform it at the time , lVe have recently learned that therc is also contradictory infor.mation about the role playsd by legal counsel in vening the settlement of the Dale matter, In December 2000, Wade Rathke told Steve Bachmann as attorney and the management councile (as uppen levet management) that the legal problems of solving Dale's embezzlements would be tumed over to Louis Robein, longtime sounsel for Local 100, and reglonally reputable labor lawyer who could reasonably bc e.xpected to provide rEliable advice in managing this sort of situation. On Junc 10. 2008, I mct rvith [,ouis Robein rvho informed us that his rolc was far more limited. He related horv around December 2000, Wade had a conversation rvith Louis to the effect that Dale had becn caught in some embezzlement. No amount was mentioned. The discussion was mainly over what liabilities Wade might have to rvorr)' about, and Louis provided on general and preliminary advice. Neither Louis Robein nor his firm rvas retained to structure or revierv any sort of resolUtion to the Rathke cmbezzlement. As best rve can tell, the only people involved in crafring the senteiirint were the PethLao |n ra*^
Y1.lP!.ltlrllvr, tllr\l !rr! | s!1!rlrJ, \i\!rir.rU.. s..rrr,,

tlha"enotintgrviewedWad€,A4aude,oranyoftbeothertlren-officersonthispoint.
interim prcliminary rcport.

Asnoted,thirisadraft

'To

bc precise, the comrnunicstion to Steve Bachmann is documented, the r€presentation to the management corrncll is based on nry undcrsfanding. I havs nol interylewed the people involved to confirm rhis point,

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vna Fqh.rr'c

/Kcnnerh Fcherrv n^tcr;7*d rhe kev docrrrnents hut rve havg no

HARMON, CURRAN, SPIELBERG EISENBERG LLP
SCNSitiYE REPOTT DO NOI ATTORNEY'CLIENT COMMUMCATION pRflrILEGED AI\[D COFIFIDENTIAL Distribute Beyond tnitiel Recipient Llst

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June 19.2008

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indication thar he pfovided a legal opinion or other guidance on the substance of the settlement.) It appears that this settlement was never rcviewed by ACORN's general counsel or the attomey supposedly retained {o do so, A hostite investigator might conclude that Wade deliberately told Steve Bachmann that he had retained different counsel on the matt€r in order to exclude legal counsel from meaningfulparticipation in reyiew of the proposcd plan. And unfofiunately, this is an organization that has to be prepared to be scrutinized by a hostile investigator.

(a

Tlvo other revelations need to be further investigated. These pertain to ACORN Beneficial Association, or ABA, a discretionary plan in plaoe before the creation of CBA that was intended not to be a nue pension fund covered by tlrc ERISA law, and to ACORN FunG a similar discretionary health care fund that was in place before the creation CHP. A large part of the embezzled funds ($2 I 5,000) were charged through ACORl,l:s AmEx sccount to ABA, When rhe theft was discovered, this meant that Dale owed ACORN this amount, and ACORN in turn orved ABA for Sre overpaynr€nt, I am told that ABA decided to write this debt offas a gift to ACORN (though the debt from Dale naturally was not forgiven). Although it is the organizarionsl legal position that this fund lvas not covered by ERISA and therefore not subject to its rules that woutd prohibir this sort of gift, it is nonetheless the cas€ that a number of organizations, possibly including unions and charities, paid funds into ABA for entirely diffcrcnt purposes. They did not rnake those contributions in order to make a gift ro ACORN. I have ncn gofien information about w'ho authorized this decisiort, but those questions need to be asked, Either the board was involved in the decision and can explain the rationale, or they were not, and there are seriouS questions to ask as to who authorized this expenditure.
As for ACORN Fund, it apparEntly had advanced a large amount of money to AOORN,l9 l$the Fund wes Got covered by EFJSA, it may have hed the discretion to do this. If it were covered by ERISA. I understand that this would be a prohibited loan to a related part)'. In any case, after resotution of the ernbezzloment and execution of the note between Dale Rathke and CCI, the situation rvas that Dale o*ed CCl, CCI orved ACORN, and ACORN oled AGORN Fund. lt rvas agreed ro bake ACORN out of this picture, so that now it is CCI that owes this money to ACORN Fund. I have nst gotten information to determine horv this decision was made or approved, but it certainly creates cencem. There is the appearance, at least that mon€y YVas taken out of (or not paid back ro) a fund established to cover employee health care costs in order to cover the cash shortfallcaused by the embezzleme nt. This dccision, combined rvith the apparent failure to notify the governing boards of affected organizations or obtain adequate legal counsel, could generate significant liabilities for the Fund and its directors. Again, tbere rnust be inquiry into the decisions about moving these funds. the advice if any that rvas relied on, and the best response nolv to minimize legalconcerns. As uith ABA, if the board of directors does not have ansrvers to questions about this organization, rve need to ask rvhy not.
'0 The explanation I have heard for this is that the Fund rvas in danget of being sued, snd moving cash out of it into ACORN helped shietd those asscts- This does nol make rnuch sense, as the funds showed as a receivable and therefore an as$et on fte Fund's books.

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here, and in any event I srn very farniliar with making recommendations that arc accepted but not acted on. It may be necessary to prune back on some operations in order to allow others to come into compliance; it may m"rily bi prudent to combine some of the disparate corporate entities you aro anempring to maintain. But whethcr you try to implement some or all of these rtcommendations, there must be someonc commiUed to follow-up. Thcre must be a review mechanism, and a means of hotding p€ople acaountable afier any final decisions arc made, If you do not make some hard choioes now crdEnsure thcy are carried out, they almost certainly

will

be made for you.


								
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