Hippie clinic turned cash cow Haight Ashbury Free Clinics

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					                           San Francisco Bay Guardian - April 5, 2006




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Hippie clinic turned cash cow?
Haight Ashbury Free Clinics founder David Smith mingled its money
with a for-profit venture that made him rich
By A.C. Thompson

It was a narrative the media could wrap its collective head around: David Smith, the
idealistic founder of the Haight Ashbury Free Clinics, a network of health care
facilities for the disenfranchised, was angry. He claimed the world-renowned
alt-institution he'd created in 1967 had gone corporate, fattening executives' salaries
while skimping on the care given to patients. As a result, Smith — a doctor who'd
started the clinics in a rented apartment with a loan of 600 bucks — was resigning.

Throughout the month of March, media outlets — including the San Francisco
Chronicle, the Associated Press, Fox News, and Fox affiliate KTVU, channel 2 —
dutifully regurgitated Smith's spiel.

It was an easily digestible story. The truth, however, is uglier, murkier, more
complicated, and far more interesting.

For the past nine months, the 67-year-old Smith and the clinics have been locked in
an acrimonious — and largely unreported — legal dispute. The clinics accuse Smith
of siphoning money out of their coffers and funneling it into a series of lucrative real
estate investments; the doctor, meanwhile, says the organization he founded owes
him a million dollars.

As a young MD with one foot in the medical establishment and one foot in the
counterculture, Smith coded the utopian ethos of the ’60s into the DNA of his
anti-institution, pledging to provide free health care to anyone who needed it — from
the drug-addled to the tribes of drifting hippies to the average residents of the Haight,
which wasn't a particularly posh neighborhood in 1967. In time the doc became
nationally known for his expertise on substance addiction.

During his nearly four decades with the clinics, Smith transformed the organization
from a hippie-run microenterprise into a sprawling collection of treatment centers with
a budget of roughly $14 million and some 300 employees. These days, the clinics —
known formally as the Haight Ashbury Free Clinics Inc. or HAFCI — receive most of
their funding from various government sources and care for some 65,000 patients




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annually.

Smith says he stepped down from his position as president because the organization
is straying from its motto — "health care is a right, not a privilege" — and its mission
of helping the impoverished and uninsured. He blames the purported change of
direction on the clinics' current CEO, John Eckstrom, a former Bank of America
executive who took the helm of the organization in 2005 after a $773,000
embezzlement scandal (see "Ripping and Running," 6/30/04).

"It's a huge culture conflict," Smith tells the Guardian. "They say I'm out of date, an
aging doctor stuck in the ’60s."

But there's another dimension to this conflict: a pair of dueling lawsuits and a
long-running skirmish over some very valuable real estate.

In the late 1970s Smith formed a for-profit company called Happening House
Ventures with his own cash as well as money from a small group of investors,
including HAFCI. Happening House promptly bought three properties, two row houses
on Clayton Street and a three-story apartment building with a storefront on Haight
Street. The clinics have operated out of the Happening House properties ever since,
and in time Happening House got heavily into the stock market and invested in
dozens of real estate projects around the state.

Today the three buildings, which Happening House picked up for a pittance, may be
worth as much as $9 million.

In August 2005 Eckstrom and the clinics sued, claiming Smith and Happening House
mishandled the clinics' stake in Happening House. According to the suit, Smith and
partner David Newlin made "errors and omissions" in the company's financial records
and wouldn't provide a full accounting of the money the clinics made or lost on
Happening House. Further, the suit claims, the duo channeled money out of
Happening House and into other real estate investments — investments owned by
Smith and Newlin.

The doctor, property records indicate, has been quite a player in the real estate
market, creating a raft of different companies and purchasing millions of dollars' worth
of properties in San Francisco, Placer County, Sonoma County, and Oakland.

Smith calls the lawsuit "nonsense" and says, "There's no evidence of fraud. There is
no fraud."

The clinics spent three years asking Smith and Newlin for a full accounting before
deciding to sue, Eckstrom says. "I couldn't get an answer. And when I asked for one, I
literally got yelled at over the phone for 30 minutes by David Newlin."

Eventually, after the two sides went to court, Eckstrom and the clinics' attorneys got




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hold of a passel of financial documents. According to Eckstrom, the records showed
HAFCI's interest in Happening House bouncing all over the place — from 30 to 10 to
20 percent — without any explanation for the changes. At present, HAFCI's stake is
valued at 12.5 percent.

Lawyers for the clinics deposed Newlin, who's been a business partner and adviser to
Smith for decades, in February. He made a startling confession: Smith, he said, had
given him 7 percent of HAFCI's share in the company in 1989. The pact had been
made verbally — there was no written contract.

But Eckstrom maintains the arrangement was never authorized by the clinics' board of
directors or anyone else at HAFCI. By law, such transactions must be approved by a
nonprofit's board.

"Basically, David Smith gave David Newlin half of our interest," Eckstrom says.
"That's how it went down."

Smith, though, portrays the deal differently. He tells us he never handed over HAFCI's
interest to Newlin, who was doing the books and made the transfer himself. "Without
my knowledge, David Newlin took the clinics' interest as his salary. I said, 'Give it
back. I'll find another way to compensate you,'" Smith tells us, adding that he offered
to sort out the situation with the clinics. The transaction, he says, "was not legally
proper."

We were unable to reach Newlin to ask him about this version of events, but Smith
and Newlin remain close, with Newlin running Happening House from a duplex the
two men own jointly. Last year the company paid him $2,000 a month to administer its
assets.

In Eckstrom's view: "There are really two questions. What's HAFCI's interest in
[Happening House]? And what's the value of [Happening House]?"

Last month Smith returned fire at HAFCI, suing the organization for failing to maintain
the three buildings it rents from Happening House. The leases between the two sides
make the clinics responsible for the maintenance and upkeep of the structures,
something Smith says hasn't happened. "The buildings are nearly uninhabitable,"
gripes the guy who worked for both organizations.

The suit demands an estimated $1 million for repairs to the three buildings.

Beyond the muddy specifics, the whole situation raises one very intriguing question:
Did Smith use HAFCI as a cash cow, a way to fatten his bank account and enrich his
for-profit corporation? The clinics, according to Eckstrom, pay $13,000 a month to
Happening House — and a decent portion of that money is going to Smith.

The mortgages on the buildings were paid off years ago; the Haight Street property,




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for example, only cost $155,000, according to property records.

The state of California has pretty strict laws about this sort of self-dealing by nonprofit
executives, so we placed a call to the office of Attorney General Bill Lockyer to see if
there was anything improper about the arrangement.

"These are the kind of things we look into," Teresa Schilling, a spokesperson for
Lockyer, says. She says a nonprofit's board of directors must approve such insider
transactions to ensure that the deal is "fair and reasonable" — in other words, they
have to make sure the nonprofit isn't getting gouged.

Schilling says she can't reveal whether the attorney general is investigating the
arrangement.

The way Smith describes it, Happening House helped prop up the clinics, not the
other way around. "I bought the buildings so the clinics would have a home, so we
wouldn't be evicted," he says, adding that HAFCI always got a deal on rent.

But the clinics, as Smith's suit makes clear, also had to cover the maintenance costs
of the buildings, something that isn't normal when it comes to rental properties.

And now, after nearly four decades in the Haight, the clinics are bailing on the
neighborhood and moving to the Mission District. The cash-strapped organization —
which laid off 10 staffers in February in a bid to cut overhead — is in the process of
moving into a vast space at 1735 Mission St., where, Eckstrom says, they'll pay 30¢
less per square foot.

At the San Francisco Department of Public Health, Gregg Sass says his agency,
which provides the bulk of HAFCI's funding, is aware of the legal dispute. "We're
following the issue closely," says Sass, the health department's chief financial officer.
"We meet about every two weeks with them."

As for Eckstrom, he's ratcheting up the pressure on Smith. On March 30 HAFCI
lawyers notified the court of plans to bring new allegations of fiduciary misconduct
against the doctor. "I don't think there was ever good information conveyed between
Happening House and HAFCI. I think there were huge boundary issues."

                                                                 Posted: 2006-04-04 15:46:07




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