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Federal legal aid vulnerable to fraud, questions of conflicts and intimidation

Monies diverted by local nonprofits to gambling, prostitutes

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U.S. Assistant Attorney General Tony West hailed Maryland’s Legal Aid Bureau with a rousing speech a few weeks ago that equated the nonprofit group with great American poverty fighters like Adlai Stevenson, Thurgood Marshall, and Clarence Darrow.

The Maryland group is “an institution where the overriding charge is to do not what is popular, or partisan, or political, but to do what is right,” the Justice Department’s top civil attorney boasted May 20 at an annual awards celebration in which the group rented out a red-bricked banquet hall inside Baltimore’s Camden Yard’s baseball stadium.

Unbeknownst to West at that moment, though, prosecutors inside his own department were preparing a criminal case exposing how Maryland’s Legal Aid Bureau failed for more than a decade to catch one of its top executives, who is accused of systematically defrauding the federally funded program.

Six days after West’s speech, Legal Aid Bureau’s former chief financial officer was charged in U.S. District Court in Baltimore with stealing, along with an accomplice, more than $1 million in federal, state and private monies that were supposed to help the poor get legal help but were instead spent on such things as personal junkets to Atlantic City for gambling and prostitutes, officials said.

The little-noticed criminal complaint constitutes one of the worst fraud cases ever to strike the Legal Services Corp. (LSC), the federal government’s main program for assisting the poor with civil law matters. The case, however, isn’t the only bad news for America’s legal aid program.

LSC is facing internal questions about the quality of its grant-making decisions, interference with its attorneys and conflicts of interest even as it doles out nearly a half-billion dollars a year to local groups that provide lawyers, civil case advice and other legal assistance to America’s poor, according to interviews and documents obtained by the Center for Public Integrity.

“Missing or flawed internal controls limit LSC’s ability to effectively manage its grant award and grantee performance oversight responsibilities,” the nonpartisan Government Accountability Office warns in a report released this week.

Experts inside and outside the federal program fear such weaknesses create a lack of deterrence that leaves it vulnerable to fraud.

In the last four months alone, the Justice Department has brought three major fraud cases against officials of nonprofit legal aid groups who received LSC funding. A fourth was uncovered last year. They range from a woman in Pennsylvania who admitted diverting money from the poor for years to a Missouri man who pleaded guilty to stealing from a program to help poor American Samoans gain access to the courts. Legal aid diverted to personal gambling is alleged in at least two of the cases.

The LSC’s own vice president, who once worked at the Maryland group and now oversees grant-making to grassroots groups, is herself facing questions about whether her office is too cozy with the nonprofit groups it funds or too lax in its enforcement.

And the federally funded corporation’s chief watchdog alleges in a soon-to-be-released report that LSC senior management for years intimidated its staff attorneys, interfering with their “ability — and ethical obligation — to provide their best independent legal advice.”

Lawyers in LSC’s Office of Legal Affairs “reported that at various times they felt ‘intimidated,’ ‘undermined,’ and ‘brow-beaten.’ Perhaps most troubling was that the General Counsel was put in a position where he felt he might be placing his job in jeopardy if he was to freely give his independent legal judgment where that conflicted with what management wanted him to say,” according to the report obtained by the Center.

The report concludes the atmosphere left LSC without the ability to get sound legal advice on important issues between 2005 and 2009, but says the environment has improved markedly in the last few months under an acting president.

Concerns grow about federal legal aid program

The confluence of trouble has officials inside and outside the LSC questioning whether the federal program is doing enough to police the conduct of the nonprofit groups it funds and to ensure its monies are actually helping the poor.

“There’s been a little of a handsoff approach. Given the history of LSC, more oversight is better than less, as evidenced by recent GAO reports,” LSC Inspector General Jeffrey E. Schanz said in an interview. “There is room for much more systemic improvements.”

The greatest tragedy of the LSC’s alleged fraud is the millions of dollars wasted that could have been spent helping poor people avoid evictions, fight illegal job terminations or battle other legal woes during the worst recession in a half century, Schanz said. Most LSC-funded nonprofits must turn away many people seeking their help because of lack of money.

“I can’t think of anything during the recession that is more critical to LSC’s mission than providing legal services to the poor, who otherwise get lost in the shuffle,” Schanz said.

That sentiment is shared by key members of Congress, including Sen. Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, who requested the recent GAO investigation.

“Bad management is jeopardizing the ability of the Legal Services Corporation to provide legal assistance to people in need,” Grassley told the Center. “Congress needs to hold the Corporation accountable on behalf of taxpayers, who provide most of the money to run the Legal Services Corporation, and for the fundamental right in our society to legal representation.”

In addition, Rep. Chris Van Hollen, D-Md., a top lieutenant to House Speaker Nancy Pelosi, recently asked LSC to look into a whistleblower’s complaint about the treatment of employees and possible impediments to reform.

Victor Fortuno, the corporation’s acting president, wrote Van Hollen back in June to say that the agency is in a state of “transition” in getting its senior management to heed the advice of its career experts but also warned some were having trouble accepting change.

“This shift to a broader more inclusive decision-making process has not necessarily been easy for all to immediately and fully embrace,” Fortuno wrote in a letter obtained by the Center.

The new chairman of LSC’s board, appointed recently by President Barack Obama, is acutely aware of the concerns that festered during the Bush years, telling the Center he is assembling an independent task force that will look at LSC’s financial oversight. “We recognize the importance of assuring the public that LSC’s funds are being well and properly spent,” Board Chairman John G. Levi said.

An agency with a history of trouble

LSC was formed as a nonprofit corporation and funded by Congress starting in 1974 to route federal funds to independent nonprofit groups across the country willing to provide free civil legal help to impoverished Americans.

Today, it supports 136 nonprofits nationwide. A House subcommittee last month approved a $20 million budget increase for the agency starting in 2011 that would bring its total resources to $440 million, reflecting the increased financial pressures the recession has put on the legal aid system.

Over the last decade, LSC has suffered from several controversies, mostly involving allegations that its top executives and its board members spent lavishly on hotels, travel, private car services, and even expensive pastries for internal meetings. It was forced to make changes to eliminate such excesses, and to ensure 95 percent of all funds go to helping the poor.

Until recently, its core work supporting the nonprofits had gone unscathed. That is until 2007 when the GAO identified serious shortcomings in its ability to track the money it gave to the nonprofits. Then last year, LSC was criticized for allowing a Texas nonprofit to use funds to pay for a decorative exterior wall made of Italian imported stone.

Now the rash of fraud cases has raised questions about LSC’s ability to oversee the money it gives to groups.

The new GAO report cites LSC for failing to fully adopt six improvements it promised to complete after the 2007 audit and suffering from “deficiencies” that have caused a “breakdown in tracking funds.”

Conflicts of interests, revolving doors

LSC Vice President Karen SarjeantSchanz’s office is reviewing whether LSC officials have been too lax in overseeing the nonprofits they fund or too close to the groups they regulate.

A chief concern is whether the combined offices of Compliance and Enforcement and Program Performance overseen by LSC Vice President Karen Sarjeant have been effectively managing two different roles: approving grants and ensuring compliance with grant requirements, according to interviews and the reports.

In the case of the Maryland Legal Aid Bureau, LSC made only a couple of compliance visits to check on the Maryland group over the 11 years of the alleged fraud scheme, with the last inspection visit being in 2007, according to Schanz, LSC officials and the Maryland group. At least six current LSC officials used to work at the Maryland group, including Sarjeant as well as the head of LSC’s Office of Program Performance, which approves the grants, LSC officials said.

Schanz said his initial impression is that LSC’s enforcement efforts suffer from the same “dysfunction” that he saw as a Justice Department watchdog in the 1990s at the Immigration and Naturalization Service, which served two roles regulating immigration and approving naturalization.

Others inside the agency see the same “coziness” with legal aid nonprofits that federal offshore drilling regulators had with the oil industry before the BP oil spill in the Gulf of Mexico.

LSC Board member Jonann Chiles is proposing to split the grant-making and enforcement responsibilities.

“Grant monitoring needs to be made a true priority,” Chiles said in an interview. “An important step in the right direction would be accomplished if the Office of Compliance and Enforcement were separated from the Office of Program Performance and then given the human and financial resources it needs to do its job.”

In an interview Tuesday, Sarjeant strongly disputed suggestions her agency is dysfunctional in its enforcement efforts. “I do disagree with that,” she said.

She added, however, “I think we can always do a better job with our oversight. I know we need more staff to do that.”

LSC spokesman Stephen Barr said LSC’s on-site program inspections have grown only modestly — from 22 in 2005 to a goal of 29 this year. As of July, LSC has made only 14 inspections, leaving it behind its goal, Barr acknowledged. And it means LSC currently averages enough inspections to reach each of its 136 nonprofits only once every five years.

But Barr said the agency has taken other steps to ensure the nonprofits they fund avoid fraud, including better training, increased oversight staff and better tools for risk assessment. Barr said LSC had terminated funding to three programs because of mismanagement, recovered monies from eight other programs and issued 994 requests for corrective actions.

Barr said one of the challenges LSC faces is that terminating a nonprofit for wrongdoing may mean cutting off an entire community’s legal aid help. “If we pull out, lower the hammer completely, who is going to serve those poor clients?” he asked.

The inspector general said he also has reviewed several allegations that were forwarded to him by Fortuno, including whether Sarjeant should have recused herself from decisions involving two nonprofit groups to which she had personal connections.

Officials said Sarjeant was involved in approving a $6,500 grant to pay the nonprofit Center for Legal Aid Education to give a training seminar at the American Bar Association’s annual equal justice conference in Phoenix in May, officials said. The Boston-based CLAE’s website recently listed Sarjeant as an unpaid member of its faculty. Sarjeant said she had volunteered to teach for free a seminar, which has not yet occurred.

Fortuno asked the inspector general to investigate whether Sarjeant had a conflict of interest, and whether she failed to get career officials’ approval for the grant, as he requested, officials said.

The IG report concluded that Sarjeant broke no laws because she never received any compensation for offering to volunteer for CLAE, but it did quote career officials disputing her assertion that they had approved the grant.

The IG blamed “inadequate communication” and “strained working relationships” for an extraordinary controversy in which the agency’s acting president felt compelled to seek an investigation of one of his vice presidents. “Better communications among LSC personnel involved might have prevented the circumstances that led to this inquiry,” the investigative report chided.

Sarjeant told the Center she felt vindicated by the IG report. “Any statements about not approaching my work in an ethical, above-board, transparent way are just not correct. I have always conducted myself with the highest professional standards.”

Schanz said, however, the entire episode highlights the need throughout the agency to disclose potential conflicts of interest. “I believe in full disclosure for any transaction, particularly one that doesn’t appear arms length,” he said.

Fifteen LSC staffers, including Sarjeant and some of her deputies, went to the Phoenix conference at taxpayers’ expense at a cost of $26,000, Barr said. The session was held at the four-star Pointe Hilton Tapatio Cliffs resort, which boasts hiking trails through Phoenix’s spectacular red-clay bluffs, a “Hilton golf academy” with a driving range, golf course and putting green, and a mountaintop restaurant where the chef’s feature runs $69 a plate.

Barr said the location was picked by the American Bar Association and LSC officials went mostly to teach various seminars. The agency is seeking reimbursement for some officials who paid registration fees but did not attend. “This was not a junket. This was an important opportunity to train our nonprofits about better board governance,” Barr said.

The inspector general is also addressing concerns about why LSC terminated a $168,000 technology improvement grant to the Maryland Legal Aid Bureau when the group could not meet all the benchmarks required for the grant. Those issues are being wrapped into a broader review into whether LSC effectively manages the $4 million a year in technology grants it has been giving to local nonprofits, Schanz said.

Sarjeant’s official biography states that she worked at the Maryland Legal Aid Bureau as chief attorney in its Montgomery County office before joining LSC in the mid-1990s. Sarjeant confirmed in an interview she approved the grant termination.

Barr said LSC frequently hires people who have experience working in local legal aid programs. But the corporation typically prohibits an employee from working on grants or oversight for their former employers, he said.

Sarjeant said, however, she saw no conflict in approving requests from career officials involving groups — like Maryland — where she has had a personal connection or past employment because she has an obligation to oversee career officials’ grant-making decisions.

“I govern my behavior here on our code of conduct, and I also have a responsibility as an attorney and I have my own ethical guidestar,” she said. “And none of those guidestars that I used to govern how I operate and behave in the office gave me any inkling there was an appearance problem with anything that I have done.”

The GAO report singles out the compliance and programs offices under Sarjeant, saying their enforcement efforts fail to fully use visits to grant recipients’ locations, computer data and other tools to ensure recipients comply with regulations and laws.

“These control weaknesses hinder LSC’s ability to effectively oversee its grantees’ compliance,” it concluded.

The dry language of the auditing report belies a more tangible consequence: since March there have been three major criminal cases that exposed how LSC funding was easily stolen by grant recipients, in some cases over years without detection.

Maryland case

In Baltimore, federal prosecutors filed a criminal information on May 26 in U.S. District Court charging Benjamin Louis King, 58, of Gwynn Oak, Md., with theft of more than $1.1 million in funds from a federally funded program.

King worked for three decades at the Maryland Legal Aid Bureau, eventually rising to the role of chief financial officer, the group said. In 1997, King approached a friend about creating a business to sell office supplies to the legal aid group, concocting a scheme in which the company would “inflate its invoices” and then divvy up the excess proceeds, according to court documents.

“The amount of money skimmed by the defendants between January 2004 and December 2007 exceeded $1.1 million, approximately 25 percent of which was directly attributable to federal grants that Legal Aid had received through the Legal Services Corp.,” the criminal information alleged. The total amount stolen was nearly $2.5 million over 11 years, but charges could not be filed for all of it because the statute of limitations had expired, according to Schanz’s office.

King, who plans to plead guilty, told investigators he used the stolen monies to fund regular gambling trips to Atlantic City and to pay for prostitutes, Schanz told the Center.

King’s attorney, Warren Brown of Baltimore, did not return repeated phone calls to his office seeking comment. King has an unlisted home phone number, according to directory assistance.

The Maryland scheme was discovered months after King left the agency in 2008, said Maryland Legal Aid Bureau spokesman Joe Surkiewicz. The group has made sweeping changes since then to better serve 55,000 poor Maryland residents a year, he said.

“We’ve completely cleaned house, completely changing and restructuring the financial unit and professionalizing it,” Surkiewicz said. “We really feel victimized by this. This is a guy that worked here for 30 years and was in a very trusted fiduciary job.”

Just a month before King’s case, federal prosecutors in Pittsburgh secured a guilty plea in federal court from Cheri A. Logue, of Claysville, Pa., on a single count of theft from a program receiving federal funds.

Logue admitted embezzling over seven years funds from the Southwestern Pennsylvania Legal Services Corp., a group that provides legal help with LSC funding. The criminal information lays out a series of red-flag transactions Logue used to steal the money, including: writing checks totaling $90,000 to herself and then recording them as payments to legitimate creditors or suppliers; making unauthorized withdrawals totaling $12,000 at ATMs near gambling locations; and charging the group’s Visa card for $72,000 in personal expenses.

In another recent case, a Missouri man pleaded guilty in March to embezzling $31,292 while he was acting director of the U’una’i Legal Services Corp. in America Samoa. Prosecutors said David Wagner’s scheme was simple: he made multiple unauthorized salary advances from the legal aid group’s checking accounts between November 2005 and December 2006.

Schanz became the LSC inspector general in 2008 and said he has been troubled enough by the agency’s commitment to oversight that he has expanded his investigative unit by two staff.

“My initial reaction was there was an awful lot of federal funds that weren’t being scrutinized,” he said. “I shouldn’t be this busy.”