Dj(caPital Research Center ~ www,eapitlllrcunrch.orc

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ACORN Beneficial Assoclation

ACORN Housing Corporation ACORN institute ACORN Votes American Institute for Social Justice Association of Community Organizations for Reform Now Citizens Consulting. Inc. Citizens Services Inc. Communities Voting Together Pennsylvania Institute for Community Affairs, Inc. Project Vote/Voting for America. Inc. From: Elizabeth Kingsley Date: June 19. 2008 Re: Initial Report on Organizational Review

INTRODUCTION My firm was engaged to conduct a review of the operations and inter-relationships of the set of
COUNCIL corporations addressed on this memo. This is an initial report on my findings and recommendations. The organizations addressed above are parties to a joint defense agreement under wh ieh we were retained to represent the common interests of all of them in obtaining advice about legally appropriate ways of structuring their relationships. The list includes a number of organizations directly affected by the embezzlement incident of 1999·2000, plus a set of others that I recCimmended including based on my pre-existing knowledge of their activities and the importance of their role in the overall operations. As you react to this initial report and begin to take actions in response, it may be appropriate to expand this group to include some otherkey entities.

A few key points, before we get into more technical specifics:
• Corporate forms must be maintained and respected, OR a decision taken to combine some of the allegedly distinct entities. o This includes having real boards and a real principal staffpersonlED for each o Appropriate lawyers must, if necessary, go directly to those boards if needed, especially ifthere are concerns about the ED. Fences need to be erected to wall off types of election-related activity that must be kept completely separate.

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o Relauve to both these first paints, too many people are wearing too many hats, or perhaps the wrong hat entirely. eel, the nerve center of the administrative functions, needs a real board, and a realistic sense of what functions it can be 'expected to serve. o eel's clients must have reasonable termination provisions in their contracts, and review those contracts regularly. eCl cannot expect [0 have a monopoly over this business. Boards of client organizations must be informed of any problems with eer's performance, and where serious should be prepared to take some or all of that work to a third-party vendor, or develop the capacity to carry out those services for themselves in-house. o The·relationship between eCI and its clients must be carried out like an)' other business on arms-length basis. Fees schedules need to be provided 8S promised, and reviewed to verify that the clients are really getting a good (or reascnable) deal here. Unfolding facts about the events of200(;) raise major concerns about tr.~nspar.el.)cY and accountability. More investigation is needed into questions about the failure to inform the board, or possibly even the full executive committee: the degree to which legal counsel and upper management may have been affirmatively misled; [he identities and roles of those Involved creating and implementing the response to the embezzlement; and t~1? im~r-corporate transfers made out of certain funds in response to rhe loss. These key questions'must be investigated, confronted, and disclosed to appropriate parties, In thy ~igg~r piCl\!r~, !f j~ is f!ot possible to invest substantially more time. attention; and resources ln the infrastructurenecessary to SUppOI1 what this multi-faceted operation has ~rown into, it may be necessary to downsize. These organizations have grown tremendously over the years. With· maturit~:·must come some added discipline.

My concerns in this report fall into four major categories: respect for corporate integrity, the necessary sepuration between different types of political work, the niceties of 50 I(c)(3) tax compliance and'accountlng for those funds. and a big-picture question about organizational capacity, In some places 1 cite specific examples to help illustrate a point. These should not be seen as pointing fingers at anyone, or suggesting-that these instances are more egregious than others not cited. It is easlest to qrl!-vY 9," ~~lirnp!~S 1 happen to be familiar with, and it can help to explain a theoretical point, but you should not think these soeclflcs represent the extent of a problem. or that only they should be of concern. In short, I am not trying to single anyone out, but to point 10 systemic institutional concerns.

~Ian)" of the corporate entities in the COUNCIL world have not operated with sufficient r"',_:,rmalities. taff roles have not been clearly delineated. and in various instances funds h:l\ e S

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been raised and spent' by people with no official relationship to a given corporation. Boards have not always been maintained, much less met and exercised their governance role. Board meetings are [lot held, or if they are, minutes are not kept, or if rninutes are kept, they never make it into the files at eel. There is no point in having these different corporations in place if they are not respected. ffnot properly operated, they create difficulties (e.g., potential conflicts of interest for lawyers, non-trivial administrative burden of state filings, and the appearance that someone is trying to hide something under a byzantine corporate structure) without generating the desired benefits, whatever those may be. This is the natural result of thinking of all these different corporations as part "ofthe family, or "us." It is highlighted by a eel organizational chart circulated at one point showing "Chief Organizer" at the top, although eCI has no chief organizer, nor any agreement with any other entity with such a person that would allow them to exercise such authority. It is reflected in having a "chief of starr' of no specified organization. There may have been an assumption that one person could supervise the staff of some number ofdifferent corporations without any formal agreements between the autonomous entities employing these different staff people. [ should note that there is a great deal of confusion surrounding the Chief Staff Tole. I have not seen an explicit statement to indicate just which corporation the Chief of Staff Is supposed to operate for, Some people' have indicated it is a general role in all corporations. while others suggest it is more limited. AHC specifically objected to what it saw presentod as an appointment of someone to supervise its staff without delegated authority from its board, a position it did not accede to. At a minimum this seems to be more evidence 0ftl:te Reed fOf: clarity about staffing and corporate interrelationships.


It may be possible to create such an arrangement by contract. Indeed, 1 was considering whether semeof the personnel problems generated by having employees of many different corporations all Working together in the same space on Canal Street could be addressed by a mutual agreement to hire or designate a shared human resources coordinator. A similar arrangement might be made to work for a "chief of staff." The issues are tricky when there are 50 I(c)(3) and other'types of organizations in the picture, but it might be workable. £t has not, however, been done, But if, as some suggest. it was assumed that ACORN's Chief Organizer can appoint a Chief of Staff for all COUNCIL' entities without any legal agreement orapproval of their boards is ~ ~Y11lptQm Qfthi& imp.reci~~ ~hin~i!1g ~~~! authorlty and boundaries. ~ !~g~! COUNCIL entities have wanted to maintain that they are not "affiliated," "related," or "controlled" by or with each other,' for various legal purposes; while allowing actual ccntrol to be exercised in a highly coordinated manner. It m~Y be p()s~j~l~to ~r~!J:.~~ ~!!1dof rh~ . .,.~ .'.
I Someone recently said to me that of course {in thGir mind) connacts between CSI and "internal" clients were mit the same as those legitimate arms-length agreements with outside clients. This is only one symptom of an . QrgMi~tiF!!1!ll 9u.1Nn: r~~~~!~~ ~~~~ily business more than an accountable organization. Legal fonnalitics are fh~' not just II question of lawyers generating paper: but of all players on the scene understanding and respecting the existence and role ofditferent corporate entities.


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inter-connectedness, control and supervision that has been exercised among the corporations as a practical matter, but it will be necessary to do so in a structured and thoughtful way. Indeed. it may be time to consider 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,

[ recommend that each of the organizations involved in this review' and every COUNCIL organization with stafTimmediately constitute a board with aI least three members, who should meet and be briefed fully on the corporation's operations, purposes, and financial and legal situation. Each board should designate a primary staff person (Executive Director or the like) to whom it will delegate authority for the day-to-day operations of the organization. In some instances it might be apprepriare for corporations to share the same ED. but not in most. Such overlap should be closely examined. These boards should plan to meet (in person or by ph(lne) absolutely no less frequently than twice a year, and preferably quarterly. They should receive monthly financial and activity reports from staff: ·(Thls could be stretched to quarterly, but no further.) I and any other attorney representing the corporation should have direct contact information for all board members (or a smaller group such as an Executive Committee ifthe board is large, as for ACORN). The boards of all corporations that file 990s and any other corporations with staff should consider the memo from me and Steve Bachmann regarding adoption of a set of corporate policies relating to the new Form 990, 990~filers will be required to answer questions about these policies on their publicly-available tax return, and a "no" must be explained. ACORN does not file a 990 with the IRS, but some states require it to complete one in order to solicit funds in their states. In any case, the policies proposed are fundamental pieces of good governance and accountability within an organization. The IRS says that it cares about governance because it finds good governance linked to legal compliance, and slip-shod or absent governance and internal accountability are red-flags for tax and other legal problems. In this case, the IRS is right. These policies are: •

• •

Whistle blower policy [priority: CRITICAL J destruction policy (simple version prohibiting illegal destruction URGENT} Contemporaneous documentation of Board and Committee meetings [priority: URGENT) Conflicts of interest policy [priority: iMPORTANT]
Document retention and of documents) [priority:

2 This recommendation cenainly applies to the main opt:rating organizations, The funds wtth no staff and possibly no current resource! may not need a designated statfpel'!lon, but they atl must heve functioning boards,








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June 19, 2008 • Documented process for determining compensation key employees {priority: IMPORT ANT]

Page 5 for the CEO and any other officers or

Also. though we have not created a draft policy at this point, all corporations with staff should 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 family members or peopleln a domestic partnership or dating relationship nor be one another's direct supervisors, Whistleblower; sexual harassment, and other po licies for reporting complaints must provide an alternate contact person ifthe person being complained about is related to the usual person reports are given to. Critically, all staff must be required to recuse themselves from any decisions relating to the employment of their relatives. (This is also covered under the conflict of interest policy.) Further, Inter-corporate relationships need to be formalized, Where services of staff are shared, or are provided on a contractual basis, the relationship should be reduced to writing and reviewed by the board or primary staff person. Those contracts should be policed to ensure that actual operations are consistent with what's on paper.
J have been told, for instance, that ACORN's communicatlons director is on the payroll of AISJ, and another Ai SJ em ployee manages the b ul Iding on Canal, Street where many different corporations reside. This is not appropriate, although those people might, depending on circumstances, be able to split t heir time worki ng for two or more corporations, The existing paymaster could (ease services to the other entity for which work is done, Every corporation with a payroll should review a. list of its staff to determine whether they are actually providing services to that corporation, lfthey are also doing work for other organizations, their employer should ent-er into an agreement for staff-sharing or fee-for-service hiring ofthe staff. Alternatively, these relationships could be structured as in-kind contributions of staff time 10 a different corporations, but the transactions must then be recorded as such.

eel plays a crucial role in promoting respect for corporate integrity. It should immediately develop a list of theofficers and primary staff person for each corporation that it serves, and any other person who is authorized by the board or the primary staff person to authorize expenditures. It must institute procedures to prevent-any funds being disbursed without explicit authorization from one of those people,
ln addition, the relationships with eCI slioUld be formalized and the fbrmalities observed. The standard eel contract allows fees to b-eset on an occasional basis. This process must be followed, so that each client is provided with the schedule as promised, once every six months. The board of each client organization must review that schedule when received, and should review CCI's performance on an annual basis to determine whether it remains an appropniite vendor for all the services it provides, When new contracts are implemented. the board of the

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client should adopt Iiresolution approving the CCI Director as Assistant Treasurer, as required by the contract, Officer positions should not be handed out by contract. These contracts need to be supportable as reasonable, arms-length relationships. To this end, they should be tenninable with adequate notice every time a new fee schedule is issued (or if not issued, that would be cause for termination). As written, eel could jack its fees up through the roof for some or all clients, and they would theoretically have no recourse until the next annual window for cancelling renewal. Finally, there are a number of"building corporations" whose function (as I understand it) is to own 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 real estate asset from possible liability for actions of any of the -groups operating out of the space. However, the governance structures for these corporations should be reviewed to ensure that they will continue to serve this intended function. Their boards must meet regularly and-document those meetings, or there is a risk that the corporate form will not serve as the desired liability shield.

The political world or ACORN lacks the protective "walls" needed to ensure that various types of activity are kept sufficiently separate. It may be that activities are currently carried out with adequate independence, but without formal policies and separation of staff functions, there are potential liabilities and problems of proof. Within both CSI and ACORN, there needs to be a formal policy adopted and implemented 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 1 p-roposed for CVT and CSt No later than immediately, people who understand the various staff functions within these entities must go over that policy and determine who would be on which side of the "wall" for the rest of this cycle. 3 The policy should be in place by the end of this month, if at all possible -- July at the latest. The main concern here is with federal candidates, although to the extent a local ACORN or CSI office is active in a state or municipal or county race and also doing nonpartisan voter engagement work 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 2-page guidance document for field staff to let them know what they can do freely without worrying about election laws, and when they need to get further guidance. The
I I understand Jeff Robinson is working on Ihe deUtiIs of how this policy would work within CSt When he bas developed an appropriate structure, it must be promptly reviewed by legal counsel, implemented, enfon:ed, and sI.!PPQrted.


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document also stated what is supposed to be the organizational policy and [hat any questions run through Marsha Green. That did not get distributed in Santa Fe as originally planned. lt needs to be gotten out to the field ASAP to avoid inadvertent FEe problems. If the document requires edits or clarification, we can work on that.

The organizations also lack an adequately documented delineation of SOl(c)(3) from non50 [(c)(3) work. II is unquestionable that a large 50 I(c)(3)-permissible voter registration and mobilizatien program is carried out using 50 l(c)(3) funds. I am not worried about the content of -this program, i.e. the message delivered, or the targeting choices within a given geographic area. However, 1 cannot eonfirm that strategic declslons about which regions QO 501(c)(3) versus nonSO I (c )(3 ) voter engagement work are not being made by the same person or people. At a minimum, there is.not adequate demonstrable separation betwllen these functions, As a result, we may not be able to prove that 50 l(c)(3) resources are not being directed to specific regions based on impennissible partisan considerations. Remember, it Is the IRS that enforces the rules for 50 I(c)(3)s. In general the government has the burden of proving you have done something \vrong, but Wfien It comes to tax compliance, the burden is on the organization to maintain records to document it has done things right. Preliminary steps have been taken to address this situation, but the 50 I(c)(3)/non-(cX3) wan needs to be firmer, and the policies previously put in place must be enforced. For instance, Project Vote has on paper a procedure to select regions where it wi II do voter registration, but i have heard reports in the past that in practice those decisions may be communicated to PY from ACORN.4 [am fold this has improved this cycle, but have not had time to interview enough staff to 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 50 I(c)(3) resources will be focused; The PV and PICA Executive Director(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.' These ~orpQratiQns and their chief staff people must control their own funds; the ED must report only to her/his own board, unless it formal, Jegally vetted written agreement appropriately delegates that authority elsewhere, And the ED must not be wearing other "hats" that jeopardize her ability to act solely in the interest of these 501(c)(3)s. In addition, at the regional state level. staffshould be educated about the need for separation at the strategic level. On several occasions (from different regions) f have seen funding proposals that combine 501 (c)(3) voter reg./engagement work with similar non·501 (c)(3) plans, which suggests possible impermissible strategic coordination.


4 This is no! to say that the decisions made were substantively improper,just that procedures need to be followed in practice.. _ An obvious enforcement mechanism is to rigidly apply the requirement that only projects generated through the documented approval process would be funded.





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A final, but major, concern is the "nonconnected" 527 organization, Communities Voting Together. (For several months we 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 below regarding organizational capacity and responsiveness.) In at least one instance, CVT may have been treated like a pot of money available to ACORN to carry out state-level political work. Funds were committed and activities undertaken in its name without the knowledge of the CVT officers or key staff person, (This incident no doubt occurred d'lA(i misunderstanding of the to rules that should apply. but that only highlights the need to institu'te and-enforce clear rules and prcaeduses.) 1 have no evidence ofCVT's officers meeting pr ~~~iving reports of the organization's activities, much less adopting any sort of plan for its "ftiture o pe"rli"t 'though as of the time of drafting this report I have not yet had an opportunity to speak directly with CYT's oficers. This situation is complicated by the fact that one of the two officers resigned on June 16, 2008.


IfCvT is not operated as a properly ~~nollconneoted" organization, it will not legally be able to make communications about federal candidates, as it has done in the past. Ifit does so anyway, it will create tremendous liability for itself, and likely f(;lf both ACORN and ACORN Votes. One of the first lines of defense against this mlstrearment lies with Cel, which must not allow any eVT funds to be disbursed without proper authorization. [fit does 50, CVT should be moved out ofCClto protect both it and ACORN.


I have recently provided documents for AfSJ to use governing its relationship with ACORN. There is an overall agreement, and two transmittal letters that can be used for specific types of funding. Similar documents should be used by AI, and any other 50J(c)(3) that makes grams to


We believe those documents have been or will be implemented. However, merely papering the
transfer of money is not sufficient. The c3s must be able to demonstrate that their funds were a.ctually used as intended, for c3 purposes. Any grant to a non-50 I(c)(3) requires reporting back so the grantor can prove how its money was spent by the grantee. Historically, this has not iiapperi~ed. The new grant documents require this reporting, and if it does not happen, r would advise the AI and AtSJ beards and key staff that no further grants should be made to any office that has outstanding reportson previous grants. . All 50 I(c)(3)s must also ensure that their funds are spent only with appropriate corporate This does not mean that the board should approve every expenditure. Authority may bedelegated to an appropriate staff person, and may be further delegated by that person. Such delegation must be explicit and in writing. eel, which controls the bank accounts, must be



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instructed not to disburse funds without appropriate approval." It must be given copies of the written expenditure authority delegation, and maintain lists of authorized individuals. The organizations must also inform eCI when a staff person leaves, moves, or otherwise should no longer be on the authorized list. They should have explicit written revocation of expenditure authority in their files. All staff must understand that cel cannot disburse any funds without proper approval. An example where this comes up is when organizations have agreements to workjointly on a project, or for one to provide grant funding to the other. A contract Of granl letter is necessary to establish that relationship. but not sufficient 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 at least one instance where that did not happen. although the payment was for a 501{c){3)-permis.sibte project, and one that apparently the 50 I(c)(3) in question was participating in. The point is that general agreement to provide funding to a project is not the same as making payments, and the other organization seeking funds should not be the one to control the making of payments. Otherwise, there is danger that we cannot demonstrate that 501(c)(3) funds are always disbursed tor 50 I (c) (3}-appropriate purposes. Another area of major concern for 50 I(c)f3) compliance is the widespread assumption that It is sufficient to substantiate the use of SOI(c)(3) funding to state (as is no doubt true) that a Iarge portion of the work of ACC>RN could be done by a 50 1(c)(3). This is the beginning ofan analysis that could support using 501 (c)(3) funds, not the end. As a case in point, I recently reviewed a proposed video project. The end result was a short film that highlighted ACORN and promoted it as an effective organization that people should feel good about. Nothing in the film was inherently 50 I(c)(3 )-imperm issible (i.e., no electoral po lilies ), However. the entire point of it was to make people (funders, members, the public) feel good about a non-50 I(c)(3) entity, to bolster its goodwill and image, and thereby its capacity to raise funds and do all its work, including the non-jOI(e}(3) political activities. I belleve we may have reached an adequate resolution on this videh,'allocating the production costs on the basis of funds raised between !\CORN and the c3s that support its work. But the point is that there was insufficient thought or care given tQ thlsin a'dvan'ce', 'rio written agreement, and little willingness to work through the technical legal ,piece needed to allow 50 l(c)(3) fund,S to be ~~:~ ~roperly for the project. FEDERAL FUNDS

f have not looked in-depth at the handling of federal grant funds, nor am Ian expert in that area. However, even with the little infonnation I have, there are concerns that must be raised.

"This applies to all the corporations.

and is mentioned elsewhere in this report in connection with

is especially critical for the 501(c)(3)s so merits special notice here.

eel. However. it







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First and foremost, arty entity receiving government 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 misuse of grant funds or related conduct should have a clear avenue to report the. concern without fear of reprisal. There must be an alternate person 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 process. Questions about the scope and depth of an investigation may need to be referred to legal counsel. The point here is not that every employee complaint is legitimate, but that serious complaints must be taken seriously. Anyone with a conflict of interest. whether real or potential. should not be involved in resolution of any whistleblower matter, In addition, any required federal audits must be carried eut completely and in a timely manner for any organization with enough grants to trigger these requirements. Any corporation required federal grant funding should have a designated staff person whose job includes making these things happen, and who can go directly to the board if necessary if they are not. corporation wlth federal grant funds should have an ongoing relationship with legal counsel with appropriate expertise In these matters. This counsel should always review any transaction that involves using federal money to hire (or sub-grant to) any other corporation. Expert legal advice is also necessary for any project that anticipates combining grant-funded activities with other goals, such as ACORN member recruitment It may be possible to handle those ;'~Iatio-n"shrps'by obtaining in-depth general guidance that would allow grantee organizations to aqppt standards that can be implemented on any given grant. . ..... ~ ..
'~ '.'


All these entities must face a critical issue of organlzational capacity. The combined budget of all the COUNCIL entities has grown tremendously in recentyears.and it is not clear that the administrative or management capacity has kept pace. Looking only at my personal has been inadequate. crops us elsewhere, possibly technlcalfties. Contracts are

experiences, I can site any number of instances where follow. This is partly. and perhaps mostly. a CC;I phenomenon,' but it as a symptom of inadequate importance given to legal requested, drafted, sent out for comment or execution. then

7 This report raises a lot of concerns about CO's capacity and performance, which must be considered seriously. I do n« want any of this to be taken as criticism of eel's staff, individually or as a whole. My review was not of individual staff performance, and those I have worked with directly have been responsive, engaged, and'har(!working. The problems are more systemic and institutional. There is only so much any hard-working group of people can do with limited resources.


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disappear into a void.' I spent literally hours trying to get someone to respond to requests for a signature on a simple form that would allow me to make the necessary filings with the FEe recently. Sometimes it seems that no one is minding the shop, or at least that requests for dealing with paperwork 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 some fairly senior staff people. There is always a bit ora tension between the community organizer who just wants to get the job done and the lawyers and accountants who want to do everything by the book, dot all i's and cross all 1'5. This is natural, and probably healthy, But it can be taken too far, and when a group of organizations grows (0 a size like this has, infrastructure 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 Indicate the need to can in outside vendors, expand capacity, or rethink eCI's role, eel's client organizations wi!! have to give serious ccnsideratlon to its capacity to provide the services they need. eel ltself needs to puta real Board in place ASAP. That Board must evaluate eel's operations, identify areas of weakness. determine whether they can be fixed, and ifso figure out a game plan for doing so. Although my general advice above is that each corporation should have a minimum of3 directors, but for eCI 5 is preferable. It is a critical part of legal and financial compliance and accountability for at! the COUNCfL organizations who will soon be faced with some very important decisions. Eventually. depending on eCI's role go ing forward, a $1ighrly larger board might be adv isable (in the range of 8-15). must first be a decision about what can and should be expected from eel, governance structure implemented. Rather than trying to pretend that eel is an ellt\~ely aln0l10RlO~lS service provider, consider acknowledging the reality of relationships and functions: 'CCi exists to 'serv'iCe a set"of co'rpo'raHons;' 'mere is"no: reasons those entities, or the largest of them, should not have a seat on the board. In the short term, this rna)' just mean identifying key people from a few tel clients to be added to the board, but even Illa:i Iy·there should be consideration of providing some expliclt client representation Oil Jht Cf.:'J i:!,Q.anj. !t wou Id also be good to have some "outside," or at )east less "i ns ide" di rectors as we I!. cct. Iike most eorporations, would benefit from the voice of ~ friendly yet independent critic. For instance, there is going to be a need to make big decisions about the incoming cash payment to buy off Dale Rathke's note to eel, Available cash always generates pressure to JJS,e it ro ,cON.fir current needs, especially in light of some of the extraordinary bills being generated by current ·efforts. But eel has major debts to other entities, and it will be crucial to have some direl;tors overseeing the use of the cash and decisions about the debts who are not subject to any conflict of interest, su ch as competl ng fid ue iary duties to poten tia1 recipients of the fund s 0 r CD I clients.

In th~ long

an appropriate

nm. there


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CRISIS 2000 AND 2008

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I understood my mandate for this project to be to provide analysis ofthe overall corporate structure and relationships among certain entities, and make recommendations to improve legal compliance and reduce risk for future operations. Inevitably, however, I have also looked specifically at the embezzlement of 1999·2000 and events following its discovery. I have been briefed as weI! on some of the issues facing the current pension fund (Council Beneficial Association, or CBA) and health plan (Council Health Plan, or CHP). These are not matters I can advise on, but the issues are connected to the general operations J was asked to review. J 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 forward-looking operations. What I have learned to date indicates that serious questions need to be asked on a lot of fronts. A full analysis of potential liability will require a consultation with II knowledgeable white-collar criminal attorney, Prior to my visit to New Orleans (June 8-10,2008),1 knew that there was contradictory information about who at the board level had been told about (he embezzlement and proposed handling of it in 2000, The management council rna)' have been told that the informaHon was shared w ith the enri re executi ve com mittee when in fact only the Presi dent had been in form ed. 8 There should be further investigation to determine who was told, and what representations the management council relied on in taking action. The. board itselfwW no doubt have some very hard questions to put to staff about the decision not to inform it at the time. We have recently learned that there is also ecntradictor)' information about the role played by legal "counsel in vetting the settlement of the Dale matter. In December 2000, Wade Rathke told Steve Bachmann as attorney and the management council" (as u(!lref level management) that the legal problems of solving Dale's embezz.lements would be turned over to Louis Robein, longtime counsel for Local 100, and regionally reputable labor lawyer who could reasonably be expected to provide reliable advice in managing this sort of situation. On June 10.2008, I met with Louis Robein who informed us that his role was far more limited. He related how around December 2000, Wade had a conversation with Louis to the effect that Dale had been caught in some embezzlement. No amount was mentioned. The discussion was mainly over what liabilities Wade might have to worry about, and Louis provided on general and preliminary advice. Neither Louis Robein nor his firm was retained to structure or review any sort of resolution to the Rathke embezzlement. As best we can tell, the only people involved in crafting
were tJu..
Ihthl.- .." ~~ ~"'-~.-~-' .'

ihe ·seriJemeni

r have not interviewed Wade, Maude, or any of the other then-officers on this point. As noted, this is a dlllfi interim preliminary report. Y To be precise, the communication to Steve Bachmann is documented. the representation to the management council is based on my understanding. I have not interviewed the people involved to confirm this point.


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Sensitive Report - Do Not Distribute Beyond Initial Reelpleat List

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indication that he provided a legal opinion or other guidance on the substance of the settlement} It appears that this settlement was never reviewed by ACORN's general counselor the attorney supposedly retained 10 do so. A hostile investigator might conclude that Wade deliberately told Steve Bachmann that he had retained different counsel on the matter in order to exclude legal counsel from meaningful participation in review of the proposed plan, And unfortunately, this is an organization that has to be prepared to be scrutinized by a bostile investigator. Two ather revelations need to be further investigated. These pertain to ACORN Beneflclal Association, or ABA, a discretionary plan in place before the creation ofCBA that was intended not to be a true pension fund covered by the ERISA law, and to ACORN Fund. a similar discretionary health care fund that was in place before the creation CHP. A large part of the embezzled funds ($2 I5.000} were charged through ACORN's AmEx account to ABA, \Vhen the theft was discovered, this meant that Dale awed ACORN this amount, and ACORN in turn owed ABA for the overpayment, J am told that A BA decided to write this debt off as a gift to ACORN (though the debt from Dale naturally was not forgiven). Although it is the organizations! legal position that this fund was not covered by ERISA and therefore not subject to its rules that would prohibit this sort of gift. it is nonetheless the case that a number of organizations, possibly including unions and charities, paid funds Into ABA for entirely different purposes. They did not make those contributions in order to make a gift to ACORN. I have not gonen information about who authorized this decision, 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 ACORN.\~ If the Fund was not covered by ERISA, it may have had the discretion to do this. I f it were covered by ERISA, I understand that this would be a prohibited loan to a related party. In any case, after resolution of the embezzlement and execution of the note between Dale Rathke and eer. the situation was that Dale owed eGI, eGI owed ACORN, and ACORN owed ACORN Pund. It was agreed to take ACORN out of this picture, so that now it is eel that owes this money to ACORN Fund. I have not gotten information [0 determine how this decision was made or approved, but it certainly creates concern. There is the appearance, at least, that money was taken out of (or not paid back to) a fund established to cover employee health care costs in order to cover the cash shortfall caused by the embezzlement. This decision, combined with the apparent failure to notify the governing boards of affected organizations or obtain adequate legal counsel, could generate significant liabititiesfor the Fund and its directors. Again, there must be inquiry into the decisions about moving these funds, the advice if any that was relied on, and the best response now to minimize legal concerns. As with ABA, if the board of directors does not have answers to questions about this organization, we need to ask why not.

The explanation I have heard for this is that the Fund was in danger of being sued, and moving cash out of it into

ACORN helped shield those assets. This does not make much sense, as the funds showed as a receivable and
thereFore an asset on the Fund's books.


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ATTORNEy..cLIENT COMMUNICATION Seositive Report - Do Not PRIVILEGED AND CONFIDENTIAL Distribute Beyond Initial Reeipient List June 19,2008 Page 15

here, and in any event J am very familiar with making recommendations that are accepted but not acted Oft. It may be necessary to prune back on some operations in order to allow others to come into compliance; it may merely be prudent to combine some of the disparate corporate entities you are attempting to maintain. But whether you try to implement some or all of these recommendations, there must be someone committed to follow-up. 'There must be a review mechanism, and a means of hold ing people accountable after any final decisions are made. If you do not make some hard choices now and ensure they are carried out, they almost certainly will be made for you.

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