Hale to the Thief?

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New York City—Want to divert a million dollars from a nonprofit agency that serves children? That’s what prosecutors say the recently indicted leaders of the Hale House did, and a new report details how they allegedly did it.

The 94-page report – commissioned by a new state-appointed board of directors charged with rescuing the agency from scandal – offers a virtual blueprint for cheating a nonprofit. Among the tactics:

• Making up a board of directors that doesn’t meet and stocking it with people who don’t even know they’re on it.

• Convincing the bookkeeper to sign checks with the name of a fictitious administrator.

• Handing out $174,000 in loans and other extra payments to workers, including the handyman, to buy complicity.

Those are among the allegations about how the Hale House has been run since its esteemed founder, “Mother” Clara Hale, died in 1992. Mother Hale founded the home for children of imprisoned and addicted parents in 1976. In 1985, she was hailed in President Reagan’s State of the Union speech as an American hero. Her daughter, former Hale House Director Lorraine Hale, and Lorraine Hale’s husband, Jesse DeVore, have pleaded not guilty to a 70-count indictment by New York State Attorney General Eliot Spitzer.

Hale and DeVore are seeking a plea bargain, and their attorneys declined to comment about the report or the charges, which include second-degree grand larceny.

The report “clearly establishes improprieties,” as well as the “complete absence of a functioning board,” says newly installed board director Zachary Carter. Not surprisingly, it reads like a back-up for the indictments: Spitzer appointed the board, and the board commissioned the report by Kroll Associates to be independently conducted and submitted to Spitzer.

What’s striking is the detailed account of the financial tactics that allowed the alleged fraud to go on for much of the past decade without employees, board members or government oversight agencies sounding alarms. The story was uncovered last year by The Daily News after someone called the newspaper to complain about conditions in an apartment building. It turns out the building was run by Hale House, and soon the entire operation began to unravel.

Following is a summary of the Kroll report.

The Money

Although it housed at most 13 children at one time in recent years, Hale House raised money as if it were a significantly larger. Backed by Mother Hale’s saintly name, Lorraine Hale and DeVore wooed donors with tales of imminent collapse, while plying city and state officials with ambitious plans of expanding services.

“It would be wonderful not to have to worry about whether there will be money to buy enough diapers or baby formula or breakfast cereal,” read one letter. Another, which the Kroll report says was written by DeVore, read, “Unless we find a few new friends to help us, Hale House could close. The bottom line is: I have to find a way to raise money to keep my babies in food and diapers.”

Such fund-raising strategies netted more than $20 million between 1998 and 2001. The direct mail campaigns alone raised almost $24 million between 1994 and 2000 – half of it going to Newport Creative Communications, which ran the

The pleas included updates on programs that were in fact no longer running.

For instance, more than 10 years ago the city of New York sold Hale House a building for $2 to host Homeward Bound, a program to provide apartments (for $280 a month) to mothers completing drug rehabilitation. Hale also secured $2.85 million in state funds to renovate the facility’s 34 apartments – one for a resident social worker and 33 for qualified families.

By 1992, Hale had canceled Homeward Bound.

A year later the city gave Hale House another six-story apartment for $1, this time for a “multiple dwelling to provide foster care apartments for the therapeutic care of infants and young children.”

Services at both buildings quickly dwindled to nothing, but Hale House continued to rent out rooms. Some were rented to employees and Hale family members. Hale House even provided an office for DeVore’s Faith Journey Productions, which produced one off-Broadway musical entitled Faith Journey.

With the cash flow from fund-raising and rent, Hale could divert money for personal accounts and services while leaving enough money to care for the kids at the House. That doesn’t mean the care was top-quality. Hale hired Ivan Black in 1992 to oversee health issues for the children, knowing that his medical license had been revoked after a conviction for conspiracy to distribute a controlled substance.

Hale got more money by cashing out two Hale House insurance policies, worth a combined $488,650, and putting the proceeds into her private account, renovating her home in Scarsdale (including a new Jacuzzi) and paying off part of nephew David Hale’s college tuition.

DeVore got a $412,912 loan for Faith Journey. Hale then attempted to cover half the repayment of the loan by donating art to Hale House, valued at $210,000 by a conjured art appraiser.

The investigation also uncovered a secret $800,000 account at Carver Bank. Former Hale House Chief Financial Officer Maurice McHugh told investigators that the balance consisted of donation checks that were reported missing or stolen. Hale controlled the account along with DeVore, who used a false identity to endorse checks.

All told, Kroll estimates that Hale and DeVore diverted $1,581,487 from Hale House.

Why It Worked

Why didn’t anyone – most notably the officials at the charities bureau of the Attorney General’s office, who oversee New York City’s 40,000 nonprofits – notice or act? Hale and DeVore shielded themselves from scrutiny using a formula that provides a roadmap to cashing in at a nonprofit.

The key was eliminating any trace of a board of directors. According to Kroll, Hale House had no semblance of a board for 10 years. “At best, there were sporadic meetings until 1994,” said the report, adding that a number of post-1994 employees said that no board existed.

Officials at charity monitoring organizations say board-tampering (albeit on smaller and less self-serving levels) is not unheard of.

“One of the things we recognize is that a prominently named board can be helpful in fund-raising, may even be a very important factor” in some donors’ decision to make a gift, says Bennet Weiner, chief operating officer of the Better Business Bureau’s (BBB) Wise Giving Alliance. “That in part is what might influence a charity to have someone on their board even though they knew that person couldn’t or wouldn’t participate.”

But maintaining the ruse of a board made entirely of unknowing participants and fictitious characters, says Weiner, would be tricky. “When we evaluate, we look to see that a board of directors meets at least three times per year. We ask for attendance rosters, who attended and did not, and other documents. So if someone is going to be deceptive, they would have to follow that through pretty well.”

That, according to Kroll, is exactly what Hale did, preparing false documents to file with the city attesting to meetings that never occurred. Hale added people to the board without their permission and listed their names on the agency’s federal tax forms. Several of those people later told Kroll that they were never part of the board.

The board also included “treasurer” Patricia Simon (a fictitious person) and Jason Brown, the name DeVore used to sign checks for the secret Carver account. Simon’s signature appears on numerous board meeting documents and resolutions, put there by former Hale House bookkeeper Martha Treminio. Treminio told investigators she believed Hale’s explanation that Simon lived too far away to come in for meetings – even though Simon’s fictitious address was across the street from Treminio’s own residence.

McHugh (the former financial officer) and Treminio signed documents verifying board resolutions to open bank accounts.

The Kroll investigation revealed one possible explanation for staff reticence: A number of employees “in a position to observe or prevent wrongdoing” received special loans or payments. Treminio received $10,752 in loans between 1996 and 2001, along with day care at Hale House for her daughter – at $3 a day. McHugh got a $50,000 loan to pay for his divorce proceedings.

Even the Hale House handyman, who often made deposits for Hale, got a $7,000 check.

In total, the report says, Hale’s relatives and employees collected $174,236 in loans, direct payments and other benefits beyond their salaries.

Even if a board had been in place, the number of willing participants and tactics used by Hale probably would have enabled her to divert money for awhile without it being noticed.

“This is not something that’s done regularly, but if [a nonprofit] wants to do something to break the law, there’s no early way of stopping it,” says Lynn LaMontagne, a spokeswoman at Boardsource, which serves as a resource for information and leadership development practices for board members. “If someone is determined to be fraudulent, a lot of damage can be done before a board even detects it.”

Nevertheless, says LaMontagne, “there is clearly something wrong” when charity-monitoring authorities do not pick up on any discrepancies that occur over the course of a decade.

The BBB’s New York City division has records on Hale House going back to 1992, the most favorable of which reports that the charity failed to provide information. The reports indicate that Hale House never used more than 50 percent of its income on programs.

That indicates that “there were problems,” New York BBB’s spokeswoman Jennifer Lammers says. Lammers also says that BBB made sure the charities bureau routinely received updates of all the groups that failed to meet the bureau’s 24 basic standards – a list that Hale House routinely appeared on after 1992.

But Lammers doesn’t see the charities bureau as the pre-eminent problem in this debacle. “Reputation is a big part of how groups fund-raise well,” she says. But reputation is also the easiest mask for groups seeking funds from people whom Lammers says are often less interested in returns than they are on “feeling good.”

“People need to check out who the director is, what records of the nonprofit are available. If the organization won’t provide you with what you want,” she says, “that itself should be a red flag.”