How a Lax Eye on Money Pushed Legal Aid to the Brink
By SUSAN SAULNY and RANDAL C. ARCHIBOLD, NY TIMES, July 8, 2004

Late last summer, an executive at the Legal Aid Society's headquarters in Lower Manhattan answered an anonymous call from a pay phone somewhere in the city. The caller, a woman who seemed knowledgeable about the organization's internal affairs, claimed that the agency's top financial officer had gone on a personal spending spree, charging tens of thousands of dollars to a Legal Aid credit card.

According to agency executives who recounted the events, the caller was referring to Theresa deLeon, the chief financial officer and a trusted veteran at Legal Aid, an organization that has represented indigent defendants in New York City for 128 years. The society opened an internal investigation and confirmed credit card charges that added up to more than $30,000, spent on things like pizza and shoes. Ms. deLeon later paid back the money and resigned.

But in the course of investigating the credit card spree, agency executives and board members were shocked, they said, at the level of financial mismanagement they discovered, with negligence so far-reaching that it threatened the very existence of Legal Aid. Though no malfeasance was found, investigators discovered over the next few months that financial officers had been neglecting their duties for years, operating without supervision or accountability to anyone at the society or on its board of directors, which had assumed a passive role, focusing mainly on fund-raising.

Financial reporting at Legal Aid was almost nonexistent, according to minutes of board meetings and interviews with board members, agency executives and staff members, several of whom asked not to be identified because of the continuing turmoil at the agency. Accounting systems and controls were inadequate, and there was no accounts payable system at all. The position of internal auditor had been vacant for two years, and when one was finally hired to sift through the confusion, she quit after nine months. In distress, the agency, financed largely by public money, took the unusual step of borrowing $18 million from Merrill Lynch to help ease its cash flow problems.

According to a member of the Legal Aid Society's board who answered questions on the condition of anonymity, "We had no management, no control, no projections, no knowledge of what was going on." He said the board learned of the problems for the first time in January. The board pressured several top officials to resign, including the chief executive, and has begun restructuring the agency's finances. "We acknowledge that we do need tighter financial control and reporting," said Patricia M. Hynes, the board chairwoman. "Some of that is in place, but we have more to do."

Legal Aid almost collapsed as a result of its mismanagement. It was saved from the brink of bankruptcy last month only by an $11 million infusion of cash from the city, and is now struggling out of financial distress by revamping its operations. But its financial crisis caused tremors throughout the courts, and it undercut Legal Aid's status as the nation's oldest and largest law firm for the poor.

The agency's many missteps also brought down a nationally known advocate for legal representation of the poor, Daniel L. Greenberg, who had led the agency through years of cutbacks under Mayor Rudolph W. Giuliani and had become the public face of Legal Aid, as well as its most resounding voice. He held the titles of president, chief executive and attorney in chief. Mr. Greenberg, 59, resigned under pressure on June 9.

Reached by telephone last week, Mr. Greenberg declined to discuss the situation and his role in it. On Friday, he issued a written statement expressing hope that the cash infusion and new financial systems would help the agency. "I believe that the organization is best served by new leadership during this time," he said. "My commitment is, always has been, and always will be to the indigent people we serve."

According to the minutes of a Legal Aid board meeting in April at the Manhattan law firm of Davis, Polk & Wardwell, Mr. Greenberg said that he took responsibility for the loss of financial control.

"As he reflected on what has happened," a member of the executive committee wrote, "he said he realized that he did not provide the kind of supervision he should have."

The Legal Aid Society was founded in 1876 to protect immigrants. At first it operated on philanthropic gifts, but after the 1963 Supreme Court ruling establishing the right to counsel for the poor, the city hired the agency to represent indigent defendants. Agency lawyers went on strike in 1994 for higher wages, but backed down when Mayor Giuliani threatened to terminate Legal Aid's contract and use private lawyers. Mr. Giuliani later reduced the agency's role in the city's courts and cut its budget.

Mr. Greenberg joined the agency just after the 1994 strike, and in the following years oversaw expansions of Legal Aid's civil services in such areas as employment, immigration, health and homelessness, while maintaining enormous criminal caseloads, even as public financing decreased.

He also expanded the authority of his office, winning board approval to change the bylaws so that he could be president of the board and chief executive, in addition to attorney in chief. The assumption, officials said, was that he would be a hands-on liaison for the directors and the management and staff.

But the arrangement failed, according to agency staff members and executives, in part because Mr. Greenberg's attention was focused on litigation and the costly expansion of the agency, and in part because the board failed to notice that Mr. Greenberg's staff was not in control of the agency's books.

"The fiscal meltdown at the Legal Aid Society finally opened the board of directors' eyes, forced them to finally engage in the job of fiscal oversight, which was always their responsibility," said James Rogers, the president of the union representing Legal Aid lawyers. "So Legal Aid is on firm financial footing now, but that doesn't change the board's responsibilities and liabilities. Their job is to oversee taxpayer assets that need great care because services to the needy are dependent on the care they bring to the organization."

Board members say they simply never received the bad news.

"The board basically was relying upon the reports management was giving them, and those reports were basically oral reports," said Ms. Hynes, the board chairwoman, in an interview last week. "The board was not receiving detailed financial reports except at the end of the year."

Ms. Hynes, a lawyer at the firm of Milberg, Weiss, Bershad & Schulman, said she could not recall the board ever having had a discussion about deficits.

In fact, the agency has run a deficit every year since 1996, according to its annual financial disclosure forms, ranging from $1.8 million in 1997 to $9.9 million in 2000.

New York City, which provides nearly half of the society's annual budget through its $68 million contract for criminal defense representation, also exercised little financial oversight. City officials say that until recently they watched only how the city's dollars were being spent.

John Feinblatt, the city's criminal justice coordinator, said the city's review of the criminal defense work in the past two years showed surpluses. But he said that with the city's agreement to give the society a one-time cash infusion of $11 million, the city will now more broadly audit and examine the society's books.

"We will look at the whole enterprise," he said. "We will require much more than we did in the past." In the future, he said, city officials would meet with the society's financial staff on a quarterly basis and receive monthly cash flow statements. In addition, the city now has the right to bring in outside financial auditors if it suspects anything amiss.

The New York attorney general's office, which oversees nonprofit organizations, has begun looking into what went wrong at the society.

"We've had preliminary discussions with the Legal Aid Society regarding a number of issues at the organization," said Juanita Scarlett, a spokeswoman for Attorney General Eliot Spitzer, and did not elaborate.

Legal Aid's bylaws insure board members, officers and staff members individually against lawsuits as permitted by the state's Not-for-Profit Corporation Law.

One transaction that has raised the ire of the staff at Legal Aid concerns Mr. Greenberg's housing arrangement. Two years ago, the board allowed him to purchase, for $420,000, an 1,850-square-foot co-op apartment that Legal Aid owned in a Park Slope brownstone near Prospect Park. Many staff members believe the price was below the apartment's true market value, although an independent appraisal provided by the board shows that the price was at fair market value. As layoff notices circulated in recent weeks, the sale was cited often as an indication of how Legal Aid wasted money.

Legal Aid nearly ran out of money in the spring and feared it could not meet its regular payroll expenses. The city's bailout helped shrink a deficit that had been expected to reach $20 million this fiscal year. And, although some layoffs may still be necessary, it saved the jobs of 140 criminal defense lawyers.

But in the weeks before the budget agreement, the sudden, largely unexplainable crisis left directors wondering what to report to their firms, among them the most highly recognized legal names in the country.

"It was suggested the directors should be given talking points they could use in explaining the situation at their firms," according to official notes from a February meeting at Davis Polk. The notes also mentioned that a "strategic communications expert" had been brought in to help. The main message, according to the Ms. Hynes, was to be this: "Emphasize that the funds were used for client services."

Except for the $30,000 that Ms. deLeon spent on herself and later repaid in full, there is no evidence that malfeasance played a role in the crisis, according to interviews and a review of internal documents. Rather, the agency's woes seem to be the result of sloppy bookkeeping and a lack of accountability.

Steven Banks, the group's associate chief attorney who has temporarily taken the agency's helm, suggested that Legal Aid had simply focused so intently on its courtroom work that it failed to notice what was happening to its books.

"It's clear that the quality of our infrastructure did not match the quality of our client services," said Mr. Banks, who assumed Mr. Greenberg's duties as chief attorney three weeks ago on an interim basis while a search committee looks for Mr. Greenberg's permanent successor.

It was Ms. deLeon's job to supervise the agency's finances while the lawyers handled the litigation. Agency executives say she had never managed the finances of a $150 million organization like Legal Aid before, and frequently found herself overwhelmed with the task. Ms. deLeon, an accountant, was previously chief of staff at the city's Department of Housing, Preservation and Development.

In an interview, Ms. deLeon - the Republican candidate for a New Jersey congressional seat in 1998 and 2000 - did not deny that she had charged $30,000 in personal expenses to the company credit card, though she said she paid back any money she owed, when asked. Regarding the financial mismanagement, she said the agency had received "clean audits" during her tenure, although she could not remember who did the audits or how many there were.

"All I can say is, we tried to keep the services going for clients," she said.

The financial meltdown does not seem to have diminished the quality of criminal defense services Legal Aid has offered the poor over the past several years. Legal Aid's 880 lawyers handle 210,000 cases a year.

"There have been no reports of negative impact on services actually rendered to clients," said John H. Doyle III, a defense lawyer at the firm of Anderson, Kill & Olick, who is the chairman of the Council on Criminal Justice at the Association of the Bar of the City of New York. Mr. Doyle's assessment was shared by several lawyers and judges interviewed for this article.

But the agency has not ruled out the possibility of diminished services for the poor in civil legal matters, which are financed by a patchwork of private contributions and grants from foundations and governments. Though this is a relatively small part of the agency's work, it often infuriates city officials when the agency sues the city on behalf of aggrieved clients. Legal Aid officials say they are making every effort to avoid such steps and maintain full legal services related to housing, immigration, employment and family law, but for years the society had fed deficits because it had underestimated the cost of many of those services.

Along with the inability to predict its real costs, the agency also suffered from effects of the Sept. 11, 2001, terror attack, executives said. The building that housed Legal Aid's Church Street headquarters suffered damage when the World Trade Center was attacked, and the agency was forced to move at a time when it was helping many attack victims and others who encountered hard economic times after the attack.

One of the first things Ms. Hynes did after becoming the board chairwoman in December was to appoint a task force to sort out the financial mess. The task force's first report was not reassuring: it discovered that "no internal financial statements were prepared" and that "the financial forecast is grim," according to the minutes of the meeting where the report was discussed. It also found that Legal Aid would run out of money by April 1. A $9 million line of credit at Merrill Lynch had been exhausted; the board decided to borrow another $9 million.

Other committees and subcommittees were formed to investigate real estate deals and auditing practices, and to determine if there was any criminal wrongdoing. Ms. Hynes said no malfeasance was found.

An outside management firm, Kiwi Partners, which has expertise in solving the financial problems of nonprofit groups, was retained to act as a temporary chief financial officer. Another management firm, Alvarez & Marsal, volunteered its services to help restructure the organization. From now on, Ms. Hynes said, lawyers will be keeping track of their hours, and the financial officer will report directly to the board.

In addition to Mr. Greenberg and Ms. deLeon, two other employees - the controller and a woman who had served as chief operating officer and development director - resigned as the financial picture became clear.

"It is just not right, but there were people on staff who did not serve the society well, unfortunately," Pat Bath, the spokeswoman for Legal Aid, said last week. "But we are moving forward, not backwards."

Ms. Hynes, a former federal prosecutor specializing in corruption and fraud, said despite the apparent gloom, she remained optimistic about the future of Legal Aid.

"The silver lining of these problems," she said, "has been our ability to really step back and overhaul the society to make it work better, to make it work more efficiently, and ultimately to be in a position to deliver, we hope, more services to clients."