Utility group transaction under scrutiny

Mike Aguirre's clients expose problematic transactions at UCAN.

Utility group transaction under scrutiny
FEDERAL PROBE INQUIRED ABOUT $1 MILLION INVESTMENT OF RENT-A-CENTER CASE AWARD
Nov. 2, 2012
Jeff McDonald
UT-SD

Back in 2005, the Utility Consumers’ Action Network collected $2 million from a class-action lawsuit against Rent-A-Center, a furniture and accessories retailer based in Plano, Texas.

Terms of the award to the San Diego-based consumer protection group required UCAN to keep the money in California. The funds were to be set aside for nonprofit efforts to educate people about their legal rights.

The agreement was signed by former UCAN Executive Director Michael Shames seven years ago last month.

Shames invested $1 million of the award in a money-market account and later in an out-of-state hedge fund called Red Rock Capital Fund LP.

The manager “isn’t promising, or even seeking, big returns,” Shames told UCAN board members three weeks before making the investment. “His is a very controlled form of risk-avoidance through 2-5 day investments in a diverse set of sectors.”

The $1 million investment sank in value by $287,000 within a year. The rest was withdrawn in a series of transactions, leaving a zero balance by the close of 2006, according to documents obtained by The Watchdog.

Shames has denied doing anything illegal or improper at the nonprofit group. He says allegations against him were independently investigated and found to be unwarranted.

UCAN Chairman Kendall Squires said he does not remember approving the investment in the fund, even though he was copied on an email regarding the buy-in.

“Recognizing that I was unaware of it at the time, as my memory serves now, yes, I’d be troubled by it,” Squires said. “I think it is a pool to be examined.”

Documents related to the Red Rock fund were specifically cited in a grand jury subpoena issued earlier this year as part of a federal investigation of the nonprofit.

Agents also sought records on Death by China Productions, an Orange County firm cofounded by Peter Navarro, the University of California Irvine economics professor and former San Diego mayoral candidate who consulted Shames on investment strategies.

Having Navarro involved in the decision to invest in Red Rock “was a huge advantage and kept the analysts’ pitches very exciting,” Shames told UCAN directors in that same December 2005 email.

North Carolina steelmaker Nucor Inc. made a $1 million donation in 2011 to UCAN, which later agreed to turn over the same amount of money to Death by China. Documents of that transaction were also sought in the federal subpoena.

Earlier this year, UCAN filed for dissolution in state court after two employees raised questions about Shames’ management of the organization.

Among other things, they alleged Shames kept secret bank accounts, practiced law without an active state bar membership and accepted bonuses without telling the board or reporting the payments on UCAN tax filings. Shames says the allegations were all investigated and found to be without merit.

Shames declined to respond to questions about why he invested UCAN revenue in an out-of-state hedge fund.

In a statement he said: “The money market account to which (you) refer was a UCAN account, not a personal one. It is reflected in all of UCAN’s books and records and authorized by the board.”

The U.S. Attorney’s Office would not discuss the status of the federal investigation into UCAN business practices.

San Diego attorney Frank Fox was the lead lawyer in the Rent-A-Center case. He was responsible for filing periodic reports with the court detailing how settlement funds were spent.

Fox told The Watchdog that he only recently became informed about the UCAN investment in an Oregon hedge fund.

“I just learned of these allegations last week, and we are looking into them,” he said.

Michael Aguirre, the former San Diego city attorney who now represents two UCAN employees who came forward with allegations against Shames, suggested federal investigators should pay close attention to the transaction.

“Misdirecting consumer education trust money to an out-of-state hedge fund is a storm warning that regulators cannot prudently ignore,” Aguirre said.

Other records obtained by The Watchdog raise questions about the depth of the independent review commissioned by UCAN in response to the 2011 allegations by the two employees, David Peffer and Charles Langley.

According to attorney Paul Dostart, who billed UCAN more than $360,000 between April 2011 and July 2012, his review found no merit to the charges lodged by Peffer and Langley.

In an April 2011 email to Squires, Shames said Dostart “specifically instructed the auditors NOT to investigate any embezzlement or misuse of UCAN monies by me.”



Dostart last week said that assertion was untrue. “At no time have I ever instructed an auditor to not investigate and report any fraud, embezzlement, or misuse of UCAN funds,” he said.

Shames stood by his 2011 email.

“Mr. Dostart can explain why he made the decision he made,” Shames wrote in an email.

UCAN has not released an independent audit in years, even though state law requires charities with more than $2 million in annual revenue to do so. A draft audit for the year ending June 2011 cites numerous problems.

“In 2011, there was a discovery of three investment accounts held by the organization that were not included in the statement of financial position at June 30, 2010,” the draft states.

A separate letter to UCAN board members recommends sweeping reforms, including stricter controls and improved record-keeping. It also notes the charity still owes Death by China $350,000 and states, “We recommend that in the future transactions of this natured be discouraged.”

Squires said issues raised in the draft audit are being addressed and a completed review will be released this month.

UCAN also is seeking a new executive director to succeed Kim Malcolm and Pat Zaharopoulos, each of whom sought to succeed Shames this year but resigned in the face of ongoing challenges...

Whistleblowers, Aguirre Sue Utility Watchdog

Whistleblowers, Aguirre Sue Utility Watchdog
Utility Watchdog Hounded by FBI, Whistleblowers
March 9, 2012
By Rob Davis
VOSD

When the Utility Consumers' Action Network began the process of dissolving, its executive director described the effort as a ruse to elicit a lawsuit from former city attorney Mike Aguirre.

If so, it worked. Aguirre, who represents two UCAN whistleblowers, filed suit Friday, alleging that the organization's board and top leaders had breached their fiduciary duty by failing to take internal complaints about UCAN's financial management seriously. (Read the lawsuit here.)

We broke down the bulk of the complaints against UCAN when the organization filed to dissolve:

UCAN filed its intent to dissolve in San Diego Superior Court, saying in papers that it faced an "imminent threat to its ability to carry on," due in part to legal threats by members of its own staff. Still, it insisted the organization would remain viable, despite the major crisis it clearly faces.

The move comes a week after an FBI agent subpoenaed UCAN's internal records and nearly a year after two employees alleged that UCAN had embezzled money, awarded illegal bonuses, set up suspicious bank accounts and failed to properly audit its books. The organization says it has investigated those complaints and found them unsubstantiated.

What The Plaintiffs Seek: Audits of UCAN's books and all of executive director Michael Shames' payments and bonuses. Damages, restitution and attorneys fees. (No amounts were specified.) And they want declarations that UCAN's members can elect the organization's board and decide whether the group should dissolve.

Why They Sued: Aguirre explained it this way in a press release: "Every red flag for financial mismanagement and fraud has been raised as the result of internal inquiries by UCAN’s employees. But instead of investigating with a public audit as required by the organization’s charter, UCAN’s Board has met secretly with Michael Shames to conduct an orchestrated cover-up.”

What Shames Says: He said he hadn't seen the suit yet but believed it was likely rehashing allegations that UCAN had already investigated and found unsubstantiated. "I will be looking for tangible evidence, documents, something, to support their allegations and not a continuation of the insinuations we've seen thus far," he said.
One Substantiated Issue The Suit Alleges: That UCAN didn't properly audit its books in 2006 as required by state law. Shames acknowledged today that the organization should've conducted an audit that year by a certified public accountant. He said an accounting firm was in the process now of auditing its books for last year and 2006.