FBI Probes Tax-Funded Child-Care Foundation

A California foundation whose widely acclaimed child-care program has been championed by powerful legislative leaders is under federal grand jury investigation for possible misuse of more than $1 million in taxpayer funds, The Times has learned.

The criminal investigation, spurred by a state auditor’s report, is focusing on whether top officials of the Foundation Center for Phenomenological Research improperly spent money intended for poor children.

Sources familiar with the FBI investigation say that federal agents are examining whether the Sacramento-based foundation’s executive director, Marilyn K. Prosser, used money from the nonprofit enterprise to purchase property in her own name and lease it back to the organization.

They also are trying to determine whether the private foundation, which receives most of its funding from public sources, used California money to help secure a multimillion-dollar contract in New York City and whether it had business relationships with Prosser family members that gave them exorbitant profits.

On advice of her attorney, Prosser declined to comment. But other foundation officials and advisers deny any wrongdoing, saying that the organization is the victim of overzealous investigators who do not understand its intricate accounting system.

One of the largest publicly funded child-care providers in California, the foundation operates 10 programs in private homes in Los Angeles County, where it also has three centers, including the David Roberti Child Development Center in South-Central, which is named for the state senator and is considered the “jewel in the crown” of the group’s facilities, officials said.

The investigation has shocked and saddened the group’s supporters and its officers, who have received international recognition for a program that serves 2,300 immigrant and poor children in California from just south of Oregon to the Mexican border.

“I firmly believe the Foundation Center has done nothing wrong,” said Donne Brownsey, a consultant for the foundation and a former top aide to Roberti (D-Van Nuys). “I have never seen anything that has led me to believe that anything wrong has occurred, anything criminal has occurred. It’s just shocking to think that people would even make that allegation.”

While federal prosecutors present their case for possible indictment, two state agencies--the Department of Education and Department of Health Services--are examining the foundation’s handling of more than $20 million in state and federal government contracts over the last three years.

A number of financial reviews have spotlighted questions about the foundation’s practices:

* The state education department recently notified the foundation that preliminary findings contained in a financial report by an outside accountant show that $429,243 to $1.1 million may have been misspent in a three-month period in 1992. The foundation receives more than $8 million annually in state and federal funds for its California programs.

“These are stunningly huge amounts of precious child development dollars allegedly illegally spent by the foundation,” Deputy Schools Supt. Robert W. Agee wrote in a letter to the foundation.

The financial review, conducted by the Alexandria, Va., firm Cotton & Co., identified expenditures that the education department considers questionable--either because they cover old debts or appear to have nothing to do with the care of children. Education department officials had turned to Cotton & Co. to verify earlier findings by state controller’s auditors.

Sacramento attorney James M. Mattesich, who is representing the foundation, contended that the Virginia firm misunderstood the organization’s financial records and as a result had reached the wrong conclusions.

* Auditors, including the foundation’s accountant during the course of a routine audit, raised concerns about high fees paid to family members and friends who made short-term loans to the organization. An April, 1993, controller’s survey said the fees amounted to “exorbitant interest rates.” Lenders earned a 10% fee even when they got their money back in as little as three days.

Foundation officials said in a written response to The Times that the short-term loans were needed to tide them over when payments from the state were late. They argued that the fees were akin to those paid by private companies in similar circumstances. They said Prosser paid the fees out of her own pocket, but her auditor noted that the fees were paid by the foundation.

* A Department of Health Services audit released in January demanded that the foundation pay back 90% of a $232,000 grant it received to provide no-smoking classes to parents and teachers. Health services auditors said there was no evidence that the foundation held all the classes its contract required--noting that at one center an employee admitted that attendance sheets had been falsified.

Mattesich said he is confident the foundation will be successful in appealing the finding.

* A report by the foundation’s accounting firm disclosed that the taxpayer-supported group loaned Prosser $344,063 in the fiscal year ending in June, 1991. Foundation officials said in their written response to The Times that their accountants mistakenly recorded some transactions as loans, when they were not.

The foundation’s accountant also noted in his audit that as of December, 1993, Prosser still held title to a movable classroom the foundation bought from her for $260,000 in June, 1992. Foundation board members say that even though the title was not transferred, they feel confident of Prosser’s word that the foundation owns the classroom.

Longtime admirers of the foundation say they have not wavered in their support, and many share foundation officials’ views that their troubles stem from personality differences with education department officials.

“I had never ever before or since seen a program equal to those run by the Foundation Center,” said Sue Toigo, who as one of the founders of the advocacy group Children’s Lobby used to make the rounds at the Capitol on behalf of the foundation.

Since it opened its first center in 1980, the foundation has been showered with accolades for the quality of its Montessori programs, aimed primarily at Spanish-speaking children.

What caught the eye of experts, state legislators and New York City officials who asked the foundation to start programs there is an apparent high rate of success at raising the self-esteem and hopes of children living below the poverty line. Although measuring the success of preschool programs is difficult, teachers at the centers say their pupils often are ready to skip grades when they leave the program to enter school. Public school administrators often visit the sites to find out what gave them an advantage over other children.

In child development centers decorated with designer touches, needy children play with top-shelf educational toys, listen to the music of Beethoven or Mozart and eat organic meals by candlelight on china dishes.

“Beauty really calls to children,” said Antonia Lopez, the foundation’s education director. “If they are given things that are beautiful they learn to respect them--and themselves.”

Foundation officials say in their response to auditors that they manage to provide quality care for children at a low cost to the state by keeping their administrative expenses down--largely by relying on Prosser to handle all the financial transactions.

Education department evaluators who visited the centers over the years generally were impressed by what they saw, with one praising the foundation in a 1991 report for having an “excellent children’s program and physical environment.”

But it was the foundation’s expenditures for seeming luxuries that first raised a red flag for state auditors and eventually led to the federal investigation.

Four former employees went to the education department starting in mid-1992 to allege that the foundation was using government funds to upgrade property that Prosser privately owned and leased back to the foundation, and to purchase elaborate furnishings for the centers.

Among expensive items purchased, they alleged, were Native American rugs at $500 to $2,000 apiece, $15,000 worth of photographic work for a public relations package, and cellular telephones and compact disc players for the centers.

One former employee said that California funds were used to pay the salaries and air fare of nine foundation staff members who traveled to New York in May, 1992. The purpose of the three-day trip, he said, was to help set up day-care programs in New York City.

Foundation officials insist that no grant money was used to improve Prosser’s properties and defended the fine rugs and costly supplies as necessary to create an inspiring atmosphere for underprivileged children. They also maintained that no California money was used for New York ventures.

But the allegations by former employees prompted education department officials to request a financial review by the controller’s office. On April 7, 1993, auditor Alan Cates identified as much as $880,000 in questionable expenses out of $2.4 million the foundation received in state funds.

The amount, the controller’s office said in its report, included some expenditures for luxury items and also funds used to pay outstanding debts. In addition, it said the foundation “used state funds intended for the child-care program for non-program purposes,” which he called a “serious violation of child-care program regulations.”

Based on Cates’ findings, the Department of Education threatened to terminate the foundation’s contract.

In an effort to ensure continued funding, the foundation turned to legislators who have long been supporters of its programs, asking them to intercede on its behalf.

The foundation appealed to state Sen. Art Torres (D-Los Angeles), a longtime admirer of the foundation, who stepped forward to contact state Controller Gray Davis.

After Davis met with foundation officials at Torres’ request, his agency agreed to allow the foundation’s accountant to present arguments to an auditor who had been directed to re-examine the findings.

The second survey lowered the amount that was reported in the first survey to $363,000. It also removed a phrase particularly objectionable to the foundation that questioned its solvency.

A representative for Davis said it is normal practice for the controller to get personally involved in matters that generate telephone calls to his office. “The important thing is that we didn’t bow to any pressure,” said Carol Thorp, the controller’s special assistant.

The second survey still raised concerns about the foundation’s practice of paying high fees to employees, relatives and friends who loaned it cash. From July to November, 1992, the report noted, the foundation paid nearly $50,000 in such loan fees, leading it deeper into financial peril.

Even before the controller’s second survey was released, foundation officials discovered they had a more serious problem. Late in the afternoon of April 16, 1993, a team of FBI agents swept into their 19th-Century Sacramento headquarters, disabling computers with wire cutters and confiscating dozens of boxes of records and electronic equipment.

FBI spokesman Thomas P. Griffin confirmed that “we have a pending investigation and it’s before the grand jury” but refused to comment further. He did say that no political figures were included as targets of the investigation.

Sources close to the investigation have told The Times that one focus of the investigation is whether Prosser used government money to buy property she leased back to the foundation.

In the meantime, some of the foundation’s supporters in the Legislature wrote letters pressing the education department panel to continue the foundation’s funding. There is no evidence that legislators were aware of the FBI raid or the federal criminal investigation.

Its most powerful and persistent supporter has been Roberti, who said in a letter to Acting Schools Supt. William Dawson the findings of the controller’s second financial survey “would appear to be in no way sufficient to warrant the termination of the . . . contract.”

In a recent interview, Roberti said his primary reason for intervening was for the sake of the children in the programs.

“We ought to try not to disrupt the lives of the kids if it can be resolved in a less drastic way,” he said. “(The controller’s report) really struck me as a bookkeeping dispute,” he said.

Dario Frommer, a spokesman for Torres, said: “Everyone is so disappointed and discouraged with the turn of events. If there’s wrongdoing, what can we do? Art Torres knew nothing of any wrongdoing. His concern was for the kids.”

Ultimately, the education department granted the foundation another full year contract.