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SPOTLIGHT REPORT | CHARITY BEGINS AT HOME

Some officers of charities steer assets to selves

This article was reported and written by the Globe Spotlight Team: Reporters Beth Healy, Francie Latour, Sacha Pfeiffer, and Michael Rezendes, and editor Walter V. Robinson.

First in a series of occasional articles.

When Jennifer Felton Cabot was married in November 2001, in Boca Grande, Fla., where her parents have a winter compound on the Gulf of Mexico, the wedding announcement appeared in The New York Times. And her father, Paul C. Cabot Jr. of Needham, made sure the ceremony was a top-shelf event. The wedding, he said this week, cost almost $200,000.

Now, questions about the source of the $200,000 may eclipse the wedding memories. Cabot, the son of legendary Boston investment banker and Harvard treasurer Paul C. Cabot, paid for the wedding by using funds from a foundation his late father established to benefit tax-exempt charitable causes.

For Cabot, charity indeed begins at home: From 1998 through 2002, he tapped the assets of the Paul and Virginia Cabot Charitable Trust, of which he is a trustee, to pay himself $5,185,216. His annual salary topped out at $1.4 million in 2001 -- a year in which, he says, he gave himself a raise to help pay for the wedding.

During the same five years, Cabot donated an average of $400,000 a year to charities; and the foundation's assets have now dwindled to $5 million.

The vast majority of private charitable foundations -- there are more than 60,000 of them in the United States -- are governed by trustees who take no compensation at all. But an investigation by the Globe Spotlight Team has found scores of foundations whose tax returns show that officers and directors are themselves the principal beneficiaries of foundation assets that are intended for charitable causes.

In some cases, pay to foundation officers exceeds annual donations, draining away funds that could otherwise support hard-pressed charities. Federal rules governing foundations require that any compensation be "reasonable."

Some examples that appear to flout that federal guideline:

* A gilded retirement package for the head of The William T. Morris Foundation of New York. The foundation more than tripled its president's compensation to more than $900,000 between 1997 and 2001. An $88,000-a-year foundation employee also doubles as a driver for the president, who is 86 and semiretired.

* The Hocker Foundation of Rancho Santa Fe, Calif., which wrote just three grants over four years, a total of $265,000 that all went to one charity, a hospital. During the same four years, the trustee, who lists himself as a full-time employee, was paid $580,000. He also violated rules governing private foundations when he took a personal loan from the foundation for $200,000, which he repaid.

* A San Francisco-area foundation, Franklin Holding Corp., paid its chairman $3.5 million in 1998. That year, its charitable donations amounted to just $1.6 million, all of that donated to a hospital.

* The Lucille and Vic Wertz Foundation of Chicago, endowed by Wertz, a one-time Red Sox and Detroit Tigers slugger. After Wertz's widow died, her two brothers took control of the foundation. Over one recent five-year stretch, they paid themselves more than $1 million in trustee fees from the $7 million in assets, while donating only to $175,000 to charities. Wertz's philanthropic focus on youth groups has been largely abandoned. The brothers, Richard T. and George T. Caleel, did not respond to repeated requests for an interview.

* The Gerda Lissner Foundation in New York was created to give grants to talented young opera singers, but its assets have dropped from $16.2 million to $12.4 million since 1998. During the same period, foundation director Betty Smith's salary has more than doubled, from $114,583 to $281,153. Smith said the foundation's board decided the raises were merited. But one of the board's directors, Edmund W. Badgley, said he never voted for any increase, and expressed surprise at Smith's compensation. Smith said Badgley was not present at meetings in which the raises were approved.

The world of foundations and trusts is regulated by the Internal Revenue Service and state attorneys general. But in practice, these charitable organizations operate virtually without scrutiny. The IRS audits only about 120 private foundations a year. And few states have the resources to keep track of the annual tax returns that flood their offices.

In an interview yesterday, Jamie Katz, chief of the Massachusetts attorney general's public charities division, said that because of an "antiquated database," his office does not even know how many private foundations -- those established by individuals -- there are among the 22,000 public charities in the state. And because private foundations operate largely out of public view, Katz said, complaints about them are rare.

Foundation directors defend hefty annual fees, even when their roles require only occasional involvement. And there are many whose roles fit that description.

A Globe analysis of public federal tax filings by thousands of foundations found hundreds of cases around the country where people who oversee charitable foundations received tens of thousands -- and sometimes hundreds of thousands of dollars -- for attending a handful of annual meetings.

In some instances, the tax returns show that well-paid directors worked "zero" hours. In others, the duties are minimal.

For example, the charter of a $28 million Philadelphia foundation, the George Jr. and Harriet E. Woodward Trust, dictates that the same seven charities receive the same grants each year. Nonetheless, payments to the two trustees averaged more than $100,000 a year between 1998 and 2002.

And in Danville, Va., the three non-bank trustees of the $21 million Carrington Charitable Trust have received annual fees averaging more than $40,000 each, even though the foundation tax returns report that they spend just 15 minutes a week on foundation business. That's a compensation rate of more than $3,350 an hour.

In an interview last week, trustee B. Carrington Bidgood said the tax return actually overstates his commitment. "Five minutes," he replied when asked how much time he devotes weekly to the foundation. "I don't keep track of all that. We have one meeting a year, and that's all," Bidgood said.

In the face of inaction by the Internal Revenue Service and state regulators, even obvious cases of excessive compensation almost always escape official notice. Cabot, for instance, said that his compensation has never been challenged by either the IRS or the office of Attorney General Thomas F. Reilly. "The foundation's tax returns have been sitting in the AG's office since day one. And they haven't ever raised any clamor," Cabot said.

In most cases, it takes a complaint to prompt official action. In Texas and Ohio, attorneys general launched investigations of two private foundations, but only after family members complained about alleged plundering of the assets by foundation officials. State officials say the IRS has not yet taken up either case.

At both foundations, the Globe found, the alleged wrongdoing was more extensive than has been reported in local newspapers.

In one, involving the Charles H. Dater Foundation of Cincinnati, records in a civil lawsuit contain evidence that the foundation's five directors, three of them Merrill Lynch brokers, took legal and director's fees and brokerage commissions of at least $9 million over several years. At least $2 million of that came from commissions the stockbrokers earned by frequent buying and selling of stocks for the foundation and the Dater estate, the lawsuit says. Last year the foundation had assets of $40 million.

Despite such publicized examples of alleged abuses by foundation officials, calls for greater regulation of the industry have had little effect. Congress last month backed away from imposing substantial new restrictions on private foundations after heavy lobbying by foundation officials.

But the Globe investigation, which used a computer database to sort through tens of thousands of tax returns filed annually by private foundations, found that the abuses are more extensive and deeply rooted than government regulators and foundation experts have thought.

Especially among smaller foundations, those with assets under $20 million, the Globe found numerous cases in which the officers and directors receive more money than the foundations award in charitable grants.

Bruce R. Hopkins, a Kansas City lawyer and author of "Private Foundations," a detailed survey of foundation tax law and compliance, expressed astonishment at some of the Globe findings, especially the compensation taken by Cabot and the president of the Morris Foundation.

In both cases, he said, the pay is excessive, based upon the legal standard that compensation for foundation officers must be "reasonable" -- and reasonableness is determined by what other people doing the same sort of foundation work would receive.

Hopkins, when told that Cabot acknowledged boosting his salary to $1.4 million to pay for the wedding, said such practices are appalling but not unheard of in foundations. "You have this mindset in some quarters that if you need the money, you dip into it," he said. "That's not the way it works. These are charitable dollars, and they ought not to be spent that way."

Cabot's father, Paul Codman Cabot, who died in 1994, was a paragon of Brahmin frugality. A founder of State Street Research & Management Co., Cabot was said to be so indifferent to his station in life that he worked out of a sparsely furnished office and wore shirts with frayed collars.

Paul Cabot Jr., who is now 73, said this week that he took only modest compensation, which he estimated to be $50,000 to $60,000 a year, from the foundation until a New York energy company of which he is chairman began to have financial difficulties in the mid-1990s.

In 1998, the earliest year for which the Globe has the foundation's tax return, Cabot paid himself $510,202. The next year, he gave himself a $370,000 raise -- to $880,263. In 2000, he paid himself $1,058,233. For the year of the wedding, he increased his salary to $1,418,278. Last year -- the foundation's fiscal year runs from Feb. 1 to Jan. 31 -- Cabot took a slight pay cut, to $1,318,240.

During three interviews this week, Cabot chose to explain, rather than defend, his compensation, describing it as "probably excessive" and "a little more than reasonable." He decided to take such a high salary, he said, because he needed the money. By his own estimate, Cabot said he could probably hire a financial manager for less than $100,000 a year to oversee the investments. The grant-making, according to the tax returns, is almost pro forma: Year in and year out, most of the money goes to the same charities.

Cabot, who has long worked in the investment management field, said he manages the foundation's portfolio himself. But under his stewardship the foundation's assets have dropped from $14 million in the mid-1990s to $4.9 million early this year, according to the foundation's most recent tax return.

Some of that decline was the result of his high salary. But Cabot attributed the drop in asset value in large part to a bad investment decision: He put 30 percent of the assets into two energy stocks, El Paso Energy Corp. and Duke Energy Corp., he said, only to see the stock shares plummet. "I got my head handed to me," Cabot said.

When the Globe first asked him about the raise he gave himself in 2001, Cabot said he did so "because I had to marry off a daughter and it took a little bit more than I had anticipated." At first, he said the wedding cost $118,000, but later said its actual cost was about $200,000. "Things don't come cheaply in Florida," he explained.

Asked if the foundation paid for the wedding, Cabot replied: "Yes. No question. The foundation pays for anything I do."

If Cabot now faces a public accounting, he may also have to answer questions from his brother and his two sisters. The sisters, Virginia C. Wood and Elizabeth C. Minot, are unpaid cotrustees of the foundation. Even so, Cabot said his siblings are unaware of his high salary. He said he sends his sisters only a list of the charitable donations each year.

Under IRS regulations Cabot could be forced to repay the foundation, with penalty, any amount that is judged to be unreasonable compensation. His two sisters, because they are trustees, could also face fines if the IRS takes action.

The cost of charity is also steep at the William T. Morris Foundation. In 2001, the last year for which a tax return is available, the New York City foundation spent $2.8 million to give away $1.8 million, with the salaries of top officials rising rapidly even as the foundation's assets diminished.

The foundation wrote checks to just 28 charities in 2001, the vast majority of them repeat recipients.

By far the foundation's largest cost is the pay and perquisites for Edward A. Antonelli, the foundation's longtime president, who is 86, and Bruce A. August, the foundation's second-ranking official. In 2001, Antonelli received $809,750 in salary and $121,312 in benefits; August was paid $736,750 in salary, $110,362 in benefits.

Between 1995 and 2001, Antonelli's salary quadrupled.

But there are other costs to support Antonelli. Amol Patil, who received $88,000 in salary and $12,000 in benefits in 2001 as a "portfolio manager" at the foundation, told the Globe in an interview that he also doubles as Antonelli's driver.

Patil also said Antonelli "still plays an active role" in the foundation. But Carol Panagi, Antonelli's landlord and neighbor in the four-unit apartment building in Bayside, Queens, where Antonelli lives. Panagi said that Antonelli rarely leaves his apartment, except when a driver comes to pick him up.

Because of Antonelli's failing eyesight, Panagi said, he no longer drives. "His health isn't the greatest," Panagi said. "I know he can't see because he bashed his car into my garage several times.... People are driving him back and forth, running errands, maybe taking him to the office, or what have you."

In a brief interview at his home, Antonelli acknowledged his role as president of the foundation, but refused to answer any questions about it. "Write a letter!" he snapped shortly before slamming the door shut. "This is not my place of business."

August, reached by telephone at his home in Westport, Conn., also refused to answer any questions, other than to deny that Patil serves as Antonelli's driver. August said he would consider questions only if they were sent to him in writing, by mail. He said he would not consider questions sent by fax or e-mail.

Two of the Morris Foundation's part-time directors, both of them elderly, said they were unable to shed much light on the foundation's operations. Arthur C. Laske Jr., of Trumbull, Conn., who is listed as the Morris Foundation's treasurer, said he knows nothing about the foundation's finances. "I don't get involved with those figures at all," Laske said.

The other director, Wilmot F. Wheeler Jr. of Southport, Conn., when asked whether Antonelli's compensation is appropriate, said: "I do have an opinion about it. But I'm not going to give it to someone who is calling me on the telephone." When a reporter went to his home to talk in person, Wheeler refused to be interviewed.

Cabot, in contrast, was agreeable to answering questions, although last night he said his lawyer had told him "to shut up. I have broken no laws." And he made it clear he has taken such a large slice of the foundation's assets to maintain an affluent lifestyle.

Just for his living expenses, Cabot said, he needs after-tax income of $30,000 a month. "My wife, I give her $10,000 a month, too. She seems to think it's not enough, like most women," he added.

He said he still has mortgages to pay, although he and his wife, Jennifer, have substantial property holdings: They bought a $1.3 million home in Needham in 1996. The same year, they bought two waterfront lots and built two homes on a barrier island in Boca Grande. The two homes have an assessed value of $2.2 million. His wife also owns a 25-acre waterfront home in North Haven, Maine, that is assessed for tax purposes at $1.48 million.

One major reason he takes such a large salary, he said, is because of the high taxes he is forced to pay on his salary. "Thanks to the tax code, that's why the salary figure seems so inflated.... The only way I can pay my taxes is to take more money out of the [foundation]. "

To underscore that point, Cabot read to a reporter from his own personal tax return for 2002. "My adjusted gross income was $1,337,000. And the total tax was $470,000."

Cabot said, however, that he realizes that drawing such a large salary would eventually empty the foundation's coffers, although he said the rising market has bolstered its assets some. For this year, he said, he hopes to reduce his salary. "I hope it will be under $1 million," he said.

"I do not squander this money on Ferraris or 85-foot yachts," Cabot said. "I live a fairly modest life."

Matt Carroll of the Globe Staff contributed to this report.

Paul Cabot
Paul Cabot
Paul Cabot Jr.
Paul Cabot Jr.
Lucille and Vic Wertz
Lucille and Vic Wertz (1955 Globe File Photo)
Charity begins at home
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Spotlight Report The Boston Globe Spotlight Team would like to hear from readers who have information about this issue. The Spotlight telephone number is 617-929- 3208.

Confidential messages can also be left at 617-929- 7483.

The e-mail address for the Spotlight Team is spotlight@globe.com

Foundation tax returns are available for public viewing at www.guidestar.org
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