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SPOTLIGHT

Foundations veer into business

This article was reported by the Globe Spotlight Team: Reporters Beth Healy, Francie Latour, Sacha Pfeiffer, and Michael Rezendes, and editor Walter V. Robinson. It was written by Healy. Third in a series of occasional articles.

PALM DESERT, Calif. -- H. Norwood Berger was a frugal man. As he built his fortune in southern California real estate and banking, he was known to drive six hours to a meeting rather than pay for a plane ticket. On the way, he and his wife, Frances, often stopped at one restaurant because the prime rib dinner was only $14.95 -- for two.

Berger was determined that his thriftiness should outlive him: He bequeathed much of his fortune, including his Sacramento Savings & Loan, to charity through a private foundation, and admonished his heirs to invest the proceeds conservatively. The foundation headquarters, he said in a letter dictated shortly before his death in 1988, should not be elaborate, and the money should go to worthy charities, "not high expenses and salaries."

But Berger's vision seems to have died with him.

His former son-in-law, Ronald M. Auen, and other trustees have used the $462 million H. N. and Frances C. Berger Foundation to bankroll speculative real estate investments and to write large paychecks for themselves, the Globe Spotlight team has found. They once risked $100 million of foundation funds on distressed Texas real estate, in a deal that ultimately paid off for the foundation -- and for the trustees.

According to the foundation's 2001 tax return, Auen and six fellow directors took $4.2 million in "profit sharing" bonuses, despite the foundation's tax-exempt status and federal rules that limit trustees to "reasonable" pay.

Federal tax laws generally forbid charitable foundations from owning or operating for-profit businesses, and bar trustees from using foundation assets in any way to enrich themselves. But the Berger Foundation is not alone in seeming to skirt those laws.

William J. Chatlos, 57, president of the $91 million Chatlos Foundation of New York and Florida, is paid $170,000 for what he claims is part-time charitable work. But the tax returns show that Chatlos is paid another $193,640 for running Sun Ray Homes Inc., a real estate development company that his grandfather left to the foundation when he died.

High pay and perks are the rule at scores of foundations across the country. There are million-dollar salaries, luxury cars, generous pensions, health care benefits allotted for part-time trustees, and even private jets financed by organizations that, in exchange for significant tax benefits to their founders, support charitable causes.

But the excesses in a few cases go beyond the pay and perks documented in two prior installments of the Spotlight series. The Globe's investigation of hundreds of foundations also turned up cases of foundation executives using tax-exempt assets to propel for-profit businesses for their own benefit.

A lawsuit filed against William J. Chatlos by one of his sisters offers a glimpse into this aspect of the seldom scrutinized foundation world. It also affords a rare look at the inner workings of a family-run foundation, and at allegations of the pursuit of profits that have led to a bitter family feud.

Joy Chatlos D'Arata alleges in the lawsuit, filed in Circuit Court in Seminole County, Fla., that her brother is running a business within the foundation, taking excessive pay, and mishandling the foundation's assets. Specifically, she charged that Chatlos took improper pay from Sun Ray Homes -- and thus from the foundation -- of at least $543,000 from 1998 through 2000, and hid the compensation from family trustees.

The pay was apparently concealed from IRS regulators as well: The foundation's tax returns did not report until 2001 that Chatlos was receiving pay from Sun Ray in addition to his other salary.

The Chatlos Foundation was established to support educational, religious, and medical causes. Under federal law, it should have sold off at least 65 percent of Sun Ray Homes by 1987, five years after the company was donated to the foundation by the estate of William F. Chatlos, grandfather of the foundation president and D'Arata, the suit alleges. IRS rules say foundations that receive gifts of active businesses can retain only a 35 percent stake.

D'Arata charges that rather than divest shares of the real estate business, as the law requires, her brother expanded Sun Ray Homes and shifted $2 million of the foundation's charitable assets into it to do new property deals. The foundation's tax filings did not disclose the property dealings and were therefore "materially misleading," according to the complaint.

But William J. Chatlos's lawyers insist the foundation is operating lawfully because it merely collects rents -- a "passive" business pursuit.

Chatlos himself, interviewed by telephone in September, acknowledged that the foundationis "prohibited from being what would be called an active business." He said the foundation has sold or given away properties, such as a water and sewer plant and a hotel, to comply with tax laws governing foundations. He declined to comment on how he had time to earn two large salaries, saying only that both jobs are "time-consuming." His lawyers at the firm Greenberg Traurig defended his pay as reasonable.

Ronald Auen, 71, the Berger heir, also defended his compensation. "We have to take a salary," Auen said during a brief interview at his Palm Desert office. Asked whether it was proper to speculate in real estate with foundation assets, he ended the interview, saying, "If the IRS wants to talk to me, that's fine."

Legal and tax experts said the Chatlos and Berger foundations could face severe penalties from the Internal Revenue Service and state regulators and may have jeopardized their tax-exempt status.

Simply investing in real estate is not prohibited for a foundation, said Bruce R. Hopkins, a partner with the Kansas City law firm Polsinelli Shalton & Welte and a specialist on the issue. But "being in the business of renting or developing real estate is," he said. As long as Chatlos is doing his real estate job from his foundation desk, the foundation is effectively running the business, Hopkins said.

"You really do have to have a separate operation, or else it doesn't work," Hopkins said.

The foundation's failure to report Chatlos's pay from Sun Ray Homes in the past is a breach of the rules, Hopkins said.

"All this is really dancing around some edges. You've got potential for jeopardizing investments and self dealing," he said.

`A little bit different' In exclusive Palm Desert, with its gated communities, emerald golf courses, and sun-drenched mountains, the Berger Foundation owns the large two-story building where it is headquartered.

Auen controls the operation, though he is no longer married to the Bergers' daughter, Joan. He has earned millions of dollars buying and selling real estate, some of it held since Berger left the properties to the foundation in two portfolios: the Berwood Title Holding Co. and the Fairfield Homes Title Holding Co.

Auen declined to take calls from the Globe over a period of three months. When a Globe reporter visited his office, he declined to explain the foundation's relationship to the two real estate entities prominently listed on the office door. "We do things a little bit different from other foundations," he said, adding that the organization "develops" property for nonprofits: "We have charitable companies. That allows us to do more for charity."

Auen and his second wife, Sherrie, frequent local society functions and often are cited in the Palm Desert press representing the Berger Foundation or their own Auen Foundation, which pays Sherrie Auen a salary of $102,000. Ronald Auen takes no pay at his own foundation because, a footnote in its 2001 tax return says, he is paid by the Berger Foundation instead.

The Berger Foundation makes substantial grants to charities. It has supported the American Cancer Society, youth baseball, and a local cultural center, and purchased vehicles for the sheriff's department, to name just a few causes. It also helped endow California State University's new Palm Desert campus, with a $4.5 million donation. Today, the entrance road to the campus, Berger Drive, is nestled between Gerald Ford Drive and Frank Sinatra Drive.

H. Norwood Berger would have liked that. In his final letter to his heirs, a copy of which was obtained by the Globe, he said the foundation's money ought to go to colleges and other worthy causes in medicine and education. He also said all major grants should carry the Berger name.

But Berger expected many of the properties he owned to be sold, to comply with IRS rules. And he laid out in detail his desire that the foundation's money be invested primarily in low-risk government bonds and utility stocks, to keep costs down. "There should not be a great deal of overhead expense," he wrote to his heirs.

In 1987, when Berger and his wife were still alive, the foundation had $7 million in assets and no paid employees. By 2001, it had grown to $462 million -- $150 million of that from the 1989 sale of the savings & loan -- and its expenses had soared. It gave $10.6 million in grants in 2001 but spent twice that, or $21.6 million, on administration. Compensation and pensions for foundation employees accounted for 30 percent of the expenses, or $6.5 million.

Typically, expenses at well-run foundations are dwarfed by annual grants.

Ronald Auen's own wages appear consistent with those of a private sector executive. In 2001, he received $457,556 in salary and benefits, $54,000 for his service as a director, and $1.5 million in what the foundation's tax return calls profit sharing.

He reported working 35 hours a week; the office is closed on Fridays. Four other employees split another $2.3 million in bonuses, while Berger's two grown children, who serve as trustees, also participated in the profit sharing. His daughter, Joan, of Scottsdale, Ariz., reaped $300,000, while son John, who lives in northern California, got $100,000.

William Hegg, a retired California banker who was chief executive of Berger's Sacramento S&L for 25 years and attended several meetings of the foundation when it was first formed, expressed dismay at how the foundation, in light of Berger's request for frugality, has been managed.

"Mr. Berger was a very austere, conservative businessman," Hegg said in an interview. "To the extent that the operation of his foundation conflicts with that, it would make him very unhappy."

John Berger declined to be interviewed, and Joan did not respond to messages left with relatives.

In the footnotes of its 2001 tax filing, the foundation suggests how the unusual bonus payments were justified, saying the Texas real estate deal earned a $96 million gain for the foundation -- an annualized 14.4 percent return over 10 years that outperformed average US real estate returns for that period.

Even if the real estate dealings by Auen and his employees were to be deemed appropriate by the IRS, their pay for such services would have to be "reasonable," under federal tax law, or comparable to what managers at similar foundations earn.

Laura J. Kenney, a senior manager in the nonprofit division at Grant Thornton, an accounting firm, said the law is clear in prohibiting trustees from operating a foundation for personal gain. She and other experts who reviewed the Berger tax returns said they had never seen bonuses of the size Auen and his colleagues granted themselves, nor such an open reference to profit sharing in foundation documents.

"No part of the net earnings can inure to the benefit of any private individual," Kenney said. If trustees are conducting for-profit business within a foundation, "it could be hurting [the foundation's] exempt status." William D. Herz, a lawyer with Barton, Klugman & Oetting in Los Angeles, a firm that the Berger Foundation has paid fees to for many years, declined to answer questions about his work for the foundation. Before hanging up on a call from a reporter, Herz said, "I don't do any of their exempt work, and neither does anyone else at this firm."

Yet the foundation paid the firm $119,527 in 2001, and of that, $45,132 was reported as a "disbursement for charitable purposes" on the foundation's tax return. That appears to contradict Herz's assertion, and indicates the payment came directly out of money the foundation could have distributed to nonprofits.

Family matter William J. Chatlos, grandson of the Bridgeport, Conn., native who endowed the foundation, said he left a job at Sears, Roebuck & Co. in 1977 to help his aunt Alice with the foundation.

According to its website, the foundation "proclaims the glory of God by funding nonprofit organizations." It also spends heavily on compensation for the family. In 2001, the Chatlos Foundation made grants worth $5.4 million, but it spent $2.2 million on administration -- $934,000 of that for pay, benefits, and pensions.

Chatlos has justified his salary, saying he handles the foundation's investments. His sister's lawsuit alleges that he refused to hire outside investment advisers; under his watch, the foundation assets plummeted 40 percent in the four years from 1998 through 2001.

Chatlos's Orlando lawyer, Dawn I. Giebler-Millner, described Chatlos as "self-taught" in handling investments, but said his stock- and bond-picking helped the foundation grow prior to the losses of the bear market years.

D'Arata's lawsuit, which seeks to divide the foundation into five smaller entities or simply to pay out its remaining assets to charity, also contends that other family members enjoy significant pay and perks from the foundation.

She alleges that the family members, some of whom do little work, received hundreds of thousands of dollars in pay. They also were given "discretionary funds" of $30,000 to $100,000, which were used to make grants to causes that came with perks, such as upscale golf outings, annual charitable dinners in New York, and a private tour of the White House.

D'Arata herself was receiving $150,041 in salary and benefits to serve as a trustee and review grants for the foundation. But when she objected in 2001 to her brother's stewardship, she was fired, according to the complaint. She is now seeking to force Chatlos to repay what the suit contends is his excess compensation. The lawsuit also estimates that the IRS could levy millions of dollars in fines against Chatlos and Sun Ray Homes. D'Arata declined to be interviewed.

The case, which has until now drawn no public notice, is pending in appeals court in Daytona Beach, Fla. Supporting D'Arata's claim is Randall W. Roth, a lawyer and professor who helped uncover one of the biggest nonprofit scandals in history, at Hawaii's Bishop Estate. In an affidavit filed last year, he wrote that the Chatlos Foundation has many of the same problems as the Bishop Estate, which was investigated by Hawaii's attorney general, and whose wholly owned affiliates were forced to pay millions of dollars in back taxes and penalties.

If the IRS or state attorney general were to investigate, Roth wrote, "both are likely to take the position that excessive compensation is being paid by the Chatlos Foundation, serious conflicts of interest exist, and there are serious violations of the Internal Revenue Code."

Stephen Salley, a partner at Greenberg Traurig who is representing Chatlos, rejected any suggestion that the foundation is violating tax laws with its Sun Ray Homes holding.

As for the compensation, he said, "The biggest pressure in the charitable world is trying to make sure that pay is reasonable." He added, "If it's excessive, then we'll have to straighten that out. But we don't believe it is."

Beth Healy can be reached at bhealy@globe.com.

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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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