Walden House, The City's leading private drug rehabilitation program, broke the law dozens of times while collecting welfare and food stamps for housing and treating convicted drug users, according to law enforcement sources and a confidential district attorney's report.
About $240,000 was believed lost, sources said, and a grand jury investigation and possible felony charges against Walden House - including grand theft and unlawfully obtaining public aid - were urged by district attorney's office staff, The Examiner learned.
But neither former District Attorney Arlo Smith nor his successor, Terence Hallinan, allowed prosecutors to take the case to the grand jury, sources said.
Joan Bennett, a former prosecutor who originally handled the case, called it a "coverup." Bennett was one of 14 prosecutors fired by Hallinan in a staff shake-up.
"If some little old lady in Hunters Point did that," Bennett said, "we'd be on them in a heartbeat. It's like someone in the DA's office is saying, "It's OK to be corrupt because we like drug programs.' "
Hallinan and Deputy City Attorney Virginia Elizondo said a portion of the loss - $73,023 - will be repaid in cash and free services as a result of Examiner inquiries that sparked a re-examination of the case. Hallinan denied tolerating the misappropriation of public funds.
Investigators and prosecutors from the district attorney's office had concluded that Walden House sought double compensation in 1992-94 for its treatment of convicted drug offenders diverted to the organization's residential facilities because of overcrowding at the jail.
The sheriff paid Walden House $60 per day for each of the 58 inmates it took. But Walden House also had the inmates apply for monthly welfare benefits - $347 in county General Assistance and $117 in federal food stamps.
The inmates were directed to sign the benefits over to the organization, although they were barred by law from receiving public assistance. Reassigning benefits is not illegal, but collecting aid while having other means of support - in this case, the sheriff's daily fee - is not permitted.
Because of incomplete records, investigators concluded that they could only prove $80,000 had been "embezzled and misappropriated" by Walden House, according to their report.
Confronted by the investigators in 1994, Walden House stopped seeking double compensation and admitted the conduct described in the report, but claimed it was unintentional.
Alfonso Acampora, Walden House's $105,500-a-year president, said in an interview that his organization sought the extra benefits, unaware that they might have been illegal, in order to avert losses it would have incurred by relying solely on payment from the sheriff.
But he admitted the "error," saying it was corrected "the day we found out."
"It wasn't done with any kind of criminal intent . . . or trying to get paid double," Acampora said.
Hallinan has said he favors alternatives to incarceration such as Walden House. Three years ago, he was a speaker at a Walden House "celebration of achievement" event honoring people who have overcome chemical dependency.
In an interview, Hallinan denied blocking grand jury action aimed at an indictment, but said Examiner inquiries prompted him to examine files in the case that he described as "closed" under Smith.
"My conclusion was you couldn't show criminal intent," Hallinan said. "But they had gotten money they weren't entitled to. There was unjust enrichment. We could have brought civil action."
He said he concluded no civil action was necessary, however, after his office and the city attorney's pressured Walden House to repay a portion of the loss.
"Acampora told me they'll repay it. I said, "You've got to do it,' " the district attorney said.
Smith did not respond to interview requests.
Before Hallinan and the city attorney re-examined the case, Walden House, a nonprofit agency with a $13.8 million annual budget, made highly favorable repayment arrangements with the city Social Services Department, source of the improper benefits.
Negotiations were completed for a $1,000-a-month refund of nearly $23,000 in food stamps, Acampora said May 9. But the General Assistance money - nearly $58,000 from The City's general fund - was to be forgiven.
"There's nothing owed there," John Vera, assistant general manager of Social Services, told The Examiner May 8.
Those arrangements changed last week.
Elizondo, counsel for the Social Services Department, told The Examiner Tuesday: "We're looking at this now, since this has been raised." The next day, she and Hallinan directed Walden House to repay the money.
On Friday, an agreement was reached between Walden House, the Social Services Department, the city attorney and the city controller.
The food stamp money will be repaid over a 12-month period, beginning immediately, and the welfare money will be worked off by Walden House's provision of free services to noncriminal substance abusers on welfare, beginning this week, Acampora and Elizondo said.
The sums owed were revised by the Social Services Department after a re-examination of the records Friday; they are now $17,139 in food stamps and $55,884 in General Assistance.
Walden House, which cares for 500-600 people with chemical dependency problems at sites in The City and at state prisons, has earned an excellent reputation in local courts during its 25 years of operation. But it suffers from chronic financial problems because it depends on public funding.
"We're in hard times now," Acampora said.
He acknowledged - and defended - his organization's practice of obtaining welfare through its clients. He said it was done, routinely, to supplement fees collected from agencies that send people to Walden House.
"Somebody has to pay," he said.
Without the welfare supplements, he said, Walden House's fees would be higher.
"Our rate at that time was $67.19 a day and (Sheriff Michael) Hennessey was giving us $60 a day," he said.
The report on the district attorney's investigation, dated Oct. 12, 1994, was written by investigator Joe Fazio, who handled the case with investigator Kathleen McDowell. Fazio is the brother of Bill Fazio, the ex-prosecutor who opposed Smith and Hallinan in the district attorney's race and was later fired by Hallinan. Both investigators declined to discuss the Walden House case.
They began to investigate in January 1994, when an inmate complained that Walden House kept his welfare benefits, according to sources and the report.
They were told by Larry Nelson, then the organization's director of adult services, that the additional welfare funding for the sheriff's offenders "helped to balance out the overall expenses incurred by residents who were unfunded," the report said. Nelson recently said he didn't recall the case.
The investigators eventually obtained 58 Department of Social Services files showing what they believed were provable violations, for a total overpayment of $80,398 between July 1, 1993, and Feb. 8, 1994, according to the report.
Walden House had collected - and kept - $57,815 in General Assistance benefits and $22,583 in food stamps, the report said.
The investigators suspected more violations, but believed they wouldn't be able to prove them.
"The program actually started in January 1992, about 18 months prior, and those records couldn't be found. The investigators didn't have the inmates' names. For some reason, the sheriff's office wasn't keeping records for the entire time," a source said.
"It would have been an additional $160,000."
The investigators felt they had a strong case, nevertheless. The report said they intended to accuse Walden House of keeping the money "without authority" and to allege funds had been "embezzled and misappropriated."
Bennett said she recommended to Smith through his top aide, Bob Podesta, that "we indict, pronto, because it was political." An indictment, which is a written accusation submitted to a grand jury, asks a panel of citizens to bring charges, rather than a prosecutor.
"Walden House was well liked," Bennett said. "Everybody trusted them. So rather than have a complaint filed against a very popular program by the DA, I recommended 12 to 18 grand jurors, because it wouldn't look like Arlo was trying to persecute a very popular and well-liked program."
Bennett said she made the recommendation several times.
"I said we've got to move, because there's a statute of limitations and the clock was ticking. I said it was a political hot potato. I was complaining, "Hey, let's get moving. Let's go.'
"Arlo Smith and Bob Podesta ignored me. I'd call Arlo and not get a call back. I talked to Podesta and he'd say, "We'll let you know.' "
Podesta did not respond to an interview request.
In mid-1994, with the case about six months old, Bennett was transferred for reasons she said remain unclear to her. Melody Schallon was assigned and the case was discussed in the district attorney's office, the Sheriff's Department and the city attorney's office.
Schallon, after concluding there wasn't enough to charge individuals because no one appeared to have personally profited, tried to determine if there was a legal basis for charging Walden House as a corporation, sources said.
They said she decided Walden House could not be charged criminally, but civil action was possible. Accordingly, Schallon tried to get the city attorney's office to move against Walden House in 1995, but without success, they said.
After Hallinan took office, Schallon tried to persuade her superiors to authorize a grand jury probe, sources said. She was as unsuccessful as Bennett had been.
"I said, "What are you sitting on?' " Bennett said she asked Schallon. "She said, "Hallinan's sitting on it,' or words to that effect. She said she brought it to his attention and hadn't heard from him on it."
Schallon declined comment. Hallinan confirmed that he was asked to take the case to the grand jury - but not to seek an indictment, he said.
"I was told the office wanted to get the records. The assistant DA wasn't confident she had all the names," he said. "I said let's see if we can do that without a grand jury investigation."
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