County finds that charity misdirected funds

Mental Health Systems, a social-services charity that collects and spends millions of tax dollars each year, improperly directed public funds to its for-profit subsidiary and sought reimbursements from San Diego County for costs it did not pay, a county investigation has found.

The San Diego nonprofit, one of the county’s largest contractors at more than $35 million a year, also withheld payments to doctors, vendors and employees in order to free up money for Novata CARES, the private for-profit company owned by Mental Health Systems, investigators said.

“While MHS prepared checks for all invoices received on a weekly basis, not all of the checks were released when written,” the audit said. “This practice violates generally accepted accounting principles because it results in understated liabilities and cash recorded on the books.”

Charity officials voided 13 checks totaling $336,000 after recording the payments on company balance sheets, the review said.

The San Diego Union-Tribune received a copy of the audit findings and related materials Wednesday under the California Public Records Act. The charity did not respond to questions about the report.

County officials turned their findings over to the San Diego County District Attorney’s Office and to the local FBI field office — both of which asked for the materials after reading about problems at the charity in the Union-Tribune. Neither office would comfirm any investigation.

The county’s review was opened in February, after longtime chief financial officer Michael Hawkey sent a letter to county officials alleging a series of improper practices at the nonprofit he served for 15 years.

The unscheduled audit came just after county regulators had opened their own routine examination of Mental Health Systems, conducted every three years.

Combined, the two reports expose questionable financial practices and order a series of reforms. The three-year review cited numerous cases of improper billings and asked the nonprofit to repay almost $200,000 and justify $2.1 million in questionable payments.

In a letter dated April 26, the county gave Mental Health Systems 30 days to develop a corrective plan or risk losing its contracts.

“We have found nothing to suggest that the service being provided to our patients is lacking in any way,” county spokesman Michael Workman said in a statement. “Quality service is being provided.”

But “the results of our audit indicate there are some serious financial issues at Mental Health Systems,” he added. “We are concerned with the financial stability of MHS and its ability to remain viable … The county is currently formulating a plan to transition services to other providers should that become necessary.”

The San Diego Union-Tribune first reported the investigation into Hawkey’s allegations early last month. In a statement at the time, the company denied doing anything improper and said it would cooperate with investigators.

“MHS is willing and able to challenge each allegation; this internal scrutiny includes years of audited financial records,” the statement said. “We have long been an organization of open transparency in our business operations and relationships.”

Mental Health Systems was founded in 1978 as a social-services charity that provides counseling, recovery and other programs for needy families. Over the decades, it expanded programs to other California counties and also performed contract work for the state prisons office.

Most of the work is performed on a cost-reimbursement basis, meaning the charity delivers the contracted services and then submits its expenses to the county for repayment.

Executive Director Kimberly Bond has declined interview requests. San Diego attorney Frank Polek, who was retained by the nonprofit, also declined to respond to the audit or demands issued by the county.

“No comment at this time,” Polek wrote in an email Wednesday. “Thank you.”

Hawkey was placed on paid leave in February, he said, after questioning decisions made by Bond, which he did not believe were in the best interest of the organization. He sent two letters the same day — one to county regulators and one to the Mental Health Systems governing board.

The letters accused charity executives of billing the county for “reimbursement” of services it had not yet paid itself, a violation of its contractual terms. He also said the charity wrongly directed funds to the Center for Autism Research, Evaluation and Services, or CARES, a for-profit provider it bought in 2014.

The company, renamed Novata CARES, has been losing money, and Mental Health Systems directed money from other programs to sustain the subsidiary, auditors said.

In all, auditors identified $5.4 million in transfers from Mental Health Systems to Novata CARES in the current and past two fiscal years. They also noted $1.4 million in expenses incurred by Novata that were paid by the charity.

Nonprofit experts say it is not unusual for charities to operate for-profit subsidiaries to support core services, but they said executives should take great care to make sure the two entities are kept as distinct as possible.

Other allegations leveled by Hawkey also were substantiated.

The county found evidence that Mental Health Systems paid Open Minds Consultants more than $1.2 million in recent years but uncovered no specific work product. Bond’s husband, David Conn, is a member of the Pennsylvania firm’s advisory board.

“According to MHS’s management, Open Minds also provided services based on verbal requests from MHS’s management without a formal agreement documenting specific deliverables and compensation,” the audit said. “Further, MHS’s management stated that it is not efficient to have formal contract agreements for every service provided by Open Minds.”

Mental Health Systems employs about 1,000 people to offer treatment, recovery and other services to clients across San Diego County and the state. Its annual budget is about $85 million.

Previous audits of the nonprofit turned up improper billing, falsified records, hiring employees with criminal histories and, in one state program, allowing inmates to lead group therapy sessions. The charity also has been ordered previously to repay thousands of dollars in government contracts.

Until December, Mental Health Systems was paying its board chairman, Ernest Wright II, hundreds of thousands of dollars per year in rent on a building he owns in Riverside County. The charity said payments were in line with market rents for the area.

The charity also is being reviewed by the U.S. Department of Housing and Urban Development, which told the Union-Tribune last month that it has questions about how the organization spent almost $600,000 in federal homelessness grants awarded earlier this year.

Mental Health Systems has until May 27 to submit a plan to correct the various issues raised by county auditors. The 30-day “cure notice” is contractually required should the county decide to transition services to another provider.