Back in late 2007, when Casa Youth Shelter, Los Alamitos, Executive Director Luciann Maulhardt got a call from the bank informing her the charity’s payroll checks were bouncing, she knew something was very wrong. It did not take long for suspicion to fall on a seven year employee, Lydia Kathleen Fitzgerald, the shelter’s Executive Assistant.

Fitzgerald was fired from the shelter in November 2007, and by December, the police had seized property at Fitzgerald’s rented Seal Beach home. But it was too late to grab much of the missing cash. According to Deputy District Attorney Brian Mulherin of the White Collar Crime Team, and the prosecutor on this case, “We know what she did with the money, she spent it.”

The investigation continued over the next 9 months, and on September 24, 2008, Fitzgerald was formally charged with multiple counts of felony embezzlement. In various court appearances between then and last Friday, Fitzgerald maintained her innocence. As the date of her January 29, 2010 trial approached, she changed her story and pleaded guilty to all counts.

According to the news release from the Orange County District Attorney’s office, “Between April 2004 and November 2007, Fitzgerald embezzled more than $435,000 from the Casa Youth Shelter in Los Alamitos, a charitable organization that provides temporary shelter and counseling for runaways and youth in crisis. While employed as an executive assistant, Fitzgerald forged numerous checks to herself and charged personal expenses for herself and her family on a company credit card. She used the money to remodel her home and purchase vacations, meals, clothes, a car, a boat, and numerous other luxury items.”

Fitzgerald was order to pay the money back to the shelter, but she is going to prison and according to Mulherin, the assets seized do not amount to much. The shelter did get about $10,000 in insurance proceeds, but that still leaves the charity short of a lot of cash. The ability of the shelter to recoup the rest of the money may depend on the outcome of two related civil cases.

So, who is really hurt here? Apparently, not some big east coast insurance company, for which it could conceivably become difficult to conjure up much heartfelt sympathy. More likely, it is the troubled teenagers of Orange County. Maulhardt said “They have sheltered over 10,000 teenagers” and “over 80% of the shelter’s operating budget comes from private donations. The remainder is from public money.” She indicated that the shelter is an independent stand alone organization, so there is no big corporate parent to fall back on either.

Maulhardt said the shelter’s operating budget is over $900,000 per year. That would imply an average of about $75,000 per month. Fitzgerald’s embezzlement occurred over a period of about 43 months, so that would suggest an average monthly take of about $10,000 per month, or about 13.3% of the shelter’s monthly budget.

This amount of loss might seem large enough that somebody at the center might miss it. The problem was, according to prosecutor Mulherin, the shelter’s staff, including the executive Director, the board, and the auditors, were all receiving forged documents which reported that the organization had more cash than it actually had.

Fitzgerald had a variety of devices to hide her scheme, including moving money between accounts. According to the DA’s office release, she “attempted to hide the theft by altering the shelter's books and records to show untrue payees or payment amounts. When the bank account used for payroll began to deplete from Fitzgerald's theft, she opened a line of credit in the shelter's name and used that line of credit to transfer money into the payroll account. The defendant failed to report or pay taxes on the income from the stolen money. Fitzgerald also put $45,000 in stolen money back in the shelter's accounts to attempt to hide her theft.”

Prosecutor Mulherin said “The records that the Executive Director was looking at, other people were looking at, the records that the auditors were looking at, all those records appeared to be—when you just looked at them—they looked to be the true records of, say, the bank.” But, of course, they were not in fact the true records.

When the altered records were put side by side against the records obtained independently from the banks, Mulherin said “If you looked very closely, you can see how they had been altered through what appears to be a cut and paste operation. It was very detailed and very well done, and so I can understand how responsible people who were trying to do their jobs and keep an eye on the operations could have missed what was going on.” He added “They didn’t notice, because they were being deceived as to the actual balance in their account.”

From a criminal point of view, that is where the prosecutor decided to leave it. But, the shelter has two other possible options. According to Steve Ellis, the shelter’s civil attorney, they have filed suits against not only Lydia Fitzgerald, but also her husband Nick and the shelter’s outside auditors. According to both prosecutor Mulherin and civil attorney Ellis, the standard of proof for a criminal complaint and a civil suit is significantly different. Mulherin did not feel comfortable that he could win a criminal case against husband Nick, but Ellis is moving forward on the civil case.

Ellis said “The civil case is going to go forward.” With regard to husband Nick, Ellis said “He said ‘She was in charge of the finances’, he didn’t know, he had no idea where this money was coming from. From my point of view, $400,000 over a four year period is an awful lot of money—that’s tax free money—new boats, and new Mercedes, and trips to the river, and home remodelings—I just think he’s going to have a difficult time convincing a jury that he didn’t know.”

This is important for the shelter getting their money back because if they can prove husband Nick was involved, the shelter can go after his assets, even if the DA does not prosecute him on criminal charges. Ellis said “He’s no longer with the family business. He’s trying to make a go of it again as an insurance agent.”

Probably the shelter’s last chance to recover the money is the outside auditors. Those auditors would be the Santa Monica-based Certified Public Accounting Firm, Holthouse Carlin & Van Trigt LLP, which according to their web site is “the largest CPA firm headquartered in Southern California.”

OC180NEWS.com spoke to David Evans, attorney for the CPA’s, and he would not even confirm that the firm performed an audit in accordance with industry standards, which just happen to include obtaining banking information directly from the banks.
Now, that’s an interesting concept.

Prosecutor Mulherin said “Probably the best way to prevent it would have been for the auditors to have gotten the financial information directly from the banks.” Since the shelter operates on a June 30 fiscal year end and this fraud occurred between April 2004 and November 2007, that means there would have been at least three year end audits where the auditors should have received confirmation of banking information directly from the banks—and three times when the fraud could have been detected.

But, alas it was not to be. The CPA’s were not involved in detecting the fraud and according to Executive Director Maulhardt, ”He was sad, he was shocked, he admitted that maybe they weren’t catching any of this stuff and they feel very bad.”

Maulhardt confirmed that the CPA firm conducted annual audits. Although attorney Evans would not commit to the scope of the CPA’s audit work, he was, nevertheless, sure of their complete innocence. He said of the CPA firm, it “Will be exonerated in the case that it fully complied with all the relevant Requirements that govern auditors in this kind of a context.”

What can a small nonprofit do to prevent becoming a victim like Casa Youth Shelter? According to Prosecutor Mulherin, “If you’re working in a church, or a charitable institution, you cannot assume that everyone is there for a charitable purpose. One of the ways that people get away with cheating charitable organizations is that people are taken at their word in those organizations and they are trusted and that is the opportunity for a lot of these deceptive criminals to take as much money as they want. People have to be very cautious about who they’re working with, and who has access to the money so that the charitable donations of the generous people of Orange County actually go to the charitable purpose.”