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Posted on 02/09/2003 7:44:09 AM PST by SheLion

For five years under former Police Commissioner Bernard Kerik, the city's Correction Department operated a little-known foundation that took in and spent some $1 million.

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Department brass filled the foundation's bank account with rebates from tobacco companies on cigarettes bought with taxpayer dollars and sold to Rikers Island inmates, a Daily News investigation found.

The highly unusual arrangement apparently allowed the money to be spent outside rules that govern public expenditures.

But where did the money go?

The answer to that question remains a mystery. Indeed, even many of the people who were in position to know, including leaders of the department's uniformed unions and at least one of three people other than Kerik who served on the foundation's board, said they don't know where the money went.

Maybe it went up in smoke.

One board member, Thomas Ward, a retired assistant commissioner for correction, told The News he quit the foundation in 1999 after being refused access to spending records.

"I had asked for financial reports," said Ward, a former Correction Department assistant commissioner. "I had requested and felt I needed to see these things and never got them."

The foundation appears to have violated basic Internal Revenue Service (news - web sites) requirements by not reporting exactly how it spent $854,441 out of the $921,311 it shelled out on programs from 1994 to 2001.

It was required to file itemized schedules of who got that money, but the documents weren't included in copies of its tax returns filed with the state attorney general. Kerik, who was the foundation's president, said he didn't know details of its operations and referred all questions to foundation treasurer Frederick Patrick, a former correction deputy commissioner who is now a deputy police commissioner.

The News repeatedly asked Patrick for documents itemizing the foundation's expenditures, including the IRS schedules.

He said the schedules had been filed but failed to produce them, even though the IRS requires charities to make returns available for public inspection.

Department officials insist that the foundation raised and spent its money legitimately, on expenses like the production of image-building videos and holding parties in jails to reduce violence.

"It's not a diversion of funds," Correction Department spokesman Thomas Antenen said. The Correction Department is the subject of an ongoing corruption probe by city investigators and the Bronx district attorney, begun in response to a series of News articles.

The scandal led to the resignation of former Commissioner William Fraser, after The News revealed correction officers worked on his home pool.

Several other officials have been suspended or demoted, including Anthony Serra, who had overall responsibility for Rikers Island. Serra has been accused by subordinates of coercing them to work on his home and his political consulting business.

The News discovered the charity in an IRS database. It wasn't mentioned in press releases that described Kerik's involvement in another charity, and Kerik failed to list his position as the foundation's president in financial disclosure forms he filed. Papers creating the charity were filed in 1993, but it still had almost no money in 1995.

That year, the department asked cigarette manufacturers for a special allowance on a long-running rebate program.

The program allowed jails to swap rebate points on packs of smokes for sporting goods, table games and promotional T-shirts and socks to be used by inmates.

City correction officials asked the companies ? Lorillard and Brown & Williamson ? to start sending checks instead of basketballs. They asked that the checks be made out to the foundation, not the city.

The switch to cash rebates happened shortly after Kerik was named first deputy commissioner, a position that gave him oversight of commissary sales.

Antenen said the change came out of a concern that the merchandise "could be construed as promoting smoking and the sale of cigarettes, especially because the socks and T-shirts were embossed with the logos of the various companies."

Antenen said the department didn't seek the opinion of lawyers or the city Conflict of Interest Board as to whether cash rebates on cigarettes bought with taxpayer dollars could be sent to an outside organization.

But he cited this passage from the Minimum Standards of the State Commission of Correction: "Profits resulting from commissary sales shall be deposited in a separate bank account and utilized only for purposes of prisoner welfare and rehabilitation." The regulation doesn't specify who should own that account, which city correction officials took to mean that it didn't have to be the city government.

He also said the state commission's minimum standards precludes jails from profiting on commissary sales.

The standards actually allow a "modest return above costs."

And an internal memo from that year, obtained by The News, shows a considerable return on cigarette sales.

The memo, an analysis of the impact of a proposal to ban smoking in jails, estimated $776,811 in net revenue on annual cigarette sales of $5 million.

It forecasted that the department could expect "$200,0000 in direct donations by Cigarette Manufacturers to the Correctional Foundation for use in inmate programs ..." every year.

And it makes clear the alternative.

"If they came directly to the Department they would have to be deposited as revenues in the General Fund," the memo says.

Then-Mayor Rudy Giuliani snubbed out the smoking ban plan in 1996, citing inmates' right to smoke.

In 2000, the rebate money began going back into the city treasury. That's the year Kerik left to become police commissioner.

Antenen said the department started putting the cash back into city funds because the commissaries were losing money.

The loss of the tobacco rebate money starved the foundation. After bringing in between $128,310 and $387,508 annually for five years straight, it raised only $3,210 during fiscal 2001.

Experts in nonprofit organizations questioned whether the tobacco money should have been diverted to Kerik's foundation.

"It should go into the general fund of the City of New York," said Raymond Horton, a professor of nonprofit management at Columbia Business School and former director of the Citizen's Budget Commission. "And the organization shouldn't try and hide what it did with the money."

Patrick readily acknowledged that cigarette rebates from the city contract funded the foundation. But he didn't believe anything wrong was done.

The presidents of the agency's uniformed unions reacted with bewilderment and anger upon learning of the foundation's existence.

"I'd like them to tell me what the hell they did with it to benefit officers," said Norman Seabrook, president of the Correction Officers Benevolent Association.

"I hope they can prove what they're talking about," he added.

Ifs, ands, butts: Money trail leads to locked doors

It's impossible to tell from the Correction Foundation's tax filings exactly how it spent $1 million it raised in tobacco money.

Between 1994 and 2001, the foundation told the IRS it spent $854,441 in grants and allocations ? everything it paid out except administrative expenses.

But there are no details beyond broad categories ? most of which also are covered in the Correction Department budget ? like "correctional training" or "violence reduction program."

During an hour-long interview at Police Headquarters, Frederick Patrick, a deputy police commissioner and the foundation's treasurer, said all the money was spent on matters central to the department's mission.

The biggest outlays went to producing promotional videos and throwing annual holiday parties for inmates, said Patrick.

"Commissioner Kerik in particular was interested in image- building and professionalism," Patrick said. "Corrections had the same success story as the Police Department in reducing violence. But very few people pay attention to what goes on on the other side of the bridge."

The videos were made by Paley Price Productions, owned by Jane Paley and her husband, Larry Price. Mayor Giuliani named Paley and Patrick to the Board of Correction, which monitors the Correction Department.

The foundation paid Bob Lee, a former WBLS disk jockey, to produce annual holiday parties at city jails encouraging inmates to avoid violence, Patrick said.

"They would use it as part of their violence reduction strategies," he said. "They would hold out the hope of comedians and gospel performers and others."

The only rough number Patrick offered was "maybe 5, 6,000 [dollars]" spent to spruce up an auditorium on Rikers Island.

Patrick also said the foundation bought refreshments for VIP events, hired consultants to evaluate programs and train employees, and filled gaps when city contracts expire before they could be renewed.

Patrick, who signed the checks, said expenditures were made in response to informal telephone requests from commissioners. For more than two years, Kerik would have been on both sides of those discussions.

Michael Jacobson, correction commissioner from 1995 through 1998, said he never made such a request or closely reviewed expenditures.

"But the question for me is were any of the expenditures inappropriate or inconsistent with the mission of the agency," he said. "My recollection is they were just sort of standard program expenditures."

Patrick also said all outlays were cleared with board members during teleconferences and quarterly board meetings.

But Thomas Ward, the only other board member besides Kerik and Patrick from 1995 through 2000, said he knew nothing of expenditures, and attended only "one or two quick planning meetings."

"I didn't know what the revenue flow was or how they were raising funds," Ward said.

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