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Mass., 2 other states to probe foundations

Massachusetts Attorney General Thomas F. Reilly and the top prosecutors in two other states yesterday said they would open inquiries into possible financial wrongdoing by the heads of several charitable foundations, including some whose hefty compensation packages eclipsed what the foundations gave to charity.

"We are clearly not happy when a fiduciary of a charity believes that he or she can use charitable assets as if they're personal funds available at their whim or pleasure without any regard for the charitable mission of the organization," said Jamie Katz, chief of Reilly's public charities division, which regulates foundations. "We've taken action against fiduciaries who have treated charitable assets as their own, and we expect to do so in the future."

Katz and the offices of New York Attorney General Eliot Spitzer and California Attorney General Bill Lockyer were reacting to yesterday's Globe Spotlight Team report on foundations whose officers and directors have dipped freely into foundation assets meant for charitable causes.

Among the foundations cited was the Needham-based Paul and Virginia Cabot Charitable Trust, whose dwindling assets were used to pay trustee Paul C. Cabot Jr. a salary of more than $5 million from 1998 to 2002 and to fund a $200,000 wedding for his daughter. Cabot did not return a phone call yesterday, but in earlier interviews he said he had "broken no laws."

Katz said the attorney general's public charities division will "review everything that came to light" in the Globe stories to "determine what further information we need or what actions are appropriate."

He said his office would focus on whether charitable assets are being used in a way that is consistent with a charity's mission, whether the operation of a charity results in any conflicts of interest, and whether officers and trustees have received unreasonably high compensation.

Sanctions for violations can include requiring trustees to reimburse foundations for excessive compensation, removing officers and trustees, and requiring foundations to enter governance agreements with the attorney general's office, Katz said.

He said the state cracks down on foundation abuses when they are brought to light, but does not have the resources to adequately police the many such institutions in the state.

In New York, Spitzer's office said it would review the records of two New York foundations described by the Globe as paying excessive compensation to its trustees: the William T. Morris Foundation and the Gerda Lissner Foundation.

William Josephson, the assistant attorney general in charge of Spitzer's charities bureau, said that if the office believes unjustified compensation was paid to any of the foundation trustees it will "launch a formal investigation and start taking measures."

Josephson also said his office would examine the records of every foundation cited in the Globe report to determine if any of them raise money or bank assets in New York, which could give the New York attorney general's office authority over them. "We're very concerned about the abuses we're seeing," Josephson said.

In California, Lockyer's charities division is reviewing findings by the Globe that the presidents of Franklin Holding Corp. of Walnut Creek, Calif., and the Hocker Foundation of Rancho Santa Fe, Calif., took personal loans from the foundations they run, according to special assistant attorney general Tricia Wynne. Both foundation chiefs also took pay that appears to have been excessive, relative to compensation paid by similar foundations.

Meanwhile, the heads of several local nonprofit charitable organizations and specialists in foundation administration voiced outrage at the excesses turned up by the Globe investigation, which was based in large part on the newspaper's analysis of thousands of federal tax returns filed by private foundations.

At Dorchester's Codman Square Health Center, which relies on foundation grants and government funding, executive director Bill Walczak said he was angered by the high trustee compensation reported by the Globe.

"How can anyone justify spending more in overhead than they actually give out? That's immoral," Walczak said. "I think the attorneys general have not been on their guard for the potential for abuse in philanthropies."

Thomas A. McLaughlin, a senior manager in the nonprofit practice at the Boston office of Grant Thornton, a national accounting firm, also expressed consternation at the array of abuses detailed.

"While I still believe that the majority of trustees hold themselves to a high standard, those who don't have tainted them all," McLaughlin said. "Any of my nonprofit clients would be thrilled to get a grant for half of what these people wasted."

James E. Post, a professor at Boston University's School of Management, said the Globe story showed the potential for what amounts to double-dipping by some foundation officials.

First, he said, wealthy individuals enjoy the significant tax breaks that flow from setting up a foundation. Then they or their successors make free use of the foundation assets to pay for high salaries and perks.

"It's not just tax avoidance; it's also the ability to feather your nest twice by paying yourself a big salary, or your family big salaries, or your colleagues big salaries," Post said. "If you're going to take public benefits extended through the tax system, you have to administer them in a way that the public gets its intended benefits."

A variety of measures at the federal, state, and foundation levels are needed to prevent the abuses, Post said. These include more funding for the IRS to significantly increase foundation audits; a recognition by state attorneys general that abuses in the foundation world are greater than they may realize; and the willingness of foundations to police themselves in an organized way.

Paul S. Grogan, president of the Boston Foundation, which awarded $48 million to nonprofit organizations last year, agreed that foundations have a responsibility to protect the public interest in the proper charitable use of their funds.

"It's a poorly kept secret in this country that, particularly among smaller private family foundations, there's a ton of abuse out there," Grogan said. "These are extraordinary privileges that our society has essentially conferred in order to prompt charitable giving, and these kinds of abuses besmirch that whole enterprise."

Beth Healy, Francie Latour and Walter V. Robinson of the Globe staff contributed to this story.

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