|
|
Timeline of | HUMBOLDT COUNTY RESIDENTS AWOKE THURSDAY MORNING, AUG. 2, to a black headline on page 1 of the Times-Standard that read, "Fraud at HSU; school feels betrayed." The alleged perpetrator was one John Sterns, an administrator who padded his expense account and exaggerated his fund-raising prowess. In the Aug. 7 edition of the weekly Arcata Eye, Editor Kevin Hoover summed up the story in a single sentence: "From July 1998 to last March, a smart, well-liked and spectacularly dishonest Humboldt State University employee systematically looted the school for cash and perks, all the while cooking the university's books to show millions in donation dollars which didn't exist." What had been previously reported was that Sterns -- who was in charge of all university fund-raising, alumni and public relations, and ancillary university programs that included public radio station KHSU, the Natural History Museum and the First Street Gallery -- was fired March 20 and a criminal investigation was launched. Last month law enforcement concluded its work and turned over three binders of evidence and interviews to District Attorney Terry Farmer. Farmer will likely file embezzlement charges against Sterns soon. Not much has been revealed about that criminal investigation, but in the meantime the results of a parallel special investigation by the auditor of the California State University Chancellor's Office were released. What are the charges -- the case against Sterns --presented by the auditor's report? That Sterns was reimbursed for $41,000 in phony travel and entertainment costs from one account through the HSU Foundation, which acts as a bank for university grants, programs and donations. That he charged $14,000 in personal items to the Foundation's credit card. That approximately half of his $29,000 regular HSU travel expenses were bogus. That he falsified records of gifts, pledges and bequests to the tune of $15 million, directing one staff member to enter $6 million in "donations" into the computer on a single day with no paperwork. That he routinely closed trust accounts and transferred funds to cover his misdeeds. According to the report, Sterns also oversaw the printing and distribution of promotional material bragging about his fund-raising successes. He lied to faculty regarding the nature and source of support for equipment and programs. He lied about the nature and availability of student scholarships and he apparently told at least one hapless parent his tax deductible "gift" to the university could be used as a scholarship for his own child. Sterns prepared fraudulent financial statements for KHSU, signing the name of a non-existent San Francisco accountant and submitted fraudulent reports to the Corporation for Public Broadcasting to obtain funding, some of which the station may have to return. Sterns created and sent bogus memos, signing the names of Alumni Board members and others, and he altered board minutes. He often forged the signature of his immediate supervisor, Vice President Don Christensen and on one occasion, HSU President Alistair McCrone. Sterns was so good at his job, his salary rose from $77,000 to $98,000 in two years. The chancellor's report saved some of its findings -- and criticism -- for the university administration. The university "did not exercise appropriate and sufficient oversight and control" over the Sterns department or over the use of university and alumni funds. University trust fund transfers, cash receipts and donations were "inadequately managed and controlled." And, the report concluded, university administrators "did not take sufficient and suitable action upon presentation of certain facts and circumstances regarding [Sterns'] administration [of his department]." "Various `red flags' regarding [Sterns'] activities were neither seen nor adequately acted upon by campus administration," according to the report. Sterns had only two supervisors -- Christensen and McCrone. Christensen, a former journalist, college instructor and administrator, came to HSU as director of university relations in 1981 and was promoted to vice president in 1987. He initiated various fund-raising efforts for the university and watched donations grow from less than $100,000 per year to more than $2 million annually by 1986. That figure rose to $5 million in recent years. In 1991-92 due to "chronic lack of funding from the state" the university administration was reorganized. Seven colleges became four, the positions of three deans were eliminated, and four vice presidents became three. Christensen assumed nearly all duties performed by the former vice president of administrative affairs including personnel, procurement, fiscal affairs, physical planning, plant operations and environmental health and safety. That organizational structure, in place during Sterns' tenure, was criticized in the chancellor's report. "We believe that because the scope of the vice president's responsibility included both university advancement (fund raising, public relations) and university administration (budgeting, accounting, personnel services, auxiliary services), the level of oversight provided was extremely vulnerable to compromise, insufficient oversight was inevitable." Christensen held a press conference the day the 57-page chancellor's report was released. Last week he agreed to a more lengthy interview in an attempt to answer the most obvious question, "How could this have happened?"
Q: In your March letter to the Chancellor's Office, you estimate the actual dollar amount lost from Sterns' alleged embezzlement was about $5,000 to $10,000. It now appears to be about $70,000, plus the salary increases he obtained over the last two years. Any other out-of-pocket losses to Humboldt State University? Christensen: None that I know of -- and I'm not sure that's entirely the case. John did travel. If that's the total amount he received from the Foundation, there was some legitimate travel within those figures.
Q: Do you have a figure on how much Sterns spent on university purchases and programs from the estimated 60 trust accounts he closed out over the last two and a half years? That wouldn't have been money into John's pocket. No, we don't have a figure yet. It's going to take some work. But the [restricted] trusts funds will be reopened and replenished [using unrestricted funds]. We are committed to that. And it's not a loss per se. The money's not missing. It was spent [on purchases].
Q: What is the impact on the Natural History Museum and other ancillary programs of the university? The museum has an account within the Foundation. There are no financial impacts. No money is missing. Same with the First Street Gallery.
Q: What about KHSU? There are two years of fabricated audits which puts the station's Corporation for Public Broadcasting funding in jeopardy -- $120,000 of the station's $500,000 operating budget. Is it true that station maintained its own set of books tracking donations and that those audits are being redone? Yes. We had that same procedure in university advancement [manual entry by more than one person to safeguard against potential fraud]. John just dismantled it. He told advancement staff, `We don't have to continue.'
Q: How did Sterns assume control over some scholarship funds, which are normally handled by the financial aid office? John's argument was we have a number of scholarships that haven't been awarded lately. They had been dormant. The pool isn't large enough and we don't have enough students applying. What I would like to do is contact the donors and see if they would be willing to rework the criteria, to support the President's Scholar Program, for instance. What he did was to write the individual saying we haven't been able to find a recipient and with your permission we'd like to use it [for other purposes]. If I don't hear from you by Sept. 1, I will assume this is OK. He never sent the letter. He put it in the file.
Q: The report mentions athletic fund raising? We argued against putting it into the report. John wasn't really involved in the athletics at all. John's role was that he distorted the figures in the athletic reports [as he did other university donations] in the annual report to the chancellor.
Q: What about the Foundation's $55,000? How did he gain control over Foundation funds? Those were operating funds. It's really not a loss to the Foundation because they have a line item in their budget for $10,000 per year that they set up for development. If it's misspent, they have "lost" nothing. We can be angry, as dear as resources are around here, that it was misused. But it not a true loss. The Foundation is just a bank for the university. A bank doesn't tell you how to spend your money. John had signature control over that fund.
Q: What about the $15 million. Who was counting on that money? The money doesn't exist. I don't know of any [departments or programs that will be affected] except the wildlife grant. [Elizabeth Hans, director of community relations, elaborated, saying, "Although Sterns told Fish and Game, `We have a donor who can match your $300K grant,' we went back to them and told them, `This guy does not have a donor. Are you still interested? And we have a certain amount of time still to raise the funds.]
Q: What about the microscope promised to one department? It's being purchased. We will use unrestricted money [donations].
Q: You've said that no donations were affected? I don't think so.
Q: You told alumni board members that what really happened is that Sterns was "moving money around, exaggerating fund-raising figures, for self-aggrandizement" and that the actual dollar loss to the university "was small -- in the five figures." That was the initial feeling. It still is.
Q: Did you suggest at one point it could be handled as a personnel matter with Sterns put on administrative leave? No. I may have said because there are elements of personnel issues here, I couldn't talk about something.
Q: It's often said that embezzlement is the most underreported crime because the victim -- in this case, the university -- feels humiliated, you used the word betrayed. I can't tell you how many people in the local community who have come up to me since this thing happened and said, "The same thing happened to me. So-and-so took me for $70,000. I had a bookkeeper who was with me for eight years and they left with $90,000." It's quite different in how you handle it in the public sector and the private sector. If you look at the cases of embezzlement that have received tremendous media attention in the last year or two -- Trinidad, Eureka High School, Humboldt Area Foundation, HSU -- but I assure you, there are businesspeople all over the community who have been stung. But the thing is they show the individual the door. There's no prosecution. They swallow their loss. They don't want the exposure. There's a lot bitterness. I've had people say, "That son of a bitch is still living and working here." We have no such options. We have a legal and moral obligation [to make the loss public].
Q: What exactly triggers a "special investigation" by the chancellor's office? Certainly not someone cheating on a mileage report? We didn't know what the magnitude was. We acted on fairly limited information. We said in the letter we thought the loss was $5,000 to $10,000 -- and we had no idea at the time that we let him go that he was falsifying audits for KHSU, moving scholarship monies around. I said at the press conference, after a while you almost wanted to laugh because you were through crying. Just when you thought everything was tied up, the auditor would ask you about something else. We had no idea that he was buying things and saying they were going to the alumni house and the property was disappearing and he was substituting secondhand goods -- that sort of thing.
Q: Some are questioning the university hiring procedures? It's a tough job to serve on a search committee. It's mostly volunteer on weekends and nights. You review maybe 150 applications, start background checks, begin by talking to references, narrowing the field to the top candidates. ... Before we hired John, there was one person on that list of references that I happened to know really quite well because she had been in the system at one time and I had worked with her at another institution. I called her. The comments were, "He's great, he's bright, he's energetic. I'd hire him back in a minute." We don't do police investigations, but we are certainly talking about that now.
Q: Describe Sterns' reputation with the faculty? One administrator said, "He was candy to the faculty -- bright and charming. They thought he was visionary." Until recently, just weeks ago, there were still administrators and faculty who didn't believe there weren't still gifts out there. Because they believed him. He was very bright. He knew the business. He knew fund raising. If he had applied his time and energy seeking gifts, he would have been very successful. For some reason beyond comprehension, he didn't. He was very good at talking to faculty. He'd go out and within days he would have the money for them. Well, he was simply taking it out of unrestricted funds, awarding the gift and going back and booking a gift of a like amount as an anonymous gift to the institution. And that would come through the record-keeping system.
Q: When confronted with a discrepancy, he always had answers? Most of the time it was just some excuse that was plausible. There was one point that he was noticeably upset and nervous, when it was called to my attention that a travel reimbursement -- signed by me -- was forged (June 2000). I asked him if he'd done it and he denied it. I said I want you to speak to everyone in your department and ask them if in fact they had signed my signature. A couple days later, he said everyone had denied it. It sounds ridiculous in hindsight, but we have had instances at the university for expediency sake -- we're a bureaucracy -- we have a grant that has to go in and people have signed signatures. It's a troubling thing, but it was my belief that it was John who had signed [the travel claims]. I'm no handwriting expert but I can look at the signatures and his signature and there were certain similarities. That prompted me to go back and look at certain records in the Foundation and I found a number of relatively minor but questionable expenditures which I then called him in to my office ...
Q: For instance? A subscription to The Economist that went to his home. I said if this is a reference material it doesn't go to your home, it goes to the office. I want you to pay for it. We listed things and he was asked to repay the money [about $225]. I sent [Sterns] a note that said when you were travelling, henceforth I want you to seek less extravagant accommodations and when you are going to the airport, when it's available, I want you to take public transportation rather than taxis. That memo was sent and he repaid the Foundation.
Q: What happened next? Late last year, October or November, [after noticing some low balances in several trust accounts] I was concerned that he was using discretionary money to augment his department, which I felt was inappropriate, like to hire temporary help. I removed his sole signature authority over three accounts -- the alumni, the partnership and the parent fund-raising accounts. And the Foundation was informed that any reimbursements out of those accounts would have to receive my signature. I believe the combination of his loss of direct access to those three accounts and then the pending loss of access to three other accounts [when Sterns was notified in January that the three ancillary programs would be assigned to the new position of director of community relations being created] -- that prompted him to start looking for another job.
Q: How did he convince the Foundation, for instance, that his claims were legitimate? If they get a request for a transfer of funds, they may ask for appropriate documentation: What is the authorization? John would say, "Good question. You have every right to ask for that. I'll get you the documentation." For example, he says there was a decision at the last alumni board meeting to transfer $5,000 from the alumni association to enrollment management. He goes back, doctors the minutes and says here's the minutes authorizing the transfer. John Sterns' accounts all carried receipts. The documentation was always there.
Q: What about university accounts? What is the claims process? He submitted them to me, for my signature. There were claims that I would sit down and say, "John. Here's a claim for lunch last Saturday and here's another for lunch on the same Saturday. How could this happen?" And he would say, "I had lunch with [so-and-so] at the Hyatt Regency in San Francisco. She's a potential donor. About an hour and a half later -- you can see it was a small bill because all I had was ice tea -- we paid for a second lunch because he was a prospective donor, too. He had answers.
Q: How did he falsify fund-raising reports to the Chancellor's Office? When are pledges, for instance, counted as "real" donations? When I was in university advancement, there was no such thing as "booking" pledges. It has changed. Now, because everyone wants to portray their development as successful [those numbers can be inflated]. They don't do anything illegal, but they certainly stretch the reporting. It's much easier for someone to come to me, and when I say, "Well, I don't see all the cash, where's the cash?" And [Sterns] says, "We've got this commitment and that commitment, and now all this is reportable. And we have this request that is pending, and ... You scratch your head and say, "Is this how we're doing things now?" and he says, "Well, we're following these bequests. They are being counted by the system now."
Q: And these reports were always signed off by you? I usually signed them. I don't know if any were forged.
Q: When you saw the enormous leap in fundraising -- from $1.6 million in 1997-98 to $6 million to $11 million -- was there a noticeable leap in expenses to raise these funds? There was a noticeable increase. He was travelling a lot. If you saw the itinerary -- in retrospect, you'd probably have to be Superman to carry it out --it was an impressive thing. Most of the time it was [to San Francisco]. He was always very good about telling you who he was going to be calling on and you'd have the vice president of such-and-such company or this Foundation head. The appointments would be laid out two hours apart sometimes for three or four days. It was a killer schedule. You'd look at it and say, "My God, we've never had these kinds of contacts..."
Q: You were thrilled? Absolutely.
Q: When were you made aware of a specific donation, for instance, the $2 million anonymous gift? Did he tell where it supposedly came from? No. Sometimes he would use a name from a past or prior reporting period, an alum or somebody who'd been close to the university, a former faculty or staff member, friend of the institution.
Q: Did you notice the discrepancies between the fund-raising reports and actual donations through the Foundation for instance? The Foundation has been having some phenomenal years. You've got a mixture of grants and development and contracts in there. You don't separate them. You wouldn't say, "How come we have $11 million when the Foundation only has $6 million?" Even in the President's message to the faculty this year, the one he will be issuing, it says [the Foundation] is reporting a record year.
Q: HSU has had only a few donors in the past in the million-dollar range? [Dr. Louis] Schatz is by far the largest. He has made a number of contributions to the university in the past for total giving of possibly $6 million.
Q: And others? The late William Smullin? Po Chung of DHL? Would those be under a million? Under.
Q: You mentioned at the press conference an anticipated $8 million gift the university is about to receive. Is that the Booneville [Mendocino County] property being willed to the university? When is it expected to be officially accepted? Probably in the next two months. It will be somewhere between $7.5 million and $8 million. It's taken many, many years. I've been working with [the donor] on that gift for a long time. It's 4,000 acres of land and a million dollar endowment to maintain it.
Q: How do you assess the overall damage to the university's credibility and future fund-raising abilities? One of the things we have to do is communicate to our alums and friends, because there has been a lot of miscommunication and misunderstanding out there. I believe we can say that John didn't pocket donations to this university, that endowments were not jeopardized. In those cases where trust funds were moved or used for another purpose, we'll return those. I think we can make a good case for continuing support for the institution. If I had to go out there and say, someone walked off with a million dollars, well ... That's not the case.
Q: The report seems to paint a picture of an HSU administrator with university credit cards, expense accounts, buying gifts, travelling, having country club dinners. Is this normal for fund raising? There is always going to be some expense involved in entertainment. The IRS has rules about what you can give people, for instance. The kind of things John claimed --from Northtown Books, small bowls from Fire & Light --were modest things. We do other things. We've bestowed honorary doctorates, with the consent and support of the faculty.
Q: The report is pretty damning about "inadequate oversight and control" of university advancement, of university advancement funds and "inadequate response to actual ... deficiencies." How do you respond? What about the "various red flags"? Some employees are relatively high maintenance. In certain areas, John was high maintenance. We had philosophical differences. I believe that because we are a state institution, what you do has to be above reproach. If you go to San Francisco, you search out before you get a reasonable hotel room. Try to find one with a state rate of $89 or $90 a night. Or if you can't, you stay at some place for $150. But you don't stay for three nights at the Hyatt Regency for $280 to $325 a night. You don't jump in a cab when there's a shuttle that goes to the airport. I though John was kind of cavalier about use of state monies. Again, I take issue with the auditor's report. When we were faced with issues, we acted on them. When there was an issue of forgery, I went through and found expenses that I though were inappropriate and he was made to repay the Foundation. When there were issues of inappropriate charges to augment his budget, his signature authority was removed from those accounts. In hindsight you could stand back and say, "How didn't you know?" But we didn't. We still do things here in a way that I characterize as doing your best to recruit good people, putting your faith in them, trusting them, working with them but not looking over their shoulder. I'm not a micromanager.
Q: How and when was President McCrone informed? The president and I didn't know until March. Staff became concerned in February. It all happened very quickly. It was something of a bombshell. Within five days, no more than a week, John was dismissed. There was really a confluence. I was called by Michael Goodman [university ombudsman] and asked to attend a meeting. He didn't say much initially. The president also gave me a document on which his signature was forged [establishing a scholarship] at that time. He said, would you investigate. I didn't have a chance. But some things were caught. John tried to move some scholarship money once and one of our employees [in accounting] said, "You can't do this. These are the result of a bequest. It takes a court order [to change]." [Sterns] was thwarted.
Q: Of the nine professional staff in university advancement below Sterns, four ended up going to a friendly professor, the university ombudsman and individual alumni board members to tell their stories -- to anyone but you. Why? It's the most hurtful side of this and I've told the staff. The reason is John drove a wedge between us. He told them I hated them. He severed the communication line between [his] staff and administrators.
Q: Wasn't the big change for you in 1992 when you were given additional duties? I'm a journalist. ... I'm not an accountant. I never had responsibility for fiscal affairs. If ever I was vulnerable, it was that area. If someone said, "You know there was embezzlement going on in your fiscal affairs department, why didn't you know?" I would have flat out said I was too damn dumb to realize what was going on. "I was trying to learn areas that were outside my area of expertise -- capital outlay, new construction, infrastructure, union contracts, personnel issues. It was a challenge for me, it was exciting, but it was brand new. The one area I was pretty comfortable with, that I thought was in pretty good shape ... [was university advancement].
Q: The university says in the report that it is going to take until February 2002 to correct deficiencies. Why? Some will be tough to meet by then. When you talk about restoring money to these trust funds, until you know how much money ... It's going to take time.
Q: You said in the press conference other staff are not under suspicion of wrongdoing. How bout staff who allowed the falsification of the time cards of student-employees? Or the staff "analyst" who entered $6 million in donations in one day with no documentation? The last finding in the auditor's report said something like, "Continue your investigation to see if anyone else is culpable" -- and we are. We have to look and see if in fact people were cooperating in any way with John.
Q: Specifically, the report found that "the scope of the VP's duties ... insufficient oversight was inevitable." What about other universities of similar size? We're quite unusual. We are thinly structured from an administrative standpoint. We have fewer VPs than any other campus. We have no associate VPs. We have an $11 million budget and over 200 employees [under one VP]. The auditor essentially said, "You're vulnerable." I admit it.
Q: Was there any link between your growing unease with Sterns and the cancelled Daly building project in Eureka? You needed to raise $10 million? The president and I worked hard on that project. John Sterns had only a marginal role, to prepare a draft of a proposal, which I reworked. There was some enthusiasm [from potential donors], but the commitments weren't there. We went to the city once and they said to try harder -- and we did. There were other factors. The city talked about a parking structure. Initially they made a commitment and they backed out. They told us they would acquire all the buildings on that one block and build a structure below with parking above. So it didn't happen. Then the Eureka Theater thing happened and the City Council got behind that. We felt it was confusing -- two theater projects, even though they were different. We couldn't get it clear in people's minds.
Q: You said in the press conference that although the chancellor's report was critical of the administration, neither you nor McCrone were admonished or reprimanded. No. Q: There are always rumors about when McCrone might retire? Do you have any information? I think he still enjoys this stuff. It's a big part of his life. He still has a great deal of vitality and energy. I don't know. I suspect he'll tell us some day. But I know I will go to opening convocation Aug. 22 and I'll encounter someone -- faculty or staff -- who will stop me and say, "I hear the president's going to announce his retirement today." The same thing happens every year at graduation. It's kind of Jeanne Dixonesque. Some day it will happen. But he's not sharing his plans with me.
Q: I understand you plan to retire to Bend, Ore., at some point? I'm turning 60. We recently bought a house in Bend and my wife and daughter are there. It was a decision we made before the Sterns situation. [The daughter is beginning high school this month.] I don't know. I'm going to retire some day. I don't think it'll be too much longer. Although it's been a short time, I find it difficult to be without my family. I want to get this [Sterns] thing straightened out. I want to get Maggie Hardy on board, our new director of university advancement, and rebuild that operation. I don't want to leave this in shambles. It's hurtful to see what's happened. |
![[photo of John Sterns]](cover0816-sterns.jpg)
![[photo of Don Christensen]](cover0816-christensen.jpg)
Comments? E-mail the Journal: [email protected]
© Copyright 2001, North Coast Journal, Inc.