Paul Dostart Dostart Clapp & Coveney, LLP 4370 La Jolla Village Drive, Suite 970 San Diego, California 92122

Transcription

1 David Peffer, Esq. Utility Consumers Action Network th Ave., Suite B San Diego, CA February 27, 2012 Paul Dostart Dostart Clapp & Coveney, LLP 4370 La Jolla Village Drive, Suite 970 San Diego, California Via Electronic Mail pdostart@sdlaw.com Mr. Dostart, I m writing to address inaccuracies and misleading statements in your letter dated August 24, 2011 (Exhibit A) which claims to present the final results of your investigation into my whistleblower allegations, which were submitted to the Board in a letter dated March 4, 2011 (Exhibit B). I have reason to believe that you have provided my March 4 whistleblower letter and your August 24 response to the office California Attorney General, either in the context of its own investigation, or in the context of dissolution papers UCAN recently filed. This is a cause for significant concern, as your August 24 letter contains significant misstatements and inaccuracies. In order to ensure that the California Attorney General has an accurate record and is not misled, UCAN Board President Kendall Squires has given me permission to carbon- copy this letter and the attached exhibits to the California Attorney General s office. I believe that correcting these inaccuracies is especially important given the recent Federal Grand Jury Subpoena requesting documents relating to Death By China, Michael Shames compensation, and UCAN s financial management. I. Whistleblower Allegations Your August 24 letter claims to provide the final results of the investigation into Shames misconduct: UCAN has commissioned, and there has now been concluded, an internal review relating to the allegations set forth in your Complaint. I have been instructed to provide you with the outcome of that review, and that is the purpose of this letter. (Exhibit A, p. 1). Specifically, you address the four allegations presented in my March 4 whistleblower letter. Below I address three of your conclusions, which are clearly in error.

2 A. Unlicensed Practice of Law Regarding my allegation that Shames engaged in the unlicensed practice of law, you point to two authorities to support your conclusion that my allegation was in error. First, you point to a May 27, 2011 California Public Utilities Commission Administrative Law Judge s ruling dismissing a motion to disqualify Mr. Shames from CPUC practice because he was not an active member of the State Bar. (Exhibit A, p. 2). Second, you point to an August 11, 2011 letter from the State Bar of California Office of Chief Trial Counsel Enforcement, stating: this mater does not warrant further action. (Id. at p. 2). Based on these two authorities, you conclude that the UCAN board considers your allegation to be in error and deems this matter resolved. No further action will be taken thereon (Id. at p. 3). Your conclusions on this issue were in error and relied on misleading evidence. The CPUC administrative law judge s opinion (Exhibit C) ruled only on a motion by former UCAN employee Phil Moskal (Exhibit D) to disqualify Shames on the grounds that inactive attorneys may not appear before the CPUC. As I m sure you re aware, this argument is incorrect as a matter of law, as California Pub. Util. Code sections , plainly allow non- attorneys to appear before the CPUC as advocates. The ALJ ruling, however, is irrelevant to my allegations. As presented in my March 4 whistleblower letter and fully fleshed out in my April 7, 2011 memorandum submitted to Mr. Squires, Mr. Lynch, and yourself (Exhibit E), my allegations were that Shames had unlawfully held himself out as entitled to practice law in violation of Business and Professions Code section 6126(a), and had unlawfully represented UCAN as an attorney and collected attorney fees from the CPUC. These points are neither addressed in nor resolved by the ALJ ruling. Although your August 24 letter quotes a letter from the State Bar as stating that this matter does not warrant further action. You entirely omit any reference to what this matter is. It has since become apparent that the State Bar you refer to was in reference to an entirely separate matter. On December 6, 2011, San Diego Reader columnist Don Bauder reported that Michael Shames had received a warning letter from the State Bar for identifying himself as an attorney while on inactive status. (Exhibit F). B. UCAN s Failure to Procure a Required Audit of Financial Statements Regarding my allegation that Shames had unlawfully failed to audit UCAN s books pursuant to Gov. Code section 12586(e), which mandates annual audits for nonprofits with over $2 million in revenue, you claim that UCAN s newly retained independent certified public accountants, AKT, have informed the UCAN board that the IRS Form 990 for UCAN s fiscal year ending June 30, 2010 included a premature accrual for monies not actually received by UCAN until its next fiscal year. As corrected for that premature accrual, UCAN s gross receipts for UCAN s FYE June 30,

3 2010 were less than $2 million. AKT has similarly informed the UCAN board that based upon AKT s preliminary review, one of UCAN s fiscal years after 2004 and prior to UCAN s FYE June 2010, had gross receipts in excess of $2 million. (Exhibit A at p. 3). You concluded that In view of the foregoing, the UCAN board considers your allegation to be in error because, as of the date of your Complaint, there has been no duty under law for UCAN to have procured a formal audit of its financial statements. (Id.). Contrary to your assertions, UCAN was under an obligation to audit its books for FYE June I understand that Bob Ames exerted significant pressure on AKT in order to manipulate the books by changing accounting methods and changing the dates on which account balances were recorded in order to get revenue under the $2 million dollar threshold. I was witness to at least one such conversation between Mr. Ames and a representative of AKT. In addition, UCAN bookkeeper Tony Pettina has stated to Mr. Aguirre that on multiple occasions UCAN has collected more than $2 million dollars in a given financial year. Legal mandate aside, given the weight of the allegations against Mr. Shames, a full audit of the past several years was clearly the appropriate course of action in light of generally accepted standards and best practices. C. Suspicious Accounts I have also alleged that Shames has opened and controlled suspicious financial accounts with the misspelled word Comsumers rather than Consumers in the account name. These accounts include: a. Utility Comsumers Action Network, Account # , Morgan Stanley Smith Barney Active Assets Account; b. Utility Comsumers Action Network, Account # C , Morgan Stanley Smith Barney China A Share Fund; c. Utility Comsumers Action Network, Account # C , PFPC; d. Utility Comsumers Action Network, Account # , American Stock Transfer & Trust Company; e. Utility Comsuemrs Action Network, Account # , American Stock Transfer & Trust Company Eaton Vance Tax- Managed Global Diversity Equity Income Fund; f. Utility Comsumers Action Network, Investor ID # , BNY Mellon.

4 Responding to this allegation, you stated that: Deposits to those accounts with a misspelled name were tied back to UCAN s financial records, and distributions from those accounts were traced to proper UCAN accounts or purposes. UCAN s board has accepted management s explanation that the account name misspellings were inadvertent oversights. (Exhibit A at p. 3). Under the heading action taken you stated that Each of these affected accounts is being (or has already been) correctly renamed, or closed with the account balance being transferred to a properly renamed UCAN account. If and when new accounts are opened in the future care will be taken to assure that the name on the account statement precisely matches UCAN s formal corporate name. (Exhibit A at p. 3-4). Your letter omits the fact that you failed to conduct any meaningful investigation of the suspicious accounts. An appropriate review of the accounts (six in all) would include a full audit and review of the original transaction records for each account. Such a review is especially indicated in this occasion, as not only are the accounts misspelled, but the account balances do not appear in UCAN s regularly kept financial books. You have variously indicated that you did not have access to the original account records, or that your review indicated that the accounts involved only nominal amounts of money, not enough to warrant a full review. Both claims are false. It is difficult to imagine how, as an attorney retained by UCAN to conduct a review of UCAN accounts containing UCAN funds, you would be unable to access the account records. As for your claim that the accounts involved only nominal amounts of money is likewise false Board President Kendall Squires has allowed Mike Aguirre to review UCAN s financial records. These records showed transactions involving large amounts of money moving to and from the accounts, including a $262, transfer from a Comsumers account at Morgan Stanley to a normal UCAN account. (Exhibit G). In the context of your failure to conduct a meaningful investigation of the suspicious accounts, your assertion that the board had accepted the misspellings as inadvertent oversights by management (Exhibit A at p. 3) is especially disquieting. II. Additional Allegations You were retained to conduct a comprehensive governance review. As part of this review, you solicited and received multiple additional allegations from the UCAN staff, myself included. Despite this, your August 24 letter addressed only the four allegations specifically spelled out in my March 4 whistleblower letter, ignoring the additional allegations you received. To my to my knowledge you have not conducted a formal investigation of these allegations, and it is unclear whether these allegations and the supporting evidence have been clearly communicated to the California Attorney General.

5 A. Death by China In or around March, 2011, acting without the Board s knowledge or consent, Michael Shames wrongfully committed UCAN to act as a pass- through organization in a million- dollar money- laundering scheme. Under this scheme, Shames arranged to have UCAN accept a one million dollar donation from the NUCOR Steel Foundation, with the understanding that the donation would be passed through to a private film production company, Death By China, LLC to be used for the production of anti- China documentary films. On March 15, 2011,, Shames signed a consulting contract committing UCAN to provide Death By China with one million dollars for the production of one or more documentary films. (Exhibit H). Under the contract UCAN received no benefit for the payment provided the contract contained a provision waiving UCAN s rights to any intellectual property produced under the arrangement. (Id. at p. 1). The contract provided that Shames was to receive a producer s credit for the films. (Id. at p. 5). It is unclear whether Shames received a producer s fee. On March 7, 2011 Michael Shames wrote NUCOR to acknowledge receipt of $600,000, the full sum of which will be used to fund the production of documentary film work under the direction of Peter Navarro. (Exhibit H at p. 7). UCAN deposited a second check from NUCOR in the amount of $400,000 on March 14, (Exhibit H at p. 8). Death by China is on its face an inappropriate transaction. It was entered into without board approval. It appears to be an attempt to mask the true source of the Death By China film s funding. It raises significant tax implications, for NUCOR, who may have benefitted form channeling the DBC funds through two nonprofits (the Nucor Foundation and UCAN), and for Peter Navarro and Death by China. The production of an anti- China, trade- protectionist film is well outside the scope of UCAN s purpose. It also raises significant questions of misdirection of charitable funds and breach of charitable trust. Under the DBC contract, UCAN is paying for the production of one million dollars worth of intellectual property and then giving it away to a for- profit entity. The only consideration guaranteed to UCAN in exchange for this million dollar give- away is a DVD copy of the movie(s) produced. B. Red Rock Financial In January, 2006, Michael Shames placed $1,000,000 in UCAN funds into the Red Rock Capital Fund, a high risk hedge fund investment. (Exhibit I). This investment was recommended by UC- Irvine economics professor Peter Navarro, who was also the recipient of the Death by China money and is named in the Grand Jury Subpoena, and hedge fund manager Matt Davio. Ultimately Shames lost UCAN $262,632 in this highly speculative and risky investment. To my knowledge UCAN has not investigated the Red Rock losses, and no disciplinary action has been taken against Shames.

6 I believe it essential that the Attorney General have a full and accurate understanding of the events taking place at UCAN before making any decisions regarding UCAN s future. Sincerely, /S/ David A. Peffer, Esq. Dated: February 27, 2012