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Further disquieting emails have surfaced internally in the case of nonprofit watchdog Utility Consumers' Action Network (UCAN), whose financial missteps are under investigation of the Federal Bureau of Investigation.

According to documents recently unearthed, Michael Shames, UCAN's co-founder who was ousted this year, on April 26 of last year emailed Kendall Squires, who had been named chairman only a month earlier. In that email, Shames described a meeting that he and Bob Ames, then newly named chief operating officer, had allegedly had with Paul Dostart, lawyer/forensic accountant who had been named a month earlier to look into UCAN's irregularities.

Said Shames in the email to Squires, "He (Dostart) specifically instructed auditors NOT to investigate any embezzlement or misuse of UCAN monies by me." Shames claimed that Dostart only wanted outside auditors to do a 2010-2011 fiscal year audit. Under such a strategy, the auditors would not have found the serious violations, which had occurred several years before the 2010-2011 fiscal year.

"I never wrote such an email," insists Shames.

Says Dostart, "I hereby advise you that at no time have I ever instructed an auditor to not investigate and report any fraud, embezzlement, or misuse of UCAN funds."

"Whatever Mr. Shames thought he heard, he did not hear Dostart say that," says Squires, who agrees that such instructions would be an ethical violation at the least. He says he does not recall and does not have a copy of the email. Squires says that increasingly through 2011, as the UCAN board members pondered Shames's role in the organization, "the discomfort grew."

That email which Shames claims he did not write indicates that Dostart said he would write a memo that refuted complaints of UCAN whistleblowers. On March 4 of 2011, whistleblower David Peffer told the UCAN board of financial irregularities; on March 17, Shames met with the staff and said he intended to dissolve the organization and would get board support. On March 25, he told the board that he wanted to dissolve UCAN and perhaps merge it with another watchdog organization in San Francisco. By September, UCAN was informing the attorney general's office of the desire to dissolve. Squires can't recall when the board decided on that course.

It would have been impossible for Dostart to give assurances that he would rebuke the whistleblowers only a month into his assignment. "I can't conceive of Mr. Dostart making that statement at that time" says Squires. He says he gave Dostart instructions to look for transgressions including "evidence of foreign bank accounts." Dostart did not tell him of any offshore accounts, he says.

Many of the UCAN questions revolve around accounts at financial institutions in which the name of the entity was misspelled: "CoMsumers." Squires initially wondered whether there had been a keying error at a financial institution. But those misspelled "CoMsumers" accounts show up at five institutions. Squires concedes that the odds of the same keying mistake being made in five separate financial institutions are exceedingly long. "I learned a while ago that the auditors were unable to get the documents," says Squires. "I went to the bank as chairman asking for them." The board hopes to find out about those misspelled accounts, he says. (Now, internal researchers have found that one of those misspelled accounts had more than $600,000 in it. Dostart had initially said that the dollar amounts in the misspelled accounts were low.)

The second disquieting revelation revolves around $2 million that UCAN received in 2005 as the result of a lawsuit that had been filed against an outfit renting housing goods to people. It was decided that UCAN should use the funds on consumer education projects. But inside researchers have shown convincingly that $1 million of that money went into a hedge fund named Red Rock. In 2005, Peter Navarro, former San Diegan who had earlier made $50,000 working for UCAN, wrote Shames that "the hedge fund guy I work with, Matt Davio," was coming to Southern California to do a lecture with Navarro. Davio met with Shames and a board member and convinced them that the fund was a good way to make conservative income. But Davio was betting the market would go down; it didn't. At one point UCAN's loss was a good deal more than $260,000. When the loss was 17%, Shames emailed Navarro and complained, "Down 17% for the year. But no response to my email. What have you found? I had initially decided that if I had a 20% loss, I pull out. We are pretty close now."

Squires thinks the ultimate loss was $130,000. It is not clear if UCAN got money back from Red Rock, or if the market went Red Rock's direction. I asked Squires if it was legal or prudent for UCAN to plunk that money in a hedge fund, and if investing that money was a violations of the court's mandate to spend it on consumer education. "If I take your facts as given, it [seems to have been] a play on the market as opposed to an investment," says Squires. "At a minimum it is questionable." Amen.

San Diego lawyer Frank Fox, who was one attorney handling the case, says he is still studying if the hedge fund investment was a violation of the court's instructions.

Says San Diego attorney Mike Aguirre, who is representing the UCAN whistleblowers, "There were a bushel of red flags that demanded an audit over many years and at each juncture the board failed to do the job they were obligated to do. It will take somebody outside the organization to resolve this -- one of the regulators." (The California attorney general claims it is investigating, as well as the Federal Bureau of Investigation.)

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Comments

SurfPuppy619 Nov. 3, 2012 @ 12:41 a.m.

Putting UCAN money into a hedge fund is an absolute violation of fiduciary responsibility for a non profit consumer watchdog. Shames could easily be personally sued and held liable for the losses.

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Don Bauder Nov. 3, 2012 @ 7:08 a.m.

SurfPup: This is what Aguirre believes, too. In particular, it appears to be a violation of the designated use agreement. In any case, it is certainly not prudent. At some point when the UCAN money was in there, Red Rock was net short, according to the documents that have been unearthed. That makes it a speculation, not an investment. Best, Don Bauder

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Don Bauder Nov. 3, 2012 @ 10:02 a.m.

NOTE 1: NEW LOSS DATA. Kendall Squires has called me back to say that he thinks that UCAN lost $263,000 in the Red Rock hedge fund. Earlier, he had thought the final loss was $130,000. Best, Don Bauder

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Don Bauder Nov. 3, 2012 @ 10:15 a.m.

NOTE 2: SHAMES HAS DIFFERENT RESPONSES TO QUESTIONS ABOUT APRIL 26, 2011 EMAIL. Jeff McDonald of U-T San Diego has a very good page one story this morning (Nov. 3) on the same set of events I reported on this morning. It is clear that both McDonald and I asked Shames about the April 26, 2011 email in which Shames related a conversation he had had the day before with Bob Ames and forensic accountant/lawyer Paul Dostart. Shames said in that email, "He (Dostart) specifically instructed auditors NOT to investigate any embezzlement or misuse of UCAN monies by me." When confronted with that email, Shames told me via email, "I never wrote such an email. Your reportage of such a fact is defamation per se." But Shames's response to McDonald is quite different. McDonald writes, "Shames stood by his 2011 email. 'Mr. Dostart can explain why he made the decision he made,' Shames wrote in an email." So which is it? As the barbershop quartet said in its warmup, "Hmmmm." Best, Don Bauder

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SurfPuppy619 Nov. 4, 2012 @ 9:27 a.m.

Poor Shames, you are destroying him.

How did he get so misguided (if he did some criminal acts, I have no idea if these allegations are true or not).

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Don Bauder Nov. 4, 2012 @ 11:37 a.m.

The question is not whether I am destroying Shames, or others in the media are, but whether Shames has destroyed himself. This will play out. Best, don Bauder

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Visduh Nov. 4, 2012 @ 7:49 p.m.

If anyone did a number on Shameless, it is Mikey himself. He may have been one of those people who granted himself secular sainthood for all the good deeds he'd done, and then started thinking big. Bend a few rules here and there around the margin, no harm done. It is, after all, for the greater good. Bend a few more rules to make the organization better. Why, "everyone" does things like that. (Unfortunately that has more than a germ of truth in it.)

Eventually, after "crossing the line" more than a few times, he wakes up one day and he's a crook. But, what the heck, it was all done for the benefit of the public (and for his career.) So, which is it, the public or his stagnated legal career? He makes a choice and heads to regions that angels fear to tread. Will the shameless one end up disbarred and in custody? I'd guess that the chances are higher than 50-50, and we have not heard the worst yet. This story is like opening up a rotten onion; each layer removed reveals an ever more rotten layer beneath.

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Don Bauder Nov. 5, 2012 @ 10:23 a.m.

Visduh: We have definitely not heard the end of this. One question is whether somebody on the current UCAN board is pressuring the US Attorney to drop the case that has been carefully constructed by the FBI. We will find that out. Clearly, key members of the current board realize now that Shames's activities were extremely questionable. Will this be another case in which San Diego law enforcement completely and deliberately drops the ball? Best, Don Bauder

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