How could this happen?
The story behind the League of Chicago Theatres' disastrous embezzlement scandal.
On December 6, the city's theater community gathered at Vintage, a trendy restaurant on North Halsted, for the League of Chicago Theatres' annual holiday party. Toward the end of the evening, executive director Marj Halperin announced that the league had just received its first-ever grant from the National Endowment for the Arts to fund a marketing initiative that would help develop audiences, a major priority in recent years. But the good cheer would prove short-lived: by December 30, Halperin and her board of directors, headed by president Kelly Leonard of Second City, had detected a cash-flow crisis at the theatrical trade association. "We couldn't figure out why that was happening," recalls Halperin. "We didn't think there was any reason we should be having those problems."
That day Halperin called in the league's auditing firm, Pandolfi, Topolski, Weiss & Company. The auditors, led by former city comptroller Ron Picur, spent three weeks combing through the league's financial records and finally delivered some shocking news to Halperin and the board's executive committee: over several years a longtime league employee had allegedly undertaken a systematic embezzlement totaling at least $200,000. According to Picur, the league's annual audits failed to uncover anything because such examinations aren't designed to ferret out fraudulent activity.
Halperin characterizes the alleged perpetrator as someone she'd grown to trust and respect: "We had shared personal stories and confidences." Others involved in league business say the person kept a Bible at her desk and even fasted on Wednesdays, perhaps to atone for her moral turpitude. According to sources at the league, she was confronted with the evidence and confessed to a pattern of wrongdoing that dated back at least to 1998. Halperin says the league turned over its evidence to Randall E. Mehrberg, its counsel at the law firm of Jenner & Block, who has passed it along to the state's attorney. According to Mehrberg, state prosecutors will investigate and decide whether to press criminal charges; a spokeswoman for the state's attorney's office said late last week that no charges had yet been filed.
Details of the alleged embezzlement were presented to the board of directors on January 27, and the next day Halperin and the executive committee faxed a memo to the league membership. "As a result of improved accounting and auditing procedures, we discovered a complex system that this employee apparently crafted to divert league funds to personal use," the memo explained. "It involved a sophisticated bookkeeping system that made the theft virtually impossible to detect over an extended period, perhaps even years....We are sure this news will be as much a shock to you as it is to us, as we are a committed organization founded and run by those who take pride in our teamwork."
But not everyone in the city is sympathetic. Doug Bragan, owner of the Ivanhoe Theater and a former auditor, served as a consultant to the league in the early 90s and helped implement a much-needed system of financial controls before ditching the league to found a rival organization, A.R.T. League Inc. "It looks like the whole system fell apart," he now says. "It doesn't appear the finance committee on the board was functioning well or asking the hard questions about finances and financial variances in the books." Alan Salzenstein, vice president of the board, concedes that the board may have been too trusting in its oversight of the league's finances: "Unfortunately our eyes were closed to what was going on."
Halperin says the alleged embezzlement dates back to 1995, well before she came on the scene, but the league's accounting system seems to have functioned differently during the tenure of her predecessor, Tony Sertich, by all accounts a stickler when it came to financial matters. Sertich, who now lives in Minneapolis, says he regularly checked and rechecked the bookkeeper's reconciliations of bank statements. To create a separate, verifiable record of incoming funds, all checks were logged in by the receptionist before being passed on to bookkeeping, and no check over $200 could be issued without a cosignature (a figure that ballooned to $2,500 during Halperin's watch). Sertich says that nearly every check was computer generated and that he made random, unannounced visits to Hot Tix locations to be sure the cash registers tallied up correctly.
In January 1996, Sertich was ousted as executive director after the board overruled his firing of marketing director Michael Pauken and Hot Tix manager Phil Lombard, both of whom were rehired while a search committee looked for a new director. Pauken says he doesn't recall ever having looked at the league's bank statements during his nine or ten months as senior staff member in charge of the office; all financial matters were handled by the league's bookkeeper--its only remaining full-time employee--along with various board members who came in on occasion. Halperin took over as executive director on January 1, 1997. Formerly a deputy press secretary for Mayor Daley and the marketing director for the Chicago Park District, Halperin was expert in marketing and public relations, while sources say that Sertich was more adept at mundane matters of finance. Says Pauken, "They went in a 180-degree different direction when they chose Marj."
Halperin was unhappy with the league's accounting software when she arrived: "It was very complex and totally out of proportion to the league's needs." The software could be used only on the bookkeeper's computer, and a person would have had to go into that person's office to reconcile bank statements. Halperin also says there was no receptionist to log incoming checks, except for those sent to the co-op advertising program. All outgoing checks were drawn up manually on an IBM Selectric typewriter, which apparently allowed the alleged embezzler to change the name of the payee. Halperin wanted to install a different accounting system but first needed a business manager to handle the complicated changeover in software. In 1998 a larger budget permitted her to hire Barb Netter, a former retail operations manager at Grand Stage Lighting Company, and by mid-1999 the league was ready to install the new software. The auditors' preliminary investigation shows that the alleged embezzlement accelerated in the latter half of that year, and Netter encountered a series of glitches as she tried to change over to the new software. Says Halperin, "I now believe that was all due to sabotage."
Late last week auditors and league staffers were still sifting through checks and invoices, trying to determine the extent of the alleged scam, while many in the theater community speculated that the league's losses might exceed the $200,000 announced in the memo. Halperin denies that the league's programs will be affected by the financial setback, but she no longer plans to fill two vacancies on the ten-person staff. Meanwhile, local theater veterans were recalling the last days of Diane Olmen's long tenure as executive director, when warring factions within the league debated whether it should be underwriting such questionable activities as officials' trips to Russia while the organization's financial situation steadily declined. Eventually Olmen was forced to resign, and the league spent much of the 90s trying to rebuild itself. Now some wonder whether the latest debacle will exhaust the theater community's tolerance. Notes Sertich, "There are only so many times you can have these kinds of scandals before people throw up their hands and lose faith."
In a January 28 item on the Chicago Human Rhythm Project, we misspelled the name of key backer Richard G. Weinberg and misstated the 1998 festival's deficit, which was $110,000. We regret the errors.
Art accompanying story in printed newspaper (not available in this archive): photo/Nathan Mandell.