In 1998, during the final weeks of his second race for state Attorney General, Eliot Spitzer called a confidential meeting for less than a handful of nonprofit leaders and philanthropy experts. The candidate wanted to learn more about the Apollo Theater fiasco in Harlem, in order to more clearly understand the AG's role in regulating charities. At the time, Spitzer and his campaign staff were traveling all over New York state, stumping in rusted-out industrial centers along the Erie Canal and flying back to Manhattan at night, looking to outhustle incumbent Dennis Vacco. Many at the meeting figured that with the election so near and the candidates so evenly matched, Spitzer would ask a few questions, probe for advice, then get onto a plane for Buffalo by lunchtime.

Instead, he wouldn't leave. He stayed at the meeting for four hours.

These days, Spitzer is still everywhere. He's fought gougers who sell overpriced school milk. He's busted wayward tree loggers upstate. He's extinguished tobacco ads from the school editions of news magazines. He's attacked Wall Street's bogus research analysts, of course, and probed trade tampering in the mutual fund industry (he currently has over 100 subpoenas outstanding). His press secretaries' home and cell phones now ring in the middle of the night and on weekends. Spitzer has become one of the nation's most recognized attorneys general. And as political insiders point out, "AG" has consistently stood for one thing in politics: Almost Governor.

But even as his lawyers go after big-money crooks, Spitzer has focused a sliver of limelight on the state's poorly regulated charity industry. Some watchdogs like to compare this do-gooder sector to the Wild West, a land where oversight is scant, and where mischievous board members and imperial directors are free to run for the hills with public money or donations, leaving as their only spoor an incomprehensible paper trail of IRS Form 990s.

Thus, in addition to Bank of America and Merrill Lynch, we have (with help from the Daily News) the charity Hale House, where a home for orphans became a budget for Lorraine Hale's wardrobe. There is the string of queries into improper fundraising and spending after September 11. Less visibly, the AG's office has intervened into and overhauled other negligent nonprofits. One such organization is the Black United Fund of New York (BUFNY) in Harlem. AG investigators discovered that BUFNY president and founder Kermit Eady was taking millions in donations and awards to specific grantees, and spending the money on real estate without board approval. Eady has since been removed, an interim board has been installed, and the AG's office is interviewing candidates for permanent positions on BUFNY's board.

There's a new, take-no-prisoners attitude at the AG's charity bureau, say nonprofit lawyers and leaders who've come under the office's scrutiny--during merger discussions, for example. Attorneys are "more aggressive" and "heavy-handed," and can be "a total pain in the ass," says one. The details of transactions are now subject to vigilance. The bureau seems more aggressive about enforcing basic reporting requirements--it boasts that it has collected 25 percent more in fines this year than last, thanks in part to a $150 penalty on nonprofits that are delinquent in filing their 990s.

But in fact, former staffers say, Spitzer's Charities Bureau isn't doing much more than his predecessors'. That's because the office has always been terribly understaffed--and it still is. Only 20 attorneys and four accountants are responsible for some 48,000 tax-exempt groups that file with the AG's office every year, and another 9,000 registered nonprofits that are delinquent in filing. For the last three years, the number of "assurances of discontinuances" (i.e., civil settlements reached by the Bureau with nonprofits) has been roughly the same: some 10 cases annually, according to documents obtained through a Freedom of Information Act request. With 16 other bureaus in the AG's office and a total of 500 attorneys, and with so much of Spitzer's attention going to investigations of the financial sector, the Charities Bureau has been virtually left to its own devices.

"Eliot doesn't bother us at all," says William Josephson, the Charity Bureau Chief, adding that one of Spitzer's most effective qualities as AG has been his ability to delegate responsibility.

So why have nonprofit executives around the state been competing with hedge-fund managers in the intensity with which they watch Spitzer's every move? The answer goes by the nickname "SOX," but the full reference sounds vaguely like a brand of men's dress shoes worn with argyles: Sarbanes-Oxley.

Over the last year, Spitzer has been advocating a state bill that would enhance his office's capacity to monitor and, if necessary, take action against nonprofit organizations. Not incidentally, the bill is also meant to force nonprofits to govern themselves more effectively. The Charities Bureau has spent the last year on a statewide campaign to sell nonprofits on the measure. "There's not a speaking engagement we turn down," Josephson told a crowd of nonprofit accountants during a speech at "Camp Finance," a retreat at the Mohonk Mountain Resort in October.

The proposal is a nonprofit-oriented, state-based version of the federal Sarbanes-Oxley Act, which regulates publicly traded companies. That's why many in the nonprofit sector dubbed the AG's proposal SOX, and it's also why some leaders in the same field bristle at Spitzer's cross-sector crusade. Financial controls that might be right for profit-making enterprises, they say--including board audit committees and financial statement certifications--may be a crushing burden on nonprofits, which typically run on shoestring budgets. Under the most recent version of the proposed bill, all groups with more than $1 million in revenue would be subject to the regulations.

"It's not a very good fit," says Dan Kurtz, a former Charities Bureau Chief under Vacco and now a partner at Holland & Knight who specializes in representing nonprofit organizations. The SOX-style bill presumes all groups are guilty until proven innocent, he says. It gives the AG's office more power and prosecutorial discretion, and ultimately creates potential for abuse by the AG's office itself. "Not all attorney generals," says Kurtz, "can be as scrupulous and confident as Eliot Spitzer."

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The Charities Bureau is located on the third floor of AG headquarters at 120 Broadway. Milling around the lobby, a visitor sees an eerie resemblance to a hospital emergency room. Perhaps that's fitting, since the work that goes on behind closed doors here can seem like painstakingly tedious, bone-cutting surgery.

When Spitzer first took over the AG's office, many sector leaders hoped he would pick a bureau chief with extensive nonprofit experience--someone who sympathized with organizations forced to run on dwindling funds, and who understood that to keep programs running and pay the light bill, a nonprofit sometimes has to stick up Peter to pay Paul. They wanted a chief who could relate.

Spitzer hired just the opposite. He picked Josephson, who'd recently left his post at the white-shoe firm of Fried, Frank, Harris, Shriver and Jacobsen. Josephson had been there longer then anyone can remember, and was anticipating a retirement listening to classical music, hiking near his country home in Columbia County, and playing his baritone flute.

Inside the AG's office, some workers call Josephson a stern boss and, at times, mutter that he can be tough to work with. When one nonprofit lawyer tried to orchestrate a merger between two groups, he says, the bureau treated the move "like a reenactment of the Brinks robbery." But others call Josephson a no-nonsense type whom the agency needs in order to deal with dwindling resources and less oversight. They joke that Josephson's hard edge has forced many charities to incorporate in other states.

Josephson does not sympathize with groups that fail to meet standards of good governance; he complains that "a pervasive sense of self-righteousness" has infected the industry. That attitude, he feels, needs adjusting--no matter how much it hurts. The task requires resourcefulness: It's hard to find the best legal talent when starting pay is just $40,000 and candidates must be at least two years out of law school. Even so, 14 of the Bureau's 20 attorneys are new hires.

One of Josephson's first moves as chief, he says, was switching a 20-year veteran, Karin Kunstler Goldman, from head of the reclusive filings department to the more visible office of public education. So far, this seems to have been a home run for the Bureau: Unlike Josephson, Goldman (the daughter of late civil rights attorney William Kunstler) has a warm bedside manner. Her connections in the sector run deep, and it's hard to find any nonprofit leader who does not praise the Spitzer Bureau's outreach to philanthropy groups--especially when soliciting feedback on SOX, which many say has been like trying to spoon-feed medicine to a cranky child.

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Ever since unveiling its nonprofit regulatory legislation, the AG's office has been talking to sector leaders about the SOX proposals, and making revisions when doing so has been politic.

Originally, SOX sought jurisdiction over all groups bringing in $250,000 or more--which generated an outcry among nonprofits. The quarter-million-dollar minimum "was much too low," says Cristine Cronin, director of Charity Wave, an online service that channels donors' gifts directly to groups. She contends that small to mid-level groups on thin-ice budgets would be strained trying to acquire accountants to assess and develop financial controls. Auditors doing this work charge about $15,000 for the first year, experts say, and $5,000 to $8,000 annually after that.

So now the AG plans to focus on groups that take in $1 million a year or more in revenues, or hold $3 million or more in assets. Each organization's board would have to form an audit committee to review financials. Executive directors and treasurers or fiscal officers would have to certify financial statements, and they would bear criminal responsibility for any cooked accounting. (Initially, board members had to certify a group's financial statements--a clause many leaders felt would frighten away volunteers.) Among other measures, the AG's office also wants the power to challenge any decisions made by a board of directors that involve insider dealing--transactions between members of the board or the staff of an organization, done for their own benefit.

Spitzer maintains that, as stakeholders with a vested interest in keeping an eye on things, audit committees can play the same watchdog role in a nonprofit that shareholders do for business enterprises. Dan Kurtz disagrees and calls the analogy "superfluous." In the corporate world, he points out, only the biggest companies are required to submit to federal Sarbanes-Oxley provisions. Without securing truly independent committee members, Kurtz says--an additional burden for groups already struggling to attract volunteer board members--such financial controls could be rendered ineffective.

Perhaps not surprisingly, accountants who work with nonprofits are among the minority in the sector who welcome the legislation with open arms. Concerns over spending money on audit committees are a "knee jerk" response from panicked groups and the lawyers that represent them, says Julie Floch, a partner and director of nonprofit services at the accounting firm Eisner LLP. She insists there is no inherent cost to adopting SOX's current measures. (Floch also heads the accounting committee of the Nonprofit Coordinating Committee, which has made recommendations to the Charities Bureau on the shape of the legislation.) The idea that SOX's more stringent regulations would take vital resources away from services, she adds, is "perception, perception, perception."

Certainly, the AG has been ceding a lot of ground in the bargaining process to nonprofits. Currently, the legislation states that the leader of a group and its chief fiscal officer should be the only individuals held criminally responsible for wrongdoing--and then only if the misdeeds were committed with their full "knowledge and acquiescence."

But the bill still has some powerful hooks. It gives the AG authority to challenge decisions made by a board of directors. The AG's office can already do that, under statutes currently on the books, says Sean Delany, a former Charity Bureau Chief for Vacco and now head of the Lawyer's Alliance, a group that offers free legal services to nonprofits. Until now, though, the language in the existing regulations has been interpreted in convoluted ways, he says. Spitzer's new provisions don't just make the office's powers "crystal clear," Delany says, they also make it the nonprofit's responsibility to prove it's done nothing wrong, rather than the AG's obligation to prove it has.

With some reservations, Jonathan Small, executive director of the Nonprofit Coordinating Committee, says giving the AG's office direct power to challenge board decisions might be essential to SOX's effectiveness in the future. "It's our belief that [self-dealing] is the area where the worst board conduct occurs," Small says.

Josephson agrees, and to prove it his office has compiled what they call a "Chamber of Horrors"--a catalog of egregious transgressions by New York nonprofits. Consider the Grand Marnier Foundation, the nonprofit arm of the French liquor importing company. In the past, the group has offered three $5,000 film fellowships to students. At one point, the AG's investigators determined, the foundation's board of directors received $33,000 a month to attend board meetings, and board officers took in nearly $3.5 million in personal compensation. (The Grand Marnier Foundation did not return calls seeking comment.)

An independent audit committee and tougher certification standards might have been able to prevent such behavior. Seen another way, Josephson says, forming an audit committee or hiring an independent auditor to assess internal financial controls could save some groups money in the long run. If embezzlement couldn't be uncovered, then budgets could at least be analyzed to reveal possible cost savings.

But, says Josephson, when he raises SOX's potential cost-saving component before nonprofit audiences, he often sees blank faces or bewilderment.

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At the Black United Fund of New York (BUFNY), there is no audit committee. Until Spitzer stepped in, there was virtually no board of directors either. And despite the group's small size, the AG's siege on the organization has triggered a political brush fire in Harlem. Picketers have taken to marching outside BUFNY offices on Adam Clayton Powell, Jr. Boulevard. They say the Charity Bureau has been too dictatorial, that Spitzer is abusing his powers, and that Kermit Eady, BUFNY's founder, should have his baby back.

"Keep your hands off!" Eady warned the absent Spitzer during a recent rally at the historic AME Church on 135th Street. "This fight we will win!"

"Teach!" hollered his angry audience.

It all started with the Apollo Theater, Eady said. Spitzer had signed a settlement agreement stating that board chairman and Harlem congressional fixture Charlie Rangel, along with other board members, did not violate their fiduciary responsibilities when they brokered the theater's lopsided contracts with television executives. Even so, Spitzer forced Rangel and the board to step down. Then the AG went after another Harlem charity, Hale House, Eady said. Spitzer replaced that board, too. Why, Eady asked, was Spitzer--the white, wealthy, Jewish son of a real estate developer--mounting an assault on Harlem?

Eady's beef with Spitzer is personal. Acting on a tip in January 2002, the AG's attorneys began to probe BUFNY, the charity that Eady founded nearly 25 years ago. Back then, Eady saw an opportunity, after noticing how easily groups like the United Way could raise money through a system of payroll deductions--say, $1 a week--passed on to a grantee of the donor's choice. Because many black charities weren't listed on the United Way's rosters, Eady figured there was a need for one that included only black groups, whether small or large, local or out of state. He wasn't the only one with the idea. Several affiliate groups started to form. They merged as the National Black United Fund. (Since then, the NBUF has cut all formal ties with Eady's group over "accountability" issues and has sued Eady in court to stop using their name. In his defense, Eady says the matter is a personality issue, based more on an internal power struggle than on fiscal accountability.)

Once the AG began investigating BUFNY, however, attorneys in the Charity Bureau began to notice inconsistencies and "disturbing facts." They also saw a virtual lack of internal structure--not to mention oversight.

There were no formal business records or evidence of board meetings, according to a preliminary report on BUFNY compiled by the AG's inves tigators. The handwriting on the group's 990s was barely legible. The forms, which are supposed to be filed with the AG's office every year, hadn't been submitted in three years. More important, in years the group did submit the filings they were incomplete, with hundreds of thousands of dollars unaccounted for.

Some grantees were also complaining that they hadn't received funds in years, according to the AG report. Of the $1.1 million BUFNY raised through payroll deductions in fiscal year 2000, only $7,000 went to its designated charities. Payments to those charities, acknowledges Eady, have "not been high."

So, where did all the money go? With the "full" consent of BUFNY's donors and grantees, Eady says, the group decided to change its mission to "economic empowerment" and invest grantees' money into several apartment buildings, in order to create affordable housing in gentrifying Harlem. When asked by the AG's attorneys how many donors or grantees knew about the change in mission, records show that Eady replied, "Some do, and some don't."

Currently, BUFNY has more than 400 housing units, at an estimated worth of $15 million to $40 million. Yet the group is somehow still $2 million in debt. Investigators from the AG's office are trying to figure out why. Eady's cooperation has been "limited," according to AG documents.

When the new interim board appointed by Spitzer first arrived at BUFNY's offices this summer, many of the members were shocked. "It was like a giant monsoon had come and tossed everything around," says Briding Newell, a board member and former commissioner of Nassau County's Drug and Alcohol Addiction department. "We find something new everyday," she says, "another piece of the puzzle." The new chairman, William Davis Jr., an architect from Harlem, says Eady had "a fundamental, profound, philosophical difference" with traditional forms of charitable oversight. Says Davis, "It wasn't clear Mr. Eady understood at all that BUFNY was a public entity, using public dollars for a public mission."

With so little money, such high expenses, and the disadvantage of being a black charity, Eady says, a director must creatively find ways to keep the organization afloat and pay its employees. "I may have not have been perfect," he says, "but I never missed a payroll."

After only a few months, Newell, Davis Jr. and Spitzer's other board appointees voted to terminate Eady from his $100,000 a year post as president, along with Eady's secretary, Larry Barton, who earned $67,000 annually. (Before the Spitzer team moved in, Eady and Barton, along with disgraced DC-37 union boss Stanley Hill, were listed as the group's only board members.) The new board voted to make Newell its executive director.

In Harlem, the battle for BUFNY has since become a turf war. Eady's outraged supporters claim the new board members are cultural strangers. "Oreo cookies!" one person at the church rally called out, chiding the members because four of them live in Nassau County.

It doesn't matter if Spitzer wins the governor's seat, Eady says. The Bureau's actions against BUFNY show that he is trying to reconstruct Harlem institutions to bolster his political advantage. That sends a dangerous message to black voters and community leaders. Long-time tenant organizer James Lewis, who runs Operation Takeback Harlem, has taken Eady's fight to the streets with the picketers. Lewis says it doesn't matter if Eady committed any financial wrongdoing while running BUFNY. The issue is domain.

"They're outsiders," he said of Spitzer's appointees.

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Could the AG's proposed regulations stop a BUFNY-style debacle--if a board or a director is determined to get away with it? Probably not, contends lawyer Dan Kurtz. "There are a lot of bad people in the world," he muses.

Even supporters think Spitzer will have to overcome many obstacles for the proposed bill to become more than just a list of talking points. The first problem, many say, is resources. If the Charities Bureau is already strapped for money and manpower, how can it make sure its new laws are enforced?

The second problem is political. Regardless of the bill's merits, it was created by a Democratic contender--so how does the bureau plan to push it through the Republican-controlled State Senate? Ask virtually any of SOX's supporters what the game plan is to slip the revised bill past Majority Leader Joe Bruno in this year's session. The response is usually a shrug.

"The hope," says Small, "is that the good governance of nonprofits won't be seen as a partisan issue." To Delany, that lofty aspiration is a pipe dream. Asked about SOX's future, he chuckles: "Unfortunately, the Republicans in the state Senate would rather fund Eliot's entire campaign for Governor than hand him a victory like this."

Floch says that it's not important anymore whether the law passes, because its goals are already being accomplished. "The whole point is to get nonprofits thinking more about ways they can govern themselves better," she says. "By now, with all the back and forth, there might be some groups out there saying, 'You know, maybe we should put together an audit committee.'"