http://www.washingtonpost.com/ac2/wp-dyn/A20332-2003Nov9?language=printer

 washingtonpost.com

Senate Panel Intensifies Its Conservancy Probe

By Joe Stephens and David B. Ottaway
Washington Post Staff Writers
Monday, November 10, 2003 ; Page A01

A six-month inquiry into the Arlington-based Nature Conservancy by the Senate Finance Committee has raised "new questions in a wide range of areas," leading investigators to intensify their pursuit of internal audits and property records they have been seeking since last summer, according to committee Chairman Charles E. Grassley (R-Iowa).

Committee investigators, who have been looking into the charity's management and real estate sales, are now particularly interested in the "valuation of land donations and the conservation-buyer program," Grassley said. The charity uses that program to sell property to private individuals, including Conservancy members.

In a statement, Grassley said he is reserving judgment until the investigation is concluded, but added: "I expect it will become even more clear that reforms to existing law should accompany any new incentives for taxpayers to donate land for conservation." Grassley is sponsor of a bill backed by the Conservancy that passed the Senate earlier this year and which would provide hundreds of millions of dollars in new conservation tax breaks.

"The Conservancy always anticipated there would be additional questions," the charity said in a statement Friday. "Should the Committee identify reforms it feels are needed, the Conservancy stands ready to work with the Committee to design and implement them."

Grassley's comments came as committee staffers and Conservancy officials met last week to resolve issues that have delayed the release of key Conservancy documents, which detail some of the charity's largest and most controversial real estate deals.

"There are some areas where the Finance Committee has yet to receive a complete response or will require additional information," Grassley and ranking Democrat Max Baucus ( Mont. ) wrote to the Conservancy last week. The Conservancy had said it could not hand over some of the records because it was bound by confidentiality agreements or did not want to release proprietary information. In its letter, the committee offered to subpoena the documents.

Baucus said in a statement last week: "The Nature Conservancy has been cooperative with the information requested to this point, and I expect this willingness to continue." The senators also asked the Conservancy for a written promise not to retaliate against whistleblowers who "have been chilled by confidentiality agreements."

Conservancy officials said in Friday's statement that they expected "in a matter of days" to resolve all issues holding up release of the documents, including concerns about individual privacy.

"The Conservancy has cooperated voluntarily and fully with the Committee and its staff throughout the inquiry and it will continue to do so," the group's statement said. "The Conservancy is eager to produce the remaining documents as soon as possible."

The Conservancy said it has obtained confidentiality waivers and is awaiting "confirmation from the committee of the Conservancy's understanding of how Senate disclosure rules will be applied."

With $3 billion in assets, the Conservancy is the world's largest environmental group and has preserved millions of acres worldwide.

The areas where the committee is seeking additional information include: internal Conservancy audits, Conservancy land sales to government agencies, a $64 million land deal on Martha's Vineyard that involved talk show host David Letterman and "details of sales, donations or purchases of land with certain private individuals and companies," the senators' letter says. The Conservancy said that 11 of its land transactions were covered by confidentiality agreements.

The Washington Post independently obtained one Conservancy audit, of a project on Virginia 's Eastern Shore . The audit found widespread accounting problems and violations of Internal Revenue Service regulations. The audit also states that managers helped a contractor "hide personal income."

The Senate inquiry began after a Post series in May reported on a wide range of Conservancy practices. Articles detailed how the charity had sold scenic properties to its state trustees, who reaped large tax breaks. Other stories disclosed that the charity engaged in multimillion-dollar business deals with companies and their executives while they sat on the charity's governing board and advisory council. The Conservancy responded by banning a range of practices.

The senators wrote the Conservancy in July seeking internal records covering 18 broad categories and set an Aug. 18 deadline. The Conservancy pledged to cooperate and has provided about eight boxes of documents. But it has withheld a number of other records. They include:

• Private records from a $64 million deal in which the Conservancy acquired 215 acres in Martha's Vineyard , Mass. , and immediately resold half. In a complicated chain of transactions, Letterman's holding company acquired several of the ocean-side tracts for use as luxury home sites.

The deal generated $32 million in potential tax breaks for the families and businesses of Boston developers Neil and Monte Wallace, two major Conservancy donors. The Conservancy defended the deal, which was outlined in the Post series in May, as a bold initiative to restore ecologically valuable grasslands.

• Details of a gift to the Conservancy of certain development rights on 11,000 acres of rugged canyon lands near Los Angeles from the Irvine Co., one of the nation's largest development companies. The gift allows the Conservancy to preserve the land, while Irvine can seek to write off the value of the rights as a tax-exempt donation.

Interviews and internal records show that the Conservancy valued those rights at $120 million and listed that amount as revenue on its books. An internal memo obtained by The Post shows that last December a Conservancy official said during a teleconference that he was concerned that the media could view such valuations "as subjective and a tool we used to inflate our income."

A Conservancy spokesman declined to comment on the gift Friday, and the Irvine Co. did not respond to requests for comment. The Conservancy said at the time of the gift that it allowed the group to preserve "relatively pristine tracts of land" and rare species in a rapidly developing area of California .

• The audit of the Virginia project, obtained by The Post after its May series, examined the Conservancy's purchase and management of millions of dollars in land through a project known as the Virginia Coast Reserve, or VCR. Stamped "Confidential," the March 2002 report said that auditors originally uncovered widespread problems two years earlier.

"Its runaway debt and deficits were essentially overlooked by corporate management," auditors wrote. The program had an operating deficit of $2.3 million, $3.3 million in external debt and $18 million in internal debt owed to the Conservancy's Land Preservation Fund.

"VCR owns numerous real properties and capital assets that were never properly recorded in the general ledger," the report states. "Several million dollars worth of land costs . . . could not be identified either in the files or from the county tax records."

The report noted that VCR hired an employee's family member to handle deposits and receipts and said that many transactions were improperly recorded.

For years, the report said, the IRS was not told that the charity provided some employees with free housing and free use of a car, a lapse described as an IRS violation.

The audit said a Virginia farmer, who oversaw property leases for the Conservancy, negotiated and managed six farm leases with his own father. The report said Conservancy officials paid the farmer's wife, instead of the farmer.

The report does not name the employees involved. Auditors sent their findings to Conservancy President Steven J. McCormick on May 24, 2002 . It is unclear whether McCormick alerted the IRS.

Asked about the audit, the Conservancy said in its statement, "The Conservancy declines to comment about the specific details of the internal audit, except to say the matters highlighted in the audit have been addressed to ensure activities at the Virginia Coast Reserve are in compliance with the Conservancy's policies and procedures." The statement also said the audit's findings "played a significant role" in reforms of the VCR program.

According to the senators' letter, the charity earlier offered to release additional records sought by investigators in exchange for confidentiality protections "modeled after the agreement entered into between the Finance Committee and Enron Corp." But the senators said that agreement was narrowly tailored to allow the committee access to Enron data protected under IRS regulations.

The senators' letter said that "a number of whistleblowers" had approached the committee. "We would ask that TNC make a public written statement that it will take no action against any former or current TNC employees or contractors who cooperate with the Finance Committee's investigation," they wrote. The Conservancy statement said the group would issue such a public, written promise.