Youth Services Bankruptcy Unveils Theft Case, FBI Probe

Youth Services Bankruptcy Unveils Theft Case, FBI Probe
South Arkansas Youth Services Inc. filed for Chapter 7 bankruptcy last month, after losing a bid in 2016 to continue managing the Dermott Juvenile Treatment Center (above) and four other juvenile centers in Arkansas. Two of its former employees, Jennifer and Aric Knight, have been charged with theft. (Google Maps | Columbia County Sheriff)

The FBI and Arkansas’ attorney general are investigating the defunct South Arkansas Youth Services Inc. of Magnolia, according to the nonprofit’s recent bankruptcy filing.

SAYS provided services to delinquent and at-risk juveniles until 2016, when it failed to win a bid to continue operating five facilities. In its Chapter 7 bankruptcy filing, it reveals that the FBI and U.S. Department of Health & Human Services have a pending “Investigation of Corruption & Fraud” and that the AG’s office has a pending investigation involving Medicaid.

Spokesmen for the U.S. attorney for the Western District and the attorney general’s office declined to comment.

The revelation of the investigations comes three months after SAYS’ former chief financial officer and her husband were charged with theft, according to the information filed by the prosecuting attorney in Columbia County Circuit Court. The former CFO, Jennifer Knight, 36, of Magnolia, is the daughter of SAYS’ longtime director, Jerry Walsh, who left in May. Her husband, Aric Knight, 37, of Magnolia, worked at SAYS as a computer specialist.

The couple allegedly used a SAYS credit card to pay for gas, food and a trip to Florida, some of which was repaid. Aric Knight was allegedly paid for work he didn’t do.

Their trial is set for March 15.

Their criminal information sheets didn’t specify the amount SAYS lost, but SAYS’ bankruptcy filing values the “employee theft” at $300,000.

The Knights’ criminal defense attorney, John Pickett of Texarkana, Texas, didn’t return a call seeking comment.

And that’s not all the bad news for SAYS. It also faces two lawsuits seeking class-action status in U.S. District Courts in Arkansas from former employees who allege SAYS failed to pay overtime.

In addition, the former assistant director, Mary C. Snider of Columbia County, sued SAYS for wrongful termination in November, saying she was fired for giving statements to the FBI and other law enforcement agents in 2016.

Snider’s attorney, David Price of Magnolia, declined to say what topics were covered in her FBI interview.

“I’m not comfortable getting into that right now,” Price said. “All I can tell you is my client gave truthful information on more than one occasion.

“A myriad of topics were talked about,” he said. “As a result, people were arrested, and [Snider] was punished.”

Snider’s lawsuit and the potential class-action cases are on hold, however, as SAYS works through its bankruptcy liquidation. It filed for Chapter 7 on Jan. 18, listing $1.1 million in assets and $466,000 in debts.

Losing the contracts to operate the five juvenile treatment facilities in 2016 was the key event that led to the bankruptcy filing, said its bankruptcy attorney, Charles Coleman, a partner at Wright Lindsey Jennings in Little Rock. “They did investigate other avenues” to operate, but those plans weren’t workable, he said.

Attorney Michael W. Boyd of Magnolia, who represents SAYS, said in a statement to Arkansas Business that “many factors played a role in the demise of this once vibrant, nonprofit organization that provided services to youth in Columbia County and across Arkansas for many years.

“The SAYS board and remaining employees made numerous efforts to salvage the organization in order to continue providing services locally, including attempts to merge with or be absorbed by other providers,” he wrote. “In the end, the substantial drop in income from the state due to the loss of contracts, as well as management issues, were too much to overcome.”

He declined to comment further.

The nonprofit’s financial problems, however, started appearing at the end of its fiscal year on June 30, 2015, when it reported a loss of $416,000 on revenue of $14.6 million, according to its IRS Form 990. A year later, SAYS lost $595,000 on revenue of $14.5 million.

Nearly all of its revenue came from government contracts, according to the IRS filings.

Contract Troubles
Founded in 1977, SAYS provided services to juveniles who had been convicted of crimes.

In 2016, SAYS operated five facilities: Dermott Correctional Facility and Dermott Juvenile Treatment Facility, both in Chicot County; the Lewisville Juvenile Treatment Center in Lafayette County; and two juvenile treatment centers in Scott County. But those management contracts ended by the end of 2016.

DHS spokeswoman Amy Webb said that the Arkansas Division of Youth Services wanted to “enhance and improve the services at the facilities” and put the contracts to operate the juvenile treatment centers and lockups out for bid in 2016.

Both SAYS and Consolidated Youth Services Inc. of Jonesboro, which was operating seven juvenile treatment facilities at the time, submitted their bids to continue operating the facilities.

Initially, Youth Opportunity Investments LLC of Carmel, Indiana, won the bid. It was supposed to start managing facilities on Jan. 1, 2017.

But awarding the contract brought scrutiny from the Arkansas Legislature. The contract for the facilities that SAYS managed would have paid Youth Opportunity $16.1 million annually, up from the previous $9.4 million. As a result, the state’s contract with Youth Opportunity was voided before it began operating the treatment facilities. In December 2016, Gov. Asa Hutchinson said DHS’ Division of Youth Services would manage the centers.

Last week, Webb said a new round of bids to manage the youth facilities might not be requested for another year.

“We are taking the additional time to assess and study our population of kids and what they will need from this type of system to be most successful,” she said in an email to Arkansas Business. “We’ll assess our own system model and look at what other states are doing.”

(Related: State to Run Youth Lockups For Another Year)

In late 2016, however, losing the bid stunned SAYS Executive Director Walsh, who was a founder of the organization.

“I’m a little perplexed about it because all of our programs are all accredited. All the DYS audits have been good. The Health Department audits have been good,” Walsh told the Arkansas Democrat-Gazette in August 2016. Walsh, whose salary was $171,000 for the fiscal year that ended June 30, 2016, could not be reached for comment.

Bonnie Boon, executive director of Consolidated Youth Services, told Arkansas Business that she was surprised that her nonprofit lost the bid after providing the service to seven juvenile correctional facilities since 1997. “There were no adverse reports on our agency,” Boon said. “We were held up as model programs down to the very end.”

CYS also objected to the bid process before the state took control of the facilities.

Consolidated still has a state contract to operate a 53-bed group home and emergency shelter in Jonesboro. The nonprofit also provides services in the community to areas that cover 10 counties in northeast Arkansas.

As the bidding issues were playing out at the state Capitol in late 2016, financial problems emerged at SAYS.

FBI Interview
Snider, then SAYS’ assistant director, had worked with Walsh for more than 20 years.

“In addition to writing grants and working with finding shelter and services for ‘at risk youth’ Ms. Snider was also involved in day-to-day activities” at SAYS, according to her lawsuit.

In early 2016, Snider was notified by the FBI that she and others who worked with SAYS were being investigated for “potential illegal activity,” her lawsuit said. FBI agents “and agents representing other law enforcement agencies” questioned Snider.

After Snider’s interviews with law enforcement, Walsh quizzed her about the statements she made.

“Thereafter, SAYS retained counsel under the auspices of performing an ‘in house’ investigation,” the lawsuit said.

Snider sat for that interview and answered questions from SAYS’ attorney, who wasn’t named in the lawsuit.

After the interviews with the agents and the SAYS’ attorney, “Snider slowly started having job duties taken away from her by Walsh,” the lawsuit said. Snider also alleged that Walsh then “became angry and abusive at times, when he interacted with Ms. Snider at work,” the lawsuit said.

“Walsh told Ms. Snider repeatedly in 2016 that she was going to ruin him and SAYS,” the lawsuit said.

In December 2016, Snider was fired “under the auspices that her job was being eliminated.” But she alleges in her lawsuit that the real reason she was fired was because she “gave truthful information in a criminal investigation.”

The information given eventually led to the arrest of Walsh’s daughter and son-in-law, who were each charged with theft of property.

Snider is seeking an unspecified amount of damages for wrongful termination and outrage. SAYS denied the allegations in its response.

Price, Snider’s attorney, said he will ask U.S. Bankruptcy Judge Richard Taylor, who is overseeing SAYS’ Chapter 7 case, for permission to move forward with his lawsuit while SAYS remains in bankruptcy. “I’ve never seen a more clear case of retaliation in my life,” Price said.

In 2010, Jennifer Knight began working as the CFO at the nonprofit her father founded. The probable cause affidavit filed in her criminal case said her husband, Aric, was originally hired as a computer technician, but his duties were later expanded to include grounds maintenance and equipment purchases. His employment dates weren’t listed in the affidavit.

Jennifer Knight left SAYS in June 2017, the same month the Magnolia Police Department received a report alleging theft.

A SAYS accountant doing an audit “found evidence of agency credit card abuse, abuse of monetary funds, electronics, and property,” the probable cause affidavit said.

Aric Knight was allegedly selling SAYS equipment and keeping the proceeds.

The audit also showed that between 2013 and 2017 Aric Knight was receiving money from SAYS for lawn services he didn’t perform.

In August, Aric Knight said in an interview with police that “any reimbursements he received were approved by administration.” He said his wife and father-in-law “gave him orders and approved purchases and reimbursements.”

Jennifer Knight told police that she was “too busy to check all purchases, reimbursements, and agency bills that she paid,” the affidavit said.

Jennifer and Aric Knight have both pleaded not guilty. They face between five years and 20 years in prison and a fine of up to $15,000, if convicted.

South Arkansas Youth Services Inc., Magnolia

Year Ending June 30, 2013 June 30, 2014 June 30, 2015 June 30, 2016 Dec. 31, 2017
Total Revenue $15,468,109 $15,841,097 $14,582,872 $14,505,705 $1,033,165
Total Expenses $15,173,395 $15,028,642 $14,998,804 $15,100,757 NA
Net Income $294,714 $812,455 -$415,932 -$595,052 NA

NA: Not available
Sources: South Arkansas Youth Services’  IRS Form 990s on file with and bankruptcy filing