South Arkansas Youth Services Board Was Negligent, Trustee Says

South Arkansas Youth Services Board Was Negligent, Trustee Says
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)

If the board of the defunct South Arkansas Youth Services Inc. of Magnolia had done its job, it could have prevented the longtime CEO from using several hundred thousand dollars for bribes and kickbacks, according to a lawsuit filed last month by SAYS’ bankruptcy trustee.

SAYS provided services to delinquent and at-risk juveniles until 2016, when it failed to win a bid to continue operating five facilities, resulting in its closure and Chapter 7 bankruptcy filing in 2018.

Also in 2018, SAYS’ CEO Jerry Walsh pleaded guilty to conspiring to misapply more than $380,000 from the nonprofit. He was sentenced to 30 months in federal prison and ordered to pay $515,631 in restitution. Walsh, 74, is scheduled to be released on May 24, 2022. He and his wife, Linda, filed for Chapter 13 bankruptcy reorganization last year and listed $116,000 in debts and $109,00 in assets.

Walsh’s scheme started in 2013 and involved the influential lobbyist Milton “Rusty” Cranford. Cranford was sentenced to seven years in federal prison in 2019 in the aftermath of a bribery scandal.

SAYS’ Chapter 7 trustee, Renee S. Williams of Hot Springs, is suing SAYS’ insurance carrier, Travelers Casualty & Surety Co. of America and Travelers Casualty & Insurance Co. of Hartford, Connecticut, for denying a $2 million claim in 2019 to pay coverage on directors’ and officers’ liability for breaches of duty and gross negligence by the board.

SAYS’ “damages and harms would not have occurred but for the … gross negligence of the Board,” according to the lawsuit filed by attorneys Thomas Daniel Berghman and Davor Rukavina of Munsch Hardt Kopf & Harr of Dallas.

SAYS’ audits should have set off alarm bells for board members who could have stopped Walsh’s criminal activity sooner “had the Board not abdicated all supervisory and oversight responsibility,” the suit said.

The lawsuit, filed in U.S. Bankruptcy Court in El Dorado, said the board members were “decent, good people,” but none of them was trained to serve on the board of a nonprofit.

As an example, the board should have objected when Walsh promoted his daughter, Jennifer Knight, to CFO in 2012.

“No reasonably prudent board of directors, with fiduciary duties to SAYS, would have approved of Knight becoming the CFO of a $15 million per year business on which upwards of 200 jobs depended, not only because of her lack of qualifications, having basically been a secretary before, but also because she was the daughter of Walsh,” the suit said. “A reasonably prudent director would not have approved of this obvious nepotism and obvious conflict of interest between CEO and CFO, let alone based on the lack of qualifications or skills.”

Knight, 39, left SAYS in May 2017. Her husband, Aric Knight, 40, also 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. In 2017, they were charged with theft of property, according to the information filed by the prosecuting attorney in Columbia County Circuit Court. They both pleaded guilty in 2018 and were sentenced to 10 years of probation.

Facts in Plain Sight

The board also failed to see “facts in plain sight” that should have raised concerns, the suit said.

The audit for the fiscal year that ended June 30, 2013, showed SAYS spent no money on legal fees and $45,000 for consulting. A year later, SAYS paid $90,000 in legal fees and $156,000 in consulting fees.

No one on the board bothered to quiz Walsh about why SAYS was paying large legal fees when the board hadn’t approved hiring an attorney.

The board also failed to implement controls and procedures for reimbursement of officer expenses. “SAYS reimbursement files show thousands of dollars in reimbursement payments to Walsh, and clearly reveal Walsh’s political activities,” the suit said.

As an example, in April 2015, Walsh asked to be reimbursed for mileage from Magnolia to Little Rock “with the notation, ‘Legislative Sessions — Also meeting w/Rusty and Lawyers.’”

From the audits, the board knew or should have known that SAYS was paying Cranford consulting fees. “A reasonably prudent director would have inquired and investigated,” the suit said.

The trustee wants a bankruptcy judge to rule that Travelers is obligated to pay the claim for the board’s negligence. Williams is seeking an unspecified amount of damages.

More than $2.3 million in claims have been filed against SAYS in its bankruptcy. And after liquiting all of SAYS’ assets, more than $2 million of claims remain unpaid.

Travelers declined to comment because the case is pending.

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