Hershey Trust spends $3.6 million investigating itself

A splintered Hershey Trust board that controls one of the nation's richest charities has spent $3.6 million on legal fees to investigate claims of possible wrongdoing by its own members, according to an internal letter from the board's chief compliance officer, Marc A. Woolley, and now-fired executive John Estey.

In the last year, the board hired lawyers to probe whether two members engaged in insider trading of Hershey Co. stock. They did not, Zuckerman Spaeder L.L.C. and others found at a cost of $3 million, the letter said.

Another firm investigated whether former chairman Robert Cavanaugh was within bounds to have his son hired as an intern last summer for one of the trust's investment counselors.

Weil Gotshal & Manges cleared Cavanaugh of any impropriety and charged the trust $650,000, according to the April 20 letter.

The letter to the board reveals a toxic environment at the highest level of a charity that oversees the 2,000-student Hershey School for at-risk children.

The charity owns a controlling interest in the Hershey chocolate company, whose brands include Reese's peanut butter cups and whose stock dividends help finance the Hershey School.

Hershey Co. spokeswoman Leigh Horner said Wednesday that the publicly traded chocolate company knew of the insider-trading allegations and retained WilmerHale partners Robert Mueller 3rd, a former FBI director, and William R. McLucas, former director of enforcement for the Securities and Exchange Commission, to investigate them in 2015. "There was nothing there," Horner said.

Hershey Trust spokesman Kent Jarrell declined to disclose itemized legal fees Wednesday, saying they would be presented in regulatory filings.

Woolley, who is still employed by the Hershey Trust, declined comment on Wednesday and referred questions to a trust spokesman.

Estey, a Pennsylvania Democratic insider who was executive vice president for administration of the Hershey Trust Co., signed the April 20 letter with Woolley.

Last Friday, the Hershey board fired Estey after federal prosecutors disclosed that he had been charged with wire fraud. Caught in an FBI sting in 2011, Estey has admitted pocketing $13,000 that was meant to pay for lobbying Pennsylvania lawmakers. The wrongdoing is unrelated to the Hershey charity.

Jarrell, the trust spokesman, said: "The boards have reviewed this letter that is from what can be described as disgruntled employees, one of whom wrote this letter after he had already signed an agreement to plead guilty to wire fraud without disclosing that to the board."

The state-chartered Hershey Trust Co. manages $12 billion in charitable assets, and its board members serve as the board of managers for the school for impoverished students, a complex charitable organization conceived in the early 20th century by Milton Hershey and his wife, Kitty.

Mark Pacella, the chief deputy attorney general who oversees charities for the Pennsylvania Attorney General's Office, declined to comment on the internal April 20 letter.

But he said that the Attorney General's Office was "committed to whatever actions are necessary to ensure that the administration of the Milton Hershey School Trust complies with applicable law."

That could include "petitioning the court to impose whatever appropriate relief may be necessary to achieve that end," he said.

On Tuesday, the Inquirer reported that Pacella was seeking the ouster by this summer of three long-standing Hershey board members, including chairwoman Velma Redmond. The others are former chairman Cavanaugh and vice chairman Joseph Senser.

Among Pacella's concerns is that the 10-member board has received lucrative compensation that flouts the rules it agreed to in 2013 to settle with Attorney General Kathleen Kane an investigation into the purchase of a $12 million luxury golf course and other financial excesses.

Cavanaugh, a Hershey School graduate, faced a Hershey Trust board inquiry into the hiring of his son for a summer internship at a Florida investment firm retained by the charity.

Weil Gotshal "concluded that no undue influence had been applied, but recommended that the board adopt formal pre-clearance procedures for related party transactions," the Woolley/Estey letter says.

Pacella, the attorney general official, wants Hershey Trust board members to reimburse the charity for the investigation.

Woolley and Estey's letter claimed that it was hard to do their jobs providing legal advice at the highest level of the charity.

"Because the board has effectively eliminated our authority to ensure that the [Hershey Trust Co.] is in regulatory compliance, and given that we have been threatened with retaliation for raising important legal and governance issues, we reserve the right to take such actions as we believe may be necessary as officers of [the Hershey Trust Co.] to protect the interest of [the Hershey Trust Co.]," they wrote in the letter.

Hershey Trust spokesman Jarrell said, "The boards believe they continue to be in regulatory compliance and continue to have appropriate discussions with the Attorney General's Office."