Ousted Hershey Trust president tells court of serious financial irregularities

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After the Hotel Hershey expansion , trustees posed under a banner: (from left) James Mead, Joseph Sensor, Robert Cavanaugh, LeRoy S. Zimmerman, Velma Redmond, James Nevels.

The just-dismissed top executive of the multibillion-dollar Hershey charity for poor children describes in a court filing widespread financial irregularities at the philanthropy, including the use of charitable assets for free rounds of golf, spa treatments, limousine rides, and excessive compensation for board members.

The executive also said the trust company that manages the charity's funds violated federal securities regulations.

Robert Reese, the former president of the Hershey Trust Co., which is basically the bank that manages the charity's funds on behalf of the Milton Hershey School, filed the document in Dauphin County Orphans' Court on Tuesday - effectively the last day that he had legal standing to seek redress for alleged breaches of fiduciary duty with the charity's assets.

Reese was voted off the charity's main board Wednesday, according to sources. Once off the board, he could not have petitioned the court.

The Inquirer, in the last 11 months, has reported a series of financial decisions by the boards that direct the Hershey empire that would seem to run counter to the directives of Milton S. Hershey, the chocolatier whose fortune is to be used to educate impoverished children at the school.

Reese's 19-page filing describes an atmosphere of excesses on behalf of the board of Hershey Trust, which is led by LeRoy S. Zimmerman, 76, a former two-term attorney general, and a friend and political ally of Gov. Corbett.

Board members earned six-figure annual compensation for working an average of five hours per week. They enjoyed free stays at the lavishly redesigned Hotel Hershey and free rounds of golf at the nearby Wren Dale Golf Club they bought with money meant to support and grow the Hershey School.

Corbett, in the final months of his tenure as attorney general and as he campaigned for governor, said he had begun an investigation of the charity amid the reports by The Inquirer. The philanthropy is regulated by the Office of the Attorney General.

A spokesman for that office, Nils Frederiksen, said Thursday that Reese's petition was "under review as part of our ongoing investigation" into the Hershey charity.

Michael J. Hussey, associate professor and expert on trusts at Widener Law School, said that the petition contained "serious allegations" and that it was highly unusual for a charity insider "to come forward with this level of detail."

Regarding the Hershey organization, Hussey noted, "Before, it's been people on the outside digging through records and complaining. Now you have someone on the inside."

Reese said in a brief interview Thursday that he would have liked to settle the issue privately, but believed he had to file the petition to protect the charity, and that he had a legal duty to do so.

Connie McNamara, spokeswoman for Hershey Trust, responded in a statement on Thursday: "The Hershey Trust Co. board has received this petition and takes its fiduciary duties very seriously. We will review these matters and respond appropriately.

"Although Mr. Reese has been a board member of Hershey Trust Co. since 2007, the trust company received notification of this filing only after Mr. Reese learned that he was not reelected to the board for another term."

Zimmerman could not be reached for comment through his Harrisburg law firm.

Reese, a scion of the peanut-butter cup fortune and a former senior executive of the Hershey Co., seeks to have Hershey trustees reimburse the charity $22 million for purchasing the Wren Dale course at an inflated price and improperly commingling funds in Hershey Trust that led to remedial action after the trust company alerted the Securities and Exchange Commission.

The petition also asks the court to remove directors who failed to act in their capacities as proper stewards of the charitable assets.

Wrongly commingling trust money and independent retirement account funds (IRAs) "financially and personally benefited the trustee/officer in his compensation," though the officer "was previously advised by counsel in 1999 this was not legally permissible," according to the court petition.

The officer was not identified. Hershey Trust disclosed the issue to its banking clients in a letter in July 2009.

The court action is the latest development to confront the Hershey charity, which has $7.3 billion in assets and operates the largest free and private school for disadvantaged children.

Critics say the school's enrollment would be substantially higher if the trustees, as required by a 101-year-old deed of trust, used the Milton Hershey estate and the dividends of Hershey Co. and Hershey Entertainment & Resort Co. to grow the school. The current enrollment is 1,800.

The Hershey charity bought the money-losing Wren Dale course in 2006 for $12 million and then built a $5 million clubhouse. The charity's own appraisal valued Wren Dale at $4 million as a golf course and $6 million as a potential site for a housing development.

Reese, in his petition, says "certain trustees were determined that the charity would own the course" and that "there was no financial analysis done by the trustees and its officers to support the $12 million price."

Reese's petition states that Hershey trustee compensation has tripled since 2002, to between $100,000 and $130,000 a year.

Beyond the compensation, trustees have benefited from free golf passes, spa treatments at the Hotel Hershey, limousine services, and "first-class air travel in unexceptional circumstances," according to the court document.

According to the charity's latest nonprofit tax filing with the IRS, Zimmerman earned $500,000 in 2009 through director fees for serving on three Hershey-related boards, including the Hershey Co.

Zimmerman has told the Hershey Co. that he will not stand for reelection to its board at the stockholders' meeting in late April. The company disclosed Zimmerman's plans on Wednesday.

Zimmerman also serves on the board of Hershey Entertainment, the for-profit subsidiary of the Hershey School that owns and operates Hersheypark, the Hershey Lodge, and the Hotel Hershey.

The Hotel Hershey recently underwent a $70 million upgrade, the court petition said, "so that trustees could enjoy their stays and experiences there." Among the new amenities: an infinity-edge swimming pool, 10 private cottages, a year-round skating rink, and a 130-seat restaurant.

The court petition says the $70 million investment was opposed by managers at the for-profit subsidiary that operates the hotel "because the investment would never have a payback to justify it."

A photo around the time that the expansion was completed shows Zimmerman and other trustees at the doors of the hotel. A banner draped over their heads reads "Zimm's Palace."

 


Contact staff writer Bob Fernandez at 215-854-5897 or bob.fernandez@phillynews.com.