DHHS audit of mental health agency finds millions in payments to executives, law firm ahead of merger


By Rose Hoban

Weeks before one of North Carolina’s state-supported behavioral health management agencies merged with another one in eastern North Carolina, there was a flurry of questionable financial activity that led to more than $4 million in payments to two top executives and back pay to the law firm that counseled the organization, according to allegations made in an internal audit conducted by the state Department of Health and Human Services.

Sarah Stroud, the former chief executive officer of Eastpointe Health Services, received $707,480 in payments in December, benefits and bonuses awarded outside the board approval process prescribed by state law, according to the 15-page audit dated June 27 obtained by North Carolina Health News.

Catherine Dalton, who had been Eastpointe’s chief business officer, was given a job reclassification and severance package worth $383,110, the audit further states, days after Eastpointe found out it would be forced to consolidate with Trillium Health Services, a much larger behavioral health management organization that now covers 46 counties.

The December payments to Stroud and Dalton were signed off by the Eastpointe board chair, Greene County commissioner Jerry Jones, but according to the audit, neither payment was approved by the full board — which is required by state law.

The internal audit recommends that Trillium seek to recoup the $1.09 million paid to Stroud and Dalton before the Jan. 1 consolidation date.

The audit also highlights an agreement that the Eastpointe CEO reached with the Charleston Group, the organization’s external counsel, that the audit says resulted in the law firm receiving $3 million in December 2023 for charges dating back to 2021.

Not only does the audit state that Eastpointe signed several backdated contracts in December, it also stated that thousands of emails that constitute public record “were deleted and not properly archived” by Eastpointe.

“These factors limited the ability of (Office of the Internal Auditor) to obtain all sufficient, reliable, relevant, and useful information needed to understand Eastpointe’s activities during and leading up to its consolidation with Trillium,” the audit document states in the introduction.

The consolidation of Eastpointe and Trillium came about after the North Carolina General Assembly included a provision in the state budget in 2023 that gave the state secretary of health and human services more control over the organizations the state contracts with to manage care for people with intellectual, developmental and mental health disabilities or substance use issues.

Sec. Kody Kinsley, head of DHHS since Jan. 1, 2022, used that new authority to restructure a system that had produced many complaints about barriers to care and difficulties navigating a system that is supposed to help provide for some of the state’s most vulnerable populations.

Eastpointe was one of six local management entity-managed care organizations, or LME-MCOs, that manage North Carolina’s mental health system. At the time of the merger, Eastpointe oversaw management of services for 45,106 people in the eastern part of the state in Duplin, Edgecombe, Greene, Lenoir, Robeson, Sampson, Scotland, Warren, Wayne and Wilson counties. 

Upon guidance from lawmakers, Kinsley reduced the number of LME-MCOs to four from the six that had been operating across the state. And that meant that Eastpointe would be absorbed into a larger system and its top executives would receive new high-ranking positions at the newly consolidated organization after Jan. 1.

Busy December

In November, Kinsley issued an order to merge Eastpointe with Trillium and dissolve the former Sandhills Center. 

In a timeline of events, the audit lays out a timeline of how in the busy weeks leading up to the merger, Stroud, Dalton and Jones drafted and executed multiple contracts that would prove lucrative to the two executives.

At 3:48 p.m. on Dec. 5, Kinsley laid out terms for the consolidation agreement that included role changes for Stroud and Dalton in the new organization, the audit states. That evening at 9:47 p.m., the audit alleges that Stroud signed an amended employment agreement that included bonuses totaling $187,550, increased travel allowances and a new “severance package equal to her annual salary plus benefits ($437,109) if her title was reclassified resulting from a merger.”

In total, the Eastpointe CEO received the following payments in December 2023: A) COLA stands for cost of living adjustment. The CEO’s salary was $375,100 through November 2023. The COLA was first included in the CEO’s regular December 2023 paycheck, increasing her annual salary to $390,105. B) The 20%-tiered bonus was calculated based on annual salary after the addition of the 4% COLA. Eastpointe paid this bonus as part of the CEO’s regular December paycheck on 12/22/2023. C) The 25% bonuses were calculated based on annual salary prior to the COLA. Eastpointe paid these bonuses on 12/8/2023. Credit: NC DHHS

Twelve minutes later, the audit says that Stroud signed an agreement guaranteeing Dalton the $383,110 payment “if her title was reclassified resulting from a merger.”

Both women, according to the audit, had been told earlier that day that such a merger was imminent. 

Ahead of the public announcement in December 2023 that the two LME-MCOs would consolidate, the audit reports that Stroud also “authorized contract changes that were favorable to The Charleston Group, Eastpointe’s external general counsel.” 

The law firm was then paid more than $3 million for work on charges backdated to January 2021, according to the document. Part of that amount included a total of $1.18 million in monthly retainer fees for nonlitigation matters from January 2021 to April 2023, a time period during which, the audit notes, “Eastpointe had no contractual obligation to pay retainer fees.”

In a statement provided by La Toya Evans, a spokesperson for the Charleston Group, she noted that the law firm “provided effective professional services consistent with the terms of legally appropriate and transparent agreements for Eastpointe for almost 18 years.

“The Charleston Group also did not bill Eastpointe for ongoing work for nearly three years as they, along with Eastpointe, anticipated amending the professional services agreement during the COVID-19 pandemic while the Eastpointe staff was immersed in preparations for Tailored Plan launch,” she wrote in an emailed statement. “During this time, the firm’s exemplary work on Eastpointe’s behalf resulted in the organization negotiating a $2.1 million settlement approved by the DHHS Secretary regarding a lawsuit alleging misconduct relating to a dispute with Trillium.”

On Dec. 7, fewer than 48 hours after the two severance agreements were signed, the audit reports that Stroud called Eastpointe’s Chief of Human Development, instructing her to pay Stroud her bonuses. The human resources chief reported to DHHS that the general counsel also texted her, allegedly telling her to “execute the terms of the employee agreement approved by the board for the CEO.”

Except that the board had not signed off on this arrangement, the audit says. 

According to the audit, the Eastpointe board did not discuss Stroud’s employment agreement. One board member told auditors they recalled discussions in “an unspecified executive committee closed session and consensus was reached” but did not clarify what that meant. 

The board failed to take minutes during executive committee meetings on Nov. 28, Dec. 6 or Dec. 16, the audit found. The audit also notes that state law and Eastpointe’s bylaws stipulate that the full board, not just the executive committee, was to decide on CEO compensation.

The following day, on Dec. 8, The Charleston Group received more than $3 million for the backdated invoices, the audit reports. 

A week later, on Dec. 15, the transition period began. According to the agreement Eastpointe signed with the state, no severance payments would be made to anyone transitioning to Trillium, the way Stroud and Dalton were supposed to. So, the audit notes that on Dec. 18, both Stroud and Dalton submitted resignations to the Eastpointe board. On Dec. 29, both women received their severance payments, each then submitted resignations to Kinsley and to Trillium CEO Joy Futrell, effective Dec. 31.

As all of this was playing out, auditors found that Stroud and Dalton were deleting thousands of emails from their accounts, with Stroud deleting 2,000 emails on Dec. 31 and Dalton deleting about 11,000 emails between Dec. 20 and Dec. 30 ahead of her departure. 

According to state law, those emails are public records. 

“Trillium had difficulty accessing certain email records of the Eastpointe CEO and CBO and was unable to determine if all email records were recovered due to unresolved problems with Eastpointe’s primary email archive,” the audit notes. 

In addition, Jones, the chair of the Eastpointe governing board at the time of consolidation, did not make himself available for an interview to auditors. “These factors limited the ability of [Office of the Internal Auditor] to obtain all sufficient, reliable, relevant, and useful information needed to understand Eastpointe’s activities during and leading up to its consolidation with Trillium,” the audit states.

NC Health News reached out to Jones, who hung up the phone when asked about the DHHS audit.

History of troubled LME-MCO finances

North Carolina’s mental health local management organizations received state appropriations to cover the care for people without insurance who need mental health services. But the organizations are mostly funded by Medicaid dollars, which flow through the agencies to pay for care received by people with intellectual, developmental and mental health disabilities. 

In North Carolina, the state pays about 34 cents of each Medicaid dollar, with the rest being provided by the federal government. In the fiscal year stretching from July 1 2022 until June 30, 2023, Eastpointe had $324,586,361 in revenues from Medicaid. In the final six months of operation, from July 1, 2023 until Dec. 31, 2023, Eastpointe’s Medicaid revenue was $202,073,124.

According to rules set out by the federal Centers for Medicare and Medicaid Services, managed care organizations that save Medicaid dollars are permitted to spend them in ways they see fit. Part of the rationale for the state-chartered LME-MCOs is that money saved would be plowed back into the mental health system. 

But that doesn’t always happen. The most notable case was Mecklenburg County-based Cardinal Innovations, which used those saved Medicaid dollars to build corporate offices in Cabarrus County, which the organization left about a decade later for high-end offices in downtown Charlotte. Cardinal eventually folded after audits showed that executive leadership gave itself generous bonuses, threw lavish holiday parties and transported board members to meetings on a private jet. 

Former state auditor Beth Wood suggested that DHHS limit the amount of profits and costs for the LME-MCOs, but lawmakers and DHHS have, at times, struggled to control the organizations, where executives are well-reimbursed. 

Stroud received $433,274 in regular salary and benefits in 2022, according to a government salaries database. The business officer, Catherine Dalton, a CPA, had received $255,670 in salary in 2022, according to that database. 

In the 2023 budget, the legislature gave the state HHS secretary more control and oversight of the organizations. It was with that new control that Kinsley pushed for consolidation from six LME-MCOs down to four.

Eastpointe has been caught up in financial issues before. In 2016, former Chief Financial Officer William Canupp was indicted by a grand jury in Wilmington on 47 counts of conspiracy, bribery, fraud and money laundering, according to local media reports at the time. 

Canupp, who was the CFO from 2010 to 2013, eventually pleaded guilty to several fraud-related counts. He was sentenced to three and a half years in prison in 2017 and was forced to pay $731,180 in restitution, which included forfeiting a home and vehicles.

He was succeeded in the CFO role by Stroud, who was named CEO of Eastpointe in 2016. 

Former Columbus County commissioner Prevatte James, who in his role as commissioner served on the Eastpointe board, told NC Health News that in 2016, he had increasing misgivings about financial management and oversight at the agency. He successfully pushed for Columbus County to switch to Trillium as the county’s care manager.  

The DHHS audit concludes that the department should seek to recoup the payments made to Stroud and Dalton. The recommendations also include new, more stringent, procedures for executing contracts during future consolidation actions and mandatory annual training for all LME-MCO board members.

Attempts to find viable contact information for Stroud and Dalton were unsuccessful. The head of the Charleston Group, Jonathan Charleston, did not respond to a request for an on-the-record statement about the audit.

The former Eastpointe board chair, Jerry Jones, now serves on the new combined Trillium governing board, along with four other former Eastpointe board members. In a bill passed on the last day of the legislative session — the same day the audit was released — lawmakers gave Kinsley the power to reconstitute Trillium’s board. 

The former Eastpointe website, accessed through the Internet Archive, lists Jones and other members of the Eastpointe board on a page that includes a section titled: “Report Fraud and Abuse.”

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