Double-dipping LI lawyers probe spurs landmark pensions reform

When private attorney Lawrence Reich first asked the Baldwin school district to put him on the payroll so he could earn a public pension, board members didn't think much about it. He offered to lower his retainer fees to offset the costs of health benefits and pension contributions and assured them the arrangement was proper.

"It wasn't a big deal. We were fairly sure it was legal, and it was being done by other lawyers," said former board member Lorraine Deller.

Little did Baldwin school officials know that in making that seemingly innocuous decision in 1978, they were setting the stage for a scandal that would explode 30 years later with statewide and even national repercussions.

Since last February, federal, state and local investigators have launched wide-ranging probes, Reich and scores of other private attorneys on public payrolls have lost all or parts of their pensions, and the state Legislature, with the help of New York Attorney General Andrew Cuomo, unanimously passed landmark pension reforms.

"It's our own version of the insider wheeling and dealing that goes on at Wall Street," said former Suffolk County Executive Patrick Halpin. "Until this was exposed, people were perfectly willing to accept it under the guise that this is just the way it's always been."

To date, state investigators have won more than $1.5 million in settlements, revoked pensions or rescinded pension credits of at least 45 lawyers and requested records from more than 4,000 local governments.

At Newsday, the story began when an anonymous reader told an editorial aide that Reich was a private lawyer getting public benefits for free. That led to a story in February. Records showed that five Long Island school districts falsely reported him as a full-time employee at the same time, enabling him to secure a public pension of nearly $62,000 a year, as well as health benefits for life. In one year, records showed, he was reported as having worked 1,286 days.

While the school districts reported Reich as an employee, they also were paying his law firm millions of dollars. That raised legal questions because the Internal Revenue Service taxes employees and independent consultants differently.

Although Reich defended the arrangement as a "common practice," the story set off a firestorm. The FBI and IRS subpoenaed the school districts' records the next day; a few days later, Cuomo launched a parallel investigation.

More stories followed about other lawyers with similar arrangements. One, Carol Hoffman, defended the practice, saying, "Hundreds and hundreds of people over thousands of years have been doing this."

But other attorneys at the affected law firms said privately that they were stunned and even furious. Although some knew a few details of the employment arrangements, they did not know everything.

By March, Newsday reported that 23 school districts -- nearly one-fifth of school districts on Long Island -- had improperly reported private attorneys as public employees, entitling them to rich benefits packages.

Meanwhile, Cuomo's investigators, holed up in a corner office in Manhattan piled high with subpoenaed records, expanded their probe statewide. By April, Cuomo declared there had been "multiple acts of fraud."

Federal investigators, however, were not so sure. In order to establish criminal fraud, prosecutors must prove intent. Moreover, because past rulings by the state comptroller appeared to tacitly allow the employment arrangements, they felt a criminal case wouldn't succeed, people familiar with the probe said.

Cuomo's investigators were undeterred. They said the law was clear: Only public employees are entitled to public pensions. Outside contractors are not.

On a separate track, state Comptroller Thomas DiNapoli announced his office would review every attorney on a public payroll statewide.

Over the following months, his auditors methodically took away pensions or pension credits from dozens of attorneys.

By May, Newsday uncovered a different kind of pension practice that stunned the public with its scope and cost. At least 40 Long Island school administrators were "double-dippers" who had retired and then returned to work as so-called interim employees. Records showed they earned six-figure paychecks on top of equally lucrative pensions, collectively earning at least $11 million a year.

Several state legislators from Long Island said they were both appalled and chagrined. They could hardly make the case to their colleagues in the Legislature for more state aid for local schools when people were gaming the system, said state Sen. Kenneth LaValle (R-Port Jefferson).

In response, Cuomo organized a legislative hearing at Farmingdale State College, where legislators heard testimony. A number of school administrators sat in the audience. Several shook their heads, and one muttered within earshot of others that the hearing was a sham.

"It's not in their vocabulary to say, 'I feel badly for the people paying taxes,' LaValle said of some school superintendents. "I never hear that."

By then, newspapers throughout the state, as well as national law journals, had picked up the story. The Albany Times-Union dubbed Long Island "the heart of pension abuse country."

Several attorneys who had gotten public pensions fought back, filing a class-action lawsuit, arguing that the pensions were a constitutionally protected benefit. The suit is pending.

Behind the scenes, Cuomo staffers met with state legislators to hammer out a wide-ranging pension reform package. At the same time, other Cuomo staffers were negotiating settlements with law firms throughout the state.

On June 24, the state Legislature unanimously passed sweeping pension reforms. Among other things, the new law upgrades the penalty for pension fraud to a felony.

Perhaps the most controversial element of the package is one barring a public-sector retiree from returning to work in the same or similar position for one year. Law enforcement groups railed against that because many agencies hire retired police as investigators. But Gov.

David A. Paterson did not bend to the pressure.

Through the summer and fall, Newsday expanded its investigation, Cuomo's office announced more settlements, DiNapoli's office revoked more pensions and Nassau District Attorney Kathleen Rice launched her own investigation. By December, there were no signs of any of the investigations abating.

Last week, Eric Phillips, a spokesman for Rice, said the district attorney's office will likely issue a grand jury report early next year on its investigation.

"Some people just haven't gotten the message yet," said Cuomo spokesman John Milgrim. "And if they need the attorney general's office to explain the law to them, we're more than happy to make it clear."

Newsday Staff Writer Eden Laikin contributed to this story.