Why this Delaware nonprofit is under investigation for fraud, misuse of government funds

Delaware state attorneys are investigating a Dover nonprofit for potential fraud and misuse of government funds after the state auditor “encountered significant challenges” with auditing Code Purple Kent County earlier this year.

State Auditor of Accounts Lydia York on June 12 alerted Attorney General Kathy Jennings to the “urgent concern” about Code Purple – a nonprofit in Kent County that provides housing, education and other resources to vulnerable populations like the unhoused and those struggling with addiction.

York’s office was asked to conduct a “performance audit” to ensure the funds Code Purple receives from the state’s Opioid Abatement and Remediation Grant Program – administered by the Prescription Opioid Settlement Distribution Commission – were being used appropriately.

“Despite our best efforts, we have encountered significant challenges in establishing trust regarding the accuracy and authenticity of the documents provided by (Code Purple),” York wrote. “Our preliminary analysis suggests potential waste, fraud, and abuse of state resources, including indications of fraudulent grant submissions.”

The allegations against Code Purple have been referred to the Department of Justice’s white collar crime unit. State officials declined to provide a copy of the auditor’s full report citing an exemption from Delaware’s Freedom of Information Act due to it being used as an investigatory file.

Code Purple received $290,000 in opioid settlement grants, which is part of the state’s probe into misuse of government funds, and more than $100,000 from legislative and other elected offices last year. The nonprofit also received a $550,000 American Rescue Plan Act grant in Fiscal Year 2024 (which in Delaware runs from July 1, 2023, to June 30, 2024), according to Delaware’s online checkbook.

Commission Executive Director Susan Holloway said it was commission staff who first “noticed data inconsistencies” with Code Purple in December 2023, froze funding to the nonprofit and alerted the Department of Justice. State attorneys then referred the matter to the state auditor.

“We should stress that it was (the commission’s) monthly reviews that uncovered the potential issues at Code Purple, investigated further and took immediate action to freeze funds and notify the proper state agencies for future investigation,” Holloway said in an emailed statement to Delaware Online/The News Journal. “The commission was glad to see this issue elevated through the DOJ and Auditor’s Office. The (commission) works with the DOJ and Auditor’s Office on compliance and is supportive of additional oversight.”

What measures should be taken by the commission to ensure nonprofits do not misuse future funds varies among members and leaves questions of whether the oversight processes currently in place are adequate.

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For Delaware’s top attorney, and co-chair of the commission, the latest issues with Code Purple were enough for Jennings to call on the public body to freeze all grant awards until outside consultants complete their report on a strategic plan for the grant program.

“This project is rife with potential for fraud, waste, and abuse — and correspondence with the state auditor has left me gravely concerned that at least one grantee appears to have engaged in wrongdoing with significant state and/or federal funds, including its Commission grant,” Jennings wrote in a June 28 letter to commission members. “While that grantee is entitled to a presumption of innocence, this severely exacerbates my already serious misgivings that our Commission has woefully inadequate guardrails in place to protect the public’s best interests.”

Code Purple representatives did not respond to requests for comment Tuesday.

Where Code Purple gets its money

The Prescription Opioid Settlement Distribution Commission discussed Code Purple in an executive session during a full commission meeting on June 28. While the executive session was not open to the public, Jennings said afterward that the DOJ “intend(s) to be very transparent with the public.”

She introduced a motion to “begin efforts to claw back” either all or some portion of the $290,000 grant awarded to Code Purple while the criminal investigation continues. This motion was approved by the commission.

Code Purple Kent County is a religious-affiliated nonprofit located at 1207 E. Division St., Dover, next door to Maranatha Life Changing Church.

The nonprofit provides housing and other services for Delawareans suffering from homelessness, abuse, financial struggles, drug addiction and the overall ramifications of the COVID-19 pandemic, according to its website .

It was formed in 2015 with Ennio Zarazoga listed as the registered agent, according to the Department of State’s Division of Corporations online database. Zarazoga is also named as Ennio Emmanuel, the principal officer or CFO, on tax forms and Code Purple’s website . However, the only 990 tax forms available on ProPublica's online database are from 2021 and 2022.

The tax forms that would encompass the government grants Code Purple received last year (which are now in question) are not available, but Delaware’s online checkbook shows the nonprofit has received $1.34 million in grants and other government funding since 2017, with the largest amounts coming in state Fiscal Years 2023 and 2024.

The nonprofit is staffed by volunteers including a doctor and pastor, community advocates and business members.

According to 990s for the 2021 reporting year, the nonprofit gave $60,000 to People Church and $260,000 to Maranatha Life Changing Church, both in Dover, for upgrades and expansions at these facilities. Code Purple reported receiving $278,531 in contributions and grants that year.

But in its 2022 tax filing , the nonprofit reported receiving $468,253 in contributions and grants in 2021 and $559,687 in 2022.

The latest tax filing available is from 2022 and shows that Code Purple received $156,840 in government grants along with $259,328 from “related organizations” and $143,519 in other contributions, gifts and grants. It also shows that the nonprofit’s largest expense is occupancy at $152,744.

Code Purple and other nonprofits doing similar work often tap into government grants, ranging from the General Assembly’s annual Grants-In-Aid bill to opioid settlement grants and federal pass-through money.

Delaware provides grants through the Division of Substance Abuse and Mental Health for addressing the opioid epidemic, but a DSAMH spokesperson said Code Purple has not received any grants from the division.

What is the Prescription Opioid Settlement Distribution Commission?

The Prescription Opioid Settlement Distribution Commission was established by the Delaware General Assembly in October 2021 as a statutory subcommittee of the Behavioral Health Consortium. The commission has 13 members in addition to co-chairs Hall-Long and Jennings, ranging from state elected officials to local organization leaders to private citizens passionate about addressing the opioid epidemic.

The charter assigned the commission with two main goals: establishing a “coordinated and consensus driven effort” to repair harm caused by the opioid crisis and making recommendations to the Behavioral Health Consortium about where to distribute prescription opioid impact and settlement funds.

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Delaware has one of the highest fatal overdose rates in the nation, with the Division of Forensic Science reporting 527 overdose deaths in 2023 alone. The crisis, which has skyrocketed in recent years, has been attributed to the misleading marketing and overprescription of opioids by a slew of developers, manufacturers and distributors nationwide.

Many of these companies — such as Purdue Pharma , Walgreens and Johnson & Johnson — entered settlements worth billions of dollars to be distributed nationwide, though a recent Supreme Court decision has impacted that cash flow.

Delaware’s portion of these funds is given to the Prescription Opioid Settlement Distribution Commission to divvy up at their discretion, including by awarding grants to local organizations. Two phases of grants have been given out by the Opioid Abatement and Remediation Grant Program so far, totaling nearly $12.5 million.

A lot of money, but 'inadequate guardrails’

Since the opioid settlement grant program’s inception in November 2022, Jennings said she’s asked for a “thoughtful plan of action — including a plan for auditing and accountability” before doling out grants.

In the letter to commission members on June 28, Jennings outlined how she and other members have asked about oversight, auditing and assessing grant effectiveness since early 2023.

In October, commission members met with Wilmington business management firm, Social Contract, to help the public body create a strategic plan for an “agile grant disbursement process that will facilitate the solicitation, review, and allocation of funds to organizations and groups committed to combating the opioid crisis,” Jennings detailed in the letter.

The attorney general and commission co-chair said Social Contract doesn’t expect to have those recommendations finalized until September, which is why Jennings recommended freezing all new grants until that plan is produced.

The commission ultimately did not heed Jennings’ advice, instead approving $1.9 million bridge grants to dozens of nonprofits at the commission's meeting June 28. Code Purple was not among those recipients.

The Prescription Opioid Settlement Distribution Commission defended its current processes and oversight approach.

Holloway said the “entire process is conducted during public meetings” and is “rather lengthy,” but ensures the “oversight necessary on organizations seeking funding.”

That process requires each grant recipient to submit “monthly compliance data” informed by the Johns Hopkins Principles for the Use of Funds from the Opioid Litigation.” This approach has also been adopted by other states, Holloway said.

“The grantees must demonstrate data and financial compliance before funds are released. For instance, grantees, some of which have very small staffs, must have working budgets and secure all expenditure-related documentation,” she said. “Funds may be released once per quarter following substantiated and documented compliance.”

The monthly data is reported to the commission’s administrative staff through Salesforce, which is then aggregated and shared on the commission’s website. Holloway said that information has been posted monthly on the commission’s website since December.

She added that all grantees are assigned a “monitor” from the commission’s staff who “regularly communicates with grantees, conducts site visits, and assesses compliance.”

When “discrepancies are flagged and validated” with a recipient, Holloway said funds are frozen.

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Prescription Opioid Settlement Distribution Commission member David Humes said he is unaware of any other potential fraud by grantees. He pointed instead to the decrease in fatal overdoses in Delaware last year, the first decline in over a decade.

“I would like to think that these grants have played a part in the reduction of overdose deaths,” Humes said. “We need to continue to fund grants so that 2023 is not an anomaly. The primary concern must be saving lives.”

Jennings stressed that she shares other members' “sense of urgency in getting these funds where they are needed,” but it’s unclear what those targets are.

“I have repeatedly stressed that even this seemingly large pot of money is finite and that not all spending is created equal,” she said. “I continue to urge restraint; it has been 20 months since the Commission began awarding grants, and we still do not know where these funds will be most useful, how we will measure their impact, or even whether our grantees are compliant.”

Lt. Gov. Bethany Hall-Long, who co-chairs the commission with Jennings, said in an emailed statement Tuesday there are no plans for new grant funding to be awarded at this time.

“As discussed at last Friday’s commission meeting, there is no date set to execute the next open grant cycle, which means there is a pause in new funding," the lieutenant governor said. “I agree with my co-chair that we need to carefully consider the next grant cycle launch date. We will continue to take input from the commission members, our consultants, and the public as we move forward.”

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This article originally appeared on Delaware News Journal: Why this Delaware nonprofit is under investigation for fraud, misuse of government funds