IN THE COURT OF COMMON PLEAS OF NORTHAMPTON COUNTYPENNSYLVANIA

CRIMINAL DIVISION

IN RE: )NORTHAMPTON COUNTY )INVESTIGATING GRAND JURY 2012 ) Misc. No. 243-2012

) GJ Case No. C-29

TO THE HONORABLE EDWARD G. SMITH, SUPERVISING JUDGE:

REPORT NO. 2

We, the members of the Northampton County Investigating Grand Jury, based upon facts

received in the course of an investigation and as authorized by the Investigating Grand Jury Act,

42 Pa.C.S.A. § 4552(a), recommend action in the public interest. So finding, we do hereby adopt

this Report for submission to the Supervising Judge.

___________________________________FOREPERSONNORTHAMPTON COUNTYINVESTIGATING GRAND JURY

DATED: ________________________

_____ Jurors voted FOR Report_____ Jurors voted AGAINST Report_____ Jurors Absent

IN THE COURT OF COMMON PLEAS OF NORTHAMPTON COUNTYPENNSYLVANIA

CRIMINAL DIVISION

IN RE: )NORTHAMPTON COUNTY )INVESTIGATING GRAND JURY 2012 ) Misc. No. 243-2012

) GJ Case No. C-29

ORDER ACCEPTING AND FILINGINVESTIGATING GRAND JURY REPORT NO. 2

AND NOW, this ____ day of ______________, 2014, upon review of Investigating

Grand Jury Report No. 2, and finding that said report properly proposes recommendations for

action in the public interest based upon stated findings, and further finding that said report is

based upon facts received in the course of an investigation and authorized by the Investigating

Grand Jury Act, 42 Pa.C.S.A §§4552 et seq., and is supported by the preponderance of the

evidence, it is hereby

ORDERED

1. That Investigating Grand Jury Report No. 2 is accepted by the Court

with the direction that it be filed as a public record with the Court of Common Pleas of

Northampton County.

2. That the District Attorney deliver a copy of the Report to the Attorney

General of Pennsylvania for whatever action, if any, that office in its discretion, deems

necessary.

BY THE COURT:

_______________________________EDWARD G. SMITH

Supervising Judge

IN THE COURT OF COMMON PLEAS OF NORTHAMPTON COUNTY

PENNSYLVANIACRIMINAL DIVISION

IN RE: )NORTHAMPTON COUNTY ) Misc. No. 243-2013INVESTIGATING GRAND JURY 2012 ) GJ Case No. C-29

)

NORTHAMPTON COUNTY INVESTIGATING GRAND JURY

REPORT NO. 2

BACKGROUND

On or about February 13, 2012, pursuant to and based upon the application of John M.

Morganelli, the District Attorney of Northampton County, an Order of Court was entered by The

Honorable F.P. Kimberly McFadden, President Judge of the Northampton County Court of

Common Pleas, summoning a county investigating grand jury for the purpose of investigating

matters including, but not limited to, unsolved homicides in and about the County of

Northampton, Commonwealth of Pennsylvania.

The Honorable Edward G. Smith, Judge of the Court of Common Pleas of Northampton

County, was designated as Supervising Judge of the Grand Jury. The members of the

Northampton County Investigating Grand Jury of 2012 were selected and seated on March 29,

2012, and charged by the Court with respect to their duties and responsibilities. The aforesaid

proceedings were conducted pursuant to 42 Pa.C.S.A. § 4541, et seq., known as the Investigating

Grand Jury Act. A Notice of Submission for the instant investigation was filed by the District

Attorney of Northampton County on or about December 5, 2013.

1

INTRODUCTION

In February of 1997, civic leaders and area historians expressed excitement when

Bethlehem Steel Corporation (hereinafter referred to as “Corporation”) announced that it would

create a National Museum of Industrial History (hereinafter referred to as the “Museum”) at the

site of the Steel Plant in South Bethlehem, Northampton County, Pennsylvania. Corporation was

a for-profit corporation and indicated at the time that it would be partnered with the Smithsonian

Institution (hereinafter referred to as “Smithsonian”) to establish the Museum which would

present the story of American industry by exhibiting industrial collections in the context of

American society. The announcement indicated that the Museum would be on a portion of the

160 acre site that operated as a steel plant since the 1870’s and an iron plant since the 1860’s.

The proposed Museum was to take over three Corporation buildings and would total more than

160,000 square feet. At the time it was announced, the Corporation stated that it hoped to attract

2 million to 3 million visitors per year to the new Museum. The Corporation also announced that

the Museum would be a private nonprofit agency to be headed by Stephen G. Donches, the

Corporation’s Vice President of Public Affairs. (See Exhibit 1 - Morning Call news story March

2, 1997)

The Museum was established as a Pennsylvania not-for-profit corporation qualified under

§501 (c) (3) of the Internal Revenue Code. The Museum was incorporated on February 21, 1997

by employees of the Corporation. The Museum’s mission as set forth in its financial statement

dated 12/31/97 is as follows:

“Presenting the story of American Industry and promoting its future by (i) exhibiting industrial collections in the context of American society, economics, technologies, business and the workers, (ii) partnering with the Smithsonian to disseminate the knowledge of our industrial history and expand the collections of America’s industrial heritage, (iii) serving as a model for economic development in urban recycling while protecting and

2

preserving the industrial architecture and collections of our past, and (iv) educating the general public through exhibits, programs, collections and publications that make strong connections between America’s industrial past, present and future.”

The Corporation, at a time, was America’s second largest steel producer and largest ship

builder. Unfortunately, a decline in the American steel industry and other problems led to the

Corporation’s bankruptcy in 2001. The Corporation was dissolved and the remaining assets sold

to International Steel Group in 2003. In 2005, International Steel Group merged with Mittal

Steel ending American ownership of the assets of Bethlehem Steel. CEO of the Corporation at

the time was Curtis H. Barnette who along with Stephen G. Donches, was one of the original

Board members of the Museum. When the Corporation began its decline, Stephen G. Donches,

in February, 2002, announced his retirement from the Corporation and then began to draw a

salary to continue to act as President and Chief Executive Officer of the Museum. (See Exhibit 2

– The Morning Call February 13, 2002)

Since that time, much of the on goings regarding the Museum has been shrouded in

secrecy. Periodic press stories indicated that the Museum was failing in its mission. In a news

article published in the Morning Call on July 29, 2004, it was reported that the Museum faced a

delayed start and faltering fundraising. The anticipated expectation that the Museum would be

opened by the summer of 2005 did not materialize. Stephen G. Donches was quoted as saying

that the goal of opening by the summer of 2005 was “going to slide a little” although he

expressed that the Museum was “making steady progress.” (See Exhibit 3 – Morning Call article

July 29, 2004)

On July 19, 2008, the Express Times reported that Stephen G. Donches was “gratified” to

watch his dream become a reality. He predicted that the Museum would be open by 2010. (See

Exhibit 4 – Express Times article July 19, 2008)

3

On February 21, 2010, the Express Times reported that the Museum had spent 8 million

dollars on operating costs with just 2.5 million on construction in the ten years since plans were

first announced to open the still unfinished tribute to American industry. At that time it was

reported that more than 1.5 million had gone towards the salary and benefits of the Museum

president and CEO Stephen G.Donches. At that time, Donches predicted that the Museum

would be open in the second half of 2011. (See Exhibit 5 – Express Times article dated February

21, 2010) On March 15, 2010 the Express Times editorially commented that Mr. Donches could

earn his salary with the speedy arrival of the Museum. The article noted that Mr. Donches, the

Museum President and Chief CEO had taken home more than 1.5 million in salary and benefits.

(See Exhibit 6 – Express Times article dated March 15, 2010)

On May 6, 2013, the Express Times reported that the Museum officials had split plans for

its long stalled Museum into phases with the hope of starting construction in the Fall of 2013,

now fifteen years after it was first envisioned. However, Museum officials again cautioned that

the Fall 2013 start date depended on continued fund raising and that construction would take

twelve to eighteen months. The article noted that in year 2011, the Museum had spent

$769,597.00 which included $203,451.00 for Donches’s salary and benefits and $103,939.00 for

Chief Financial Officer Theodore Harlan. (See Exhibit 7 – Express Times article dated May 6,

2013) On September 14, 2003, the Morning Call again reported that the Museum on the site of

the former Corporation had been scaled back. It was noted in that article that annual donations

for some years barely covered the operating cost which included $260,777.00 in employee

compensation $181,000.00 of which is Museum President and CEO Stephen G. Donches’s

salary. As of September 15, 2013, Donches declined to estimate an opening date for the

Museum. (See Exhibit 8 – Morning Call article dated September 14, 2013)

4

Seventeen years has now passed since Stephen G. Donches was placed in control of the

Museum and accomplishing its mission. In addition to private funds solicited by Mr. Donches

and other board members, the Museum has been the recipient of public funds. Suspicions about

the management of the Museum prompted the Office of the Northampton County District

Attorney to launch an informal investigation into the Museum in 2012. At that time, the

investigation was limited to obtaining any and all financial records of the Museum for

examination by forensic auditors retained by the Office of the District Attorney. The forensic

audit was not completed until late 2013. After review of the forensic audit, the District Attorney

of Northampton County on December 5, 2013, filed a formal Notice of Submission of

Investigation with the Honorable Edward Smith, Supervising Judge of the Northampton County

Investigating Grand Jury. A copy of the Notice of Submission of Investigation is attached hereto

as Exhibit 9 and made a part of this report. Between January 9, 2014 and January 30, 2014, the

Grand Jury heard testimony from witnesses and reviewed financial records as well as other

corporate records of the Museum.

Based upon our review, and notwithstanding that we found no evidence of criminal

activity on the part of any person associated with the Museum, we now feel compelled to issue

this report. This report outlines the scope of our investigation, the evidence uncovered, the

abuses we uncovered, as well as our recommendations for action in the public interest based

upon our stated findings.

TESTIMONY OF GERARD WALSH

Gerard Walsh, a county detective employed by the Northampton County District

Attorney’s Office, testified before the Grand Jury on January 9, 2014, and again on January 23,

2014. Prior to his employment in the Office of the Northampton County District Attorney,

5

Detective Walsh was a criminal investigator for the Pennsylvania State Police and was a

supervisor of criminal investigations. He was assigned by the District Attorney the matter

involving the Museum.

Detective Walsh presented a power point presentation regarding the history of the

Museum. He read into the record various newspaper articles from 1997 through the present

which reported the progress of the Museum during that period. A copy of those articles are made

a part of this Grand Jury proceeding as Exhibits 1-8. A copy of the power point presentation is

made part of this Grand Jury proceeding as Exhibit 10.

Detective Walsh also testified that from the outset, the estimate that the Museum would

attract 2 to 3 million visitors per year was overly optimistic. Other similar museums including

but not limited to the Henry Ford Museum in Michigan and the Steam Town USA Museum in

Scranton, Pennsylvania attracted far less. (Henry Ford Museum – 1 million visitors per year;

Steam Town USA – 200,000 visitors per year) Detective Walsh detailed how Stephen G.

Donches, an employee of the Corporation was installed as the CEO and President of the Museum

in 1997 and has served in that capacity to the present. Detective Walsh noted that Mr. Donches

retired from Bethlehem Steel in February 2002 after 35 years last holding the position of Vice

President of Public Affairs. As Vice-President of Public Affairs, he was in charge of federal,

state and local government affairs and chairman of the company’s political action committee.

Detective Walsh testified that Mr. Donches, to his knowledge, did not have any experience as a

curator, fund raiser and or manager of a non-profit museum. Detective Walsh testified that he

visited the site of the Museum in January 2014 and saw a sign that read “Museum under

construction….” As of the time of this report, the Museum was still not open.

6

TESTIMONY OF DENNIS L. HOUSER, C.P.A.

Dennis L. Houser, a Certified Public Accountant testified before the Grand Jury on

January 9, 2014. Mr. Houser is the principal in a company known as Financial Forensic

Consultants. He has a Bachelor of Arts in accounting and is a certified public accountant since

1977. He is certified in financial forensics by the American Institute of Certified Public

Accountants. He also is a certified fraud examiner and a life member of the Certified Fraud

Examiners. He is a Forensic Certified Public Accountant. Mr. Houser has 42 years of

experience in accounting, auditing and taxation for corporations, partnerships, not-for-profit

organizations and governmental entities. He has participated in investigations involving

employee theft, procurement fraud, internal fraud and management fraud. He has been an expert

witness in the Courts of the Commonwealth of Pennsylvania in both civil and criminal matters as

well as before both federal and state grand juries.

At the request of the Northampton County District Attorney, Mr. Houser undertook a

complete review of the financial records and other corporate records of the Museum from its

inception in 1997 through approximately April 30, 2012. The Museum voluntarily surrendered

numerous financial records and other documents for Mr. Houser’s examination. Mr. Houser

prepared a fifty-three page report, a copy of which is attached hereto as Exhibit 11 and which is

hereby incorporated by reference in this Grand Jury Report.

1. Synopsis of Financial Records

Mr. Houser, in summary, testified to the following:

— That Articles of Incorporation for the National Museum of Industrial History

(Museum) were filed on February 21, 1997. The names of the Incorporators are Charles A.

Martin, Charles W. Campbell, Jr. and Richard G. Masters.

The Consent of the Incorporators of the Museum was filed on February 28, 1997,

7

adopting the resolution for the Acceptance of Charter, election of a temporary secretary,

adoption of the By-Laws, and election of Directors. The elected directors of the Museum were

as follows:

C. H. Barnett, Chariman Class A S. R. Crew Class B S. G. Donches Class A J. A. Jordan, Jr. Class A G. L. Millenbruch Class A J. D. O’Connor, Vice Chairman Class B

— That the Museum’s Financial Statements dated December 31, 1997 contain certain

notes regarding the Museum. Note 1 of the Financial Statements dated December 31, 1997

relates to the Organization of the Museum. The Organization note is as follows:

The National Museum of Industrial History (the “Museum”) is a Pennsylvania not-for-profit corporation qualified under Section 501 (c)(3) of the Internal Revenue Code. The Museum’s mission is presenting the story of American industry and promoting its future by (i) exhibiting industrial collections in the context of American Society, economics, technologies, businesses and the workers, (ii) partnering with the Smithsonian Institution (“Smithsonian”) to disseminate the knowledge of our industrial history and expand the collections of America’s industrial heritage, (iii) serving as a model for economic development and urban recycling while protecting and preserving the industrial architecture and collections of our past, and (iv) educating the general public through exhibits, programs, collections and publications that make strong connections between America’s industrial past, present and future.

— That the Museum’s Financial Statements dated December 31, 2002 contain an

additional note relating to the organization of the Museum. Note 1 of the Financial Statements

dated December 31, 2002 contains an additional statement relating to obtaining funds for the

Museum’s Exposition Hall. The additional Organization statement is as follows:

Management is continuing its efforts to obtain funds, primarily through contributions, so that the Museum may commence construction of Exposition Hall, previously the Preview Center. The Museum has employed full time employees whose focus is on soliciting contributions from corporations and others sources at the national level. The Museum plans to open the 30,000

8

square-foot Exposition Hall in the Fall of 2004, which will serve as the base of its operations during construction of the main Museum facility and will be utilized as a site for prototyping exhibits and programs and developing cooperative relationships with corporations, education institutions, and other parties.

— That the Museum’s Financial Statements dated December 31, 2003 contain a new

note relating to the adoption of a retirement plan by the Museum. The new Note 5 of the

Financial Statements relates to setting up a retirement plan for employees of the Museum. The

Retirement note is as follows:

The Museum has adopted a defined contribution retirement plan, which is qualified under Section 403(b) of the Internal Revenue Code. The plan covers the Museum’s employees. Under the plan, employees may voluntarily contribute a percentage of their pretax compensation to the plan subject to IRS limits, with the Museum contributing an amount equal to 50% of the employee’s contributions, up to a maximum of four percent.

— That the Museum’s Financial Statements dated December 31, 2003 contain a new

note relating to uncertainties. The new Note 8 Statements relates to the Museum’s ability to

continue as a going concern. The Uncertainty note is as follows:

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, are based on the continuation of the Museum as a going concern. As a startup organization in a difficult economic climate, the Museum has encountered some difficulty in raising sufficient funds to begin the construction of the Exposition Hall.

Realization of a major portion of the assets in the accompanying statement of financial position is dependent upon continued operations of the Museum. Management believes that actions presently being taken to raise funds for the construction of the facilities and to fund operations will provide the opportunity for the Museum to continue as a going concern.

The Uncertainties Note was removed from the financial statements for the year ended in

2004, and for all years thereafter.

— That the Museum’s Financial Statements dated December 31, 2008 contain a new

note relating to related party transactions. The new Note 8 of the Financial Statements relates to

9

a contract with a construction management firm, whose chairman of the board is a member of the

Museum’s Board of Directors. The Related Party Transactions note is as follows:

During 2008, the Museum entered into a contract with a construction management firm, whose chairman of the board is a member of the Museum’s Board of Directors, to provide project management services for certain improvements to the Museum’s building. The contract, which includes services of sub-contractors, has a guaranteed maximum cost of $2,000,000 and the current estimated project cost is approximately $1,900,000.During the year ended December 31, 2008, construction costs in the amount of $1,116,251 were paid to the firm for its fees and its payments to sub-contractors. These costs are included in construction in progress at December 31, 2008. At year end, the Museum is committed to $157,500 in construction work, which is covered by the above contract. This amount is also included in Note 7 – Commitments.

—That the Museum’s Financial Statements dated December 31, 2009 contain a

modification of its note relating to related party transactions. The modified Note 8 of the

Financial

Statements relates to a contract with a construction management firm, whose chairman of the

board is a member of the Museum’s Board of Directors. The modified Related Party

Transactions note is as follows:

During 2008, the Museum entered into a contract with a construction management firm, whose chairman of the board is a member of the Museum’s Board of Directors, to provide project management services for certain improvements to the Museum’s building. The contract, which includes services of sub-contractors, was completed in 2009. During the years ended December 31, 2009 and 2008, construction costs in the amount of $852,394 and $1,116,251, respectively, were paid to the firm for its fees and its payment to sub-contractors. These costs are included in construction in progress at December 31, 2009 and 2008, respectively.

— That the Museum’s Financial Statements dated December 31, 2010 contain a

modification of its note relating to related party transactions. The modified Note 8 of the

Financial

10

Statements relates to a contract with a construction management firm, whose chairman of the

board is a member of the Museum’s Board of Directors. The modified Related Party

Transactions note is as follows:

During 2008, the Museum entered into a contract with a construction management firm, whose chairman of the board is a member of the Museum’s Board of Directors, to provide project management services for certain improvements to the Museum’s building. The contract, which includes services of sub-contractors, was completed in 2009. During the year ended December 31, 2009, construction costs in the amount of $852,394 were paid to the firm for its fees and its payments to sub-contractors. These costs are included in construction in progress at December 31, 2010 and 2009, respectively. In 2010, the firm provided additional construction management services and $78,224 was paid to the firm for fees and subcontractors payments, of which $37,512 is included in construction in progress at December 31, 2010.

— That the Museum’s Financial Statements dated December 31, 2010 contain a new

note relating to a $4,500,000 grant the museum received from the Commonwealth of

Pennsylvania in July 2001. The Government Grant note is as follows:

The Museum, through the City of Bethlehem, PA, obtained a $4,500,000 grant from the Commonwealth of Pennsylvania in July 2001. Grant funds are available to the Museum for reimbursement of construction expenditures, subject to the Museum’s expenditure of certain qualified matching funds as defined by the Commonwealth.

2. Synopsis of Minutes of Board of Directors Meetings

Mr. Houser also testified and gave an overview and summarization of the minutes of the

Board of Directors meetings of the Museum beginning in and about 1999. At the March 19,

1999 Board of Directors meeting, Mr. Barnette and Mr. Donches discussed plans for the

Museum which consisted of two phases including a Preview Center to open early in the year

2000 and a main museum targeting a first phase opening in 2002-2003. The establishment of a

Preview Center was discussed at subsequent Board of Directors meetings on April 7, 1999, and

December 16, 1999. At that time it was discussed that the Preview Center would serve as the

11

Museum’s base of operations during construction of the main facility. At it’s July 14, 2000

meeting, the Museum’s board reviewed the business plan for the Museum and related matters

including (a) Phase I – The Preview Center; (b) Phase II – The Machine Shop and (c) Phase III –

The Iron and Steel. At the December 20, 2000 meeting of the Board of Directors, it was stated

that the Preview Center would now open in April 2002. However, at the November 9, 2001

meeting of the Board, there was discussion that the September 11, 2001 terrorist attacks and the

Chapter 11 bankruptcy filing of the Corporation had impacted upon the plans for the Museum.

The Board at that time considered alternatives including (1) temporarily halting Museum

activities until the Board gained a better understanding of the effects of these events and (2)

terminating plans for the Museum. The Board ultimately agreed that in the short term,

management should continue activities based on its then current business plan while at the same

time analyzing the other alternatives. It was decided that fund raising efforts should continue

with the understanding that potential contributors be fully advised of the various uncertainties

related to plans of the Museum.

At the April 3, 2002 meeting of the Museum’s Board of Directors, it was again decided

that fundraising efforts should continue with the understanding that potential contributors be

fully advised of the various uncertainties related to plans for the Museum. During the September

18, 2002 meeting of the Museum’s Board of Directors, Mr. Donches said that following a

meeting with the Museum’s architect and project manager, it was concluded that a reasonable

opening date for Exposition Hall (previously the Preview Center) assuming completed

fundraising, would now be April 2004. Back at the November 21, 2002 meeting of the

Museum’s Board of Directors, discussion concerning the need to improve liquidity by cost

reductions and increased revenues through fundraising was discussed. During the December 18,

12

2002 meeting, the Board of Directors again discussed the status of the financial picture of the

Museum. Mr. Donches reported because of the weakened condition of the Museum at that time,

a decision to release an employee (Mr. Johnson, Vice President of Institutional Advancement-

salary of $160,000 in 2002) had been made. Mr. Johnson’s employment with the Museum was

terminated in early December. It was discussed that liquidity would continue to be a concern

and should be followed closely.

At the board meetings of February 13, 2003, April 15, 2003 and July 17, 2003, the Board

discussed again the difficult financial situation for the Museum including but not limited to cash

flow and lack of revenues through fundraising. Despite this, Mr. Donches suggested that

planning efforts should be focused on positioning the Museum to acquire properties, real and

personal, including historic records, documents, memorabilia, machinery and equipment so that

subsequent phases of the Museum could be properly developed. Mr. Donches also urged that

fundraising be completed for Exposition Hall as soon as possible. It was pointed out at the

meeting, however, that fundraising would be difficult with future property ownership uncertain.

At the July 17, 2003 meeting of the Museum’s Board of Directors, Mr. Donches

presented the Institutional Development Report and reviewed the status of Exposition Hall and

the importance of starting renovations to the facility. Mr. Donches stated that with support from

the Board he would attempt to raise at least 90 % of the funding needed to complete Exposition

Hall with the goal of starting construction by the end of the year. At the October 16, 2003 board

meeting, the Board had a lengthy discussion on the importance of Exposition Hall. At the

December 4, 2003 meeting of the Museum’s Board of Directors, Mr. Donches discussed the

immediate goals of the Museum which included (a) the importance of raising the remainder of

the $5 million dollars necessary for the construction of Exposition Hall; (b) the need to expand

13

fundraising efforts to a national level and (c) the implementation of plans to establish a

fundraising organization for the Lehigh Valley fundraising campaign. It was agreed that upon

raising approximately $2 million dollars, construction of the structural improvements to

Exposition Hall would commence. The Board agreed that the primary focus of the Board and

staff of the Museum in the short term would be raising the funds necessary to start construction

of the Hall. Although, 2004 was now the projected year in which to open Exposition Hall, the

Board met on February 12, 2004, April 29, 2004 and July 28, 2004 and discussed the need to

start construction relative to Exposition Hall. At the January 27, 2005 meeting of the Museum’s

Board of Directors, Mr. Donches led an extensive discussion of the financial and business plans

for Exposition Hall. It was at that time that the Board gave approval to commence construction

of a new roof on Exposition Hall. The Museum’s Board of Directors met on April 14, 2005, July

14, 2005, September 28, 2005, November 21, 2005 and December 7, 2005, once again

discussing issues regarding liquidity and the need to open Exposition Hall. The Board of the

Museum met on March 9, 2006, June 8, 2006, September 28, 2006, and December 7, 2006

during which time various discussions of the future of the Museum, storage of artifacts and other

issues were discussed. It was during this period of time that Mr. Donches recommended that

fundraising efforts include the need to retain professional fundraisers and a professional museum

manager. The Board of the Museum met on March 8, 2007, June 14, 2007, September 13, 2007

and December 20, 2007. Much of these meetings involved discussion concerning fundraising

efforts by paid consultants and otherwise. At the September 13, 2007 meeting, the fundraising

consultants presented a status report on the fundraising campaign and discussion ensued on the

importance of continuing to develop a list of national prospects as well as the need to continue

efforts to solicit the funds with a sense of urgency. Also at this meeting, the Board discussed Mr.

14

Donches’ performance and compensation which resulted in a vote of confidence with no

recommended changes.

During the March 13, 2008 meeting of the Museum’s Board, there was discussion

highlighting the dwindling cash position of the Museum. Despite the ominous situation facing

the Museum, Mr. Donches recommended that the Museum’s current strategy be maintained. At

that meeting it was noted that the Museum had received a $1 million dollar personal gift from

new board chairman, Mrs. Priscilla Payne Hurd and that she wished it remained anonymous from

a public standpoint. The Board was challenged to raise a match to the gift by June 1, 2008 so

that construction on the exterior of the Preview Center could begin that summer. It was also

announced that Mr. and Mrs. Curtis H. Barnette had made the first matching gift contribution of

$100,000. The Board met thereafter on May 29, 2008, September 11, 2008 and December 11,

2008. At the December 11th meeting, Mr. Donches presented the President’s Report highlighting

the progress on the building construction and the favorable reaction that it had generated in the

community.

In 2009, and specifically at the September 10, 2009 meeting of the Board, Mr. Donches

presented the President’s Report in which he provided an update on the status of construction.

Specifically he stated that he anticipated construction would be completed in October (2009) and

he advised that the total cost of that phase of the project including the new roof, was $2.5 million

adding that the cost should generate a reimbursement from the Commonwealth of Pennsylvania

of $1.4 million by year end. At the December 10, 2009 meeting of the Board of Directors, Mr.

Donches presented the President’s Report in which he stated that exterior construction work was

completed during mid October. Mr. Donches once again advised that the total amount of that

phase of development including the new roof was $2.5 million and he reiterated that the cost

15

should generate a reimbursement from the state of $1.4 million. However, three months prior,

Mr. Donches represented to the Board that the Museum’s request for reimbursement had been

“met by the state,” despite budgetary issues. Notwithstanding, during the December 10, 2009

meeting, Mr. Donches advised the Board that state budgetary constraints may cause a delay in

reimbursements from the state.

In 2010, the Board met on March 11th, June 10th, and September 9th. At the September 9,

2010 Board meeting, Mr. Harlan noted that there were no new pledges of money for the period

of June through August 2010.

At the April 7, 2011 meeting of the Board of Directors, the Board expressed the sense of

urgency for the need to develop a credible fundraising plan with various suggestions proposed.

Among the recommendations were suggestions of a concentrated effort to pursue all potential

government sources for funding, retaining fund raising consultants, and establishing minimum

achievable goals in order to open the Museum by January 2014. The Board directed Mr.

Donches to pursue opportunities and provide to the Board at the June meeting a viable plan to

raise sufficient funds to meet the cash flow needs of the Museum in accordance with the

construction schedule and proposed business plan.

The June 9, 2011 meeting of the Museum’s Board of Directors does not reflect that Mr.

Donches presented the plans as requested at the April 7, 2011 meeting. During the September 8,

2011 Board meeting, Mr. Harlan reviewed the financial report for the period of June through

August 2011 and for the year to date 2011. Mr. Harlan noted that there were no new pledges of

money for the period reported. He reviewed pledges and grants receivable and he discussed the

cash flow for the remainder of the year. Mr. Donches asked Paul W. Zambo, fundraising counsel

to discuss the development planning and campaign approach produced by the Boards working

16

group. It was reported that planning a kick-off event for the public phase of the campaign was

underway. Discussion of the current cash status ensued and given the urgency of the situation,

Mr. Donches was directed to develop alternative plans for consideration prior to the December

2011 meeting.

At the December 15, 2011 meeting, Mr. Harlan reviewed the finance report of the year to

date through November 2011. Mr. Harlan noted that limited cash inflows prevented the Museum

from making significant progress toward opening the Museum and created a significant cash

reduction. Mr. Zambo presented an overview of the fundraising plan to raise the required funds

to complete the Museum, suggested that the capital campaign be set at $10 million, reviewed the

campaign calendar, explained to the Board the challenge grant and report on the recent prospect

meetings.

3. Significant Operating Expenditures

Stephen G. Donches (“Donches”) – Expenditures - $2,472,453.00

Mr. Houser found that between April 30, 2002, and December 30, 2011, payments

totaling $2,472,453.00 were made to Donches, as follows:1

Wages Retirement Total2002 $ 135,000.00 $ 17,629.00 $ 152,629.002003 $ 180,000.00 $ 18,801.00 $ 190,801.002004 $ 180,000.00 $ 16,739.00 $ 196,739.002005 $ 180,000.00 $ 22,526.00 $ 202,526.002006 $ 180,000.00 $ 21,689.00 $ 201,689.002007 $ 180,000.00 $ 22,206.00 $ 202,206.002008 $ 177,220.00 $ 27,061.00 $ 204,281.002009 $ 176,194.00 $ 29,815.00 $ 206,009.002010 $ 181,460.00 $ 23,179.00 $ 204,639.00

1 Mr. Donches testified that for years 2012 and 2013, he was paid $182,919 in each year.

17

2011 $ 179,420.00 $ 24,031.00 $ 203,451.00Total $1,749,294.00 $223,676.00 $1,972,970.00

Theodore W. Harlan (“Harlan”) Expenditures total $754,126.00

Mr. Houser found that Harlan was elected by the Museum Board of Directors, at its

meeting held on April 7, 1999, to hold the office of Assistant Treasurer and Assistant Controller.

There is no mention in the April 7, 1999 minutes as to the compensation Harlan was to receive

from the Museum. Moreover, we did not find mention that the Museum’s Board of Directors

approved compensation to be paid to Harlan while holding the office of Assistant Treasurer and

Assistant Controller, in any minutes of the Museum’s Board meetings.

Mr. Houser found that Harlan was elected by the Museum Board of Directors, at its

meeting held on December 4, 2003, to hold the office of Controller. There is no mention in the

December 4, 2003 minutes as to the compensation Harlan was to receive from the Museum.

Mr. Houser found that on May 13, 2003, the Museum entered into an agreement to

engage Theodore W. Harlan, CPA, to provide accounting and financial services to the Museum

as requested by Stephen G. Donches, President and CEO of the Museum. The services were to

include, “preparing financial statements and monthly payroll, processing accounts payables,

developing business plan financials, etc., and such other services as may be required from time-

to-time during the Consulting Period.” The agreement was to be on a calendar month-to-month

basis, beginning May 1, 2003. The compensation paid to Harlan was to be $65.00 per hour. The

understanding under the Agreement was that services performed by Harlan would be as an

independent contractor and not as an employee of the Museum. Stephen G. Donches signed the

contract on behalf of the Museum, as President and CEO.

18

Mr. Houser found that Harlan was elected by the Museum Board of Directors at its

meeting held on December 11, 2008, to hold the office of Treasurer. There is no mention in the

December 11, 2008, minutes as to the compensation Harlan was to receive from the Museum.

Mr. Houser found that during the Board meetings held on June 11, 2009, June 10, 2010,

and June 9, 2011, the Museum’s Board of Directors elected Harlan to hold the office of

Treasurer and Controller.

Mr. Houser found that between June 18, 2003 and December 31, 2011, payments totaling

$584,126.00 were made to Harlan, as follows:2

IndependentContractor Wages Retirement Total

2003 $ 8,840.00 $ 8,840.002004 $ 38,285.00 $ 38,285.002005 $ 32,760.00 $ 32,760.002006 $ 36,259.00 $ 36,259.002007 $ 67,680.00 $ 67,680.002008 $ 86,472.00 $ 86,472.002009 $ 99,581.00 $11,426.00 $111,007.002010 $ 85,000.00 $13,884.00 $ 98,884.002011 $81,539.00 $22,400.00 $103,939.00Tota

l$270,296.00 $266,120.00 $47,710.00 $584,126.00

Community Counselling Service Co., LLC (“CCS”) – Expenditures total

$496,250.00

Mr. Houser testified that the Board, at its meeting in September 2006, adopted a

resolution authorizing Mr. Donches to approve a contract with fundraising counsel at a fee of

$30,000 per month for an initial period of six months. Between October 11, 2006 and March 13,

2007, six payments of $30,000 each were made to CCS totaling $180,000.

2Mr. Harlan was paid $85,000 for years 2012 and 2013.

19

Mr. Houser found that on April 12, 2007, the Museum entered into an extension of an

agreement with CCS dated October 2, 2006, for professional fund-raising services. The original

agreement was extended on the following dates: March 21, 2007; April 12, 2007; May 24, 2007;

June 14, 2007; July 16, 2007; August 21, 2007; August 31, 2007; and December 28, 2007. We

found that on February 26, 2008, the contract was extended for an additional two weeks

beginning March 3, 2008 and ending on March 14, 2008. The compensation paid to CCS was to

be $27,500 per month.

Mr. Houser found that between April 18, 2007 and February 15, 2008, 11 payments of

$27,500 each were made to CCS totaling $302,500. An additional payment of $13,750 was

made to CCS on March 18, 2008. The total expenditures to CCS between October 11, 2006 and

March and March 18, 2008, totaled $496,250.

Liberty Property Limited Partnership – Expenditures Approximately total $350,000

These payments are for artifact storage at a leased facility at 754 Roble Road, Allentown

PA pursuant to a lease since 2006.

Morris Kreitz & Sons, Inc. (“Kreitz”) – Expenditures total $257,677.92

Mr. Houser found that between February 17, 1999 and March 17, 2010, expenditures to

Kreitz totaled $257,677.92. The payments to Kreitz were recorded in QuickBooks and reported

on the Museum’s financial statements as exhibit and artifact relocation.

Diane Gingold & Associates (“Gingold”) – Expenditures total $214,267.90

Mr. Houser found that between November 24, 1999 and May 26, 2000, expenditures to

Gingold totaled $214,267.90. The payments to Gingold were recorded in QuickBooks and

reported on the Museum’s financial statements as payments for fund raising – planning.

20

Mr. Houser did not find any mention in the minutes of the Museum’s Board of Directors,

that the Board approved a contract with Gingold.

Charles H. Bentz Associates, Inc. (“Bentz”) – Expenditures total $219,645.52

Mr. Houser found that on April 22, 2005, the Museum entered into an agreement to

engage Charles H. Bentz Associates, Inc. in the management of a capital and endowment

campaign. The agreement was for activities beginning on May 1, 2005 and continuing through

October 31, 2005. The compensation paid to Bentz was to be $25,000 per month beginning May

1, 2005 and continuing through October 31, 2005, for a total of $150,000. The monthly fee

included all travel, living, and Bentz office expenses. Stephen G. Donches signed the contract

on behalf of the Museum, as President and CEO, as did Curtis H. Barnette, in his capacity as

Chairman of the Board.

Mr. Houser testified that while he did find mention in the minutes of the Museum’s

Board of Directors that Charles Benz attended the January, April and July 2005 Board meetings,

he did not find mention in the minutes that the Board of Directors approved entering into a

contract with Bentz.

Mr. Houser further found that between December 23, 2004 and October 27, 2005,

expenditures to Bentz totaled $219,645.52.

IKON Public Affairs/IKON Holdings, Inc. (“IKON”) – Expenditures total $180,023.46

Mr. Houser found that on February 23, 2007, the Museum entered into an agreement to

engage IKON Public Affairs to be the Museum’s Washington, DC governmental relations

consulting firm. As compensation, the Museum agreed to pay IKON a fee of $3,500 per month,

plus authorized travel expenses. The term of the agreement was from March 1, 2007 through

December 31, 2007, with the caveat that the Museum could terminate the agreement with or

21

without cause, at any time, upon 60-days written notice to IKON. Stephen G. Donches signed

the contract on behalf of the Museum, as President and CEO.

Mr. Houser did not find any records indicating there was an extension of the agreement

with IKON past December 31, 2007.

Mr. Houser found that between March 1, 2007 and December 17, 2010, expenditures to

IKON by the Museum totaled $180,023.46.

Mr. Houser did not find any mention that the Museum’s Board of Directors approved a

contract with IKON, in the minutes of the Museum’s Board meetings.

Paul W. Zambo Associates (“Zambo”) – Expenditures total $165, 830

Mr. Houser found that on September 13, 2011, the Museum entered into an agreement to

engage Paul W. Zambo Associates to provide professional services to manage the initial phases

of the Capital Campaign for the Museum. The agreement established a three-month contract

period, beginning September 1, 2011 and ending November 30, 2011, for managing capital

campaign activities and providing data management assistance. As compensation, Zambo was to

be paid a total of $36,000 in three installments. In addition, Zambo was to be reimbursed any

out-of-pocket expenses for mileage, postage, printing and supplies used in campaign activities.

Stephen G. Donches signed the Contract on behalf of the Museum, as President and CEO.

Mr. Houser found that an Addendum dated February 24, 2012 extended the contract for

an additional four-month period, beginning March 1, 2012 and ending June 30, 2012. The

contract provided for a fee of $6,000 per month to be paid to Zambo. Stephen G. Donches

signed the Addendum on behalf of the Museum, as President and CEO.

22

The minutes of the Museum’s Board of Directors mention that Paul Zambo attended the

June, September, November, and December 2011 Board meetings; however, Mr. Houser did not

find mention in the minutes that the Board approved entering into a contract with Zambo.

Mr. Houser found that between July 27, 2011 and April 30, 2012, expenditures to Zambo

totaled $51,830.84. Additional fees in 2012 and fees totaling $60,000 for 2013 bring the overall

total to $165,830.00.

O’Brien Kreitzberg Entertainment (“Kreitzberg”) – Expenditures total $110,218.73

Mr. Houser did not find any mention of Kreitzberg in the minutes of the Museum’s Board

of Directors.

Mr. Houser found that between June 22, 2000 and September 29, 2000, expenditures to

Kreitzberg totaled $110,218.73. The payments to Kreitzberg were recorded in QuickBooks and

reported on the Museum’s financial statements as exhibit design and development.

Mr. Houser did not find any mention that the Museum’s Board of Directors approved a

contract with Kreitzberg, in the minutes of the Museum’s Board meetings.

Silent Planet – Expenditure - $58,000.00

Mr. Houser found an expenditure to Silent Planet at $58,000 for a website. The

Museum’s website is found at wwwNMIH.org. Mr. Houser testified that this is an exorbitant fee

for a professional website which can be created and launched for approximately $5,000.3

4. Mr. Houser’s Findings

Mr. Houser testified and reported the following findings:

3 On January 23, 2014, Detective Walsh testified for a second time. He testified that on January 17, 2013 he had received various documents from the Museum that had been requested by the Office of the District Attorney. He then reviewed transaction accounts for fiscal years 2012-2013 which did not cover the time period of the forensic audit conducted by Mr. Houser. In addition to his salary, Detective Walsh detailed that Mr. Donches has been reimbursed for food and travel expenses. For 2012 his expenditures were $1,351.84. For 2013 his expenditures were $3,803.63. These were generally for food at restaurants including but not limited to Melt, Prime Steak House, Hotel Bethlehem, St. James Gate, and Shula’s Steak House. In addition, as noted above, Zambo was paid additional fees for 2012 in the amount of $54,000, and the year 2013 in the amount of $60,000.

23

(a) Minimal Guidance From Museum Board Regarding Monies Donated to

the Museum

Mr. Houser testified and reported that he found minimal guidance from the Museum

Board of Directors to the Museum management regarding how monies donated to the Museum

were to be expended.

(b) Conflicts of Interest Existed with Respect to Board Members Who Financially

Benefited From the Museum Activities.

Mr. Houser testified that on June 8, 2006 the Board of Directors approved a resolution of

a conflict of interest policy for directors and officers of the Museum. Mr. Houser highlighted

some specific notable involvements between directors and their financial interests as follows:

* Daniel G. Gambet – Mr. Gambet disclosed on his 2007, 2008, 2009 conflict of interest

statements, that he was a director of KNBT Charitable Foundation. Although Mr. Houser found

no relationship between KNBT Charitable Foundation and the Museum as a vendor or a donor, it

was noted that the Museum had funds on deposit in KNBT Bank money market account.

* L. Charles Marcon – Mr. Marcon disclosed in 2010 conflict of interest statement that

the company he owned, Duggan and Marcon Incorporated will bid on construction work at the

Museum. Mr. Marcon is now Chairman of the Board of Directors as of the issuing of this report.

* L. Alvin Butz – Mr. Butz was elected as a class A director at the December 7, 2006

meeting of the Museum Board of Directors. Mr. Butz disclosed in 2007 through 2012 conflict of

interest statements that he is chairman and largest shareholder of Alvin H. Butz Incorporated and

has done construction management work for the Museum.

Mr. Houser testified that prior to Mr. Butz’s election to the Museum Board of Directors,

Alvin H. Butz Incorporated was doing work for the Museum. Between April 12, 2000 and April

24

26, 2002, Alvin H. Butz Incorporated was paid a total of $810,977.00 for fees and payments to

subcontractors. This total included $288,000 in expenditure for Pre-phase I related work on the

Preview Center and $488,000 for the roof project. Mr. Houser found an additional $34,341.00

was recorded on the books in connection with the roof project and reported as professional fees –

other.

Mr. Houser testified that after Mr. Butz was elected to the Board of Directors on

December 6, 2006, the Museum made expenditures to Alvin H. Butz Incorporated totaling

$2,033,310.00 as follows:

2007 - $2,502.94 for roof clean up reported as repairs and maintenance

2008 - $17,699.92 for project number 3139

2008 - $1,907,023.57 for demolishing project

2011 - $78,223.57 for project number 3185 preview exhibit area

2011 - $1,909.46 for promotional expenses

2012 - $25,950.84 for elevator removal for exhibit artifact relocation

Mr. Houser also testified that he could find no discussions in the minutes of the Board of

Directors meetings relating to the contract awarded to Alvin H. Butz Incorporated prior to the

actual signing of the contract on May 27, 2008. Mr. Houser did not find any discussions in the

minutes of the Board of Directors meetings held on May 29, 2008, two days after the contract

had been signed. Mr. Houser found that the $2,844,287.92 totaled expenditures to Alvin H. Butz

Incorporated were classified on the books of the Museum and reported on the financial

statements of the Museum as follows:

$2,738,871.91 – Construction in Progress

$40,711.37 – Expensed as Preview Exhibit Area

25

$34,341.40 – Expensed as Professional Fees – Other

$25,950.84 – Expensed as Exhibit Artifact Location

$2,502.94 – Expensed as Repairs and Maintenance

$1,909.46 – Expensed as Promotional Expenses

(c) The Museum Lacked a Formal Process and/or Procedure for the Approval of

Vendor Invoices Prior to Payment.

Mr. Houser testified that although the Museum Board specifically authorized the

expenditure of funds in certain instances, they did not produce any documents describing any

procedure or process of approval of vendor invoices prior to payment and Mr. Houser was not

able to independently identify any specific process and procedures utilized by the Museum.

(d) There Exists Inconsistent Treatment and Reporting of Expenditures

Mr. Houser found that from its inception in 1997 through December 31, 2010, the

Museum consistently reported write-offs for uncollectable pledges as bad debts on its statement

of functional expenses attached to its 990 Form. However, for the year 2011, he found that Note

2 of the Museum’s Notes to Financial Statements stated the following:

During 2011, a donor notified the Museum, that only $50,000 of a $523,933 balance of a pledge, made in the year 2000, would be available to the Museum. Accordingly, 2011 support and revenues, and pledges receivable were reduced by $473,933.

Since this pledge was made in the year 2000, Mr. Houser was curious as to when the

Museum first learned that the donor was only going to pay $50,000 of its $523,933 pledge.

When Mr. Houser examined the Museum’s 2011 990 Form, he did not find the $473,933

uncollectable pledge reported as a bad debt expense. Rather, he found the uncollectable pledge

as an adjustment to net assets of the Museum, thus bypassing the reporting of the $473,933 as a

26

bad debt on the statement of functional expenses. The net affect is that the Museum understated

its expenses as reported on its 2011 990 Form in the amount of $473,933.

(e) Mr. Donches kept “kicking the can down the road” by Encouraging the Board

to Spend More and More money on the Preview Center/Exposition Hall even as some more

prudent members of the Board made repeated calls for fiscal restraint.

Mr. Houser noted as set forth above a number of times Board minutes reflect a concern

by some Board members of the Museum’s precarious financial status.

(f) Some Donated Funds should have been Restricted for Construction.

Mr. Houser testified that donors were donating money to construct a museum not to pay

for excessive salaries, consultants and other operating costs. Mr. Houser testified that donors

contributions were grossly mismanaged in that approximately 80% of funding went to operating

expenses rather than the mission - construction of a museum. Mr. Houser testified that a

restricted construction fund should have been established so that donated funds were available

for construction.

(g) Mr. Donches’s salary when compared to salaries of other CEO’s for similarly

situated non-profit corporations was excessive.

Mr. Houser testified that Mr. Donches’ salary was double that of CEO’s in similarly sized

and missioned non-profit organizations. Taking into consideration the operating budget of the

Museum and the region, average salary of a CEO would be around $93,000 per year.

TESTIMONY OF STEPHEN G. DONCHES

Stephen G. Donches appeared before us on January 16, 2014. He came voluntarily

without a subpoena. We also note that Mr. Donches cooperated with the Office of District

27

Attorney and voluntarily turned over for review all requested documents. Despite this, however,

we found his testimony to be incredulous at times.

Mr. Donches was hand picked by Mr. Barnette to act as President, CEO and be a Board

member of the Museum at its inception in 1997. He described Mr. Barnette as a “friend and

close business associate.” Mr. Donches acknowledged that he had no experience or education in

museum startup or management. He also acknowledged that his experience had been limited to a

long career at a for profit corporation in accounting and public affairs. He never managed a non-

profit organization. Although he acknowledged that his assignment of CEO at the Museum

included acting as chief fundraiser, curator and construction manager, he actually had no

experience in any of these fields. In fact, he hired, at great expense, numerous professionals to

do all of these jobs.

He admitted too that he never sought bids for professional work because he legally did

not have to do so. Thus, he often retained people he knew who benefited financially. For

example, he characterized Lee Butz of Alvin H. Butz, Inc., who was retained as construction

manager and served on the Board, as a “friend.” Mr. Donches also admitted that the

expenditures of almost $1 million in fundraising consultants resulted in little to no results and

overall cost the Museum needed funds. He also admitted that the expenditure of $180,023 for

IKON Public Affairs, a lobbyist firm also yielded no results.

Even though the Museum and/or Preview Center was no where near ready, Mr. Donches

also acknowledged that the firm of Morris Rieitz & Sons (“Rieitz”) was paid $257,677 between

1999-2010 to move various artifacts from Washington D.C. to Bethlehem. The artifacts were

originally delivered to the Corporation site, and then had to be moved again at additional expense

to a climate-controlled building at the request of Smithsonian. On May 26, 2006, Mr. Donches

28

executed a lease as President/CEO, between the Museum and Liberty Property Limited

Partnership, to lease 754 Roble Road, Suite 70, Allentown, PA, consisting of 9,600 rentable

square feet, for storage of the Museum’s artifacts. The lease amount for the first lease year was

$60,000 annually, plus a monthly payment of $2,127.33 for annual operating expenses. The

lease was amended four times and eventually extended through June 30, 2012. Mr. Donches

testified that it costs the Museum about $125,000 a year to have the artifacts stored at the present

time.

Mr. Donches testimony illustrated a Museum dominated by former officials of the

Corporation who served in various capacities and Board positions all of whom had almost blind

confidence in his performance as CEO. For example, the three original incorporators (Mr.

Martin, Mr. Campbell, Jr., and Mr. Masters) were all corporation employees as well as four of

the six original Board members (Mr. Barnette, Mr. Donches, Mr. Jordan and Mr. Millenbruch).

The other paid employees, Mr. Wilkens, Mr. Harlan and Mr. Johnson were also former

employees of the corporation. Mr. Donches acknowledged that when he retired from the

Corporation in 2002, the Corporation was in bankruptcy and headed toward closing. With that

prospect, he negotiated a $180,000 a year salary plus benefits as CEO of the Museum where he

has remained for the past 12 years. As such, the Museum was a resting place for soon to be

unemployed officials of the Corporation who benefited from high paying salaries and other

benefits at the Museum.

Mr. Donches appeared almost unfazed that about 80% of all donated monies had been

spent on operational expenses including $2 million to him for salary and other benefits. Mr.

Donches acknowledged that the Corporation had donated from day one the building that was to

serve as the Preview Center/Exposition Hall. Mr. Donches had difficulty explaining why no

29

construction took place on the donated building between 1997 and 2005 when it appeared the

Museum had $10 million available as of 2002. After the construction in 2005 (new roof on

Exposition Hall - $500,000) no other construction work was done until 2008. Since 2008, there

has been no additional construction. Mr. Donches conceded that after 17 years and between $17-

19 million dollars, the only tangible progress was (1) a new roof on the donated building (2)

exterior work on the donated building and (3) relocation of donated artifacts from the

Smithsonian in Washington to Bethlehem.

Mr. Donches acknowledged that to date, the Museum has received approximately $16

million dollars in private cash donations. Approximately $10 million of that came from Priscilla

Payne Hurd (over $9 million) and Mr. Barnette (just under $1 million). In addition, the Museum

received federal funds from the Institute of Museum and Library Services ($70,000) and state

funds from RCAP ($1.4 million of a $4.5 million grant) and from DCED (Department of

Community and Economic Development) funds of $10,000. He also acknowledged that all

artifacts had been donated by the Smithsonian at no cost to the Museum.

Mr. Donches acknowledged that the Museum failed to meet all of its projected dates to

open. Although he expressed frustration, he also said he was steadfast in his view that he could,

with more money ($3 million dollars), and time, get the Museum up and running. Incredibly,

after 17 years and $17-19 million dollars, Mr. Donches described the Museum as a “start-up”

organization. Even under direct questioning by a member of the Grand Jury, Mr. Donches

refused to throw in the towel that the Museum may not be viable under any scenario going

forward. He also refused to concede that perhaps new leadership was needed. He has never

considered resigning.

TESTIMONY OF THEODORE W. HARLAN

30

Theodore W. Harlan appeared before us on January 16, 2014. He came voluntarily

without a subpoena. He testified that at the present time he is employed by the Museum in the

position of Treasurer and Controller. He was employed by the Corporation from 1977 to the end

of 2001. His job changed a number of times during these years starting out as a manager of

Internal Audit and thereafter various jobs within the accounting department.

He indicated that he met Stephen Donches in the late 1990’s at the Corporation. He also

acknowledged that during the time frame when he and Mr. Donches retired (Mr. Donches in

2002), it was pretty much known that the Corporation was going out of business in the near

future. He further testified that in mid 1998 or thereabouts, he was assigned to be Assistant

Controller of the Museum related to his job at the Corporation. Mr. Harlan later did work as an

independent contractor at the Museum and thereafter was brought on as a full time employee in

approximately 2009 at a salary of $85,000 dollars per year. He also participated in the

Museum’s retirement plan and medical benefits.

Mr. Harlan acknowledged that the incorporators of the Museum, (Mr. Martin, Mr.

Campbell and Mr. Masters) were all employees of the Corporation. He also acknowledged that

the original Board of Directors (Mr. Barnette, Mr. Donches, Mr. Jordan, and Mr. Millenbruch)

were also employees of the Corporation.

He also acknowledged that he knew Mr. Robert Wilkins who was also an employee of

the Corporation and the Museum’s first paid Executive Director.

Mr. Harlan reviewed the uncertainties note that appears on the Museum’s financial

records for December 31, 2003. He acknowledged that the uncertainties note “raised a flag”

with respect to the viability of the Museum for the next year. Mr. Harlan acknowledged that

with his background in accounting and auditing, in his position as Treasurer/Controller, he had

31

concerns about the viability of the Museum project. He acknowledged that there never was

sufficient money in hand to see through the construction and that they never had a big cash

reserve. He also indicated that pledges of new money were fairly sporadic. Mr. Harlan testified

that one donor, Priscilla Payne Hurd, a one time Chairperson of the Board of Directors,

individually contributed approximately $9.5 million dollars to the Museum project over a period

of time. He also testified that Mr. Barnette pledged $1 million dollars and has delivered

approximately $750,000 dollars of that pledge. Mr. Harlan acknowledged that the bulk of the

private money came from Ms. Hurd and Mr. Barnette.

When Mr. Harlan was asked specifically as to who “called the shots”, at the Museum in

terms of decisions to be made for hiring consultants, architects, construction managers etc., Mr.

Harlan responded that it has been essentially Stephen Donches. Mr. Harlan testified that he did

not set policy and had no role in making such decisions. Mr. Harlan also testified that the only

significant construction projects was the $500,000 project for a new roof in 2005 and the

construction in 2008 with respect to the exterior of the building.

Mr. Harlan testified that he did his job with respect to painting the true financial picture

of the Museum at all times and relayed such information to the Board. He acknowledged that

there was a “sense of urgency” by the Board at times as he painted the financial picture. He

testified that he believed that he conveyed to the Board adequately the serious questions about

the viability of the Museum for consideration by the Board.

With respect to the over the $1 million dollars spent on fund raising consultants, Mr.

Harlan stated that use of the fund raising consultants was unsuccessful. He testified he was not

satisfied with the results of the fund raising consultants relative to the Museum. He also testified

32

that the money paid to IKON Public Affairs for lobbyist services did not result in any significant

benefit to the Museum.

Mr. Harlan testified that at times he sat in on Board of Directors meeting and at no time

did Board members raise the issue as to the competency of Mr. Donches to continue to run the

Museum. He acknowledged that most of the Board members had some association with the

Corporation. He did acknowledge that there was frustration with some Board members that the

Museum was not making significant progress. Nevertheless, Mr. Harlan testified that he never

heard any Board members express concern or raise the issue that Mr. Donches should be

replaced as CEO.

Mr. Harlan acknowledged that approximately 80% of the revenue of the Museum was

spent on operating expenses. He also testified that the yearly rent being paid for storage of

artifacts is a drain on the financial status of the Museum. Mr. Harlan testified that there is

approximately $770,000 dollars cash on hand as of the end of 2013. He indicated further that no

new money has come in as of the date of his testimony. Mr. Harlan indicated that he does not

know when the Museum will open. He indicated that he could not tell the Grand Jury that the

Museum would be open by the end of year 2014 or by 2015. He acknowledged that for the year

2013, the Museum brought in approximately $460,000 dollars in contributions. Mr. Harlan

acknowledges that the Museum has made no effort to seek small donors and has relied on large

donors for revenue. There has never been a community wide capital campaign with respect to

the Museum. Mr. Harlan testified that at the annual operating expenses for the Museum for 2014

will be somewhere between $600,000 - $700,000 dollars.

GRAND JURY FINDINGS

33

1. After 17 years, and approximately $17-19 million dollars in privately donated and

public funds, the mission of the Museum as set forth in its corporate records has failed.

2. Despite the fact that the building was donated by the Corporation, and that all artifacts

have been 100% donated by Smithsonian, the Preview Center/Exposition Hall has never opened

and there exists no tangible evidence to believe that the Museum will ever open and be viable

under the current leadership.

3. Proper management would have accomplished the opening and operation of the

Museum with less expense.

4. Stephen G. Donches had no experience in non-profit management.

5. Stephen G. Donches had no experience or any qualifications specifically in museum

start up or management.

6. The Museum was a resting place for soon to be unemployed officials of the

Corporation who continued to benefit from high paying salaries, retirement benefits, and other

benefits at the expense of the organization.

7. Mr. Donches as one of the original members of the Board of Directors and as a

“founder”, was given too much power and the organization suffered from “Founders Syndrome”.

8. Mr. Donches was given authority to expend monies on behalf of the Museum

with little to no direction from the Board. Mr. Donches’s judgment and decisions

resulted in millions of dollars wasted on expenditures that did not advance the objectives

of the organization to wit:

— Donches engaged 4 different fund raising firms (“CCS”, “Gingold”, “Bentz”,

“Zambo”), with total expenses over $1 million dollars. These expenditures resulted in

approximately $75,000.00 in return. In addition, despite the expenditures, the Museum

34

did not even implement or execute any broad fundraising effort and continued to rely on,

unsuccessfully, a limited number of wealthy donors.

— Donches engaged IKON, a Washington based lobbyist firm for $180,023

which also yielded no results.

— Donches prematurely moved artifacts from Washington D.C. to Bethlehem for

costs of $257,677 and storage space costs of approximately $350,000 with no Museum in

place. The rent is a continuing expense and a continuing drain on Museum funds.

— Donches paid $58,000 to Silent Planet, for a website far in excess of market

price and for a Museum that has never opened.

9. Mr. Donches’s judgment and decision to not start construction on the Preview

Center until 2005 despite having approximately $10 million dollars available as early as

2002 allowed Museum funds to be consumed by operating expenses (80%) and did not

advance the objectives of the organization.

10. Mr. Donches has benefited financially from the activities of the Museum to wit:

— Mr. Donches has received almost $2.5 million dollars in salary and benefits over the

past 12 years. Further his salary of $180,000 per year is double that of a similarly sized

non-profit organization.

11. The Board was packed with former corporation officials and their friends who

generally expressed blind confidence in Mr. Donches even in the face of

17 years of an unrealized fulfillment of the corporate mission.

12. Board members lacked qualifications and experience in museum start up and/or non-

profit management.

35

13. A number of Board members had conflicts of interest in serving the Museum,

particularly L. Alvin Butz who benefited financially.

14. There existed inadequate minimal guidance from the Board to Museum management

regarding how monies donated to the Museum was to be expended.

15. The Museum lacked transparency and the Board routinely granted lucrative salaries

and retirement benefits which were out of line with similarly missioned and sized non-profit

organizations.

16. Despite financial “red flags”, uncertainties as to viability and a sense of urgency as to

lack of revenue, Mr. Donches and the Board continued to maintain the existing unsuccessful

strategy. In addition, Mr. Donches kept “kicking the can down the road” by recommending to

the Board to spend more and more money and by public statements that the time was near for the

opening of the Museum.

17. Donors generosity was exploited by reliance on overly optimistic and unrealistic

expectations as well as public statements by Mr. Donches as to the near opening of the Museum

despite Board direction that donors be cautioned as to the viability of the Museum.

18. The Museum lacked oversight.

19. The Museum lacked a formal process/procedure for the approval of vendor invoices

prior to payment.

20. There existed inconsistent treatment and reporting of expenditures.

21. There are serious questions regarding the costs to sustain the Museum going forward

and its viability even if it eventually opens.

GRAND JURY RECOMMENDATIONS

36

1. We recommend that the Museum Board immediately request the resignation of

Stephen G. Donches as CEO, President and Board Member of the Museum and terminate Mr.

Donches in the event he fails to honor the request for his resignation. We further recommend

Mr. Donches have no ongoing affiliation with the organization.

2. We recommend the Board of the Museum immediately search for an experienced

interim CEO with both Museum and non-profit management experience to assess the viability of

the Museum going forward. We further recommend this position be filled at a salary

comparable to the salaries of non-profits of similar size and mission.

3. We recommend an unbiased review by the current Board of the conflict of interests

and qualifications of said Board members, to reflect the best interests of the organization’s

mission.

4. We recommend that the Museum Board consult with outside legal counsel to obtain

an independent legal opinion as to the legal merit of bringing a civil action against Mr. Donches

to recoup any and all monies paid to him over the period of the last 12 years due to negligence

and/or breach of contract in the mismanagement of monies donated to the Museum, and failure

to fulfill the mission of the Museum in a timely manner.

5. We recommend that the Northampton County District Attorney send this report to the

Office of Pennsylvania Attorney General, Charitable Trusts and Organizations Section for their

determination as to whether the Museum should be the subject of an involuntary dissolution

under Pennsylvania law and all current funds on hand be distributed to a similar non-profit

organization.

37

6. We recommend the information contained in this report be disseminated to the general

public by all news media so that potential contributors are fully advised of the history, various

uncertainties and current viability of the Museum.

7. We recommend that the Pennsylvania legislature consider potential legislation that

can protect the public from donating to non-profit corporations that exist primarily for the benefit

of the officers and their business friends and who fail within a reasonable period of time to

complete the non-profit mission.

CONCLUSION

This Report represents a summary of the pertinent evidence presented to the

Northampton County Investigating Grand Jury of 2012 relating to the facts and circumstances

surrounding the National Museum of Industrial History, Bethlehem, Northampton County,

Pennsylvania. Although this Report does not recite all of the testimony placed before the Grand

Jury, this Report does contain sufficient cause upon which to conclude that a Report detailing our

findings and recommendations was necessary and in the public interest.

38