Coventry Selectman Scott Morley and auditor Jeff Graham had arrived unannounced that September morning, and they had a bad feeling as they watched the town clerk spin around and heft the heavy tote back inside the building.
For more than a decade, the Selectboard has been trying to account for tens of thousands of dollars in town funds identified as missing, but none of the first five auditors the town hired was able to complete reports.
Each time, Diaz — the town clerk, treasurer and delinquent tax collector — failed to provide documents they needed.
Graham, the sixth auditor the town had hired, said he worried that Diaz was withholding documents crucial to his investigation, and seeing her almost out the door with the packed plastic bin confirmed his suspicions. On that day, he and Morley waited until noon for Diaz to leave before searching the building.
Morley found the bin in the boiler room, sitting in the center of the concrete floor. The door was locked, Graham said, but its wooden jamb had worn away so that both men were able to enter the dark, warm room without twisting the handle.
Inside the bin were financial documents – delinquent taxpayer receipts, for instance, with penalties and fees added manually to the original computer-generated reports. Graham had been seeking the records for more than a year.
“Since our numerous requests for information included some of these actual items found,” Graham wrote in a six-page letter to the Coventry Selectboard dated Dec. 12, “I can only conclude Ms. Diaz had ill intentions with the removal of these documents.”
Despite what they say they saw, Graham and Morley are wrong, Diaz said. “They saw me coming back from the gym,” she said. “I was not walking out of the door with a tub.”
Graham wanted to review files in a vault in her small office, and the tub of documents was sitting in front of the vault. So she hauled it to the boiler room, where it would be out of the way, Diaz said.
She had no ill intentions, she said.
She summarized town officials’ concerns about missing money as “a smear campaign.”
Diaz, 48, was elected in 2004 and — despite an embezzlement investigation at a company where she had worked, a guilty plea to tax evasion, and intense scrutiny by auditors — has remained in office, often winning re-election by large margins.
One possible explanation is outlined in a lawsuit the town filed against Diaz on Dec. 16 in Orleans County Superior Court. “I have concluded,” Graham stated in an affidavit, “that some taxpayers have been allowed to pay their property taxes later than the tax due date without being charged interest at the statutory rate.”
Graham also believes certain property owners have not paid their taxes at all and that Diaz failed to include them in a list of delinquent taxpayers submitted to the Selectboard, he wrote.
In an interview, Selectboard Chair Mike Marcotte explained what all this may mean. “It appears she’s got a special group of people whom she’s doing things for,” he said, “and those are the people who are coming into board meetings and voting her back into office.”
Selectman Brad Maxwell said he has the same suspicions. Graham said it’s a reasonable assumption. Morley wouldn’t address the accusation.
“That is a false allegation,” Diaz said. “Every person who is delinquent, every person who comes into my office after the due date, pays penalties and interests.”
In October the Vermont State Police launched an investigation into Diaz and the town’s accounts, police spokesman Scott Waterman said. It’s now sharing its findings with the Orleans County state’s attorney’s office, Waterman said. And although the FBI would not confirm it, Graham said agents contacted him in late December to obtain his records to consider opening their own investigation. He expects to meet with them again.
The Selectboard has been trying to distance Diaz from the town’s funds for years, but Marcotte suspects its finances have been documented too poorly for authorities to have much to go on. The board is now suing Diaz as part of an effort to recover what it says are missing documents and money, and Marcotte hopes Graham’s extensive work will help the state police and FBI build a case that won’t fall apart.
A small town
Coventry, a town of about 1,000 residents, collects taxes on property like all Vermont municipalities. In 2015, nearly 9 percent, or 42 property taxpayers, were late. The Selectboard is skeptical of that total because it says Diaz, who compiled the list, made it impossible for auditors to reconcile her work.
During the 2016 election, Diaz won the town clerk seat with 75 votes, 25 more than her opponent Debra Tanguay. She also took the treasurer position with 75 votes, just five more than Tanguay. She ran uncontested for delinquent tax collector, as she has most years.
Benny Montalvo has heard the allegations about Diaz doing favors for voters, but talk is cheap, he said. When he was late in 2013, 2014 and 2015, he said, he paid all his associated fees and interest. He said he walked into Diaz’s office, she showed him his balance, and he paid it in person.
The 61-year-old has lived in Coventry for some 15 years and has never had any problems paying taxes with Diaz. He likes to think she is fair and honest. He appreciates that she calls him when his dog is loose.
“I wish I was one of those people. No, believe me,” he said, “if we’re late, we pay the penalties.”
Diaz is up for re-election as delinquent tax collector March 7, but earlier this month the town asked Orleans County Superior Court Judge Howard VanBenthuysen to disqualify her. Paul Gillies, a Montpelier lawyer representing the town, argues that Diaz is ineligible to run for re-election as delinquent tax collector because she failed to turn over money that she gathered on the job.
Her terms as clerk and treasurer expire in 2019.
Audits identify missing money
Coventry is a town of tall hills, dirt roads and whitewashed buildings that look as if they haven’t changed from when the town was chartered on Nov. 4, 1780. There is little traffic in this Northeast Kingdom community less than 10 miles from the Canadian border.
Like other Vermont towns, Coventry is governed by a Selectboard that manages the town money without outside oversight. The three-member board meets every Monday evening in a small room hardly large enough for a game of table tennis.
At a recent meeting, as they do during most of them, Marcotte, Morley and Maxwell read with frustration a delinquent tax report and list of cash receipts prepared by Diaz. Brows furrowed and eyes rolled. Morley described the documents as fictional. They lacked dates and Diaz’s signature. On some pages where receipts were required, Diaz provided only scanned images of $10 and $20 bills.
“I’ve been pulling what I have left of my hair out to try to get the town’s accounts in order,” Morley said after the meeting. “If we don’t have those accounts, the auditors can’t audit, and that’s been happening for 12 years.”
Graham’s is the latest audit and the only one ever completed. All his services — including a less-thorough audit and his support in court — cost the town $287,099.38. It’s expensive partly because he had to re-create documents Diaz did not provide. The town’s part-time Selectboard clerk, Amanda Carlson, listed sums for previous audits – some $66,000 combined — but she is not confident in their accuracy because she hasn’t yet physically seen their invoices or scrutinized town accounts.
Graham’s audit found the town had no method for recording and reconciling tax deposits and related payments in its largest and main operating account, the general fund, and he could not determine to what extent the failure would impact that account.
The audit concluded that the town’s internal controls are so poor there is a “reasonable possibility” that a significant error in its financial statements could occur and not be prevented, or detected and corrected, on a timely basis.
His audit identified some $63,000 in money missing from 2014 to 2016. Most of the money came from property taxes. In total, the investigations by all six auditors beginning in 2004 — the year Diaz was elected — have identified about $150,000 in missing money, according to Graham.Graham would not say whether he suspects Diaz is stealing from the town, though he’s been asked the question many times. Maxwell laughed nervously when asked and said he would not share how he honestly feels. Reluctant to cast Diaz as the sole source of the town’s problems, Morley would not say whether he associates the bin they found in the boiler room with the discrepancies in the town’s accounts.
“The facts are the facts,” Morley said. “There was a tote of materials taken and placed in the boiler room, and that’s unusual.”
But Marcotte said he believes Diaz is embezzling. Given her unwillingness to cooperate with financial investigations, he can find no other explanation for why the town’s accounts are in such disorder.
Diaz said she’s not embezzling. “As soon as Mr. Graham can give me a real number that doesn’t change every other sentence out of his mouth, I’ll defend it,” she said.
She said the town has no proof, and she criticized Graham’s reports, background and knowledge of finances. She said he is “creating numbers.”
Diaz said she read only Graham’s forensic audit and none of the numerous other reports he compiled in his investigation.
The town, meanwhile, is trying to recover $150,000 that’s been identified as missing.
Coventry’s insurer, the Vermont League of Cities and Towns, would cover up to $500,000 with one occurrence of employee theft if it could be proven, said Interim Director Joe Damiata. The league typically covers the cost of municipal embezzlement when criminal charges have been filed, he said.
Morley said he hopes to submit a claim by mid-March. In January, he met insurance officials and they came to a “handshake agreement” that the town’s claim could reach back to 2004, he said. He anticipates the claim will exceed $150,000 to capture any amounts that financial investigations have not yet identified as missing.
It is unclear whether the Vermont League of Cities and Towns would cover any losses from a failure to charge late fees or interest on delinquent tax payments.
Embezzlement charge dropped
The Selectboard commissioned its first audit in 2005, fearful that Diaz might be diverting money from the town. At the time, the Newport Police Department was investigating Diaz on suspicion that she embezzled from the local contractor Gray’s Paving and Sealing, where she had been working part time as a bookkeeper since 2000.
An investigation found $22,413 in unauthorized transactions at Gray’s. An auditor with the Newport firm Gene A. Besaw & Associates cited red flags in a June 2005 police affidavit.
“The bookkeeping was in disarray,” Emily Wheeler said. “Accounts payable invoices were not filed, penalties were paid on late payroll return filings, bank accounts were not reconciled and deposits in the computer did not match deposits in the bank.”
Wheeler’s firm discovered dozens of suspicious checks, according to the affidavit. Fifteen, totaling $10,606, were written either to cash or to Diaz and endorsed by her or had no endorsement at all. Six, totaling $1,200, were paychecks for expenses such as a cash advance or overtime pay that the company president stated she should not have received. Other paychecks, totaling $9,896, allegedly were payments for work Diaz did not perform and included duplicates for the same pay period. Others were written before Diaz performed the work.
The company president, Arnold Gray, did not authorize Diaz to write any of the checks to be cashed by her, according to the affidavit. Instead, he was often told she was in a hurry and so he’d sign blank checks and leave them for her to write and mail accounts-payable bills, according to the affidavit.
Gray declined to comment for this story, but he told police that Diaz approached him on June 1, 2005, with a check for $20,500. He accepted it and told a Newport police detective that he wished to drop all charges of embezzlement against his former bookkeeper, according to the affidavit. But the case continued.
In an interview, Diaz said the check she gave Gray did not contain funds stolen from the company. It was money he paid her for work she’d done, but she felt so insulted by his accusation of embezzlement that she didn’t want the money anymore, she said.
“I pretty much ran the office and was hurt that he slapped me with embezzlement,” she said.
About a year after the check, Gray sought an additional $5,274, according to an April 2006 victim impact statement filed in court. Accounting fees totaled a majority of that sum, but he said Diaz still owed him $1,913. He also asked that in the event of her conviction, she be placed on probation and apologize.
The alleged embezzlement “created a great deal of disappointment in our former book-keeper,” Gray’s wife wrote on their behalf in the statement. “This situation, as well as the publicity, has created a stressful (very) situation for us. It has created some sleepless nights for us both.”
The case never went to trial. The Orleans County state’s attorney’s office dropped its felony embezzlement charge in August 2007. No document contained within Diaz’s inch-thick file explains why, but an affidavit in a criminal investigation launched less than a year later does: “the victim in the matter, Arnold Gray, did not want to pursue the matter further.”
Marcotte thought this was odd. In Vermont, once charges have been filed, the wishes of a witness or victim don’t usually impact a case, unless the prosecution hinges on their testimony in court. But that wasn’t the situation here. The state could have called on an auditor and piles of financial documents to reinforce its case. Orleans County state’s attorney’s office officials could not explain their office’s decision of a decade ago.
“Why do you drop something like that?” Marcotte said.
Around the time the state dropped the charge, the auditor hired by the Coventry Selectboard to review the town’s accounts finished what she could of her report. Fraud, she told Marcotte, was likely occurring in Coventry.
Two counts of tax evasion
In December 2008, the Vermont attorney general’s office opened an investigation into Diaz. Marcotte had requested the probe after the demise of the state’s embezzlement case against her and the ominous findings of two audits, by that point, into the town’s accounts, according to a January 2009 affidavit by an investigator with the AG’s office.
On Jan. 27, 2009, Judge Walter Morris issued a search warrant for the office of the town clerk and treasurer in order to seize financial documents. State investigators believed they would find evidence of embezzlement.
On the morning of Feb. 2, 2009, police entered Diaz’s office and seized enough evidence to fill 13 boxes. In their search, they said, they discovered that Diaz was also collecting money and registering people for the Vermont Association of Snow Travelers, or VAST.
Judge Morris issued another warrant for her office a week later, narrowing the scope this time to seize only registration documents that Diaz was holding for the nonprofit snowmobile organization. Investigators believed they would find more evidence of embezzlement.They based their suspicions on an interview Detective Thomas Howell, of the attorney general’s office, had with an employee of the Newport Department of Motor Vehicles on Feb. 9, 2009. The employee told him that about a year earlier a man from Albany had come in with a registration form for his snowmobile that was signed by Diaz. The form showed that the man had given Diaz $294 for tax and registration fees. But when the DMV employee checked, there was no record of the DMV receiving the money, Howell said in an affidavit.
“That’s the first time I’ve heard that, first of all,” Diaz said in a recent interview. “And I am a DMV agent through VAST. I complete them, I mail them to VAST, VAST mails them to the DMV. I have no idea about that one.”
VAST Executive Director Cindy Locke said she has never had any problem with Diaz and believes the nonprofit received the payment in question. But it has suspended Diaz’s role with VAST in light of the ongoing investigations in Coventry, she said.
What happened with the state’s attempt to build an embezzlement case is unclear. It shifted gears, and by April 2011 it had charged Diaz with more than 10 felony counts of failing to file tax returns, failing to pay state taxes and filing a fraudulent tax return. Investigators estimated she owed Vermont $10,722, according to a February 2010 affidavit.
Assistant Attorney General John Treadwell declined to discuss the details of his office’s case against Diaz, but he said generally prosecutors would not file charges unless they felt they could prove them beyond a reasonable doubt.
This shift, like in the previous criminal investigation of Diaz, surprised Marcotte. An investigator with the attorney general’s office had told him it was clear “there were things going on there,” as Marcotte put it. “Then I was really taken aback when they filed tax evasion charges against her and not any charges against her as far as embezzlement,” he said.
On Feb. 11, 2010, Vermont attorney general’s office Detective Darin Barber drove to the tiny Coventry town clerk’s office to speak with Diaz, according to an affidavit. When he asked why she had not filed tax returns for the years in question, Diaz told him she didn’t think she made enough money after her child support deductions each year. She repeated that explanation once more.
Barber asked if she had checked the state’s tax guidelines to be sure, and Diaz said she had not, according to the affidavit. He then tested the bookkeeper’s understanding of tax law, using as an example 2008, in which she made a gross income of $51,791. After deductions, including child support, she still had a taxable income of about $40,000.
“I asked her if she thought she did not have to file on that amount of money,” Barber stated in the affidavit. “She did not answer and asked me where I got those figures.”
He told her through search warrants of her banking accounts and wire transfers, and she asked him when she would get a copy of those figures. “I advised her upon arraignment,” Barber stated in the affidavit.
In October 2011, Diaz pleaded guilty to two counts of tax evasion, according to a copy of her plea agreement. The charges were misdemeanors, and the court suspended her jail sentence of 15 days to six months, ordering her instead to perform 100 hours of community service and file accurate taxes from 2003 to 2009 and from 2011 to when her probation expired in 2013, according to her plea agreement.
Treadwell could not say why the state agreed to the diminished sentence.
In an interview last week, Diaz said she didn’t owe any taxes and that’s why she didn’t file returns. Had she, the state would have refunded her anyway, she said. The money it believed she owed was based on a cursory inspection of her bank account statements, which, it discovered upon further review, contained tax-exempt funds, she said.
State police discovered Diaz had received $90,385 wired from Panama in the periods from 2003 to 2004 and 2006 to 2008. Diaz told an investigator that her father-in-law wired her the money for child support because her ex-husband does not pay what he owes. She said his annual obligation to their two children is $6,000, but during the years in question, according to an affidavit, she was wired significantly more money. In 2003, she received $35,940.
In the recent interview, she didn’t address the Vermont attorney general’s charge that she lied on her 2011 tax returns.
The storage closet
Coventry’s civil lawsuit against Diaz does not accuse her of embezzlement. Mainly, it’s an effort to obtain documents the Selectboard and auditors have sought for more than a decade. The board is exasperated. It says so in a request that Diaz be held in contempt of court filed with Judge VanBenthuysen, who on Dec. 29 ordered Diaz to give the board all the town records she was keeping outside of her office.
“Ms. Diaz defied this order and has provided the Town with no documentation, thumb drive, or other electronic record,” said Gillies, the board’s attorney, in the motion for contempt. “She was also required to provide copies of all receipts in a continuing manner by the Court’s order. She has defied this as well, providing the Selectboard with a record of a $200 deposit and delinquent tax check, while on the same day depositing $7,433 in the bank, based on checks dated from November 21, 2016 to the present, none of which have been reported, as required by law.”
Diaz appeared in Orleans County Superior Court at a Jan. 30 hearing. She sat by herself at the defendant’s table inside the cavernous white-walled room, her posture rigid. She would be representing herself, she told VanBenthuysen, because she couldn’t afford an attorney.
On her table sat a stack of documents and on top of that a black external hard drive. She said she had brought the records Gillies requested.
But after breaking for roughly an hour to review them, Gillies returned and had Graham take the witness stand.
The volume of documents they are seeking, Graham said, would fill a 6-by-6-foot box.
“The pile you see there,” he said, nodding to the stack now on the plaintiffs’ table, “is about 12 inches high.”
The records Diaz provided were “not even close,” he said.
VanBenthuysen ordered Diaz to issue the plaintiffs a copy of a key by that afternoon to a locked closet on the second floor of the town community center where Graham suspected some of the documents were stored. And once more, he encouraged Diaz to hire a lawyer, given the complexity of the case and “possibility of multiple venues” for the lawsuit.
After the Selectboard meeting that night, Marcotte, Morley, the board clerk and some local reporters walked up the stairs in the Community Center and opened the closet. The floor was cluttered with election paperwork and discarded boxes. From the door, Marcotte saw boxes marked “AP,” for “accounts payable,” but he didn’t see any marked “accounts receivable,” which would document money coming into the town. He hasn’t searched the room yet to see if he finds what he’s looking for.
“We’re going to do our part”
Marcotte said the Selectboard is taking steps to safeguard the town’s accounts. It’s asking voters in the March 7 election for the ability to appoint, instead of elect, delinquent tax collectors. And Marcotte, also a Republican state representative, introduced a bill this legislative session to allow towns to vote on whether to make the offices of clerk and treasurer appointed and prevent a single person from holding both the office of treasurer and delinquent tax collector.
The Selectboard also removed a financial recording program from Diaz’s computer and set it up on a new computer in its offices across the hall. It hired Carlson, the part-time board clerk, who will start full time by the end of February. She will use the program instead of Diaz and do all the town’s bookkeeping and record the Selectboard’s minutes.
Marcotte said board members tried to strip other duties from Diaz, but state statute barred them. It requires that the elected treasurer receive and deposit money, “which is probably the biggest area that we would like to influence,” he said. “But we can’t.”
In December, the Selectboard adopted 10 policies intended generally to tighten the town’s financial operations. One outlines steps to create a town reserve fund. Another establishes a process for contractor bidding. And one other, titled the “Fraud Prevention Policy,” creates a channel for employees and town officers to report concerns and a process to investigate them.
Diaz refused to sign any of them. They are established policies, and the Selectboard will follow them, Morley said.
Whether Diaz does, he said, is her own prerogative.
“We’re going to do our part,” Morley said, “and hopefully someday, somehow, somebody will come along and do theirs.”