The scene was worse than he expected. Cat feces caked the carpeting. Cat hair hung in clumps on bookshelves and swivel chairs. Ammonia burned Morley’s eyes as two feral cats burst across the hall and raced into another room.
Morley was a little more than a year into his term as one of Coventry’s three selectmen in the summer of 2016 when he went to investigate the pitter patter that he often heard during meetings.
Several times he had asked for a key to unlock the door to the second floor, but each time Cynthia Diaz, then town clerk, treasurer and tax collector, said she didn’t have one.
Finally, he gave up and forced his way in. Upstairs, Morley found litter boxes so filthy the cats were defecating on the floor.
Whether she was asked for the key to the upstairs or financial information, Diaz’s answer was often the same: She made excuses. Auditor after auditor requested financial documents to investigate the town’s missing money, but Diaz withheld the files they needed. Board members requested information about the town’s accounts, and Diaz wouldn’t give it to them.
Since she was elected to three town positions in 2004, the town had asked the Vermont State Police, the Orleans County state’s attorney’s office, the Vermont state auditor and the Vermont attorney general’s office to investigate what appeared to be fraudulent activity.
Local and state authorities found Diaz was writing checks from town accounts to herself and did not deposit cash for property tax payments in a town bank account.
Despite investigations by troopers, state and local prosecutors and the state auditor, Diaz was never charged with embezzlement. The Vermont attorney general convicted her on two misdemeanor counts of tax evasion for which she was required to perform 100 hours of community service.
Diaz remained in office until the Selectboard forced her out in June. According to a forensic audit, the Northeast Kingdom town of some 1,000 people is missing an estimated $1.4 million or more.
How, residents and outsiders ask, could so much money be missing? Why haven’t authorities been able to prosecute Diaz despite what many say appears to be strong evidence? Who is to blame for letting the saga drag on so long? And if money was stolen, where is it?
Diaz did not return calls placed to her cellphone for this story. On Town Meeting Day in March, when asked directly if she had embezzled any town funds, Diaz said simply: “No.”
When Morley took office in March 2015, he had more than cat scat to clean up. The Selectboard was locked into a pattern of blaming Diaz for stealing money and scrambling the books.
The town clerk spun that to her advantage, convincing residents the board was on a witch hunt.
On election day, that’s what many voters saw. Every time authorities investigated and failed to file charges, it furthered her claim that the Selectboard had it in for her. Diaz, 49, is a member of the prominent Hancock family. She grew up in Coventry and is the single mother of two college-aged children.
Morley saw a way for the Selectboard to regain control of the situation. He found Jeff Graham, a fraud examiner who did what five auditors before him couldn’t: quantify the town’s losses. He brought in Paul Gillies, a former deputy secretary of state and respected Montpelier attorney, who sued Diaz on behalf of the town. And he found Amanda Carlson, the town’s first full-time administrator, who now runs town operations.
Diaz held power over Coventry like few others. The Selectboard tried to hold Diaz accountable, but she refused to provide financial information. When the Selectboard ordered audits, Diaz and the town attorney, Bill Davies, withheld the reports from town officials. Graham, the fraud examiner, found that Diaz had not fined certain delinquent taxpayers and some residents had not been required to pay taxes at all.
The town’s system of checks and balances had crumbled, and Diaz took advantage of the chaos, officials and auditors said.
She did not, however, act alone, Morley says. Other town officials who were in a position to stop her didn’t do so.
“The 2012 grand list for the town of Coventry went missing that year,” he said.
A grand list is the record of property values for all parcels in town, and it is used to assess property taxes. Its disappearance was a big problem, Morley said, and he couldn’t figure out how it happened.
Diaz told Morley that her computer crashed that year. That didn’t make sense to Morley. Her computer generated the list and didn’t crash then. He questioned her further and got “a lot of lies, spin, controversy, hate.”
Morley said he also got pushback from town listers who didn’t respond to questions about the missing document. After he raised questions, the 2012 grand list suddenly appeared in the town offices with no explanation.
“We all know who the ringleader is,” Morley said, “but there’s an awful lot of people who at best looked the other way — and maybe worse.”
Morley, a 45-year-old corrections officer at the Newport state prison, has made a second job of fixing Coventry. He is serious, but also enjoys solving problems. Sometimes before meetings he dribbles a basketball in the community center, bouncing with energy. Carlson, the town administrator, recently bought him a fidget spinner – a popular toy marketed to millennials – to keep his hands occupied during meetings.
Before Morley took office, Mike Marcotte and Brad Maxwell, members of the board for some 25 years, raised alarms in 2005 about problems with the books and attempted to get state officials to intervene, but they made no meaningful progress with Diaz. They couldn’t even get rid of the cats.
Morley did. But he recognizes how difficult things had become for the Selectboard.
“It was a strange relationship, a damaged relationship, between Cynthia and the board,” he said.
Anyone in the community center could hear the cats, but most people were uncomfortable confronting that and other problems in town. Board members knew Diaz was popular. She had the support of many residents because she was related to a number of people in town and had given certain residents a break on taxes.
The Selectboard members worried that if they cracked down, residents would turn on the board.
“Cynthia’s not wrong on all issues. Nobody is,” Morley said. “She would have certain valid points on some things,” and Morley would meet with her often to hear her side. “But she certainly dug herself in at a certain point, not wanting to work with you on anything.”
In her office downstairs, Diaz kept a Rottweiler by her side. The dog frightened people and cast a pall over the town offices.
Diaz herself also intimidated people, town officials say. An investigator with the state auditor said she was brazen about flouting the law, as though she knew she’d never be caught. In a town meeting in 2016, she gave a local newspaper photographer the finger. Another investigator said his questions slipped off her like she was made of Teflon.
Others saw her as Robin Hood. She wouldn’t collect penalties for late taxes in certain cases and in a few instances allowed residents to go without paying taxes at all, according to an analysis by Graham.
Morely said townspeople appreciated her favors and refused to believe the Selectboard’s claims, starting a year after she took office in 2004, that she was embezzling. That’s why, he and others said, Diaz won five elections to town clerk, delinquent tax collector and treasurer.
“Some of it was just a system failure,” he said, “and some of it was just something else.”
Morley and Graham are perplexed by a number of financial anomalies they’ve found along the way. Diaz appears to have taken cash payments for property tax payments without depositing them in the town bank account. From records obtained by VTDigger, it appears Diaz has several accounts in the Pribanco International LTD Bank in the Bahamas, has ties to multimillion-dollar properties in Hawaii and California, and has received $90,000 in wire transfers from Panama, where her former husband lives.
Officials worried also that Diaz could have mishandled money from the Waste USA landfill, the only remaining active landfill in the state. Graham found no fraudulent activity. But it was the annual contribution of hundreds of thousands of dollars in tipping fees from Waste USA that masked the town’s financial problems, according to Marcotte, the chair of the Selectboard and a state representative. Without the landfill, Marcotte said, taxes would have gone up significantly.
An FBI investigation has not yet resulted in charges, even though documents show the feds were in contact with the town in 2011, again last winter, and as recently as this summer.
Simple embezzlement cases – in which, for instance, the suspect is writing checks to herself – take no more than 90 days to bring charges, said Don Keelan, a certified public accountant from Arlington. Complex fraud cases can take six months or more, but never years, he said.
Investigators knew that Diaz was writing checks to herself and receiving cash in her office that she was not depositing into the town’s accounts, according to audits and police records dating back to 2006. Both of those activities, Keelan said, constitute fraud.
Either piece of evidence would likely be enough to charge someone with embezzlement, he said, especially if they had a history like Diaz.
“This is a pattern that went on year after year,” he said.
Gillies, the town’s interim attorney, also couldn’t understand why serious charges were never brought. “With all that evidence, nothing was done. It’s troubling,” he said, “why the investigations didn’t lead to action.”
The pattern of Diaz’s apparent fraudulent behaviors began only months after she took office in 2004.
New Hampshire auditors Anne Marie Mooney and James Taylor pointed up the problems in 2005, and their findings would have shocked the selectmen if they had seen the report.
While the Selectboard had been told about missing cash, it didn’t have access to the Mooney audit, and consequently didn’t understand the depth of the problem.
The board didn’t get copies of the Mooney report until this May.
Town attorney’s advice
Bill Davies was the town’s attorney for more than a quarter century until the Selectboard fired him in May.
The Selectboard didn’t spell out the reasons for the town attorney’s dismissal. But in interviews, individual board members said they were flummoxed by Davies’ apparent unwillingness to help them resolve the issue with Diaz.
The 2005 Mooney audit report became a particular sticking point. Marcotte said Davies did not share the report with the Selectboard.
VTDigger sought the Mooney report in a public records request with the Vermont attorney general’s office and shared a redacted copy of the audit with the Selectboard. It was the first time town officials had seen the audit.
If the Selectboard members had had access to the auditor’s report, they would have known 12 years ago that Diaz, nine months after she took office, did not deposit cash in town accounts from November 2004 to June 2005, a practice she continued in 2006 and 2007.
They would have known that Diaz drew two personal checks from the town’s bank account for $200 in October 2004 and nearly $3,300 in November the same year. And they would have been aware that the auditor couldn’t account for the town’s cash.
At the time, Marcotte recalls the town attorney telling him it would be best for the Selectboard not to see the report, in order to avoid the perception the board was going after Diaz.
After Davies was fired late this spring, the board asked him to return all town records and money he collected on the town’s behalf.
Davies said in a letter to the Selectboard that his office doesn’t have the “manpower or machine power” to give the town the documents it was seeking by a late June deadline.
The town’s former attorney continues to hold more than 100 municipal records, including documents about properties sold at town auctions, records on city codes, contracts and deeds.
Davies has returned money – though in a roundabout way. In late May, shortly after he was fired, he met Diaz outside the community center and handed her three checks. The checks were for about $5,100 in town funds and had been written to “Cynthia Diaz Treasurer,” according to scanned copies of them. She hadn’t been fired as clerk and treasurer yet.
In mid-June, Diaz deposited the checks into a personal account she opened at Community National Bank in Newport. The bank froze the account that day, and Judge Robert Bent in late July ordered the bank to transfer the money back to the town’s account.
Town officials were dismayed that Davies did not give the checks to the town’s new delinquent tax collector, Kate Fletcher. And they are baffled that instead of writing the checks to the town of Coventry, he directed them to Diaz, who is actively under investigation on suspicion of embezzlement.
Davies did not return repeated calls for this story.
Selectboard members won’t say why they fired Davies, and his termination letter is vague. But town officials said the advice Davies gave the board outlined only one option for dealing with Diaz – asking the state for help – and that option led nowhere.
“Without seeing the audit report, all we could do is make assumptions,” Marcotte said. “That’s why we relied heavily on the state police and then the state’s attorney,” Keith Flynn, to investigate the town and prosecute Diaz.
State’s attorney drops embezzlement charge
Diaz was no stranger to Flynn, then Orleans County state’s attorney. In August 2007, he dropped the only embezzlement charge ever leveled against her. It came out of a Newport Police Department investigation that found Diaz had been writing unauthorized checks to herself while working as a bookkeeper for Gray’s Paving and Sealing, a local contractor.
The police reviewed the work of the Newport auditing firm Gene A. Besaw & Associates, which discovered more than $22,400 in unauthorized transactions using company checks.
There were checks written to Diaz for 40-hour workweeks, even though she had worked 20 hours, and sometimes wrote duplicate checks to herself for the same pay period, documents show. Police say checks were also issued for overtime pay and a cash advance, none of which were approved by her boss.
And there were a number of checks – 15 totaling more than $10,600 – written either to cash or to Diaz and endorsed by her or by no one at all, according to court documents.
Diaz kept the company’s books from 2000 until Arnie Gray, her boss, fired her in 2005. “Arnold Gray stated he did not give Cynthia Diaz permission to write these checks to be cashed by her,” the audit states. “He was often told she was in a hurry and he would leave signed blank checks for her to use to write and mail the accounts payable bills.”
Gray wouldn’t comment for this story, but he told police that Diaz approached him in June 2005 with a check for $20,500 based on an agreement they came to, and he accepted it.
It’s possible Flynn dropped the embezzlement charge because Gray didn’t want to pursue it — which is what state records say — but that doesn’t make sense, Marcotte said. Once charges have been filed in Vermont, the wishes of a witness or victim don’t usually impact a case, he said, unless the prosecution hinges on their testimony in court. In this case, he said, Flynn had evidence that showed fraud.
Flynn, now an assistant Vermont attorney general in the environmental division, doesn’t recall the Gray’s Paving case.
“I’m not trying to be elusive here,” Flynn said. “But I just don’t remember all the facts from a case back then. I’m sure that at the time I made the appropriate call based on the facts before me. Nobody has a crystal ball.”
At that time, the Coventry Selectboard was worried about the Gray’s Paving case and its own books. Two years prior, the Selectboard hired the Mooney firm, and when the auditor told Marcotte she suspected fraud was occurring in Coventry, Marcotte asked the state police to investigate. A probe began in December 2006.
Detective Sgt. Kelly Clark met with Flynn in March 2007 to discuss the concerns from Coventry officials. She wrote about their conversation in a memo.
“Diaz’s bookkeeping practices were to benefit her,” Clark wrote. “There is definitely a problem with Procedures that were detrimental to the town of Coventry. Diaz should not be the Tax Collector and the Treasurer.”
Flynn told the state police detective he could not prove embezzlement because there was no evidence showing that Diaz had taken funds for her own use, according to a memo from Clark. Flynn and Clark called Mooney, the town’s auditor, and they all agreed that Mooney would contact them if she found fraud.
“At this time,” Clark wrote, “the case is considered closed.”
Flynn said he could not recall his conversation with Clark.
In January 2011, Flynn became Gov. Peter Shumlin’s commissioner of the Vermont Department of Public Safety, after serving more than a decade as state’s attorney for Orleans County.
AG pursues tax evasion
At the request of Marcotte, the Vermont attorney general’s office opened its own probe into Diaz in 2008. Investigators persuaded Judge Walter Morris to issue two search warrants for Diaz’s office because they expected to find evidence that she was embezzling.
And they did, according to records from the attorney general’s office. Tom Howell, who conducted the probe, found that Diaz was allegedly issuing checks to herself without documentation. Howell said she was accepting taxes in cash that weren’t deposited and she was allegedly taking cash to register snowmobiles, but didn’t process the registrations.
Investigators also found she wasn’t paying her income taxes.
Prosecutors ran with that. By April 2011 the office filed against Diaz 14 felony counts of tax evasion – not embezzlement – despite the evidence, Diaz’s history of fraud and her position as an elected official trusted with taxpayer money.
William Sorrell, the attorney general then, didn’t recall the Diaz investigation. “It doesn’t ring any bells with me,” he said in an interview.
Efforts to reach a prosecutor who worked on the case, Ultan Doyle, were unsuccessful. Assistant Attorney General John Treadwell was also involved, though he refused to comment on the case because he has a dim memory of the details.
Generally, Treadwell said it would be unethical for prosecutors to file charges against a defendant without being able to prove them beyond a reasonable doubt.
One count of felony tax evasion in Vermont under the most serious circumstances carries a fine of $10,000 and three years in prison.
The 14 felony charges in the Diaz case were pleaded down to two misdemeanor charges.
Diaz didn’t spend any time behind bars. 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.
Prosecutors gave Marcotte no explanation.
“We were flabbergasted,” he said.
No help from outside
While Selectboard members felt abandoned, their actions — or inactions — also played a role in Diaz’s ongoing tenure in office for a dozen years.
They met once a month and knew little of her day-to-day actions. Often, they took her at her word because they didn’t know what else to do. But trust can be an impediment to internal controls, auditors say. Not a single investigator had good things to report about the town, and the Selectboard knew that.
It also knew that in many ways, Diaz ran the town. She kept board minutes. She managed land records. She handled all town money without oversight from the board. She was in her office five days a week and used her frequent contact with townsfolk to win their support and shift it away from the board.
“Our biggest mistake was allowing Cynthia to be in charge of so much,” Marcotte said. “It was responsibilities that she wanted, and certainly members of the board don’t have the time to do that. If she wanted to do that, we figured that was fine.”
Around 2011, the state auditor’s office began investigating the town at Marcotte’s request. The auditor at the time, Tom Salmon, had Diaz and Marcotte complete a list of questions to gauge how the town handled money.
“Are bank account and fund balances reconciled on a monthly basis?” the questionnaire asked Diaz.
She checked a box labeled “No.”
Someone in Salmon’s office highlighted the row in yellow and noted, “WHY NOT?”
“Have you attended trainings on recordkeeping?”
Diaz left the boxes blank.
Salmon’s office highlighted that row in yellow and noted that she needed training.
“Does someone other than the treasurer review bank reconciliations?”
Diaz checked the box “No.”
Next to it, highlighted in pink, was written, “RED FLAG!!”
Marcotte’s responses to the questionnaire showed that the Selectboard had a poor understanding of what Diaz did. He said he didn’t know whether the town’s bank statements were reconciled on a regular basis, nor did he know whether the town was maintaining its deposit slips and bank reconciliations.
“Has a signature stamp ever been used for any town account?”
“Don’t know,” Marcotte checked.
“The answers to the questions on our questionnaire indicate extremely weak internal controls of the financial activities of Coventry,” Salmon concluded in January 2012. “The treasurer performs every financial transaction with no oversight from the board. There is no effort to segregate accounting duties to reduce the risk of errors or abuse.”
Marcotte said the board wasn’t ignorant out of apathy. It asked Diaz to explain what she was up to, but she wouldn’t say. It created policies to tighten internal controls, but she didn’t follow them. And the board couldn’t fire her; she was an elected official, who was consistently re-elected.
“We tried to look out for the best interests of the town,” Marcotte said. “But there’s only so much we can do.”
After Salmon filed his report that winter of 2012, the Selectboard hired a clerk from Lyndonville to work with Diaz to implement his recommendations. But early on, the woman’s husband became ill, and she stopped working with the town.
When the board hired the Newport auditing firm Gene A. Besaw & Associates to confirm that Diaz had made the changes, auditors found she hadn’t, Marcotte said.
The state auditor’s office gave Marcotte other advice, too, but the recommendations went nowhere.
In 2008, during a previous investigation by Salmon’s office, assistant Joe Juhasz outlined three steps Marcotte should take.
One, consult the town’s attorney, Davies.
Two, call Orleans County State’s Attorney Keith Flynn.
Three, call Vermont Attorney General Bill Sorrell’s office.
Marcotte, also a legislator, followed each step but found no relief for the town. The state brought only the misdemeanor tax evasion charges. Diaz stayed in office.
“It didn’t seem like anybody wanted to do anything about it,” Marcotte said.
The Selectboard remained locked in this stalemate of inaction until Morley was elected in 2015.
His fresh eyes, Marcotte said, are what Coventry needed.
No cats and new carpets
Morley laughs when he’s told people see him as a hero, but to many involved in Coventry’s government, he is. It’s ironic, they say, that it took a prison guard to clean up the town.
He has less than a year left in his term on the board and swears he won’t run for re-election. One term and done, he says.
After more than a decade of dead ends and indecisive steps, change came two years ago when Morley won a seat on the board. Each success the board has had since then has given its members more confidence to rebuild the town, he said.
“Slowly, over time,” Morley said, “you begin to limit your exposure, and then all of a sudden, things are happening really fast.”
In 2015, the board hired Graham, the latest auditor. He discovered this spring the town is missing an estimated $1.4 million or more.
On Town Meeting Day, voters booted Diaz from the office of tax collector. She was forced out of her offices as treasurer and town clerk in June because she could not secure a bond for required insurance coverage.
In May, the town won an insurance claim of nearly $500,000, based on the forensic audit.
And in June, state police confirmed the FBI had taken over its investigation of the town’s finances.
This week, the town has a hearing in its civil suit against Diaz.
Before Morley leaves office in March, he is working through a list of people who work for the town. He plans to meet with each one.
Maybe, he said, the people on his list will swallow a little deeper when he questions them. Maybe his questions will make them realize they hurt the town. He has many questions. And questions are easier to ask, he said, when you know the answers.
Today, the board is renovating the second floor of the community center. The carpets have been ripped up. The furniture has been thrown out. The windows are clean and open, and the rooms smell of fresh air and lumber.
The Selectboard has a key now to the second floor, and the cats are all gone. There remain only claw marks gouged into the soft wood of door jambs.
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