Details Unfold in Diocesan Cash Probe
Money Flowed from an Accounting Contractor to Firms Owned by Top Catholic Finance Official

By James F. McCarty and Joel Rutchick
Plain Dealer
January 10, 2004

Private companies controlled by the chief financial officer of the Cleveland Catholic Diocese received more than $750,000 from an accounting firm the CFO had hired to work for the diocese.

The checks were written over the past six years to companies of Joseph H. Smith, the diocese's highest-ranking lay employee. The transactions are under investigation by the diocese, which suspended Smith this week, and the matter has been referred to law-enforcement authorities.

The investigation was launched this week after Rocky River lawyer Jay Milano received an anonymous letter and documents detailing the flow of money from a business operated by Anton Zgoznik to companies affiliated with his friend, Smith.

The records show regular payments from the diocese and parishes to Zgoznik's firm, which then would write checks to Smith's companies.

The four- and five-figure checks are listed as "consulting fees."

At least $225,000 in consulting fees, according to records, went from the accounting firm to Smith's Tee Sports Inc., a marketing firm that runs golf tournaments and distributes sports apparel.

"We see no logical explanation for this," Milano said Friday. "We felt obliged to give the documents to the diocese and law-enforcement authorities because it looks like there's something terrible here."

Milano, who represents seven plaintiffs in a sex-abuse racketeering lawsuit pending against the diocese, turned the financial records over to a diocesan attorney and the U.S. Attorney's office Monday.

Tuesday, Bishop Anthony Pilla suspended Smith.

Although the records show hundreds of thousands of dollars flowed from Zgoznik's business to Smith's companies, the original source of most of the money is the Sunday collection baskets filled by 800,000 Catholics in Northeast Ohio.

More than 80 percent of the diocesan financial requirements are filled by the parishes, according to former employees. Parishes are expected to pay monthly assessments to the diocese, based on financial abilities: Parishes with schools pay 111/2 percent of their monthly offertory collections; parishes without schools pay 161/2 percent, diocesan spokesman Bob Tayek said Friday.

In the letter to Milano, the anonymous writer explained the motivation for passing along the internal documents.

"I trust that you will be able to use this documentation to expose the guilty, and to cause changes in the system in order that this will never happen again," the letter states. "Ideally, it would be best if the ill-gotten funds were returned to the diocese for the benefit of those for whom they were originally intended."

Zgoznik, 36, had worked under Smith in the diocesan finance office until 1999. The friends each owned vacation condominiums in Zephyrhills, Fla., and continued to share the wealth of their businesses after Zgoznik left diocesan employ in 1999. But Zgoznik continued to handle diocesan accounting work as a consultant, teaming up with Zrino Jukic, president of ZJ & Associates Inc. of Mentor.

Records show the diocese was by far its biggest customer.

In 2000, for instance, ZJ received more than $1.2 million - almost all of it from the diocese, related departments and parishes, according to monthly bank-deposit statements.

The same year, Zgoznik and Jukic wrote more than $193,000 in checks to Smith's companies.

ZJ also wrote nearly $85,000 in checks that year to Thomas J. Kelley, then chief operating officer of the diocesan-affiliated Catholic Cemeteries Association, for unspecified services. In the past six years, records show, ZJ and a successor firm paid Kelley and his management company more than $331,000. In 2000 alone, the association paid ZJ $135,000 for accounting services.

Kelley, who has retired, could not be reached for comment.

Smith, 47, of Avon Lake, did not return calls seeking comment. Zgoznik and Jukic also could not be reached.

Diocesan spokesman Tayek said the accounting firm Ernst & Young has been hired to assist the diocesan finance council in investigating the transactions.

"Any wrongdoing will be prosecuted," Tayek said. He added that possible violations of the diocese's code of ethics or conflicts of interest also will be reviewed.

But it's the financial amounts that will draw the focus of an investigation.

In addition to Tee Sports, Smith's JHS Enterprises collected more than $450,000 from ZJ and its successor company, Institutional Financial Advisors, Inc., over the past six years.

Records show more than $93,000 in payments from ZJ to Resultant Corp. in 1997, 1998 and 1999. Smith incorporated the firm and served as its agent.

Smith, a lawyer and a certified public accountant, has worked for the diocese for 21 years, the last 10 as CFO. His duties include overseeing the Catholic Cemeteries Association, the Building Commission and the offices of pension, finance and insurance.

Zgoznik and Jukic have operated a series of companies out of a building in a Mentor industrial park. Their company, The Impavid Group, purchased the building in 1997. Then-diocesan finance employee Donald Felkin was listed as Impavid's agent and was succeeded by Zgoznik two years later.

In Latin, impavid means fearless.

To reach these Plain Dealer reporters:

jmccarty@plaind.com, 216-999-4858

jrutchick@plaind.com, 216-999-4829