CARMICHAEL, CA (MPG) - Earlier this year, the Carmichael Water District Board of Directors voted to move forward with a lawsuit against former General Manager Steve Nugent, former Assistant General Manager Lynette Moreno, and former Human Resources Coordinator Lori Kalisiak.

The move came after a special procedures audit report revealed that more than $640,000 in benefits had been received by District employees over 10 years without Board approval—and the majority of the unauthorized funds went to those three members of management staff. The District contends that Nugent, Moreno, and Kalisiak conspired to obtain these benefits, so the lawsuit, filed in April, seeks restitution for the total value.

In July, the defendants’ attorney, Wesley Ehlers, filed an answer to the lawsuit, in the form of a cross-complaint for damages against the District. Claims for Moreno and Kalisiak were submitted under the Government Claims Act, which gives the District an opportunity to consider and remedy the claimed injuries before a lawsuit is officially filed. The claims specifically name Directors Mark Emmerson, Jeff Nelson, Ron Greenwood, and Paul Selsky, as well as current General Manager Cathy Lee, stating that they have slandered and defamed the claimants, causing emotional distress, loss of wages and employment opportunities, and other damages.

Moreno’s claim states that she was slated for promotion to general manager when former General Manager Steve Nugent announced his retirement in July 2019. But her attorney says contract negotiations failed because the District wanted Moreno to accept benefits less than what she was making as assistant manager. They then recruited to fill the position, ultimately hiring Lee for the role. According to Moreno’s attorney, after Lee was hired, she and the named directors began harassing and undermining Moreno.

The claims for both Moreno and Kalisiak state that they were accused of embezzlement through employee benefits, with Lee making such comments during staff meetings. And their attorney claims that when the Board of Directors voted in May 2020 to remove the unauthorized benefits, it was clear the matter had already been discussed in a closed session, in violation of the Ralph M. Brown Act that guarantees public access to meetings and materials.

The claims further state that the directions given to Richardson & Company, LLP, which conducted the special procedures audit of employee benefits from 2010 through July 2020, included false claims about the creation of an unauthorized benefits package, resulting in multiple inaccuracies in the final report. Moreno and Kalisiak claim that the benefits were authorized by the directors and created under their direction as part of an employee retention program discussed in former General Manager Nugent’s performance evaluations in 2008. Their claim asserts that the benefits were authorized since for more than a decade the directors approved budgets and expenditures that included those benefits.

Moreno ultimately resigned from her position in December 2020 due to what her attorney calls a hostile work environment, while Kalisiak was terminated after the April 2021 meeting when the Board announced the lawsuit. Kalisiak’s claim also includes a demand for defense and indemnity because she contends that her conduct was within the scope and course of her employment, as she was only promoted to her management position in October 2011, after the benefits had already been implemented.

While this type of demand can be legally upheld, the District can refuse to provide a defense if they contend that any of three conditions apply: the act was not within the scope of employment, providing a defense would create a conflict of interest, or the former employee’s actions were due to fraud, corruption, or malice. In its answer, the District must provide a reason for refusal, and General Manager Lee submitted a memo on the matter, writing, “Those reasons are obvious—the District has sued the defendant former managers, including Ms. Kalisiak, because they worked in concert to obtain unauthorized benefits from the District without Board approval or authorization in a value exceeding $640,000, and have refused to acknowledge any wrongdoing or make any restitution.” Lee recommended that Kalisiak’s demand for defense and indemnity be refused “on all three grounds.”

At a special meeting on August 2, 2021, the Board of Directors unanimously voted to reject all the claims of Moreno and Kalisiak. District Counsel Josh Horowitz stated that all the issues raised in the countersuit would be addressed during litigation.

After losing more than $640,000 over 10 years, the District is looking to strengthen internal controls to avoid similar incidents in the future. Richardson & Company’s special procedures audit report recommended reviews of employee pay and benefits as part of the District’s annual audit. Richardson & Company have experience working on this particular issue, Lee suggested that they were best positioned to perform these services and ensure the previous problems had been resolved. The cost of these services—$8,500 for the audit, with some additional funding for any unforeseen expenses that arise during the scope of work—was not included in the current budget, so at the September 21 meeting the Board voted unanimously to approve $10,000 to cover these costs.