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June 2015

  

Regulators' Actions Against Charities that Swindled $187 Million from Donors Serve as Compliance Reminder

  

 
 

  

     

  

 
 

For more information about this alert, please contact:

  

Thomas J. Schenkelberg

Practice Area Chair

816.360.4371

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Douglas K. Anning

Practice Area Vice Chair

816.360.4188

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Jonathan S. Blum

214.661.5576

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John F. Crawford

312.463.6320

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Virginia C. Gross

816.360.4157

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Alicia M. Kirkpatrick

816.572.4486

Email | Bio

  

  

To view a full list of our Nonprofit Organizations Professionals, click here.

  

To learn more about our Nonprofit Organizations practice, or for more Nonprofit Organizations Intelligence, click here.

  

  


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On May 18, 2015, the Federal Trade Commission (FTC) and 58 agencies from all 50 states and the District of Columbia filed a complaint charging four cancer charities and the individuals controlling them with allegedly swindling more than $187 million from consumers.

Because multistate actions generally only include 25 to 30 states, it appears that Attorneys General and Secretaries of State in every jurisdiction are active and serious about making charities and fundraisers accountable for their actions and the public representations. In fact, we may see more similar actions in the future. With this in mind, it is important for all charitable organizations to ensure that they are in compliance with all federal and state law requirements relating to charitable fundraising.

The Complaint

The federal court complaint names Cancer Fund of America, Inc. (CFA) and Cancer Support Services Inc. (CSS), their president, James Reynolds Sr., and their chief financial officer, Kyle Effler; Children's Cancer Fund of America Inc. (CCFA), its president and executive director, Rose Perkins; and The Breast Cancer Society Inc. (BCS) and its executive director and former president, James Reynolds II.

In the complaint, the FTC and state agencies label the cancer groups as "sham charities" and charge the organizations with deceiving donors and misusing around $187 million in donations from 2008 to 2012. According to the complaint, the defendants represented themselves as legitimate charities that spent 100 percent of their proceeds on services for cancer patients, such as hospice care and buying pain medication for children. The complaint alleges that, in fact, these claims were false and that the charities operated as "personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted." Investigators found that the charities spent less than 3 percent of donations on cancer patients.

According to the complaint, the defendants used the organizations to pay lucrative salaries to family members and friends and spent contributions on personal items such as cars, trips, luxury Caribbean cruises, college tuition, gym memberships, concert and sporting event tickets, and dating site memberships. The defendants also hired professional fundraisers who received up to 85 percent or more of every donation.

The complaint asserts that in order to hide their high administrative and fundraising costs from donors and government regulators, the defendants falsely inflated their revenues by reporting more than $223 million in donated gifts-in-kind that were allegedly distributed to international recipients. The complaint states that by reporting the inflated gift-in-kind donations, the defendants created the impression that they were more efficient with donors' dollars than was actually the case. Thirty-five states also alleged that the defendants filed fraudulent and misleading financial statements with state charities regulators.

Two of the charities, the CCFA and BCS, agreed to settle the charges before the complaint was filed. Under the proposed settlement orders, Effler, Perkins, and Reynolds II will be banned from fundraising and charity management, and CCFA and BCS will be dissolved. Litigation will continue against CFA, CSS, and James Reynolds Sr.

A Reminder for Charitable Organizations

While this complaint is an egregious example of inappropriate/fraudulent behavior, it serves as a reminder that regulators are becoming increasingly vigilant in their efforts to prevent fraud and ensure compliance with the law. Thus, this is a good time to examine your organization's compliance with federal and state laws to ensure it does not get caught in a regulator's crosshairs.

This is also a reminder that the regulators and donors use publicly available information to form opinions about your organization. Therefore, it is important that this publicly available information is presented in a manner that will reflect favorably upon your organization. A charity's Form 990 and other IRS filings can provide these persons with insight into a charity's governance practices and financial health.

For example, the FTC advises donors to review the amount of a charity's cash versus gifts-in-kind, which is shown on Schedule M to the Form 990: "[i]f a charity is using gifts-in-kind to inflate its operations and then spends most of its cash to pay executives or cover operating expenses, this should raise red flags, and you may want to consider donating to a different organization."

Also, charity watchdog organizations such as Charity Navigator, CharityWatch, and the Better Business Bureau Wise Giving Alliance can be sources for information about charities. Charitable organizations should confirm that they are in good standing with, or adequately represented by, these groups. If they are not, the charity should determine how to improve its standing.

For More Information

If you have questions about the complaint or about checking the legitimacy of charitable organizations, please contact:

  

 
 

  

     

  

 

 

  

     

  

 
 

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