Wednesday, March 12, 2008

Should Private Inurement And/Or Excess Benefit Transactions Be Viewed As Prima Facie Evidence of Criminal Behavior?

In yesterday's Houston Chronicle, there was another story about insiders improperly using charitable funds for allegedly personal purposes.  According to the report, two former leaders of the Sickle Cell Association of the Texas Gulf Coast are being tried for felony theft.  They allegedly misused $400,000 of the 501(c)(3) organization's funds over four years.  A few weeks ago, we blogged the story of a New York nonprofit that had engaged in apparent private inurement and excess benefit transactions.  In that case, too, the report noted that the District Attorney's office was looking into bringing criminal charges.  And then way back in December, we blogged the story of the former IRS Commissioner and former CEO of the American Red Cross allegedly using his corporate credit card to engage in some Elliott Spitzer-like meetings.  We wondered then whether doing so constituted private inurement or excess benefit.  These cases caught my particular attention because in my Tax Exempt Organization's class yesterday, one student noted that no insider, disqualified person or organization manager would be stupid enough to just pay themselves exorbitant salaries outright.  The student suggested instead that it would be more likely that private inurement or excess benefit transactions require some sort of "mens rea."  In other words, some sort of prior planning or premeditation, a knowing, intentional, disguised or hidden conspiracy perhaps.  That comment lead to a discussion of whether private inurement or excess benefit transactions very nearly constitute, in each instance, the prima facie case for criminal prosecution, whether for theft, embezzlement or fraud.  I'm not so sure that the statement is too broad.  The insider deals leading to Sarbanes Oxley, after all, were similar to the sort of fiduciary breach Justice Posner implied was necessary to prove private inurement in United Cancer Council v. CommissionerThose behaviors all involved lying about the use of "invested funds" (i.e., donations in the case of nonprofits)and siphoning off the top.  And many of those cases were prosecuted under severe criminal statutes most likely because the market harm justified more severe sanctions than excise penalties such as those imposed under relevant securities laws (or IRC 4958).  Perhaps it would be in the best interest of the independent sector, too, if private inurement and/or excess benefit transactions were more often viewed as prima facie evidence of a crime.  Take the Sickle Cell Association predicament for example.  The Houston Chronicle article notes that because of the siphoning of a few leaders, the organization has lost its United Way Funding and the new executive director is spending much of her time rebuilding  the community's trust in the organization.  In the meantime, those suffering from the debilitating disease suffer:

With a criminal case against a predecessor looming, Lorna Hankins spends her days assuring the public the Sickle Cell Association of the Texas Gulf Coast is legitimate.  Since she took over the association in May, she's been trying to repair the damage linked to accusations that two former leaders took nearly $400,000 from the nonprofit over four years. Some of that damage has been financial — the association has already lost funding from its primary source, the United Way of Greater Houston.

It is probably the case that donor support decreases and charitable beneficiaries' suffering increases every time an insider or disqualified person is caught with his hand in the cookie jar.  Maybe private inurement and excess benefit ought to be view as a prima facie criminal law matter (in addition to reason for excise taxes under IRC 4958 and in some cases revocation).  Treating such matters as prima facie evidence of criminal behavior does not mean conviction is certain.  It just suggests that that the punishment ought to be commensurate with the harm to the individual charity and the sector as a whole if the insider, disqualified person or organization manager is unable to show that the problem arose out of plain negligence (as, for example, the misvaluation of an asset or service because of a failure to know -- or should have known --certain facts).  A rebuttable presumption of sorts with more severe consequences when the presumption is not disproven.  As my student points out, and as recent events show, private inurement and excess benefit transactions increasingly rely on mens rea and conspiratorial behavior.  Certainly, the damage done to the individual charity, donors, and the whole independent sector is a crime.


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I find your arguments to be very interesting. In my opinion though the $400K that was siphoned from this particular sickle cell organization is nothing in comparison to the blanket campaign to keep sickle cell treatment the status quo.

There is a FDA Orphan Drug called Nicosan that is known to these organizations. It was presented 34th Annual Sickle Cell Disease Convention hosted by the American Sickle Cell Society in October of 2006. To date investigational drug applications have yet to be made for this drug because it's primary market is Nigeria where it was developed into it's present form by Dr. Ramesh Pandey, the biochemist who produced the first commercially viable generic form of vancomycin. This drug is non-toxic. It returns 50% of sickled cells to normal shape and function, eliminates crises in approximately 75% of cases and reduces crises by 50% of the most refractoy ones.

The only treatment approved for the sickle cell in the West is hydroxyurea. It is carcinogenic, causes bone marrow suppression, birth defects and sterility. It is only utilized in 2%-3% of SCD sufferers because of it's toxicity.

So here we have a community of very ill people that for all practical purposes has no viable treatment other than hydration and pain medications. One would think that as many cancer sufferers have done, band together and seek the drug through the FDA's expanded access program. This is a program where a drug that has not been approved but shows a greater efficacy and or safety profile comparative to existing treatments can be made available for use immediately rather than waiting for the entire approval process. This was successfully done with the drug Gleevec.

Unfortunately this information has not been disseminated to the public by any of the United Way/Novartis funded organizations. What would be the harm of trying to bring a treatment to the U.S. and E.U. now rather than later when it has been shown to be non-toxic and has clinical trials as well as in vitro studies that attest to it's effectiveness? There is none. The only thing that this might cause would be the obsolescence of these sickle cell disease organization save for the purpose of genetic counseling. Would we even need them for that purpose? That function could easily be preformed by other health organizations.

So instead of being proactive these organizations continue to keep everything as is without actually accomplishing anything for the patients they claim to serve.

If you would like to read more about this ignored treatment please visit the link below.

Hopefully this drug will be made available in the future through the usual process but until the Nigerian market is being fully supplied I believe that IND applications are a ways off. Nigeria has 4 million sickle cell patients. The production facility is not yet complete in that country but should come online sometime this Summer. It could be a long wait for people in the U.S. and E.U. if they don't act on their own to get this treatment sooner than later.

Posted by: Asclepius | Mar 13, 2008 12:45:57 AM

Thank you for that fascinating [and sad] comment. It really does concisely raise a whole host of issues -- from the inequitable distribution of health care nationally and internationally to the way governments subsidize public goods through their tax codes. It would take someone much more informed than me to adequately reply to all the issues raised, but I will venture this statement. A major criticism of nonprofit organizations in many developing and emerging economies is that they too often merely perpetuate government policy or business monopolies. A major criticism of nonprofits in China, for example, is that their activities and viewpoints must, as a matter of law, be consistent with the government's activities and policies. This stands the phrases "independent sector" and "non governmental organizations" on their heads. Your comment suggests that sickle cell charities in the United States are intentionally or through negligence serving a policy that unnecessarily perpetuates a health care crisis, perhaps because it is a crisis dealing with the health care of a population lacking in political muscle. Others have written and talked about this phenomenon as well. Thanks for educating us.

Posted by: Darryll Jones | Mar 13, 2008 7:20:16 AM

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