December 13, 2012
Board Negligence Results in $5.5 Million Settlement
As reported by the Nonprofit Quarterly, the founder and former board president of a New York City nonprofit, Educational Housing Services, that provided affordable housing to students entered into to a $5.5 million settlement with the New York Attorney General Eric Schneiderman, ending an investigation involving "stunning" board negligence according to the AG. The article summarizes the board's poor stewardship:
According to the attorney general’s findings, the board breached its duties of loyalty and care between the years of 2003 and 2009 by contracting with Student Services, Inc. (SSI), a corporation founded and controlled by Scott [founder] and his wife which he says charged Educational Housing millions of dollars for intermediating cable, phone and Internet services for the building at a large mark-up. The attorney general’s office asserts that SSI provided no meaningful benefit and sees the situation as a case of civil fraud that was approved by the board of directors. Therefore it is not pursuing criminal charges against Scott but it is tapping the personal assets of Scott, the organization, and the trustees.
“We have no tolerance for officers and directors who treat a nonprofit organization as a vehicle for personal enrichment,” Schneiderman said in a statement. The AG’s findings state that board members received salaries simply for being trustees and that some had well-compensated consulting contracts that provided “little value” to EHS. As a result of the settlement, which includes no admission of any wrongdoing whatsoever, the five board members must pay $1 million from their own personal funds and they have resigned and been forever banned from sitting on the board of any New York charity. Scott has also resigned and is required to make restitution of $2.5 million personally, while Scott and SSI will jointly waive their rights to an additional $2 million expected under the EHS-SSI agreement, and the board will pay $1 million.
[For follow-up discussion on board oversight of conflict transactions, see Price of Board Inaction: $5.5-Million for One Charity (The Chronicle of Philanthropy)]
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