Nonprofit Law Prof Blog

Montana AG Settles with Central Asia Institute & Greg Mortenson

Earlier this month, Montana Attorney General announced that his office had reached a settled with the section 501(c)(3) Central Asia Institute and its founder, author Greg Mortenson, after allegations arose regarding the accuracy of reports regarding the Institute's work (see, e.g., the 60 Minutes segment reported on by the NY Times/AP).  According the AG's announcement, he concluded "that CAI’s board of directors failed to fulfill some of their responsibilities as board members of a nonprofit charity. Further, Mortenson failed to fulfill some of his responsibilities as executive director and as an officer and director of the organization."  In the settlement agreement, Mortenson, who co-authored "Three Cups of Tea" and "Stones into Schools" about the Institute's accomplishments, agreed to repay over $1 million to the Institute and not sit on the Institute's board as long as he remains an Institute employee.  A new board of at least seven members will be appointed during a 12-month transition period.

In related news, the Christian Science Monitor reports that Mortenson and the Institute also face a civil lawsuit from four individuals claiming that they were mislead by allegedly false accounts in his books.  The readers claim they bought the books and donated to the Institute based on the stories of the Institute's work related in the books.

LHM

Prompt Action by Nonprofit Board Members Key to Avoiding Fiduciary Liability

As reported by the Daily Tax Report, at a Georgetown University Law Center program yesterday on Nonprofit Governance, Missouri Attorney General Bob Carlson provided simple advice - nonprofit boards can avoid potential legal liability for a breach of fidicuary duties if their reaction to such breach "is quick and shows immediate action."  Carlson provided the example of a nonprofit executive director that failed to share financial information with the board of the directors, resulting in the board being completely unaware of the organization's near collapse.  Upon learning of the dire financial status of the organization, the board immediately fired the executive director, installed an interim director, “and essentially righted the ship on the fly, so the organization did not go under.”  Their prompt reaction, opined Carlson, prevented them from being sued.  Carlson stated that he typically gives Board members the opportunity to correct a fiduciary problem, and only pursues lawsuits if there is not a sufficient response. 

Along with IRS Exempt Organizations Director Lois Lerner, Carlson advised erring on the side of transparency, with both officials providing examples of items that nonprofits should considered posting to their websites:  financial statements, executive compensation, and the minutes of meetings.  He believes that more transparency ultimately leads to better fundraising ability, because donors often complain about their lack of knowledge with respect to the use of their donations.  Both Carlson and Lerner agreed that recruiting and retaining "engaged" board members is essential to smooth operations and avoidance of trouble.  In addition, board knowledge of its governance responsibilities leads to overall better decisionmaking.

NOTE:  Lerner advised that the IRS will release the preliminary results of its study of governance on April 19, 2012.

NAM

Illinois Hospitals' Property Tax Exemption Battle Could Negatively Affect Credit Ratings

As reported by the Daily Tax Report, Fitch Ratings, a global rating agency, released a report entitled Illinois Property Tax Exemption Battle, in which the rating agency concluded that the Illinois Department of Revenue's current enforcement stance on the property tax exemptions of Illinois nonprofit hospitals is a "negative credit development" for certain of these hospitals.  As previously blogged, Illinois Governor Quinn lifted a moratorium on nonprofit hospital exemption cases last month.  Essentially, according to the report, a nonprofit hospital's loss of tax exemption, along with current operational challenges, could "negatively affect" the hospitals' creditworthiness.  The report opines that certain "lower rated entities will have a limited ability to absorb an additional expense in the form of a property tax."

The report acknowledges that this tax-exemption challenge is not limited to Illinois, mentioning an Ohio nonprofit dialysis clinic [Dialysis Clinic, Inc. v. Levin, see previous blog] that, similar to Provena Covenant Medical Center in Illinois, lost its property tax exemption due to insufficient provision of charity care.  The Ohio Supreme Court upheld revocation of the clinic's property tax exemption.  The Court noted that the Ohio test for exemption was narrower than the “community benefit” test of federal law, but did not find that a minimum amount of charity care is required.  Rather, in Ohio, an exemption is granted if services are provided “on a nonprofit basis to those in need, without regard to race, creed, or ability to pay.” 

Whether the Fitch report will impact the ongoing Illinois debate on hospitals' property tax exemption is unclear.  The spokesman for the Illinois Hospital Association is nevertheless "hopeful that a legislative solution can be enacted" in the upcoming General Assembly session.

NAM

International Sports Charity Focus of State Police Investigation

The Hartford Courant reports that Rhode Island State Police are looking into a variety of financial transactions engaged in by the Institute for International Sport that may have improperly benefited Executive Director Daniel Doyle Jr.  Among the transactions at issue are tuition payments for one of the Mr. Doyle's children, $80,000 of "reimbursed expenses" over two years, and millions of dollars in land purchases on an island where Mr. Doyle and an investment partner also owned property.  According to the Institute's website, Mr. Doyle founded the Institute in 1986 and has organized programs involving thousands of student-athletes around the world.  The Institute's most recent Form 990 available on Guidestar shows an annual budget that was $2.3 million in 2008 and $1.1 million in 2009, net assets of approximately $2 million, and annual reportable compensation paid to Mr. Doyle of $72,000 from the Institute, another $72,000 from related organizations, and $25,151 in other compensation from the Institute and related organizations.  The investigation apparently arose from Rhode island's acting state auditor raising questions about the Institute's use of a $575,000 government grant, and over the past month the Providence Journal has run dozens of stories on the Institute, including its financial and other connections to the University of Rhode Island.

LHM

Exposed Problems with NY's Charity Care Law

The New York Times reports on a recent study showing that New York's charity care system has significant problems that are not being acknowledged nor addressed by the state government.  The complicated system, which is partially financed by an 8.95% surcharge on hospital bills, is criticized by some patient advocates as ineffective in improving patient access and care.  The study found that some hospitals failed to provide patients with elibility information on discounted care as required by NY state law, did not provide patients with financial aid applications, and made impermissible demands for unnecessary documents.   While providing limited to no financial aid and utilizing aggressive bill collection practices (including liens against patients' homes), hospitals continued to collect, without questions or audits, from the state charity care pool that distributes more than $1 billion a year.  Patient advocates and hospital administrators are reportedly being assembled to overhaul a better system. 

NAM

Efforts to Save CA State Parks Continue

There is no immediate news on the efforts to link nonprofit groups with CA state parks to keep the parks open, but I wanted to share a blog that is posting reports on the efforts for anyone who wants to keep up on the latest news for the CA parks.  On October 4, 2010, the CA legislature enacted AB 42, a bill that adds §5080.42 to the California Public Resources Code.  The new provision modifies the statute that gives control of the state park system to the Department of Parks and Recreation.  The new section gives the department the authority to enter into "an operating agreement for the "development, improvement, restoration, care, maintenance, administration, or operation" of a state park with a "qualified nonprofit organization."  The goal is to keep parks open, using nonprofits to help find resources to manage and maintain the parks.

Christine Sculati's Blog has posted a number of stories about the efforts of nonprofit organizations to work with particular parks in California.  Her most recent post on the subject describes efforts of the Portola and Castle Rock Foundation to save Castle Rock and Portola Redwoods State Parks. She notes that 70 state parks have been identified for closure, with 18 of those in the Bay Area.  The parks located near populous areas may have a better chance of generating the kind of fundraising that will be needed to keep them open.  Her posts provide excellent descriptions of the problems and the efforts to save the parks, and are worth a read if you're interested in this topic.

sng

 

Oregon's Naughty, not Nice, List

Oregon's Attorney General recently posted a list titled "Oregon's 20 Worst Charities: 2011."  The charities on the list are those that spend most of their revenue on telemarketing or administrative work.  This is the third year the AG has posted a list, which represents an attempt by the Attorney General's office to educate consumers about charitable giving. The charity topping the list is Shiloh International Ministries, labeled the worst in 2010, too.  The charity raises money to provide medical necessities and moral support for needy children, but its financial filings show that 96.8% of the money spent by the nonprofit went towards management and fundraising.  The organization is based in California.  Number 2 on the list is a Florida organization, American Medical Research Organization, which spent 4.2% of its annual expenditures on its charitable purposes. The Attorney General's office posts Tips for Charitable Giving and uses the list to educate the public about careful philanthropy.

Charity Navigator gives Shiloh International Ministries zero stars and shows that 83.8% of expenditures in 2009 went to fundraising expenses and most of the rest went to salaries for three people.  Total expenditures in 2009 were $829,220, with revenues of $825,928.  Because the states cannot regulate fundraising by charities, the Attorneys General and sites like Charity Navigator try to educate the public about the uses made of charitable dollars.

sng

 

 

 

 

More Strain on Relationship Between State Governments and Nonprofits

Continued Decreases in State Funding of Social Programs

The Chronicle of Philanthropy reports that nonprofits should expect to see continued decreases in funding and additional increases in demand for services through 2013 as state governments' budgets continue to deal with decreasing revenues.  A new report, issued by Changing Our World, a philanthropy consulting firm, does a historical review of the economic crisis, calculates its negative effects on state budgets, and assesses whether charitable giving can stave off the decrease in government spending on social programs.  Because 44 states have greatly reduced their spending and used federal stimulus money to make up the difference, the loss of that stimulus money will mean further cuts in social programs during the next two fiscal years.  In order for nonprofits to meet the resulting increase in demand for such services in some of the most affected states, the report estimates that charitable giving would need to increase by 30 percent in 2011 and 60 percent in 2012, which the report refers to as “historically unprecedented.”

Taxation of Nonprofits' Real Estate

We continuously blog about state and local governments looking to nonprofits as additional revenue sources.  In another such development, The Nonprofit Quarterly reports that Pennsylvania State Senator Wayne Fontana introduced in October Senate Bill 1281, which would grant local governments the ability to tax the assessed value of nonprofits' land.  The Senator stated that specific exemptions would be enacted to protect "small" nonprofits, such as Boys and Girls Clubs and churches.  The bill as introduced specifically exempts properties owned by local, state, and federal governments, and by “police, fire, including volunteer fire and relief, public works or emergency services.”  According to the article, although there is no mention of small nonprofits, the asserted "small" nonprofit carveout is likely the proposed exemption of the first $200,000 of aggregate land value. The tax would only be imposed on the value of the underlying land, not any improvements on it.  The specified intent of the Bill reads:  “It is necessary and proper for local governments to have the option to ensure the continued viability of certain essential services it provides or causes to be provided by requiring a contribution from owners of tax-exempt properties toward the cost of the services.”  The Senator explained:  “There are nonprofit organizations out there that are sitting on high-valued, tax-free real estate. If they sold this land, these nonprofits would make a handsome profit.”

NAM 

NY Reviewing Cause Marketing

In connnection with Breast Cancer Awareness Month, a number of companies promise to benefit breast cancer charities with the sale of their products and services.  The NY Attorney General has directed the Charities Bureau to send questionnaires to companies and charities to ask about these cause marketing campaigns, to determine whether money was reaching the charities.  The Attorney General seeks to protect both consumers and charities, both by shutting down sham fundraising campaigns and through education for consumers.  In June, the AG sued to shut down the Coalition Against Breast Cancer, a sham charity, and in August, two defendants pleaded guilty to criminal charges for misusing more than $500,000 donated to the phony charity.  The AG provides "tips" to consumers on its website, to guide consumers in making wise choices when buying products or services in response to cause marketing.  For the AG's press release explaining the concern, go here.

sng

Oregon Takes On a Telemarketer

The Oregon Department of Justice has announced "an agreement that resolves accusations of misconduct against an Oregon-based veterans charity and its for-profit telemarketer."  A suit was filed in 2010 against Veterans of Oregon & Members of the Community (VOMC) and Associated Community Services, Ind. (ACS), a telemarketer.  The suit involved alleged violations of Oregon's no-call law and misleading statements about how contributions would be used.  

Among other things, the DOJ suit alleged that VOMC, through their fundraiser, ACS, raised hundreds of thousands of dollars from Oregonians by soliciting donations over the phone "telling donors that contributions would be used to help homeless veterans or veterans with medical needs."  Instead, 80% of the fundraising money went to ACS, and only a minimal amount of the remaining 20% went to veterans. The majority of the money VOMC received was used to pay travel expenses of the Director, John Neuman, and other members of VOMC as they traveled around Oregon awarding honorary medals to veterans.  

Under the agreement the former director of VOMC cannot serve as a director for two years, and the board agrees to procedures that will insure that donations are spent for actual charitable purposes.  The board must obtain proposals from at least three telemarketing firms before agreeing to a contract with a telemarketer.  VOMC must not permit the telemarketer to use donor information for commercial purposes, and the board must review all scripts and written materials provided to donors.  ACS paid $40,000 and agreed to refrain from soliciting donations in Oregon on behalf of any nonprofit client until December 31, 2013.  If ACS acts as a fundraiser in Oregon after that date, it must register with the Attorney General and show that it will comply with the law.  ACS must disclose its status as a professional fundraiser. 

The announcement by the Attorney General states, "It is extremely important that charities be properly managed, that they do not deceive donors and that the telemarketers they hire follow the law."

Thanks to Samantha Benton who provided information about this action by the Attorney General as part of my Nonprofits Organizations class.

sng

Michigan "Blues" Conversion Sparks Controversy

A legislative effort to convert Blue Cross Blue Shield of Michigan, a nonprofit organization that controls 70% of Michigan's insurance market, into a for-profit insurance company is encountering strong opposition from the chair of the state's Senate Insurance Committee.  The Detroit News reports that the 31-year-old statute granting the Blues' nonprofit status is up for review, which prompted the Governor to call for a "fresh look" and consideration of a for-profit conversion that could arguably stimulate competition, decrease rates, and improve overall access to health care.  The company is opposed to the proposed conversion, arguing that "[a] nonprofit, community-governed Blue Cross allows the company to do more to improve health care quality and security for all the people of Michigan, rather than operate as a profit generator for stockholder owners."

This Michigan development is not a new nor unique one, as Blues have been converted in other states.  As aptly raised by The Nonprofit Quarterly in its related article, a for-profit conversion customarily results in the creation of a charitable foundation - does this adequately account for the loss of charitable assets that results from such a conversion?  Will there be any tangible effect from the Blues operating as a for-profit insurer, especially in light of the Affordable Care Act?

NAM

Illinois - The Fight Over Tax Exemption for Hospitals Continues

The Chicago Tribune reports on the continually evolving issue of a charity care prerequisite for hospitals' state property tax exemption.  As previously blogged by John Colombo (see posts here and here), the Illinois Supreme Court determined in March 2010 that Provena Covenant Medical Center in Urbana did not meet the state law's definition of "charitable" necessary for real property tax exemption; specifically, that a hospital must provide some substantial amount of charity care in order to be granted an exemption.  Relying on that Provena decision, in August 2011, the Illinois Department of Revenue revoked the property tax exemptions for three Illinois hospitals on the basis of too minimal amounts of charity care (see John's post on this development here).  After these revocations, the Illinois Governor declared a moratorium until March 1, 2012 with respect to hospitals' tax exemption determinations.  In the interim, the State and other stakeholders are supposed to reach a resolution.

Although the Provena decision adopted a charity care standard for hospital tax exemption, there are no bright-line rules on what constitutes charity care and how much should be conferred by a hospital to maintain its tax-exempt status.  Hospitals are arguing that a definite charity care standard (say, 5% of the hospital's revenues) would be more burdensome on some hospitals than others.  Hospitals are seeking legislation that would set clear and definable standards for tax exemption.

In light of these recent developments, local assessors are addressing the taxability of hospitals with varying approaches.  Some are are assessing taxes on hospitals thereby leaving it to the State's Department of Revenue to determine if each hospital qualifies for tax exemption under standards hopefully reached prior to the lift of the moratorium next March.  Other assessors are forgoing assessments of hospitals, but requesting that such hospitals file new applications for exemptions.  Regardless of the approach adopted, the issue of whether to tax or not tax a hospital is certain to create an "administrative nightmare" for Illinois and its local governments.  And, perhaps more importantly, will the feds use the eventual Illinois resolution as a basis for reexamining the federal income tax treatment of nonprofit hospitals?

NAM

Illinois Governor Puts Moratorium on Tax Exemption Rulings for Nonprofit Hospitals

In an earlier post I noted that the Illinois Department of Revenue had denied tax exemption to three other nonprofit hospitals in Illinois in the wake of the Provena Covenant litigation.  The Chicago Tribune recently reported that Governor Quinn has imposed a moratorium on any further action by the Department on nonprofit hospital tax exemptions pending discussions with the Illinois Hospital Association regarding a legislative solution to this issue.  The governor has targeted March 1, 2012, as a date for recommendations regarding legislation.  It appears, however, that litigation proceeds in the meantime.  The story noted that while each of the three denied hospitals welcomed the moratorium, "they would pursue appeals."

JDC

Failed 9/11 Charities and Charity Regulation

Last week the Associated Press reported on several 9/11 charities that never produced promised benefits and in several cases benefited their founders or founders' companies.  The article notes that the IRS revoked the tax-exempt status of almost four dozen 9/11 charities for failing to show how money was collected and spent, but the article is silent on whether the IRS investigated or penalized recipients of possibly improper financial penalties.  A follow-up article notes that at least two states - Arizona and New York - have launched investigations into one or more the charities named in the initial report.

LHM

UPDATE: NJ Drops Donor Designation Rule Proposal

Yesterday I blogged about a New Jersey proposal to enhance donor designation of charitable contributions, perhaps unconstitutionally.  Later yesterday, the NonProfit Times reported that New Jersey Division of Consumer Affairs has dropped the proposal, apparently in response to comments highlighting the cost and difficulty of implementing the proposed rule.  For additional coverage, see the update issued by the New Jersey-based Center for Nonprofits, which submitted comments expressing concern about the proposal.

LHM

NJ Proposes Taking Donor Designation to the Next Level

The NonProfit Times reports that the New Jersey Division of Consumer Affairs is seeking public comments on a proposed rule that would require charities to inform donors that they can direct a soliciting charity to use the donor's contribution to fund a particular program if a solicitation by that charity names multiple programs as an inducement for the donor making the contribution in the first place.  The proposed rule would apply to organizations that received contributions of more than $250,000 in the previous fisal year.  According to the article, Errol Copilevitz of Copilevitz & Canter, a firm that specializes in charitable solicitation laws, has already objected to the proposal on the grounds that it unconstitutionally compels speech and fails to recognize that realistically some of the funds raised would need to be used to cover fundraising expenses.

LHM

LA Times: "Los Angeles to Hand Over Animal Shelter to Nonprofit Group"

While perhaps more commonly seen in the health care area in recent years (see previously blog posts about Grady Memorial Hospital in Atlanta and Martin Luther King Jr. Hospital in Los Angeles), today brings a L.A. Times report about the transfer of another kind of service from a local government to a nonprofit group.  According to the article, the Los Angeles City Council voted yesterday to turn over management of the Northeast Valley Animal Care Center to the Best Friends Animal Society.  While the Center is only three years old, it has never been fully staffed because of government budget constraints.  Best Friends will not be receiving any payment for its services and said it will be spending up to $1 million to improve the facility, which originally cost $19 million.  The City of Los Angeles estimated that it would have cost it $3.3 million annually to run the shelter.  This may be only part of a wave of such transfers, as the city is also considering whether to turn over to nonprofits or other private entities the management of several arts facilities, the Los Angeles Convention Center, and the Los Angeles Zoo and Botanical Gardens.

LHM

NYT: "California Scrutinizes Nonprofits, Sometimes Ending a Tax Exemption"

The New York Times reports that California nonprofit groups are being increasingly scrutinized with respect to the benefits they provide to state residents, with groups that are deemed not to be benefiting state residents sufficiently losing their property tax exemptions.  The denials by county assessors are apparently based on the requirement (see Q&A13) that exempt property be used in way that "primarily benefits persons within the geographical boundaries of the State of California."  The article notes, however, that this requirement appears to be have been applied inconsistently and therefore may be constitutionally vulnerable as a result.  It is also not clear how such a requirement is consistent with the Commerce Clause of the U.S. Constitution, given the Supreme Court's decision in Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564 (1997).

LHM

Summer State Update: Mass. & Oregon Reject Restrictions on Charities; NY Opens Inquiries into Same

Despite the summer heat and continuing fiscal crisises, some state officials still found time to consider additional regulation of charities.  Here are updates on some of the most significant developments:

Massachusetts:  We previously blogged about proposed legislation in Massachusetts that would have prohibited charities compensating directors without Attorney General approval.  The Chronicle of Philanthropy reported last month that legislature in that state rejected the proposal, although its state Senate sponsor vowed to continue to pursue it in the future.

Oregon:  We also previously blogged about proposed legislation in Oregon that would have given the Attorney General in that state authority to disqualify certain charities from receiving (Oregon) tax deductible contributions based on their level of program expenditures.  The same Chronicle of Philanthropy article also reported that this legislation failed, although the Attorney General stated he planned to pursue this measure in the future.

New York:  Attorney General Eric T. Schneiderman announced the creation of a "Leadership Committee for Nonprofit Revitalization" to develop a serious of recommendations "to reduce the regulatory burdens and costs on nonprofits while strengthening nonprofit accountability."  More recently, Governor Andrew M. Cuomo announced a statewide review of executive compensation paid by taxpayer supported nonprofits, possibly triggered by news reports focusing on high compensation at nonprofits that provide Medicaid-financed services according to a NY Times article on the review.

LHM

NY Attorney General Sues Coalition Against Breast Cancer Alleging Massive Fundraising Fraud

In an absolutely explosive case harkening back to United Cancer Council, the NY Attorney General filed suit against the Coalition Against Breast Cancer, Inc. and several insiders alleging that the exempt organization is "a sham charity that has diverted nearly all of the millions of dollars raised in the name of breast cancer to its officers, directors and fundraisers. Get the full complaint here.  For media reports click LATimes, Reuters, and USA Today.  The complaint's first twelve paragraphs are set out below and, if true, the insiders have a lot more to worry about than just a state law action. 

 

1. CABC is a sham charity that has diverted nearly all of the millions of dollars raised in the name of breast cancer to its officers, directors and fundraisers. Falsely claiming research affiliations with hospitals such as Memorial Sloan-Kettering and using other lies and exaggerations, Defendants deceive donors into believing that their donations will help eradicate breast cancer through research, mammogram screening and other programs. In reality, CABC spends none of its funds on eradicating breast cancer, nor does CABC have any research affiliation whatsoever with Memorial Sloan-Kettering or any other hospital nor does it conduct or fund any research on breast cancer or any other cancer. Nor does CABC perform any mamograms or other breast cancer screening nor is it affiliated with any mammography screening facilities and, as its own records show, CABC spends virtually nothing on breast cancer prevention.

 

2. Instead, in the last five years alone-a period that has witnessed 200,000 women die from breast cancer and millions more fighting to survive it-CABC has squandered and misused virtually all of the $9.1 million it raised in the name of breast cancer. By its own records, during this period, CABC spent less than 4 percent of the donations it received on any purported charitable programs, and almost none of the donations - less than one-half of one percent - went for charitable purposes authorized under its certificate of incorporation. In 2008, a year in which CABC raised over $1.4 million from the public, it spent a mere $374 for mammograms. In the last three years, despite raising over $4 million, CABC funded mammograms for only 11 women.

 

3. In short, Defendants have misused and wasted millions of charitable dollars that could have been used to treat and potentially save an untold number of breast cancer victims across this state and country. 

 

4. Andrew Smith and Garrett Morgan, longtime friends and business associates, launched the CABC fundraising operation in 1995 to exploit the breast cancer nlovement for their personal financial benefit, at a time when both were in need of cash. Smith was emerging from personal bankruptcy and Morgan was being investigated for his role in a fraudulent meals-on-wheels charity, which was later ordered permanently shut down.

 

5. Smith and Morgan launched CABC despite having no connection to the breast cancer cause. From its inception, CABC has served as a cash machine for Morgan, Smith and other insiders. Defendant Snlith best summarized CABC's raison d'etre in a February 2010 email he sent to Morgan following a sharply critical press article that questioned CABC's legitimacy:

 

We are in a bad place. You need the money and so do I.

 

6. The CABC business model is straightforward: pick a sympathetic cause; lie and mislead donors about how donations will be used; provide a veneer of legitimacy by creating a website to exaggerate the organization's mission; spend a token amount on charitable programming; divert nearly all of the funds raised to the founders and other insiders; and ensure that there is no board oversight.

 

7. From CABC's inception, Smith has handpicked the board, appointing his family and friends, including his former wife, Lori Smith, and then later, his girlfriend, Debra Koppelman, and her friend Patricia Scott, none of whom had any experience in the breast cancer cause or non-profit management, much less the capacity to fulfill their fiduciary responsibilities as directors. As a result, CABC has operated without any financial oversight and without any controls preventing self-dealing and conflicts of interests, allowing it to run as a convenient piggy bank for CABC's directors and Morgan.

 

8. Were CABC a bona fide charity and were its board providing even the most basic oversight, it would have been apparent that CABC's mission was not being carried out, given that even after 15 years of operation, virtually none of the money raised in CABC's name went to legitimate charitable purposes. But CABC has no functioning board, with directors serving in nanle only. They perform no oversight, exercise no fiduciary responsibilities, and are simply content to continue the CABC fundraising operation led by Morgan, so long as they are paid their unjustified salaries and benefits.

 

9. Indeed, CABC's directors-Smith, Koppelman and Scott-have completely abdicated their fiduciary oversight responsibilities by ceding control over CABC's fundraising operations and strategy to Morgan and his for-profit telemarketing company, the Campaign Center. With no oversight, Campaign Center has gone unchecked and engaged in fraudulent fundraising tactics on CABC's behalf, including lying or grossly exaggerating the scope of CABC's charitable activities and mailing phony pledge invoices.

 

10. Smith, Koppelman and Scott have failed to exercise any diligence concerning whether the amount paid to Canlpaign Center is reasonable. Year after year, they renew the Campaign Center's contract without ever attempting to negotiate more favorable terms with the Campaign Center, or reaching out to other fundraisers not connected to Morgan to obtain a better deal for CABC. Instead, last year, CABC actually increased Campaign Center's cut from 80% to 85% even though there had been no change or inlprovement in the services provided. They even gave Campaign Center the exclusive right as "broker" to select other fundraisers for CABC.

 

11. Smith, Koppelman and Scott, who are all employed elsewhere, have used the charitable funds raised by Morgan to inlproperly pay themselves salaries, retirement benefits, dental, medical and other benefits-even free BlackBerry phones-despite providing no services' warranting these benefits.

 

12. Smith and Koppelman have also engaged in substantial insider transactions in violation of the Not-for-Profit Corporation Law, including $105,000 in loans to Smith, a $50,000 loan to Koppelman, and a risky stock sale by Smith to CABC.

 

dkj