Thursday, February 9, 2023

Henry Hansmann Enabled George Santos And Other Nonprofit Malefactors: The Agency Costs of the Nondistribution Constraint

Skin-in-the-Game Investing: Why It Matters | USGI


Curious about how far Santos went in abusing nonprofit organizations? I mean look, if you are willing to cheat a dog charity there is really nothing redeeming about you.  Who would cheat a good ol' loyal dog!  If you want to know how the government might eventually charge him for his heartlessness, consider these excerpts from the indictment in United States v. Andrew Gillum; Gillum came within a few percentage points of winning the Florida gubernatorial election five or six years ago but is now defending himself against allegations of Santos-like behavior:

34. GILLUM and LETTMAN-HICKS caused the National Black Justice Coalition ("NBJC"), an entity created pursuant to Title 26, United States Code, Section 501(c)(3), to serve as "fiscal sponsor" and accept the funds from Organizations C and D for the CDLS effort.

35. On or about August 24, 2016, GILLUM sent an email to Organization C which included a project proposal, budget, and supporting documentation. The total proposed budget of $201,552 included $50,000 for the campaign manager, $90,000 for a communications consultant, and $41,412 in overhead, including office rent and administrative costs. The proposed budget did not disclose that funds would be transferred to P&P or be used to pay GILLUM.

37. LETTMAN-HICKS used her position as Executive Director and CEO of the NBJC to divert $50,000 of the funds donated by Organizations C and D. She did so by purchasing a $25,000 cashier's check from NBJC's bank account on March 16, 2017, and another $25,000 cashier's check on May 30, 2017. On those same dates, each cashier's check was deposited in the bank account of P&P [a for-profit entity controlled by Lettman-Hicks.

38. LETTMAN-HICKS then distributed the fraudulently obtained funds to GILLUM, disguised as salary payments from P&P, and in so doing, caused interstate wire communications to occur. 

. . . 

42. In 2018, GILLUM and LETTMAN-HICKS defrauded Individual F of $150,000 of his $250,000 contribution to GILLUM's campaign for Governor of the State of Florida.

43.  The Forward Florida PAC was a type of tax-exempt organization under Title 26, United States Code, Section 527, for the general purpose of advancing GILLUM's political prospects. A Section 527 group is created primarily to influence the selection, nomination, election, appointment, or defeat of candidates to federal, state, or local public office.

. . . 

46.  In May 2018, GILLUM solicited Individual F to contribute money to GILLUM's campaign for Governor and falsely and fraudulently represented to Individual F that the entire contribution would be used for GILLUM's campaign for Governor.

47.  Based upon GILLUM's false representation that the contribution would be used solely for GILLUM's campaign for Governor, Individual F agreed to give a $250,000 contribution for GILLUM's campaign for Governor.

48.  Instead of depositing the funds into the GFG campaign or Forward Florida PAC accounts, the defendants caused the $250,000 to be wired into an account of Organization E, a 50l(c)(4) organization, managed by an acquaintance whom GILLUM and LETTMAN-HICKS could control.

. . . 

51.  Letterman-Hicks then caused Organization E to provide only $100,000 of the $250,000 campaign contribution into the Forward Florida PAC account. LETTMAN-HICKS then obtained the remaining money for P&P by arranging a fraudulent contract with Organization E to allegedly provide services on a voter education program regarding the gubernatorial candidates, knowing that these services would not be performed. Pursuant to the fraudulent contract, P&P obtained $132,500 of Individual F's campaign contribution, which was then disbursed to LETTMAN-HICKS and GILLUM.

These smart guys pretty much follow a game plan they think nobody else knows or will find out about -- set up a nonprofit, use its halo effect to solicit donations (Gillum used the name "National Black Justice Coalition," a name that might have prompted a donation from me) and then funnel donations to the person who thinks himself too smart to get caught.  Really dumb, but for only a small percentage of the wrongdoers no doubt.  For everybody caught, there are probably ten or more people who aren't caught. 

Henry Hansmann is the real evil genius behind the whole thing.  I bet you didn't know that.  Yep, it was Hank who first got us all singing the praises of the nondistribution constraint (NDC).  Have you ever heard such mumble jumble?  Who talks like that at a cocktail party?!  "Well, the kids asked for money and the car keys to go out one night, but they hadn't completed their chores so I imposed a nondistribution constraint on their asses."  The NDC was all good, Hank assured us in The Role of Nonprofit Enterprises, because the NDC (the whole phrase taste like rotten eggs, sour milk and vinegar in my mouth, bleh!) helps "buyers" get what they pay for.  Donors are buyers in economic talk, unknown beneficiaries are the ultimate consumers; donors, not being ultimate consumers, cannot know that the public goods and services they paid for are actually delivered as promised.  The NDC doesn't guarantee that beneficiaries get what donors pay for, but theoretically it lessens the possibility of diversion by removing one temptation -- personal consumption rather than charitable spending.  In some other fashion the NDC is thought to solve the free-rider problem inherent to financing public goods and services.  If Hank ever discussed the NDC's costs, I don't remember and I am not about to go re-read 60 pages of hard core economic porn to find out.  I'd rather get a root canal or a rusty fork poked in my eye.   

But what do you mean costs?  What costs?!  Santos and Gillum prove that the cost of the NDC is that ain't nobody watching.  Nobody has immediate or traceable bottom line financial skin in the game when it comes to nonprofits.  And in Florida, the Attorney General is usually too busy protecting us from African American History, or suing to overturn the election to care.  And what ol Hank might not have told you is that profit is not just useful to spur innovation by the hope of unlimited upside.  Oh no, not just that!  The profit incentive also spurs close monitoring -- it solves or reduces the agency problem. When people have skin in the game, they watch how money is being spent, and people like Santos and Gillum aren't so easily able to disguise their donation-funded foie gras consumption as nonprofit spending.  Nobody has sufficient skin in the nonprofit game to care about close monitoring of the sort needed for Hank's wayward minions.

So.  Thanks a lot Hank!  Always with the jokes that guy.  And if government is unwilling to effectively monitor nonprofit spending, let the capital market do it.  Beef up government supervision of public organizations, or find a happy medium between profit taking and charitable mission.

darryll jones

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