Tuesday, October 3, 2023
DC AG’s Investigation of Nonprofits Incorporated in “Foreign” Jurisdictions: Is it a Violation of the “Internal Affairs Doctrine”?
Last week, the Wall Street Journal published an opinion piece about a letter that 12 Republican state AGs sent to DC AG Brian Schwalb. In it, they complained about the DC AG’s investigation into several nonprofits associated with conservative activist (and Federalist Society founder) Leonard Leo. (There is no link to the letter because none is published online and I have been unable to get a copy, perhaps because of my truly pathetic journalistic skills). According to the WSJ,
“Mr. Schwalb [issued] subpoenas. This is remarkable because the D.C. AG lacks jurisdiction. All of Mr. Leo’s affiliated businesses and nonprofits mentioned in the complaint are based outside of D.C., including in Virginia or Texas. Under a longstanding legal principle known as the internal affairs doctrine, matters relating to an entity’s internal workings are governed by the laws of the state of its incorporation and enforced solely by that state’s officials.”
(Politico also has an article about the DC AG’s investigation, which, unsurprisingly has a different take on it). (UPDATE: Politico posted another article today that reports that the Leo-affiliated entities are not cooperating with the DC AG and that the DC AG is also investigating Arabella Advisors, a "liberal 'dark money' group" that was the subject of a complaint from a conservative watchdog group.)
But, of course, the internal affairs doctrine applies to – you guessed it – internal affairs, and so the claim that DC does not have jurisdiction over the Leo-affiliated entities raises the question of the claim at the heart of DC’s investigation. Is it an investigation into the internal affairs of the Leo-affiliated entities, or something else? Unfortunately, I don’t have access to the DC AG’s subpoenas or any other source for its legal reasoning establishing jurisdiction. The WSJ piece claims that the investigation was initiated because of a letter sent by the Campaign for Accountability to the DC AG in April, but unfortunately CfA only posted its companion letter to the IRS (which obviously has jurisdiction). That letter identifies the alleged misconduct, saying,
“There are questions as to whether the Leo-Affiliated Nonprofits have diverted substantial portions of their income and assets, directly or indirectly, to the personal benefit of Leonard Leo. Most of these entities have either made substantial independent contractor payments one or more of his for-profit business entities or made major contributions to other Leo-Affiliated Nonprofits that made such payments. Such payments were generally listed as made in exchange alleged consulting, research, public relations, or similar services, however, CfA has reasonable questions about whether those alleged services were actually rendered at all or, if services were rendered, whether the payments made were substantially in excess of the fair market value of those services.”
So, the question is, under DC state law are diversions of nonprofit assets to the personal benefit of someone who directly or indirectly controls that nonprofit an “internal affair” or not? Not to get too confusing on matters of jurisdiction, but it seems clear that DC has personal jurisdiction over at least some of the entities (all of the ones I checked) because they maintained their principal office in DC and they may well have conducted fundraising operations in the District. So, the question is just about the scope of the internal affairs doctrine, not about the “reach” of state authorities over foreign entities.
Anyway, if anyone from the DC AG’s office, or the Republican AGs who wrote the letter, would like to provide their analysis of the question, I and my students would love to see it!