California AG Sues Veterans’ Charity

August 10, 2012       Mark Hrywna      

Five years after being the focus of a congressional oversight hearing, a California veterans’ charity is being sued by the state Attorney General’s Office for more than $4.3 million regarding allegations of fraudulent fundraising, self-dealing and excessive executive compensation. 

Attorney General Kamala Harris yesterday filed a civil lawsuit in State Superior Court in Riverside County also seeking removal of officers and directors of Winchester, Calif.-based Help Hospitalized Veterans (HHV), which distributes arts and craft kits to hospitalized veterans. 

HHV officials did not return telephone calls seeking comment. 

“The officers of Help Hospitalized Veterans improperly diverted money that hard-working and patriotic Americans donated to support injured vets,” Harris said via a press release announcing the litigation. 

The lawsuit alleges that directors and officers of HHV breached their fiduciary duty by wasting charitable assets on golf memberships and a condominium for use by officers, and authorizing excessive executive compensation to the group’s former president, Roger Chapin, and current President Michael Lynch. 

The suit alleges that the HHV board approved compensations packages for Chapin and Lynch that were “unreasonable and excessive” and in violation of the law, including unlawfully approving retroactive salary increases. Chapin received more than $2 million in excessive compensation, including a lump-sum retirement payment of nearly $2 million in a Supplemental Executive Retirement Plan (SERP), and Lynch received more than $900,000 in excessive compensation, the lawsuits states. 

A veteran of the U.S. Army Finance Corps, Chapin retired as president of HHV in August 2009. The lawsuit seeks general and punitive damages, restitution, civil penalties and the removal of those officers and directors named in the lawsuit. 

In 2007, Rep. Henry A. Waxman (D-Calif.), then chairman of the House Oversight and Government Reform Committee Hearings, held hearings about the fundraising practices and overhead of veterans’ charities, where Chapin testified. 

Also named as defendants in the lawsuit were former employee Elizabeth Chapin, Roger Chapin’s wife; the charity’s officers or directors Robert Beckley, Jr., Thomas Arnold, Leonard Rogers, and Gorham Black; accountant Robert Frank and McLean, Va.-based Frank & Company, PC; and direct-mail professional fundraiser Creative Direct Response, Inc., in Bowie, Md. Calls to CDR seeking comment were not immediately returned.  

Chapin also is charged with self-dealing, including loans HHV allegedly made to a vendor, American Target Advertising (ATA). ATA was not named as defendant in the complaint. 

ATA President of Corporate and Legal Affairs Mark Fitzgibbons, a frequent critic of state charity regulators, said he hasn’t yet seen the complaint but the company has a longstanding policy that it does not talk about its clients. ATA was not named as defendant in the complaint. 

The lawsuit alleges that the nonprofit used “accounting gimmicks” to “inflate the amount of income purportedly spent on providing veterans’ services while artificially minimizing the amount reportedly spent on fundraising.” For example, in one case it led to a drop in reported fundraising costs from 65 percent of total costs to less than 30 percent, resulting in “substantially false” filings to both the Internal Revenue Service (IRS) and the Attorney General’s office.  

Among the other charges in the complaint are aiding and abetting a breach of fiduciary duty against Frank and his accounting firm; wrongful acquisition of property/unjust enrichment against Chapin and his wife Elizabeth, for reimbursements. CDR was accused of misrepresentations in solicitations to donors, along with HHV, its directors and officers. 

In its most recent IRS Form 990 filing, the 40-year-old charity reported total revenue of almost $33 million. ATA was compensated about $2.4 million and CDR about $867,000 as consultants on direct mail programs that had gross receipts of $29 million from the activity. 

Among the other allegations in the complaint: 

* A Maryland company called EZScores donated sports scorecards in 2005 to the Coalition to Salute America’s Heroes (CSAH), another charity founded by Chapin, which would distribute these calling cards to active duty military personnel, allowing them to obtain sports scores and information by telephone. Both HHV and CSAH claimed almost $19 million in donations as revenue and program services expenses, according to the attorney general. 

* HHV purchased a condo in 2006 “without adequate inquire into the prudence of that investment,” which incurred a loss of more than $150,000. There also was the $80,000 spent for golf club memberships as a perk for board members and inadequate monitoring of reimbursements for employee travel, entertainment and gifts.

* Lynch approved wasteful and expensive reimbursements to Elizabeth Chapin for gifts to people at ATA. From 2003 through 2006, HHV allegedly provided at least four loans to ATA totaling some $800,000 that was not paid back in full, according to the complaint.