Feed The Children Faces More Litigation

October 20, 2009       Mark Hrywna      

Barely a month after they wrote an internal memo about possible fraud and criminal conduct, two employees at Feed The Children, Inc. have filed a wrongful termination lawsuit against the billion-dollar charity.

Former controller Stephanie Dean and former director financial reporting Stefani Hovarter claim in their lawsuit that Chief Financial Officer Christy Tharp did not report tax liabilities to the state in hopes of the statute of limitations expiring without the state agency noticing. They seek compensation for lost income, mental pain, anguish and embarrassment, and punitive damages and attorney’s fees.

The two employees claim in their lawsuit that “no legitimate reason existed or was given for the termination.” They had not been disciplined or counseled for any previous issues, and one plaintiff received 4.5 out of 5.0 rating in her evaluation this past June. Dean was employed since April 2008 and Hovarter since March 2009.

The lawsuit, filed Oct. 14 in Oklahoma County District Court, names as defendants, Feed The Children, Inc., and directors Rick England, Leo Fundaro, C. Earnest Wyatt and Dan Mugg. The four defendants are among the board members who were involved in a power struggle over control of the Oklahoma City, Okla.-based charity for the past year.

The four were among a group of board members briefly ousted by newly appointed directors, who also dismissed Tharp and General Counsel Larrie Sue Jones, among others. When that litigation finally settled this past summer, founder Larry Jones gave up day-to-day operations while remaining as a spokesman and fundraiser, and Tharp and Larri Sue Jones (Larry Jones’s daughter) were among those who returned with the organization.

In a Sept. 17 memo to six board members, Dean, Hovarter and Accounting Supervisor Stephanie Mendenhall, laid out the charity’s potential state use tax liability of $1.1 million from 2002 through 2009, and perhaps more in other states. Dean and Hovarter, who also contacted the Oklahoma Tax Commission (OTC) about the discrepancy, say in their lawsuit that they were terminated Sept. 29 by the four board members named in the lawsuit.

“This memorandum is being addressed directly to the Board of Directors rather than the Chief Financial Officer due to a disagreement between the authors and the CFO regarding the appropriate manner in which to handle the issue,” the memo states. The memo notes that in cases “where fraud/tax evasion is involved, there is no statute of limitations.”

Tharp approached Mendenhall in mid-July about FTC not paying the state use tax on purchases where the vendor is not charging the appropriate sales tax, according to the memo. After Hovarter and Dean were brought into the discussion, the three who penned the memo agreed the correct approach would be to contact the OTC to admit that the tax has not been paid. Voluntary reports of non-compliance limits the exposure to a three-year period, the memo states, so penalties are waived which could cut in half the estimated $1.1 million liability.

According to the memo, Tharp realized when she started at FTC in 2001 that the state tax was not being paid and “indicated that she had decided to neither approach the OTC regarding the past tax liability nor the use tax…in hopes that the statute of limitations would expire without OTC discovering non-compliance.”

The memo indicates that FTC paid a use tax of $16,183 for July and $19,882 for August.

The memo ultimately recommended to the board members a thorough evaluation to determine the actual tax liability to Oklahoma; hiring a tax attorney specializing in sales and use tax; external auditors be notified of the noncompliance to properly reflect it in 2009 audited financial statements; and, research be conducted to determine if similar liabilities exist in other states.

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