Fundraisers Hit For $24.6 Million In Fines, Restitution

July 1, 2014       Mark Hrywna      

In a case that two years ago caught the attention of the U.S. Senate Finance Committee, the New York Attorney General announced a $24.6-million settlement with direct mail companies that misled donors amid a series of conflicts of interest with a startup charity. It’s believed to be the largest financial settlement for deceptive charitable fundraising in U.S. history.

The investigation by New York Attorney General Eric Schneiderman’s office found that more than 90 percent of the $115 million raised for the Disabled Veterans National Foundation (DVNF) in Washington, D.C., between 2008 and 2013 went to pay direct mail vendors and their affiliates.

The settlement was signed by most parties on June 11 and 12, before Schneiderman officially approved it yesterday. The parties to the settlement have neither admitted nor denied the Attorney General’s findings.

Quadriga Art will pay $9.7 million in damages, $800,000 to the state for costs and fees, and forgive $13.8 million in debt owed by DVNF. The New York City-based firm also will adopt significant reforms “to improve transparency and set a higher ethical bar for the direct mail charitable solicitation industry.” Quadriga will pay $6.7 million now and $3 million in quarterly installments of $500,000 through April 2016.

Convergence Direct Marketing will pay $300,000 in damages as part of the settlement. The Bethesda, Md.-based firm designed the solicitations and provided other advice, according to the AG’s office. Convergence will pay $300,000 in three installments of $75,000 by July 15, $100,000 by July 2015 and $125,000 by July 2016.

The combined $10 million in damages to be paid by the two companies will be used to support “federally conducted research into technological advancements, new treatments, and innovative rehabilitation and service-delivery practices designed to improve the lives of disabled veterans,” according to the AG’s office. For example, $1 million of the funds will be directed to support cutting-edge spinal cord research at the James J. Peters VA Medical Center in the Bronx; $1.25 million will go to support research on mental health issues; and $750,000 will be directed to support research into medical issues confronting disabled female veterans.

In 2012, the U.S. Senate Finance Committee requested documents from the charity after an expose by the CNN program, “AC360,” while several of the firms mentioned in the investigation were profiled in “America’s Worst Charities,” an extensive investigation last year by the Tampa Bay Times and Center on Investigative Reporting.

DVNF reported almost $28 million in total revenue and expenses in its most recent tax filing (2012), with almost $20 million paid to Quadriga or its affiliates. The charity hired a new CEO, Joseph VanFonda, this past October and its first director of development, Barfonce Baldwin, in May.

The investigation found that DVNF failed to maintain adequate independence from its principal fundraising since it was founded in 2007, by the board of the National Association of State Women’s Veterans Coordinators (NASWVC), many of whom must step down as founding directors of DVNF (Precilla Wilkewitz, Pamela Luce, Bertha Cruz Hall and Lynda Waldroop) by the end of the year. At least five new qualified directors must be added to the board, which also must establish a new audit committee.

The charity is required to appoint a committee to re-examine its business model, terminate Quadriga and Convergence as fundraising advisors and cannot hire them for three years. It also must discontinue national fundraising appeals that use certain messaging, such as fictional stories of wounded veterans that the AG’s office found misleading.

DVNF had engaged Brick Mill Studios, a Quadriga affiliate, in December 2007 as its fundraising counsel under a contract drafted by the Kansas City, Mo., law firm of Copilevitz & Canter that was virtually identical to the one that had recently been signed between NASWVC and Brick Mill, according to the settlement.

Quadriga’s agent, Larry Rivers, “served as a highly influential ‘unpaid financial consultant’ to that board, even while earning over $2.3 million in undisclosed commissioners from Quadriga on the business that the fundraiser did with DVNF,” according to the investigators. Quadriga also managed DVNF’s public relations response to media outlets and DVNF later hired Rivers’ daughter, Raegan, as chief administrator officer.

In a 670-word message on Quadriga’s website, CEO Mark Schulhof said the agency has taken responsibility for mistakes made with starting up the charity. Quadriga Chairman of the Board Thomas Schulhof, who was responsible for the DVNF account, has resigned. He is Mark Schulhof’s uncle and a founder of Quadriga.

“It is my firm belief that from this experience we – as a company and as an industry – will grow strong. We have taken steps to ensure that this situation will never occur again, reformed our business practices, and dedicated ourselves to serving as a role model for the industry as a whole. The lessons learned from this experience will be applied toward every aspect of our business, every day, as we look in new and exciting directions for opportunities to help our industry innovate and improve,” Mark Schulhof said.

Quadriga was the subject of a series of stories by CNN’s AC360 and played a prominent role in a number of organizations listed in a Tampa Bay Times/Center for Investigative Reporting series last year called “America’s Worst Charities.” In response to CNN’s coverage at the time, Schulhof said that in 70 years of being in business, Quadriga had never been fined or charged, nor had it made a profit from DVNF.

Quadriga took advantage of the lack of fundraising experience on the charity’s board to pursue a “funded model” direct mail solicitation campaign much larger than the board imagined, according to Schneiderman. One member of the board expected the initial campaign to raise only $50,000, according to the settlement. A “funded model” arrangement allows for a fundraiser to assume up-front costs of a direct mail campaign but is only paid out of revenues generated by the campaign.

In exchange, the fundraiser obtains effective control over the charity’s donated revenues as well as a lien on the charity’s donor list. DVNF’s board was no informed and did not ask about many critical aspects of the campaign, such as projected revenues and costs, the projected break-even point, the price of items used in the campaign or potential conflicts of interest, according to the investigation.

DVNF also paid Charity Services International (CSI), a third-party vendor, to obtain donated goods from corporate and institutional donors, document the value and transfer of title to the donated goods and transport them to recipients. Convergence, without informing its charity client, received commissions from CSI, linked to the amount of goods that DVNF obtained from the South Carolina-based vendor. DVNF has terminated its relationship with CSI and will establish a board-level gift-in-kind committee to re-evaluate its gift-in-kind program.

Reforms agreed to by Quadriga and Convergence will require full disclosure of all potential conflicts of interest, prohibit dealings with a start-up charity that does not have independent counsel, and require the direct mail vendors to exercise due diligence concerning the factual accuracy of the fundraising appeals they send out in a charity’s name. To ensure that its “funded model” charity clients fully understand the scope and costs of their fundraising campaigns, Quadriga is also required to provide these clients with a complete written description of the elements of the proposed campaign, the costs and rate structure associated with each such element, and the annual and total costs and revenues the campaign is projected to generate.