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The Civil Investigative Demand

By Mark Hrywna - January 12, 2016

The stable of lawyers for the Hu­mane Society of the United States (HSUS) has been busy the past year responding to re­quests from a number of state regulators, including Colorado, Oklahoma and Tennessee (in addition to North Dakota a few years ago). Some of those state charity regulators closed the investigations with no evidence of violations.

In Oklahoma, Attorney General Scott Pruitt sent requests, including “burdensome, unnecessary details wholly unrelated to Oklahoma fundraising, including meeting notices and employee handbooks,” according to HSUS, which responded to the requests but claimed privilege for some documents. The Oklahoma Solicitation of Charitable Contributions Act explicitly ex­empts privileged documents from disclosure and despite that, HSUS said the AG would not sign a nondisclosure agreement in ex­change for receiving them.

“We responded to the rather voluminous request for information, copies of ads we put out, solicitation letters. We felt the AG was well within its rights to do that and we were willing to oblige,” said Drew Edmondson, a former Oklahoma AG now in private practice hired by HSUS. Another request came for additional materials, including minutes of board meetings. While most of those were not a problem, Edmondson said some dealt with privileged attorney-client communications or proprietary information, such as future plans, which fall under the state’s trade secrets exception.

If an organization does not have the re­sources or experience, it might be easily intimidated, said HSUS President and CEO Wayne Pacelle. “It might cause them to drop certain activities that might be viewed as more politically controversial. We’ve been through the battles so we can take a punch and we know how to fight back,” he said. “We’re a very veteran organization in terms of political campaigning,” having done ballot measures and establishing a 501(c)(4) organization for advocacy purposes, he said.

Nonprofit managers should remember that they have options when it comes to regulatory inquiries. It’s not always prudent to cooperate unquestionably. A request for in­form­a­tion can be too broad or unfocused and executives are within the organization’s rights to resist an inquiry, attorneys argue. A subpoena would require a judge or court to sign off, requiring some rationale from a regulator for saying that they need certain information. A Civil Investigative Demand (CID), however, does not require a judge’s approval or review.

Requests for information can be objected to in part or whole; answered or by negotiation limited. If there is no agreement and the nonprofit leaders believe the requests are not proper, the regulator would have to go to court to enforce the request, according to Errol Copilevitz, founding partner of the Kansas City, Mo., law firm Copilevitz & Canter. An objection to a CID could lead to a judge ruling on the matter but “it rarely gets that far,” he said. Most courts would say the charity regulator has investigatory powers and wouldn’t be “eager to curtail their use unless abusive,” he said.

Some attorneys have described non-judicial subpoenas as being among their biggest irritants. Others are wary about the potential for non-judicial subpoenas to merely be used for harassment. “No doubt there have been times regulators abuse the process,” Copilevitz said.

Usually charities get a letter from an attorney general (or state charity regulator) — not a subpoena — that explains what they’re looking for from the organization. “More often than not, my hunch is that people put it together and send it,” said Robert Tigner, general counsel of the Association of Direct Response Fundraising Counsel (ADRFCO), a national association of agencies that specialize in direct response fundraising. “What they probably should do, if they’re worried about something in particular, such as releasing confidential information, or if they’re worried they’re about to have imposed on them an extensive search of documents and don’t want to bear that cost, go get a lawyer to contend with it,” Tigner said.

With few exceptions, a judge granted an HSUS motion in district court to enjoin the AG from seeking those documents and in the alternative, do a judicial review of the documents to determine whether they were privileged.

The AG’s office was taking the position that it should see all the documents requested, and if privileged, would give them back, Edmondson said. But HSUS argued that if it’s privileged, regulators don’t get to see them at all to determine whether they get to use them. The key word in Oklahoma’s statute is “relevant,” according to Edmondson. If the inquiry involves misleading advertising, he said the relevance of board minutes must be demonstrated.

“We certainly believe it’s been resolved,” Edmondson said, since the issue is no longer in the courts, though HSUS has not received written confirmation from the AG’s office indicating the inquiry has concluded since motions in the spring. A spokesman for the Attorney General’s Office said they do not “typically comment on ongoing investigations, nor confirm whether or not we are actively investigating.”

A CID is purely administrative, Edmondson said, while a subpoena is a court action. In the enforcement of consumer protection laws, most state attorneys general have a CID at their disposal to demand documents, which also can be used in their supervisory role of foundations and trusts, he said. “It does not require the signature of a judge. They simply would like to look at documents. Typically, they are items that an AG has the right to look at, based on their role in these arenas. But occasionally, they ask for something they’re not entitled to look at,” he said.

Pacelle said state officials have the right and duty to examine charities but he also sees what he believes to be a common link among all the HSUS-related inquiries: The Center for Consumer Freedom (CCF) and its founder, Rick Berman. “Most AGs realize there are some people who try to attach nefarious motives to groups that have different ideology and motives, and see through that this group just doesn’t like HSUS,” he said.

That activity by HSUS can spur retaliatory efforts by opponents. A candidate on the other side of one of its ballot initiatives could try to work through a charity regulator as a retributive sort of effort. “Any time in politics, you win some, you lose some, you could face backlash from somebody you opposed,” Pacelle said. In this case, he said it’s likely that specific states — where HSUS has opponents in certain industries, like pig farming — were contacted.

“So many of these things are subject to judicial review,” Pacelle said, and an attorney general or secretary of state doesn’t want to be embarrassed by a frivolous or groundless legal action.

While resources of a nonprofit can play a role, Pacelle said the best defense is the truth and an organization’s track record. “Many of these politically driven efforts fade away once you show that you are prepared to defend your position,” he said.

“Even in today’s environment, you can see that sort of misuse of government power, and it’s very important to stand up for yourself, and to shine a light on it. That may mean, asking for help, if you don’t have internal legal resources, asking for help from entities that specialize in legal work and might do it for free. It means going to the press and carefully articulating your case and calling out overreaching conduct by government authorities if they are actually going too far,” Pacelle said.

“Government has a legitimate role in charitable oversight,” Pacelle said, adding that it’s “long overdue” for authorities to crack down on the abuse of the tax code. He supports proper and careful use of the authority of government but is opposed to overreaching and groundless efforts that are politically driven that attempt to silence groups.

Mark Fitzgibbons, president of corporate affairs at American Target Advertising in Manas­sas, Va., is widely known for regularly pushing back against regulators and often is critical of the use of administrative subpoenas. A state may authorize an investigation but to get emails and documents from a charity, officials need some type of cause – an objective suspicion that a law is being broken, he said.

“We don’t hear about most of them [subpoenas or demands]” because whether a charity or 501(c)(4) or even a business, when you get a demand of investigation by the government, Fitzgibbons said it’s not something most organizations want the public to see, even when nothing comes of it.

“There are ways to object to these often times unlawful subpoenas. First thing I recommend, the charity or their lawyers, ask regulators to cite the law they are enforcing,” he said.

A lot of charities want to work with regulators, even if they believe they’re not doing something wrong, they’ll cooperate to fix it. “Once you’ve provided documents, you’ve consented to a search and you’ve waived your 4th Amendment protections. In one sense, it’s important to go on the record early to object if a demand doesn’t comply with the authorizing statute or if it’s overly broad or too burdensome,” Fitzgibbons said.

A secondary effect of not having the wherewithal for legal challenges is that regulators will pursue a consent decree, getting “charities to agree to do things that regulators probably could not get them to do in court,” Fitzgibbons said. “Especially for charities that lack the resources to fight, it can be an extortive process, which is why all of these subpoenas should be issued by judges, not unilaterally by AGs who are by their nature political office holders. There’s too much of a temptation to have the power to enforce the laws as well as write yourselves essentially what are search warrants.”    E


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