Big Fines Might Have Little Impact

The largest settlement for alleged deceptive charitable fundraising in U.S. history has people around the nonprofit sector talking about fundraising regulation and where it stands today.

The New York Attorney General’s Office recently announced a $24.6-million settlement with direct mail companies that allegedly misled donors amid a series of conflicts of interest with a charity that it essentially helped to create from scratch.

More than 90 percent of the $115 million raised by the Disabled Veterans National Foundation (DVNF) between 2008 and 2013 went to pay direct mail vendors and their affiliates, according to results of an investigation by the New York Attorney General’s Office. Attorney General Eric Schneiderman announced the settlement on July 1, with most parties signing off on it June 11-12. A spokesman for the AG’s office declined to say how long settlement discussions took or comment for the record beyond a press release and copy of the settlement.

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

The only comments from Quadriga officials regarding the settlement were posted to the company’s website.

Convergence Direct Marketing also 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 investigation. 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 firm was paid more than $310,000 from 2010 through 2012, according to DVNF’s tax forms. It’s unclear how much Convergence was paid in earlier years. The combined $10 million in damages to be paid by the two companies will be used to support research by the Veterans Health Administration (VHA) office of research and development, paid out over the next two years, according to the settlement paperwork.

The parties to the settlement have neither admitted nor denied the investigation’s findings.

DVNF will be 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.

Opinions of the Quadriga settlement vary around the nonprofit sector.

Geoffrey Peters called it “a poster child for what is wrong with state charity regulation. Once again, a terrible charity and an awful fundraiser have combined with a charity regulator to make headlines,” despite the fact that DVNF was registered as a charity in New York and all other states that require registration. Peters, the CEO of Moore DM Group in Bowie, Md., and general counsel to the American Charities For Reasonable Fundraising Regulation (ACFRFR), also questioned Schneiderman’s ambitions for future office, such as governor, as well as the absence of the Internal Revenue Service (IRS) and other “self-regulatory bodies.”

Marc Owens, a former director of the IRS Exempt Organizations Division and now a partner at the law firm Caplin and Drysdale in Washington, D.C., said the settlement is a good example of the authority of state attorneys general and the timeliness and effectiveness of their enforcement tools. Not only did the New York AG get restitution but it “can essentially step into the overall governance of an organization and the way it actually operates; that is its true regulatory role,” he said.

State regulators move on different timeframes because the IRS is built on a tax administration and collection system, not on a regulatory system, Owens said. The attorney general “is out there to protect citizenry in the state and able to take immediate action not tied to tax returns,” he said.

The Quadriga episode is likely just “the tip of a largely unseen iceberg,” according to Ken Berger, president and CEO of Charity Navigator, a Glen Rock, N.J.-based charity that rates and studies nonprofits. New York touts one of the largest attorney generals offices in the country when it comes to charity oversight and investigation. “Even there, I suspect we will continue to see settlements like this periodically. In much of the rest of the country, the unethical behavior is not even known about to do anything about,” he said.

Other observers praised New York for getting reforms that apply to a non-New York based charity’s operations while its jurisdiction is not national. The investigators alleged that DVNF failed to maintain adequate independence from its principal fundraiser 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.

Alissa Gardenswartz, president of the National Association of State Charity Officials (NASCO) and first attorney general in the Colorado Department of Law’s Antitrust, Tobacco and Consumer Protection Unit, praised the settlement, calling it “fantastic,” both in terms of the monetary relief as well as the structural relief to replace the board and other remedies going forward to ensure the charity operates legitimately.

Gardenswartz expects NASCO’s development of a single portal multi-state registration tool, where charities can register once in multiple jurisdictions, to the help the registration process and charity oversight. “Registration still provides valuable information to regulators but I think there are limitations because that data is not digitized to the ability of analyzing that data,” she said.

As big data comes online and states try to catch up and modernize databases, some observers expect the enhanced tools will help regulators determine the bad actors more quickly.

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

Whether there was any discussion or consideration of shutting down the charity is unclear but the move to oust all board members was likely a move to salvage the organization. “It seems as though at some level, the organization — but for what was going on with the fundraisers — was founded by people who legitimately wanted to provide charitable services. I think what the attorney general’s office tried to do, and did successfully, was make it so it could continue on and pursue legitimate charitable work it intended to do in the first place,” Gardenswartz said.

Government tends to be very reluctant to close charities due to the legal hurdles and potential media spotlight, according to Berger.

Some in the direct mail industry fear that the black eye caused by the DVNF-Quadriga settlement might affect contributions to legitimate charities that follow appropriate rules. “What does concern me is how this will impact charities that do good work — that do provide services, that are taking care of animals, that are really fighting the abuse, starvation or whatever cause — how they’re going to be impacted by this,” said Direct Marketing Association of Washington (DMAW) Executive Director Donna Tschiffely. “That’s the bigger concern, how this one bad apple is going to cause a really negative ripple effect that I don’t think we know what the full impact will be,” she said.

“Like any other industry, you’re going to have good guys and bad guys. As an organization, what we want to do is promote best practices, ethical practices. There isn’t a need for more regulation necessarily, to put unnecessary burdens on the charities, because that’s where the burdens will end up falling,” she said.

“From an organizational perspective, we just have to continue to provide education, promote best practices and provide networking opportunities for our members. In some ways it’s black and white: communicate better with members and donors with the impact we make, not just some charity evaluator’s star rating but the impact that organizations make with their dollars,” Tschiffely said.

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 investigation report.

A “funded model” arrangement allows for a fundraiser to assume up-front costs of a direct mail campaign but is only paid from 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 not 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 investigators.

In a 670-word message on Quadriga’s website, CEO Mark Schulhof said the agency has taken responsibility for mistakes made with starting the charity. 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 via the website message.

At least one observer noted that Thomas Schulhof’s resignation was not a requirement of the settlement, nor was an apology from Mark Schulhof, describing the statement as more contrite and apologetic than necessary.

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 investigators. The law firm represented Brick Mill at the time, Founding Partner Errol Copilevitz said, but only was asked to draft a contract and did not negotiate it. What got the attention of the media and regulators at the time was the volume of mail, he said, because an aggressive acquisition program started just before the recession hit that annihilated projections, created the substantial debt and ballooned the cost of fundraising.

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 commissions from Quadriga on the business that the fundraiser did with DVNF,” according to the investigation report. Quadriga also managed DVNF’s public relations response to media outlets and DVNF later hired Rivers’ daughter, Raegan, as chief administrator officer. She earned compensation of $55,884 in 2010 and $78,187 in 2011, according to the tax forms, resigning on Aug. 31, 2012. Board members reported compensation in 2012 ranging from $1,594 to $2,832, the result of a $200 per diem when required to travel to attend board meetings.

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 Fort Mill, S.C.-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. NPT