The NY Attorney General negotiated a $25M settlement with a charity that raises funds to help veterans and the fundraising organization that runs the direct mail campaign.
The fundraiser, Quadriga Arts, agreed to pay a range of financial penalties:
- $ 9.7M – to NY State for damages caused
- $13.8M – forgive debt owed to Quadriga by Disabled Veterans National Foundation
- $ 0.8M – reimburse NY State for investigative costs
- $24.3M – total penalty
A consultant to Quadriga agreed to pay a $300K fine.
How does DVNF owe Quadriga so much money?
The fundraiser advances all the costs of the direct mail efforts and then seeks reimbursement from the charity.
According to the CNN coverage, the fundraiser has collected $116M over the years on behalf of DVNF, but retained about $104M for its costs. Thus the charity has only seen 10.3% of the funds raised.
The charity agreed to remove all its founding directors and not have any dealing with the fundraiser for 3 years unless the AG approves the contract.
Read through the articles below. I think you will realize the issues involved are way over the top.
Before you start thinking the AG is overly aggressive, ponder how egregious this case is. I’ve not seen anything like this in my years serving the NPO community. My guess is every client I’ve ever worked with won’t even recognize or comprehend what this fundraiser and charity were doing.
This overlaps with other issues that have been visible in recent years. The 2012 990 and financial statements suggest we could have a conversation about joint cost allocation. Other fundraisers getting attention are mentioned in the 990. In 2012 the organization reported $5.8M of household goods and hygiene supplies which were recorded at fair market value, so there is a possible discussion of GIK as well. That $5.8M is a hugely material portion of program services other than joint cost allocations. We could also have a conversation about going concern disclosures as well. The notes disclose a long list of federal and state agencies that have requested documents. Overall, the financial reports for 2012 would make a good case study if someone wanted to dive deep into one situation and had the time to do so.
A few articles on the settlement:
- Chronicle of Philanthropy – N.Y Wins $25-Million in Charity Fraud Case. The settlement document can be found at the bottom of the Chronicle article.
- Center for Investigative Reporting – Charity fundraiser Quadriga Art agrees to $25 million settlement. Article says DVNF is not on the America’s 50 Worst Charities list, but Quadriga is a fundraiser for five charities that are on the list.
- CNN – AC 360 – Whopping find could change the way fundraisers for charity operate.
- Wall Street Journal – ‘Misleading’ Fundraising for Veterans
Update: The New York AG’s press release is here: A.G. Schneiderman Announces $25 Million Settlement With National Veterans Charity and its Direct Mail Fundraisers.
Another party is mentioned in the settlement. According to the press release, the veteran’s group must end its relationship with the organization that was providing the GIK materials. The press release also says that vendor (who is on the list of 5 largest independent contractors) is affiliated with another vendor (who is also on the list of 5 largest independent contractors). The AG also asserts the third-party vendor was making payments to the smaller of the two sanctioned fundraisers.
If you’ve read this far, you might take a look at the notes again. Anyone who wants to research the accounting for joint cost allocation might want to double check to see if there is something in the accounting literature that supports the concept of limiting allocation to program services at the level of one-third of total joint costs. Let us know what you find.