More followup on FTC action against 4 cancer charities

There is a lot more to say on the FTC and all AGs going after four charities that were way out of line.

5/19 – William P. Barrett at Forbes – Cancer Charities Agree to Dissolve Amid Fraud Claims – Article summarizes the case by the FTC. Two of the four charities have agreed to close their doors. Three of the named individuals have agreed they will not have future involvement with charity management or even fundraising.

We did nothing wrong and we agree not to break the law again

Article points out the irony we seen these kinds of settlements. Even though the three individuals agreed to not be involved in the charity sector again during their lifetime and two of the charities agreed to be taken over by receivers and then liquidated, the charities and individuals involved denied doing anything wrong.

It is as if it’s a normal and everyday thing that individuals agree to be legally barred from involvement in their economic sector and charities agree to corporate suicide when they have done nothing wrong.

But that’s the legal dance that is necessary. Denying wrongdoing is necessary to prevent the consent degree from becoming proof to anyone who later tried to sue the charities or individuals.  Even though I understand the reason, it seems silly to those looking in from the outside.

Contested claims

Mr. James Reynolds Sr., Cancer Fund of America, and Cancer Support Services will contest the assertions at trial.

Mr. Barrett points out their defense might be a bit more difficult because the two charities are fighting their insurance companies to force them to provide legal defense. The companies providing D&O and corporate liability policies claimed they were lied to by the charities, according to the article.

Let me interpret that for you: The insurance companies providing D&O and liability coverage are refusing to reimburse the charities’ legal costs. The reason, from the insurance companies, is they say there were some sort of misrepresentations on the applications which would have led them to decline underwriting of the policies.

The charities have sued in court to force the insurance companies to pony up. Insurance companies are fighting.

That will likely make it very difficult for the charities and its key leader to continue a legal defense for very long.

Capital punishment or corporate suicide?

The Breast Cancer Society website now consists of one page. I will quote a couple of paragraphs from the public document.

Charities – including some of the world’s best-known and reputable organizations – are increasingly facing the scrutiny of government regulators in the U.S. The Breast Cancer Society (TBCS) is no exception. Unfortunately, as our operations expanded – all with the goal of serving more patients – the threat of litigation from our government increased as well.

While the organization, its officers and directors have not been found guilty of any allegations of wrong doing, and the government has not proven otherwise, our Board of Directors has decided that it does not help those who we seek to serve, and those who remain in need, for us to engage in a highly publicized, expensive, and distracting legal battle around our fundraising practices.

I have loved leading TBCS and being part of a team that engaged heart and soul in helping to serve the mission of the charity selflessly, tirelessly, and honorably.

On behalf of TBCS, I want to thank you for allowing us to be a part of your lives. …

Giving back to the community is a mission that drives me. You will forever and always been in our hearts.

Mr. Barrett characterizes this letter as a corporate suicide note. Evaluate that for yourself.

Some of the major issues

The article says the FTC complaint says the four charities combined raised $187M in cash contributions and $223M of gift-in-kind contributions.

That makes a total of $410M of combined revenue of which 54.4% was GIK.

The article says the FTC says Breast Cancer Society had a $6M contribution of mebendazole in 2010. That is a drug that was key to the GIK overstatements that have been visible in recent years. I’ve discussed mebendazole extensively.

Article also says the complaint says the charities didn’t get control or ownership of the goods and didn’t even know where they were going.

I have only browsed the FTC complaints and the stipulations. Need to go through them in more detail. The stipulations don’t have much information. Most of the visible information will be in the complaint.

Based on what I’ve read so far, this case involves the same issues that I’ve been writing about for quite some time: valuation of medical GIK, overvaluation of mebendazole, variance authority, and functional allocation of expenses.

A huge issue in the case is spending most of the money raised to pay the fundraisers who raise the funds.

As I have time, I will dive into these issues in far more detail.

Other articles

5/24 – William P. Barrett reports gets TV time for cancer charity fraud coverage. He was interviewed by local station KIRO about shady charities. You can see the segment here.

5/21 – Barry Meier & Rebecca Ruiz at New York Times – Patchwork Oversight Allows Dubious Charities to Operate – Article describes the difficulty in regulating the nonprofit sector.

A program to share information from the IRS to state regulators was complicated to start with and then fell apart after the IRS found itself in a fiasco over the way they were processing 501(c)(4) organizations applications. (hey, how’s that for a neutral phrasing?)

Resources for enforcement are limited. Article has good background on the complexities of dealing with the charities that are operating way out-of-bounds.

Coverage on Twitter

Brian Mittendorf (@CountingCharity) has a few tweets that make the point raised by a number of writers:

5/19 – The telemarketing as program costs + questionable overseas gifts-in-kind combo is more common than these four. Plans to expand, @FTC?

5/19 – nice to see a crackdown on “sham” cancer charities. There are several more following this playbook, so I’m hoping to see continued action.

5/20 Long overdue gov’t action on 4 “sham” charities. @cohenreport rightly notes that others follow the same playbook.

5/21 .@arianaeunjung my question: will they take as long to go after the other low-hanging fruit?

Caroline Preston (@cpreston) makes the same point, also in May 19:

Feds and states *finally* cracking down on “sham” Reynolds family cancer charities

Suzanne Perry (@copsuzanne) points out on May 20 this is the first time regulators have gone after the GIK issue:

Cancer-charity case: first time state regulators “have aggressively pursued deceptive use of gifts in kind”  @FTC

If you want a read a recap of the coverage as it developed, you can check out the twitter feed of Prof. Brian Mittendorf – @CountingCharity

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