Details on FTC enforcement action against four cancer charities – 1

The news coverage has died down about enforcement action taken against four charities by the FTC and every state attorney general. I’ve not seen anything that dives a deep into the accusations. This post is the start of a series of discussions on the case.

Why go into detail?

After having read through the accusation, it is obvious this case contains most of the problematic issues we have seen over the last few years in nonprofit accounting and fundraising. Off the top of my head, I don’t recall any issues under discussion in the charity world that are not present in this case. That makes this set of allegations a good case study.

The complaint can be found here. That is a public document. I claim journalist status, so will quote the document at length.

Here is the opening of the complaint, with a few comments added:

SUMMARY OF THE CASE

1. Defendants, four sham charities and the individuals who run them, have engaged in a massive, nationwide fraud, telling generous Americans that their contributions will help people suffering from cancer, but instead, spending the overwhelming majority of donated funds supporting the Individual Defendants, their families and friends, and their fundraisers. Collectively, between 2008 and 2012, Defendants raised more than $187 million from donors in the United States. This case is about those sham charities, the individuals who ran them, and the false and deceptive claims they made while raising these enormous sums from an unsuspecting public.

That $187M number is the headline in most reports I have read. Those reports usually infer this is the amount that has been diverted to personal use.  Several reports hint that amount was used for inappropriate personal expenses such as vacations and goodies.

Such inferences are extremely incorrect.

First, that number represents cash contributions, not expenses.

Second, the combined numbers in the complaint indicate that $149.9M was spent on fundraising. I assume this is the amount paid to outsiders.

Third, the combined compensation to employees is $33.6M, as I add up the amounts in the complaint. While a huge portion of this, according to the complaint, was paid to the key players and their relatives, obviously the vast majority was compensation.

Fourth, that leaves some tiny portion of the total that would be for expenses which the complaint and FTC allege are inappropriate.

The second paragraph highlights alleged misrepresentations to donors:

  1. In telemarketing calls, direct mail solicitations, websites, regulatory filings, financial documents, and Combined Federal Campaign materials, Defendants have portrayed themselves as legitimate charities with substantial nationwide programs whose primary purposes were to provide direct support to cancer patients, children with cancer, and breast cancer patients in the United States. They also have described specific programs that donors’ contributions supposedly would support, including, e.g., stating that donations would be used to provide pain medication to children suffering from cancer, transport cancer patients to chemotherapy appointments, or pay for hospice care for cancer patients. These were lies. Not one of the Defendants has operated a program that provides cancer patients with pain medication to alleviate their suffering, transports cancer patients to chemotherapy appointments, or pays for hospice care. Moreover, the vast majority of donors’ contributions have not directly assisted cancer patients in the United States or otherwise benefitted any charitable purpose. Rather, donations have enriched a small group of individuals related by familial and financial interests and the for-profit fundraisers they hired. This diversion of charitable funds has deceived donors and wasted millions of dollars that could have been spent as donors intended, to help Americans suffering from cancer.

Later in the complaint, there are detailed accusations of actionable misrepresentations for focusing fundraising pitches on programs that do not exist.

According to the complaint, it is not a matter that only a tiny amount of dollars were spent to transport cancer patients or pay for hospice care. The complaint alleges that the dollars spent on certain programs were zero and several highlighted programs actually did not even exist.

The complaint continues with a summary of the GIK accounting issues:

  1. Defendants have hidden their high fundraising and administrative costs from donors by using an accounting scheme involving the shipment of pharmaceuticals and other goods (known as gifts-in-kind or “GIK”) to developing countries. Through this scheme, collectively from 2008 through 2012, Defendants improperly reported over $223 million in revenue and program spending in their financial statements. This had the effect of making Defendants appear to be larger and more efficient with donors’ dollars than they actually were, deceiving the donating public.

The complaint contains multiple mentions of total expense over a five-year period of time for each of the charities. I have aggregated those numbers into a spreadsheet, and will share that later.

For the moment, let’s just look at a few numbers. I will combine the numbers of all four organizations across all five years. I’m not sure what sort of accounting word could be used to describe that calculation, but it represents the combined amounts of multiple entities for half a decade.

The combined expenses of the four charities over five years is $411.7M, as I add up the amounts.  Of this, the above-mentioned $223M is GIK. Without GIK, the combined expenses for five years would be $188.7M.

Fundraising expenses cited in the complaint are $149.9M for the four organizations over five years.

To illustrate the impact of the GIK, fundraising as a percent of total expenses would be 79.5% if GIK is excluded from the calculation. Adding in GIK drops the fundraising percent of total expenses to 36.4%. The impact of GIK is dramatic.

A host of issues about GIK are raised in the complaint. I hope that those who have ears to hear will hear. The Feds and AGs have already figured out the issues, dear brothers and sisters in Christ.

More to follow.

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