Details on FTC enforcement action against four cancer charities – 2

This is the second in a series of posts diving deep into the detail mentioned in the complaint by the Federal Trade Commission and all Attorneys General against four named cancer charities.

My goal is to highlight some of the information that I think is of particular interest to the wider nonprofit community.

I perceive the attention paid to the complaint is drying up. Before discussing the FTC complaint, want to mention one interesting article of late:

6/1 – Suzanne Perry at Chronicle of Philanthropy – $187-Million Fraud Case Puts Charities on the Defensive – Article has reactions to the FTC and 50+ AGs going after the cancer charities that were so far over the line.

My description of the comments are they range from wondering what took the regulators so long to whether this is just a start.  Article points out there has been regulatory action against some members of this group for a long time (over 20 years with CFOA) but that doesn’t seem to have deterred additional problematic efforts.

One focus on the article is the limited staffing at the AG offices which limits how much they can focus on the charity sector. Various industry sources comment on the limits of self-regulation.

Back to the FTC complaint, which can be found here.  It is a public document. I assert journalist status, so will quote the document at length.

Here is the summary of the organizations’ activities, as interpreted by the FTC:

DEFENDANTS’ BUSINESS PRACTICES  

A Profitable Endeavor

25.The Corporate Defendants are sham charities created and controlled by Defendant Reynolds, Sr. and his extended family and friends for their personal profit. Since at least 2008, and continuing to the present, Defendants have collected tens of millions of dollars in contributions from unwitting,  generous, donors by claiming to help people suffering from cancer. Defendants have deceived donors into believing that their contributions support bona fide charities that use contributions primarily to provide cash grants and material supplies directly to cancer patients, children with cancer, and individuals with breast cancer in the United States.

Paragraph 25 is a good summary of the FTC’s accusations. Most of the discussion throughout the complaint can link back to that paragraph, whether very directly (fundraising for programs that allegedly don’t even exist, hiring many family members as employees, alleged personal use of exempt resources) or indirectly (foreign GIK , existence/ overvaluation/ variance authority of GIK, functional allocation).

 26.In reality, the Corporate Defendants do not operate as bona fide charities. Instead of operating for the benefit of cancer patients or otherwise serving legitimate, mission-related purposes, Corporate Defendants primarily support private interests. From 2008 through 2012, the Corporate Defendants collectively spent 87.9% of contributions from individual donors paying for-profit fundraisers and other fundraising costs and compensating the Individual Defendants, related persons, and other employees. In contrast, Defendants collectively spent less than 3% of donors’ contributions on the cash and goods sent to cancer patients in the United States.

Later on, the complaint lists key dollar amounts for each of the charity’s expenses. The complaint aggregates the amounts for each charity over a five-year period. Amounts for CFOA and CSS are combined in the complaint since there are so intertwined.

I aggregated the amounts mentioned for each of the charities.

Here are the combined numbers for all entities across the five years addressed in the complaint, as those numbers are listed in the complaint:

  • $149.9M – fundraising expenses
  • $  33.6M – compensation to all employees
  • $    5.2M – U.S. GIK and financial assistance
  • $188.7M – total cash expenses

Breaking those amounts into percent of total cash expenses:

  • 79.4% – fundraising expenses
  • 17.8% – compensation to all employees
  • 97.2% – subtotal
  •   2.8% – U.S. GIK and financial assistance
  • 100% – total cash expenses

The difference between 97.2% I calculated and the 87.9% mentioned in the complaint is because I used cash expenses as the denominator and the complaint used cash contribution revenue.

27.In addition, charitable contributions have financed personal loans to Individual Defendants, employees, and other insiders, and paid for trips for the Individual Defendants, their families, and friends to Las Vegas, New York, Disney World, and other locations. Funds donated to help cancer patients have also paid for goods and services used primarily for the private benefit of Individual Defendants, employees, and other insiders. For example, donated funds were used to pay for vehicles, personal consumer goods, college tuition, gym memberships, Jet Ski outings, dating website subscriptions, luxury cruises, and tickets to concerts and professional sporting events.

Details on the personal use of funds is not further visible in the complaint (or I missed it on my first browse and second read). It is not immediately apparent to me what dollar amounts are involved. I cannot tell which of the above categories of expenses contain those amounts, whether it is included in compensation or financial assistance.

28.Defendants’ advertised charitable causes were simply the mechanisms through which they created employment opportunities for themselves, their friends, and their family members, and funded other private benefits. The Corporate Defendants operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.

More to follow.

Part one is here. Part 3 is here.

I hope that those who have ears to hear will listen very carefully. This isn’t over, dear brothers and sisters in Christ.

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