Details on FTC enforcement action against four cancer charities – 3

This is the third in a long series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. My posts are visible using the FTC tag.

My goal is to highlight some of the information that I think is of particular interest to the wider nonprofit community. This complaint is the most detailed information available in the public realm about the range of issues that have been visible in the charity world over the last few years. Keep in mind that unlike the long series of news coverage on the issue this information is from regulators who have subpoena authority.

The complaint is visible here. I will quote it and add my comments.

Continuing with the complaint:

Misrepresentations about Charitable Efficiency: Improperly Reported GIK Used to Disguise Low Charitable Program Expenditures and Minimize High Administrative and Fundraising Costs

  1. The actual amount spent by CFA, CCFOA, and BCS on the cash and goods provided to cancer patients has been so small because of their high fundraising costs and their use of donated funds for salaries, perks, and other benefits to the extended Reynolds clan. To mask these high administrative and fundraising costs, which the donating public views unfavorably, Corporate Defendants embarked on an extensive scheme involving shipping GIK goods internationally. The vast majority of the goods shipped were prescription pharmaceuticals that, in numerous instances, could not be distributed or sold in the United States. Corporate Defendants’ participation in this scheme was limited to paying shipping costs and broker’s fees to ship containers of goods to organizations in developing countries – but they reported the full value of the shipments as if the prescription medicine and other goods had been donated to, and distributed by, them.

That the medicines may not be legally sold in the US makes it problematic to argue that any indicator of valuation in the US is an appropriate measure for the GIK. That’s a separate discussion. Many charities think illegality of sale in the US is not a pertinent factor.

Complaint will have more detail on the handling fees and broker fees.

  1. Corporate Defendants used this scheme to create the bookkeeping illusion that they received millions of dollars in contributed revenue and spent millions of dollars on charitable programs (“program spending”) with low administrative and fundraising costs. Through this scheme, between 2008 and 2012, Corporate Defendants collectively increased their total reported contributed revenue by over $223 million. Simultaneously, in the same five-year period they also increased their reported program spending by over $223 million. This more than doubled their apparent efficiency (the ratio of money spent on program expenses as compared to money spent on total expenses) from 20.7% to 61.5%. In fact, Corporate Defendants should have reported neither this contributed revenue nor the program expenses associated with these international GIK transactions.

There are many ways to calculate overhead or supporting services or charitable efficiency or whatever ratio you wish to use for analysis. This paragraph is combining the reported program costs for all the charities over five years with and with out the donated GIK. The complaint asserts the combined program percentage over a five-year time horizon would have been 20.7% without the GIK and was an aggregated 61.5% with those shipments included.

That calculation shows the magnitude of the GIKs which were booked.

I haven’t double checked that calculation.

What I’ve calculated is the total fundraising costs listed in the complaint for the charities combined over five years. Dividing that by total expenses including GIKs gives 36.4%. Divide those fundraising costs by total expenses excluding GIK gives 79.4%.

Whichever way you do the calculation, you can see the huge impact.

For all four charities combined over five years, the asserted value of GIKs was larger than all other revenue.

  1. Reynolds, II introduced the international GIK shipping scheme to the CFA board in 2008, while he was still CFA’s vice-president. According to board meeting minutes, “by agreeing to accept goods and cover the shipping costs, CFA can credit these shipments toward patient services with a substantial offset to our fundraising costs.” A PowerPoint presentation to the CFA board by Effler confirmed that effect, observing, “our international shipping component has become very beneficial to boost CFA’s program service percentages.” CCFOA began its own shipments in 2009, after Reynolds, Sr. referred the broker CFA used, a company named INTERMEDIATE (“INTERMEDIATE”), to Perkins. When BCS was formed by Reynolds, II in 2008, it immediately embraced an international GIK shipping scheme. CSS also reported a handful of shipments.

The quoted paragraph from minutes suggests the motivation for recording the GIK.

Because the for-profit company that was involved with all these shipments has not been charged as a part of this case, I will not be naming them. This is my choice. It would be perfectly reasonable to name them, since the complaint specifically identifies them. I shall not do so.

If you really want to know who it is, you can look for yourself. If you have been following this issue over the years, you will recognize the name.

As you will see, the complaint explains this company is a major player in the story.

  1. Corporate Defendants each used INTERMEDIATE, a for-profit entity, to facilitate their GIK transactions. INTERMEDIATE advertised that participants in its GIK program could help “[r]educe fundraising percentages by booking large gift values.” To accomplish this, INTERMEDIATE provided Corporate Defendants with a turn-key operation that located donors (“upstream donors”) with GIK goods that those upstream donors wanted to give to downstream recipients in foreign countries. These upstream donors – the same two or three organizations were involved in almost all of the Corporate Defendants’ international GIK transactions – were nonprofits who had themselves received the goods from some other party, often yet another nonprofit. INTERMEDIATE itself did not possess or hold title to any of the goods reported as GIK revenue by the Corporate Defendants.

While holding title is not necessary to record a GIK shipment as revenue and expense, follow along with the rest of the discussion substituting ‘variance authority’ for ownership. Interpret the explanations in that light. By the time you are done, I think you will get to the same conclusion whether you think ownership or variance.

Having another party find your GIK donors for a fee is not a good start to the variance discussion.

Having that party find “almost all” of your GIK isn’t a good start either.

Next: part 4

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