(update: headline modified)
The conflict over donated pharmaceuticals has heated up again.
The California Attorney General has filed cease and desist orders against three large charities who received between 89% and 98% of their revenue from medical GIK.
Update: Those percentages appear to include all GIK, not just medicines. For example, in 2015 Food for the Poor had $1,159M total income with $1,033M of donated goods, according to their audited financial statements. According to their 990 for 2015, of the total GIK $818.7M was drugs and medical supplies, $110.8M was clothing and household goods, with $103M of other GIK. For 2015 donated drugs and medical supplies are 70.6% of total support and revenue.
Update: For MAP in 2015, total drugs and medical supplies from Schedule M of the 990 ties to the donated inventory on the audited financial statements. The only other GIK listed on Schedule M are securities, which amount ties to the financial statements. For 2015, donated drugs and medical supplies are 97.8% of total revenue and support. Likewise for CMMB, the drugs and medical supplies listed on Schedule M ties to the line donated pharmaceuticals, equipment and supplies on the audited financial statements. For 2015, donated drugs and medical supplies are 90% of total support and revenue.
A complaint was filed against another charity, National Cancer Coalition, for overvaluation of GIK. The charity conceded the state’s claims and agreed to terminate the charity’s existence.
The three large charities are Food for the Poor, MAP International, and Catholic Medical Mission Board.
The cease and desist orders can be found at the AG’s web site:
- Cease and Desist Order – Food for the Poor, pdf
- Cease and Desist Order – MAP International, pdf
- Cease and Desist Order – Catholic Medical Mission Board, pdf
Actions regarding the charity closing its doors:
- People v. The National Cancer Coalition – Complaint, pdf
- People v. The National Cancer Coalition – Stipulated Judgment, pdf
This post will describe the complaint against NCC and the stipulated judgment.
The NCC website is not available on the internet, or at least I can’t find an operating site. Going to the public URL shows a dead site. Let me know if I missed something.
Complaint
The AG accuses NCC of overstating the value of donated medicine. The claim is the charity used values in the U.S. for medicine which “could not be distributed or used in the United States”, in which case the AG asserts international valuations should have been used.
For legal reasons I do not understand, this complaint is structured as an unfair business practice. If I follow the complaint correctly, the AG claims that the organization’s 990s are materially misstated, with those 990s made available to consumers in the state.
From the NCC complaint:
17. Of critical significance, the U.S. pharmaceutical company donors prohibited the pharmaceuticals from being distributed and used in the United States. Even though the pharmaceuticals were prohibited from being distributed in the U.S., Defendants used U.S. market prices to value the donations instead of the applicable minimal international market prices .
The accounting issue is described as follows:
18. California law requires charities that solicit donations in this State to follow Generally Accepted Accounting Principles (“GAAP”) in their financial reporting. (Bus. & Prof. Code, §17510.5, subd. (a).) Thus, all charities soliciting in this State are required to “play by the same rules” in their financial reporting. Under GAAP, charities can only claim the “fair market value” of gifts in kind, which is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement-date.” (FASB ASC 820-10-35-2.) GAAP also requires charities to use the “principal market” in valuing assets or, in the absence of a principal market, the “most advantageous market” for the asset. (FASB ASC 820-10-35-5.) Importantly, charities must have access to the principal or most advantageous market in valuing the asset. (FASB ASC 820-] 0-3 5-6A.) For example, if a charity receives a donation of pharmaceuticals from a U.S. pharmaceutical company that prohibits distribut10n in the U.S., then the U.S. is neither the principal nor the most advantageous market. The U.S. is the prohibited market. Finally, “in the absence of evidence to the contrary, the market in which the reporting entity normally would enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal market or, in the absence of a principal market, the most advantageous market.”
Three examples of claimed overvaluation from the NCC complaint:
21. The difference in U.S. versus the applicable international market prices for National Cancer Coalition’s donated pharmaceuticals was immense. This is shown by the following samples of National· Cancer Coalition pharmaceutical transactions:
22. 2013 shipment to Nicaragua: National Cancer Coalition valued the pharmaceuticals Simvastatin and Hydrochlorothiazide at $115,625 (total) using U.S. prices. This was over six ·times the true fair market value of less than $18,500 using the applicable international prices.
23. 2013 shipment to Guatemala: National Cancer Coalition valued the pharmaceuticals Alendronate Sodium, Gabapentin, and Hydrochlorothiazide at $152,289 using U.S. prices. This was over three times the true fair market value of less than $46,000 using the applicable international prices.
24. 2013 shipment to Nicaragua: National Cancer Coalition valued the pharmaceuticals Lisinoprir and Simvastatin at $142,449 (total) using U.S. prices. This was over five times the true fair market value of less than $28,100 using the applicable international prices.
You will notice in this and following posts that mebendozole is not mentioned once.
The impact on NCC program service ratio is significant, per the compliant. From paragraph 22:
d. Citing its 2012 IRS Form 990, National Cancer Coalition stated it “shows that we devoted 97.7% of our resources to programming, 0.54% to administrative expense and 1.76% to fundraising.” That claim was false. Using international prices for National Cancer Coalition’s pharmaceutical shipments, its actual program expense percentage had dropped to less than 60% when it made the representation.
NCC uses Wholesale Acquisition Cost (WAC) in U.S. for valuing medicine.
See paragraphs 27 through 30 for allegation of fundraising conducted for a program that the state asserts did not even exist.
Stipulated judgment
On March 8, 2018, the same day that the complaint was filed, NCC entered into a stipulated judgment.
In paragraph 5, NCC admits
“…that its use of U.S. market prices in valuing its pharmaceutical donations· overseas violated GAAP and California law because the pharmaceuticals were restricted to use and distribution outside the U.S.
In the accepted injunctive relief in paragraphs 6, NCC essentially concedes all of the states arguments in terms of valuation and agrees not to engage in any further misrepresentation.
In paragraph 7, NCC agrees it will dissolve within 180 days.
In paragraph 8, civil penalties of $500,000 are assessed and then waived due to lack of sufficient assets to pay the penalties.
So, for NCC, the accusation ends with the charity agreeing to the states claims and agreeing to close its doors.
Update: Select financial information for the 3 charities receiving cease-and-desist orders here.
Update: Select financial information for NCC, the charity agreed to dissolve itself:
9/30/14 990 information – latest 990 available at Guidestar
- FY 13 total revenue – $123M
- FY 14 total revenue – $ 12M, which is a 90.2% drop
9/30/14 990 –
- $12.1M total revenue, of which $9.7M is donated drugs and medical supplies (80%)
- Cash income is $2.4M
- $17.8M total expenses, of which $15.1M is grants. In addition, 4 listed telemarketing firms were paid $2.0M per Part VII, Section B.