What are the legal costs to fight a major cease and desist order from the California Attorney General?

Attorneys talking to judge. Image courtesy of Adobe Stock.

It took a major amount of effort to oppose the cease and desist orders issued by the California Attorney General against three charities.

Various filings in the case and the one day of transcripts I’ve read indicate that each of the charities had a couple of highly experienced trial attorneys representing them.

Have you ever wondered what the tab runs for a major enforcement action? I do. When reading of massive cases against big banks I’ve been curious what the legal costs run.

Normally that information is invisible. Appropriately, there is no way to look inside private companies, massively huge public companies, and checkbooks of individual to see their legal bills.

With not-for-profit organizations, the situation is different. Charities are required to file a 990 with the IRS and send a copy to many state regulators. The majority of charities post the last several years of 990s on their website.

Part IX on page 10 of the 990 shows the detail of expenses. Line 11b discloses legal fees, line 11c shows accounting fees, and line 11g shows other professional fees not listed on one of the previous lines. Pull the 990s and you can see the disclosed information.

 

So, let’s take a look at the 990s for MAP International, Food for the Poor, and Catholic Medical Mission Board to see what their legal fees have been running.

For each of the charities, the legal fees for the last five years are pulled from the 990 and listed. You can visually see where the costs increased.  I will assume the large increases are related to the actions of the AGs from California and other states, with the California effort being the overwhelming majority of the costs.

An average of the earliest 3 years is calculated to provide a baseline, then compared to the legal costs for 2017 and 2018.  The increase over baseline is assumed to be an approximation for the costs to address the CD&O.

I have listed my calculations so you may check them. You may revise any assumptions or amounts as you wish.

 

MAP International

Here is the calculation of increased legal costs for MAP:

9/30/2014         17,738
9/30/2015         40,321
9/30/2016         10,925
9/30/2017         45,632
9/30/2018       282,183
  —–
average of ’14, ’15, ’16         22,995
baseline (rounded average ’14, ’15, ’16)         23,000
 —–
FY 17 increase over baseline         22,632
FY 18 increase over baseline       259,183
 —–
estimated increased costs for ’17 & ’18       281,815

 

Several comments.

First, above analysis makes a long string of assumptions, such as the increase over a calculated baseline are all for the C&DO.

Second, the heaviest costs would be during the hearing in front of a state administrative law judge, which was scheduled for 14 days starting on November 27, 2018. That puts the highest costs into the 2019 fiscal year for MAP but in the 2018 fiscal year for Food for the Poor.

The cost for representation during the hearings is not included in the MAP amounts above.

That means a rough approximation of the incremental legal costs incurred by MAP are somewhere around $280,000 before the hearings started.

I reached out to MAP for their comment on the above analysis. A representative advised me MAP does not comment on unaudited financial information. In response to my request for comment on the costs incurred thus far in FY 19, the representative said the 990 for 2019 will have that information.

You can pull the information for yourself if you wish:

 

Food for the Poor

Here is the calculation of increased net legal costs expensed for FFP:

12/31/2014      14,834
12/31/2015       6,440
12/31/2016       9,838
12/31/2017      86,288
12/31/2018    635,403
 —–
average of ’14, ’15, ’16      10,371
baseline (rounded average of ’14, ’15, ’16)      10,000
 —–
FY 17 increase over baseline      76,288
FY 18 increase over baseline    625,403
 —–
estimated incremental costs for ’17 & ’18    701,691

 

Several comments.

Same comment as MAP for a long string of assumptions.

Also, the heaviest costs for the hearing in front of a state administrative law judge are included in the FFP amounts for the year ended 12/31/18.

In Part VII Section B of the 2018 990, the list of largest independent contractors paid over $100,000 includes two law firms. The total paid to those firms is listed as $909,455.  The legal expense on the functional expense page shows $625,403.

I reached out to FFP for explanation of the difference between the two amounts. A representative advised me the ministry’s insurance company reimbursed part of the incurred legal costs. I will assume there are no other legal costs so will therefore assume the reimbursement is the difference between $909,455 and $625,403, or $274,052.

When I asked FFP for comment, I included the table above. The representative did not comment on the analysis and I did not ask a followup question.

Here is a revised calculation (with a long string of embedded assumptions) of the amount of incremental legal costs incurred and the amount expensed:

Legal costs in FY 17      86,288
Less assumed baseline    (10,000)
Payments listed for 2 law firms in ’18    909,455
Less assumed baseline    (10,000)
Assumed increase in legal fees over assumed baseline for ’17 & ’18    975,743
Less inferred reimbursement  (274,052)
Net incremental legal costs for ’17 and ’18    701,691

 

If every one of those assumptions are reasonably close, that means the legal costs incurred through 12/31/18, which is after the major hearing, is somewhere around $970,000. Net of the inferred amount of reimbursement, the net incremental expense is somewhere around $700,000.

You can pull the information for yourself to double check the analysis:

 

Catholic Medical Mission Board

Data from the last five years of 990s for CMMB for legal, accounting, and other professional fees are as follows:

 legal  accounting other prof
9/30/2014  117,947   135,804  1,531,556
9/30/2015   65,244   139,007  2,722,532
9/30/2016   47,332 0  2,145,546
9/30/2017 0 0  2,650,171
9/30/2018 0 0  1,835,757

 

For reasons not visible, the 990s do not report accounting and legal fees for the last few years but do show substantial other professional fees on line 11g.

I reached out to CMMB for comment on the reason for the legal costs not being listed and for the amount of legal costs related to the C&DO.  A representative advised me that since the ministry is in the appeal process they won’t have any comment until the case is resolved.  The representative did say that the organization’s insurance company has provided reimbursement for a portion of the costs.

You can double check the amounts for yourself:

 

Over time I will update the above analyses.

Attorney General’s costs

I saw a comment on the reimbursement amount sought by the AG but cannot find the source again so won’t mention the amount until I can provide a link.

Let’s just say for the moment that the AG incurred very substantial costs as well.

Magnitude of documents

Here are two indicators of the extent of effort involved in the C&DO and why the costs are at the present level.

I read the list of filings for the case about the time the appeal hearing was underway. At that time there were 115 items listed. Of those, there were 30 notices or orders, which would have been short documents but required careful consideration.  There were 16 proof of service documents, which provide evidence a certain document was delivered to certain parties. That leaves 69 other documents by my count which were pleadings, correspondence, or forms. Each of those 69 documents would have been fairly long and required very careful analysis and full understanding by multiple attorneys of all parties.

One of the charities published a certified copy of the transcript from December 11, 2018. That was the day the administrative law judge gave his verbal conclusion on the case. The total document for that one day ran 204 pages long, The transcript for the conversations ran 166 pages.  Those were numbered from page 1,902 through 2,067. In addition, an index of the words used during that day ran another 37 pages.

I have no indicator which would show the volume of exhibits submitted for the hearing or the volume of documents provided to the AG by each of the charities.

As you can tell from the two indicators mentioned, there was a lot of material that each of the legal teams had to know inside and out.

Full disclosure

It is time again to provide the disclosure comment I’ve made multiple times before.

Before starting my own firm back in 2002, I worked in the California office of a then-small national firm that focused on serving the not-for-profit community. That firm is the current auditor and tax preparer for one of the above charities.  If memory serves correctly, that charity was a client of the Atlanta office of the firm for several years before I left. I am quite sure I did not do any work on that engagement.

This same firm also prepares the tax return for another one of the charities discussed above. I think the firm picked up that client well after I went out on my own.

As an intentional one-person firm serving the non-profit community, I am obviously a teeny tiny competitor to this firm.

Your thoughts?

What do you think of the above analysis? Did I miss something? Make a bad assumption? Math error? Dumb typos?

You may leave a comment on this post. Keep in mind all comments are moderated.  Professional comments will be approved.  You might keep in mind I am the sole authority for determining what is professional.

 

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