Details on FTC enforcement action against four cancer charities – 10

July 29, 2015, 9:09 am
Marble panel on FTC building in DC. Photo courtesy of DollarPhotoClub.com

Marble panel on FTC building in DC. Photo courtesy of DollarPhotoClub.com

This is the tenth in a looooong series of posts diving deep into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities.

The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the second post discussing allegations in the complaint asserting that the financial statements of the charities were misstated. Four paragraphs summarize the problems the FTC has with the accounting for donated medicines.

  1. Corporate Defendants obtained the paperwork they used to claim these figures for just the cost of the payment to INTERMEDIATE (which included both INTERMEDIATE’s fees and shipping costs). For example, in connection with a 2011 shipment to Guatemala, CFA reported contributed revenue and corresponding program expense of over $8 million, but only paid INTERMEDIATE a fee of $50,550. For one 2010 shipment to Ghana for which CCFOA reported contributed revenue and program expense of over $3.8 million, CCFOA paid INTERMEDIATE just $39,960. In addition, for a 2011 shipment to Honduras for which BCS reported contributed revenue and program expense of at least $3.8 million, BCS paid INTERMEDIATE just $28,120. Although Corporate Defendants used such transactions to add hundreds of millions of dollars in program expenses to their financial reports, these “programs” existed entirely on paper. Corporate Defendants did not possess the goods and played no role in their overseas distribution. They hired no additional staff to manage these multimillion-dollar international GIK programs and in most instances spent virtually no staff time on them. In addition, the very high dollar values associated with these transactions largely resulted from overvalued pharmaceuticals.

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Details on FTC enforcement action against four cancer charities – 9

July 27, 2015, 9:13 am
Federal Trade Commission Building in Washington, DC. - Picture courtesy of DollarPhotoClub.com

Federal Trade Commission Building in Washington, DC. – Picture courtesy of DollarPhotoClub.com

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

The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the first post in a series discussing allegations in the complaint asserting that the financial statements of the charities were misstated. Paragraphs 127 through 130 provide a condensed summary of the massive concerns the FTC has over the accounting for GIK shipments. There are severe accusations embedded in these four paragraphs.

To give you a hint where the FTC is going with this section, my paraphrase of the last sentence of paragraph 130 is the FTC alleges that the charities’ audited financial statements and 990s as provided to the IRS, state regulators, and the general public were “false and misleading.”

Deceptive Impact of Reporting GIK Transactions

  1. The increased contributed revenue and program spending Corporate Defendants reported – collectively over $223 million – had the effect of diminishing the reported percentage of revenue they spent on fundraising and administrative costs and increasing the proportion of reported expenses they spent on program services, making Corporate Defendants appear more efficient to donors than they actually were. Thus, the reported international GIK revenue for the five years from 2008 through 2012 resulted in CFA’s reported fundraising expenses being 25.4% of total contributions. In reality, 67.4% of consumers’ donations (including revenue from CSS), or 82.9% without counting CSS’s “contributions” to CFA, were spent on fundraising. For the same period, CCFOA used its international GIK revenue to report fundraising expenses of 47% of total contributions. In reality, 81.5% of consumers’ donations were spent on fundraising. Similarly, BCS reported fundraising expenses of 29% of total contributions, while in reality 84.6% of consumers’ donations were spent on fundraising. Corporate Defendants also used the inflated contributed revenue amounts when choosing purported “comparable organizations” for setting their executives’ pay, thus improperly increasing the Individual Defendants’ salaries.

You might wonder what’s the big deal if a charity records a GIK shipment when it should not, as alleged by the complaint. Revenue is increased by the valuation of the shipment and expenses are increased by the same amount. Impact on the bottom line, or change in net assets, is zero.

Why does it matter?

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Details on FTC enforcement action against four cancer charities – 8

July 23, 2015, 9:00 am
Federal Trade Commission Building in Washington, DC. - Picture courtesy of DollarPhotoClub.com

Federal Trade Commission Building in Washington, DC. – Picture courtesy of DollarPhotoClub.com

This is the eighth in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the second of two posts on comments in the complaint addressing valuation at an overall level. Next discussions will go into detail of valuation issues by charity.

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Details on FTC enforcement action against four cancer charities – 7

July 20, 2015, 7:20 am

This is the seventh in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. The complaint can be found here. My posts in this series are visible using the FTC tag.

This is the first of two posts on comments in the complaint addressing valuation at an overall level. Following paragraphs in the complaint go into detail by charity.

This will be a long post. Not sure how to conveniently break it into two or three separate discussions.

Corporate Defendants Improperly Reported the Value of GIK

  1. Even assuming, arguendo, that in some instances Corporate Defendants could have properly claimed the GIK goods’ value as contributed revenue or reported it as program expense, in numerous instances, Corporate Defendants used improper valuation methods to inflate the reported values of donated goods. Corporate Defendants also failed to retain appropriate documentation of those valuations.

This is not going well. I think that paragraph asserts that none of the GIK shipments should have been included in revenue.

Furthermore, assuming shipments actually had variance authority there are two additional problems according to the complaint. First, goods were overvalued. Second, documentation is not retained to support the recorded valuation. Read the rest of this entry »


Details on FTC enforcement action against four cancer charities – 1

June 12, 2015, 9:53 am

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: Read the rest of this entry »


More followup on FTC action against 4 cancer charities

May 26, 2015, 9:02 am

There is a lot more to say on the FTC and all AGs going after four charities that were way out of line.

5/19 – William P. Barrett at Forbes – Cancer Charities Agree to Dissolve Amid Fraud Claims – Article summarizes the case by the FTC. Two of the four charities have agreed to close their doors. Three of the named individuals have agreed they will not have future involvement with charity management or even fundraising.

We did nothing wrong and we agree not to break the law again

Article points out the irony we seen these kinds of settlements. Even though the three individuals agreed to not be involved in the charity sector again during their lifetime and two of the charities agreed to be taken over by receivers and then liquidated, the charities and individuals involved denied doing anything wrong.

It is as if it’s a normal and everyday thing that individuals agree to be legally barred from involvement in their economic sector and charities agree to corporate suicide when they have done nothing wrong.

But that’s the legal dance that is necessary. Denying wrongdoing is necessary to prevent the consent degree from becoming proof to anyone who later tried to sue the charities or individuals.  Even though I understand the reason, it seems silly to those looking in from the outside.

Contested claims

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N.Y. State settlement with veteran’s charity and their fundraiser

July 1, 2014, 9:56 am

The NY Attorney General negotiated a $25M settlement with a charity that raises funds to help veterans and the fundraising organization that runs the direct mail campaign.

The fundraiser, Quadriga Arts, agreed to pay a range of financial penalties:

  • $  9.7M – to NY State for damages caused
  • $13.8M – forgive debt owed to Quadriga by Disabled Veterans National Foundation
  • $  0.8M – reimburse NY State for investigative costs
  • $24.3M – total penalty

A consultant to Quadriga agreed to pay a $300K fine.

How does DVNF owe Quadriga so much money?

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IRS closes audit of Food for the Hungry’s 2008 tax return

June 3, 2014, 6:52 pm

On March 24, 2014, Food for the Hungry issued this press release:

Food for the Hungry’s 2007 Tax Return Audit ResolvedIRS acknowledges that FH followed all laws and accounting standards

In the press release the CFO, Barry Gardner, provided the following comment:

“After an exhaustive review lasting 1,030 days, the IRS allowed the 2007 return to stand as originally filed,” said FH Chief Financial Officer Barry Gardner. “Contrary to erroneous press reports in 2012, no fine was ever levied or paid. While FH and the IRS have minor disagreements concerning certain transactions from that period, those transactions were deemed not to require revision of FH’s tax return.”

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Another explanation why meds cost so much; this ties into the GIK valuation issue

June 2, 2014, 7:37 am

This post will be deep background on the GIK valuation issue. I won’t connect the dots to the international versus US pricing issue, just lay out a few pieces of the puzzle.

One of many fascinating things I’ve learned about pharmaceuticals while blogging about mebendazol and the related valuation issues is the dramatic disparity of the prices for meds in the US and overseas. There is also a huge gap between branded and generics.

I’ve looked for data on the difference in consumption of meds and costs paid here in the US versus the rest of the world. Can’t find what I’m looking for. Somewhere sometime I saw a comment that we in the US consume 10% of all prescription meds but pay 50% of the costs. Can’t support that with anything other than hazy memory. I am fairly comfortable that the disproportionate relationship exists, even if the numbers are off.

Why does that disparity exist? Is it, perhaps, a good thing?

The underlying economic model is US residents pay for all the astoundingly huge development costs of brand new wonder drugs and the rest of the world pays the incremental costs of making another pill.

What that model does is recover the billions of dollars needed to find a new drug and motivates big pharma to look for another blockbuster.

Megan McArdle explains the issue much more clearly in her article Would you Pay $84,000 for a New Liver?

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Case study of legal and accounting costs during major IRS audit

February 19, 2014, 9:36 am

Update 2/19, 6 p.m. – Earlier today I received a reply from Food for the Hungry sharing some background information with me.  They will look at this post in more detail and get back to me.  I will share with readers whatever additional information the organization wishes to share.

Update:  IRS audit has been resolved.

A charity going through a major dispute with the IRS has incurred a lot of costs dealing with an audit.

After seeing two sets of financial statements and 990s that were restated last fall (yes, yes, I’m a little slow on the uptake), I thought about checking to see if the Food for the Hungry financials have been restated. Checked the New York AG web site and didn’t see any revisions.

I would like to use the Food for the Hungry financial statements as a case study of the costs incurred from getting involved in a tax or legal dispute.

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Part 2 of CNN report on trying to follow $40M of GIK

February 12, 2014, 7:04 am

The second part of the Anderson Cooper 360 report on a number of shipments worth over $40M ran last night. Check out What happened to $40 million in charitable donations? – Four charities, one identical shipment. The segment is 7 minutes long.

My comment on part 1 is here.

The AC360 team tried to follow shipments on the ground in Guatemala to find either the charity that received them or the downstream charities that used the medicines. They did not have much success. Actually, no success.

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CNN files their report on the $40M of shipments. My summary of visible comments on investigation(s).

February 11, 2014, 7:14 am

CNN aired a report that is part of their combined reporting with the Tampa Bay Times and Center for Investigative Research. Previously mentioned the print reports here and here.

The video report, which runs just under 6 minutes in length, is from Anderson Cooper 360:  Where did $40 million in charity donations go?

CNN sent their team to Guatemala to track down the shipments. They tried to follow the shipments after the meds arrived in country.

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More background on two charities that revised GIK from WAC up to AWP

February 10, 2014, 8:26 am

Previously discussed here and here two charities that revised their 2012 financial statements by increasing their valuation on donated medicine from WAC to AWP.

I reached out to both organizations on Wednesday, February 5, for comment on this post. I have not heard back from either organization. If they provide any comment, I will update this discussion.

You might want to get a fresh cup of coffee. This will be a long post.

Why look at these restatements?

Two reasons.

First, it is counter to the trend we are seeing of organizations reducing the valuation of GIK.

Second, it provides a glimpse into the reasoning for using AWP. There is very little in the public realm (at least that I’m aware of) that explains why organizations are using AWP.

I’ve looked at more than a few financial statements in the last two years for organizations that have a large volume of GIK. I’ve even had a few posts on point. Usually a specific issue is not very visible in the financial statements. Occasionally, a set of financials will clearly illustrate some issue that is widely present in this sector.

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Another charity restates 2012 GIK income upwards to AWP

February 4, 2014, 7:11 am

When it rains, it pours.

That’s not just an advertising tag line from a salt seller. It’s also a saying in my family, meaning when a few things happen, there often is a string of things that follow.

That’s what it feels like in the GIK area now.  After months of not much happening, I’ve written five posts in two weeks on GIK issues.

Today’s news (at least it’s news to me) is another charity’s revision of the values used for GIK in 2012. It looks like the amounts are increased from wholesale acquisition cost to average wholesale price.

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Charity restates GIK revenue in 2012. Increases valuation to AWP.

February 3, 2014, 7:50 am

You read that correctly. Audited financials and 990 were restated for value of donated meds. Not a reduction from AWP, but an increase to AWP.

Cancer Fund of America has filed an amended 990 and audited financial statements with the New York regulators. The valuation of GIK medicines was increased to AWP.

I was clued in to the change by a comment from William Barrett, who writes at Forbes and New to Seattle. He has been covering the GIK valuation issues for a loooong time. I’ve mentioned his articles several times. In fact, it was his article at Forbes that first made me aware of the issues with mebendazole.

You can find the filings with the New York AG here.

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