The stunning announcement that regulators from all 50 states and the federal government were working jointly to shut down four allegedly “sham” cancer charities has put the nonprofit world on the defensive once again. Nonprofit leaders are reminding colleagues to follow ethics principles, calling for more money for charity regulators, and lamenting the new black eye for the fundraising profession.
“It just creates one more notch in the weakening trunk of confidence and trust that people have in nonprofits because of this kind of behavior,” says Roger Craver, a direct-marketing fundraising consultant. Some experts see a silver lining in the unprecedented collaboration among regulators, saying it could provide a model for future crackdowns on fraudulent charities. Cindy Lott, lead counsel to the Charities Regulation and Oversight Project at Columbia University, calls it “a high-water mark in the evolution of state charities regulation.”
“At the state level alone, this case involved dozens of attorneys general offices as well as secretaries of state and other agencies that are tasked with charitable oversight at the state level,” she said in an email, praising the “time and tenacity” it took to draw up multiple state and federal counts against multiple defendants.
William Josephson, a lawyer and former head of the New York State Charities Bureau, criticizes the Internal Revenue Service and state regulators for failing to do more to fight charity malfeasance. But he calls this a “very important case,” partly because the Federal Trade Commission stepped in to fill the IRS “vacuum.” He notes that the complaint details the statutes in every state that have allegedly been violated.
“It’s a very interesting list,” he says. “Will that encourage states to get off their duffs and do something? “Well, I hope so. They’ve certainly been given a road map.”
Long Time Coming
But some experts are dismayed that the charities and their founders — accused of bilking consumers out of more than $187 million from 2008 to 2012 to benefit a network of family and friends — have gotten away with their activities for so long. The four organizations are all connected to James Reynolds Sr., who started Cancer Fund of America in 1987.
Some states have tried to rein in that charity before: The complaint cites actions taken by Connecticut, Pennsylvania, New York, Vermont, Massachusetts, and Georgia from 1991 to2007 against Cancer Fund of America for things like inadequate board governance, improperly valuing donated goods, and misrepresenting charitable programs. But it continued operating and spawned three other groups — the Breast Cancer Society, Cancer Support Services, and Children’s Cancer Fund of America.
Cancer Fund of America and Children’s Cancer Fund of America both were included on the list of “America’s Worst Charities,” compiled in 2013 by the Tampa Bay Tribune and Center for Investigative Reporting, which highlighted groups that spent most of their donations on commercial solicitors and just a fraction on direct aid to people in need.
Insufficient Resources
Some nonprofit leaders attribute the problem to underresourced state and federal regulators. “Oversight has failed largely because there are insufficient funds and coordination at the federal and state level to ensure that cheats and crooks are not allowed to thrive,” Diana Aviv, chief executive of Independent Sector, the coalition of nonprofits and foundations, said in an email.
Her group sent a letter last week to the House Appropriations financial services subcommittee asking it to increase the IRS’s budget for enforcement activities in the 2016 fiscal year.
But Geoff Peters, a direct-marketing executive, says fundraising trade associations deserve some of the blame for not doing more to weed out the bad actors. “I have known about [Cancer Fund of America] for probably 25 years,” he says. “Almost everyone else in our industry that’s paying attention at all knew about this charity.”
Mr. Peters — a volunteer lawyer for the American Charities for Reasonable Fundraising Regulation, a coalition that fights “excessive” charity regulation — says trade groups have tapped him to testify before Congress several times about what they considered misguided legislation and “almost always the argument they use is the industry should remain self-regulating.”
“But if that is what we truly believe, isn’t it time for us to actually do it?”
Mr. Peters, a former member of the Direct Marketing Association Nonprofit Federation’s advisory council, says that group and others should identify cases they think state regulators, who often have a “woeful” lack of expertise, should pursue — while also steering them away from burdensome reporting requirements that will do nothing to uncover fraud.
“I have yet to see any of them do that,” he says. “They are so afraid of being picked on. If they actually go after one of these bad apples, somebody might say, ‘Whose side are you on, the regulator’s side or the charity’s side?”
Shannon Wiley, deputy general counsel in South Carolina Secretary of State’s Office, says she would welcome such help. Sometimes when her office contacts a charity to inquire about a problem with a regulatory filing, she says, the group will say, “I know all these other people who are doing this and this. Why aren’t you investigating them?” But when it asks them to provide names, “99.9 percent of the time, they say, ‘I don’t want to do that’ and they won’t.”
Charity Self-Regulation
The Association of Fundraising Professionals issued a statement after the cancer-fraud case was announced, citing the Code of Ethical Principles and Standards. But the group favors persuasion over sanctions. Anyone, whether a member or not, can contact AFP’s ethics committee about “questionable situations,” says chief executive Andrew Watt, adding that the association needs to do more to encourage fundraisers to do that. But the committee gives priority to “identifying and resolving situations before they even become problems, offering suggestions and recommendations to encourage compliance with the code.”
Senny Boone, executive director of the Direct Marketing Association Nonprofit Federation, defended her group’s self-regulation procedures, which apply to fundraising firms working for nonprofits as well as for businesses (through the parent Direct Marketing Association). When serious wrongdoing is alleged, she says, the group’s ethics committee works with the company to find a solution; if that is impossible, it refers the case to regulators and discourages people from doing business with the company by publicizing its noncompliance with the association’s ethical guidelines.
The nonprofit federation in 2012 opened an ethics investigation into Quadriga Art (now Innovairre), a direct-marketing company that agreed to a $25-million settlement with the New York Attorney General’s Office last summer over charges involving its work for a veterans charity that was deeply in debt after spending most of its money on outside vendors and just a fraction to help veterans.
Ms. Boone says Quadriga cooperated with the investigation, which concluded after the New York settlement was announced and Quadriga agreed to change its business practices. “Had they not been cooperative,” she says, “we would have gone to the attorney general.” (Mr. Peters says the federation should have continued investigating Quadriga’s relationships with other charities.)
Unhappy About Settlement
Meanwhile, the legal action against the Reynolds charities continues. Children’s Cancer Fund of America and the Breast Cancer Society settled with the regulators and will be shut down; their leaders, Mr. Reynolds’s ex-wife Rose Perkins and his son James Reynolds II, respectively, have been banned from fundraising, charity management, and oversight of charitable assets.
But litigation continues against Mr. Reynolds, Cancer Fund of America, and that group’s fundraising arm, Cancer Support Services, all of which declined to settle. A lawyer for Mr. Reynolds did not respond to questions about the case.
Asked whether regulators could win a preliminary injunction to stop those groups from operating pending a final ruling, Tracy Thorleifson, an FTC lawyer in Seattle who worked on the case, said that remained an option. But, she added, regulators have to take into account U.S. Supreme Court rulings barring prior restraint of free speech,
Not everyone is happy with the settlement won by the FTC and states. In a television interview, Ken Berger, the just-departed chief executive of the watchdog Charity Navigator, called it “pathetic” that the individuals involved are paying only a small price despite charges they used donor money for things like excessive compensation, ski outings, gym memberships, dating services, college tuition, and gym memberships.
The younger Mr. Reynolds must pay a financial judgment of $75,000; another defendant, Kyle Effler $60,000; and Ms. Perkins nothing.
Ms. Thorleifson says state laws exempt some home equity, personal property, and retirement accounts from such judgments, limiting the amount regulators could assess.
The FTC, which can intervene only against organizations operating for their own profit, or that of their members, “doesn’t have criminal authority,” she says. “We did everything the FTC can legally do, closing a corporate entity. The individuals are banned from ever doing this again. That’s as effective as we can get.”
Daniel Borochoff, chief executive of CharityWatch, a watchdog that has awarded Cancer Fund of America an “F” for many years, endorsed that view.
“They’re actually closed down. They’re not allowed to work in the field,” he says. “A lot of times there’s a slap in the wrist, a fine, and it doesn’t really impair the organization.”
He and others wonder whether the regulators will set their sights next on other charities that engage in similar practices as the cancer charities — for example, overvaluing donated goods, or gifts in kind, to make it look like they are spending more on programs than is the case.
“We’re just getting started,” says Ms. Wiley of South Carolina. “We’re very interested in continuing to root out charity fraud as much as our resources allow. If we had a whole bunch of people, we’d be tearing it up.”