May 19, 2015

4 Cancer Charities Charged in $187 Million Fraud Case

Megan O'Neil, for The Chronicle

Art Taylor, chief executive of the BBB Wise Giving Alliance, a charity watchdog, described the accused charities as "evil."

This story has been updated since it was first published.

 In an unprecedented effort to crack down on charity fraud, the Federal Trade Commission, all 50 states, and the District of Columbia today announced they had taken legal action against four cancer charities they described as "shams" operating for the benefit of family and friends.

The federal complaint accuses the Breast Cancer Society, Cancer Fund of America, Cancer Support Services, and Children’s Cancer Fund of America, along with several of their executives, of bilking more than $187 million from consumers through deceptive fundraising pitches.

It cites practices that have long been on regulators’ radar — for example using donated goods, or "gifts in kind," to inflate spending on programs and thereby mask high administrative and fundraising costs.

The four charities are all connected to James Reynolds Sr., president of Cancer Fund of America and Cancer Support Services, its fundraising arm. His ex-wife, Rose Perkins, heads the Children’s Fund of America, and his son, James Reynolds II, is executive director of the Breast Cancer Society.

Jessica Rich, director of the FTC’s Bureau of Consumer Protection, called the legal effort a "historic moment," telling a news conference it marked the first time her agency had joined with all state charity regulators to "present a united front against charity fraud."

"Millions of dollars intended for cancer patients never reached the patients, depriving legitimate cancer charities and cancer patients of much-needed funds and support," she said.

Several States Investigating

Rumors have swirled about a multistate investigation of charity fraud for years. The investigation began about five years ago, with Elizabeth Korsmo, an assistant attorney general in New Mexico, playing a leading role. (Ms. Korsmo's office declined to discuss the case because some litigation is pending.)

The Breast Cancer Society and Children’s Cancer Fund of America agreed to settle the charges against them, and, under orders that now must be approved by a court,  the organizations would be dissolved. The younger Mr. Reynolds and Ms. Perkins would be banned from fundraising, charity management, and oversight of charitable assets.

Kyle Effler, a Reynolds family friend and former chief financial officer of Cancer Fund of America and Cancer Support Services, also agreed to settle and would also be banned from charitable work.

But legal action will continue against Cancer Fund of America, Cancer Support Services, and the elder Mr. Reynolds, who declined to settle.

The regulators propose to impose a judgment of more than $136 million against the charities and individuals that settled, the amount that consumers donated from 2008 to 2012. But Ms. Rich said only a small portion of that money will actually be recovered, the bulk of it after the charities sell their assets. She said states will then distribute the money to legitimate charities.

Among the charges laid out in the complaint:

  • That the charities used telemarketing calls, direct mail, websites, and other materials to portray themselves as legitimate charities that provided direct support to cancer patients. Instead they allegedly used the organizations for "lucrative employment" for family members and friends, and spent consumer donations on items like cars, trips, luxury cruises, and jet ski outings. Ms. Rich said Children’s Cancer Fund in 2012 spent less than 1 percent, or $45,000, of donations to give some families facing a cancer diagnosis a small amount of money, while paying Ms. Perkins more than $231,000.
  • That they hired professional fundraisers who often received 85 percent or more of every donation, spending more than $120 million on such firms from 2008 to 2012. The charities could not justify such high costs, the complaint says, on grounds they were start-ups or dealing with an unpopular cause.
  • That they reported more than $223 million in donated "gifts in kind" that they claimed to distribute to international recipients. In fact, they were allegedly "pass-through" agents for those goods, using them to make it look like they were larger and more efficient than they were. Thirty-five states accused the groups of filing misleading financial statements in this area.
  • That they appointed unqualified associates to their boards, which failed to observe charity-governance procedures like reviewing expenses and program accomplishments against budgeted numbers or enforcing conflict-of-interest policies.
  • That they provided professional fundraisers with deceptive materials.

Early Suspicions

The Breast Cancer Society, set up to provide services to patients and their families, came to The Chronicles attention in 2012 when it leapt into the Philanthropy 400 list of the charities that raise the most money. It qualified after it reported almost $38 million, or 73 percent of total donations, in the form of noncash contributions — medicines, medical supplies, and hygiene items, most of which it said it shipped overseas.

IRS rules allow charities to report those goods as contributions as well as program costs once they are distributed. But some charities have come under scrutiny for overstating the value of such goods or using them to make donors think they were spending more on programs.

Hugh Jones, a charity regulator in Hawaii, said to his knowledge "this is the first time state charity regulators have aggressively pursued the deceptive use of gifts in kind."

Cancer Fund of America and Children’s Cancer Fund of America both made the list of "America’s Worst Charities" compiled by the Tampa Bay Times and Center for Investigative Reporting in 2013 based on the big percentage of cash paid to commercial solicitors and small amount of direct aid. The former charity issued a statement at the time saying it "has helped over 100,000 patients across our country since we started in 1983. The media wishes to report on cash only, thereby ignoring that we are able to purchase products in volume and save in order to serve more families."

The websites of both those charities have been taken down. The senior Mr. Reynolds, Ms. Perkins, and Mr. Effler could not immediately be reached for comment.

The Breast Cancer Society’s site includes a statement from the younger Mr. Reynolds saying the organization, officers, and directors "have not been found guilty of any allegations of wrongdoing and the government has not proven otherwise." However, it adds that the board "has decided that it does not help those who we seek to serve, and those who remain in need, for us to engage in a highly publicized expensive and distracting legal battle around our fundraising practices."

The proposed settlement would allow the Breast Cancer Society to spin off to a legitimate charity one of its programs — Hope Supply, which works with retailers and manufacturers to provide personal-care supplies like wigs and post-mastectomy bras to patients.

Art Taylor, chief executive of the BBB Wise Giving Alliance, a charity watchdog, who appeared at the FTC news conference, signed an open letter in 2013 warning donors not to buy into the Overhead Myth, which is the notion that the best way to judge charities is by how much they spend on overhead rather than on how much impact they have.

But, he said in an interview, "organizations spending 80 or 90 cents out of a dollar [on fundraising] have some explaining to do."

He said the Breast Cancer Society, Cancer Fund of America, and Children’s Cancer Fund of America all failed either  to provide detailed information to his group or to answer questions about their activities. He told the news conference that taking money from donors intended for cancer victims "is about as evil as it gets."

Learn More

Suzanne Perry discusses the charges and their impact on the nonprofit world on WBUR Boston's Here & Now radio program.

Send an email to Suzanne Perry or Megan O'Neil.