News and analysis
June 30, 2014

N.Y. Wins $25-Million in Fundraising Abuse Case

The New York attorney general’s office announced today that it had won a $25-million settlement in its investigation into fundraising abuses by a veterans charity and its direct-mail vendors, Quadriga Art and Convergence Direct Marketing.

It said it believes the settlement—which also requires Quadriga Art to adopt a series of changes to its business practices and the charity to replace its founding board members—represents the largest financial relief ever obtained in the United States for deceptive charitable fundraising. Almost $10-million of it will be directed to programs to help disabled veterans.

Attorney General Eric Schneiderman said the case "shines an unflattering light on some of the most troublesome features" of direct-mail fundraising practices.

"Taking advantage of a popular cause and what was an unsophisticated charity," he said in a statement, "these direct-mail companies used cleverly designed but misleading mailers to raise tens of millions in donations from generous Americans, nearly all of which went to the fundraisers and their agents and left the charity nearly $14-million in debt."

Conflicts of Interest

The charity, Disabled Veterans National Foundation, and Quadriga Art were the subject of CNN exposés over several years showing that very little of the money they raised actually paid for programs to help veterans. That prompted a 2012 Senate Finance Committee investigation that went quiet after some initial inquiries.

Quadriga Art, a direct-marketing company in New York, agreed to help the veterans charity set up in 2007 by fronting costs for printing, packaging, and mailing fundraising letters. The group, which depended on direct mail for almost all of its cash revenue, fell deeply into debt while trying to reimburse those costs to Quadriga and its affiliates.

The New York investigation also found that the parties were guilty of misleading solicitations and conflicts of interest. For example, the mailings highlighted a story about a wounded veteran that the Disabled Veterans National Foundation never helped and falsely claimed that the charity had a robust national network of veterans’ advocates and benefit coordinators, the statement said.

Larry Rivers, a Quadriga Art commissioned sales agent, also served as a consultant to the veterans charity, which then hired his daughter as chief administrative officer, the statement added.

‘A Position of Contrition’

Under the settlement, Quadriga Art, which neither admits nor denies the findings, will pay $9.7-million in damages, forgive $13.8-million owed by the veterans charity, and pay $800,000 to New York State for costs and fees. Convergence Direct Marketing, which advised the charity on its fundraising strategy, will pay $300,000 in damages.

Mark Schulhof, Quadriga Art’s chief executive, said in an interview that the company is taking a "position of contrition" and pledges to make changes. "We’re apologetic not only to the industry that’s been embarrassed, but to everybody who’s had to feel pain because of this."

He said Thomas Schulhof, his uncle and a member of Quadriga’s founding family, will step down from his position as board chair because he was the person who negotiated the contract with Disabled Veterans National Foundation.

He said Quadriga Art has successfully negotiated other arrangements where it covered up-front costs for charities, but that the veterans group did not have the infrastructure in place to handle a massive direct-mail operation.

The Deal’s Terms

The settlement calls for both Quadriga Art and Convergence Direct Marketing, of Bethesda, Md., to take actions: for example, to fully disclose all potential conflicts of interest, refrain from dealing with a start-up charity that does not have its own legal counsel, and perform "due diligence" to ensure fundraising appeals are accurate. The companies must also provide more information to charities about the costs involved in fundraising campaigns when they cover the up-front expenses of such efforts.

The Disabled Veterans National Foundation, meanwhile, must create a committee to reexamine its business model, refrain from using Quadriga or Convergence for three years, and discontinue misleading fundraising appeals.

It must also terminate its relationship with Charity Services International, a group that it paid to obtain donated goods for veterans that in some cases, the attorney general’s office said, did "not have any useful purpose."

CNN reported that the gifts included items like hand sanitizers and candy. Charities can count the value of donated goods as program costs on their tax forms, which they can then tout to show how much they are spending on their cause, even if none of it comes from cash donations.

The attorney general’s office said Convergence had received commissions from Charity Services International linked to the amount of goods the veterans charity obtained.

Joseph VanFonda, chief executive of the Disabled Veterans National Foundation since late 2013, said in a statement he welcomed the settlement, which will "enable us to improve the services we deliver and increase transparency with our loyal donors." He said the group had hired an experienced fundraiser for a new position of development director.

A Convergence representative could not immediately be reached for comment.

Send an e-mail to Suzanne Perry.