July 23, 2015

Why Taking Legal Action Against Charity Fraud Is So Hard

When all 50 states and the Federal Trade Commission joined together in May to sue Cancer Fund of America and three related charities for fraud after a four-year investigation, some commentators asked, "What took so long?"

As a former state attorney general, I thought, "What an accomplishment!" In my experience, state nonprofit regulation presents formidable structural, financial, and legal challenges that make this first broad-based enforcement action a significant milestone.

When I was appointed Tennessee attorney general in 2006, one of my biggest surprises was the scope and complexity of the office’s nonprofit work. I knew the office had a broad portfolio, but I did not expect to litigate over a multimillion-dollar university art collection, foundation mismanagement, or misuse of nonprofit corporations. I should not have been surprised, since the nonprofit sector is estimated to account for 5 percent of the nation’s gross domestic product and 10 percent of its private-sector work force.

State attorneys general frequently collaborate on enforcing consumer protection, false claims, and antitrust laws. For example, 49 states and the federal government negotiated a highly publicized $25-billion consumer-protection settlement in 2012 with the five largest U.S. banks over allegations of fraud in servicing home mortgages. But in the nonprofit area, while many states have strong individual traditions of enforcement, broad collective action has been absent, at least until now.

So why did the states need four years to pull together the case against Cancer Fund of America and three related entities, which the complaint alleges were engaged in "massive, nationwide fraud" in their fundraising for cancer victims? After all, the defendants raised over $187 million from 2008 to 2012, and less than 3 percent went to cancer patients, according to the complaint.

First, there are structural challenges to nonprofit enforcement. In many states, nonprofit regulation is spread among multiple offices. For example, Tennessee’s attorney general enforces the state’s nonprofit statute, while the secretary of state enforces the charitable-solicitation statute and handles nonprofit registration and reporting.

The cancer-charity fraud case reflects this complexity. The complaint identifies 50 state attorneys general, the attorney general of the District of Columbia, eight secretaries of state, the Rhode Island Department of Business Regulation, and the Utah Division of Consumer Protection as participants in the lawsuit. As the number of responsible parties multiplies, cases inevitably move more slowly, and matters are more likely to fall through the cracks.

Second, nonprofit cases have financial challenges that other civil enforcement does not. Consumer cases, for example, are frequently brought against well-capitalized for-profit entities and often result in recoveries that state enforcement agencies can use to fund future cases. In the 2012 mortgage-servicing settlement, my office received $1.8 million for its work.

In contrast, during my eight years as attorney general, none of our charitable-litigation recoveries went to fund the office’s enforcement efforts.

Nonprofit enforcement, particularly involving fraudulent solicitation, often involves entities whose assets have been dissipated before a suit is ever filed. And recoveries, whether large or small, are more likely to be directed to bona fide charities than applied to the costs of investigation and litigation. This result respects the defrauded donors’ charitable intent, which is good legal policy and the right thing to do, but it does not help pay for future enforcement.

The cancer-charities case appears to be following the same path. According to the pleadings, the government will collect only a fraction of the settlement judgments against individual defendants because of their inability to pay. What little is recovered from the settling entities will likely be distributed to legitimate charities.

The lack of a reliable funding stream for nonprofit enforcement work is a problem in an era of shrinking state budgets. Because nonprofit fraud does not generally attract the same public interest as criminal protection or consumer enforcement, there is less political pressure to invest scarce resources there.

Even without financial incentives, all 50 states recognized the need to stop the alleged fraud at the four related cancer charities, so donors would no longer be cheated and funds would not be diverted from legitimate charities. The settlement shut down two entities and placed permanent solicitation bans on three individuals. That leads to the third challenge facing the states: Fraudulent solicitation cases like these are difficult to prove.

The U.S. Supreme Court has set a high First Amendment bar for governments seeking to limit speech related to charitable solicitation. As a result, the line between constitutionally protected speech and fraudulent solicitation can be hard to define. Exorbitant fundraising costs and paltry charitable spending are not enough. The government must prove fraud to make a case, which takes considerable time and resources.

Even before the 50-state lawsuit was filed, several states had obtained judgments against Cancer Fund of America over the years. But when one state succeeded, the business simply moved its focus to another.

That is why collective enforcement action was necessary. And the key to such action is enhancing the states’ ability to coordinate and share nonprofit information more efficiently.

Some of that work is already under way:

  • The National Association of State Charity Officials and the Charities Project of the Columbia Law School National State Attorneys General program provide important venues where state nonprofit-enforcement officials compare notes and collaborate.
  • The National Association of Attorneys General, the membership organization of state attorneys general, works with Nasco and is financially supporting the Cancer Fund of America litigation.
  • The Columbia Charities Project and the Urban Institute’s Center on Nonprofits and Philanthropy are close to finishing the first national survey of state charities regulators, which will provide the most detailed information to date on the nature and mission of these offices and the challenges they confront.

The most important advancement in collective enforcement, however, may be Nasco’s Single Portal project. The portal will offer a nationwide, web-based registration and filing system for nonprofits and their professional fundraisers and provide a central repository of regulatory data for officials, academics, policy makers, and the public. The project is working on a funding plan to launch the website. When the website goes live, a nonprofit will no longer be able to move from state to state to escape its past.

Federal agencies obviously play critical roles in multistate nonprofit enforcement. The FTC provided key support in pursuing the Cancer Fund of America case. Nasco is talking with the IRS and Treasury Department about making nonprofit tax data more accessible to state officials.

But state regulators are on the front line in regulating nonprofits in our federal system. It is a challenging job that demands greater efficiency, enhanced transparency, and stronger enforcement — all of which require money. While some of those resources must come from the states, the nonprofit community also needs to play a greater part. Let’s honor the generosity of America’s donors by finding the means to investigate and file the next multistate lawsuit or, better yet, to stop the fraud before a lawsuit is needed.

Robert E. Cooper Jr. is a member of the law firm of Bass, Berry & Sims, in Nashville. He served as Tennessee attorney general from 2006 to 2014 and as legal counsel to the governor of Tennessee from 2003 to 2006.