News and analysis
August 16, 2012

Tough Questions Raised About a Fundraising Company’s Approach

A Senate investigation and a series of CNN exposés have put the spotlight on Quadriga Art, a 70-year-old direct-marketing company in New York that is under fire for its relationship with charities that spend most of the money they raise on direct mail.

Two of the charities highlighted by CNN—the Disabled Veterans National Foundation and SPCA International, an animal-welfare group—are millions of dollars in debt and use most of their direct-mail donations to pay bills to Quadriga and its subsidiary Brickmill Marketing Services.

The Senate Finance Committee opened an inquiry into DVNF in May. The committee chairman, Democrat Max Baucus, and Richard Burr, the senior Republican on the Veterans Committee, said they wanted to ensure that the charity was devoting enough money to its charitable purpose to warrant its tax exemption.

They asked DVNF a number of questions about its relationship with Quadriga.

The controversy has rattled some nonprofit experts, who worry that the negative publicity will add to public distrust of charity fundraising efforts.

A trade group, the Direct Marketing Association Nonprofit Federation, which includes Quadriga as a member, is looking into the issues that have been raised in the Senate inquiry, said Xenia “Senny” Boone, senior vice president for corporate and social responsibility.

She said volunteer committees would review the matter because the organization “asks its members to adhere to fundraising best practices since it is important to have the highest standards to build and retain donor trust in fundraising.”

Controversial Practices

Quadriga or Brickmill advanced money to help get the veterans charity and animal charity off the ground, negotiated long-term contracts with them, and started direct-mail operations that have so far left little money for programs beyond the educational messages included in the mailings.

The company says it uses such practices to help charities that don’t have a lot of money, especially start-ups, quickly find a pool of donors to support their programs—an effort that can cost more than a dollar to raise a dollar.

Over time, it argues, a large initial investment to recruit donors will pay off, calling it a “proven model” on its Web site.

“We don’t all have millionaire benefactors to start charities, and this is a way for people to do good,” said Robert Dragonette, a senior vice president at Brickmill, a company that Quadriga acquired from the Paralyzed Veterans of America in 2004.

But some fundraising experts question whether a business relationship that throws organizations into debt for years, leaving them little money for their missions, is such a good deal.

“They are creating a whole business model based on dependency,” said one direct-marketing executive, a 30-year veteran who reviewed the contract between Brickmill and DVNF. “The indebtedness of the organization grows and grows and grows, and there doesn’t seem to be a plan to get weaned off this flow of seemingly free money.”

The executive, who said he is familiar with Quadriga’s operations but does not compete with the company, also questioned the lack of competitive bidding and called the seven-year contract length “excessive.”

Small Sums for Services

The Disabled Veterans National Foundation submitted its contract with Brickmill to the Senate Finance Committee, which is investigating reports by CNN and CharityWatch, a charity-ratings service, that the veterans charity has spent only a tiny percentage of the tens of millions of dollars it has raised from the public on direct services to veterans.

According to its 2011 financial statement, it raised about $20-million from direct mail last year and spent less than 2 percent of that, or about $344,000, on grants benefiting people who served in the military—for example, for groups that help veterans and individuals who needed help with rent or mortgage payments.

Under the contract, signed in 2007, Brickmill, acting as “fundraising counsel,” agreed to advance the money that was needed to help start a direct-mail operation­ and to pay for the charity’s state-registration costs. DVNF agreed to pay the company back out of an escrow fund that would hold the fundraising proceeds.

It called for Brickmill to design and manage the campaigns and offer database-management services and for PEP Direct, another Quadriga subsidiary, to process the donations.

While not mentioned in that contract, Quadriga produces DVNF’s mailings, including the “premiums,” or gifts, that are inserted to entice donors to give—some of them relatively expensive items like large calculators and fleece blankets, according to an analysis by Richard Steinberg, a professor at Indiana University-Purdue University.

Concern From Auditors

That arrangement raised a red flag for the veterans group’s auditors, who noted in their review of the charity’s 2011 financial statement that DVNF was using Quadriga for virtually all of its direct-mail fundraising activities and owed $17-million to the company’s “related entities.”

They added that while there was no indication the credit arrangements would tighten up, “Any reduction in credit could have a material impact on the financial condition of the foundation and its ability to continue as a going concern.”

The charity is now using a non-Quadriga company, Convergence Direct Marketing, as its fundraising counsel, but that has not affected the financial arrangements with Brickmill, a Quadriga spokeswoman said.

Mr. Steinberg argued in his analysis that DVNF benefits from the contract since Brickmill carries all the risk, in effect offering a no-interest loan and requiring payments only if the campaigns make money. That shows, he said, that “they believed the long-term investment would pay off.”

Quadriga’s chief executive, Mark Schulhof, said in an e-mail that Quadriga and its subsidiaries have made only a “minimal profit” from the DVNF contract, partly because of the impact of the recession.

“In a non-recession environment, the program would have generated more positive net income sooner,” he said. However, noting that the charity had acquired 2 million donors, he added, “We remain confident that this program will continue to yield positive results.”

Ethical Issues

However, some nonprofit experts said the financial arrangements between DVNF and the Quadriga entities raise ethical questions since the companies in effect helped to create a charity that would then use their services.

“They basically started this nonprofit that would be beholden to them for seven years,” said Allison Porter, president of Avalon Consulting, which advises nonprofits on fundraising strategies, after reviewing DVNF’s contract with Brickmill as well as Mr. Steinberg’s expert opinion about the arrangement.

She said new charities require big investments, and they may have to wait five years before they see net income. But they would normally have seed money from a private donor, not a commercial firm, and they would use direct mail as just one arm of a diversified fundraising plan.

Ms. Rivers said her charity selected Quadriga because “we were aware of their work with other veteran organizations. Quadriga Art has a reputation for the lowest prices in the market,” she said. “They also offered DVNF extended terms” for payments.

Mr. Dragonette of Brickmill said only a small share of the company’s contracts are for seven years, and those are mainly with start-ups because it takes time for the initial investment to pay off.

The Disabled Veterans National Foundation was started by six women who served in the military and, at least according to its tax returns, none are significantly benefiting from the charity’s revenues.

The group’s 2011 Form 990 lists five board members who received $1,594 to $2,832, along with Ms. Rivers’s salary of $78,187.

Ms. Rivers said DVNF hopes to “reach the point of self-sufficiency in the next five years.”

10-Year Contract

SPCA International also received money from Quadriga to start operations and has a 10-year contract with the company that runs through 2016. It reported on its 2010 Form 990 tax return that it had expenses of almost $16-million and liabilities of $8.7-million—the amount it owed Quadriga and Brickmill, according to a charity spokeswoman.

A big percentage of the money that both DVNF and SPCA International report spending on programs on their tax forms pays for direct-mail pieces that issue a call to action or contain educational messages.

Another big percentage is in the form of donated goods that they receive from a broker and distribute—for example, hygiene products, blankets, hand sanitizers, candy, and cough drops in the case of the veterans charity and animal medicines for developing countries in the case of the animal charity.

Such reporting is acceptable under accounting rules but helps earn them an F grade with CharityWatch, which argues those are not the kinds of “programs” that many donors think they are supporting when they respond to a direct-mail appeal and that donated goods can be overvalued. (Another prominent charity-ratings group, Charity Navigator, has posted “donor advisories” for the two charities, highlighting the questions raised by CNN and the Senate.)

The Senate committee has asked DVNF to answer two rounds of written questions. A committee staff member confirmed a CNN report that the panel was expanding its inquiry to include Quadriga but declined to give details.

The Quadriga spokeswoman said in an e-mail that the company had met with committee staff members in June “to clarify our role in helping charities to succeed,” adding: “We answered many questions at that time and expected follow-up questions and have made clear that we are happy to answer any additional questions they may have.”

Expense-Paid Trips

Quadriga produces about 15 percent of its premiums in China, operating an office in Hong Kong and three factories in Shenzhen—and it sometimes takes charity clients overseas to have a look. Ms. Rivers said she visited a Quadriga printing plant while traveling in Asia. She said she paid her own travel expenses but Quadriga paid for three nights’ lodging in Hong Kong.

In other cases, the company said it covers all expenses.

“There are times when Quadriga Art brings clients-at their request-to China to tour the production facility and see where their premiums are developed. We similarly take clients (several times a month) to our domestic facilities,” the Quadriga spokeswoman said.

Quadriga produces 85 percent of its premiums at facilities in New Hampshire, Iowa, and Virginia—items like greeting cards, address labels, notepads, and calendars, the spokeswoman said. The Chinese plants produce stationery and printed products and finalize assembly of some products that the company buys from other vendors such as T-shirts, coffee mugs, and umbrellas.

But some nonprofit experts question whether such costly overseas trips are appropriate.

“If you’re a nonprofit and you’re accepting from a vendor with whom you’re doing business a gift of some sort—travel that might cost thousands of dollars—wouldn’t it be logical to ask, Couldn’t my nonprofit be paying thousands of dollars less for this work?” said Robert Tigner, general counsel for the Association of Direct Response Fundraising Counsel.

The Quadriga spokeswoman rejected that criticism. “The expense of taking a small amount of clients to tour our facilities in China, where 15 percent of our products are produced, is done at Quadriga Art’s cost. It is not passed on to our clients,” she said. “I can assure you, the 20-plus-hour flight for a short trip with long days and a 12-hour time change is hardly lavish.”

Send an e-mail to Suzanne Perry.