In one of the largest actions brought to date against charity fraud, on May 19,

Question

In one of the largest actions brought to date against charity fraud, on May 19, 2015, the Federal Trade Commission (FTC) and 50 states’ attorneys general filed a civil complaint against a group of four cancer charities alleging that they bilked donors of $187 million. According to the Washington Post, the government alleged that the scheme was run by a single family through charities known as the Cancer Fund of America, the Children’s Cancer Fund of America, Cancer Support Services, and the Breast Cancer Research Society. At the center of the fraud operation was James T. Reynolds Sr. who opened the Cancer Fund of America in 1987.

Over the decades, according to the complaint filed by the FTC and the state regulators, Reynolds expanded the enterprise to four separate groups and was joined by his son, friends, and members of his Mormon Church congregation in Knoxville, Tenn. Prior to starting these nonprofits, he had been fired by the American Cancer Society due to sloppy bookkeeping, irregular hours, and taking the title to a car meant to be auctioned for the charity.

Although the charities said they spent 100 percent of their donations on services such as hospice care, chemotherapy and pain medication for children, the charities spent less than 3 percent of donations on cancer patients. During 2007-2015, the Cancer Fund and its affiliate raised $187 million, of which $75 million went to telemarketers and direct mail consultants. The enterprise paid out salaries of $8 million in 2011 alone – thirteen times more than patients received in support from the organization during that same period, according to the Tampa Bay Times, of which $1 million went to Reynolds family members.

According to the suit, the four groups spent the vast majority of the donations, not on providing services to cancer patients, but rather to pay for fundraising to increase donations, extremely large salaries and bonuses, luxury cruises, all-expense paid trips to Walt Disney World and other trips, college tuition, cars for personal use, gym and dating site memberships– all for family members and friends.

The charities’ marketing was designed to be emotional. According to the Washington Post, one letter told potential donors that "one in eight women will be diagnosed with breast cancer in America” and had pictures of a women who were bald, presumably from chemotherapy. The charities promised to give the money to patients to pay for pain medications and hospice services.

“Some charities use donations to send children with cancer to Disney World,” said Mark Hammond, secretary of state for South Carolina, whose office joined the investigation of the groups in 2012. “In this case, the Children’s Cancer Fund of America used donations to send themselves to Disney World.”

According to Jessica Rich, Director of the FTC’s Bureau of Consumer Projection, the charities, “siphoned hundreds of millions of dollars away from well-meaning charities and people with cancer who needed the services the defendants falsely promised.”

The complaint stated that they hired professional fundraisers who often pocketed 85% or more of every donation. The charities spent more than $120 million on such firms from 2008-2012. The lawsuit also accused the charities of falsifying financial documents, reporting inflated revenues and overvaluing gift donation, and not delivering much of donated goods to cancer patients. Instead, patients were sent boxes of “seemingly random items” such as Little Debby snack cakes, Carnation Instant Breakfast drink, adult briefs, sample-sized soap, and blank greeting cards. Much of these were purchased from procurement agents who sell discontinued products to nonprofits at a fraction of their retail value.

Last March, a settlement was reached, although there was little left of the millions raised from the public. As part of the settlement, the charities agreed to be permanently dissolved and liquidate their assets. James Reynolds Sr. was to surrender an unspecified amount of his personal assets and he and other family members were banned for life for managing charitable assets or being a board member of a charity. The agreements imposed tens of millions of dollars in penalties on the charities and the individuals, but little money was recovered because most of it was already spent, according to the FTC.

            Answer the following questions in reference to the Cancer Fund of America case:

A. What were the underlying governance issues that created the conditions for this fraud?

B. Who was responsible for the fraud that happened and why?

C. What do you think it was about their governance model that kept these issues isolated from their stakeholders and communities they serve?

D. How were they able to continue the fraud for so many years behind closed doors? Why do you think it took the regulatory authorities so long to act? Should the external regulatory authorities have intervened in a different way? If so, when and how?

E. What are lessons learned about governance that can keep this type of scam from happening to other nonprofits?

Explanation / Answer

A. The government claimed that the scheme was run by a single family through charities known as the Cancer Fund of America, the Children’s Cancer Fund of America, Cancer Support Services, and the Breast Cancer Research Society. Prior to starting these nonprofits, Reynolds had been fired by the American Cancer Society due to sloppy bookkeeping, irregular hours, and taking the title to a car meant to be auctioned for the charity (illegal acquisition). Different advertising strategies were used in order to create an emotional appeal for fundraising.

B. James Reynolds Sr. was responsible and was further asked to declare personal assets due to the scam.

C. The governance model included lack of transparency regarding funds which is why millions of dollars were put at stake. Manipulation of funds at different levels & by varied stakeholders was done.

D. Since deeper levels of research and finding the parties involved in the scam as well their motive/intent were to be explored before a conclusion could be made. Different organizations and agencies were involved which is why it took so long to find the true culprits. The external regulatory authorities could have made teams to supervise each agency involved in the functioning so as to keep a close tap on the usage of funds. More accountability at individual as well organizational level was needed to prevent the situation.

E. Keeping close association with such organizations to ensure that the funds generated by them are utilized for the purpose they claim to. More transparency of funds and greater responsibility at governance level could have prevented the situation. Meetings held at ministry level to resolve the issue could alter the same.

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