In The People of the State of New York v. McEnerney, Brady and Company, LLC and Edmond Brady, Index No. 450796/2018, filed May 7, 2018, the AG alleged the defendants were instrumental “in perpetuating the existence of a sham charity,” the Breast Cancer Survivor Foundation, a not-for-profit corporation established in 2010, by:

• falsifying the charity’s financial statements in an effort to inflate the value of its charitable services;
• failing to report significant internal control failures; and
• issuing audit reports that falsely gave the charity an “unqualified audit opinion,” the clean bill of health necessary to solicit charitable contributions in New York.

Central to the complaint, which alleged fraud and false filings under New York law, is the allegation that the defendants had full knowledge that the charity was run by, and for the benefit of an external fundraiser, who was known to the defendants as not only a client of the accounting firm, but a source of referrals. According to the complaint, the accounting firm had provided accounting services to at least nine companies controlled by the external fundraiser, most either in, or associated with, the fundraising business. Indeed, it was the external fundraiser who selected the accounting firm to prepare the IRS forms and perform audits for the charity.  The AG alleged that the accountants were presented with “blatant red flags” such as:

• the Board of Directors of the charity never met (it was also noted in the complaint – and in the preliminary investigation report – that the only permanent Board members were the founder and his wife);
• the charity had no physical office or medical facility, yet reported donating substantial medical services; and
• all communication with the audit team was by and through the external fundraiser, not a director or officer, and there was no documentation authorizing his management.

Yet, as the AG asserted, even when faced with such indicators of potential fraud and failures of internal control, the auditors failed to either make a report to the charity’s Board of Directors or to “conduct the appropriate procedures and obtain audit documentation . . . relating to these indicators.”  Instead, the complaint avers that the principal accountant signed off on IRS forms that he knew contained false statements and authorized inaccurate audit reports, knowing the reports would be incorporated into state filings.  Concluding that such inaccurate reporting “deprives New Yorkers of access to reliable information,” the AG reasons that the defendant accounting firm “played an integral role in helping [the charity] to defraud New York donors.”  The complaint seeks restitution and damages, as well as civil penalties for the defendants in connection with the amount sourced from New York donors. A total of $18 million was solicited from 2010 to 2016; only $1 million was contributed from New York donors. We will be on the watch to see whether other states will also seek restitution in this manner.

See Something Say Something

This complaint delivers high praise and healthy affirmation for the members of accounting and auditing teams who speak up. According to the complaint, junior members of the audit team alerted senior auditors, in writing, about a number of concerns, warning that the external fundraiser “appears to be running the Organization . . .” According to the complaint, those junior members were removed from the audit team by the defendants who “willfully ignored  . . . professional standards” despite warnings from those who exercised professional judgment and skepticism.

Fiduciary Duty is not Delegable

This complaint is yet another reminder that officers, directors and trustees must exercise due diligence at all times and refrain from relinquishing oversight responsibility related to essential fiduciary functions.  That would include taking responsibility for not only selecting an accounting firm, but overseeing and understanding the compliance implications of its work product.

On February 21, 2013, the New Jersey Attorney General filed a civil suit against the Hurricane Sandy Relief Foundation after the organization solicited more than $631,000 in charitable donations from the public. The foundation was not a tax-exempt organization recognized by the IRS, nor was it registered to solicit charitable funds within the state of New Jersey. According to the complaint, approximately $13,000 of the money solicited and received by the foundation was transferred into private bank accounts and only 1% of all donations received were actually distributed to victims. Eight months after Hurricane Sandy hit New Jersey, the founders of the fraudulent organization agreed to settle with the state of New Jersey by dissolving the foundation and turning over $334,000 in donations to a court-appointed administrator. If the case had gone to court, the founders would have faced over $20,000 in civil fines. Although this case was settled, New Jersey authorities are still prosecuting over 200 fraud cases related to Hurricane Sandy. In connection with earlier disaster-related fraud during times of tragedy caused by Hurricanes Katrina, Rita, and Wilma, and the Gulf Coast Oil spill, the U.S. Department of Justice charged more than 1,300 defendants in 47 judicial districts as of 2011.

To avoid donating to one of these fraudulent charities, see below for some tips that can help you detect and report charity fraud.

If you are a donor:

• Do your research before you donate. If you are being asked for a donation by phone, be careful about giving money with a debit or credit card by phone when you receive the call. Ask the charity to send you information by mail and ask for the name of the charitable organization and its tax identification number (E.I.N.). It’s also good to ask the person calling to identify his or her role with the organization and to obtain the telephone number of the person calling. You can always call the charity back directly to make a donation, or mail your donation.

• Using a credit card (as opposed to cash or a check) to make donations can offer greater protection.  There’s a better chance of being able to cancel or dispute any charges if you were to find out later that the organization is fraudulent.

• Pay attention to the names and websites of the charities soliciting donations. If you have questions about whether the charity is legitimate, the IRS has an online research tool called “Select Check” that you can use to determine if the organization is recognized by the IRS as a tax-exempt entity.

• Also, most states have a charities department that you can contact if you have concerns or questions about a particular charity. These resources are helpful if you believe you may have been a victim of a charity scam or if you want to find out whether an organization is registered to solicit donations in your state.

o For Pennsylvania, call the Charities Bureau at (717) 783-1720.
o For New Jersey, call the Department of Consumer Affairs, Charities Division at (973) 504-6215.
o For New York, call the New York State Attorney General’s Charities Bureau at (212) 416-8401.

• If you have been the victim of a charity scam, you should also call the Department of Justice’s National Center for Disaster Fraud at (866) 720-5721. In addition, you can file a complaint against a tax-exempt organization with the IRS by completing IRS Form 13909, Tax Exempt Organization Complaint (Referrall).

If you are a charity:

• Make sure that your organization is listed under the correct name on Select Check and on other charity search engines such as Guidestar. This is particularly important if your organization has undergone a name change.

• Conduct routine internet searches for organizations with similar names to help detect impersonators and to distinguish your activities from other charities.

• Make sure that your organization is properly registered on state and federal databases before soliciting charitable contributions.

• If your organization is a 501(c)(3) organization, make sure to state your status on your website and on any solicitation materials. Many states, such as Pennsylvania , New Jersey, and New York, also require charitable organizations to include disclosure language on all solicitations.

• If you are providing something of value to donors in exchange for their donations, review the applicable laws to ensure that your organization is in compliance with any substantiation and disclosure requirements for charitable contributions. See IRS Publication 1771, and the links above.

• If your organization’s application for tax-exempt status is pending, do not tell donors that their donations are tax-deductible. Even though your organization may be exempt in the near future, your organization is not presumed exempt during the application process. See the IRS website for additional information on required disclosure language before soliciting charitable contributions.

Parting Words:

In the weeks before Super Storm Sandy ever made landfall, more than 1,000 Sandy-related internet domains had been registered. How can a donor gauge which websites are related to legitimate charities and which ones are out to take advantage of the public’s generosity? The recent natural disasters and the events in Texas, Florida, Puerto Rico, Mexico, and the Caribbean continue to remind us of the overwhelming generosity of our society. Don’t let charity fraud stop you from donating to important causes. It is important, however, to stay vigilant against potential fraud and to conduct your own research before giving.