Fraud Case Ending in Settlement Gives Pennsylvania a Partial Victory

When things get slow at work, Edward H. Shevenock Jr., Pennsylvania’s top charity investigator, goes to

the file room and reads the financial records of some of the 10,000 nonprofit groups that raise money in the state, looking for possible problems. That’s what he was doing nine years ago when he came across a name that seemed familiar, and he realized he had just seen it on another charity’s form.

Mr. Shevenock’s discovery, which inspired him to trace link after link between those groups and other charities, eventually led to the biggest investigation in the history of the Pennsylvania Bureau of Charitable Organizations.

By the time it was over, Mr. Shevenock and other investigators had been to nine states, collected enough financial records to fill a room, begun using a computer program the FBI and other federal agencies use to trace financial fraud, and created a database of news reports on charity fraud that the bureau now shares with investigators in other states.

Along the way, the bureau also learned to pay better attention to transactions between related charities. Some groups use these to conceal financial problems or overpayments to top officials by making payments or transferring money through different nonprofit organizations.

The bureau’s investigation resulted in 235 pages of charges against a network of nonprofit organizations that the bureau said boosted the income of key officers by making unreported payments to them from other groups and businesses, bringing in $1.7-million over four years for Howard Ray Wilkinson, the Michigan man at the center of the groups.

As a result of an out-of-court settlement last month, Mr. Wilkinson and the four main charities involved in the case paid a total of $150,000 and agreed never to solicit in Pennsylvania again. They denied any wrongdoing, however, under the terms of the settlement.

Bureau officials say they are pleased with the settlement because it protects Pennsylvania’s citizens from being asked for money by the groups that they say haven’t clearly disclosed how they spend donations. “We think it’s a good result,” says Tracy L. McCurdy, the head of the charity bureau.

But charity watchdogs say the state’s settlement highlights a bigger national issue: Because states have different charitable-solicitation laws and some states conduct little oversight of charities, nonprofit groups that have been barred from some states continue operating in others. Cooperation between states is limited by conflicting laws and lack of money, and the federal government’s oversight of charities is mostly restricted to tax issues rather than charitable solicitations.

The settlement “is great for Pennsylvania, but what about the 49 other states?” says Daniel Borochoff, president of the American Institute of Philanthropy, in Chicago. “It shows how we need more regulation on a national scale. When you have these relationships among different groups, the money gets lost.”

Making Connections

Back in 1998, when Mr. Shevenock noticed that two organizations in Michigan shared some of the same officers, he wasn’t too concerned. It was odd, though, that the two groups, which also had similar names, were in different cities. Mr. Shevenock remembered them even as other cases caught his attention.

In the following months, as he came across more connections between those charities and others, Mr. Shevenock began tracking the relationships among the groups on a sheet of legal paper, then on a big wall chart. He eventually began using a law-enforcement software program that can keep tabs on the relationships among thousands of pieces of data.

“You kept seeing a core group of individuals, living in Michigan, involved with a law firm in Washington, D.C., or Texas, as well as a charitable organization in Texas and a charitable organization in D.C.,” he says.

Not until investigators had puzzled over the intertwined organizations for a while did they find old newspaper articles about the groups, including an eight-year-old series by the Detroit Free Press that raised many of the issues they were investigating, although there was no record that any legal charges had been pursued as a result. That motivated Mr. Shevenock to begin compiling a list of news reports about charity fraud, information he sends to 38 other states to help in their investigations.

Also missing was a central repository of state charity-fraud cases. Mr. Shevenock found that some states had reached settlements with one or more of the Wilkinson charities, but he wasn’t sure he had found them all. None of the states appeared to have uncovered the entire network. The National Association of State Charity Officials, which represents charity regulators, is looking at whether to incorporate such a database of cases as it revamps its Web site.

‘Stay Focused’

Pennsylvania’s charity bureau fit its work on the investigation around hundreds of other complaints. Its biggest challenge was the size and complexity of the network; by 2003, the investigation was an unwieldy tangle of facts and possible legal charges.

Ms. McCurdy, who joined the bureau as its lawyer at that point, decided what charges to include in the lawsuit.

Her first job was to decide what potential charges to drop. The convoluted relationships suggested all kinds of possible wrongdoing, but the bureau, which is primarily charged with enforcing the accuracy of documents submitted to it and of solicitations to donors, was limited in what it could do.

“As with any investigation, it’s easy to go off on a lot of different paths, and you have to stay focused on what you want to pursue,” she says. “You can’t bring every possible charge that you think you should bring.”

Even pared down, the bureau’s lawsuit still contained more than 1,280 charges against four charities and several officials that it said had failed to report required information on their financial statements, their federal informational tax returns, or the state’s registration documents.

The bureau said Mr. Wilkinson and people related to him didn’t report that they had received income from the National Child Safety Council, in Jackson, Mich.; the American Children’s Safety Source, in Dallas; the National Fire Safety Council, in Michigan Center, Mich.; and the United Children’s Fund, in Washington. Ten smaller nonprofit groups were also involved, the bureau said, as well as businesses owned by the nonprofit officials that sold goods or services to the charities.

Among other things, the lawsuit said that Mr. Wilkinson was paid a total of $1.7-million from 1998 to 2001 through his charities and a for-profit bingo rental hall he and another man owned that served those organizations; that the bingo hall charged the charities about 1,000 times the market value to lease space and buy supplies in a Kentucky bingo hall; and that the charities underreported income from the bingo hall.

Mr. Wilkinson’s late wife, Glennis; two sons, L.J. and K.C.; a daughter-in-law, Casey; two sons-in-law, Howard Double and Jerry Taylor; and a brother-in-law, the Rev. Carl J. Benes, were among those named in the lawsuit as failing to report their ties to one another “by blood or marriage” as required by law.

In the settlement, the four charities acknowledged that they had failed to report relationships between those people and others, that they had sometimes failed to identify Mr. Wilkinson as an employee, and that they had failed to report payments to some charity officers. But they said they had not broken any laws.

Alan P. Dye, a Washington lawyer who represents charities, and whose law firm served as the mailing address for United Children’s Fund and seven other groups connected to the case, said the lawsuit was “a great overreaching.” Mr. Dye, who was president of United Children’s Fund for two years, was one of 16 individuals named in the lawsuit.

Even if the charities’ filings were inaccurate, they were only “technical inaccuracies,” Mr. Dye says.

“We settled because it had cost a tremendous amount of money in legal fees, it was going to cost a tremendous amount more, and it was felt it was best to settle,” he says. He estimated the amount at “hundreds of thousands” of dollars. “We were pretty confident that most, if not all, of these allegations would have been found to be erroneous.”

Ms. McCurdy says the inaccuracies were significant.

“How charities are spending their money and where the money’s going is one of the most important criteria in donor decision-making,” she says. If, as the bureau alleged in its lawsuit, a single person is running multiple operations, and that fact is not reported, “that’s more than a technical violation.”

‘Balancing Act’

Whether other states or the federal government will pursue charges against Mr. Wilkinson and his charities is an open question. Because neither Mr. Wilkinson nor the groups admitted wrongdoing, other states will not be able to use Pennsylvania’s settlement as a basis to pursue their own charges. “It’s a balancing act when you’re trying to settle a case,” Ms. McCurdy says. “The agreement accomplished our goal of protecting the citizens of Pennsylvania.”

The money was also important because it enabled the bureau to offset some of its costs and because the amount — the largest payment ever made to the charity bureau — sent a message about the importance of the case, she says. While she doesn’t know exactly how much money or time the case consumed, it required more resources than the bureau’s other cases.

William Josephson, the former head of New York’s office that regulates charities, says it is difficult for a single state to do much more than recover its costs and protect its citizens. He remembers cases in which making a group promise never to solicit New Yorkers again “was about all we could do.”

New York permanently barred United Children’s Fund, one of the charities named in Pennsylvania’s case, from raising money in its state in 2001.

Mr. Josephson says it will be difficult to shut down many fraudulent organizations nationwide until more states step up their regulatory efforts and are able to coordinate them with the federal government — including not just the Internal Revenue Service but also the Federal Trade Commission and the U.S. Postal Service.

The problem is that many regulators can’t step up their efforts to catch fraudulent charities without more money and manpower, says Karl Emerson, a Philadelphia lawyer who headed the bureau when Mr. Shevenock began his investigation.

“You can’t imagine how many hundreds of hours of work have gone into the Michigan case. It took a lot of time, and most state registration bureaus don’t have the resources to tackle it,” Mr. Emerson says. “All the people I know who work in state charity offices are very dedicated and want to do the right thing, but there’s just a huge lack of resources.”