New York’s Review of Nonprofit Groups: a Sampling of Cases

The New York attorney general’s office advocates a variety of new rules that would affect charities, from

one requiring groups in New York to seek bids when hiring professional fund raisers to a federal law permitting the Internal Revenue Service to share investigatory information with state regulators.

Also on the attorney general’s agenda is an effort to curb financial abuses by small private foundations and other nonprofit groups — especially abuses that stem from failures by boards of directors.

In recent months, four auditors from the attorney general’s office randomly checked a portion of the financial records filed with the state by some 46,000 nonprofit groups operating in New York State. The auditors turned up dozens of cases that raised questions for the regulators. The attorney general is investigating more than 30 of them.

One such case involves the Grand Marnier Foundation, established in New York in 1985 by the president of a company, Carillon Importers, that was the exclusive importer of Grand Marnier liquor to the United States.

The attorney general alleges that the foundation’s board, which consisted of the founder of the import company, an employee of the importer, a lawyer, and three executives of the French company that produces Grand Marnier liquor, received compensation totaling $3.4-million over a 10-year period ending in 1999. The payments included more than $746,000 in distributions from a pension plan, the attorney general says.

During the same 10-year period, the foundation’s assets fell from about $11.3-million to $6.7-million, and stood at $6.4-million in 2000, according to the attorney general.

William Josephson, assistant attorney general-in-charge in the New York State Charities Bureau, said that the foundation has tried to slow the state’s investigation, in part by claiming that some of the payments are too old to fall within the state statute of limitations.

“Unfortunately, the statute of limitations enables us only to go back six years, so they are going to keep $2-million of that no matter what,” Mr. Josephson said. Grand Marnier continues to try to thwart the attorney general’s case, he added, by seeking to exclude all but three years of payments from the investigation.

“They are doing everything they can to try to protect what, from our point of view, are ill-gotten gains,” Mr. Josephson said.

Officials of the Grand Marnier Foundation did not respond to voice-mail requests for interviews on the attorney general’s charges.

Financial Records

Many of the other cases turned up by the New York auditors are still in the early stages of investigation, and the attorney general’s office is not naming the groups in question. It did, however, provide The Chronicle with key details culled from financial records that the groups filed with the state.

Some examples:

• A private foundation whose 2001 annual report listed legal fees of more than $450,000, paid to a law firm in which the foundation’s president was formerly a partner. Included in the lawyers’ invoices are bills for nonlegal services, including a visit to the Vatican. In 2001 the foundation also paid $53,000 in premiums for life-insurance policies of the board’s president. The foundation reported net assets of about $85.6-million as of April 30, 2001.
• A private foundation that lost almost $1-million on securities sales of $2.4-million during the fiscal year ending October 31, 1998. The group’s net assets fell 59 percent from November 1, 1995, to October 31, 1999, from $850,000 to $350,000. During the same period, the foundation distributed $53,000 to charities, paid officers’ compensation of $53,000 in the form of investment fees, and incurred interest charges of $56,000. The attorney general said it requested information concerning the extent to which the foundation’s losses were attributable to margin calls, which occur when a customer of a stockbroker is asked to put up more cash to cover market losses and satisfy outstanding loans from the broker. The attorney general said it was told the foundation could not get the requested information.
• A private foundation whose board — a husband and wife — made unsecured loans totaling almost half of the foundation’s assets at below-market rates of interest to family members and entities controlled by family members. The board also engaged and paid entities owned and managed by family members ostensibly to perform services for the foundation.
• A charity whose trustees failed to perform their oversight role and engaged in conflicts of interest. “None has any knowledge of fiduciary duties, some attend meetings only rarely, and some have profited personally from transactions with the charity,” the attorney general said in a written summary of the case. The charity has engaged in numerous transactions with companies controlled by the chief executive, most of which have not been adequately disclosed to the board, and the charity’s financial resources have been used to support political campaigns, the attorney general said.
• A private foundation whose 2001 annual report showed a loan of $50,000 — half of the foundation’s assets. “The note was executed by the vice president of the foundation, doing business as his for-profit company,” according to the attorney general’s summary of the case. Dated 1993, the note provided for interest-only payments to the foundation at a rate of 6 percent, with payment of the principal upon demand. The foundation told the attorney general that it has regularly been paid monthly interest. “Those parts of the note which refer to the collateral provided and the remedies available for nonpayment of the note have an ‘N/A’ entered in the spaces provided,” the attorney general said.