Nonprofit-Abuse Sleuths

Pennsylvania bureau takes lead in rooting out charity schemes

By Elizabeth Schwinn

Tucked away in an office building next to the state capitol, the Pennsylvania Bureau of Charitable

Organizations doesn’t attract much notice.

Yet the bureau has emerged as a leader in curbing legal abuses by charities. In the past decade, Pennsylvania has prohibited more than 200 nonprofit organizations from doing business in the state because they failed to comply with its laws. And it has successfully helped prosecute more than 100 charities and their officials — including a dozen national groups based in other states — resulting in millions of dollars recovered for legitimate charities and jail time for some charity leaders.

Just last month, the bureau settled its most complex case to date involving a ring of child-safety nonprofit organizations that it said had failed to report payments to top officials at other organizations, as well as relationships those officials had with groups and people with whom the charities did business. Twenty people and nonprofit organizations in Michigan and other states were charged with more than 1,000 violations of state laws.

The four largest charities and the founder of three of the groups have agreed never to seek donations in Pennsylvania again and to pay the bureau $150,000. Under terms of the settlement, the charities and officials deny that they broke any laws. While regulators in other states have previously raised questions about some of the groups in the case, Pennsylvania is the first to link the organizations together.

‘New Era Philanthropy’ Scam

The case shows how far the bureau has come in the 15 years since it was caught napping while one of the biggest nonprofit scandals in history unfolded on its home turf. After taking in more than $350-million from nonprofit groups and private donors around the country, the Foundation for New Era Philanthropy, in Philadelphia, was finally exposed as a pyramid scheme and collapsed in 1995.

At that time, Pennsylvania’s charity bureau had just five employees and a budget of $613,000. Its job was primarily to process charity registrations.

In New Era’s aftermath, Tom Ridge, who was the governor of the state, appointed Karl Emerson, a state deputy inspector general, to lead the charity bureau. Since then, the bureau’s budget has grown to $1.3-million, and its staff now comprises 17 employees, including 10 who focus solely on investigating and auditing nonprofit groups. They keep tabs on 10,000 charities registered in the state. That’s a higher regulator-to-charity ratio than in New York, which is also considered one of the nation’s toughest charity regulators and has 20 people enforcing the state’s charity laws for nearly 60,000 registered charities.

The resources Pennsylvania has put into charity enforcement are a key reason it is one of the top state enforcement agencies, according to Marc Owens, a Washington lawyer who in the 1990s was head of the IRS division that oversees tax-exempt groups.

“They’ve got a long reach,” Mr. Owens says. “They’re very effective.”

New Chief

Tracy L. McCurdy, who last month replaced Mr. Emerson as head of the bureau, took charge of the child-safety case when she joined the bureau as a state prosecutor in 2003. She says she knew little about charities then, but like most of the bureau’s current employees, she has learned on the job.

Ms. McCurdy is part of a team of lawyers, auditors, and investigators recruited by Mr. Emerson, who retired from the bureau after 12 years to become a lawyer in private practice.

The first recruit: Edward H. Shevenock Jr., a former colleague from the state inspector general’s office. Mr. Shevenock now oversees the bureau’s special-investigations unit.

Together, Mr. Emerson and Mr. Shevenock came up with a plan to identify groups that were raising money in the state but not filing the necessary registration. They visited centers for the elderly, who are frequent targets of charity scams, and attended local neighborhood meetings to publicize the bureau’s work and phone number, urging residents to alert them of nonprofit groups they had any questions about. They even made a public-service announcement for television.

Soon the office was flooded with calls from people who wanted to know if the charity that had just asked them for money was legitimate, and Mr. Emerson and Mr. Shevenock discovered that thousands of charities had flouted state law by ignoring the requirement that groups must be registered there before they may ask Pennsylvania residents for donations. At the time, only about 3,700 groups were registered with the state.

The calls sometimes led Mr. Shevenock and other employees to drive out to homes to pick up shopping bags full of solicitations. One woman had saved more than 3,600 letters that she had received in a year’s time from different charities, Mr. Emerson says.

Their work resulted in the addition of thousands of charities to the state’s rolls.

To help analyze the forms filed by those groups, Mr. Emerson brought in Dena B. Markowitz, a certified public accountant.

Ms. Markowitz, now the bureau’s audit-division chief, says she initially feared the job might be boring. “I thought it was just going to be a bunch of people who didn’t know how to fill out a form,” she says.

Her impression soon changed. The first charity she looked into was the Big 33 Scholarship Foundation, which sponsors an annual game between the best high-school football players in Ohio and Pennsylvania. Because a local newspaper had a year earlier lambasted Big 33’s executive director, Howard W. Minnich Jr., over what it believed was high compensation, she checked his current salary on the group’s Form 990, the informational tax return charities file with the Internal Revenue Service and many states.

The line was blank.

Ms. Markowitz dug deeper and found that while the rest of the form had been filled out, important information was nonetheless missing. By looking at the group’s state registration form and Mr. Minnich’s business filings, she was able to figure out that Big 33 had failed to report on its 990 that its accountant was the group’s treasurer, that it paid salaries to Mr. Minnich’s wife, son, and aunt, and that it rented space from Mr. Minnich’s company — all disclosures required by law.

“This was more than people who couldn’t fill out a form,” she says.

Big 33 ended up signing an agreement with the state admitting to its errors and paying a $12,000 fine, as well as $6,000 to cover the investigation’s costs. The organization also revised some of its policies as a result of the agreement.

‘Sixth Sense’

The Big 33 case showed Ms. Markowitz that she has a gut instinct for finding serious misreporting, an important skill since the bureau says it will never be able to examine all of the charities registered with the state.

Mr. Emerson says that Mr. Shevenock has that instinct, too.

“Ed’s got a sixth sense about these things,” says Mr. Emerson. “If he says something smells funny, there is something wrong.”

Sometimes the tip-off comes from numbers that just don’t quite make sense. For example, Mr. Shevenock recalls noticing something odd in the 1998 and 1999 financial reports for the Children’s Wish Foundation, an Atlanta charity that distributes toys, airline tickets, and other gifts to terminally ill children and their families. The organization’s fund-raising costs went way up and the amount of money brought in went down, but it reported spending the same amount on its charitable programs during both years. According to its financial reports, it donated far more goods to other charities than it had just a year earlier, allowing it to include the value of those goods in its estimate of how much it spent on charitable programs.

“When something changes drastically like that, it sends up a red flag,” Mr. Shevenock says. He sent an investigator to check out a donation of items the charity sent to a Ronald McDonald House in Hershey, 15 minutes away from the bureau’s office. The charity had said the donations were worth $30,215.

“The way the donations were valued, you’d expect to have seen boxes and boxes of stuff,” Mr. Shevenock says. “I thought they might have gotten a closet full of stuff they couldn’t use. But when our investigator got there, they basically said they got some boxes that they valued at $4,000.”

The bureau charged Children’s Wish with grossly overstating the value of some of the gifts it channeled to other groups. It also alleged that the charity’s money went to support lavish personal spending by its leaders.

Children’s Wish denied any wrongdoing, and the group took its case to a hearing examiner, a state administrative official whose role is to weigh the evidence on both sides before making a final recommendation for action to the governor. The examiner imposed a $41,000 fine on Children’s Wish — a thousand dollars for each charity that said it hadn’t gotten as much as Children’s Wish said it had provided. But, the examiner said, the state failed to prove that the charity’s travel expenses and gift purchases were an improper use of the charity’s money.

Errol Copilevitz, a Kansas City lawyer who represented Children’s Wish, says the charity’s accountant misled it over the value of the donations. The charity is now suing the accountant it worked with at the time. The accountant has denied wrongdoing.

Mr. Copilevitz criticizes the state lawyer assigned to the case against Children’s Wish for “going overboard.” (Ms. McCurdy, who wasn’t there at the time, says, “I’m sure he took the appropriate action to protect the people of Pennsylvania.”)

However, Mr. Copilevitz has only praise for the bureau itself. As far as state oversight of charities goes, Mr. Copilevitz says, the Pennsylvania bureau is one of the most effective. “Very few states have the resources that office does,” he says. “It’s one of the best, from the standpoint of oversight.”

Legal Challenges

But victories can be hard to come by.

Even with its lineup of talented staff members, bureau leaders say they often are unable to rein in charities that collect lots of money but do little good. The U.S. Supreme Court has ruled that raising money is a form of protected speech under the First Amendment because fund raising is so often intertwined with charities’ missions of advocacy and educating the public.

State regulators say the restriction has had the practical result of barring them from discouraging donations to groups that do little to help anyone.

One step the Pennsylvania charity bureau has taken since the late 1990s is to keep an updated list of the percentage of donations the charities it oversees spend on fund raising. The problem, officials say, is that not many people pay attention to those figures.

Mr. Shevenock also keeps a list of news stories about charities involved in fraud anywhere in the United States, which he shares with other regulators in a daily e-mail message..

And the bureau still collects bags of charity solicitations from frustrated state residents, although now virtually all of the groups are already registered with the state, unlike a decade ago.

Trent Stamp, executive director of Charity Navigator, a watchdog group in Mahwah, N.J., says he gets complaints from time to time from “relatively lousy” charities that are upset by steps taken by the Pennsylvania bureau.

“They’re the only officials I ever hear that about, which means they must be doing something right,” he says. “Most charities in most states don’t know who’s regulating them, and don’t care.”

Despite the obstacles to enforcement, regulators say they take comfort in knowing they have scared away at least a few of the fraudulent solicitors.

Drew A. Koser, one of the bureau’s investigators, remembers a time the New Jersey attorney general’s office called about a charity whose headquarters were in Pennsylvania that was making questionable solicitations. The charity hadn’t registered with the state, so Mr. Koser went out to the address to find out why not.

But when he talked to the charity’s founder, it turned out there was nothing Mr. Koser could do.

Says Mr. Koser: “He said, ‘On the advice of our attorney, we don’t solicit in Pennsylvania.’”