Ralph Nader’s Quiet Crusade

Lawsuit charging excessive pay and unprofessional grant making at Conn. foundation could shake up rules of philanthropy

West Hartford, Conn.

Ralph Nader, whose high-profile lawsuits against corporations and government agencies have produced big changes in American automobile-safety standards and consumer protections, has been quietly pursuing a legal campaign against a small family foundation here.

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By asking the courts to take action, he hopes that he will grab the attention of foundations and policy makers and force them to grapple with hard questions about what constitutes self-interest in grant making, how family-run funds should be governed, and how much foundation officials should be paid.

“The trillion-dollar foundation world — never has so much money led to so few changes,” says Mr. Nader bitterly.

Mr. Nader’s lawsuits usually have cast him in the role of an outsider crusading in behalf of the public interest. But in his suit against two trustees who run the $45-million Maximilian E. and Marion O. Hoffman Foundation here, Mr. Nader is an insider. He served on the foundation’s board for seven years, and a charity he founded, the Center for Study of Responsive Law, received $725,000 from the foundation in the years before the lawsuit.

In his suit, Mr. Nader charges that Doris and Bahij Chaho (pronounced shaw-ho) — who serve as the top officials of the fund, which was created with money from their relatives — “abused their positions of control.” What’s more, he says, they wasted foundation money by making grants to projects that had been recommended by their friends and that had not been subjected to a rigorous review process.

Mr. Nader also charges that the Chahos wrongly awarded themselves nearly $900,000 in compensation over a six-year period — an amount that Mr. Nader says is much too high because he believes that they worked no more than 30 days a year on their philanthropy. Foundation officials are forbidden by law from receiving excessive financial benefits.

The couple, who refused to be interviewed for this article, deny through their lawyer that they were unprofessional grant makers or that they did not put in sufficient hours to deserve their pay. Many grantees of the foundation say they were questioned extensively before they received any money, and members of the current board — which includes a retired judge who is the former Lieutenant Governor of Connecticut — say they have been impressed by the diligence of the Chahos.

Mr. Nader’s claims, says Peter C. Williams, a New York lawyer who is representing the Chahos, “are totally without merit.”

The couple has asked that a judge throw out the lawsuit, which was filed in 1993. But no one has ruled yet on that request because Mr. Nader and his lawyers are still collecting evidence for his suit. Mr. Nader says several early attempts to settle with the Chahos fell through, and he expects to be ready within the next few months to ask the court to set a trial date.

Experts on non-profit law say Mr. Nader’s case represents one of the first major efforts to test whether a foundation can be penalized for not doing enough to make sure its grants have been thoroughly and independently reviewed. Some experts worry that if Mr. Nader’s case goes to trial — and he wins — wealthy donors could be dissuaded from putting their money into a foundation out of fear that the courts will be setting the standards for how they choose to give away money.

Others say Mr. Nader’s questioning of foundation practices comes at an important time. As the number of foundations continues to grow rapidly — partly as a result of the beginning of the largest intergenerational transfer of wealth in the nation’s history — the infusion of money has the potential to transform philanthropy.

At the same time, observers fear, the money could be squandered if too many people who know little about non-profit work are put in charge of dispensing vast sums.

Meanwhile, the Internal Revenue Service has significantly reduced the number of audits of foundations it conducts each year — making it hard to tell whether foundations have appropriately used tax-exempt dollars.

Questions about the appropriate distribution of charitable funds is not new to the Chahos. In fact, it was the Chahos’ concern about a potentially wasteful gift that first led them to ask Mr. Nader for help.

In the mid-1980s the couple was involved in a battle over the estate of Marion Hoffman, Mrs. Chaho’s sister, who had died in 1983. Mrs. Hoffman had inherited a fortune from her husband, Maximilian, an importer of luxury cars.

On the day before she died, Mrs. Hoffman promised that her charitable trust would provide $36-million for the construction of one of the world’s largest telescopes. The telescope was to have been named in honor of her late husband.

The Chahos thought the telescope project was a bad use of Mrs. Hoffman’s money, especially since they learned shortly after her death that the W. M. Keck Foundation, in Los Angeles, had promised to provide $70-million to the California Institute of Technology to build the facility.

The Chahos, who were acquainted with some of Mr. Nader’s relatives, turned to the well-known lawyer for help in nullifying the pledge and finding a legal way to turn the charitable trust into a grant-making foundation.

“I can’t think of anyone else who I have complete trust in as I do in you to handle this foundation and to see that it is properly administered,” Mrs. Chaho wrote in a letter to Mr. Nader, who provided a copy to The Chronicle.

Mr. Nader put the Chahos in touch with a lawyer who was able to help the estate avoid fulfilling the pledge.

Once the money from the Hoffman estate was available, the Chahos created a foundation and asked Mr. Nader to be a trustee.

“They said they didn’t know anything about foundations,” Mr. Nader recalls. “I didn’t want to do it because I never do this sort of thing. Time is too precious. But they begged me to.”

Mr. Nader agreed and became one of three trustees, along with the Chahos. Mrs. Chaho also appointed herself as president and her husband, a retired physician, to be treasurer.

Right from the start, according to Mr. Nader, things soured.

First, he says, Mrs. Chaho wrote into the foundation’s bylaws two classes of trustees: Mrs. Chaho, and later her husband, were made Class A trustees, while Mr. Nader was a B. While such distinctions are common in the corporate world, usually among shareholders, they are unusual at foundations. Mr. Nader sees the distinction as a sign that the Chahos wanted to control the foundation.

“They just wanted to take it over,” he says. “It was a bit of a hostile act. We were supposed to all be equals.”

The next major problem for Mr. Nader was when the Chahos told him in 1988 that they were going to begin to draw annual salaries: $80,000 for Mrs. Chaho, and $55,000 for Dr. Chaho.

They told him they had based the amounts on a report on foundation salaries that they had hired an outside consulting company to conduct. Mr. Nader questioned the consulting company’s report because he says it looked only at foundations with assets comparable to those of the Hoffman fund. He says it would have been more fair to compare the Chahos to other grant makers who worked the same number of hours as he says the couple did.

Through their lawyer, the Chahos say they worked far more than 30 days a year and that their salaries were in line with those of officials at other foundations with similar assets.

But Mr. Nader says he was frustrated by how little effort he believed that the couple put into foundation business.

He says that at board meetings, which were held about four times a year, the Chahos routinely showed up with superficial presentations on grant recipients and shallow assessments of potential grantees.

Mr. Nader also complains in his lawsuit that the couple refused to “hire professional staff” to evaluate grant applications or to provide Mr. Nader with any help in analyzing grants. He says he typically never received information about potential grantees until he got to board meetings, making it impossible for him to do the kind of responsible oversight that he believes all foundation board members should do.

However, Joseph Jaspen, a lawyer for the Hoffman Foundation since its founding, says the Chahos have always been thoroughly prepared at board meetings, which he has attended regularly. “They give us reports on what they’ve done, and it’s clear,” he says.

Mr. Nader says he was also concerned that too many grants went to causes that were of personal importance to the Chahos, such as the local symphony, and private schools and colleges that their children attended. Such grants are commonly made by family foundations, but Mr. Nader says he felt that as a trustee it was his duty to speak out for the public good and not just “rubber stamp” the Chahos’ gifts for pet charities. He says he was concerned that the Chahos were treating the foundation’s assets “like family property, like an inheritance.”

The Chahos dispute Mr. Nader’s charges. In their court statement, they say that they always acted professionally, denying that they lacked expertise or thoroughness in grant making.

Nancy Levin, director of development for the Fidelco Guide Dog Foundation, a charity in Bloomfield, Conn., that trains seeing-eye dogs, says she has had many interactions with the Chahos over the years and has found them to be nothing but professionals. Her organization has received $50,000 from the Hoffman fund since 1990.

“I have always found them gracious and responsive grant makers,” she says. “If there’s anything you have to ask, they will answer it.”

The foundation’s informational tax returns, submitted each year to the Internal Revenue Service, show that however board meetings were conducted and expenditures approved, the foundation did give a number of grants during Mr. Nader’s tenure to charities that reflect his interests. They include $20,000 for a public-safety project by the Center for the Study of Alternative Pursuits, in Beachwood, N.J., and $25,000 for an environmental project by the Citizens Clearinghouse for Hazardous Waste, in Falls Church, Va.

But most grants went to Hartford non-profit groups, in particular to schools and colleges. And when Mr. Nader left, grants to national organizations or social-justice charities all but dried up.

By 1993, Mr. Nader says, he grew so fed up with the Chahos that he resigned from the board and filed the lawsuit.

Thomas Troyer, a former tax-policy official at the Treasury Department during the Johnson Administration and one of the lawyers working with Mr. Nader, says he agreed to take on Mr. Nader’s case because “if what Ralph says is right, this was an egregious deviation from sound principles of running a private foundation.” He adds, “It seemed that every effort ought to be taken to see that the foundation is run correctly.”

Charity leaders in the Hartford area, especially those who have received grants from the Chahos, say they were stunned to learn about the charges. They say the Chahos are well-respected by local charities.

Winifred Coleman, president of St. Joseph College, in West Hartford, which received a $1-million grant this year from the foundation for a new arts complex, says, “I would describe the Chahos as being very diligent.”

She recalls that before the college received a $400,000 grant to make a building accessible to the handicapped, the Chahos pored over blueprints of ramps, and each of them visited the site.

Robert M. Jeresaty, a semi-retired heart surgeon at St. Francis Hospital and Medical Center, in Hartford, who has served on the Hoffman Foundation board since Mr. Nader left, also describes the Chahos in glowing terms.

“What they have accomplished is very important and very beneficial to the community and outside the community,” he says. “They have been very helpful and done an excellent job.”

Dr. Jeresaty is one of three new trustees named to the foundation’s board since Mr. Nader left and filed his lawsuit. The other two are Joseph J. Fauliso, a retired judge and former Lieutenant Governor of Connecticut, and Marie Gustin, a retired superintendent of schools in New Britain, Conn.

Ms. Gustin, too, has nothing but praise for the Chahos. “They seem to be very serious about their work and hold us to the task of being serious as well,” she says. “They do everything honorably, from where I sit. They are accountable.”

Mr. Nader says he has pursued the lawsuit over the years because he believes that foundations need to be held more accountable for their practices and compelled to act more ethically.

Although foundation experts frown on situations where small, close-knit boards make salary and grant-making decisions while also being responsible for insuring that those decisions are proper and ethical, they say such situations are not against the law. And, they note, determining exactly how much foundations should pay their officers and directors is tricky business, partly because the number of hours worked is difficult to determine.

Mr. Nader, who draws no compensation from the dozens of non-profit groups he has established and who says he lives off $30,000 a year in speaking and writing fees, says he would like to see the foundation world create better criteria for setting salaries than relying on consultants’ reports that are based on existing salaries. “What keeps this in place are these justifications,” he says. He also says he would like to see that family foundations with paid staffs are challenged to make grants that represent professional work with the public’s interests in mind, rather than the family’s pet causes.

But some experts say that Mr. Nader’s ideas on creating such standards are highly questionable.

“It is dangerous to start saying, This is how you have to do it,” says Daniel L. Kurtz, a former New York assistant attorney general and author of the book Board Liability: A Guide for Nonprofit Directors. “I’d be exceedingly uncomfortable with a legally driven measure of performance that becomes the subject of litigation.”

It’s impossible, he says, to try to determine “superior” grant making. And, he adds, no one — including Mr. Nader, whom Mr. Kurtz says he admires — should start trying to do that.

“Once upon a time,” says Mr. Kurtz, “I thought it was best to make grants to remote groups because the gifts were pure and disinterested. Later, I thought, No, do your charity close to home, where you have a personal investment.”

He says that he has come to realize that there is no single approach to effective grant making — and that that is what makes philanthropy effective.

Other foundation experts say that the questions Mr. Nader raises about the Hoffman foundation demonstrate the need for more checks and balances to insure that foundations are accountable in their use of tax-exempt funds.

While the Internal Revenue Service might be expected to play that role, it has focused most of its energy recently on policing charities. In the 1970s — following Congressional hearings that scrutinized foundations — the I.R.S. says its agents audited every foundation every year. Today the I.R.S. estimates that it audits 200 or so of the nation’s more than 35,000 private foundations a year.

Marc Owens, director of the agency’s Exempt Organizations Division, says audits have dropped off because agents never found financial abuses to be widespread, and he says Mr. Nader’s complaints do not change his mind.

Mr. Nader begs to differ.

He says that while it may not be of the magnitude of a major scandal, he suspects that ethical lapses take place daily at foundations — especially at small, family-run foundations where officers so often lack grant-making experience.

He calls it “a little noticed mess across the country.”