November 1, 2007 | Read Time: 6 minutes
Leo Eloesser was a pioneer in providing health care in developing countries, and when he died in 1976, he directed most of his estate to provide loans to needy medical students.
Now the Pennsylvania attorney general’s office is suing the American Friends Service Committee, based in Philadelphia, saying that the charity, which received most of Dr. Eloesser’s estate, misspent the money.
In his will, Dr. Eloesser said simply that he wanted his estate to “establish loan funds for medical students.”
Joyce Campbell, Dr. Eloesser’s partner and the executor of his estate, picked American Friends to administer the loan fund, even though Dr. Eloesser was not a Quaker.
In a 1979 letter to Ms. Campbell, the nonprofit organization promised to use the $1-million bequest to make grants to other groups that would use the money to support the training of medical students and health-care professionals.
Spending Questions
The attorney general’s office says the charity spent more than $6-million in interest from the fund from 1982 to 2004 “on a variety of international charitable services not specific to the benefit of medical students.” No one is accused of having personally benefited from the alleged misspending.
American Friends, which works for social justice and peace and provides humanitarian relief, stopped making grants from the Eloesser fund in 2004, when the charity looked at whether it had adhered to the terms of the gift, according to John Treat, a spokesman for the charity. The fund is now worth more than $3-million, according to court documents.
Mr. Treat says the “vast majority” of the funds were used to train medical workers in countries in Central and South America and the Caribbean.
“We acted in good faith throughout the life of the fund,” Mr. Treat says.
He adds:”We trained thousands of people to do the work that we understood from the executors was what Dr. Eloesser would have wanted. We’re very proud of what we accomplished.”
But he acknowledges that in “later years,” some of the money may have been used for medical services rather than for medical training.
American Friends has promised to provide the attorney general’s office with a full accounting of expenditures by the Eloesser Trust — as well as 13 other endowments worth about $8-million — by December 5.
“If the court says we need to make changes, we’re going to comply fully with what’s asked of us,” Mr. Treat says.
Mark A. Pacella, chief deputy attorney general of Pennsylvania, says the nonprofit organization may be required to repay money to the fund if any misspending is confirmed.
“If there were a waste of funds, we’d try to restore those funds, and develop some sort of structure to limit the likelihood of that happening again in the future,” Mr. Pacella says.
Discovering Problems
Patrick Manion, until September a fund raiser at American Friends and the apparent whistle-blower in the case, questions why the charity didn’t go to the attorney general’s office itself in 2004, when it first discovered problems with the fund.
He thinks the charity may ultimately have to pay back all of the more than $6-million that it has spent.
“If they had done this back in 2004, we wouldn’t even be talking about this,” Mr. Manion says. “If you go to the court yourself, it’s a whole different ballgame.”
‘Eloesser Flap’
Dr. Eloesser enjoyed a colorful life practicing medicine around the globe.
He grew up in San Francisco and built a medical practice there, supported leftist causes, and befriended well-known artists of his era, including Frida Kahlo. He was a medic for the Republican fighters in the Spanish Civil War, and a physician with Communist forces in China following World War II.
He also invented a surgical procedure, called the “Eloesser flap,” for removing fluid from chest infections.
He moved to Mexico with Ms. Campbell in the 1950s, where he opened a clinic for the poor. He died in 1976.
When American Friends accepted Dr. Eloesser’s bequest in 1979, it sent Ms. Campbell a letter stating it would treat the gift as an endowment, and spend only the income from the fund, “unless circumstances change in such a way as to suggest that principal of the bequest ought to be used.”
But in 2001, after auditors issued an opinion that American Friends could tap the principal, the charity began spending more aggressively from the fund and increased the amount it used to cover expenses. In a typical year, about 20 percent of fund expenditures went to cover the charity’s administrative costs related to the loan programs, but in 2004 those costs shot up to 45 percent of spending.
Mr. Treat says the charity is trying to figure out what led to the big increase in spending. By the end of 2004, the Eloesser fund was nearly exhausted, he says.
The charity has no record that Ms. Campbell was ever consulted about the change to permit spending of the principal.
“I know that our staff was in contact with Joyce in the early years of the fund,” Mr. Treat says. “In later years, it’s my understanding that she had Parkinson’s and that we had less contact with her.”
When Ms. Cambell died in 2004, American Friends sold an interest in a downtown San Francisco building that had been providing income to Ms. Campbell.
That action resulted in a new influx of $1.15-million into the Eloesser fund, and it prompted a review of the endowment fund’s spending.
When it became clear that the American Friends may not have fully adhered to Dr. Eloesser’s wishes, the charity halted all grant making, and voluntarily repaid $1.14-million to replenish the fund in 2005.
Mr. Treat said an internal review of the Eloesser fund and its spending had been under way for roughly two years when it received word in late July that it was being sued by Pennsylvania’s attorney general.
The charity’s internal investigation, says Mr. Treat, had not indicated a problem significant enough to report to the attorney general’s office.
“If you know much about Quakers, we try to be deliberate,” Mr. Treat says.
He says the review had focused in part on how best to carry out Dr. Eloesser’s wishes amid changes in many of the countries to which the nonprofit organization has traditionally provided funds.
“When we began this program in the early 1980s, you had wars in several countries in Central America,” Mr. Treat says. “The whole social-services system was under severe stress. It’s quite a different situation 25 years later.”
Contract Not Renewed
Mr. Manion, the fund raiser, became aware of the problems with the Eloesser trust when he traveled to San Francisco to sell the real estate that had been providing income to Ms. Campbell.
He says he shared his concern about the Eloesser trust with “authorities” — he declines to say exactly who — in April.
In September, Mr. Manion’s employment contract with American Friends was not renewed. He believes he may have lost his job because he complained internally about the handling of the Eloesser fund.
Mr. Treat says he can’t discuss personnel issues in detail. But he describes Mr. Manion’s explanation for his dismissal as “categorically incorrect.”
“I could have kept my mouth shut and I’d still be there,” Mr. Manion says. “But it’s just not right what they did.”
