posted on: Monday, August 31, 2009

Gary Snyder

She is a married mother of three and looks just like your sister, but she has done irreparable damage to the Ann Arbor Amateur Hockey Association. And, her case is another example of the spineless enforcement of our judiciary toward nonprofit malfeasants.

As the association’s former bookkeeper, The Detroit News noted that she pleaded guilty in June to two counts of embezzlement of nearly $1 million from the organization. She methodically emptied the treasury of the AAAHA over a two-year period to pay for diamond earrings, Cadillac Escalades and expensive trips.

The judge evidently felt sorry for her and didn’t like the probation department’s recommendation that she pay back $160,000---just enough to keep the association afloat. Instead, the judge cut it in half. The perpetrator says that she has paid back a quarter of a million dollars, but the association and the department say they haven’t seen a dime.

The rest of the sentence was not much tougher. Instead of prison, she got parole. Instead of paying all the money back, she needs to pay only $1500 a month. At that rate she will pay it off when she is 116 years old.

This is more the norm than most would think. There is plenty of evidence to underscore that assertion.

I have written extensively about charitable fraud. The coddling of the criminals by judges and prosecutors is rampant. Such lenient sentencing is under the guise of not overcrowding the jails or assuring that restitution is fully discharged. Most believe that if the convict is in jail they will be unable to pay what is owed. That is a spurious argument since studies have shown that very few convicts every pay their restitution and that nearly 50% never pay one penny.

With reference to sentencing, many perpetrators get a free pass. Their method of operation is to never steal anything small so that that they have the resources to defend themselves. Do it with impunity and then cry and plead for the mercy of the court.

We have seen it time and again. Many times prosecutors and often judges agree to sentences that seem laughable given the magnitude of the crime. On occasion some get a tough sentence because they do not even try to defend himself (see Bernard Madoff sentence of 150 years), but too few are strongly sentenced in order to send a message that malfeasance does not pay.

For years we have been comforted to know that our prosecutorial system would weed out the bad apples. But the tide is turning in favor of the crooks and with more frequency they are turned out on the street with little more that a slap on the wrist.

There are several reasons for lack of stringent enforcement.

For example, use my home state of Michigan, which is typical. Jails are crowded so in August 2007, the chief judge of the circuit court ordered sentence reductions for 266 prisoners at the county jail to alleviate chronic overcrowding. The day the order was issued, 45 percent of the inmates were released. Since August 2005, more than 1,800 inmates have been released.

The overcrowding and other issues have consequences. We are seeing prosecutors suggesting, and judges giving, lighter sentences. We are seeing an extraordinary inconsistency in sentencing.

Take for example these:

Again in Michigan, despite being charged with stealing $250,000---a 15 year felony--- from the Juvenile Diabetes Research Foundation and pleading guilty, the executive got no jail time.

No victims, no problem.

We recently saw a once-powerful former Pennsylvania state senator get a relative slap on the wrist for the following: obstruction of justice for destroying evidence, stealing from a nonprofit, using taxpayer dollars to snoop on political enemies and ex-girlfriends, taking advantage of his board position on another charity by taking free trips and pocketing more than $4 million. With 137 corruption counts and federal guidelines recommending 21-27 years the Judge sentenced him to a little over 55 months in prison (12 days per felony) and restitution. This lean sentence drew a response from thousands of citizens expressing their dismay.

In Montana, the former chairman of the annual East/West Shrine football game was given a six-year suspended sentence for stealing $40,000 from the charity event. He wrote checks to himself from the Shriners' bank account during a 2 1/2-year period. No jail time for this very prominent executive.

The soft sentencing has consequences. In Delaware, Jody Chubbs first embezzled from her employer while on parole for embezzling from a previous employer. She then wrote thousands in bad checks, stole money from customers of a towing business she operated and -- after her arrest and indictment in federal court -- stole the identity of a childhood friend. Chubbs appeared to show no remorse for stealing more than $367,000 in various forms. Her apology was, "I never meant to hurt anyone."

No harm, no foul.

There was an airtight case at Fiver Rivers Community Development in South Carolina where an executive stole hundreds of thousands of dollars of state and federal grant money. Who is watching the money? Her daughter: hired as chief financial executive and had no financial experience. They used agency money for a high life by traveling, buying jewelry, high-definition television sets and sharing some of the assets with relatives. The mother and daughter pleaded guilty. Neither will serve jail time. Both will have 5-year probation and restitution was ordered.

There was a legal settlement at the American Veteran Relief Foundation and attendant funds. The leaders stole over $19 million and settled for a $19 million fine that was waived by the FTC because of inability to pay.

Lots of stolen money to defend, not an issue

In New York City, an $880,000 theft from the Whitney Museum received 200 hours of community service; the executives that looted the Gloria Wise Boys and Girls Club of $1.2 million were ordered to repay only $70,000.

On the other hand:

In Washington DC, a $4,000 theft at the Washington Teacher’s Union received an eleven year sentence, while a $47,000 theft from the Vietnam Veterans of America received 5 years in prison. The president of the Crow Creek Tribal School received 26 months in prison for a $6000 theft and a $51,000 theft at the Van Buren Police Department drew 5 years in prison.

The inconsistency in sentencing is overwhelmingly in favor of leniency for the perpetrator. With an adequate defense, the chances of jail are minimal. Without high priced legal counsel, the defendant gets the opposite results. Big thefts result in better defense.

With seldom jail time and little chance of restitution being fully discharged, where are the disincentives to not engaging in contemptible behavior?

Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.

posted on: Tuesday, June 30, 2009

Gary Snyder


In the wake of the well-documented and well-publicized increase in corruption and malfeasance in numerous charities, too few are searching for tools to identify good governance, recognize poor management or dissuade dishonesty and fraud.

Many look to watchdog agencies to assist them in making thoughtful decisions regarding their donations by avoiding those charities with bad practices. However, some question if these agencies are misdirected and inconclusive in their efforts to address the current increase in private inurement and self-dealing in organizations with a one size fits all approach.

For-profit Sector

Prior to the economic meltdown, the public trusted credit-rating watchdogs to assist them in their investment choices. Services like Moody’s Investors betrayed their trust by giving triple-A grades to some of the cancerous derivatives and, as The New York Times stated, gave Countrywide Financial high grades. These gold seals of approval have encouraged the spending spree that left both investors with large losses and homeowners struggling with foreclosures. The imperceptible arms-length relationship between the watched and the watchdog led Moody’s profit margins to skyrocket, even surpassing Exxon’s. With no competition for the three big for-profit rating firms, the days ahead look even rosier.

Both for-profit and nonprofit watchdogs alike use proxy and unsubstantiated measures to evaluate the attributes of an organization. They are typically a reflection of the past and little forward-looking signs and structure. They seem so arbitrary.

One example serves to illustrate that point. Despite being under the sleepy eye of the for-profit watchdogs, The McKinsey Quarterly, in a study, suggested that investors paid a premium (about 18%) for good structural performance such as good governance. General Motors governance guidelines were the gold standard. Obviously they failed on a number of counts with the U.S. government unwilling to let the board fire its own CEO. Ultimately the government took-over the company and it was put into bankruptcy only to be saved by the U.S. taxpayers. So those investors with confidence in the watchdogs and their standards got hit twice.

All this, as Fortune Magazine noted, happened as the confidence in financial rating services crashed by 50%.

Charitable Sector

Several years prior to the economic implosion, there had been significant dwindling in charitable confidence. To put donor’s confidence in perspective we need only to look at a Brookings Institution study where only 11% of the public thought charities do a very good job of spending money wisely and only 19% feel that charities do a very good job of running their programs and services.

It is a generally accepted myth that the nonprofit rating services, such as Charity Navigator, BBB Wise Giving Alliance and American Institute of Philanthropy, are monitoring all nonprofits. The criterion that is used by watchdog groups is wanting. Because of different criteria, the rating agencies recommendations often conflict. One even sells its seal of approval on a sliding scale. Moreover, all fail to address in any substantive manner many of the issues that have gotten the nonprofit sector in trouble—scandals and inadequate governance.

Some ratings are anachronistic. For example, to sanction to automatic failure any group that has a certain number of years of expenses in reserves is preposterous. In these troubling times, who wouldn’t have wished that they had a huge amount of reserves? One could argue that not having any operating reserve may not suit all nonprofits and that could be lethal. That, for example, applies to 28 percent of the DC area charities, as the Washington Post cited. On the other hand, because the sector is so diverse, each organization needs to analyze its own cash flow and expenses and make decisions based on the strength of grants, the vicissitudes of fundraising, the potency of the economy and the revenue stream generated from all activities. To deny that the governing body is in the best position to make such a decision is shortsighted. Without sufficient funds (and that number is growing, I am confident), nonprofits will join the 16% failure rate of existing nonprofit groups in 2000 that either disappeared or became so small that they were no longer required to file tax returns by 2006, the Urban Institute study of DC area charities showed.

The quality of submissions to watchdogs is dubious. Charity evaluators, by their own admission, believe that the reporting from the nonprofits is often inconsistent, unclear and incorrect. Some point to large amounts of chicanery in the submissions they receive.

But is all of this bad and do these watchdogs perform a much-needed service? Some say that they raise the level of debate. Others challenge the simplistic checklists and metrics that may or may not be meaningful. Some have expressed concern that some may have crossed the line from being independent raters to becoming active consultants.

Let’s look at conventional believes that have become baked into generally-accepted good practice:

• Financial board expertise needed: we have seen some of the premier charities get caught in fraud even though they had very sophisticated board members with impressive financial skills. An example: In spite of board and Congressional monitoring, the Smithsonian had hair raising abuses including virtually unlimited travel and noncompetitive contracts, little oversight in salaries and housing allowances. On its Board of Regents: Chief Justice of U.S. Supreme Court; Vice President of U.S.; an executive of Microsoft; two university presidents; prominent builder; a venture capitalist; congresspersons.

• Frequency of board of directors meetings: Over the years watchdog agencies have changed the number of board meetings that will make boards more successful. There apparently is no optimal number of meetings that puts an agency in good stead. The most important intangible is effectiveness of the deliberations of the members. On Board of United Ways: The Central Carolinas United Way had some of brightest minds but the frequency of meetings did not preclude it from making the some glowingly embarrassing mistakes. They gave the executive of a mid-sized agency the highest salary and benefits package in the entire United Way system. They tried to keep it a secret. When the press got a hold of it, they fired her and are currently being sued by her. Embarrassed, 3 board members resigned, but the agency is still withholding pertinent documents from the public. This shortsightedness has been replicated in several United Ways including Atlanta, Capital Area, and New York with many affiliates with ongoing malfeasance.

• Attendance, size, more: It is unclear that attendance, codes of conducts, board size and minimum number of board members have reasonable impact, but some watchdog agencies think that these are important. Studies in the for-profit sector are inconclusive that board size means better decision-making. Diversity, seldom considered, may prove to be a more important matrix.

• CEO importance: There are mixed reviews as to the importance of having the charities CEO on the board. We have seen the Smithsonian with its CEO on the board and the CEO at American Red Cross and United Way not on the board having similarly poor results. There is no argument as to the importance of the CEO. However, The Urban Institute study finds that a CEO serving on the board means that the board is weaker and less engaged. The CEO, coupled with board chair, is the public face of the organization. A poor face, as in the case of the Smithsonian, ended with his humiliating firing. Several poor showings at the Red Cross ended with very public dismissals. The compromised face of several of those at local United Ways cost the agency dearly with diminished contributions. One thing is clear, there needs to be a demarcation between the roles of the board (as the ultimate authority) and the CEO (carries out the boards mandates).

Some believe that watchdogs in both the for-profit and nonprofit sectors are seemingly propagating meaningless guidance. This is particularly important since in many instances there is no better outcome by adhering to the standards than not. Furthermore, the costs associated with adhering to such fungible determinants can be immense in terms of time and money, particularly for small agencies.

The strengthening of the matrices that produce organization integrity may lie in some of the intangibles. Such human dynamics such as leadership character (both board and staff), organizational values, how decisions are made, open communications --- both at board meetings as well as between staff and board---conflict management and strategic thinking (both long and short) may promise to be the difference between a successful and a compromised agency.

Such skepticism has lead to an effort currently underway---The Social Investing Rating Tool. It will try to assess the way donors evaluate whether a charity is worth their money as well as whether organizations have favorable outcomes. Some believe that is a good endeavor, but others will reserve judgment until its completion. One problem is that it is made up of prominent philanthropists and entrepreneurs some of whom have questionable issues residing within their own organizations.

All want both sectors to do well. In the future, maybe we should calculate how the watchdogs measure objective data that support board members and staff dedication and diligence to do good governance. Maybe more importantly, they should gauge how agencies are doing with empirical evidence or determine whether their work is even making any difference.


Gary Snyder, the managing director of Nonprofit Imperative in West Bloomfield, Mich., is author of Nonprofits On the Brink and publisher of a monthly e-newsletter—Nonprofit Imperative, which focuses on the major issues affecting the philanthropic community. He can be reached at gary.r.snyder@gmail.com or at 248.324.3700.

posted on: Friday, June 12, 2009

Gary Snyder

About a decade ago, we were in the midst of unraveling one billion dollars of fraud as a result of two of the largest Ponzi schemes in the history of the charitable sector. In the intervening years we have seen the pyramid plans explode and affect the nonprofit sector far beyond anything anyone expected in 1999. Few lessons were learned.

The nonprofit Baptist Foundation of Arizona and the Foundation for New Era Ponzi schemes, coupled with bad taste that grew out of the American Red Cross and United Way’s handling of September disaster funds, caused a public outcry for change.

The for-profit Enron and Adelphia scandals joined in the public’s calling for strengthening corporate ethics and nonprofit responsibilities. The public pleaded for more accountability in how public and private institutions husband their resources. They were simply asking for good stewardship and some discipline.

Since then, the public and private sector---the nonprofits as well as the for-profits alike---have had a challenge defending their reputations.

Enforcement and regulatory agencies were ill prepared to face the onslaught of what was to come. As recently as a few decades ago, most Ponzi schemes were relatively small. The Washington Post notes that they have grown exponentially. The FBI has almost 500 open Ponzi investigations nationwide -- up from about 300 in 2006. Law enforcement officials with other agencies have noticed similar trends, and authorities said they expect to turn up many more cases in coming months. As the economy and the financial markets went into a nosedive, Ponzi operators couldn't find new investors to keep their fraud apace. Investors began demanding for their money and turned to law enforcement to get it.

The godfather of the Ponzi schemes is that which Bernard Madoff perpetrated. Estimates suggest that Madoff wiped out a generation of Jewish wealth and philanthropy resulting in several hundreds of millions dollars of much needed services lost. (See previous article on religious-related Ponzi schemes)

Madoff’ $65 billion fraud was just one of many that either used nonprofits as part of their ruse or had a direct effect on a charity.


• In the mid 1990’s more than 11,000 people, predominantly elderly, were caught up in an opportunity to invest in the Baptist Foundation of Arizona. It cost investors about $590 million. The BFA had a cozy relationship with its legal counsel as well as it accounting firm with both party to the hoax. In June, the appeal court upheld the perpetrators convictions.
• As early as 1993, the Foundation for New Era was rolling with more than $400 million in investor’s money but victimized the entire lot, including universities, museums, Christian organizations, churches and colleges. In addition, this Ponzi scheme initially stumped regulators (including PA’s attorney general) and securities firms with virtually no one looking at its IRS Form 990.

Here are some very recent Ponzi schemes (it isn’t small potatoes!):
• The Thomas D. and Elizabeth S. Hooper Foundation were totally drained of its assets by an $80 million Ponzi scheme by Joseph Forte who recently pleaded guilty
• The Alexander Dawson Foundation had entrusted $13.5 million to Mark Bloom (North Hills Management) only to find he used the money to purchase a $5.2 million Manhattan triplex and $300,000 for his daughter’s bat mitzvah.
• Two Fort Lauderdale, Fla., attorneys, one of whom was chairman of the University of Florida Law Center Board of Trustees and the Fort Lauderdale Chamber of Commerce's downtown council, were indicted in a nearly $1 billion Ponzi scheme known as Mutual Benefits. They fleeced the terminally ill, elderly and people with AIDS.
• A Los Angeles lawyer was in-house counsel for an elaborate real estate Ponzi scheme in Orange County that conned $52 million from mostly elderly investors.
• Two California men ran an $80 million Ponzi scheme promising Korean-American investors a 36-50 percent return.
• Two arrested Northern California men steered proceeds to senior care and assisted living facilities with $200 million “callously swindled” in a Ponzi scheme, according to the state attorney general.
• Playing on a relationship with the CEO of United Way (Charlotte) and as a former employee, she took in about $11 million in a Ponzi scheme defrauding 200 investors, many of them elderly. She pleaded guilty. The United Way was not involved.
• Using members of their church--- Church of Jesus Christ of Latter-Day Saints in Lake Arrowhead (CA)--- as investors and leads the husband and wife Tuckers got $31 million in its Ponzi scheme.
• Terence Mayfield defrauded his fellow parishioners at the Tom’s River (NJ) The Church of Grace and Peace of more than $1 million through two real estate investment Ponzi schemes.
• Northern Californians Anthony Vassallo and Kenneth Kenitzer orchestrated $40 million investment fraud many of whom he met through Vassallo’s church in this classic Ponzi scheme.
• Targeting members of the Chinese-American community in Dallas and in California, Weizhan Tang, a Canadian, defrauded investors of up to $75 million with his and his partner’s Ponzi scheme.
• Dennis Bolze of Gatlinburg who operated a commodity pool in a manner akin to a Ponzi scheme took in up to $21 million from about 100 investors, nearly half of whom live in Europe or other places outside the U.S. some of whom were Foundations.
• Paul Greenwood and Stephen Walsh who ran WG Trading Company LP and Westridge Capital management Inc. of Connecticut and California left little of the nearly billion dollars that were invested by mostly of charitable and university foundations, and retirement and pension plans. The University of Pittsburgh and Carnegie Mellon University, have sued the defendants seeking to recoup the $114 million they invested in the funds.
• Clelia A. Flores who operated a $23 million investment scheme targeted at California’s Hispanic-American community. She solicited investors through word of mouth at churches and others places throughout the Hispanic- American community.

The effect of these scams cannot be overstated. As corruption in the charitable sector skyrockets, the confidence in the nonprofit sector has sunk to new lows. The exploitation of trust and hope has lead to devastation for the victims. Confidence is becoming an increasingly hard commodity to recapture in these troubling times.

Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.