Feed the Children - charitywatch.org

From AIP's April/May 2009 Charity Rating Guide & Watchdog Report

Charity Head Stages Failed Coup

Larry Jones, founder of the well-known hunger charity Feed the Children (FC), was recently mentioned in an ongoing court case in which the group’s longstanding board of directors claim they were unlawfully ousted by Jones, board chariman Dwight Powers, and five improperly appointed directors. Court papers reveal that after learning of the board's plans to place him on "indefinite sabbatical," Jones packed the board in his favor with directors who would be friendly to him and then fired the longstanding directors. Among the board's concerns were that Jones allegedly did not receive board approval for major purchasing commitments, including approximately $35 million per year for a "Television Buying Agreement," and evidence of a son's personal use of charitable resources. Jones, along with his new board, then fired most of FC's key staff, including the charity's chief financial officer, chief operating officer, and an internal auditor. Also fired was FC's general counsel, Larri Sue Jones, Larry Jones' daughter.

According to a February article in The Oklahoman, Jones' attorney, Leif Swedlow, said of the court case, "The suit attempts to dispute the election of five prominent pastors to Feed the Children's board of directors. Feed the Children believes that the claims have no merit." The judge disagreed, reinstating the five fired board members, and ordering no major changes in the organization until a later hearing on the matter can be held.

FC, which has consistently received an F grade from AIP for low program spending and high fundraising costs, continues to receive a failing grade based on its 2007 tax form and audit, the most current available. For more than a decade AIP has been reporting on issues related to FC's financial efficiency, accountability, and governance, and is interested in what additional information may be revealed while following the ongoing case as it unfolds.

From AIP's April/May 2009 Charity Rating Guide & Watchdog Report

Charity Questions the Value of Donated Goods

How $118,000 Shipment May Be Worth Less Than $7,000 to Recipients

Feed the Children (FC) is practically a household name thanks to its celebrity endorsers and television infomercials featuring malnourished children in impoverished areas of the globe. The charity claims on its web site that it spends 83% of its budget on its programs. What some donors may not realize is that hundreds of millions of dollars worth of donated goods are included in this high program percentage, some of which are "worthless to most people" according to one Oklahoma based charity, Mission Shawnee (MS).

FC receives a large share of its donations from its "corporate partners," such as Avon, Frito-Lay, ADM Co., Coca-Cola, among a long list of other companies. Companies have incentive to give in-kind donations of what FC refers to on its web site as "unsaleables, overages, and dated products" to charities such as FC in exchange for the lucrative tax deductions such donations may generate. In fact, FC lists tax savings as the first reason companies should consider donating, touting that companies "can receive up to twice the cost of the products you donate," and that FC works to "maximize benefits to your company."

Unfortunately, not all of the items FC accepts and later distributes to its partner charities are in usable condition or appear to be worth the value that FC is placing on them. MS received a shipment from FC late last year that included 265 cases of canned goods, most of which were "severely dented or rusted," or "without labels" and had to be thrown away, according to MS president, Dr. Robert Dawson. This shipment, which also included 1 pallet of containers, 72 cases of bottled water, 50 bags of flour, and 1 case of discount pharmacy cards, was valued by FC at $118,932.61, according to the "Certificate of Donation" FC provided to MS. This amount seemed extremely high to Dawson, who later contacted FC for a breakout of how the different items were valued. He discovered FC was valuing the pharmacy cards at "about $23 per card," accounting for about $112,000 of the shipment's total value, according to Dawson.

In its 2007 tax form FC reports accepting donations of pharmacy cards worth over $22.4 million, but does not provide a breakout of the amount it distributed to other charities or, more importantly, explain how it determined that the cards are really worth this amount. Similar cards are readily available for free through numerous web sites and organizations. At least some of the pharmacy cards were initially donated to FC from marketing services company Vertrue Inc. According to the informational material attached to the pharmacy cards MS received, people using the cards may "save an average of 20% on prescription drugs." Dawson said he was not able to distribute any of the pharmacy cards he received from FC due to lack of interest because they cannot be used in conjunction with any other discounts, such as with a person's health insurance. "If one side were blank we could use them for scratch paper," said Dawson, referring to the cards.

While it does appear that some cardholders may be able to take advantage of drug discounts by using the pharmacy card for certain purchases, AIP questions the high value FC is placing on the cards. Charities have incentive to inflate the value of the in-kind items they receive and distribute because they can take credit for the value of these goods in their program percentages. This can have the effect of making a charity appear to be operating efficiently even if very little of the cash donations it receives are being used for its charitable programs. According to FC's Board of Directors Meeting Minutes of April 11th, 2008, the charity's own auditors flagged how FC values its noncash goods as one of its "material weaknesses," specifically naming the "Vertrue pharmacy card situation."

This is not the first time AIP has caught a charity using donated cards of questionable value to puff up its program percentage. Help Hospitalized Veterans (HHV) took credit for $18,750,000 worth of "phone cards" it received and passed through to its related charity Coalition to Salute America's Heroes (CSAH) in fiscal 2006. These "phone cards," which were distributed to overseas military personnel by CSAH, were not for soldiers to call home to their family but rather to make free calls for sports scores with ads provided by a company called EZ Scores. HHV and CSAH, who share the same president and founder, each counted $18,750,000 of the sports score cards as a contribution and program expense in their respective fiscal 2006 financial statements. These sports score cards and $2 million in donated public service airtime accounted for 85 percent of CSAH's total program expenses reported in its 2006 financial statements.

MS received only one shipment from FC prior to the one containing the mostly unusable items. It included a large volume of items for infants and toddlers, most of which MS was able to distribute to the needy and were "very useful" according to Dawson. However, it can be expensive for some small groups to request items from FC since it requires charities like MS to pick up the tab for any costs to transport available donated items from its warehouse. "We have to get ahold of a refrigerated truck to pick up the items," said Dawson, who cited this as the primary reason why MS did not regularly request additional goods from FC after the first shipment. He said that arranging transportation for the items was costly and that the goods made available to his charity by FC were not always items his small charity could easily use or what was most needed. "Usually we have limited use for a half a train car of pickled beets," he added.

Since FC does not purchase the donated goods that it distributes, nor does it pay to deliver goods to its recipient partner charities, donors who contribute to FC may be wondering what happens to their cash donations to the group. About 60% of FC's cash was spent on "television and radio" and "direct mail" in 2007 according to the group's audit reporting of the same year. AIP determined that in 2007 FC spent only 18-19% of its budget on its programs once noncash items are excluded.

As of publication FC has not responded to AIP's requests for comment on this story.

From the April/May 2005 Watchdog Report

Food is Only a Small Portion of What Feed the Children Distributes

Feed the Children (FC), an AIP F-rated charity that spends only 18% of its cash budget on program services and spends 60% on direct mail and television and radio ads, has been enormously successful obtaining gifts in kind. In fiscal 2004 FC received $865 million in donated goods, a 79% increase from fiscal 2003. 64% of its in kind donations came from three corporations, according to FC’s fiscal 2004 audit.

FC has repeatedly declined to fulfill AIP’s request to disclose what it is actually distributing to which specific charities. Finally, in February of this year FC did disclose to us in a letter the basic categories and amounts of $796 million worth of goods distributed. This letter did not cite the time frame in which the distribution occurred and omitted any information on which charities received the goods, saying, “Our policy to not disclose the names of the charities that we distribute to is fully compliant with nonprofit law.” FC cited privacy as their reason for not disclosing who received the goods. This would be an understandable concern if we had requested the names of people who had received the goods. Since AIP is asking only for the names of charities, not individuals, AIP does not believe that providing such information violates anyone’s privacy.

Donors should be cautious not to read too much into a charity’s name—Feed the Children’s distribution of “assorted food,” “produce,” and “beverages” accounts for only 14% of the total distributed. By not disclosing more specifically what types of in-kind food or drink are distributed, there is no way of knowing how much of it is non-nutritious or empty-calorie foods, such as soda pop and chips (Frito Lay is a “corporate partner” of FC). The biggest category of distribution is “medical” at 66%. After food, the next largest categories cited are “miscellaneous” at 9% and “books” at 5%. Knowing which charities received these goods could give the public insight as to whether or not these items are used to benefit children or others in need.

From the November 2000 Watchdog Report

Charity Circulated Forged Audits

When are audited financial statements unaudited? When the accompanying audit report is fake. The fiscal 1999 and 1998 financial statements of Feed the Children (FTC), formerly Larry Jones International Ministries, Inc., distributed to AIP and state regulators contain the forged signature of Arthur Andersen L.L.P., a major public accounting firm.

According to FTC, its former Chief Financial Director Monty Rainwater confessed that he forged Arthur Andersen’s name on FTC’s ’98 and ’99 financial statements. Tim Hackler, a spokesperson for FTC, said that Mr. Rainwater had told officials that he did it because he got behind in his work. Mr. Hackler said no one told Mr. Rainwater to forge the documents and that he did not do so for financial gain.

Mr. Hackler said that he feels at this time that the unaudited numbers used in the financial statements are good. He also said that Arthur Andersen is currently conducting an audit of FTC’s 1998 and 1999 finances.

FTC became suspicious a few months ago when officials could not get a few financial documents from Mr. Rainwater in a reasonable amount of time, according to Mr. Hackler. FTC then asked Capin Crouse, a Chicago accounting and consulting firm that specializes in nonprofits, to take a look around the finance department. At the time of Capin Crouse’s investigation, Rainwater admitted creating the forged audits and was fired shortly thereafter, according to a statement from Capin Crouse.

Although FTC has stated that it does not doubt that the 1998 and 1999 forged statements are materially accurate, AIP still is concerned that FTC’s Board of Directors did not discover over a two-year period that a real audit was not conducted. Typically at nonprofit organizations, the board or an audit committee of the board annually approves an audit and also receives communications from the auditor concerning the organization’s internal controls and other financial management practices. Barry Gardner of Capin Crouse told AIP that FTC’s audit committee approved the forged fiscal 1998 audit and he did not know if the committee had approved the forged fiscal 1999 audit. FTC’s audit committee approved the 1998 audit in spite of the fact that it had not received direct communication from its auditor. Mr. Rainwater, according to Mr. Gardner had circumvented direct communication between FTC’s board and its auditor.

ACCUSATION OF BRIBE COVER-UP AND ONGOING CONCERNS
Wesley Billings, a former FTC finance officer, says he quit his job in 1998 at the charity because he was asked to create false paperwork to cover up a $20,000 bribe that was allegedly made by the charity to a Russian official, and because he was concerned about other purported financial irregularities, which he said he described in memos to FTC officials. Mr. Hackler told The Oklahoman that Mr. Billings was referring to a $30,000 bribe that a Moscow customs official demanded to allow goods to clear customs. FTC was given the option to pay $58,000 in government fees in lieu of the bribe and this is what the charity chose to do. Mr. Hackler accused Mr. Billings of making vague accusations against FTC.

Feed the Children continues to receive an “F” grade from AIP for spending only 12% of its fiscal 1999 cash budget on program services that are not conducted in conjunction with fundraising. FTC also continues to spend most of its cash budget on television programming and advertising, direct mail and postage, which accounted for $37 million, or 75% of total cash expenses, in fiscal 1999.

AIP believes strongly that an organization with a name like Feed the Children should devote more of its efforts to collecting and distributing food. Only 13% of the $243 million of gifts in kind that FTC distributed in fiscal 1999 was “Food and child care items,” this category accounted for 23% of gifts in kind in fiscal 1998. FTC continues to distribute far more dollars worth of “Medical, dental and optical supplies, equipment and services” and “Other materials and services” than food.

POPULARITY OF CHARITY GROWS
These problems have not been obstacles to FTC’s rapid growth. According to FTC’s unaudited figures for fiscal 1998 and 1999, cash contributions have jumped 168% from $25.0 million in 1994 to $67.0 million in 1999, including a 41% increase from 1998 to 1999. Gifts-in-kind or donated goods contributions have rocketed 251% from $69.9 million in 1994 to $245.2 million in 1999, including a 60% boost from 1998 to 1999.

The Daily Oklahoman reported that the son of Larry Jones, founder and president of Feed The Children (FTC), AKA Larry Jones Ministries International, stated in a personal bankruptcy filing that he owed his father’s charity $950,000. When the Oklahoma City newspaper pursued its story, FTC appeared to attempt to squelch the news. “These are disturbing and reprehensible tactics, of the kind you would expect from the worst elements in society, not from our religious leaders,” commented Stan Tiner of the Oklahoman in an editor’s note that accompanied the story.

The editor of the Oklahoman reported that Larry Jones said he would give the newspaper a story "twice as good" if it did not publish its story, and FTC’s lawyer and other third parties insinuated that information about the private lives of the reporters covering the story had been obtained. A Feed the children spokesperson told AIP that the “twice as good” story Larry referred to was about the work of Feed the Children, and information about a reporter was discussed, not insinuated, with an Oklahoman editor “off the record and on background.”

Many charities encourage their employees to spread the word about their good works and fine leaders. At FTC employees are required to sign a confidentiality agreement as a condition of employment. The Oklahoman reported that one section of this agreement states: “The undersigned agrees not to write or publish, or cause to be written or published, anything relating to, or alluding to, Larry Jones International Ministries, Inc., Feed the Children, or any other subsidiary or about Larry Jones and his immediate family, or staff members, past, present or future or concerning vendors. This includes, but is not limited to television, radio and all other media.” While it is a common practice in the nonprofit field for employees to respect the privacy of donors and clients and not to reveal the trade secrets of any for-profit subsidiaries, FTC’s confidentiality agreement is exceptionally broad, and it may deter the scrutiny that every charity needs. FTC told AIP that it is reevaluating its employee confidentiality agreement.

AIP’s summer Charity Rating Guide reported on FTC employee thefts at its Nashville warehouse, the low percentage of its cash budget being spent on program services, accountability problems and other concerns. Since AIP’s summer publication, the Oklahoman has looked further into FTC’s practices and activities. Some of the newspaper’s findings follow:

Feed the Children Execs Accused of Stealing Donated Supplies Intended for the Needy

After conducting a four-month investigation, WTVF, a Nashville television station, recently reported that it had secretly videotaped Feed the Children’s (FTC) Nashville front office “from the executive director on down” regularly taking boxes of donated goods. WTVF reported that “even family members [of FTC staff] got in on the action.” Warehouse workers, who tipped off WTVF about the alleged thefts, told that station that they saw staff takes boxes they believed were intended for Kosovar Refugees and Oklahoma Tornado Victims. The Associated Press reported that Tennessee Bureau of Investigation agents had raided the charity’s Nashville office and the homes of six administrative employees producing boxes of shoes, videos, blankets, food and other goods they believe were donated for the needy. “Merry Christmas to me” was written on one box according to the AP.

Steve Highfill, who was recently replaced as director of the Nashville center, one of FTC’s two U.S. distribution centers, told WTVF: “If they're taking stuff home and giving their little brother a pair of shoes or some food, I don't have much to say about that. If that’s wrong, fine. I don't think so and I don't think people are going to think so.” Larry Jones, founder and president of Feed the Children, responded later at a press conference by saying: “Donated items are not perks for employees. The executive director was not acting with my authority or approval with the decisions that he made regarding the employees taking donated items, and he was not acting in conformance with company policy.” FTC has temporarily closed its Nashville center and laid off all of its staff.

FEED THE CHILDREN
Questions remain about whether staff members at FTC’s Oklahoma City headquarters knew about the alleged employee pilfering. According to WTVF, Nashville warehouse workers were apparently ignored when they called the Oklahoma headquarters several times in December and January to report that administrative employees were using the warehouse as a personal shopping mall. Emilee Truelove, a FTC spokesperson, told AIP that she could not confirm or deny whether FTC received such calls. In response to the allegation that such calls were ignored, Mr. Jones told the Associated Press, “I hope our investigation brings that out because that’s new to me.” He also told the AP that he had hired investigators after learning that some Oklahoma City workers were taking goods, and those workers were subsequently arrested and prosecuted.

Ms. Truelove told AIP that Larry Jones learned in April that warehouse employees had a tape of alleged warehouse thefts, but that they had not sent it to him as he had requested.

EFFICIENCY, ACCOUNTABILITY AND FAMILY TIES
Feed the Children receives an “F” grade from AIP because in our opinion it spends only about 14% of its cash budget on program services that are not conducted in conjunction with fundraising. In fiscal 1998, FTC spent almost $13 million on television programs and almost $12.9 million on direct mail and postage. These two items account for about 70% of its $37 million cash budget. FTC, whose primary purpose is to distribute donated goods and supplies to the needy, spent only $944 thousand, or less than 3% of its cash budget, on shipping, handling and storage in fiscal 1998.

Feed the Children distributed $140 million of donated goods in fiscal 1998. About 23% of this amount was for “food and child care items.” (Note: FTC changed this category in fiscal 1998 from “food and grains.”) FTC distributed far more dollars worth of “Medical, dental and optical supplies” and “Other materials and services” than food in fiscal 1998.

Feed the Children appears to have an accountability problem. In the past it has not received “open book” status from AIP because it has failed to send us requested documents. Since the recent warehouse problems were exposed, however, FTC has said that it will comply with AIP’s document requests. FTC, also known as Larry Jones International Ministries, Inc., is not a member of the Evangelical Council for Financial Accountability, which requires that its members uphold standards for financial accountability, ethics and reporting.

FTC owns a for-profit trucking company that is headed by Larri Sue Jones, Larry Jones’ daughter. (She is also Legal Counsel for FTC.) This is of concern to informed donors since for-profit companies are not required to publicly disclose their financial statements. It is also not clear why FTC should be in the for-profit trucking business unless it can demonstrate that it can ship the charity’s donated goods more efficiently than outside transportation companies. Ms. Truelove told AIP that “Larry Jones created an empire from the ground up” and that he set up his own trucking company because he does not want to rely on outside people. She said that the trucking company was set up as a for-profit so that its trucks could bring back loads after making shipments of donated goods. She also said that none of the Jones family receives pay or benefits from FTC’s for-profit trucking firm. Larry Jones, his wife Francis Jones, who is Executive Vice President of FTC, and his daughter Larri Sue Jones together received compensation, benefits, expense accounts and other allowances totalling nearly $269,000 in fiscal 1998, according to FTC’s fiscal 1998 IRS Form 990.