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Leaked Report Alleges Wrongdoing within Shriners Hospitals for Children

   Oct 01, 2008

Image result for shriners hospital for childrenIn April of 2008 a Special Investigative Committee of the Joint Boards of the Shriners Hospitals for Children (SHC) issued an internal report on allegations that members of SHC's board of directors unethically intervened in the executive evaluation process of Edgar McGonigal, SHC's Director of Development. The purported report was leaked and posted on wikileaks.org, a web site that anonymously publishes sensitive material. It named Chairman of the Board of Trustees and SHC President Ralph Semb, and SHC Treasurer and Trustee Gene Bracewell, as the board members involved in the alleged unethical evaluation, which may have stemmed from a potential conflict of interest with a past poorly performing fundraising vendor, Vantage Direct Marketing Services (VDMS). McGonigal, who was fired and rehired by SHC, "believes that the actions of Mr. Semb were based on his unwillingness to support initiatives of Messrs. Semb and Blackwell with respect to direct mailing, among other things, and therefore had retaliatory aspects," according to the report. SHC is one of America’s wealthiest charities with fund balances of $9.7 billion and receives an F grade from AIP for having very large available asset reserves —equal to 11.6 years worth of operation.

At SHC McGonigal is responsible for some fundraising activities, including portions of the direct marketing program. In the past, SHC had contracted some of this work to Vantage Financial Services (VFS) whose apparent successor organization is VDMS, according to the report. However, past contracts appear to have been unfavorable to SHC: from June of 1999 through December of 2003, SHC received about $2.5 million, or approximately 5%, of the $46.2 million that VFS raised on SHC's behalf. For comparison's sake, from 2005-2007 SHC used a different fundraiser, Barton Cotton Sales Corporation, for direct mail services and received approximately $11 million, or about 46%, of the $23.9 million raised on SHC's behalf.

In June of 2006 and May of 2007, SHC received direct mail proposals from two different affiliates of VDMS, Convergence Direct Marketing and MCS Direct. Though neither of the proposals appeared to make apparent the affiliations with VDMS, the connections were apparent to McGonigal. Convergence previously used presentation materials that contained both its and VDMS's name and MCS Direct listed a joint venture with VDMS on its web site. McGonigal concluded that the Convergence proposal was inferior to a contract SHC had with a current provider and was not impressed with the MCS Direct presentation. He did not recommend pursuit of either contract, according to the report.

Also noted in the report is that VDMS is affiliated with Vantage Deluxe World Travel (Vantage Travel), whose CEO is the son of one of Bracewell's long-time associates. Bracewell has traveled on cruises arranged by Vantage Travel, at least some of which "have been provided to him at no charge…or a nominal fee," according to the report. Semb claims to have not participated in a Vantage Travel arranged cruise since at least 1999.

The report states that in October of 2006 Semb unilaterally terminated McGonigal on the basis of poor performance. It also notes that prior to McGonigal's termination, Bracewell had made comments claiming that McGonigal was unsuitable for the position. A SHC Trustee later came forth with documentation indicating that, in fact, McGonigal's performance was not unsatisfactory. At the Joint Board meeting that November, McGonigal was reinstated to his position.

In June of 2007 SHC began a routine, confidential executive evaluation of McGonigal, for purposes of executive development. According to the report, Semb contacted the director of the review and encouraged him to solicit evaluations from two of McGonigal's colleagues that Bracewell was in contact with. Both of McGonigal's colleagues believed that Bracewell had urged them to give a negative evaluation. Two unnamed senior executives indicated that these actions "compromised the…review process in an unprecedented way."

The report also preliminarily investigated claims, currently unsubstantiated, from a former SHC Controller that possible irregularities may exist in SHC's expenses as reported on its 2006 tax Form 990 which was executed by Semb. The Committee had not yet reached any conclusions with respect to these allegations at the time of the report's publication. According to Committee member John C. Nobles in a July 2008 The New York Times article, the Committee has since been disbanded by the board.

Prior to the Committee's disbandment, it set forth a series of recommendations for SHC, including: 1.) reprimanding Semb and Bracewell for violation of SHC's Conflict of Interest Policy, 2.) further investigation by the Committee into the allegations regarding the 2006 Form 990, including the hiring of an outside forensic accountant, 3.) amending the Conflict of Interest Policy to require compliance by assigning a full-time member of the legal department to the role and by forming a compliance committee within the Joint Boards, 4.) banning business with any entity that provides gifts, gratuities or favors to any board member or executive, and 5.) implementing a confidential path or hotline for employees or board members to report suspected wrongdoing.

According to The New York Times, Dr. Bernard J. Lemieux, who headed the Joint Boards, said no reprimand of Semb and Bracewell "was warranted or necessary." Lemieux also said in The Times article that SHC had reviewed its reimbursement policy and created a hotline to report wrongdoing. Semb told The Times that he and Bracewell had not tried to influence the choice of a direct-mail vendor.

As of press time, SHC had not responded to AIP's inquiries regarding the allegations made in the report.

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