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Huge Amounts of Donations Squandered by "F" Rated Charity Before Settlement Is Reached

Posted on September 24, 2014

Believed to be the largest amount of financial relief ever obtained in the U.S. for deceptive charitable fundraising, a $24.6 million settlement will be paid by the for-profit direct mail vendors of what has become one of the largest veterans charities in the U.S., Disabled Veterans National Foundation (DVNF). The settlement, announced in July 2014, was secured by New York’s Office of the Attorney General (OAG) as a result of its investigation into the alleged direct mail fundraising abuses by Quadriga Art (and its affiliates, including Brick Mill Studios ) and Convergence Direct Marketing in connection with their services on behalf of DVNF. Although it is quite astounding that DVNF’s direct mail related costs totaled about $4.7 million more than the $116 million in cash contributions collected from 2008-2013, the fact that DVNF allegedly still owed Quadriga close to $14 million at the time of the settlement also is shocking. However, the most appalling part of this case as described in the OAG’s investigation may be how DVNF was started, the lack of oversight by the DVNF board, and the multiple conflicts of interest that extended among the many involved parties.

Believe it or not, according to the OAG’s investigation, the creation of DVNF can be traced back to a “test-run” nationwide direct mail fundraising campaign and appears not to have stemmed from a passion to support our nation’s millions of injured veterans. The suggestion for this test-run direct mail campaign came about in 2007 after a meeting was arranged between representatives of a small women’s veterans charity, National Association of State Women Veterans Coordinators (NASWVC), and fundraising  counsel Brick Mill Studios. Larry Rivers, who arranged this meeting, was not only a friend or acquaintance of the women representing NASWVC, but also a Quadriga sales agent paid commissions based on the net dollar value of the services paid for by any charity Rivers introduced to the Quadriga companies (including Brick Mill), according to the OAG. A curious part of this arranged meeting between NASWVC and Brick Mill is that the OAG notes that at the time, NASWVC’s program activities were limited to organizing a small annual conference, which in 2007 cost the organization less than $10,000. This makes CharityWatch wonder why NASWVC would need to hire professional fundraising counsel to conduct a large-scale, nationwide direct mail solicitation campaign. However, according to the OAG, Brick Mill and/or Rivers suggested that NASWVC could test-run two fundraising campaigns, one in the name of NASWVC and a second in the name of a new, to-be-established “foundation.” Therefore, in our opinion, the real motivation for Brick Mill and/or Rivers may have been to start and essentially control a new veterans charity using the women from NASWVC. Ultimately, this is what ended up happening as, according to the OAG, NASWVC engaged Brick Mill as its fundraising counsel in November 2007 and agreed to establish a new charity, DVNF, for the purpose of test-running the suggested simultaneous direct mail fundraising campaigns.

Wasting little time, Quadriga’s lawyers, acting as legal counsel for DVNF, set up the charity, and in December 2007, DVNF engaged Brick Mill as fundraising counsel under a contract virtually identical to the one signed by NASWVC in November, according to the OAG. In fact, the OAG describes that “DVNF was an entity separate from NASWVC in name only” from the time DVNF was formed until approximately two years thereafter; DVNF did not have an office or employees, its board of directors consisted of the same women on NASWVC’s board, and its program activities were few other than to support the limited activities of NASWVC. DVNF, however, ended up the far and away “winner” of the two test-run direct mail campaigns as the solicitations sent on behalf of DVNF raised over $10 million in 2008 versus the mere $143,000 raised in the name of NASWVC, according to the OAG. Given these results, Quadriga discontinued soliciting on behalf of NASWVC before the end of 2008 according to the OAG, leaving the newly-formed DVNF as the focus for which Quadriga would eventually raise over $116 million in funds in the name of disabled veterans at a cost of almost $121 million by the end of 2013.

Brick Mill offered NASWVC and DVNF the use of a “funded model” for the two test-run direct mail campaigns, according to the OAG. Under the funded mailing model, the fundraiser assumes the up-front costs, and the charity pays the fundraiser solely out of the contributions raised as a result of the campaign. If the monies raised by the campaign are insufficient to cover the fundraising costs, the shortfall accumulates as debt, but neither the charity nor its directors or officers are obligated to cover any shortfall. However, the real risk of the funded mailing model is that the charity may lose control of its donor list (also called the “house list”) and the opportunity to solicit from it in future years. This is because the fundraiser may obtain a lien on the charity’s house list or the right to rent donor names until any debt is paid in an effort to lessen its risk of not fully recouping costs; the fundraiser also may obtain contractual control over all of the charitable funds raised until they exceed the amount due.

In CharityWatch’s opinion, use of the funded mailing model gave the Quadriga entities more leverage to control the relationship with their charity clients, NASWVC and DVNF, since the fundraiser controls the house list until any debt is paid off. We also believe that there exists a major problem with the funded mailing model in that it innately provides an incentive for the fundraiser to conduct massive direct mail campaigns in an attempt to recoup its investment and reward its affiliated companies even if it harms the future reputation and financial position of its charity client. Such incentive appeared especially present in the case of DVNF given that it essentially was started by Quadriga and, according to the OAG, operated with little oversight from the board of directors who instead deferred to Quadriga to make many of the managerial decisions for DVNF in its early years of existence.

The Quadriga entities involved in DVNF’s fundraising activities included Brick Mill as fundraising counsel, PEP Direct / PEP Response Systems for receiving and processing the donated funds, and Quadriga itself for the direct mail printing and production related operations. Convergence Direct Marketing initially joined DVNF’s fundraising activities as a Brick Mill subcontractor to handle other direct mail campaign related responsibilities, including strategy and evaluation, according to the OAG, and was paid a retainer by Quadriga plus commissions based on the number of solicitations sent on behalf of DVNF. Convergence replaced Brick Mill as DVNF’s fundraising counsel in June 2010, but the OAG notes that the parties’ tasks for DVNF did not materially change, nor did Convergence seek any competitive bids from others for the services being provided by the Quadriga entities. All the while, it appears that the DVNF board members may not have fully realized the nature of the interested party relationships among those involved in its direct mail fundraising as according to the OAG, Brick Mill did not adequately disclose to them that Quadriga and PEP were Brick Mill’s affiliates, nor that Convergence’s compensation would include a commission based on DVNF’s direct mail volume.

It also seems that the DVNF directors were not fully informed of the commission-based financial relationship between Quadriga and Larry Rivers, nor fully cognizant of how much influence the Quadriga related parties were exercising over the DVNF board. Rivers is described in the OAG’s report as an “unpaid financial consultant” to DVNF that advised the charity about organizational and operational matters and the merits of its direct mail fundraising, yet Rivers had been receiving payments from Quadriga since 2007 that totaled approximately $2.3 million as a result of him “introducing” DVNF to Quadriga, according to the OAG. Further, while the DVNF board relied on Rivers as a consultant, the OAG describes that Quadriga was routinely providing guidance to and consulting with Rivers about DVNF’s program activities, budget, board matters, and the public relations defense of DVNF’s direct mail fundraising. Quadriga also supported DVNF’s March 2010 hiring of Rivers’ daughter, Raegan Rivers, as its Chief Administrative Officer even though she had only limited post-college work experience at the time, and DVNF never posted a job announcement for the position or interviewed any other candidates before her hiring, according to the OAG. DVNF paid Raegan Rivers $55,884 in compensation in 2010, $78,187 in 2011, and over $101,000 for her base compensation in 2012 and payments made to her for consulting services provided to DVNF after her August 2012 resignation. By comparison, DVNF reported paying all of its other officers and/or directors combined a total of only $57,719 over the 2010-2012 period, $35,377 of which was paid in 2012 to the new Interim Executive Director. Raegan Rivers’ position as a DVNF officer provided Larry Rivers, Quadriga and Convergence with a direct conduit to the DVNF board as they would often communicate with her regarding DVNF matters, sometimes providing guidance and direction that she would pass on to the DVNF board, according to the OAG.

DVNF racked up almost $121 million in direct mail related expenses through 2013 for the campaigns being run by Quadriga and Convergence, which translates to an average $102 cost to raise every $100 in funds from 2008-2012. Exasperating DVNF’s fundraising inefficiencies, the OAG found that DVNF’s direct mail solicitation letters contained numerous misleading statements. The allegedly misleading aspects of DVNF’s solicitations included false claims that DVNF had a robust, nationwide network to provide direct assistance to disabled veterans; fictitious anecdotes about DVNF helping specific veterans in need; deceptive claims that DVNF will turn every dollar donated into ten dollars worth of goods for disabled veterans; and false assertions that DVNF exclusively serves disabled veterans, rather than veterans in general. Accordingly, while it was bad enough that almost all of the cash donations raised through DVNF’s direct mail campaigns were going directly into the pockets of Quadriga and Convergence, Quadriga and Convergence allegedly used deceptive solicitations in an effort to encourage giving to DVNF, which despite what was being claimed or implied in its solicitations, spent an average of only 4% of its cash budget on program services from 2008-2012. Given the exorbitant direct mail expenditures, the purportedly misleading solicitations sent to donors, and the woefully low percentage of funds used for program services, it’s no wonder that the OAG found that the creation of DVNF can be traced back to several parties with financial interests in proliferating a large-scale fundraising campaign for a charity that for all intents and purposes they controlled for its first several years of existence.

Under the OAG settlement terms, in compensation for funds that should have supported disabled U.S. veterans according to DVNF’s solicitations, the Quadriga affiliates and subsidiaries agreed to pay a combined $9.7 million and Convergence $300,000 in damages that will go to programs to help disabled veterans. However, given that donors contributed over $116 million in funds to DVNF, the $10 million in damages that will be used to support disabled veterans programs represents only about 9% of DVNF’s cash contributions, which is a far cry from the at least 60% in program spending CharityWatch considers reasonable for charities. In fact, the damages collected from Quadriga and Convergence would have to increase by close to seven-fold to reach 60% of the total cash contributions raised by DVNF. Therefore, while this $10 million in damages may be significant in its context as part of the settlement agreement, it barely compensates for Quadriga’s and Convergence’s actions on behalf of DVNF that allegedly helped divert many multiples of that amount in donations that could have benefited the programs of veterans charities with satisfactory or better spending ratios for program services.

The Quadriga entities also agreed to relieve DVNF of its $13.8 million in remaining fundraising debt as part of the OAG settlement, and DVNF will continue to operate. Under the settlement terms, however, DVNF must replace all of its founding board members with at least five new directors that add experience in the areas of accounting, nonprofit administration, social services and board governance. The settlement also requires that DVNF create an independent audit committee to oversee its accounting and financial reporting processes; refrain from using Quadriga or Convergence for three years and from engaging the services of Larry or Raegan Rivers; and end the use of the allegedly false and misleading fundraising claims. Neither Quadriga, Convergence, DVNF, nor any of the other parties to the settlement have admitted or denied the OAG’s findings or conclusions.

DVNF announced the hiring of a new Chief Executive Officer in October 2013 (while the OAG’s investigation still was ongoing). The new CEO was “preparing the organization for big changes that will make it more effective in its service to veterans, streamlining operations, and expanding reach” upon his hiring, according to DVNF. A new Director of Development with 10 years of experience in donor relations and nonprofit fundraising joined DVNF in May 2014. About two months later, the DVNF Board of Directors voted a current board member to take over as the board’s new president, being “tasked with adding new board members to give DVNF fresh perspective on its operations, and [to] work with [CEO] VanFonda to implement his vision to rebrand the organization in order to better meet the needs of veterans, while increasing transparency and accountability to donors,” according to a July 2014 press release by DVNF. The addition of three new DVNF board members was announced in early August 2014, with DVNF’s CEO saying in the press release, “All three of these new board members have qualifications and experience to help bring about the necessary changes I have been emphasizing since my arrival at DVNF.”

Whether or not DVNF will take advantage of the OAG settlement to turn itself into an accountable, financially efficient charity remains to be seen. CharityWatch has graded DVNF an “F” since 2010 when at that time we were the first to warn donors of its outrageously high professional fundraising expenses and its $8.4 million debt owed to an unnamed vendor (suspected and now presumed to be the Quadriga entities). Even though we wish the OAG had shuttered DVNF, or at least further penalized DVNF’s founding board members who failed to exercise proper oversight of the charity, the settlement agreement did unveil the possible extent to which some for-profit fundraising companies can influence and control a charity’s operations, especially inexperienced, start-up charities. It’s unsettling to realize that DVNF likely isn’t the only such charity to be exploited by for-profit fundraisers, but unfortunately, it would be naive to think otherwise. So next time you find a solicitation in your mailbox from a new charity, do your research before contributing, and remember DVNF—the veterans charity founded for a test-run direct mail campaign that had few accomplishments other than to line the pockets of Quadriga and the other parties that had a hand in its fundraising activities from 2008-2013.

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