Features

Long Running Family Charity Scheme Exposed

Posted on July 27, 2015

(With 3/30/16 Update)

Unfortunately for most of us, we have been touched personally by cancer in some way. That makes it all the more shameful when bad actors in the charity world mislead good-intentioned donors under the ruse of helping cancer patients, only to turn the misfortune of others into a great fortune for themselves and for-profit fundraisers. Four such cancer charities with a history of “F” grades from CharityWatch finally have been sued in a nationwide regulatory action. Cancer Fund of America (CFA), Cancer Support Services (CSS), Children’s Cancer Fund of America (CCFOA), and The Breast Cancer Society (BCS), as well as certain of their leaders, now have the dubious honor of being defendants in the first jointly filed lawsuit by the Federal Trade Commission (FTC), all 50 states, and the District of Columbia alleging deceptive solicitations by charities. The May 2015 federal action asserts that CFA, CSS, CCFOA and BCS bilked donors for more than $187 million between 2008 and 2012, but some of the allegedly shameful practices used by these four cancer charities started long before the late 2000s and regrettably, aren’t uncommon among other charities rated poorly by CharityWatch.

Nepotism & Lack of Governance

The Cancer Fund of America, founded by James Reynolds, Sr. (Reynolds) in 1987, has been “F” rated by CharityWatch since 1993 for its extremely low program spending and high fundraising costs. Named along with CFA and Reynolds as defendants in the May 2015 federal complaint are CSS (CFA’s fundraising affiliate), CCFOA and BCS, spin-off charities from CFA that each were started and run by either Reynolds or a Reynolds family member who had previously worked at CFA. This includes James Reynolds, Jr. (Junior), who started working at CFA from the age of 16, and Reynolds’ ex-wife, Rose Perkins (Perkins), both of whom also are named as individual defendants in the complaint. The formation of these “spin-offs” helped CFA, according to Reynolds as noted in the complaint, because CFA was “really top heavy” with executives. As the respective leaders of two of the CFA spin-offs, CCFOA and BCS, Perkins and Junior each were able to make higher salaries after leaving CFA. Junior was compensated over $260,000 in 2008 by CFA and BCS combined before leaving CFA for BCS, and Perkins earned over $220,000 in 2009 from CCFOA, according to the tax filings for each charity. Reynolds’ compensation from CFA eclipsed the $200,000 mark in 2005, the year Perkins left her position as CFA’s vice president to become the chief executive officer of CCFOA. Additionally, the complaint describes that Junior promoted his wife to “a newly-created, second-in-command position [at BCS] at a significantly higher pay scale, and for which he neither advertised nor interviewed other candidates.” Junior’s wife was paid almost $120,000 by BCS in 2012, as reported in its tax filing. As all of this suggests, in addition to spreading out their high executive salaries, the Reynolds family now had three different charities for which to create jobs that could be held by relatives and friends. Taking full advantage of this, the complaint describes that 22 individual family members are or have been employed by Reynolds, Perkins and/or Junior at CFA, CCFOA and/or BCS, and that the charities allegedly used donor dollars to enrich family members and friends with lucrative salaries and personal items including cars, trips, luxury cruises, college tuition, gym and dating site memberships, and sports and concert tickets.

In fact, the May 2015 federal complaint alleges that CFA, CSS, CCFOA and BCS “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.” The charities’ respective boards of directors have included “hand-picked” family members, friends and fellow church members that have not acted independently from Reynolds, Perkins and Junior, but rather “[a]gain and again … have ratified decisions that furthered the private interests of the Reynolds clan, and ignored or failed to question policies and practices that benefitted those private interests at the expense of their charitable missions,” according to the complaint. The complaint alleges that the boards of CFA, CSS, CCFOA and BCS did not even carry out basic board governance practices, such as reviewing financial expenditures, creating and approving annual budgets, monitoring program accomplishments, observing conflict of interest policies, performing independent evaluations of executive salaries, and limiting gratuitous employee benefits. For example the complaint notes that: CFA and CSS have not used board-approved budgets at all; the CCFOA board knew that Perkins had hired, set salaries, determined bonuses, and set benefits for her relatives; board-approved bonuses at CFA and CCFOA were not related to revenue, performance or achievement of strategic goals, and were approved for multi-year periods, often with minimal board-level discussion; the CCFOA board approved a salary increase for Perkins at a time when the charity was scaling back its sole program due to lack of funds; and Junior’s salary at BCS increased by over 40% to almost $371,000 in 2010, the same year that both net donations received and direct cash aid distributed by BCS decreased. The nepotism, conflicts of interest, and lax board oversight described in the complaint that characterize CFA, CSS, CCFOA and BCS have allegedly allowed Reynolds, Perkins and Junior for years and years to get away with deceiving donors and misusing charitable funds to mostly profit themselves and the professional fundraisers they hired that took a cut of typically 80% or more of the cash donations collected, all according to the complaint. Although lax board oversight can be difficult to spot from the outside, family relationships and related party transactions involving the board members and/or officers of a charity must be reported on its annual IRS Form 990 filing, and are something that donors should take into consideration when making giving decisions.

Creating Name Confusion

Do the names “Cancer Fund of America,” “Children’s Cancer Fund of America” and “The Breast Cancer Society” happen to bring to mind a major, well-known cancer charity in the U.S.? Perhaps the American Cancer Society (ACS), which is often nicknamed “the Cancer Fund”? Well, that may not be a coincidence, but rather, a tactic employed by some charities to use names that sound or look similar to famous, well-regarded national charities. In fact, CFA’s founder, James Reynolds, Sr., was a former employee of the Knoxville County, Tennessee chapter of ACS before he was forced out of his job and later started CFA. Not only did Reynolds pick a similar sounding name to ACS for his new charity in 1987, but he also used a similar post office box address and closely-timed neighborhood door-to-door solicitation campaigns to those of ACS. The similarities between CFA and ACS even spurred a lawsuit against CFA in the mid 1990s that was filed by the Commonwealth of Pennsylvania and which resulted in a settlement that included a Commonwealth Court consent decree that required CFA to “clearly and conspicuously disclose” in its fundraising appeals that it is not affiliated with ACS, according to a February 1995 press release by the Pennsylvania Attorney General (AG). The Pennsylvania AG is quoted in the press release, saying that his office “frequently receives complaints from consumers who are solicited by ‘look-alike’ or ‘sound-alike’ charities which can be mistaken for well-established groups like the American Cancer Society and American Heart Association.”

Some specific examples of potentially confusing names among charities rated by CharityWatch include the “D” rated National Humane Education Society, which is similar to the well-known Humane Society of the United States; and the “F” rated Breast Cancer Research & Support Fund and “F” rated Breast Cancer Relief Foundation (a program of the National Cancer Coalition), which both are similar to the “A+” rated Breast Cancer Research Foundation. Whether intentional or coincidental, when charities use look-alike or sound-alike names, the potential confusion created for donors is real. This real possibility for such name confusion is what charities like those of the Reynolds family appear to be banking on, unfortunately more for their personal benefit and the profit of professional fundraisers than for helping those truly in need.

Improving Efficiency Ratios with Gifts-in-Kind

Another way that CFA, CCFOA and BCS may have confused donors is by disguising, at least on paper, their low program spending and high fundraising costs through reporting contributions and expenses related to gifts-in-kind (GIK) (or non-cash donations) distributed internationally. The May 2015 federal complaint against CFA, CSS, CCFOA and BCS describes their dealings in international GIK as “an extensive scheme” in which “[t]he vast majority of the goods shipped were prescription pharmaceuticals that, in numerous instances, could not be distributed or sold in the United States.” According to the complaint, the four charities failed to check that the contents being shipped overseas matched the descriptions on provided inventory lists, “[n]or did they make sure that donated pharmaceuticals were not expired or were in otherwise useable condition.” CFA, CSS, CCFOA and BCS reported the full value of the shipment contents in their respective contributions and expenses as if the GIK had been donated to and distributed by the four charities, when actually, their involvement with the GIK “was limited to paying shipping costs and broker’s fees to ship containers of goods to organizations in developing countries,” as described by the complaint. The federal action alleges that CFA, CSS, CCFOA and BCS improperly reported the receipt and distribution of GIK they did not own, as well as the value of the GIK, resulting in an increase of over $223 million to both their combined total reported contribution revenue from 2008-2012, as well as their combined total program spending over the same period. This gave the illusion that over 61% of the total spending by the four charities was for program services, when it otherwise would have been about 21%, according to the complaint. The complaint even cites an internal CFA presentation containing the observation that “our international shipping component has become very beneficial to boost CFA’s program service percentages.”

CharityWatch’s grades for all charities are based on calculations that remove the value of gifts-in-kind from contributions and expenses, which explains why we have a history of giving CFA & CSS, CCFOA and BCS such low “F” grades despite the “illusion” of more efficient program spending and fundraising ratios that they’ve created on their financial statements thanks to the value of GIK included in contributions and program expenses. The potentially dramatic impact of GIK can be seen in the table below, for example, which shows CharityWatch’s ratings of CFA (consolidated with CSS), CCFOA and BCS, for certain years of operation when respective GIK values were relatively high, compared to how each charity would be rated if we had instead included the value of GIK in contributions and expenses.

Charity

Gifts-In-Kind Excluded

Gifts-In-Kind Included

Program %

Cost to
Raise $100

Actual
CW Grade

Program %

Cost to
Raise $100

Would-be Grade

CFA & CSS (2011)

27%

$65

F

67%

$29

B-

CCFOA (2010)

15%

$78

F

52%

$45

C-

BCS (2013)

11%

$84

F

63%

$36

C+

 

There’s about $48 million in combined value for the GIK amounts at issue in the table above, with over $19 million in GIK reported by CFA & CSS, over $6 million by CCFOA, and over $23 million by BCS. International GIK shipments represented 100% of the GIK expenses included in CCFOA’s program services in 2010, and that percentage was about 94% for BCS in 2013 and about 85% for CFA & CSS in 2011.

The reality is that the reporting requirements for international gifts-in-kind on a charity’s IRS Form 990 filing are so minimal and allow for so much discretion and flexibility that in CharityWatch’s view, it almost invites abuse or misuse by charities. Basically, charities only need to provide a geographic area for the GIK recipient (e.g., Africa, the Caribbean, Central America or Southeast Asia), a general description of the GIK provided (e.g., “clothing,” “food” or “medical supplies”), an aggregate dollar value for the GIK sent, and a valuation method (usually “FMV” for “fair market value”). The lack of particular names and addresses for the organizations outside of the U.S. supposedly receiving the GIK, plus the non-specific descriptions of the goods being shipped, make it impossible for a third-party, such as CharityWatch, to verify the actual receipt and value of the GIK being reported.

Moreover, the inconsistent and improper valuation of gifts-in-kind in general has long been a problem in the nonprofit industry. For example:  World Help disclosed in 2013 that the misreporting of GIK caused it to overstate its 2011 revenue by over $200 million; in January 2012, the IRS penalized Food for the Hungry $50,000 for allegedly deceiving the public when it valued GIK at hundreds of times more than their actual purchase price; and Feed the Children disclosed in its fiscal 2010 audit that under the adoption of a new valuation standard for donations of de-worming pharmaceuticals distributed internationally, the approximately $544 million that it recognized for contributions of de-worming pharmaceuticals in fiscal 2009 would have instead been valued at approximately $21 million. CCFOA had its own reporting issues regarding the valuation of GIK as evidenced by a comparison of its original versus amended tax filing and audited financial statements for 2012, which shows that CCFOA increased the value of the donated drugs and medical supplies it distributed internationally by over $7 million. To explain this, the notes to CCFOA’s amended audited financial statements for 2012 include the following disclosure [emphasis added]:

Subsequent to the issuance of Children’s Cancer Fund of America’s December 31, 2012 financial statements, management and the Board of Directors made the decision to revalue the Organizations [sic] gifts in kind to more accurately reflect fair value in accordance with generally accepted accounting principles and to report such values consistent with prior years. Donated Supplies and Commodities were originally reported as $1,945,305 in contributions and Supplies and Commodities Distributed were originally reported as $1,933,806 in expense. After revaluing the donations using Average Wholesale Price as used in prior years, Donated Supplies and Commodities as restated are $9,020,878 and Supplies and Commodities Distributed as restated are $9,009,379

Like a magician’s trick, CCFOA boosted its GIK by about 365% on its restated financial statements for 2012, and its ratios magically improved from 32% to 63% for program spending and from $65 to $35 for the cost to raise $100 in funds. With the benefit of being able to so easily inflate contributions and program spending, while diluting the ratios for fundraising and administrative costs, it’s no wonder that the four Reynolds family cancer charities are far from being the only ones to allegedly use GIK “schemes” to mislead donors. CharityWatch’s removal of the value of GIK from a charity’s contributions and expenses, however, neutralizes the would-be impact of any such GIK “schemes” and provides donors with an apples-to-apples comparison of how charities use their cash donations, regardless of any dealings in GIK.


As a result of the May 2015 federal complaint, CCFOA and BCS have agreed to cease operations under the terms of a settlement. The settlement also prohibits Rose Perkins and James Reynolds, Jr. from any future fundraising, charity management, or oversight of charitable assets. CFA, CSS and James Reynolds, Sr., however, have not settled, and the case against them will continue to be litigated (as of July 22, 2015).

While the May 2015 federal action against CFA, CSS, CCFOA and BCS is a tremendously positive step by our government regulators, CharityWatch hopes that they continue to pursue other questionable charities that appear to be misleading the public and wasting millions of our charitable dollars. One possible example is the “F” rated American Association for Cancer Support (AAFCS), whose founder is connected to the Reynolds family by having been an employee of CFA and CCFOA, as well as being Rose Perkins’ daughter-in-law. Although AAFCS, just formed in 2011, was not included in the May 2015 complaint, it is being investigated by the Tennessee secretary of state’s office (SOS), as reported by The Wall Street Journal in July 2015. A spokesman for the Tennessee SOS is quoted in that report saying, “We are very aware of the strong family ties between the American Association for Cancer Support, Inc. of Knoxville and the four sham charities named in the unprecedented multistate action.” Reinforcing AAFCS’s link to the four Reynolds family charities named in the complaint, CharityWatch’s President also is quoted by The Wall Street Journal, adding that AAFCS “appear[s] to follow a pattern similar to the groups that were part of the [FTC] claim.”

See also the James Reynolds, Sr. & 24 Family Members feature in the CharityWatch Hall of Shame.

 

March 30, 2016 Update:  CFA & CSS Shut Down and Reynolds Banned for Life Under Settlement Orders

Cancer Fund of America (CFA), Cancer Support Services (CSS), and their leader, James Reynolds, Sr., have agreed to settle charges related to the claims made in the May 2015 action alleging that CFA, CSS, CCFOA and BCS bilked donors out of more than $187 million. CFA and CSS allegedly were responsible for more than $75 million of the claimed amount. Under the settlement orders, CFA and CSS will be permanently dissolved, and Reynolds is permanently banned from managing, operating, fundraising, or otherwise working for a nonprofit organization.

The settlement was announced March 30, 2016 and concludes the largest joint enforcement action ever undertaken by the FTC and state charity regulators. See the FTC’s press release for more on the settlement agreement.

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