More than two dozen local, state and national nonprofit agencies are being sued for the return of $2.1 million in donations in a Waco, Texas based lawsuit. A trustee for Life Partners Holdings claims the donations were made by the CEO from funds he fraudulently received from the company before it filed for bankruptcy last year. The alleged scheme appears to have been going on for seven years according to the claim.
The suit claims that donations from the CEO were fraudulent because the funds were obtained through an excessive fee structure that bilked investors out of returns.
Life Partners Holdings was recently investigated by the U.S. Securities and Exchange Commission for their practices involving the sale of investment contracts. According to the suit, Life Partners hid the amount it charged in fees and that only about 20% of the proceeds from investors were actually used to acquire policies while the remaining 80% was divided between future premiums and commissions to licensees and Life Partners. The Texas financial firm is accused of defrauding investors out of $1.3 billion according to the bankruptcy trustee representing creditors.
The attorney that filed the suit notes that no one believes the defendants were involved in the fraud, however, the CEO stands accused of evading taxes and steering millions of dollars to his alleged mistress, the founder of one of the local animal welfare groups in the list of defendants. A lawyer for the CEO said the suits filed by the bankruptcy trustee have “little, if any, validity” according to the Chronicle of Philanthropy. The suit is seeking to recover as much of the funds as possible.
Several of the recipients are animal welfare organizations but funds were also donated to renovate a building on a college campus in East Waco. The issue, of course, is that the majority of the funds received have been spent and many of the organizations are not in a position to be able to pay back the donation.
The Cancer Fund of America and Cancer Support Services raised approximately $75 million in donations for the fight against cancer, the problem was that less than 5% was actually being used for the intended mission while the remaining funds went to the charities’ organizers and their friends. According to articles in the Washington Post and the Chronicle of Philanthropy, the Federal Trade Commission announced a major victory on March 30, 2016 in its crack down of the sham organizations. As part of a settlement with the FTC, the charities agreed to be permanently dissolved and all of their remaining assets liquidated. Unfortunately, about 85% of the funds raised were already spent, mostly on keeping the scam going through ongoing fundraising efforts. The leader of the alleged nonprofits, James Reynolds Sr. will also have to surrender an unspecified amount of his personal assets and be banned for life from managing a charitable organization’s assets or being part of any charity’s board of directors.
According to the Washington Post, the director of the FTC’s Bureau of Consumer Protection, Jessica Rich, called the scam “a pernicious charity fraud” and continued in a statement to note that the groups “syphoned hundreds of millions of dollars away from well-meaning consumers, legitimate charities, and people with cancer who needed the services the defendants falsely promised.” The charities’ remaining assets will first go to repay states’ litigation fees and, after that, to legitimate charities that the states select.
According to the Chronicle of Philanthropy, “two other charities in the largely family-operated network, the Children’s Fund of America the Breast Cancer Society, agreed to close last year after federal and state authorities charged the four groups with collectively bilking some $187 million from donors.”
According to recent articles from Business Insider magazine and the New York Post even highly sophisticated investors are not immune to potential investment fraud against their non-profits. The Moore Charitable Foundation, an environmental charity established to protect land, water, and wildlife was the recent victim of an alleged investment fraud. The Foundation founded by hedge fund billionaire Louis Bacon, put approximately $25 million of its endowed funds toward the fraudulent investment. Along with being a well-known environmentalist, Bacon is known to be one of the most successful hedge fund managers out there and doubtless represents one of the most knowledgeable and sophisticated investors in the market.
Investment banker Andrew W. W. Caspersen was arrested on Saturday and charged with securities and wire fraud for his involvement in the alleged $95 million scam. Business Insider states: “According to the complaint, Caspersen solicited investments from two institutional investors in late 2015 for a shell company he called Irving Place III SPV LLC. Irving Place sounded similar to Irving Place Capital Partners III SPV, a legitimate private equity fund that’s not associated with Caspersen. Caspersen falsely told investors that their investment would be secured by the $900 million of assets of Irving Place Capital Partners III SPV…Caspersen’s Irving Place had ‘no legitimate business operations,’ the complaint said. Instead, of investing the money, Caspersen placed it in a brokerage account for his ‘personal use.’ He lost most of it from ‘aggressive options trading.'”
Questions started coming up in early March when Caspersen tried to solicit an additional $20 million from the Foundation. Based on their suspicions of perceived irregularities, the Foundation contacted the general counsel of the investment bank. According to the New York Post, of the original investment, “all but $40,000 of the money is gone, the feds say.”
Read more about the case here: http://www.businessinsider.com/moore-charitable-foundation-allegedly-defrauded-by-andrew-caspersen-2016-3
Millions of Americans have been on the receiving end of telephone callers falsely claiming to be from the IRS. Enough people have fallen for this scam over time to make this a lucrative business for the scammers.
At last, one such scammer, Sahil Patel, was sent to prison for 175 months and forced to disgorge $1 million of ill-gotten gains since his arrest back in December 2013. Patel was arrested for his participation in organizing the U.S. side of a fraud ring that used call centers in India to contact American citizens. The calling tactics were fairly sophisticated, even misusing calling services to make the Caller ID display phone numbers coming from the FBI or other federal agencies.
Unfortunately, Patel is but one of many scammers and his arrest barely makes a dent in the rampant and brazen criminal activity we are seeing. The callers are doing their homework – they know enough about the person to make the story believable. TIGTA, the agency overseeing IRS activities, still receives up to 12,000 complaints per week about these calls.
If you receive a phone call claiming you owe money to the IRS, do not answer any of the caller’s questions under any circumstances, no matter how convincing they sound. Instead, ask for the person’s name, ID, and their contact number. If the person immediately hangs up, you can be sure it is as scam. If unsure, contact your tax advisor or call the IRS at 800.829.1040, so your account can be reviewed to be sure there are no issues.
Earlier articles in our nonprofit fraud series focused on the underlying causes and signs of fraud. Now that you are armed with that information, what can you do about it? Fighting fraud requires elements of prevention, deterrence and detection.
Examples of effective anti-fraud controls include:
Conducting even an informal risk assessment periodically can be helpful in assessing what controls are in place and whether some should be added. It is not practical to have controls that would prevent all fraud as it would be too expensive, so it’s important to find a happy medium.
Small nonprofits are limited in the extent of internal controls they can have but there are some basic controls and segregation of duties they can implement. To learn more about how to implement anti-fraud controls in your organization, contact your Aronson advisor or Craig Stevens at 301.231.6200.