Over the past year, New York Attorney General Eric Schneiderman has hunted down a succession of nonprofit scam artists.
His secret?
In James Sheehan, the state’s chief charity enforcer, he has a good bird dog.
Since taking over at the New York Charities Bureau in 2014, Mr. Sheehan has used a new state law governing nonprofits to aggressively flush out cheats and put nonprofit boards on notice.
Mr. Sheehan, known as a zealous regulator when he served as New York’s Medicaid inspector general, has designed an enforcement strategy that tracks the outside organizations that work with nonprofits, including lawyers, accountants, and for-profit fundraising firms. Most of the time, he says, people who are committing acts of fraud are not doing it alone. So when a nonprofit is caught, he looks into the web of fundraisers and accounting firms that helped it to try to root out more culprits.
“If you want to find bad guys, you find one bad guy and map out his relationships,” he says.
Mr. Sheehan’s work was most recently on display in a high-profile settlement with Cooper Union on September 2. In the settlement, which closes a chapter in a long-running dispute at the college, Cooper Union agreed to overhaul its Board of Trustees and submit to an independent financial monitor.
The same week, the state also reached a $4.4-million settlement with trustees of the Homeland Foundation, who siphoned off charitable donations for personal use. In addition to repaying the charity, the trustees agreed to expand the board membership and rewrite the group’s bylaws to eliminate trustee compensation and prevent it from making sweetheart deals to nonprofits with ties to board members.
Scared Board Members
While charity leaders welcome a purge of bad actors from their ranks, they worry that Mr. Sheehan’s approach will backfire and ultimately weaken nonprofits, says Doug Sauer, executive director of the New York Council of Nonprofits.
“It scares board members from serving,” he says. “They don’t want to have to keep looking over their shoulder.”
Normally, governance issues and fraud cases are brought to state regulators’ attention by a whistle-blower or a call from the media, according to Cindy Lott, executive director of the National State Attorneys General Program at Columbia University Law School and senior visiting fellow at the Urban Institute.
With Mr. Sheehan at the helm of the Charities Bureau, the New York attorney general’s office is taking a tack charity enforcers nationwide should view as a model, Ms. Lott wrote in an email. He is “pursuing a more proactive, methodical approach, looking for potential stress factors or particular relationships that could serve as indicators of potential problems within a charity,” Ms. Lott wrote.
Tough Law Passed
Mr. Sheehan’s aggressive approach is made possible, in part, by the New York Nonprofit Revitalization Act, a comprehensive revision of charity regulation that became law in 2014. While it lowered some bureaucratic hurdles for nonprofits — by making it easier to form and dissolve charitable groups — the law is regarded as perhaps the toughest in the nation in terms of how it seeks to regulate nonprofit board activity. Charity regulators nationwide are watching New York to see how the new law is enforced.
Since the law’s passage, Mr. Sheehan has traveled across the state speaking to nonprofit groups, accountants, and lawyers about the rules, which include a new whistle-blower policy. They also require nonprofits to create conflict-of-interest policies and prohibit board members from steering funds to nonprofits they have ties to.
Mr. Sheehan would like to see nonprofit audit committees request that their auditors certify that audits are performed according to standard accounting principles. They should also, he says, go “fraud brainstorming” with their accountants to explore how charities could be vulnerable to scams and ask for advice on internal controls that could mitigate risk.
“A good audit committee should ask for both of those things, and a good auditor should give them both,” he says.
Mr. Sheehan plans to offer a webinar series this fall to inform nonprofits about the requirements and plans to issue reports that for the first time will chronicle the bureau’s investigation efforts. The reports, he hopes, will raise awareness about the law and illustrate that investigations often end with a promise from the nonprofit that they will take specific actions to comply rather than being called to testify in front of a jury.
His goal is to help nonprofit accountants and lawyers understand the intricacies of the law so they, rather than law enforcers, can keep nonprofits in line.
“Behavior change works better when it comes from people saying, ‘This is what you need to do,’ rather than government saying, ‘You did it badly,’ " he says.
By educating nonprofits and the groups that serve them about their responsibilities under the law, Mr. Sheehan hopes to make his job of enforcing the law easier.
“Anyone who’s been in that job for more than 10 minutes is going to realize the limits of your enforcement resources,” says Sean Delany, executive director of the Lawyers Alliance for New York and a former charities-bureau chief.
Scams Persist
But educational efforts won’t reform the worst scofflaws.
Since taking the job, Mr. Sheehan’s investigations have resulted in a suit filed in April against Brooklyn Child and Family Services as well as the Project Teen Aid Housing Development Fund. The suit alleges the groups kicked residents out of houses owned by the nonprofits so the charities’ board members could sell the homes and profit directly from the lucrative real-estate market.
Another investigation discovered an alleged scam run by the National Children’s Leukemia Foundation. The group, according to a lawsuit filed by the state in July, attracted gifts of nearly $10 million by touting programs that didn’t exist.
According to press reports, officers of all three charities sued by the New York regulator, and their lawyers have denied wrongdoing.
The lawsuit against the National Children’s Leukemia Foundation illustrates Mr. Sheehan’s strategy of casting a wide net by examining people and businesses affiliated with troubled charities. It resulted from charges brought by all 50 states and the Federal Trade Commission against four allegedly fraudulent cancer charities in March. The leukemia organization and the cancer groups shared the same telemarketer, Associated Communication Services.
Expect more charges based on telemarketer relationships, Mr. Sheehan says. He and his team of about 25 lawyers are scouring Pennies for Charity, an annual report by the New York Attorney General’s office. The most recent report, issued in March, showed that only 48 percent of the money raised by telemarketers registered in the state actually went to charity.
Lots of Lawyers
While some cases seem clear-cut and some offenses appear egregious, questions about the new law abound. What is the definition of a conflict of interest? What constitutes independence for board members? And how, exactly, must auditors be examined annually by boards, as required? The language in the statute isn’t clear, says Mr. Sauer of the New York Council of Nonprofits. The rules, he says, instituted a lot of procedural tripwires that have put nonprofits on guard and scared people away from serving on charity boards.
“Everyone had to run out and pay for lawyers,” he says. “There are a lot of gotchas there.”
Like Mr. Sauer, Michelle Jackson, associate director of the Human Services Council, a group of 180 nonprofits, worries that prosecutions of nonprofits will continue to make headlines and sour public opinion on charities.
“Unfortunately, the news reports on car accidents,” says Ms. Jackson. “They don’t show the story where there wasn’t any traffic.”
Ms. Jackson, who, like other nonprofit leaders is aware of the reputation Mr. Sheehan earned New York’s Medicaid inspector general, says he has gone out of his way to meet with members of her organization to learn about difficulties they’ve had complying with the rules.
“He’s not a pit bull,” she says. “At least so far.”
Mr. Sheehan says those meetings, both in public and in private, will continue. Because many of the organizations he regulates provide essential human services, he says, he recognizes the need to punish misdeeds without destroying organizations that help shelter the homeless and feed the hungry.
“There’s no such thing as perfect compliance,” he says. “If there are 12 apostles, one of them is going to go bad. But if bad things happen, you want them to be corrected.”