New York, NY - July 1, 2014 - Attorney General Eric T. Schneiderman today announced that his office has secured a $24.6 million settlement of his Charities Bureau’s investigation into direct mail fundraising abuses at what has become one of the country’s largest veterans’ charities, the Disabled Veterans National Foundation (DVNF). The abuses, the investigation found – including misleading solicitations and failure to disclose conflicts of interest –were perpetrated by DVNF’s two outside, for-profit direct mail vendors, Quadriga Art and Convergence Direct Marketing.
Under the settlement, Quadriga, which produced and sent out the mailings and played the dominant role in running DVNF's fundraising efforts, will pay $9.7 million in damages, and Convergence, which designed the solicitations and provided other advice, will pay $300,000 in damages. This $10 million will go to help support and improve the lives of disabled American veterans. In addition, Quadriga will forgive $13.8 million in debt that DVNF owes to Quadriga, and adopt a number of significant reforms to improve transparency and set a higher ethical bar for the direct mail charitable solicitations industry. Quadriga will pay an additional $800,000 to the State of New York for costs and fees.
“This investigation sheds light on some of the most troublesome features of direct mail charitable fundraising as it is practiced in the United States today,” said Attorney General Schneiderman. “Taking advantage of a popular cause and what was an unsophisticated start-up charity, these direct mail companies used cleverly designed but misleading mailers to raise tens of millions of dollars in donations from generous Americans, nearly all of which went to the fundraisers and their agents, and left the charity nearly $14 million in debt. Charities and their fundraisers that rely on direct mail campaigns can and must do better -- and this settlement is an important milestone on the path forward.”
The settlement with Quadriga and Convergence is believed to represent the largest amount of financial relief ever obtained in the U.S. for deceptive charitable fundraising. In addition to forgiving DVNF’s current debt of approximately $13.8 million, these for-profit direct mail companies will pay $10 million to assist the disabled vets who were supposed to have been helped by the DVNF’s nationwide appeals. Those funds will be used to support federally conducted research into technological advancements, new treatments, and innovative rehabilitation and service-delivery practices designed to improve the lives of disabled veterans. For example, $1 million of the funds will be directed to support cutting-edge spinal cord research at the James J. Peters VA Medical Center in the Bronx; $1,250,000 will go to support research on mental health issues; and $750,000 will be directed to support research into medical issues confronting disabled women veterans.
DVNF, the Louisiana-incorporated, Washington, D.C.-based charity in whose name millions of misleading mailings were sent to the public, was founded in late 2007 by a board with no direct mail fundraising experience. The charity is required by the settlement to reorganize its board, including replacing all of its founding directors; appoint a committee to re-examine its business model; terminate Quadriga and Convergence as fundraising advisers, and discontinue in all of its nationwide fundraising appeals the use of certain messaging, such as fictional stories of wounded veterans supposedly helped by the charity, that the New York Attorney General's Office found to be misleading to the donating public.
Through the end of 2013, DVNF had raised over $116 million in charitable donations from members of the public who generously responded to the mailings and product inserts that Quadriga and Convergence designed, manufactured and shipped. Many of those mailings were false and misleading, the investigation found. Some highlighted a moving story about a wounded veteran who was never helped by DVNF; others falsely claimed that DVNF had a robust “network” of veterans’ advocates and benefit coordinators throughout the country; and still others claimed that for every dollar donated, the DVNF would be able to deliver $10 in goods and services to disabled veterans, when in reality over 90 cents of every dollar went to cover DVNF’s direct mail costs. Indeed, despite having already paid its fundraisers over $104 million, DVNF still owed them another $13.8 million.
DVNF was founded in November 2007 by the board of the National Association of State Women’s Veterans Coordinators, another Louisiana not-for-profit corporation. From the beginning, the investigation found, DVNF failed to maintain adequate independence from its principal fundraiser, Quadriga. Quadriga’s lawyers got the charity up and running and drafted the fundraising counsel agreement that DVNF signed with Brick Mill Studios, a Quadriga affiliate; Quadriga selected DVNF’s auditor; Quadriga’s agent, Larry Rivers, a veteran with deep ties to the DVNF board, served as a highly influential “unpaid financial consultant” to that board, even while earning over $2.3 million in undisclosed commissions from Quadriga on the business that the fundraiser did with DVNF; and, when the media asked probing questions about these relationships, it was Quadriga that managed DVNF’s public relations response.
The Attorney General’s investigation determined that Quadriga took advantage of the DVNF board’s lack of fundraising experience to sign the charity up for a “funded model” direct mail solicitation campaign far larger in scale than the DVNF board ever imagined. Under the “funded model” arrangement, the fundraiser assumes the up-front printing, packaging and mailing costs of the direct mail campaign, and is paid only out of the revenues brought in by the campaign. In exchange, the fundraiser obtains effective control over the charity’s donated revenues, as well as a lien on the charity’s donor list. In this case, the investigation found, DVNF was not adequately informed, and did not ask, about many critical elements of such a campaign, including its projected revenues and costs, the projected break-even point for the charity, the price of particular items used in the campaign or potential conflicts of interest. Here, there were multiple conflicts of interest, including among the Quadriga affiliates, between Convergence and Quadriga, and between Larry Rivers, Quadriga’s commissioned sales agent, and DVNF, where Rivers served as a consultant and which then hired his daughter as chief administrative officer.
Since its founding, DVNF’s principal program activity has been its “gift-in-kind” program. Under this program, DVNF paid a third-party vendor, Charity Services International (CSI) of South Carolina, to obtain donated goods from corporate or institutional donors, document the supposed value and transfer of title to the donated goods and transport the goods to recipients such as veterans’ homeless shelters and “stand-downs” (sites where goods are distributed to needy veterans and their families). The investigation found that DVNF’s board provided minimal oversight of its “gift-in-kind” program, failing in many cases to ensure that the donated goods were being directed to disabled veterans, as the fundraising appeals suggested, or had any useful purpose at all. The investigation also showed that, without telling its charity client, Convergence received commissions from CSI linked to the amount of goods that DVNF obtained from CSI.
Under the settlement agreement, DVNF has terminated its relationship with CSI and will establish a board-level gift-in-kind committee to re-evaluate this program and, if it is continued, improve its administration.
The settlement affords DVNF, which hired a new executive director while the investigation was ongoing, the opportunity to make a fresh start: It is relieved of its enormous debt burden; all of its original board members must step down by the end of 2014; at least five new qualified directors must be added to its board; and, in addition to the gift-in-kind committee, the board must establish a new, independent audit committee. Furthermore, after a transition period winding down its existing direct mail campaign, DVNF is prohibited, for three years, from using Quadriga or Convergence to design or manage its charitable fundraising appeals, and it must permanently cease and desist using the fundraising claims the Attorney General’s office found to be false and misleading.
Attorney General Schneiderman’s settlement also requires Quadriga and Convergence to adopt a comprehensive set of reforms that will serve as important rules of conduct for the charitable fundraising industry going forward. Among other things, the reforms agreed to by Quadriga and Convergence require full disclosure of all potential conflicts of interest, prohibit dealings with a start-up charity that does not have independent counsel, and require the direct mail vendors to exercise due diligence concerning the factual accuracy of the fundraising appeals they send out in a charity’s name. To ensure that its “funded model” charity clients fully understand the scope and costs of their fundraising campaigns, Quadriga is also required to provide these clients with a complete written description of the elements of the proposed campaign, the costs and rate structure associated with each such element, and the annual and total costs and revenues the campaign is projected to generate.
The parties to the settlement have neither admitted nor denied the Attorney General’s findings. A copy of the settlement is available here.
The investigation was conducted by Assistant Attorneys General Michael Torrisi and Elizabeth Fitzwater of the Attorney General’s Charities Bureau and Senior Enforcement Counsel David Nachman of the Executive Division, together with Research Analyst Liam Arbetman. The Charities Bureau is led by Bureau Chief James Sheehan. The Executive Deputy Attorney General for Social Justice is Alvin Bragg.