Lawsuit filed alleging massive fraud by four cancer charities

From the News Sentinel:

Telemarketers told donors all over the country their gifts to a Knoxville-based charity would provide pain medication to children suffering from cancer, help transport patients to chemotherapy appointments and pay for hospice care for those dying of the disease.

Instead, a pittance of the $187 million raised by the Cancer Fund of America and its affiliated nonprofits over five years went to patient care packages made up of sample-size soaps, Little Debbie snack cakes, Carnation Instant Breakfast drinks, plastic cutlery, women’s makeup, iPod Nano covers, blank seasonal greeting cards and batteries.

The rest of the money raised — more than 87 cents of every dollar — went to pay the telemarketing companies that solicited the donations and to fund salaries, lavish trips and personal loans for founder James T. Reynolds Sr., his family and his employees.

They bought meals at Hooters, items from Victoria’s Secret and tickets for concerts and sporting events. Employees received gym memberships, dating website subscriptions and college tuition.

The nonprofit paid for board members and employees to take extravagant “training” trips on Carnival Cruises in the Caribbean and at Walt Disney World in Florida.

The charity even paid for a baby sitter to come along.

That’s according to the Federal Trade Commission and agencies in all 50 states, all of which filed a joint lawsuit Monday against the four “sham charities” and the people who run them. Each is accused of eight counts of fraud, misleading state charity regulators and violating telemarketing rules.

The government negotiated settlements totaling more than $200 million with two of the charities and three individuals — Reynolds’ ex-wife, his son and a close business associate of Reynolds.

But the case against Reynolds, the family patriarch who founded the Cancer Fund and originated its wide-reaching scheme in 1987, remains unresolved and will likely play out in court, said Tennessee Secretary of State Tre Hargett. Reynolds said Monday that his charity has been under federal investigation for more than four years.

Note: News release below.

Knoxville, Tennessee – (May 19, 2015) – Tennessee Secretary of State Tre Hargett, Tennessee Attorney General Herbert H. Slatery, III, together with state law enforcement partners in every other state in the nation, the District of Columbia, and the Federal Trade Commission, have jointly filed a federal lawsuit against four phony cancer charities and their operators with strong roots in East Tennessee, who allegedly scammed more than $187 million from consumers throughout the country.

“It’s unfortunate that we even have announcements like this. This action is about protecting Tennesseans from people or organizations determined to scam them out of hard-earned dollars they thought were going to help people in need. These organizations made unsuspecting people believe their donations were actually going to help cancer patients,” said Secretary Hargett. “It’s a sad situation, but these types of charities, and their operators, should know we will hold them accountable as long as they prey on the kind hearts of Tennesseans.”

The joint complaint alleges that the defendants—including Cancer Fund of America, Children’s Cancer Fund of America, Cancer Support Services and The Breast Cancer Society—portrayed themselves to donors as legitimate charities with substantial nationwide programs whose primary purposes were to provide direct support to cancer patients, children with cancer, and breast cancer patients in the United States.

In fact, the overwhelming majority of consumers’ contributions benefitted only the perpetrators, their families and friends, and professional fundraisers, who often received 85% or more of every donation. Consumers’ donations were wasted and misused, cancer victims were not helped, and the representations that defendants were legitimate charities were false. Among other things, defendants or their telemarketers often told donors that their contributions would be used to provide pain medication to children suffering from cancer, transport cancer patients to chemotherapy appointments, and/or pay for hospice care for cancer patients. These, however, were lies. The defendants did not operate programs that provided these services.

“I am happy to join with our state and federal colleagues and the District of Columbia as we present a united front combatting charity fraud of the worst kind. The Public Interest Division of our office, led by Janet Kleinfelter, has worked extremely hard to stop this egregious behavior. With our actions today, we are ending deceptive solicitations that targeted residents of Tennessee and every other state in the country. These companies claim to assist children with cancer and breast cancer patients, but do very little to that end and in the process take advantage of the generosity of individuals who truly want to help those battling the disease. We are also continuing the fight against Cancer Fund of America in court, where we will be seeking to halt its deceptive acts as well,” said Tennessee Attorney General Herbert H. Slatery III.

The federal court complaint names Cancer Fund of America, Inc., Cancer Support Services, Inc., the president of these two corporations, James Reynolds, Sr., as well as the CFO of both and the former president of Cancer Support Services, Kyle Effler; Children’s Cancer Fund of America, Inc., and its president and Executive Director Rose Perkins; and The Breast Cancer Society, Inc., and its Executive Director and former president, James Reynolds, II. The federal and state plaintiffs today also filed stipulated judgments with five of these defendants: Children’s Cancer Fund and Rose Perkins; The Breast Cancer Society and James Reynolds, II; and Kyle Effler. Litigation will proceed against Cancer Fund of America, Cancer Support Services (which the complaint alleges operates as a common enterprise with Cancer Fund of America), and James Reynolds, Sr.

The federal court complaint alleges that Cancer Fund of America, Cancer Support Services, Children’s Cancer Fund of America, and the Breast Cancer Society were sham charities, “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 individual defendants allegedly hired family members and friends, whether qualified or not, and used the organizations to provide them with steady, lucrative employment. The sham charities spent more money on salaries than on the goods and services they provided to cancer patients. In addition, the complaint alleges that the defendants spent donations on things like cruises, jet ski outings, concert tickets, and dating site memberships—actions that were made possible by corporate boards who rubber-stamped the decisions of the individual defendants.

In the eight-count complaint, the FTC and all the plaintiff states charged the defendants with misrepresenting that contributions would be used for charitable purposes, misrepresenting specific program benefits, misrepresenting revenue and program expenses related to international (gifts-in-kind) GIK, and misrepresenting that the primary focus of their reported programs was to provide direct assistance to individuals in the United States. Thirty-six states also charged defendants with making false and misleading filings with state charities regulators.

In addition, the FTC and 36 states charged Cancer Fund, Children’s Cancer Fund, and the Breast Cancer Society with providing their professional fundraisers with deceptive fundraising materials and thus the means and instrumentalities of deception. Finally, the FTC and the plaintiff attorneys general, including the Attorney General of the District of Columbia, charged defendants with violating the FTC’s Telemarketing Sales Rule. Cancer Fund, Children’s Cancer Fund, and the Breast Cancer Society were charged with assisting and facilitating in TSR violations and Cancer Support Services was charged with violating the TSR’s prohibitions on deceptive charitable solicitations.

To hide their high administrative and fundraising costs from donors and regulators, the complaint alleges that Cancer Fund, Children’s Cancer Fund, and Breast Cancer Society wrongly reported certain GIK as donated revenue and program services in their financial statements. Through this accounting scheme, these corporate defendants claimed to have received more than $223 million in donated GIK goods, and then reported distributing these goods to international recipients. In fact, however, the complaint alleges that these defendants were merely pass-through agents, did not own the GIK as they claimed, and should not have reported it as donated revenue or program expenses. By reporting this GIK, these defendants created the illusion that they were much larger and much more efficient with donors’ dollars than they actually were.

Settlements require that Children’s Cancer Fund and Breast Cancer Society be dissolved; Individuals Perkins, Reynolds, II, and Effler banned from fundraising, operating charities

In settlements filed concurrently with the complaint, five defendants agreed to leave the charity business and to stop fundraising. Children’s Cancer Fund of America and Rose Perkins agreed to entry of a judgment for $30,079,821, the amount that consumers donated to Children’s Cancer Fund between 2008 and 2012. The judgment against Children’s Cancer Fund will be partially satisfied by payment of the proceeds of the liquidation of all its assets by a receiver. In addition, the receiver will dissolve the corporate existence of Children’s Cancer Fund. The judgment against Perkins will be suspended based upon her documented inability to pay. In addition, Perkins will be banned from fundraising, from managing a charity, and from oversight of charitable assets.

Breast Cancer Society agreed to entry of a judgment for $65,564,360, the amount consumers donated to it between 2008 and 2012. Breast Cancer Society also agreed to the appointment of a liquidating receiver who will close its operations, liquidate its assets, and dissolve its corporate existence. The Breast Cancer Society settlement provides an option, subject to court approval, for the organization’s Hope Supply Warehouse program to be spun off to a legitimate, qualified charity unrelated to the current individual defendants and their family members, if such a charity willing to accept the program can be located. Remaining assets will be paid to plaintiffs to partially satisfy the judgment. In a separate order, Reynolds, II also agreed to a $65,564,360, judgment for the injury caused by the corporation he controlled, but that judgment will be suspended because of his limited ability to pay, upon payment of $75,000. In addition, Reynolds, II will be banned from fundraising, from managing a charity and from oversight of charitable assets.

In a separate settlement, the former Cancer Support Services president and chief financial officer of Cancer Fund, Kyle Effler, agreed to entry of a $41,152,231 judgment, the amount that consumers donated to Cancer Support Services between 2008 and 2012. That judgment will be suspended following a payment of $60,000. Effler, too, will be banned from fundraising, from managing a charity, and from oversight of charitable assets.

“I am grateful for the support we have received from multiple partners in Washington, D.C. and across the country,” Secretary Hargett said.

The action was filed in the U.S. District Court for the District of Arizona. The settlement agreements will not be final until approved by the Court. Litigation will proceed against Cancer Fund of America, Cancer Support Services, and James Reynolds, Sr.

People with questions about a charity or professional solicitor operating in the state of Tennessee should contact our Division of Charitable Solicitations and Gaming by calling (615) 741-2555 or going to sos.tn.gov/charitable.