For 14 years, the American Legacy Foundation has managed hundreds
of millions of dollars drawn from a government settlement with big
tobacco companies, priding itself on funding vital health research and
telling the unadorned truth about the deadly effects of smoking.
Yet the
foundation,
located just blocks from the White House, was restrained when asked on a
federal disclosure form whether it had experienced an embezzlement or
other “diversion” of its assets.
Legacy officials typed “yes” on Page 6 of their
2011 form
and provided a six-line explanation 32 pages later, disclosing that
they “became aware” of a diversion “in excess of $250,000 committed by a
former employee.” They wrote that the diversion was due to fraud and
now say they believe they fulfilled their disclosure requirement.
Records and interviews reveal the full story: an estimated
$3.4 million loss, linked to purchases from a business described
sometimes as a computer supply firm and at others as a barbershop, and to an assistant vice president who now runs a video game emporium in Nigeria.
Also not included in the disclosure report: details about how
Legacy officials waited nearly three years after an initial warning
before they called in investigators.
“We’re not innocent in this,” said Legacy chief executive
Cheryl Healton. “We are horrified it happened on our watch.
. . . The truth hurts — we screwed up.”
A Washington Post analysis of filings from 2008 to 2012 found
that Legacy is one of more than 1,000 nonprofit organizations that
checked the box indicating that they had discovered a “significant
diversion” of assets, disclosing losses attributed to theft, investment
fraud, embezzlement and other unauthorized uses of funds.
The diversions drained hundreds of millions of dollars from
institutions that are underwritten by public donations and government
funds. Just 10 of the largest disclosures identified by The Post cited
combined losses to nonprofit groups and their affiliates that
potentially totaled more than a half-billion dollars.
While some of the diversions have come to public attention, many
others — such as the one at the American Legacy Foundation — have not
been reported in the news media. And The Post found that nonprofits
routinely omitted important details from their public filings, leaving
the public to guess what had happened — even though federal disclosure
instructions direct nonprofit groups to explain the circumstances. About
half the organizations did not disclose the total amount lost.
The findings are striking because organizations are required to
report only diversions of more than $250,000 or those identified as
having exceeded 5 percent of an organization’s annual gross receipts or
total assets. Of those, filing instructions direct nonprofits to
disclose “any unauthorized conversion or use of the organization’s
assets other than for the organization’s authorized purposes, including
but not limited to embezzlement or theft.”
Examples of financial skullduggery abound in the District, throughout the Washington region and across the United States.
A few blocks from Legacy’s offices on Massachusetts Avenue, the nonprofit
Youth Service America
reported two years ago that it discovered a diversion in 2009 of about
$2 million that had been “misappropriated” by a former employee. After
The Post asked about the incident, he was charged in federal court and
in June was sentenced to four years in prison for theft.
A few blocks in the other direction is the
Alliance for Excellent Education,
which disclosed four years ago that investment manager Bernard L.
Madoff’s Ponzi scheme had wiped nearly $7 million from its balance
sheets. In a statement to The Post, officials there called the figure a
“paper” loss.
A few blocks farther is
AARP,
the national charity that advocates for older Americans. In 2011, it
disclosed two incidents with losses totaling more than $230,000,
attributed to embezzlement and billing irregularities. An organization
spokesman said no one has been charged in those incidents.
And just outside the Beltway, the Maryland
Legal Aid Bureau,
with offices throughout the state, disclosed two years ago that a
former finance director and an accomplice had been convicted of making
off with $1.1 million; officials there said in interviews they now think
the total loss was closer to $2.5 million.
Investment fraud was blamed for some of the largest losses
identified. Funds linked to Madoff’s scheme, which bilked investors
across the country for decades, reportedly drained $106 million from
Yeshiva University and its affiliates, $38.8 million from the Upstate New York Engineers Health Fund and $26 million from
New York University, according to the disclosures they filed.
But hefty sums disappeared in many other ways, too:
●The
Conference on Jewish Material Claims Against Germany,
a New York-based charity for Holocaust survivors, reported in 2010 that
it had been bilked out of $42 million in an elaborate, decade-long
conspiracy by swindlers who created thousands of fake identities. A
spokesman said the estimate has since been raised to $60 million.
●The
Vassar Brothers Medical Center
in Poughkeepsie, N.Y., in 2011 reported a loss of $8.6 million through
the “theft of certain medical devices.” A medical center spokeswoman
said a confidentiality agreement prohibited her from explaining further.
●
Columbia University
disclosed in 2011 that it had been defrauded of $5.2 million in
“electronic payments.” A university spokesman confirmed that the
disclosure referred to an incident involving a former university
accounting clerk and three associates, later convicted of redirecting
$5.7 million meant for a New York hospital.
●And the 140-year-old Woodcock Foundation of Kentucky, which
awards scholarships to students in need, disclosed that alleged fraud by
a former chairman drained more than $1 million from its accounts,
leaving the charity with assets totaling just $8.
“You go out of your way to trust a nonprofit. People give their
money and expect integrity. And when the integrity goes out the window,
it just hurts everybody. It hurts the community, it hurts the
organization, everything. It’s just tragic.”
The Rev. Raymond Moreland, Maryland Bible Society
Each year, larger registered nonprofits file a form with the
federal government that lays out their mission, leadership, revenue and
expenses. The question about diversions was added to the forms with
little fanfare in 2008, one of several changes meant to make it easier
for the public to gauge how well nonprofit organizations manage money.
While the losses identified in The Post’s study total hundreds of
millions of dollars, they represent only a fraction of the total. The
new question was phased in over three years and appears only on forms
submitted by larger nonprofit groups. Private foundations and many
smaller groups fill out alternative forms or no forms at all.
The Internal Revenue Service has said little about what
information it has gathered from the responses, beyond reporting last
year that 285 diversions totaling $170 million had been disclosed in one
year alone, 2009.
Chicago lawyer and governance consultant
Jack B. Siegel,
an early proponent of adding the diversions question to the disclosure
forms, said he had hoped it would allow the public to discover for the
first time just how much theft was taking place and would discourage
organizations from covering up problems.
“People should follow up and ask, ‘Are you properly monitoring
the money I’ve given you?’ ” Siegel said. “If I’m giving you my money
and you’re wasting it by allowing people to steal it, why should you be
allowed to hush that up? Why shouldn’t I know that?”
More than 1.6 million nonprofit groups are registered with the
federal government, and they control more than $4.5 trillion in assets.
An additional 700,000 organizations, such as churches and smaller
groups, need not register.
From 2000 to 2010, the number of registered nonprofits increased by 24 percent, according to an
Urban Institute study. Annual revenue at such organizations, adjusted for inflation, grew by 41 percent.
Those nonprofits perform vital work in the community and depend
on public goodwill, volunteers and donations. But the public’s stake in
the organizations is even greater. Tax benefits extended to nonprofit
organizations and their donors cost the U.S. Treasury about $100 billion
a year in foregone revenue, according to the
Congressional Research Service — a form of subsidy meant to further the organizations’ good works.
As it has grown, the nonprofit sector has repeatedly run into
accountability problems, prompting congressional inquiries over the past
decade into groups as varied as the
Nature Conservancy and the
Smithsonian Institution.
Little comparative data are available about the prevalence of fraud across business sectors. But a 2012 study by
Marquet International,
a Boston-based security firm that conducts an annual study of
white-collar fraud, concluded that nonprofits and religious
organizations accounted for one-sixth of major embezzlements, placing
second only to the financial-services industry.
John D. White, president of the Virginia Scholastic Rowing
Association, says his group is trusting of no one after its longtime
treasurer embezzled money that has prevented the association from making
needed improvements.
(Matt McClain/The Washington Post)
“I come across these cases all the time,” said Christopher T.
Marquet, who heads the firm. He said oversight at nonprofits is often
thinner and supervisors more trusting. “The control structures in these
organizations are much weaker,” he said.
In Legacy’s case, its report not only failed to disclose the
total of its estimated loss but also did not reveal that multiple
diversions had occurred over seven years and that they were not
discovered until more than a decade after they began.
Roughly half the organizations examined in the Post study did not
appear to have revealed the full amount lost, even though federal
filing instructions direct charities to disclose the amounts or property
involved.
Some organization officials said in documents and interviews that
they chose not to alert police, instead settling for restitution, which
often meant they also avoided public attention.
In interviews, some organizations said estimates of their losses
had changed since their filings. The Post also found that a small
percentage of groups chose to disclose financial restructurings, mergers
and other types of financial losses, even though they involved no
apparent wrongdoing.
The groups filing the reports were as varied as the nonprofit sector itself.
Locally,
Georgetown University
reported in 2012 that an unidentified administrator paid himself
$390,000 in “unapproved compensation” over four years from a bank
account the university did not know existed. No one was charged.
“People are going to say, ‘You stupid people,’ ” said the group’s president, John D. White. “They’re exactly right. You have to pay attention.”
The Virginia Scholastic Rowing Association says it had no idea
the “queen” of regattas was quietly spending tens of thousands of
dollars on things such as NFL tickets, vacations and cable TV. The
Post’s Lee Powell explains how a nonprofit group got taken.
(The Fold/The Washington Post)
And the 200-year-old
Maryland Bible Society of Baltimore disclosed that it had been defrauded of an undetermined amount by an unnamed former employee.
“It’s sadder when it happens to a nonprofit,” said the Rev.
Raymond Moreland, a Bible Society official who said in an interview
that a former secretary took $86,000 by falsifying checks and misusing
credit cards, then concocted fake audit reports to cover her trail. “You
go out of your way to trust a nonprofit. People give their money and
expect integrity,” he said. “And when the integrity goes out the window,
it just hurts everybody. It hurts the community, it hurts the
organization, everything. It’s just tragic.”
The former secretary was convicted of theft, Moreland said, but “the scar is still there.”
Legacy’s big loss
The American Legacy Foundation is a revealing case study. While
some challenges it faced were uncommon, fraud examiners said many
resemble those they see time and again.
Legacy was founded as a nonprofit organization in 1999 out of the
Master Settlement Agreement that resolved health claims brought against
cigarette companies on behalf of the public by authorities in 46 states
and the District.
With $50 million in annual expenditures and $1 billion in assets,
Legacy is perhaps best known for its edgy anti-tobacco advertising
campaign known as “Truth.’’ In one high-profile stunt, Legacy filmed
young people piling hundreds of body bags outside a cigarette company’s
headquarters in Manhattan, graphically depicting the daily toll of
tobacco-related illness.
“Being an honest and dependable source of information is our
bread and butter, because the minute we start bending and manipulating
the truth, we’re no better than the tobacco industry,” the organization
says on its “Truth” Web site.
When first asked by The Post about gaps in their disclosure
report, Legacy officials declined to provide full details. But they said
they had a change of heart when they later learned that authorities did
not plan to seek charges against the man they thought was responsible
for the group’s loss.
After discussions with The Post, Legacy officials supplied copies
of some documents and financial data related to what they allege was a
fraud committed by one of their most beloved former employees.
Deen Sanwoola, they said, was a charismatic computer specialist
who was Legacy’s sixth hire. He was tasked with building the
organization’s information technology department.
No one realized, during Legacy’s frenetic early days, that the
department had been formed without adequate financial controls, Legacy
officials said. Or that Sanwoola had been placed in charge of both
ordering electronic equipment and logging it as having been received — a
mix of responsibilities that an outside auditor later described as a
classic error that placed Legacy at risk.
“He had the keys to the kingdom of IT,” said Healton, who as
Legacy’s president and chief executive received a compensation package
worth $729,000 in fiscal 2012.
Reached by phone recently, Sanwoola, 43, told The Post he has had
no contact with Legacy for six years and had no idea that anyone had
raised questions about his department’s operations. “You’re kidding,
right?” Sanwoola asked.
Sanwoola promised to call back with additional information. He
did not and did not respond to numerous subsequent attempts to contact
him by telephone and e-mail about Legacy’s allegations that he defrauded
the organization.
After Sanwoola’s arrival in October 1999, Legacy’s IT department
began spending freely on computers, monitors and software, much of it
purchased from a single company in suburban Maryland, Healton said.
Thanks to the court settlement, Legacy enjoyed a tremendous flow of
cash, with revenue exceeding $320 million.
The first questionable purchase came in December 1999, according
to a forensic audit conducted years later. “The fraudulent billing
started almost immediately on his arrival,” said Wasden, the board
chairman.
In that first transaction, the foundation paid more than $18,000
for a computer processor and related equipment that auditors concluded
should have retailed for less than $7,000.
Data, documents and a summary of findings that Wasden provided to
The Post show that questionable purchases of printers, software and
servers steadily increased in size and frequency, peaking with 49
charges in 2006. In some instances, Legacy appeared to have paid many
times an item’s worth, auditors said. In others, auditors said Legacy
paid an inflated price for “phantom purchases” of equipment that
apparently never arrived.
Anthony T. O'Toole, executive vice president and chief financial officer for Legacy.
Over years, Sanwoola is thought to have generated as many as 255
invoices for computer equipment sold to the foundation, Legacy officials
said; 75 percent of them later were deemed by the foundation to have
been fraudulent. During that period, the officials said, Sanwoola
developed close personal ties to Legacy’s chief financial officer,
Anthony T. O’Toole.
“Everybody loved Deen,” O’Toole acknowledged.
In early 2007, Sanwoola, by then an assistant vice president with
a $180,000 compensation package, announced he was leaving. It jolted
Healton, who said she “begged” him to stay. O’Toole recalled Sanwoola
saying that his wife wanted to raise their children in Nigeria and that
the move would allow him to help his ailing mother.
And that appeared to be the end of it.
Until six months later, when an executive at Legacy approached
O’Toole and told him he was unable to locate computer equipment listed
in the inventory. O’Toole said he waved away the complaint without
bothering to investigate.
“He just pooh-poohed it,” Healton said of O’Toole, who received
current and deferred compensation totaling $568,000 in fiscal 2012.
Three years later, the same employee — Legacy officials describe
him as a whistleblower — again raised an alarm. This time, he bypassed
O’Toole and took his concerns to a staffer close to Healton.
The response this time was different. Within days, Legacy hired
forensic examiners to investigate and Healton notified the board.
One of the outside auditors’ first reactions, Healton recalled,
was, “There’s no way an organization like yours could spend this much on
IT.”
Auditors interviewed employees, reviewed invoices and recovered
deleted files from a backup computer server in Chicago. Auditors found a
template for invoices from the outside supply company, Legacy officials
said, as well as computer code that showed the template had been
designed and generated by someone using Sanwoola’s log-in.
Officials concluded that of $4.5 million in checks and credit
card charges associated with the Maryland IT supply company,
$3.4 million had been fraudulent.
Legacy officials and their auditors did not provide The Post with
any documentation showing how Sanwoola, who is not named as a director
on the supply company’s incorporation records, personally benefited from
the sales. In a written statement, Legacy officials said, “we have no
information or opinion regarding whether anyone other than Sanwoola had
any involvement in any fraud or other improper activity.”
“We stumbled,” Wasden said. “There are kids out there we could
have touched that we didn’t, because this money was taken from our
coffers.”
In late 2010 or early 2011, foundation executives asked Miller,
the Iowa attorney general on Legacy’s board, to call the office of the
U.S. attorney.
From Legacy to Fun City
Legacy officials said they had made no attempt to contact
Sanwoola, based on a request from federal prosecutors. In a statement
for this article, the U.S. Attorney’s Office responded that they had
made no such request.
The Post located Sanwoola in Lagos, Nigeria, where he said he
continued to work in IT and owned a business — he is “mayor” of Fun
City, a brightly painted children’s amusement center featuring
refreshments and a variety of video games. “I love games,” he said in a
brief telephone conversation.
Sanwoola said that there were no problems during his tenure at
Legacy and that he had heard no complaints since his departure. He
initially questioned whether a reporter’s call was a trick orchestrated
by tobacco companies.
“Are you serious?” he asked when told of the investigations. “Wow. . . .
I’m kind of bothered and concerned. Why couldn’t they just call me up
and say, ‘Hey, we’re doing an audit. This is what we found out. What’s
going on?’ ”
American Legacy Foundation board member Tom Miller, center
left, who is Iowa’s attorney general, and Legacy Chairman Lawrence
Wasden, the attorney general of Idaho, sit on a panel discussing the
1998 tobacco settlement Wednesday at the National Press Club.
(Mary F. Calvert/For The Washington Post)
“It’s way more than a shock to me, coming to me after more than
six years,” Sanwoola said. “If they are putting it on me — I don’t get
it. . . . Using the word ‘defrauded’ is just frustrating my head. I need to sit down and get my head together.”
The invoices that auditors identified as questionable purported
to have come from Xclusiv, a Maryland company that appears to no longer
be in business. Some invoices used the slightly different spelling of
Xclusive.
Contacted by The Post, neither of the men listed as corporate
directors said he knew Sanwoola. One of them, Mack Adedokun, said he had
never heard of Legacy and that Xclusiv had been a barbershop, not an
electronics supply company. The other, Abdul R. Yusuf, said that the
company had sold computers to Legacy but that he was unsure how many or
who had arranged it. He declined to say who controlled Xclusiv.
Yusuf said he did not know how personal papers bearing his name
and Social Security number had ended up on documents that Legacy said
were recovered from Sanwoola’s computer, but Yusuf speculated that he
may have been the victim of identity theft.
Told that property records showed Sanwoola had once bought a home
in Greenbelt from a man bearing Yusuf’s name, Yusuf said that probably
was his brother, who had the same name, shared the same address and has
since died. “I’m just hearing all of this for the first time,” Yusuf
said of details about Legacy’s claims. “I don’t know what you’re talking
about. It’s so scary.”
Disclosure
Word that millions of dollars were thought to be missing remained
largely within Legacy until it came time in 2011 to file its annual
disclosure, a public document signed under penalty of perjury.
The disclosure
said that the “fraud” of more than $250,000 did not “meet other
materiality tests for financial reporting” and that the organization had
told its board and law enforcement. It also said Legacy had filed an
insurance claim that had been “successfully settled.” The document did
not reveal that the settlement fell far short of the loss.
When first approached by The Post, Legacy general counsel
Ellen Vargyas
said the organization had no obligation to identify the full estimate
of the loss and stressed that more information was in the foundation’s
2012 filing. That filing included a reference to $1.3 million in
miscellaneous revenue from an insurance settlement, without saying what
it was for.
“I do think it was a full and appropriate disclosure,” Vargyas said.
Legal specialists consulted by The Post disagreed. “Those
suffering a diversion are obligated to report the dollar amount,” said
Gary R. Snyder, a charity consultant who tracks fraud.
Legacy’s board has included prominent public officials such as
former U.S. homeland security secretary Janet Napolitano.
Former Utah governor Jon Huntsman Jr. also has served on Legacy’s board.
Federal filing
instructions direct nonprofits to “explain the nature of the diversion, amounts or property involved
. . .
and pertinent circumstances.” Charity specialists said there is no
established penalty for a nonprofit that fails to follow the
instructions.
A day after declining to disclose the amount to The Post, Vargyas
reconsidered. “Our best estimate of the full loss comes to this:
$3,391,648,” she wrote in an e-mail. She said her initial reluctance to
disclose an amount was because Legacy’s number was based on estimates
that had “never been tested in a court of law.”
Wasden added that the absence of a total dollar figure in its
public filing was the foundation’s way of being restrained in describing
its loss, in deference to the then-continuing federal investigation.
The U.S. Attorney’s Office stressed, however, that it did not suggest
that Legacy play down the size of the loss in its disclosure.
Legacy officials said they were told in March, for the first
time, that there would be no charges. The U.S. Attorney’s Office
disputed that, saying the FBI informed Legacy in February 2012 that the
investigation had been closed because, despite warnings, Legacy had
taken more than three years to report the missing computers and lacked
reliable records of what it owned.
Healton said she had expected the criminal case to clear the way
to recover its money. But now there also will be no civil lawsuit
seeking repayment, Legacy officials said; as with the criminal case, the
statute of limitations has passed.
“No excuses. It’s a terrible loss, and it shouldn’t have
happened,” Healton said. “If we lost $3.4 million, that’s $3.4 million
that did not go to save lives.”
Vargyas said officials had taken the discovery “enormously seriously” and are dedicated to avoiding a recurrence.
“Obviously, we have to do better,” Vargyas said. “We do view ourselves as holding a public trust.”
Dan Keating and Jennifer Jenkins contributed to this report.
