Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: FTC, states charge cancer charities with bilking consumers out of $187M, (May 19, 2015)

By John W. Arden, J.D., LL.M.

In one of the largest government actions alleging charity fraud, the FTC and law enforcement partners from every state have charged four cancer charities and their operators with taking $187 million in donations from consumers under false pretenses, the FTC announced today. The charities told donors that their money would help cancer patients—including children and women suffering from breast cancer—while the overwhelming majority of donations benefitted only the perpetrators of the fraud and the fundraisers, the FTC claimed (FTC v. Cancer Fund of America, Inc., May 18, 2015).

A complaint, filed in the U.S. District Court for the District of Arizona, named as defendants Cancer Fund of America, Inc. (CFA), Cancer Support Services, Inc. (CSS), their president James Reynolds, Sr. and their chief financial officer Kyle Effler; Children’s Cancer Fund of America (CCFOA) and its president and executive director Rose Perkins; and The Breast Cancer Society, Inc. (BCS) and its executive director and former president James Reynolds II.

According to the complaint, the defendants used telemarketing calls, direct mail, websites, and materials distributed by the Combined Federal Campaign, which raises money from federal employees, to portray themselves as legitimate charities with substantial programs that provided direct support to cancer patients in the United States, such as providing patients with pain medication, transportation to chemotherapy, and hospice care. The lawsuit charged that the claims were deceptive in violation of Section 5 of the FTC Act, the FTC Telemarketing Rule, the Telemarketing and Consumer Fraud and Abuse Act, and state consumer protection laws.

The defendants allegedly used the organizations for lucrative employment for family members and friends and spent consumer donations on cars, trips, luxury cruises, college tuition, gym memberships, jet ski outings, sporting event and concert tickets, and dating site memberships. The defendants allegedly hired professional fundraisers who often received 85 percent of every donation.

To hide the high administrative and fundraising costs, the defendants falsely inflated their revenues by reporting more than $223 million in donated “gifts in kind,” which they claimed to distribute to international recipients, it was alleged. Thirty-five states claimed that the defendants filed false and misleading financial statements with state charity regulators.

CCFOA and Perkins, BCS, Reynolds II, and Effler have agreed to settle the charges against them. Under the proposed settlement orders, Effler, Perkins, and Reynolds II will be banned from fundraising, charity management, and oversight of charitable assets, and CCFOA and BCS will be dissolved. Litigation will continue against CFA, CSS and James Reynolds Sr.

The proposed final order against CCFOA and Rose Perkins imposes a judgment of $30,079,821, the amount consumers donated between 2008 and 2012. The judgment against CCFOA will be partially satisfied via liquidation of its assets. The judgment against Perkins will be suspended based on her inability to pay.

Proposed final orders against BCS and Reynolds II impose a $65,564,360 judgment, the amount consumers donated between 2008 and 2012. The BCS order provides an option, subject to court approval, for spinning off its Hope Supply Warehouses program to a legitimate, qualified charity. BCS’s remaining assets will be liquidated and used to partially satisfy the judgment. The judgment against Reynolds II will be suspended when he pays $75,000.

The proposed final order against Effer will impose a judgment of $41,152,231, the amount consumers donated to CSS between 2008 and 2012. The judgment will be suspended upon payment of $60,000.

“This is an historic moment—the first time that the federal government and the state charity regulators have joined together to present a united front against charity fraud,” said Jessica Rich, Director of the FTC Bureau of Consumer Protection, in an opening statement during today’s news conference.

The case is No. 2:15-cv-0088NVW.

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