Washington Post. 10/27/2013. Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits

http://www.washingtonpost.com/investigations/inside-the-hidden-world-of-thefts-scams-and-phantom-purchases-at-the-nations-nonprofits/2013/10/26/825a82ca-0c26-11e3-9941-6711ed662e71_story.html

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Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits

The American Legacy Foundation’s headquarters in Northwest Washington (Linda Davidson/The Washington Post)

WRITTEN BYJoe StephensMary Pat Flaherty

PUBLISHED: OCTOBER 26

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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.

SEE ALSO: Read about how a trusted bookkeeper wasembezzling money from a nonprofit rowing clubin Virginia, plus how this story was reported.

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.

Cheryl Healton is Legacy’s founding president and chief executive.

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 executiveCheryl 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.As part of its analysis, The Post assembled the first public,searchable database of nonprofits that have disclosed diversions, available at ­wapo.st/
diversionsdatabase. Groups on the list were identified with the assistance of GuideStar, an organization that gathers and disseminates federal filings by nonprofits.

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.