DES MOINES — State and federal officials brought a consumer fraud lawsuit Tuesday against four alleged "sham" charities that bilked consumers out of more than $187 million in donations used primarily to enrich the operators' families rather than the cancer-related causes they misrepresented, Iowa Attorney General Tom Miller said.
"The conduct we're alleging here is very serious," said Miller, who held a news conference to discuss the jointly filed lawsuit brought by the Federal Trade Commission and officials in all 50 U.S. states and the District of Columbia. The suit alleges that the four cancer charities and their operators scammed Iowans and consumers throughout the country over a five-year period beginning in 2008.
The complaint alleges the defendants — including the 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.
"These defendants raised money to help victims of cancer and then used the money primarily on themselves," Miller said. "This conduct was at the expense of legitimate charities and causes, and the many generous donors who wanted to alleviate suffering by cancer victims."
Miller said he does not think "a huge percentage" of the money involved will be recovered.
"It's not going to approach $187 million, but we'll get as much as we can," he said.
Chris Coleman, the president of the Better Business Bureau serving greater Iowa, the Quad-Cities and the Siouxland area, urged consumers to "study, research and be informed" before making a contribution to a charitable organization.
He and Miller said they do not believe the scam will negatively impact legitimate organizations seeking to raise money to aid cancer victims and research.
Miller said his office could not calculate how much money came from Iowans, but he said the state represents about 1 percent of the U.S. population, so he projected that up to $2 million of the contributions came from Iowans.
According to the lawsuit filed in Arizona, a large majority of consumers' contributions benefited only the defendants, their families and friends, as well as professional fundraisers who often received 85 percent or more of every donation. Miller said about $5 million of the money raised was used for legitimate charitable purposes.
The complaint alleges that the Cancer Fund of America, Cancer Support Services, the 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 they were qualified or not, and used the organizations to provide them with steady, lucrative employment.
The lawsuit also alleged that the defendants wasted and misused consumers' donations, furnished little or no significant help to cancer victims and made false representations to the public that their charities were legitimate.
Among the allegations, the lawsuit claims the defendants or their telemarketers often told donors they would use their contributions to provide pain medication to children suffering from cancer, transport cancer patients to chemotherapy appointments and pay for hospice care for cancer patients. However, the suit branded those claims as false, alleging that the defendants did not operate programs that provided these services.
Named as defendants were: Cancer Fund of America Inc. and Cancer Support Services Inc. (which the complaint alleges operate as a common enterprise) and their corporate leaders, James Reynolds Sr. and Kyle Effler; the 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 state and federal plaintiffs also filed stipulated judgments with five of the defendants: the Children's Cancer Fund and Rose Perkins; the Breast Cancer Society and James Reynolds II; and Kyle Effler, according to a news release from Miller's office.
The complaint alleges that more money was spent on salaries than on the goods and services the organizations provided to cancer patients. In addition, the complaint alleges the defendants spent donations on luxuries such as cruises, personal watercraft outings, concert tickets and dating site memberships. All of the expenditures were approved by corporate boards that rubber-stamped the decisions of the individual defendants, the complaint states.
The lawsuit detailed a gifts-in-kind scheme that defendants used to make the corporate defendants seem larger and more effective than they really were, Miller said. Through the accounting scheme, the corporate defendants claimed to have received more than $223 million in donated gifts-in-kind and then reported distributing those goods to international recipients.
In fact, however, the complaint alleges the defendants were merely pass-through agents, did not own the gifts-in-kind as they claimed and should not have reported them as donated revenue or program expenses. By reporting the gifts-in-kind, the corporate defendants were made to appear far more legitimate and efficient to donors, regulators and charity watchdog organizations.
In settlements filed concurrently with the complaint, five defendants agreed to leave the charity business and stop fundraising. The settlement agreements will not be final until approved by the federal court.