A Global Nonprofit Ponzi Scheme? Lessons Learned from a Fiscal Sponsor’s Collapse

When a nonprofit implodes, the tendency is to avert one’s gaze and hope that it was simply that one nonprofit or its specific cast of characters that made it a “one-off.” When the nonprofit International Humanities Center (IHC), a fiscal sponsor for over 200 projects around the world, imploded, it’s estimated that it took with it more than $1 million in donations that never made it to the intended recipients in what begins to look like a nonprofit version of a Ponzi scheme. Much of the money donated to IHC to hold and administer on behalf of the array of progressive political and cultural groups was likely used to pay for IHC’s past obligations and expenses—and an additional six-figure sum was allegedly embezzled by a staff person involved in a fraudulent investment deal. Dozens of the IHC projects lost thousands or hundreds of thousands of dollars entrusted to IHC for back-end operations—funds that were, in some cases, all that the groups had. Then again, since IHC was keeping the books, no one knows for sure just how much was, seemingly, misappropriated.

Now, these small organizations are asking themselves how this could have happened and what they might be able to do to recover their lost funds. But the groups lack the resources—and in some cases, the desire—to track down their money. We must not avert our gaze. If other groups outsourcing back-end operations to nonprofit fiscal sponsors are to avoid being taken advantage of, what lessons can we learn from the odd, sad tale of IHC?

The Victims: Small Grassroots Projects

Julie Ray works on conserving the local environment, history, and culture of central Panama at La MICA Biological Station. Working on location, Ray explains that she is “unable to run the NGO herself.” So, she chose the International Humanities Center (IHC) to be the project’s fiscal sponsor because of IHC’s “experience working with projects located abroad who wanted to fundraise in the U.S.”

From 2008 until May of 2011, the IHC was quick in paying La MICA’s expenses; she would request advances deposited in the project’s account and present expense receipts whenever she returned stateside. Then, communications and payments from IHC became a bit more sporadic, at times nonexistent. Advances and payments that were normally same-day transactions now took two or three weeks, or more. Ray was told that there was only one IHC staffer who could process money transfers, so that when he went on vacation, the process stopped.

Ray finally contacted IHC in December to inquire as to how she might be able to help make the process run faster. Should she submit her requests for funding more than a month in advance if it was taking IHC a month to process requests? Was IHC so short-staffed that projects like La MICA Biological Station should be thinking about how to adjust their financial planning? Two emails from Ray to the IHC leadership got no response. Then, Ray learned of a letter sent to some projects (though she never directly received it) from IHC Executive Director Steve Sugarman. In the letter, Sugarman announced that IHC, Ray’s fiscal sponsor, was insolvent, all-but-broke, and therefore unable to meet its obligations to a number of the projects on whose behalf it had collected donations.

A similar story to Ray’s has played out at many of the hundreds of projects like La MICA that IHC has sponsored over the years. Like the projects supported by better-known fiscal sponsors such as Third Sector New England and the Tides Foundation, these projects are largely “doers”—activists. Often, they will reside with a fiscal sponsor for accounting and other back-office functions while they develop the track record and internal capacity to go off on their own as a 501(c)(3) public charity. Others choose never to stray from a fiscal sponsor because they do not wish to divert any focus from the primary mission of the organization. As Greg Wragg of STREATS told NPQ, he “didn’t want to get involved” with nonprofit management, preferring instead to devote his energies to his organization’s main focus: helping homeless individuals.

“A (c)(3) is a big hassle,” says Deena Metzger of Mandlovu, another group that used IHC. “You can either raise money or do your work.” Another selling point was that IHC felt “personal in a world that is so institutional and disconnected,” Metzger says. “That personal relationship is very important to me.”

Other projects that turned to IHC included the Afghan Women’s Mission, Jane Ayers Media, investigative journalist Greg Palast’s investigative journalism fund, Rob Kall’s progressive news and commentary project OpEdNews, the Election Defense Alliance, Citizens for Election Reform, Voter Action, the Florida Fair Elections Coalition, the Election Transparency Coalition, and Soldier’s Heart, which works to alleviate post-traumatic stress disorder by helping to integrate returning veterans into their communities.

In return for offering these groups back-office services, the International Humanities Center of Pacific Palisades was supposed to take 10 percent of the funds generated on behalf of each project, but it now appears that IHC took much more than its contract with these groups stipulated.

In December, some of these projects heard from Sugarman what a few might have begun to suspect: the organization they had trusted to handle their finances and record keeping was, for all intents and purposes, just about dead. One of the project directors who was able to track Sugarman down found him admitting, reportedly, that the IHC had obligations of $1 million or more but funds at its disposal of only $10,000 (for more on the collapse of IHC, see Part I of this two-part series, “Vanishing Act: Activist Groups Say Donations Disappeared with Fiscal Sponsor”.

There were some warning signs, as IHC was in trouble—for some years—before the announcements of its ultimate demise in December 2011 and January 2012. For instance, the Internal Revenue Service launched what Sugarman’s correspondence referred to as a three-year audit of IHC. Representatives of projects contacted by Nonprofit Quarterly talked about the never-before calls from IHC at that time—calls in which IHC was suddenly asking for records and documentation to demonstrate the charitable bona fides of the projects’ expenses. One observer recalled meeting with Sugarman at that time and finding him troubled and stressed, which Sugarman allegedly attributed to the pressure of the IRS audit.

Another warning sign? One would think that a nonprofit whose business is fiscal sponsorship would be loaded with accounting intelligence, but IHC seems to have eschewed external audits before 2008. With the benefit of an external audit in 2008, IHC’s financial position suddenly shifted from marginally healthy to seriously problematic. The organization seems to have been reporting a large portion of the donations it received as unrestricted income, but post-audit, the classification of IHC assets as restricted mushroomed and the unrestricted assets plummeted.

In 2007, the organization had a positive total in its unrestricted net assets. At the beginning of 2008, that number had shifted hugely to negative $300,000, suggesting that IHC probably owed its sponsored projects moneys that it had spent on itself. By the end of 2008, that number had grown to negative $614,000, though it dropped to a negative $201,000 in 2009. In addition to discovering a batch of unknown liabilities, the auditors documented a growth in IHC’s temporarily restricted assets, from $973,000 to $1.557 million in calendar year 2008, a number that stayed at $1.553 million in 2009. IHC might have been able to draw unrestricted funds from its program service revenues, but the number plunged from $1.055 million in 2008 to $537,000 in 2009.

If IHC had professional auditors looking over their finances in earlier years, the nonprofit’s 990 forms would have revealed operating deficits, because IHC would not have been able to dip into project accounts that would have been classified as restricted assets. It is incredible that an organization selling its function as a financial back-office operation wouldn’t have been aware of these problems. Or if they were, the organization would seemingly have had to be engaged in an all-but-intentional Ponzi scheme, knowingly using donations for projects’ future expenses to pay their (and IHC’s) past expenses. Eventually, all Ponzi schemes collapse of their own accord, as the money coming in cannot cover the past-due calls.

If that’s what IHC was (or turned into), then the timing of IHC’s ultimate demise was perfect from a Ponzi standpoint. The nonprofit went down in December. As many of these projects experience significant end-of-year donations, it would be an ideal time for IHC to pay its own past and current expenses before closing up shop and leaving its projects without their donations.

The “Nigerian Investment Scheme” and Other Fiscal Disasters

What triggered all of this? If Sugarman was indeed stressed by the IRS audit, another source of stress might have been the reported expenditure of IHC cash in a fraudulent investment scheme that several sources have alleged captured an IHC operations person who left the organization or was dismissed sometime in 2009. A written statement from the director of Headwaters Productions (another project that used IHC as its fiscal sponsor) that was supplied to Nonprofit Quarterly by multiple sources quotes Sugarman acknowledging the fraud, which he characterized as a “Nigerian investment scheme.”

In this type of scam, an individual or organization is lured in with promises of big returns on an initial payment or investment. The victim is then pressured for additional payments, which are sometimes paid because victims feel that if they don’t keep paying, they’ll never see the return they originally expected, losing everything they have already put in (which is, of course, what happens in the end). 

According to the statement, Sugarman affirmed that the staff person, subsequently terminated by mutual consent, “illegally took project funds” and fled to the Philippines. In 2010, Sugarman wrote to some of the projects informing them that this employee had left the organization and warned them not to talk to him or answer his calls.

Given that IHC’s cash on hand dropped from $598,000 to $103 in 2009, it does seem as though someone may have purloined a few hundred grand from IHC, perhaps as either perpetrator or victim of the reported investment scam.

Despite the alleged theft of hundreds of thousands of dollars by a key employee, IHC’s board and leadership never reported the incident to the authorities or took any legal action. Instead, the board and the employee quietly reached an agreement to sever their relationship, so that neither the employee nor the purported Nigerian scammer was ever prosecuted. Was IHC afraid of bad publicity due to a core employee (its operations manager) charged with a massive theft? Or did they think that the organization’s operations manager might be able to cause some financial damage to an organization with apparently compromised financial controls had he been fired or turned over to the authorities for prosecution? 

Whatever the case may be, based on our interviews, there seems to be a sense that Sugarman found himself overwhelmed by the twin phenomena of an IRS audit and an associate who may have fallen for a fraudulent investment scheme. Throughout 2008 and 2009, Sugarman was looking for money from a foundation or an angel investor, according to those involved with IHC-affiliated projects. The goal was supposedly to increase the number of IHC-sponsored projects by a factor of five—but might he actually have been looking for money to dig the organization out of a hole that its Ponzi-like operations were only exacerbating?

In response to all of this, by 2010 Sugarman was still hoping for a big grant from foundations for IHC’s capacity-building, according to representatives of Mandlovu and Headwaters Productions. They say that, when confronted, Sugarman ascribed the organization’s downward spiral to the loss of a $15.2 million foundation grant in 2008 plus his having signed an expensive five-year office lease in Pacific Palisades, Calif. The picture that begins to emerge is one of a CEO who seemed unable to fully grasp what was happening around him, harboring visions of that big organization-grant coming through to save the day.

Sugarman and his operation may have thought they were on the path to a major business launch, a trajectory establishing IHC as a progressive fiscal sponsor competitor to the likes of Tides. But in actuality, the venture was teetering for years, operating at less than optimal levels of staff and financial efficiency, and leaving the sponsored projects relying on a thin reed for the basic information they would need to determine their own financial health.

Money Lost: You Don’t Know What You Don’t Know

The final tab on IHC’s financial toll on these projects is constantly increasing. Nonprofit Quarterly has seen a spreadsheet of estimated losses for about 45 of the projects totaling $890,000. Sugarman himself allegedly told some of the projects that their losses were about $1 million. The group of IHC project directors is estimating a total loss in the realm of $1.5 million.

What will the projects get back from IHC? In his letters, Sugarman claims that he will be raising money on his own, outside of IHC, to compensate the projects for their losses. But the reality is that these projects have, in all likelihood, lost their moneys. Even if there were assets to tap, there are other claimants, including the federal government for a tax lien on the IHC and perhaps the City of Los Angeles, which might be looking for reimbursement of some of the Recovery Act conservation block grant funds it distributed to IHC.

But most, if not all, IHC projects, only really knew how much money IHC owed them when IHC told them. So Jane Ayers of Jane Ayers Media, for example, can’t really tell whether the donations to her project simply disappeared in 2008 and 2009, though she had been receiving much higher contributions before, or whether IHC was collecting and repurposing her funds. Other projects dependent on IHC reporting also really cannot definitively say how much money they might have lost.  As a result, all estimates of project losses are estimates in two ways.

First, the groups reporting specific dollar losses are generally working from numbers that they got from IHC itself. In hindsight, they suspect or know that the reports from the organization were unreliable. The other problem with estimating losses is that the groups that have banded together to do something about the IHC situation haven’t actually been able to contact all of the 200 sponsored projects on what they understand to be the most current list. Some organizations that have not responded may not even be aware that there is something wrong with the dollars ostensibly being held on their behalf. Or perhaps they may be too disheartened or dismayed to bother to respond. They may simply be choosing the route that took them to a fiscal sponsor in the first place: a desire not to have to deal with all of these financial issues.

Rob Kall’s OpEdNews operation is more conventionally structured than some of the other projects, and he estimates that his project lost $11,000 in donations from some 300 donors, accounting for perhaps 25 to 30 percent of the budget of the online news portal. But he doesn’t really know either, and it seems likely that the IHC projects will never really know how much they are owed.

Beginning Investigations of IHC Fraud and Mismanagement

Someone is doing something at IHC, even though the shop is closed. Federal Express deliveries have been signed for. The website that went down in January was suddenly up for a little while later in the month. Although Sugarman’s correspondence pledged that the organization would no longer be accepting and processing donations, one IHC project donor tested it and successfully made a $100 donation to IHC, though it remains to be seen whether the contribution will ever make it to the intended project beneficiary. But efforts to reach Sugarman by Nonprofit Quarterly and by some of the projects have garnered no response. Rumors are that the employee who was involved in the scam is out of the country. Will anything be done to help the IHC-sponsored projects?

Going forward, the groups have a couple of hurdles to overcome. First, even those project directors who believe that Sugarman straight-out misrepresented IHC’s financial position and may have reallocated their funds to IHC’s own operations do not seem to harbor much or any ill will toward him. They recall, as La MICA’s Julie Ray does, the days when IHC was operating so quickly that requisitions faxed in the morning resulted in payments that afternoon.  Perhaps it says something about the kinds of people involved in the IHC projects that their reaction to Sugarman, despite rising feelings of anger and betrayal at the loss of funding, was one of concern for him. Also, many of these small projects seem to place little trust in government or the police and have been reluctant to bring in the authorities at the California attorney general’s office or the Internal Revenue Service or, for that matter, the FBI. 

Nonetheless, there are some investigations underway. The California attorney general’s office has received sufficient complaints to have begun its own investigation. Sharon Simone of Headwaters Productions reports that contacts have been made with the FBI and the Los Angeles district attorney. It is unclear from correspondence made available to Nonprofit Quarterly whether the Internal Revenue Service has gotten into gear, but the IRS typically does not confirm or deny investigations until they have been completed.

Meanwhile, these projects will have to track down known donors, explain the details of what amounts to a fiscal sponsorship Ponzi scheme, and hope that the donors will be willing to ante up more money to make up what was lost. But for most of these projects, the donors weren’t making four-, five-, or six-figure donations, but rather credit card donations in the tens or maybe hundreds. They may have made have the donations anonymously, and in any case, it will be miraculous if they are able to get sufficient records from IHC to enable them to track down who donated to which project. For some, finding and capturing their donors will indeed be a herculean effort.

On top of that, with IHC’s collapse, Mandlovu and many other projects must now make the switch to another fiscal sponsor or else choose between two alternatives that they see as unpalatable: forming a full-fledged 501(c)(3) or shutting down.

Losses Beyond Dollars

Ironically, some of the IHC projects that first encountered Sugarman during his stint with the fiscal management operation Social & Environmental Entrepreneurs (SEE) and are now hoping to re-affiliate with SEE as their fiscal sponsor if they haven’t already. Will the projects use their IHC experience to hold their new fiscal sponsor more accountable?

While IHC is likely not representative of the fiscal sponsorship industry at large, the industry does have a challenge. Several years ago, some of the better-known fiscal sponsors—Tides, Third Sector New England, Earth Island Institute, Community Partners, and others—joined together to form the National Network of Fiscal Sponsors (NNFS). Its guidelines for fiscal sponsors lay out a framework of what to look for in a potential sponsor and some tips on the best practices good fiscal sponsors use. 

Potential IHC projects might have raised their guard with IHC’s failure to follow one key NNFS best practice: the retention of “an independent certified public accountancy firm to conduct and present to the board of directors an annual financial audit consistent with Generally Accepted Accounting Principles (GAAP) and available to the public.” Doing sois also a requirement of the California Nonprofit Integrity Act of 2004 for nonprofits with gross revenues or more than $2 million, a threshold that IHC passed in 2006.

But even so, groups would not have had much ability to gauge IHC on the recommended best practices concerning systems for handling funds, project fund accounting, sufficiency of staffing, and sufficiency of systems. If they had such abilities, some might not have needed or wanted a fiscal sponsor in the first place.

Greg Wragg of STREATS, one of the groups that used IHC, says he looks at fiscal sponsors as something like a “supermarket” of financial services for small projects like his. But he wonders who sets the standards and what benchmarks, if any, exist for gauging performance against the best practices outlined by the NNFS?

Much of the fiscal sponsorship literature is written mostly for an audience of potential and actual fiscal sponsors, but the literature lacks a consumer-oriented guidebook—a tool that projects might use to gauge and compare potential fiscal sponsors not just on cost issues but on quality of service and integrity of operations.

For nonprofit executives with healthy salaries and their own accounting departments, all of these questions may seem moot, but to people like Julie Ray, the consequences are real. The money her La MICA Biological Station lost (that she knows of) would have funded two months of her work in Panama. Likewise, the Afghan Women’s Mission’s loss of $400,000 in the IHC collapse will undoubtedly impact the organization’s programs in health care and education. It means less money for the eight schools it funds in cities and refugee camps in Pakistan, and less health care resources at the Malalai Clinic in Khewa, along the Afghanistan/Pakistan border, for the approximately 30,000 Afghani refugees in that region. 

The fiscal sponsors likely know—and the IHC travesty clearly underscores—just how vulnerable these sponsored projects really are. The stories of the IHC projects here and in Part I of our coverage of this fiscal sponsor’s collapse remind all of us about how much of the nonprofit sector is small, grassroots, underfunded, and in need of support and protection in order to fulfill important functions in communities around the world—often under the radar screen. The role of fiscal sponsors in helping these fledgling groups function is pivotal. But if they screw up, horribly—like IHC did—they impact communities around the world where every charitable dollar really means something.

About

Rick Cohen

Rick joined NPQ in 2006, after almost eight years as the executive director of the National Committee for Responsive Philanthropy (NCRP). Before that he played various roles as a community worker and advisor to others doing community work. He has also worked in government. Cohen pursues investigative and analytical articles, advocates for increased philanthropic giving and access for disenfranchised constituencies, and promotes increased philanthropic and nonprofit accountability.

  • Kristin

    Testing testing

  • Sasha Crow

    It is distressing but not surprising to have run into this information about IHC. We were under IHC’s sponsorship ( Collateral Repair Project – an Iraqi refugee aid project in Jordan) until at least mid-year 2011. We had filed out Articles of Incorporation in Oct 2010 after becoming increasingly frustrated with IHC’s procrastination in sending requested funds, lack of promised financial reports, rudeness when we requested information, and the sudden leaving of a key staff member – and the letter that we do not have any further communication with him. These things coincided with IHC suddenly doubling their fee at end of, as I recall, 2009, promoting us to seek stand-alone 501(c)(3) status.

    Because we left their sponsorship, we were unaware until today that they had folded and with projects’ funds. Now we re concerned that IHC had been skimming off our donations while we were still under their sponsorship.

    Should we contact the FBI or CA Attorney General to report that we were possibly victimized, too?