Death by Social Enterprise: The Case of the Missing $19 Million

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March 5, 2015; Jewish Daily Forward

 

A recent rash of failures among large Jewish social service agencies in New York City included the case of FEGS, which found itself $19 million short before declaring itself defunct in January. The lingering question, of course, was where had the money gone. Originally, FEGS seem to place blame for its financial hole on for-profit subsidiary SinglePoint Care Network, a joint venture with the not-for-profit Selfhelp. SinglePoint failed shortly following its launch in 2012, but in its tax reports, FEGS reported losing just $215,000 on the investment.

The answer according to the Jewish Daily Forward is that another for-profit subsidiary meant to generate revenue has instead drained the agency. FEGS began paying out massive amounts of money to the AllSector Technology Group starting in 2011; in that single year, transfers of $8.6 million were made. In 2012, it was $9.1 million. Before that, between 2001 and 2010, payments had grown from $2.1 million to $4.9 million.

AllSector is hardly a new idea; it was meant to provide tech services to FEGS and other nonprofits with similar needs. There is no explanation made for the jump, though in 2012, AllSector expanded to incorporate a technology accelerator, Center4, which was housed separately and was supposed to “drive technology innovation to strengthen the capacity of nonprofit health and human service agencies.”

After 2012, writes Josh Nathan-Kazis, the organization’s tax filings become less clear. Nathan-Kazis says that $14 million was transferred between FEGS and AllSector in 2013, but there were inconsistencies in the way the report was completed. Concerning the tangle of information, Nathan-Kazis writes:

“In 2013, the most recent fiscal year for which FEGS’s tax filings are publicly available, the relevant section is riddled with inconsistencies. FEGS reports selling $4.1 million in assets to AllSector on one page, yet on another it reports not selling assets to any related organization. And while every other year, FEGS reported paying AllSector for ‘performance of services,’ in 2013 FEGS reported being paid for ‘performance of services’ by AllSector to the tune of $10.2 million. FEGS does report paying a related organization for ‘performance of services’ that year, but fails to list that transaction.”

FEGS, by the way, owns 95 percent of AllSector, but will not reveal who owns the remaining five percent.

Meanwhile, FEGS itself was growing at an unprecedented rate, doubling its annual expenditures to almost $230 million in just over a decade, partly by taking over competitors. In fact, even in the months immediately before declaring the loss of nearly $20 million, FEGS apparently was trying to absorb yet another nonprofit.

FEGS is commenting about none of this. When asked if FEGS would confirm that it had received $14 million from its subsidiary, a FEGS spokeswoman wrote, “We aren’t going to be commenting on the questions you’ve sent.”—Ruth McCambridge

 

  • R. Scott Dixon, CPA

    The author does a good job of explaining very complex transactions and shows skill working through the Part IV checklists within Form 990, all while staying within a layman’s understanding. FEGS’ filed Schedule R, Related Organizations, would undoubtedly provide further riddles of inconsistency. I would imagine ultimately that FEGS also will have to deal the big gorilla of NPO’s “things not to do,” excess benefit transactions.