The Attorney General of New York has just announced a $24.6 million settlement with a veterans charity and its fundraisers.

This is the largest financial settlement won by fundraising regulators in U.S. history.

CNN broke the news last night on Anderson Cooper 360. You’ll recall it was that network’s investigative team who first surfaced the story, then for two years relentlessly pursued it.

For all the work the CNN team put into this effort, you’ll see that Drew Griffin ends with the unfortunate admonition to avoid all direct mail.  Not fair … but understandable given what these shows have to do to win audience.

The investigation focused on direct mail fundraising practices at the Disabled Veterans National Foundation (DVNF).  It “shines an unflattering light on some of the most troubling features of direct mail charitable fundraising as it is practiced in the United States today”, said Attorney General Eric Schneiderman.

Here’s what New York’s Charitable Bureau found in their investigation:

• Through the end of 2013 DVNF raised more than $116 million in donations. DVNF paid its fundraisers more than $104 million and still owed them another $13.8 million. The Agitator alerted our readers to this two years ago and indicated this situation was not unique.
• The investigation determined that DVNF’s board was ill informed, largely absent, and not performing its fiduciary role.
• Since its founding, DVNF’s principal program activity has been its “gifts-in-kind” (GIK) program, where the Foundation paid a third-party vendor, Charity Services International (CSI) of South Carolina to obtain GIK that really had no useful purpose. See The Agitator’s 11,500 Bags of Coconut M&Ms.
• Conflicts of interest. Larry Rivers, prominent in veterans groups, helped land the DVNF contract for Quadriga. He then continued to serve as Quadriga’s representative while also positioning himself as an unpaid advisor to DVNF’s board. He was paid $2.3 million by Quadriga without the knowledge of the client. River’s daughter, without any nonprofit experience, was hired as the Foundation’s administrator.

You can download all the details of the investigation here.

Here are the key elements of the settlement:

• Quadriga Art, which produced and sent out the mailings, will pay $9.7 million in damages, and Convergence Direct Marketing will pay $300,000 in damages. The $10 million will go to support the lives of disabled American vets.
• In addition, Quadriga will forgive $13.8 million in debt that DVNF owes the firm and will pay a further $800,000 to the State of New York in costs for the investigation.
• Perhaps most importantly, where the future of direct response fundraising is concerned, Quadriga has proposed and agreed to adopt a set of reforms that improve transparency and set higher ethical standards than now exist. More on this in a moment.
• In terms of the Disabled Veterans National Foundation, the settlement gives the organization a fresh start. All of its original board members must step down by the end of this year. At least five new qualified directors must be appointed. The board must establish an independent audit committee and the organization must permanently stop using fundraising claims the Attorney General’s office found to be false and misleading.

This is serious stuff. $24 million worth of seriousness. And heaven only knows what these revelations will do to fundraising at other nonprofits dealing with veteran issues. Or any type of fundraising for that matter.

HOWEVER … there is another side to this story. One that CNN and the public won’t –and shouldn’t — dive into. But fundraisers should. Let’s call it the Silver Lining Side.

Here are some additional facts and observations:

• Since the Attorney General’s investigation started, DVNF has appointed a new Executive Director, a Marine veteran, and a new board to support him.
• There are new processes and procedures in place. The 0-15 months file numbers nearly 600,000 donors who will produce a net of nearly $4.5 million from direct mail this year. To boost this the Foundation has launched an online giving effort and a mid-level giving program.
• I’ve just spoken with Mark Schulhoff, CEO of Quadriga. And, after two years of denying or avoiding the issue he candidly told me, “Roger, we made a bad mistake. We’re sorry and we want to move forward. We are committed to reform and want to be engaged in it with the direct response community.” Frankly, as I told Mark, I’m all for redemption and hope the trade will take him up on the offer.
• Take a look at the letter Quadriga will post on its website and Quadriga’s statement for the media. Most importantly review the list of reforms Quadriga has pledged as part of the settlement to undertake.
• These reforms are good and needed. Particularly those that go to transparency in letting all nonprofit clients know which consultants, which agencies, are being paid how much for their use of Quadriga. Frankly, this must become an industry-wide standard for everyone.
• To me these reform practices mean fundraising companies, consultants and their copywriters — this means everyone involved in this sector, no weaseling — has the duty to determine whether their clients’ claims and stories are true.
• Fundraising companies and their suppliers have the duty to disclose all payments made to themselves and other fundraising agencies, consultants, and suppliers or anyone else in the food chain. (I don’t have anything against fee splitting or kickbacks, if they’re disclosed to the client.)
• No more slick tactics. Don’t even think you can recommend a lawyer, who also works for your agency, to give an unsuspecting client advice and approval that “this contract is a good deal”.
• Expect to report regularly in front of boards on ROI and how true your actual results are measuring up to your promises.

Of course today these aren’t regulations and rules in every state; but they should be. Attorney General Schneiderman, even though it’s an election year and he’s riding the now-so-popular veterans cause, has demonstrated he has more balls than all the other 49 Attorneys General combined.

The obligation of transparency and financial disclosure could be, by far, the most important outcome of this case. And the fact that we as a sector have failed at self-policing is our own fault.

Thank heavens for David Fitzpatrick, the producer of the CNN investigation, and the team’s investigative reporter, Drew Griffin, were there and raising hell when the rest of us weren’t. They get an Agitator raise.

Quadriga has given us a $24 million lesson and a huge opportunity by putting forth a set of new standards. Are we up to the transparency proposed?

Your thoughts, please?

Roger

P.S. In the days ahead we’ll explore the myriad details and implications of this case. How to explain fundraising costs — and income — to donors … how to make sure your board really understands how your fundraising works financially … and when and why having an outside agency fund your direct response program can be a good — not bad — thing.