California Attorney General Sues Monterey County AIDS Project and Its Board

Published on: by Gene Takagi Category:BOARDS / GOVERNANCE, CALIFORNIA LAW, CURRENT AFFAIRS & OPINION

On May 24, 2010, the California Attorney General filed a complaint against the Monterey County AIDS Project (MCAP) and several of its officers, directors, and key employees for, among other things, diversion and improper distribution of charitable assets, breach of fiduciary duty for failure to use assets for a restricted purpose, breach of fiduciary duty for failure to take actions to recover improperly diverted funds, and negligence.  According to the complaint, more than $2.8 million of charitable assets was "misappropriated, misapplied or wasted."

It may be instructive for California nonprofits to read the complaint, which alleges that the defendants:

  • "never adopted reasonable standards of investment, invasion and use of the principal and income from the Housing Endowment";
  • "did not keep adequate records or minutes of board meetings at which decisions were made to withdraw monies from the Housing Endowment";
  • "breached their fiduciary duties to MCAP by failing to maintain adequate board meeting minutes evidencing that there was reasonable inquiry by the board as to whether the funds were being withdrawn and spent in accordance with the restrictions";
  • "improperly used funds from the Housing Endowment to pay the rent for the "MCAP Benefit Shop," a thrift shop in Monterey County"; and
  • "failed to exercise any board oversight over the MCAP Benefit Shop and failed to maintain any inventory records or financial records for the MCAP Benefit Shop … [and] [t]herefore, … breached their fiduciary duty to conduct reasonable inquiry to determine whether the MCAP Benefit Store was complying with state and federal laws regulating the operation of nonprofit thrift stores … [and] … their duty to account for MCAP's charitable assets."

Lawsuit
 

The complaint alleged that defendants breached their fiduciary obligations in managing and accounting for charitable trust funds they received by engaging in the following conduct:

  • Failing to keep adequate records of expenditures;
  • Pervasive commingling of restricted charitable assets from the Housing Endowment with MCAP's general bank accounts;
  • Failing to prevent charitable funds from being spent for improper purposes;
  • Failing to account for all of MCAP's charitable assets; 
  • Failing to account for cash expenditures; and
  • Failing to conduct any reasonable inquiry into the questionable conduct of some of MCAP' s directors, officers and de facto directors.

While it's not clear from the complaint, it appears that some of the defendants did not engage in any affirmative wrongdoing but merely failed to provide appropriate oversight (defendants "either knowingly participated in the diversion of charitable assets, or failed to make reasonable inquiry into the conduct of other MCAP officers, directors, or de factor directors which would have prevented the diversion of charitable assets").  Nevertheless, all defendants "are jointly and severally liable for all amounts diverted."

For more information about this lawsuit, see Charity Governance Blog's post here ("the lawsuit is a potential blockbuster").

More to follow …