Fiscal sponsors must respect laws related to protecting assets restricted to furthering the charitable purposes of specific projects . If funds intended for a particular internal (Model A) project are diverted and used for other purposes (e.g., the fiscal sponsor’s general operating expenses), there may be legal repercussions.
This was very recently exemplified in a case involving a California nonprofit corporation acting as a fiscal sponsor.
Press Release from California Attorney General
Thursday, April 7, 2022
Contact: (916) 210-6000, firstname.lastname@example.org
OAKLAND – California Attorney General Rob Bonta today announced a stipulated judgment against ZeroDivide and its directors and officers to resolve allegations that the nonprofit violated California’s charitable trust laws. ZeroDivide allegedly misspent approximately $606,000 in restricted donations meant to fund two of its charitable programs, instead using these donations to cover salaries and benefits for employees who did not work on those programs, and to fund other programs. Today’s settlement requires ZeroDivide to be dissolved and prohibits two of its officers from leading charitable organizations in California, or holding or soliciting charitable donations from Californians for three years. ZeroDivide and its directors and officers must also pay over $460,000 in damages, penalties, and other fees.
“As ZeroDivide’s financial situation became increasingly precarious, its officers misappropriated money designated for specific programs to pay for unauthorized operational costs,” said Attorney General Bonta. “Today’s settlement should serve as a warning for charities who consider misspending donations. Donor intent must be honored. My office is watching, and we will hold you accountable.”
ZeroDivide is a San Francisco-based nonprofit focused on bringing technology to low-income communities that ceased operations in 2016 due to its financial insolvency. ZeroDivide operated two primary programs: Digital Bridge and the Renaissance Journalism Center. Through the Digital Bridge program, ZeroDivide provided technical assistance and “capacity building” to other nonprofits and public entities, such as libraries, as they adopted new technologies and upgraded their technology infrastructure. ZeroDivide’s Renaissance Journalism Center advanced equity in the reporting of news stories by journalists.
In court filings, Attorney General Bonta alleges that between 2014 and 2016, the California Endowment, California Wellness Foundation, Ford Foundation, Vesper Society, Whitman Institute, and Wyncote Foundation provided restricted donations to fund these two programs. At the same time, ZeroDivide’s unrestricted revenue was shrinking, and it began to struggle to pay operational costs. Unbeknownst to donors, ZeroDivide began to dip into restricted funds to pay for a range of expenses, such as the salaries and benefits for staff and other programs that donors expressly did not want to fund. ZeroDivide’s board of directors was aware of this misconduct and failed to stop it from happening.
In total, ZeroDivide allegedly misspent approximately $606,000 in restricted donations. ZeroDivide also maintained inaccurate financial statements related to the receipt and spending of program funds; failed to file required annual reports with the Attorney General’s Registry of Charitable Trusts, and failed to maintain adequate financial records, among other violations.
As part of the stipulated judgment, ZeroDivide and its directors and officers will be required to pay $326,008 in damages and $138,525 in penalties, late filing fees, and attorney’s fees. The nonprofit’s directors must also dissolve ZeroDivide and distribute the damages amount and any remaining assets to Community Initiatives, the fiscal sponsor for the Renaissance Journalism Center. Finally, two of ZeroDivide’s officers will be permanently enjoined from any future violations of California’s charitable trust laws and will be prohibited, for three years, from leading a charitable organization in California, working in a paid or volunteer capacity for a for-profit entity in the business of charitable fundraising in California, and from soliciting, holding, or managing funds or assets for a charitable purpose in California or from Californians.
In California, the Attorney General has primary responsibility for supervising charities, charitable trustees, professional fundraisers, and others who solicit or hold charitable donations. The California Department of Justice investigates the loss and misuse of charitable assets, fraudulent and misleading solicitation practices, improper reporting practices and other breaches of fiduciary duty. Charities are required to register and file annual financial reports with the Attorney General’s Registry of Charitable Trusts.
Lessons to Be Learned for Fiscal Sponsors
- Properly observe restricted fund accounting and bookkeeping requirements
- Maintain accurate financial statements that reflect the receipt and spending of project/purpose-restricted funds
- Properly observe charitable trust requirements, including ensuring that donor-restricted funds are used for the charitable purposes represented in the solicitation or specified by the donor
- Refrain from “borrowing” funds from a restricted fund designated for a particular project/purpose for general operating funds
- Manage the fiscal sponsorship program so it creates sufficient revenues to properly operate and exercise sufficient oversight over the projects (see Fiscal Sponsorship: Fees (Model A)) and be careful of accepting funding that will be paid in arrears, requiring the fiscal sponsor to fund project costs itself before receiving the conditionally promised funding
- Ensure the board members and officers are knowledgeable about their fiduciary duties, including how this relates to governance of a fiscal sponsor (e.g., consider duties relative to each restricted fund/project)
- Ensure the board is actively involved in financial oversight and decisions when the organization is beginning to have cash flow and solvency issues
- Ensure compliance with annual and other periodic filing and registration requirements, including with the state charities regulator (e.g., Attorney General)
- Ensure compliance with required grant reports to funders
- Carry adequate insurance protecting directors and officers (though they may not always protect against personal liability)