Ignorance Is Not Bliss: Nonprofit Trustees Agree To Million Dollar Settlement With New York Attorney General For Lackadaisical Governance

In April 2015, the New York Attorney General entered into a $1.025 million settlement with the trustees of the Victor E. Perley Fund, a nonprofit that serves underprivileged children in New York City. A two-year probe revealed that the Fund’s chairman, along with a fellow trustee, had used its multi-million dollar portfolio as a private slush fund. The duo’s self-dealing and conflict-ridden, high risk investments would have been discovered had their fellow trustees exercised even a modicum of oversight. This carelessness brought the Fund, in the words of  New York Attorney General Eric Schneiderman, “to the brink of financial ruin.” For those who would take a laissez faire approach to nonprofit governance, this settlement should serve as a warning: Ignorance will not excuse.

Since its creation in the late 1950s, the Perely Fund provided $250,000 a year in grants to community organizations serving children in Manhattan.  As reported by Crain’s New York Business, the State Office of the Attorney General began to investigate the Fund when one of its regular grantees reported that the organization’s grant money had evaporated.

According to the settlement agreement, the Fund’s troubles began in 2009, when four of the five board members resigned and trustee Richard A. Basini took control. Basini recruited an investment banker, James J. Cahill, and three members of the clergy (as required by Perley’s will) to reconstitute the board: Rabbi Jill Hausman, Monsignor Michael Crimmins and Reverend Peter Larsen. Basini then engineered a change in the Fund’s mission. It would stop making grants and instead focus on establishing a children’s choir.

Under the guise of its new mission, and with little to no oversight by the clergy trustees, Basini and Cahill did as they pleased. Basini paid himself tens of thousands of dollars a year for marketing, but conducted no actual fundraising. The Fund collected exactly two donations in 2010 and 2011, totaling about $2,400; it paid Basini $122,000 for his services during the same period. Even more egregious was the trustees’ approval of Basini’s purchase of a $1.1 million Southampton home—purportedly as a choir retreat—without investigating or evaluating the transaction. The trustees allowed Basini to live in the house for “a substantially below market rent or, at times, no rent at all.” The 2,200 square foot house boasts “golf course views from every room” and “a free-form heated pool with flagstone patio [and] waterfall.” Basini reported his activity in Fund tax returns and financial statements, none of which the clergy trustees reviewed until they were contacted by the government.

The clergy trustees adopted a similarly lax approach for overseeing Cahill’s management of the Fund’s investment portfolio—its primary source of revenue. Cahill and Basini made “risky investments” without performing any due diligence and, in at least one case, misrepresenting the Fund’s status as an accredited investor. One venture was even exposed as a fraudulent scheme in which the Fund lost—and never recovered—$1.2 million. Meanwhile, Cahill earned undisclosed fees from at least two entities that received Fund investments.

According to Attorney General Schneiderman, the trustees “met only rarely, and when they did, failed to observe basic principles of sounds governance, such as reviewing budgets, monitoring investments, and circulating and approving minutes.” Thus, in just a few years, the Fund’s assets dwindled from $3.7 million to approximately $1 million.

Pursuant to the settlement agreement, the clergy trustees agreed to pay $1 million to the Attorney General’s office and accepted a three-year ban on serving as a fiduciaries for New York non-profit entities. Cahill agreed to pay $25,000 and accepted a lifetime ban. Basini died in April 2013; the agreement does not reflect any pursuit of his estate. The government will retain $50,000 for fees and expenses and the balance will be remitted to the Fund, which is prohibited from funding the Perley Children’s Choir and must reconstitute its board to the satisfaction of the Attorney General.

As this case demonstrates, trustees and other fiduciaries are responsible not only for intentional misconduct, but also for unreasonable neglect of their duties. Indeed, the New York Attorney General appears to have made ferreting out the potential negligence of nonprofit boards a priority. Last month, Mr. Schneiderman’s office launched an investigation into the management of the esteemed Cooper Union for the Advancement of Science and Art. As reported by the New York Times and the Wall Street Journal, the investigation is focused on the board’s stewardship of Cooper Union’s endowment and its most significant asset—the Chrysler Building.

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