DATELINE: April 9, 2009, Chicago
Last month, a federal jury convicted former Pennsylvania State Senator Vincent J. Fumo on 137 felony counts, sending him packing for what is likely to be a lengthy prison stay. A number of the charges against Fumo centered on his abuse of Citizens Alliance for Better Neighborhoods, a Philadelphia charity that received $17 million from Peco Energy, a large utility company. Fumo extracted the payment in exchange for favorable disposition of a regulatory matter.
Now that the multi-year investigation and trial have concluded, Pennsylvania Attorney General Tom Corbett has stepped into the...
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batter’s box. On April 6, 2009, Chief Deputy Attorney General Mark Pacella filed a lawsuit on behalf of the Pennsylvania Attorney General against individuals who during all relevant times served as officers and directors of Citizens. The complaint begind by noting that the criminal trial of Fumo and Ruth Arnao, who served as Citizen’s executive director, established that the two had used Citizens to “unlawfully advance their personal convenience, enrichment, and political advantage.” The complaint then alleges that the two: (i) purchased $75,000 of tools for their personal benefit; (ii) spent $350,000 to purchase, operate, maintain, and insure motor vehicles for their personal use; (iii) used Citizens employees for personal purposes; (iv) purchased a building for Fumo’s senatorial district office for $225,000 and then spend an additional $600,000 to remodel the building; (v) permitted Fumo’s campaign office to occupy free space; (vi) expended more than $250,000 on political polls through a for-profit subsidiary of Citizens; and (vii) engaged in other inappropriate activities. In total, the Pennsylvania Attorney General alleges that somewhere around $1.9 million in Citizens’ funds were diverted from its charitable purposes.
What makes the lawsuit particularly interesting is the fact that the attorney general alleges that the other directors breached their fiduciary duties by failing to prevent the alleged waste and mismanagement by Fumo and Arnao. The complaint further alleges that none of the other officers and directors exercised any control or oversight over investments made by Fumo and Arnao on behalf of Citizens. The attorney general notes that Fumo and Arnao invested some $9 million with a registered broker-dealer founded by a personal friend of Fumo. The complaint then details conflicts of interest over how the some of the funds were subsequently invested, as well as lax oversight by the board and officers over those investments. The founder of the broker-dealer had previously given Fumo $1 million and a $500,000 speedboat. The complaint alleges that the officers and directors failed to adequately oversee the investments. Of particular note is the alleged failure of the officers and directors to obtain relevant audited financial statements pertaining to the investments. Interestingly, the attorney general alleges that the Form 990 did not contain any reference to these investments.
The factual allegations conclude by stating:
But for the failure of the OFFICERS/DIRECTORS to discharge their fiduciary duties of loyalty and care owed to CITIZENS, the unlawful waste and mismanagement of the organization’s assets and employees could not have occurred.
The attorney general asks for the following relief: (i) a complete accounting by the defendants of their administration of Citizens’ assets, and (ii) payment of the monetary losses resulting from the alleged breach of fiduciary duties. The attorney general then asks for the revocation of the Citizens’ corporate franchise and the application of cy pres to dispose of the charity’s remaining assets. Alternatively, the attorney general asks for the removal of all the existing officers and directors.
That’s the crux of the suit. It is a significant one, particularly if the attorney general prevails. In such case, the suitwould establish that directors cannot sit idly by while other directors and officers abuse the charity.
The Philadelphia newspapers have criticized Attorney General Tom Corbett for being late to the party. For example, the Philadelphia Inquirer charged that had the attorney general acted sooner, he could have better protected Citizens' assets. Corbett Slow to Take Action (Apr. 9, 2009). We understand that viewpoint, but we are more sympathetic to Corbett. What the Inquirer failed to acknowledge is that Corbett was not acting in a vacuum. There was an intense and ongoing federal investigation during the period in question. The attorney general did not have a freehand with federal prosecutors in control of events and records. What we would like to see is for federal law enforcement officials to work out a protocol that would permit state charity regulators to intervene sooner in similar cases. Unfortunately, criminal investigations raise fundamental questions regarding constitutional rights of the accused. Those considerations can impose limits on civil litigation until the criminal matter is resolved.
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