The California Attorney General settled its lawsuit against L.B. Research Foundation, Gerald Buckberg and five other directors earlier this month. The case involved allegations that the defendants abused their authority, committed fraud, diverted funds, and engaged in unlawful business practices or acts. The California Attorney General also alleged that the defendants filed and distributed false and incomplete reports. Of note are allegations that extended to the Form 990, not just to reports required to be filed with the AG’s office.
It is not at all clear that the settlement constitutes a...
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The Foundation will keep books and records in accordance with GAAP.victory by the California Attorney General. When we examined the original complaint, we noted that the attorney general sought to recover over $500,000 in allegedly misappropriated funds and assess over $100,000 in civil penalties. Under the terms of the settlement, Buckberg agreed to pay $140,000 to the Foundation and he, together with the five named directors, agreed to pay $73,000 to the State of California to cover attorneys’ fees and costs. That falls far short of what was sought. Then again, the attorney general did recover something for the Foundation. Moreover, we have no idea (and probably never will) whether the IRS forced other amounts to be returned to the Foundation. The California settlement may only be the tip of the iceberg. Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
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We often are asked how attorneys general and charity regulators approach breach of duty cases. The L.B. Research Foundation settlement provides an excellent example of the basic approach and philosophy held by many charity regulators. The following are among the terms of the settlement:
To summarize, the California Attorney General apparently is far more interested in putting the charity on the road to good governance than recovering every last dollar that was allegedly misused. In others words, rehabilitation trumps punishment. Of course, that assumes the attorney general would have prevailed had he gone to the mat. It may be that the attorney general's case was a weak one. Moreover, we should note that the defendants did not admit any wrongdoing in the settlement.
What is notable is the $73,000 in attorneys’ fees and other costs that the California attorney general managed to extract from Buckberg and the named directors. It is very hard for charity regulators to obtain monetary recoveries from directors for breach of duties because of liability shields and indemnification clauses. In this case, the California Attorney General was able to extract some dollar amount from the directors. While this amount does not constitute damages for breach of fiduciary duties, it does result in a financial cost to the directors. Other directors should take note, which is what we suspect the California Attorney General hopes will happen.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
