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Charity Caveat Emptor

On Friday, a Federal judge in Minnesota sentenced Cameron Lewis, age 36, and his father Tyron Lewis, both of Monticello, Utah, to 17 and five years respectively for defrauding hundreds of school districts of nearly $40 million using a now-defunct charity called the National School Fitness Foundation (NSFF).

The fraud amounted to money laundering; a Ponzi scheme.

I know Cameron. Met him the first time over lunch at a Chinese restaurant along with several of his board members. I met with him subsequently several times. He has a certain charisma.

I mention this because a charity I once worked for came within a hair’s breadth of partnering with the NSFF.

That charity wasn’t defrauded by Lewis. But we did actually partner with Aaron Tonken, the Hollywood event planner and now convicted felon, who went to prison in 2003 for defrauding charities (as I recall) of $1.9 million. The charity I worked for lost $100,000 due to Tonken’s machinations, but later recovered the money in full.

I also met once with Tonken, who unlike Lewis had no discernable charisma and a very distinctive speech impediment.

What both men share in common is that they are accomplished fabulists. When Cameron explained how the NSFF was paying for the fitness equipment, it seemed plausible.

When Tonken told you that he could get Cher, or the Backstreet Boys, or Diana Ross to your event, you believed him, in no small measure because there was that tape of the Clinton’s toasting him at a star-studded 2000 Hollywood fundraiser, which Tonken produced.

The fact that Tonken told you what celebrities he could deliver for your charity event while George Hamilton sat next to him nodding agreeably only helped. Likewise, the Lewises hired competent and honorable people, who themselves had no part in the fraud, but who talked persuasively about the NSFF’s mission.

There are people out there who by dint of personality or sociopathic immorality are capable of defrauding well-meaning and otherwise prudent charities.

So how do you keep your charity’s nose clean?
  • The test of time. Like all Ponzi schemes, the earliest participants do just fine. The NSFF was able to make equipment payments for the initial school districts with the earnest money paid by the ensuing school districts. But the whole NSFF enterprise rose and collapsed within the space of five years. If as a school district you said no to the NSFF the first time around, by the second time they came around it was all over but the shouting.
  • Don’t be seduced by celebrity flash. Two of Tonken’s more common techniques for securing celebrity support was the use of expensive gifts (watches, jewelry and the like), and by making large pledges or actual donations to the celebrity’s own charity. Both were paid for with someone else’s money. For his part Lewis successfully wooed a number of prominent politicians, who publicly hailed the work of the Foundation. If you looked no deeper than the celebrity involvement or implied political endorsement, you were likely sunk.
  • Don’t dismiss niggling doubts out of hand. The fitness equipment cost for each school in Cameron Lewis’s scheme was something like $50,000, which the NSFF pledged to repay in full. But there was no legitimate revenue stream to cover that expense. My mind reeled when Cameron first laid out those numbers. There’s about 90,000 public schools in the United States and 90,000 multiplied by $50,000 is $4.5 billion! There’s not too many $4.5 billion charities in the United States. But I said to myself, “they seem like capable people. Surely they’ve figured out something that isn’t apparent to me.”
  • Curb your desperation. The schools got sucked in because of the epidemic of obesity in American children these days. The school districts desperately needed something that worked, and the NSFF had compelling evidence that their program was effective. Likewise, the charity I worked for desperately needed a splashy event that announced its arrival. What better way to do that than with a bunch of A-list celebrities in attendance?
This is hardly an exhaustive list. And I’ve left out obvious things like having a competent accountant or lawyer look over agreements or books. That’s probably prudent, but one of Lewis’s own financial people, a very sophisticated and principled CPA, didn’t smell a rat until he’d been there nearly a year; but when he smelled the stench of fraud, he immediately resigned. And in the case of Aaron Tonken, he wouldn’t have shown you his books if you’d have asked and didn’t have to because he was organized as a for-profit.

It probably wouldn’t have been that helpful to check references either. The first schools in the NSFF program were delighted. Until Tonken's tell-all book came out, so was every celebrity he dealt with.

If a charity you’ve worked with/for has been defrauded, or had a close call, feel free to share your experience.

Comments

Hi,

I wanted to let you know about the Nonprofit December Giving Carnival. Deadline to submit your post is Dec. 20th.

Here is the link,
http://christopherscottblog.typepad.com/blog/2007/11/december-giving.html

Let me know if you have any questions.

Christopher S.
www.ChristopherScottblog.com

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