Feb 5th, 2020
Another AG suit against NRA
01/06/21 02:02 PM
From The Trace
Out of the Spotlight, D.C. Case Targets Abuses by NRA Charity
Attorney General Karl Racine alleges the gun group improperly siphoned millions of dollars from an affiliated foundation.
By Will Van Sant Jan 6, 2021
Karl Racine, the District of Columbia attorney general. Andrew Harrer/Getty
Since New York and the District of Columbia filed lawsuits against the National Rifle Association last summer, the New York case has captured nearly all the attention. But the lower-profile D.C. suit poses a significant threat to the organization. It’s focused on the NRA Foundation, an affiliated charity that has lent cash and influence to the gun group in recent years.
D.C. Attorney General Karl Racine alleges that the NRA improperly siphoned millions of dollars from the foundation, and that its trustees failed in their governance duties. In early 2019, after the trustees expressed concern over the flow of money from the foundation to the gun group, NRA chief executive Wayne LaPierre persuaded them to back down, Racine contends.
“These are very serious charges,” said Sean Delany, a law professor at New York University who formerly oversaw the charities bureau of the state Attorney General’s Office and served as president of the National Association of State Charities Officials. “The foundation and its directors made the mistake of feeding the beast.”
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The NRA Foundation was established in 1990 and its articles of incorporation, filed with the District of Columbia, commit the organization to “charitable, educational and scientific purposes.” Those purposes include promoting firearms and hunting safety and supporting marksmanship training. The articles also state that the foundation will support the activities of the NRA, but only when those activities “are in furtherance of” the foundation’s mission.
Under the federal tax code, the foundation is a charity and prohibited from substantial lobbying or backing candidates. Unlike donations to the NRA — which is permitted to take part in political campaigns and lobbying — donations to the foundation are tax deductible.
From 2009 to 2019, the foundation funneled $244 million to the NRA, according to audited financial statements. Of that amount, $160 million was in the form of grants to NRA programs. During the same period, according to the statements, the foundation paid the NRA $84 million in reimbursements to cover salaries, benefits, and other operating expenses.
The NRA is increasingly reliant on the NRA Foundation’s money, said Brian Mittendorf, an accounting professor at The Ohio State University who has studied the gun group’s finances. Mittendorf said the foundation paid for 9 percent of the NRA’s budget in 2019, the highest percentage in at least a decade. The percentage has increased since 2016, Mittendorf said, and while the trend is not evidence of impropriety, it does highlight a necessity for safeguards.
“The need for funds persists at the NRA, and the foundation has funds,” Mittendorf said, “so the dynamic that gave rise to this complaint will continue absent a substantive change.”
Racine notes that the foundation’s bylaws call for a majority of trustees to be NRA board members. Such overlap is common. Members of corporate boards routinely serve as trustees of related corporate charities. When doing so, it’s expected that they protect the charity’s interests. “In function and practice,” however, Racine claims, “the foundation has been operated as a wholly controlled subsidiary of the NRA, without independence or a separate identity.”
When the NRA began to have cash flow problems, the group turned to the foundation, securing a $5 million loan in 2017. An agreement between the foundation and the NRA barred the gun group from using the charity’s money for partisan political purposes, according to Racine. But his complaint alleges that the $5 million was “intermingled with the NRA’s general financial accounts and neither the NRA nor the foundation tracked how the funds were used.”
According to Racine, the loan was arranged under the guidance of then-NRA treasurer Woody Phillips, who was also the foundation’s treasurer and sat on the charity’s investment committee. Phillips is a defendant in the New York case and is alleged to have “misused NRA assets to enrich himself and other NRA officers and directors.” The Trace has reported that Phillips had embezzled from a former employer before coming to the NRA, where he spent 26 years.
The NRA repaid the first loan in March 2018 and then asked for a second $5 million loan three months later. Because the NRA had by then defaulted on a seperate loan from a major national bank, according to Racine, it asked to prioritize paying back the bank. “The loan subordination greatly benefited the NRA,” Racine writes, “with no ascertainable benefit to the foundation.”
According to the complaint, foundation president and investment committee member William Satterfield, who sits on the NRA board, had a “moment of candor” in which he told investment committee chairman Susan Hayes that “if she skipped the vote approving the NRA’s drastic loan alteration request ‘it will enable both of us to avoid voting on a very bad deal for the foundation.’”
Delany, the attorney in New York, said the comment “suggests a consciousness of wrongdoing.”
Neither Satterfield nor Hayes responded to phone messages and emails.
Trustees approved the request to prioritize the bank debt and a year ago granted an extension on the $5 million loan.
At a September 2018 meeting of trustees, Racine alleges that current NRA treasurer Craig Spray said a “study” had determined that an increase of nearly $6 million in management fee reimbursements from the foundation to the NRA was warranted. Despite the study being a surprise to the trustees, and without seeing any documentation to justify their decision, Racine alleges that the trustees approved the increase, which involved an immediate transfer of $4 million to the NRA, in a closed-door session that lasted less than 50 minutes.
“The increase was approved based solely on the word of NRA employees and the conflicted foundation treasurer [Phillips],” Racine writes. “Due to the foundation’s lack of independence, the foundation allowed the NRA to control the management fee process. In effect, the foundation did not receive any assurances that it was receiving fair value for its payments to the NRA or that foundation funds were being used exclusively for foundation purposes.”
As part of the deal, the NRA shifted 75 percent of the costs of consultancy fees being paid to the foundation’s former director back to the foundation. Racine alleges that the retired director, who is identified in New York’s case as H. Wayne Sheets, has provided no consulting services to the charity in return for the $30,000 a month he collects.
The handling of the reimbursement approval concerned some foundation trustees, according to the complaint, and at the end of 2018, the investment committee requested an outside review to determine whether the payments were justified and if the work could be done less expensively by an independent contractor. The committee also sought a separate outside review to examine whether the NRA was using foundation funds in a manner consistent with the charity’s mission. According to the complaint, LaPierre made a rare appearance at an investment committee meeting in January 2019 and told the trustees that it was not a good time to hire an outside auditor or do the desired research. The drive for independent review was abandoned.
“Again, it’s a smoking gun,” Delany said, drawing a parallel to Satterfield’s comments on avoiding a vote to subordinate the second loan. “They were supposed to be stewards of the foundation’s money and had concerns, but did not act on them responsibly.”
Racine is asking to establish a trust into which the NRA would repay funds that were allegedly diverted improperly from the foundation. He’s also seeking new governance policies that ensure the foundation’s independence and a monitor to oversee transactions between the entities.
Attorneys for the foundation and the NRA sought to have the case dismissed, arguing that the gun group spent money from the foundation in a manner consistent with the charity’s purposes and that the charity was not obligated to track how the funds were spent. In late December, Judge Jose M. Lopez dismissed the two counts in Racine’s complaint that named the NRA and involved creation of a trust. He ruled that while Racine offered evidence that appeared to support establishing a trust, arguing for one was not a proper basis for a lawsuit. Rather, the judge found, a trust could only be imposed as a remedy later if Racine prevails. Delany said the dismissal was technical and did not “change the posture of the litigation.”
The judge let the counts against the foundation proceed. Citing D.C. law, Lopez wrote that “the alleged facts as presented by the District allow this court to draw the reasonable inference that the foundation’s officers failed to discharge their decision-making authority in a manner they ‘reasonably believed to be in the best interests of the corporation.’”
Racine has notified the court that his office still considers the NRA a defendant, despite the dismissal of the counts naming the gun group. Racine told Lopez that, if the NRA argued that it is no longer a party, he would amend his complaint and add the group to the surviving counts. The NRA made such a claim on January 5, stating in a filing that it will oppose the move.
As of now, the parties are scheduled to move forward with discovery this spring.
Will Van Sant
Will Van Sant is a staff writer, covering the gun lobby for The Trace. Until 2019, he was an investigative reporter at Newsday.
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