Possible Breach of Fiduciary Duty at Black Box Voting?–

III. The Legal Standard of Care.

The standard of care for managing a charitable corporation has traditionally been lower than for managing a charitable trust, though the clear trend is to raise the standard of care for corporate charities. And times have changed such that investment strategies that might have passed muster 30 years ago would probably not pass muster today. Even under the old corporate standard embraced in the relevant Washington state statute, it would be hard to justify retaining all the financial assets in a non-interest bearing account:

Rev. Code Wash. 24.44.050. Standard of conduct

In the administration of the powers to appropriate appreciation, to make and retain investments, and to delegate investment management of institutional funds, members of a governing board shall exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision, and in so doing they shall consider long and short term needs of the institution in carrying out its educational, religious, charitable, or other eleemosynary purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions.

Would an ordinarily prudent business person fail to invest any of over $600,000 in cash in an interest-bearing account, when that constituted all of the investment assets of the charitable corporation?

How can you meet the goal of “appreciation” of a portfolio if you don’t invest it, thus insuring that its value will depreciate (not appreciate) in value because of inflation?

How can you meet the goal of “expected total return” when your expected total return is zero in nominal terms and negative in real terms?

Further, because the financial assets were not invested at all at the end of the year, the managers might have breached their duty of care, as well as possibly their duty of prudence.

If I were a lawyer for BBV and had been asked to sign this tax return, I probably would not have been able to do it ethically, at least not without trying to figure out what is going on and correct it (e.g., by going to the Board of Directors). Unless accounted for by something not evident, the tax return on its face appears to reveal a serious breach of the managers’ fiduciary duty.

If things are as they appear to be (and they may not be, as I discuss below), the most common remedy for managerial breach of the duties of prudence or care would be for the managers to make good the loss to the charity resulting from their apparent breach. Even if there has been a breach, however, not every court would order the traditional remedy of damages (damages are best measured as the amount that would have been earned if the portfolio had been carefully and prudently invested). Some courts might be willing to settle for simply ending any fiduciary breach, without making the managers make up any investment loss to the charity.

IV. Other (Mostly Benign) Possibilities.

So what happened?

On the BBV website, BBV Director Bev Harris indicates that BBV’s accounting firm obtained a 6-month extension of time to file BBV’s return (without asking her first). Yet, as Kos commenters noted, no accountants signed the returns as preparers. That is odd. If the preparer were a lawyer and refused to sign the return for the reasons I would probably have refused to sign, I believe that the lawyer would have a duty to inform the Board of the possibility of improper behavior that the Form 990 seems to raise. I don’t know what the obligations of an accountant would be in the same situation, but BBV’s accountants work for the charity, not the officers or employees. BBV’s Form 990 shows $48,918 in legal fees and $4,905 in accounting fees (990, p.2).

I wonder whether any accountants could have done any substantial work for BBV without finding out that all its donations were going into non-interest bearing accounts. If they discovered this, what did they tell the Officers and Directors about this practice? I also wonder whether the accountants who Bev Harris said received an extension to file BBV’s 990 are even still working for BBV, since the Form 990 appears not to have been professionally prepared. I should note that, other than the extension reportedly obtained by the accountants, there is nothing to indicate that either the lawyers or the accountants did any work on the tax return that was filed.

Here are some of the other possibilities besides the one that seems to be raised by the information disclosed on the return–i.e., some possibilities besides simply putting over $972,000 in a non-interest bearing charitable corporation account and retaining $613,000 in that account at the end of the year:

1. Perhaps the charity is somehow set up legally so that it does not have to invest its financial assets. This is highly unlikely, but not impossible. Further, the Attorney General of Washington should oppose any charity that tries to initiate such a counter-productive policy.

2. Perhaps instead all the many individual donors to BBV made it a condition of their gifts that the assets were to be held in non-interest bearing accounts. This is extremely unlikely, since the return indicates that the largest possible single donation it received was no more than $30,554 (the largest gift may have been less than this amount, it could not have been more; see 990, p.3, lines 26a and 26b).

3. It would be theoretically possible that every dollar was spent almost on the day it came in to the charity (so they didn’t have much money in the coffers), but in the last few days of the fiscal year, $600,000 was donated. This is highly unlikely, because substantial fundraising took place earlier in the fiscal year and (as just mentioned) the return discloses that the highest single donation did not exceed $30,554.

4. Perhaps instead the charity was operated legally and the cash was invested, but the tax return was in error. I hope this is the case. If so, BBV needs to refile a corrected Form 990. In my opinion, the Board of BBV also has a fiduciary responsibility to investigate why the error happened and to view the documentary evidence of how the money was invested. Further, they should strongly consider having the books fully and professionally audited to ensure the accuracy of the books and the accuracy of future IRS filings. After Enron, accountants and corporate boards can’t just stick their heads in the sand (especially if questions arise), or the board members and accountants may be held personally liable.

5. Perhaps instead the cash was commingled with the private funds of one of BBV’s officers or employees, so that any interest was earned by the officer, not BBV. If so, that would be an extremely serious ethical breach. If the commingler were a lawyer, in some states he or she might be disbarred or sent to prison (or both). If there was any commingling, the Board would have some very serious decisions to make and should probably get an opinion of counsel on how best to proceed.

6. Last, perhaps there is something about either the facts or the law of this situation that I don’t understand. My views are not intended to be a formal legal opinion on the facts. To give one, I would need to get full access to BBV’s financial records and financial officers and to research Washington law more extensively in light of that detailed information.

V. My Background and the Comments Policy.

To review my background as it relates to these legal issues: As some of you may know, I am a co-author of the most widely used law school textbook on Estates and Trusts, which includes chapters discussing charities and charitable trusts, though these chapters are more within the expertise of my co-authors than myself. I once published a scholarly tax article on a technical problem involving the duty of (nonprofit) private foundations to distribute a given portion of their investment income. Years ago in practice, I represented several of the largest charities and foundations in the state of Illinois on both fiduciary and tax issues. Yesterday, I consulted an academic expert in nonprofit organizations and their taxation, who similarly thought that BBV’s Form 990 raised serious legal questions about whether there had been any breaches of fiduciary duty.

Regarding comments to this post: I am tentatively opening comments on the tax and fiduciary issues only. I expect that there are lawyers among our readers who know a lot about these areas of law, and they may have insights into BBV’s tax returns or fiduciary duties that would be enlightening. The disputes between BBV and its critics on the left have been very nasty. Accordingly, do not post (even civilly) on the merits of the case for or against Diebold or on BBV’s contentious relationship with other election reformers. In addition, because of the possibility (but far from the certainty) of wrongdoing by BBV, please be careful not to post any comments that might be defamatory toward BBV or anyone else. In other words, please be especially cautious in your comments.