New York State AG's Office Focused on Nonprofit Accountability

New York attorney general Eric T. Schneiderman has put the state's nonprofit organizations on notice that the era of laissez-faire governance is over, the New York Times reports.

Schneiderman's office is investigating the finances of the Cooper Union for the Advancement of Science and Art, which was founded in 1859 by philanthropist Peter Cooper on the premise that it be "open and free to all" but began charging tuition last year, saying it faced financial ruin otherwise. According to the Times, the investigation is focused on the board's management of the school's $735 million endowment; its handling of the school's major asset, the Chrysler Building; its dealings with Tishman Speyer Properties, which manages the iconic Manhattan skyscraper; and its use of the building as collateral to obtain a $175 million loan from MetLife at a rate of 5.75 percent — which it spent on a lavish new building while the school continued to run operating deficits. The school also agreed to a prohibitively expensive pre-payment penalty on the loan, making it financially impossible to extricate itself from the agreement. One of the issues in the investigation is whether the school disclosed the penalty clause when it sought court approval for the loan.

The school's trustees told the Wall Street Journal the attorney general's office has expressed concerns about Cooper Union president Jamshed Bharucha's level of transparency and is pushing for his resignation, as well as  a periodic review of the school's ability to reinstate its no-tuition policy. According to the Journal, the school's board voted on April 9 in favor of informing Schneiderman's office that it would not renew Bharucha's contract if such a move would help end his investigation and forestall future litigation.

Schneiderman's investigation fits into the broader strategy his office has taken to get ahead of potential problems and scandals by "stress testing" nonprofits that show signs of trouble, said James Sheehan, the chief of the AG office's Charities Bureau. "Once an organization is in trouble, donors don't want to give money and people don't want to join the board," said Sheehan. "We want people to anticipate these issues before they become disasters."

Nonprofits have traditionally received little scrutiny until a scandal erupts or they're on the brink of collapse; in recent years, a number of New York City institutions, including the New York City Opera, Long Island College Hospital, and the Federation and Employment Guidance Services, have collapsed in financial disarray. Indeed, many cases of nonprofit mismanagement involve breaches of fiduciary duty rooted in a board members' sincere if ultimately misguided effort to help, the Times notes. Board members are typically "people who are generous donors who support the mission of the institution," said Sheehan. "There's a culture of politeness and respect, and they support the chief executive. Most chief executives don't want board members to ask tough questions."

"It's easy to forget, but New York's charities, collectively, are a big and important part of our state's economy, and I consider it my responsibility to promote and protect the nonprofit sector," Schneiderman told the Times. "In part, we do that by aggressively investigating and prosecuting fraud. But we work just as hard to prevent mismanagement before it starts and, whenever possible, get troubled charities back on track."

James B. Stewart. "Cooper Union Inquiry Puts Nonprofits on Notice." New York Times 04/09/2015. Mike Vilensky. "Cooper Union Board Offers Not to Renew Contract of President Jamshed Bharucha." Wall Street Journal 04/09/2015.