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Whopping fine could change the way fundraisers for charity operate

By David Fitzpatrick and Drew Griffin, CNN Investigations
July 1, 2014 -- Updated 0124 GMT (0924 HKT)
STORY HIGHLIGHTS
  • New York state reaches a nearly $25 million settlement with Quadriga Art
  • Quadriga is a direct-mail company and worked with a veterans foundation
  • Three-year CNN investigation found very little was actually going to veterans
  • Prosecutor said veterans got M&M candy, chef's hats and unwanted shoes

New York (CNN) -- In what it called the "largest amount of financial relief ever obtained for deceptive charitable fundraising," the New York State Attorney General's office has reached a nearly $25 million settlement with one of the nation's biggest direct-mail companies.

The settlement calls for damages of just under $10 million and forgiveness of debt for another $13.8 million against Quadriga Art, whose clients include some of the nation's most well-known charities.

A three-year CNN investigation into Quadriga Art and its profiteering off donations made to U.S. veterans has led to a fine that New York regulators say is precedent-setting. This potentially could change how professional fundraisers operate in the state of New York and possibly the entire country.

The total settlement prevents Quadriga from engaging in what it calls a "funded model" of beginning new charities -- paying all of the start-up costs and fundraising costs in advance in hopes of profit down the road.

In particular, the settlement zeroes in on Quadriga's relationship with a charity based in Washington called the Disabled Veterans National Foundation, founded in 2007.

2012: Charities in debt to fundraiser
2012: We're not getting money, vets say
2012: What happened to $56 million?

After direct-mail payments, little left for veterans

CNN has been reporting on Quadriga and the veterans foundation since the fall of 2010, broadcasting a series of reports that showed the charity sending practically all of the millions it raised back to Quadriga as payment for the direct-mail campaign. Almost none of the cash left over went to veterans, the CNN investigation found.

As a result of CNN's reporting, the Senate Finance Committee began an investigation of Quadriga and the veterans foundation. So did the New York State Attorney General's office.

The Senate investigation is ongoing, according to a spokesman for the committee. The New York state investigation found that for all intents and purposes, the charity was a front for Quadriga.

"From the very beginning," the state said, "the investigation found DVNF lacked independence from its principal fundraiser, Quadriga. Quadriga's lawyer's got the charity up and running and drafted the fundraising counsel agreement that DVNF signed."

In all, the charity raised $116 million since 2008 but returned $104 million of it to Quadriga, according to the attorney general.

And of that leftover funds, much of it was sent in the form of donations that one prosecutor said was "dreck" -- M&M candy, chef's hats and coats and leftover shoes that no one wanted.

The settlement was signed by New York State Attorney General Eric Schneiderman.

State Attorney: Actions were 'pretty despicable'

"To take the money that people are trying to spend to help disabled veterans just to feed your own overhead and to pay off your executives as Quadriga did here is pretty despicable," Schneiderman told CNN.

Quadriga president and CEO Mark Schulhof said in a statement that he has "taken responsibility for the mistakes that were made" in its dealings with the veterans charity.

"We deeply apologize for our actions and for any adverse impact they may have had on our industry," he said.

Schulhof also said his uncle, Tommy Schulhof, had resigned as the company's chairman of the board.

Under terms of the settlement, the founding board members of the charity are resigning and the charity can no longer do business with Quadriga for three years unless the company is a legitimate low bidder and prosecutors agree.

A spokesman for the Disabled Veterans National Foundation, Timothy Gillis, said the settlement "actually strengthens" the charity.

It wasn't just veterans; it was also Native American children

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