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A few more interesting books about MLMs:


Merchants of Deception, by Eric Scheibeler.


All that Glitters is not God, by Athena Dean.


Spellbound, by Robert Styler.

I have not read all of those books, and they need to be taken with a grain of salt as all "tell-all" books should. Nevertheless, they are recommended by a reliable source -- the Millenium Project ("Offending the Offensive since 1999") -- which, quite apart from its general trustworthiness, also is good on the book recommendation front: many of the books it recommends together with these three books are book that I have read and are quite good.

Labels: books, MLM

"The Charlatan", by Pietro Longhi. Credit: Wikipedia.

MLM watch is an excellent web site with many, many links showing the fraud inherent in MLMs. MLM watch is a sister site of Quackwatch.

But aren't these two different things? MLMs are an economic scam, Quackery is a medical scam.

Not at all! MLMs, as the pathetic earning of 99%+ of MLMers shows, are de facto pyramid schemes: only a few at the very top make money, by getting it from the "downline" -- those at the bottom of the pyramid. But how can the upline get the suckers in the downline to give the upline money for nothing, without running afoul of anti-pyramid-scheme laws?

Well, one must have a product -- officially -- and one of the most common products in MLMs are all kinds of quack-based lotions and potions, which cost almost nothing to produce and can be sold for a huge markup to the suckers, as long as one claims all sorts of non-specific "health benefits".

Conversely, many quacks who want to sell worthless nostrums try selling it through the MLM route -- this allows them both to dump the stock on the suckers by telling them that it is a product "everybody wants", as well as avoid the publicity or scrutiny that would occur if they sold the product in regular retail stores.

Among others, quack medicines sold the MLM way include Herbalife, Privatest, Seasilver, and numerous others. When not actually worthless, the product sold -- such as Quixtar's Nutrilite's vitamins and minerals -- are almost invariably (as always with MLMs) far, far more expensive than the generic brand would be -- often ten times as much.

MLMers like to claim that, sure, their products are ten times more expensive -- but that's because it's "natural" and "special" and "unique". Nonsense. It's ten times more expensive because it's an MLM scam. Gotta pay that upline!

If someone offers you any sort of vitamin / medicine / food supplement / treatment through MLM, run. If the product isn't actually quack medicine, it's the same vitamins or supplements you can get elsewhere -- at ten times the price.

Labels: MLM

Quite apart from being the sure road to losing money quickly, MLMs are also dangerous for philosophical and moral reasons. They encourage magical thinking: the belief that the all-important thing for success is optimism, drive, and "being a go-getter", and that this is more important and will overcome all stubborn facts.

What's more, contrary to their claims that they are "independent" and "businessmen" unlike those nasty ol' Just-Over-Broke losers, in reality MLMers are parasites: they exploit natural feelings of friendship, kinship and trust for monetary gain (which is usually nonexistent in any case). They use their family's and friends' trust in them to sell them worthless stuff at high prices and get them into their "downline", and if any when they ever make it into the top, they make money mostly from the abuse of the trust of the people in their "downline": promising them that if only they keep giving them money, they will eventually "make it".

The magical thinking aspect of the MLM cults, their worship of 'success', has never been better exposed than in G. K. Chesterton's 'The Fallacy of Success' (in All Things Considered). The fallacy is that there is no such thing as 'success' in general: there is only success in some particular thing, from chess to carpentry. Those -- MLMers in particular -- who worship 'success' and go to workshops about how to be 'successful' always fail, since they never learn how to be successful in anything in particular, and are only there to learn how to act like people who are successful in something act. As Chesterton says (he was a very entertaining writer, so worth quoting in length):

These writers profess to tell the ordinary man how he may succeed in his trade or speculation—how, if he is a builder, he may succeed as a builder; how, if he is a stockbroker, he may succeed as a stockbroker. They profess to show him how, if he is a grocer, he may become a sporting yachtsman; how, if he is a tenth-rate journalist, he may become a peer; and how, if he is a German Jew, he may become an Anglo-Saxon. This is a definite and business-like proposal, and I really think that the people who buy these books (if any people do buy them) have a moral, if not a legal, right to ask for their money back.

If you are in for the high jump, either jump higher than any one else, or manage somehow to pretend that you have done so. If you want to succeed at whist, either be a good whist-player, or play with marked cards. You may want a book about jumping; you may want a book about whist; you may want a book about cheating at whist. But you cannot want a book about Success. Especially you cannot want a book about Success such as those which you can now find scattered by the hundred about the book-market.

You may want to jump or to play cards; but you do not want to read wandering statements to the effect that jumping is jumping, or that games are won by winners. If these writers, for instance, said anything about success in jumping it would be something like this: "The jumper must have a clear aim before him. He must desire definitely to jump higher than the other men who are in for the same competition. He must let no feeble feelings of mercy (sneaked from the sickening Little Englanders and Pro-Boers) prevent him from trying to do his best. He must remember that a competition in jumping is distinctly competitive, and that, as Darwin has gloriously demonstrated, THE WEAKEST GO TO THE WALL."

Quite true. What these books do -- and what MLM or other 'success seminars' do -- is, as Chesterton says:

In such strange utterances we see quite clearly what is really at the bottom of all these articles and books. It is not mere business; it is not even mere cynicism. It is mysticism; the horrible mysticism of money. The writer of that passage did not really have the remotest notion of how Vanderbilt made his money, or of how anybody else is to make his. He does, indeed, conclude his remarks by advocating some scheme; but it has nothing in the world to do with Vanderbilt. He merely wished to prostrate himself before the mystery of a millionaire.

Indeed so. Anybody who had ever been to one of those seminars can tells us how they are all about worshiping success -- either of the "big pin" in Amway or of a similar person -- not because those people tell them anything worthwhile about how to make money, but merely because those people made money.

Never mind that, as in the case of most such authors, the author himself made the money not in business, but in selling books and ridiculously overpriced "training programs" about success; never mind that the books and seminars are worthless, giving nothing more than rah-rah positive thinking and trite advice (like in the book above); all that matters is to attach oneself in some way to the millionaire, the "big pin", the "top upline", etc., out of the belief that if you try to act like them, you'll be like them -- a belief on par with the primitive tribesman's belief that if they eat lion's meat, they will be as strong as a lion.

As for the parasitic, trust-destroying nature of MLMs, their raising of selfishness to a positive good, their looking-out-for-number-one attitude, Andrew Oldenquist noted, in his book The non-Suicidal Society:

Running through most of these books is the idea that there is a quick and simple secret to success, a psychological gimmick that will bring you affection, sex, the esteem of others, and power over them. They are books for failures, for mice who would be supermen, and who want to be respected, obeted, and caressed without having to posses the character that makes one worthy of respect, obedience, or caresses. They parallel, in the realm of psychology and the spirit, the books whose gimmick for financial success is optimism, selling from your home, or buying a Cadillac for image before making your first detergent sale.

If everyone were to try to follow the advice in these books our society could not existed. A life wholly dedicated to dissimulation or manipulation can only exist within an environment in which the rest of us most of the time believe what we are earnestly told, act on principle and from group loyalties, and try to do our fair share... The manipulator must be carried on a sea of people who themselves to not lead that kind of life. The advice of the selfishness manuals is like a pyramid club or chain letter scheme in which only those who get in early are able to profit.

For MLMers, like for used-car salesmen, honesty, caring, and trust are merely instrumental, all sacrificed to the moloch of non-existent 'success'. It is better, if one is an MLMer, to appear honest, fair and non-exploitive than to actually be honest, fair, and non-exploitive. Hence, notes Oldenquist, the frenzied attempt in 'success' seminars and MLMs about marketing yourself, public relations, 'dressing for success', appearing to be making money as one loses one's shirt (so that it is easier to "sponsor" potential victims), and so on.

There is nothing new here, of course. 2500 years ago, there were already men who thought this way:

For what men say is that, if I am really just and am not also thought just, profit there is none, but the pain and loss on the other hand are umistakakable. But if, though unjust, I acquire the rputation of justice, a heavenly life is promised to me. Since then, as philosophers prove, appearance tyrannizes over truth and is lord of happiness, to appearances I must devote myself. I will describe around me a picture and shadow of virtue to be the vestibule and exterior of my house; bnehind I will trail [like] the subtle and crafty fox...

This is Adeimantus, in his challenge to Socrates in Plato's Republic.

Does this not describe perfectly the average MLM "big pin" and "go-getter" -- speaking of virtue, success, "family", etc., while demanding the downline miss another car payment as they go broke fast to enrich him?

Labels: MLM, pyramid scheme

Listening to online talk radio is like trying to navigate the Los Angeles freeway system at the peak of rush hour while hitting your forehead repeatedly with a hammer. Even if you make it to your final destination without shooting anyone, you worry that you'll emerge from the car just a little bit dumber than when you climbed in.

The typical right-wing extremist show goes something like this: The host introduces himself and describes in titillating detail his most recent victimization at the hands of the evil feds - the US government apparently has an endless supply of silent, black helicopters and wastes billions of dollar annually bugging the homes and phones of small-time radio hosts - all because he's determined to share "The Truth" with his vast army of listeners. His fans, all 42 of them, are thrilled to think that they're in on some secret truthiness, and are therefore more than happy to overlook the obvious lies and exaggerations the show host slips in next. Just when you think the fibs about the topic du jour are so outrageous that the listeners will have to slap their knees and admit that the whoppers being told are truly funny stinkers, the show breaks for commercials.

And for pure entertainment value, there's nothing better than the advertisers who peddle their goods on the extremist talk show circuit.

Worried about the impending apocalypse? Just buy gold coins, freeze-dried food, and a few dozen cases of ammunition from us and you'll be the king of your county when the world economy collapses. Have the Jews rigged the Federal Reserve to ensure your financial failure? Here's a $3,000 debt elimination package that guarantees you'll never have to pay off your mortgage and credit card debt to those evil Jew bankers again. Cash only, please. Feeling like you're coming down with the flu? A little colloidal silver in your water will make you right as rain again. Just because your skin turns permanently blue, it's a small price to pay for thwarting the government's plan to kill you with those sinister flu vaccinations. Angry with Uncle Sam for taking 191.4% of your hard-earned money each week? Quick, buy our detax toolkit and you can be a tax-free hero, just like the founding fathers, Ross Perot, and the Kennedy clan. Call now and we'll throw in an offshore Ponzi scheme for free!

After the break, the host continues his lengthy rant on whatever news event or paranoid fantasy pissed him off that day, punctuated with occasional calls from supporters who tell him that he is obviously correct because they can't find anything on the topic in the Illuminati-controlled, mainstream media.

The show invariably ends with an impassioned request for donations. Taking on the entire US government ain't cheap, you know.

The topics may be racist and hate-filled, and the medical and financial advice may land the listener in a god-awful mess, but in general, most online talk radio shows are relatively harmless. Few of the hosts openly advocate violence, and even fewer have more than a couple dozen scattered listeners, many of whom are too paranoid to leave their homes because the black helicopters are hovering in the shadows and the airplanes overhead are spreading mind-control chemicals through their condensation trails. A host's success is measured in terms of donations with the ultimate goal of having enough money come in to avoid that depressing get-a-real-job alternative.

After all, it's easier to collect unemployment or disability if you don't have an employer reporting your earnings to those jack-booted thugs at the IRS.

But then there are the rare birds - the hosts that manage to gain a significant following measured in the thousands rather than dozens - who believe that the only solution to their paranoid problems is to hunt and kill the perceived enemy. Primary targets may include Jews, blacks, immigrants, UFOs cleverly disguised as famous people, gays, state and federal employees, and even strategic government buildings.

While gathering donations is still a fundamental objective, these gurus have an ultimate goal of inciting others to do their dirty wet work for them, for free.

They're not as funny as the other guys.

Labels: conspiracy theory, Weird beliefs

This book is a classic, but still deserves a plug. Perhaps the best book ever about economic hysteria -- the .com bubble, the housing bubble, the Madoff bubble, the "MLMs are sweeping America!" bubble, etc., etc., -- is still Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds. Not only is it extremely informative, it is fun to read.

Amway UK had released their earning statement on November 2nd.

Needless to say, it's beyond pathetic.

Out of 14,000 folks or so, we have:

1). about 10,000 earning an average 47 Euros (about 60 bucks) a month -- before expenses.

2). about 3,000 earning an average of 139 Euros a month -- before expenses.

3). 36 folks earning about 2000 (2076) Euros a month -- again, before expenses.

Even if all those 36 were really successful -- if it was all pure profit, not including time spent, fuel, inventory bought for "personal consumption", what have you -- that's a success rate of, er, about 0.3%. And that's using the best case scenario.

What an opportunity!

These folks' page nails it. They seem, by the way, to be quite clever people, as can be seen in their other pages.

Elaine and Ed Brown's home during the standoff.


Ed and Elaine Brown.

Elaine Brown, the infamous tax protester who, together with her husband Ed, defied the government for nine months in an armed stand-off while booby-trapping her home with explosives, got sentenced to 35 years in prison.

Of course, heavy punishment in itself is not necessarily proof that one is wrong. But in this case, as usual with tax protesters, the heavy punishment has little to do with the original tax evasion charges, and everything to do with with rigging one's home with explosives while filling it to the brim with weapons. The mandatory minimum for the explosives charge and the plot to kill federal agents is 30 years.

If they had protested against the government in other ways, such as speaking to the press for example, then the worst-case scenario for their tax evasion charges would be a few years in prison. Certainly not de facto life in prison. Even if they were 100% correct -- and they are not -- about the government "illegally" making them pay taxes, protesting in this way would still be guilty of the explosive and plotting charges and still be sent to prison for the rest of their days.

That Ed and Elaine practically sent themselves to prison, due to their own violent, dangerous, and downright bone-headed behavior that (again) had nothing to do with the original tax issue, does not, of course, stop the usual gang of idiots from claiming it is all a huge government conspiracy to silence them, punishing them for 'a plot to defend themselves'.

I know! Next time a cop stops me for driving 40 in a 35-MPH zone, when I was clearly only going 32, I'll shoot him dead on the spot! I'd just be defending myself against evil government coercion, right? We all know that if you think the government wronged you, every possible act of violence is justified in retaliation. Just ask Ed and Elaine!

As I said: idiots.
Ah well.

Labels: Ed Brown, Elaine Brown

Image credit: Southern Poverty Law Center.

You've got to give it to Mr. NotHaus: he has the perfect name for his job, that of a 'Liberty Dollar' promoter. Now, the Southern Poverty Law Center reports, he has a new job: he is promoting a Marijuana church, where he is -- waaaaaaaaaaaaaait for it -- the 'high priest'.

Yes, Virginia, we finally have an answer to the eternal 'what are they smoking?' question about tax protesters, although, to be fair, it wasn't hard to guess.

As I said, you can't make this stuff up.

Labels: Bernard von NotHaus

"Freedom Daily" is the organ of the Future of Freedom Foundation ('advancing freedom and free markets since 1989 -- has it really been 20 years?! but I digress.) There is nothing these folks hate -- and I do mean hate -- more than 'liberals', as their web site shows. To give an idea of the kind of politics they support, it should be noted that they gave a positive review to Buchanan's anti-WWII book.

Now, if those folks cannot find a shred of truth in the tax-denial movement's claims, it shows you just how far out there the tax-denial folks are.

While we're on the subjects of conspiracies -- including IRS conspiracies (or, more accurately, conspiracy theories) -- for good academic-level (but accessible) articles about conspiracy theories, Michael Shermer's latest is a good start. Also, try Wikipedia's rather comprehensive view of IRS conspiracy theories.

The problem with conspiracy theorists is that they rarely believe in only one conspiracy. If you believe that, say, the US government is ruled by reptile-like aliens, it is not a big deal to believe the moon landing was faked -- and if "they" can do that, surely you can believe "they" can convince everybody to pay taxes despite the fact that there is no law requiring it.

Ah well.

Labels: conspiracy theory

An outsider often wonders: how can anybody believe what the tax protestors, NESARA promoters, MLM pushers, and so believe? Do these folks really think that (for instance) pointing at the flag in the courtroom and shouting, "admirality flag!" will stop the trial? Or that shape-shifting reptilians are out to stop them from getting trillions of dollars? Or that losing money fast by recruiting one's own competitors, as one works for free for one's upline, is the way to success?

Well, yes, they do. And not, they are not necessarily clinically insane -- or even stupid. The truth is, human nature makes us believe things, especially things we want (or, worse, need) to be true. For a fascinating look at what makes people believe such stuff, read Michael Shermer's book, Why People Believe Weird Things.

Labels: Michael Shermer, Weird beliefs

Those who follow the "tax protestor" -- actually, tax denial -- movement know they are deeply conspiratorial. Everything is part of an awful conspiracy, including the exact typeface used on letters they receive. In the immortal words of Aldous Huxley, paranoids live "in a world of terrifying significance."

While it is possible that some of the people who believe in conspiracy theory are actually paranoid (in the clinical sense), for most it fills some other psychological need -- in paricular, the need to explain away the inevitable failures and disappointments of life as a nefarious plot against them, and the need to feel important for being "in on the secret".

For this, any conspiracy theory will do. It is no surprise that tax protestors often believe in many other conspiracies -- such as in The Protocols of the Learned Elders of Zion (or its modern equivalents, replacing "Jews control the world" with "Zionists control the USA"), 9/11 conspiracy theories (decisively exploded here, for example), and so on.

Labels: tax protestor

Subject:

Ray Styles v. Friends of Fiji: Big Winner at Slots a Big Loser with Nevada Charity

Richard L. Fox describes for LISI subscribers an intriguing and cautionary tale, which is believed to be a case of first impression regarding the legal obligations under a donor-advised fund agreement of a charity sponsoring donor-advised funds.

The case involves an individual from Wichita Falls, Texas. He had the good fortune of winning $8 million at a slot machine in Lake Tahoe, Nevada.

Then, on the advice of a now infamous tax planning advisor, he contributed $2.5 million of his winnings to a charity incorporated under Nevada law (but operating out of Danville, CA) to establish a donor-advised fund account pursuant to a donor-advised fund agreement. The $2.5 million contribution, as it turns out, was the only contribution ever received by the charity.

Unfortunately for the donor, the directors and officers of the charity, consisting of only two individuals, ignored the donor-advised fund agreement in its entirety, opting instead to use the donor's $2.5 million contribution for their own purposes, rather than to further the charitable purposes of the donor.

Despite the Nevada District Court holding that the charity breached the express terms of the donor-advised fund agreement and breached its duty of good faith and fair dealing by failing to attempt in any way to achieve the donor's charitable goals, the court awarded no remedy or damages to the donor, thereby allowing the charity to ignore the donor and the donor-advised fund agreement with absolute impunity.

An appeal was recently filed on February 23, 2009 with the Nevada Supreme Court, asserting that, in light of the breaches found by the trial court, the trial court erred in not providing any remedy or damages to the donor.

Richard L. Fox is an attorney and a partner in the law firm of Dilworth Paxson LLP, in Philadelphia, where he heads the Philanthropic and Nonprofit Group. He represents a multitude of charitable organizations, including some of the largest private foundations in the country. He is a member of the editorial board of Estate Planning and BNA Tax Management, and writes and speaks frequently on issues pertaining to philanthropy.

Richard was also recently named by Worth Magazine as one of the Top 100 Attorneys in the country representing affluent families and individuals, including in the areas of private foundations and philanthropy, as well as a Pennsylvania Super Lawyer in these areas. We reviewed Richard's latest book, Charitable Giving: Taxation, Planning and Strategies in LISI Charitable Planning Newsletter # 139.

EXECUTIVE SUMMARY:

In 2002, an individual from Wichita Falls, Texas won $8 million at a slot machine in Lake Tahoe, Nevada.

Upon receiving and relying on the advice of a now infamous tax planning advisor, Jerome Schneider, who subsequently spent six months in federal prison after pleading guilty in February 2004 to the charge of conspiracy to defraud the Internal Revenue Service (in a matter unrelated to this case), the individual contributed $2.5 million of his winnings to a charity incorporated in Nevada, now operating out of Danville, California.

The contribution was made to establish a donor-advised fund account with the charity pursuant to a donor-advised fund agreement, to be used to make distributions to other charities recommended by the donor. The $2.5 million contribution turned out to be the only contribution ever received by the charity.

Rather than using the donor-advised fund account to further the donor's charitable purposes, the directors and officers of the charity, consisting of only two individuals, ultimately ignored the donor and the donor-advised fund agreement in its entirety.

The directors and officers of the charity, instead, opted to use the donor's $2.5 million contribution for their own purposes, which, as it turned out, consisted principally of paying themselves substantial annual salaries, transferring hundreds of thousands of dollars to another organization they created almost immediately after becoming directors and officers of the charity, paying hundreds of thousands of dollars to sponsor celebrity golf events at lavish resorts, purchasing penny stock (in a company in which one of the directors and officers of the charity held an interest) later sold at a 90% loss, paying hundreds of thousands of dollars in fundraising expenses without the charity receiving any fundraising proceeds, and paying over $500,000 in legal fees, the vast majority of which were incurred to defend the charity in the Nevada litigation brought by its sole donor, whose only goal was to have his contribution transferred to a bona fide charity pursuant to the terms of his donor-advised fund agreement. In the end, not one dollar of the donor's donor-advised fund account was ever used by the charity to further the donor's charitable purposes.

In the suit brought by the donor against the charity in the State of Nevada, the Nevada District Court held that the charity breached the express provisions of the donor-advised fund agreement and that the failure of the charity to attempt in any way to satisfy the donor's charitable goals was contrary to the intention and spirit of the donor-advised fund agreement and, thus, in violation of the implied covenant of good faith and fair dealing.

Surprisingly, notwithstanding this determination, the Nevada District Court did not award any remedy or damages to the donor. Thus, a charity receiving $2.5 million from a donor was allowed to ignore the donor-advised fund agreement in its entirety, fail in any way to satisfy the donor's charitable goals and charitable intent, fail to act in good faith and fair dealing, and use the donor's $2.5 million contribution for the sole purposes of its two directors and officers, all with absolute impunity.

Substantial and repeated attempts have been made to enlist the assistance of the State Attorney General in California and Nevada, as well as the Internal Revenue Service, in an effort to ensure that funds dedicated to charitable purposes have not been wasted or misused and to recover any funds not used for charitable purposes.

Apparently, however, no action has ever been taken by either of these states or by the Internal Revenue Service.

Currently, the case in Nevada is on appeal with the Nevada Supreme Court pursuant to an appeal just recently filed on February 23, 2009.

FACTS:

GOOD NEWS:

In 2002, Ray Styles, the owner of a local barbeque restaurant from Wichita Falls, Texas, had the good fortune of winning $8 million at a slot machine in Lake Tahoe, Nevada.

BAD NEWS:

Unfortunately, Styles then had the misfortune of receiving and relying on the advice of the now infamous Jerome Schneider who, at the time, was widely known and well-regarded by many as a tax planning expert, including having appeared on CNN and CNBC and ABC Radio and the Business Radio Network.

Based on Mr. Styles' philanthropic goals and his desire to secure an income tax deduction in 2002, Mr. Schneider advised Mr. Styles to make a $2.5 million contribution to establish a donor-advised fund account at a charity, known as "Friends of Fiji" (EIN: 98-0191060), which was incorporated in the State of Nevada but currently operates out of Danville, California.

Unbeknownst to Mr. Styles at the time he was receiving advice from Mr. Schneider, however, it was actually Mr. Schneider who had created Friends of Fiji and Mr. Schneider was also an officer and director of Friends of Fiji.

Also unbeknownst to Mr. Styles was that his $2.5 million contribution was the only contribution that Friends of Fiji had ever received (thus making Mr. Styles the sole donor to Friends of Fiji) and that, although Friends of Fiji was incorporated in Nevada on July 28, 1998, it had never engaged in any activities, involving a donor-advised fund or otherwise, essentially rendering it a dormant and empty shell corporation, although, in response to its Form 1023, Application for Recognition of Exemption, it had previously received an IRS determination letter on October 30, 1998, classifying it as Section 501(c)(3) tax-exempt entity and a public charity.

Apparently, Mr. Schneider had initially established Friends of Fiji to solicit funds for charities located in the Republic of the Fiji Islands, a purpose that never came to fruition, leaving Friends of Fiji as a dormant empty shell from the day it was created on July 28, 1998 until Mr. Styles' $2.5 million contribution in 2002, the first year in which Friends of Fiji actually filed a Form 990 with the IRS.

Also unknown to Mr. Styles was that Friends of Fiji, which was originally determined by the IRS to be a public charity based on representations made in its Form 1023, Application for Recognition of Exemption, lost its public charity status shortly following Mr. Styles' contribution, officially being converted by the IRS from a public charity to a private foundation on September 18, 2003, despite representations by Friends of Fiji in the donor-advised fund agreement that it would "take all actions necessary to maintain [that] qualification at all times."

Finally, unbeknownst to Mr. Styles, at the time he was being advised by Mr. Schneider, Mr. Schneider was apparently under investigation by the U.S. Justice Department.

On December 19, 2002, Mr. Schneider was indicted by a federal grand jury on one count of conspiracy to defraud the Internal Revenue Service, 14 counts of wire fraud and eight counts of mail fraud (in a matter unrelated to this case). After pleading guilty in February 2004 to the count of conspiracy to defraud the Internal Revenue Service, Mr. Schneider subsequently spent six months in federal prison (http://www.quatlosers.com/jerome_schneider.htm).

THE DONOR-ADVISED FUND AGREEMENT AND THE DIRECTORS AND OFFICERS OF FRIENDS OF FIJI

In connection with his $2.5 million contribution to Friends of Fiji, Mr. Styles signed an 11-page, single-spaced donor-advised fund agreement dated October 14, 2002, that, typical of donor-advised fund agreements used across the country,

 * * * gave Mr. Styles advisory privileges to make recommendations for distributions to other charities,

 * * * required Friends of Fiji to hold the contribution in a separately accounted-for donor-advised fund account, and

 * * * imposed a host of other requirements that are typically imposed on a sponsoring charity under a donor-advised fund agreement.

The donor-advised fund agreement also specifically required Friends of Fiji to take all actions necessary to maintain its public charity status although, as indicated above, shortly after Mr. Styles' $2.5 million contribution in 2002, Friends of Fiji became a private foundation on September 18, 2003. That meant it became subject to the much stricter tax regime of Chapter 42 of the Internal Revenue Code applicable to private foundations, including the imposition of an excise tax on investment income that is not imposed on public charities.

At some point prior to Mr. Styles' contribution in 2002, Mr. Schneider resigned his positions with Friends of Fiji and, apparently, "through" Mr. Schneider's attorney at the time, had two individuals, Gary Nerison and James Bickel, brought on as the sole directors and officers of Friends of Fiji.

Interestingly, in the Deposition of Gary Nerison on Tuesday, May 17, 2005 in connection with the Nevada litigation brought by Mr. Styles, Mr. Nerison's answers to a number of questions provide invaluable insight as to how Mr. Nerison became involved with Friends of Fiji, a charity that, although incorporated on July 28, 1998, had never engaged in any charitable activities and prior to Mr. Styles' contribution in 2002, had never received any contribution of any kind:

 * * * When asked "How did you become associated with Friends of Fiji?", Mr. Nerison responded "Through Dan Herling."

 * * * In response to the question "And who is Dan Herling?", Mr. Nerison stated "Dan Herling is an attorney for Duane Morris."

 * * * When Mr. Nerison was asked "And how it is that [Mr. Herling] got you involved with [Friends of Fiji]?", Mr. Nerison responded "He approached me one day and asked if I would be interested in running a foundation."

 * * * When asked "How is it that [Mr. Herling] knew about Friends of Fiji?", Mr. Nerison stated that "He at the time was representing Jerome Schneider on some business."

 * * * When Mr. Nerison was asked "Do you know Jerome Schneider?", he responded "I do."

 * * * When asked "And how did you meet [Mr. Schneider]?", Mr. Nerison stated "Through Dan Herling."

 * * * In response to the question about "What made you decide to get involved with Friends of Fiji?", Mr. Nerison responded "I thought it was a very interesting challenge and was interested."

 * * * In response to the question "Have you ever been involved in a nonprofit corporation before?", Mr. Nerison stated "No … nothing direct."

In the Deposition of James Bickel on Tuesday, May 17, 2005 in connection with the Nevada litigation brought by Mr. Styles, Mr. Bickel's answers are consistent with those of Mr. Nerison, as follows:

 * * * In response to the question, "How did you become familiar with Friends of Fiji?", Mr. Bickel stated "I was introduced to it by Gary Nerison."

 * * * In response to the question "And do you know how [Mr. Nerison] became aware of Friends of Fiji?", Mr. Bickel sated "He was introduced by Dan Herling."

 * * * And, in response to the question "Why did you get involved with Friends of Fiji?", Mr. Bickel stated "Because Mr. Nerison asked me to."

Apparently, neither Mr. Nerison nor Mr. Bickel had any direct experience running or operating a charity or a foundation, but, for whatever reason, they were put in the position, which they apparently willingly accepted, of being in charge of a dormant empty shell "charity" that suddenly found itself holding $2.5 million in cash, subject to a donor-advised fund agreement with Mr. Styles, a high-school educated barbeque restaurateur from Wichita Falls, Texas.

FRIENDS OF FIJI AND THE WORLD HEALTH AND EDUCATION FOUNDATION

Almost immediately following Mr. Styles' $2.5 million contribution pursuant to his donor-advised fund agreement dated October 14, 2002, Friends of Fiji took actions that were inconsistent with the donor-advised fund agreement, in that the directors and officers of Friends of Fiji used Mr. Styles' contribution for their own purposes, rather than using his contribution to further his charitable goals. This included creating the "World Health and Education Foundation" (EIN: 04-3766459), an entity controlled by Mr. Nerison and Mr. Bickel which was incorporated in the State of California on February 7, 2003 (almost immediately after they became directors and officers of Friends of Fiji), to which hundreds of thousands of dollars were subsequently transferred from Friends of Fiji, all attributable to the $2.5 million contribution by Mr. Styles to Friends of Fiji. Based on its Forms 990, the only "contributions" ever received by World Health and Education Foundation have come from Friends of Fiji.

In the end, not one dollar of Mr. Styles' $2.5 million contribution, which was required to be held in his donor-advised fund account pursuant to his donor-advised fund agreement, was ever used by Friends of Fiji to further his charitable purposes. This includes a recommendation made by Mr. Styles to Friends of Fiji on January 30, 2007, stating:

"I am hereby recommending that the entire balance of my donor-advised fund be distributed to the NEVADA COMMUNITY FOUNDATION," which was accompanied by a letter from the Nevada Community Foundation to Mr. Styles, which acknowledged and expressed "our deepest thanks and gratitude for your recommendation."

This recommendation was rejected by Friends of Fiji, as Friends of Fiji made no transfer of any kind to the Nevada Community Foundation or to any other charity recommended by Mr. Styles.

Instead, Mr. Styles' $2.5 million contribution to Friends of Fiji, representing the only contribution it ever has received, was used solely for the purposes of its directors and officers, Mr. Nerison and Mr. Bickel, without regard to Mr. Styles or his donor-advised fund agreement. It was also recently learned that the lead litigator for Friends of Fiji in the Nevada litigation subsequently joined the board of directors of the Nevada Community Foundation, the very charity to which Mr. Styles has recommended his donor-advised fund be transferred.

As further discussed below, the Nevada District Court held that Friends of Fiji breached the express provisions of Mr. Styles' donor-advised fund agreement and that its failure to attempt in any way to satisfy Mr. Styles' charitable goals was contrary to the intention and spirit of the donor-advised fund agreement and thus in violation of the implied covenant of good faith and fair dealing. (To read a copy of the court's decision, click here.)

FORM 990 DISCLOSURES BY FRIENDS OF FIJI AND WORLD HEALTH AND EDUCATION FOUNDATION

Starting with its 2002 Form 990-PF, which included an attached statement indicating that Friends of Fiji received its first contribution in December 2002 (of course, this was Mr. Styles' $2.5 million contribution) and that the focus of the charity was changing (notwithstanding that Mr. Styles was the sole donor and Mr. Styles had a donor-advised fund agreement with Friends of Fiji), Friends of Fiji acted in a manner wholly inconsistent with Mr. Styles' donor-advised fund agreement by failing to attempt in any way to satisfy Mr. Styles' charitable goals.

As reflected on its 2003 Form 990-PF, Friends of Fiji starting paying annual compensation to Mr. Nerison and Mr. Bickel, and on behalf of the World Health and Education Foundation, paid $100,000 for World Health and Education Foundation to be the Tour and Tournament Principal Sponsor of the "Cody Unser Celebrity Golf Fiesta" (a two-day event held "at the five-star Hyatt Tamay Resort in Albuquerque, New Mexico"), paid $100,000 for the World Health and Education Foundation to be the Title Sponsor of the "Joe Montana Legends of Golf Tournament" (a two-day event held at Edgewood Golf Course, Lake Tahoe, Nevada, hosted by Harrah's-Harvey's Casino Resort), and paid $25,000 for the World Health and Education Foundation to be the lead sponsor of the "Kid's Turn Golf Classic 2003."

The expenditures made in 2003 set the pattern for future expenditures by Friends of Fiji being made solely as determined by Mr. Nerison and Mr. Bickel, without regard to Mr. Styles and his donor-advised fund agreement. Because the only contribution Friends of Fiji ever received was Mr. Styles' $2.5 million contribution in 2002, each and every expenditure made by Friends of Fiji, as determined by Mr. Nerison and Mr. Bickel, was necessarily attributable to Mr. Styles' contribution to Friends of Fiji.

The information contained in the Forms 990 filed with the IRS by Friends of Fiji and the World Health and Education Foundation clearly reflects that Mr. Styles' contribution was not used to further his charitable purposes, but was used for the purposes of Mr. Nerison and Mr. Bickel, its sole directors and officers. Such information provided on the Forms 990 also raises some very important issues about the use of Mr. Styles' contribution. For example:

1) * * * Since 2003, Mr. Nerison and Mr. Bickel have paid themselves nearly $600,000 in compensation (generally $108,000 each year) for an * * * organization that merely makes a nominal number of disbursements each year and engages in no direct charitable activities of any kind. For example, for the years 2006 and 2007, respectively, Mr. Nerison and Mr. Bickel * * * received combined annual compensation of $108,000 (for such years, Mr. * * * Nerison received $84,000 and Mr. Bickel received $24,000) when Friends of Fiji, in each of these years, showed one "charitable disbursement," of $25,000 and $20,000, respectively, which went to the World Health and Education Foundation, the very organization controlled by Mr. Nerison and Mr. Bickel.

2) * * * According to its 2005 Form 990-PF, Friends of Fiji incurred over $200,000 in fundraising expenses in 2005, but received absolutely no fundraising proceeds of any kind in that year or any other year.

3) * * * Friends of Fiji transferred hundreds of thousands of dollars to World Health and Education Foundation, an entity controlled by Mr. Nerison and Mr. Bickel, which generally used such funds to be a principal sponsor at celebrity golf tournaments, including a transfer of $311,836 made from Friends of Fiji in 2005, as reflected on Schedule B ("Schedule of Contributors") of the 2005 Form 990 for World Health and Education Foundation.

4) * * * As reported on it 2006 Form 990-PF, Friends of Fiji paid $50,000 for a "penny stock," YaSheng Group (YHGG.PK), which it purchased for $50,000 and sold for $5,175, resulting in a 90% loss. Interestingly, in a Deposition of James Bickel dated May 30, 2008 in the case of Joe Martin v. World Health and Education Foundation (in the Superior Court of the State of California), in response to the question to Mr. Bickel, "Do you hold any financial interest in YaSheng, direct or indirect?", Mr. Bickel responded by stating "I own shares – public shares."

5) * * * Since 2003, Friends of Fiji has paid more than $500,000 in legal fees, including $318,529 in 2007 alone, the vast majority of which was used to fight Mr. Styles, its sole donor, in the Nevada litigation, just so the directors and officers of Friends of Fiji could continue to use Mr. Styles contribution for their own purposes, notwithstanding that, in the end, the Nevada District Court held that Friends of Fiji had a legal duty to use Mr. Styles contribution for his charitable purposes and that, in failing to do so, Friends of Fiji breached its duty of good faith and fair dealing to Mr. Styles. This costly Nevada litigation continued even after Mr. Styles made a recommendation to Friends of Fiji on January 30, 2007 that his donor-advised fund account be transferred to the Nevada Community Foundation, a recommendation that was rejected by Friends of Fiji. Apparently, at some time after January 30, 2007, the lead litigator for Friends of Fiji apparently joined the board of directors of the Nevada Community Foundation.

6) * * * World Health and Education Foundation, whose only contributions have come from Friends of Fiji, loaned Gary Nerison, a director and officer, $20,000 in 2007, as reflected on the 2007 Form 990 for World Health and Education Foundation. Specifically, an attachment to the Form 990 provides that "During the 2007 calendar year, The World Health and Education Foundation loaned Gary Nerison, President, $20,000 … due by March 15, 2009." Consistent with California law (California Corporations Code 5236), the Bylaws of World Health and Education Foundation provide it may not loan money to any director or officer "without the approval of the California Attorney General."

7) On its 2005 Form 990, World Health and Education Foundation indicated that it conducted a "Celebrity Golf Fundraiser." This celebrity golf event was, according to a June 5, 2005 article in the San Francisco Chronicle (entitled "Catching Up With Kenny Stabler"), the "second annual Ken Stabler Celebrity Golf tournament … benefiting the World Health & Education Foundation." Accordingly to the article, the tournament was to be held at the Arrowcreek Course in Reno, Nevada, and "The idea for the tournament came from Gary Nerison, president of the WHEF." The 2005 Form 990 for World Health and Education Foundation reflects the following issues in connection this tournament, which indicate that this celebrity golf tournament ended up losing nearly $150,000 of funds of Friends of Fiji otherwise dedicated to charitable purposes and the financial results of this tournament were not properly reported on the 2005 Form 990 of World Health and Education Foundation:

 * * * The fundraising proceeds and expenses were not reported on lines 9a and 9b of Part I of page 1 of the 2005 Form 990, as required for fundraising events, such that the gross revenue and direct expenses of the tournament were not properly reflected on the Form 990.

 * * * The Form 990 reflects that the tournament raised gross revenue of $58,763; however, this amount was reflected as "program service revenue," rather than what it really was, proceeds from a celebrity golf tournament. A golf tournament is not considered a program service of a Section 501(c)(3) tax-exempt entity. Notwithstanding, the $58,763 amount is reflected as "program service revenue" on Part 1, line 2 and Part VII, line 93a, of the 2005 Form 990. As indicated above, fundraising proceeds should be reported on line 9a of Part I of page 1 of the 2005 Form 990.

 * * * The expenses in connection with the tournament were included in Part III of the 2005 Form 990 as "Program Services Expenses," when, in fact, they were nothing more than fundraising expenses in connection with a celebrity golf tournament, having nothing to do with any program. Thus, as indicated above, these fundraising expenses should have been reported line 9b of Part I of page 1 of the 2005 Form 990. World Health and Education Foundation incurred $205,659 in fundraising expenses for the tournament, as delineated in Statement 1 attached to the Form 990, under the heading "Golf Outing Fundraiser Fees and Costs," as follows:

 Security * * * * $ 1,000

 Travel Expenses for Celebrities * * * 31,597

 Appearance Fees * * * 55,326

 Entertainment * * * * 41,472

 Prizes, Awards, Trophies * * * * 31,827

 Insurance * * * 7,322

 Photography * * * * 4,586

 Rent * * * 488

 Advertising * * * 2,958

 Miscellaneous * * * * 2,957

 Facility Expense * * * 11,837

 Printing * * * * 14,289

* * * Total * * * * $205,659

* * * ======

 * * * Thus, because the gross fundraising revenue from the tournament was $58,763 and the fundraising expenses of the tournament were $205,659, the tournament actually lost $146,896. Because the revenue and expenses were treated as part of a program service, rather than the proper treatment as fundraising revenue and expenses, this $146,896 loss was not reflected on the front page of the 2005 Form 990, where it belonged (on line 9c). Thus, on the face of the return, the IRS, a State Attorney General, and the public could not readily determine that this tournament lost $146,896 and, the revenue and expenses were basically "buried" by treating the golf tournament as a program service, which it clearly is not.

 * * * Notwithstanding that the celebrity golf "fundraising" tournament lost $146,896, as demonstrated above, Part VIII of the 2005 Form 990 for World Health and Education Foundation states that "Proceeds from celebrity golf fundraiser were used to make charitable donations to 501(c)(3) organizations." Query how one could assert on a Form 990 that proceeds of a celebrity golf tournament that lost $146,896 were used to fund anything, as the tournament resulted in World Health and Education Foundation not ending up with a penny of net proceeds, but instead ending upon using $146,896 of funds otherwise dedicated to charitable purposes (i.e., the net loss for the tournament) for people to play golf at a lavish golf club in Reno, Nevada with celebrities. Clearly, no proceeds from the tournament were used to make charitable donations, as the tournament produced no net proceeds, but, in fact, lost $146,896.

 * * * The only reason that World Health and Education Foundation could have conducted the Ken Stabler Celebrity Golf Tournament in 2005 was because, as reflected on Schedule B ("Schedule of Contributors") of the 2005 Form 990 for World Health and Education Foundation, it received $311,836 of funds from Friends of Fiji during 2005, thereby allowing the World Health and Education Foundation to utilize $146,896 of Friends of Fiji funds so that World Health and Education Foundation could conduct a money-losing celebrity golf tournament at a lush country club in Reno, Nevada (http://www.arrowcreekcc.com/). Thus, it was only on Friends of Fiji's dime (actually $146,896) that the World Health and Education Foundation could have conducted a celebrity golf tournament having a price tag of in excess of $200,000. Thus, the $146,896 loss incurred by World Health and Education Foundation from conducting the Ken Stabler Celebrity Golf Tournament was funded entirely by Friends of Fiji, and, as a result, was directly attributable to Mr. Styles $2.5 million contribution to Friends of Fiji.

 * * * Interestingly, and consistent with the propensity to use the funds of Friends of Fiji to fund celebrity golf tournaments, the World Health and Education Foundation, also in 2005, was apparently the "2005 Title Sponsor" of the "Legends Celebrity Golf Tournament 2005 with Joe Montana," held at Harrah's Havey's Casino Resort in Lake Tahoe, again funded with transfers of funds from Friends of Fiji to the World Health and Education Foundation.

8) Despite the fact that the only contributions ever received by World Health and Education Foundation were from Friends of Fiji, a private foundation, onsistent with its previously filed Forms 990, Part IV-A of the 2007 Form 990 for World Health and Education Foundation indicates on line 26f that the "public support percentage" for World Health and Education Foundation is 99.9908%, thus, in effect, treating all of its receipts of funds from Friends of Fiji as being public support. There are no grounds for this treatment and, as a result, rather than the treatment of itself as a public charity on its Forms 990, the World Health and Education Foundation should now actually be a * * * private foundation and should be subject to the private foundation excise tax rules of Chapter 42 of the Internal Revenue Code and file Form a 990-PF, not Form 990. World Health and Education Foundation received its IRS determination regarding its Section 501(c)(3) tax-exempt status and its public charity status on August 18, 2003, with its advance ruling period ending December 31, 2007. It received its public charity status determination based on representations in its Form 1023, Application for Recognition of Exemption, that it would receive contributions from the general public, sufficient for it to be classified as a public charity under Section 170(b)(1)(A)(vi) of the Internal Revenue Code. Such application, however, made no mention of Friends of Fiji, although the only contributions ever reported on Forms 990 as being received by World Health and Education Foundation came from Friends of Fiji. Given the representations made on the Forms 1023 of World Health and Education Foundation, in contrast to the reality of its only contributor being Friends of Fiji, it would appear that the World Health and Education Foundation should be considered a private foundation as of February 7, 2003, the date of its incorporation.

Notwithstanding that all of the contributions received by World Health and Education Foundation have come from Friends of Fiji, and all of the contributions received by Friends of Fiji have come from Mr. Styles, both Mr. Nerison and Mr. Bickel widely tout their role with the World Health and Education Foundation, i.e., as being the co-founders and officers of the World Health and Education Foundation, a charitable organization. (Examples of this can be found by "Googling": (1) "World Health and Education Foundation" and "Gary Nerison" and (2) "World Health and Education Foundation" and "James Bickel".)

THE LAWSUIT

Being totally dissatisfied, to the point of being distraught, with the way he was being treated by Friends of Fiji from the start and the manner in which his $2.5 million contribution was being used by Friends of Fiji, Mr. Styles brought suit against Friends of Fiji on August 31, 2004, Ray Styles v. Friends of Fiji, A Nevada Corporation; Gary Nerison, James S. Bickel, in District Court, Clark County, Nevada, No. 51642, asserting, among other things, that it failed to comply with the terms of his donor-advised fund agreement by, in effect, ignoring him and the terms of the agreement, and using his contribution for the purposes of Mr. Nerison and Mr. Bickel, the sole officers and directors of Friends of Fiji.

For the Nevada litigation, Mr. Styles engaged local Las Vegas counsel, with Richard L. Fox, Esq., of the law firm Dilworth Paxson LLP, who is licensed only in Pennsylvania and New York, serving as an adviser and Mr. Styles' personal lawyer. Given the prohibitive costs involved in pursuing this case further, Mr. Styles is no longer using Nevada counsel. However, with the assistance of Mr. Fox (without charge), Mr. Styles just recently filed, on February 23, 2009, a pro se appeal with the Nevada Supreme Court under its "Civil Proper Personal Appeal" procedure, where a litigant is not represented by Nevada counsel.

THE OPINION OF THE NEVADA DISTRICT COURT

Among the specific express breaches of the donor-advised fund agreement by Friends of Fiji, as determined by the Nevada District Court in its Findings of Fact and Conclusions of Law dated December 11, 2007, included the following:

 * * * Friends of Fiji failed to provide Mr. Styles with quarterly reports following the receipt of his contribution indicating, among other things, the balance in his donor-advised fund;

 * * * Friends of Fiji failed to disseminate to Mr. Styles fund reports, special mailings, annual reports, information on special events or have any personal contact with Mr. Styles;

 * * * Friends of Fiji used Mr. Styles' contribution "for charitable purposes unrelated to those recommended by [Mr. Styles] and without consulting [Mr. Styles];" and

 * * * Although the donor-advised fund agreement required Friends of Fiji to take all actions which are necessary to maintain it public charity status, "Friends of Fiji decided not to take those actions and instead the IRS determined that it was a private foundation."

In addition to these express breaches by Friends of Fiji, the Nevada District Court found "that the failure [of Friends of Fiji] to attempt in any way to satisfy [Mr. Styles'] charitable goals is contrary to the intention and spirit of the [Donor-Advised Fund] Agreement and thus in violation of the implied covenant of good faith and fair dealing."

Despite its findings of express breaches of the donor-advised fund agreement by Friends of Fiji and its failure to act in good faith and fair dealing by failing in any way to use Mr. Styles' contribution to further his charitable goals, the court did not award any remedy or damages to Mr. Styles. In the end, therefore, the Nevada District Court held that a sponsoring charity can breach the express terms of a donor-advised fund agreement, fail in any way to satisfy the donor's charitable goals and intent, fail to act in good faith and fair dealing with the donor, and use the donor's contribution for the sole purposes of its directors and officers, all with absolute impunity, a truly frightening decision, which is currently under appeal with the Nevada Supreme Court. (For a copy of the appeal, click here)

ATTEMPTS TO ENLIST THE ASSISTANCE OF ATTORNEYS GENERAL IN CALIFORNIA AND NEVADA

Interestingly, substantial and repeated efforts were made on behalf of Mr. Styles to enlist the assistance of the State Attorney General in California and Nevada (in the case of the California Attorney General, as far back as June 8, 2007), so as to ensure that contributed funds to Friends of Fiji that were dedicated to charitable purposes have not been wasted or misused and to recover, on behalf of Friends of Fiji, any funds expended that may not have been used for bona fide charitable purposes.

This was not done to necessarily seek assistance for Mr. Styles, but to ensure that, in light of the financial disclosures made on the Forms 990 filed by Friends of Fiji and the World Health and Education Foundation, charitable assets contributed to Friends of Fiji were being preserved for the good of the public, the ultimate beneficiaries of charitable assets. To date, however, based on the available public information, no action has ever been taken by the Attorney General in California or Nevada against Friends of Fiji or its directors or officers.

Unlike California and many other states, the Nevada Attorney General does not have its own division specializing in regulating charities and overseeing charitable assets, and regulating charities and charitable assets does not appear to be anywhere a priority of the Nevada Attorney General's Office. Further, while California generally does take an active role in regulating charities and Friends of Fiji operates in California, the California Attorney General does not have the same degree of statutory power over a nonprofit corporation incorporated in another state as it has over a nonprofit corporation incorporated in California. (World Health and Education Foundation was, however, incorporated in California and operates in California.)

Although Mr. Styles has appealed the trial court's denial of any remedy or damages to the Nevada Supreme Court, as a practical matter, Mr. Styles' entire $2.5 million contribution will likely have been dissipated by the time any possible relief could be obtained in the Nevada Supreme Court. Without the help of a State Attorney General, therefore, Mr. Styles could ultimately prevail in the Nevada Supreme Court, but be left holding a judgment against a charity that no longer has any funds, thus providing a hollow victory.

Further, unlike a State Attorney General, who has "parens patriae" authority over a charity, a donor lacks authority and jurisdiction over a donee charity, lacks the power to enjoin the use of a charity's assets, lacks the power to take any actions to challenge the use of a charity's funds for noncharitable purposes, lacks the authority to remove the directors and officers of a charity for not acting in the charity's best interests, and has no power to recover funds on behalf of a charity that were not expended for bona fide charitable purposes.

Mr. Styles time and time again, demanded that Friends of Fiji discontinue spending any more of his contribution, pending the ultimate outcome of the Nevada litigation, but it refused to do this. Mr. Styles also previously sought to freeze the assets of Friends of Fiji in a motion made in the Nevada courts, but that motion was denied. Moreover, despite repeatedly notifying the IRS regarding certain concerns about this matter (as far back as June 18, 2007), the IRS, to this point, has not taken any action in this case that has been announced publicly.

COMMENT:

This is an important case, and apparently one of first impression.

If the decision of the Nevada District Court is allowed to stand by the Nevada Supreme Court, it essentially means (at least under one State Supreme Court's opinion) that charities across America holding billions of dollars in donor-advised funds have no legal obligation to carry out the terms of donor-advised fund agreements or fulfill the spirit and intention of such agreements, as even if they totally ignore a donor and a donor-advised fund agreement, the donor will not be entitled to damages or any other remedy.

WARNINGS FOR DONORS

This case presents a cautionary tale for donors contemplating contributions to charity on a number of fronts.

First, it is imperative that the donor conduct due diligence on potential charitable tax planning advisors, including getting references and referrals. A donor should ensure, to the extent possible, that a potential advisor has a proven track record, is ethical and trustworthy, renders reliable advice, and, perhaps most importantly, is not in a position of having a conflict of interest whereby his interests may outweigh those of the donor's.

Second, a donor must know the prospective donee charity, its board of directors, its financial status, the nature of its activities, its history, and its reputation for dealing with donors, particularly when large dollars are at stake. It is critical to seek the advice of others who have dealt with the charity and get their input as to how the charity deals with its donors and the extent to which it is inclined to follow donor intent and engage in litigation with donors.

Third, consider the state in which the charity is incorporated and be leery of a charity that is incorporated in, for example, Nevada, but does absolutely no activities in that state. Question, for example, why a charity, not having any contact with Nevada, would opt to incorporate in Nevada and be subject to the laws of that State and be subject to the jurisdiction of the Nevada Attorney General.

As a Nevada corporation, Friends of Fiji is primarily subject to the jurisdiction of the Nevada Attorney General, which apparently doesn't take a great interest in regulating charities incorporated in that state or overseeing charitable assets, notwithstanding the statutory authority given to it by Nevada legislature. Nevada legislature gives the Nevada Attorney General authority and jurisdiction over charities incorporated in Nevada.

Specifically, NRS 82.536, "Attorney general: Examination of corporate affairs; powers of enforcement," provides as follows:

1) A corporation for public benefit and a corporation holding assets in charitable trust is subject at all times to examination by the attorney general, on behalf of the state, to ascertain the condition of its affairs and to what extent, if at all, it fails to comply with trusts it has assumed or has departed from the purposes for which it is formed. In case of any such a failure or departure, the attorney general may institute, in the name of the state, the proceeding necessary to correct the noncompliance or departure.

2) The attorney general, or any person given the status of relator by the attorney general, may bring an action to enjoin, correct, obtain damages for or otherwise to remedy a breach of a charitable trust or departure from the purposes for which it is formed. (Added to NRS by 1991, 1263).

Notwithstanding the powers vested in it under Nevada law, the Nevada Attorney General simply doesn't appear to get involved in matters involving the regulation of charities or their assets.

Fourth, be aware that even in a state where the Attorney General is active in regulating charities and overseeing charitable assets, the State Attorney General will not take on a role in every case to ensure that donor intent is followed or take action to avoid the possible misuse of assets dedicated to charitable purposes or seek to recover assets that have not been used for charitable purposes.

Even where the State Attorney General takes an active role in monitoring charities, it has limited resources and a limited staff, so the Attorney General will not always be there to "come to the rescue" of a donor that has bona fide issues with a charity or where a charity appears to be wasting its assets, and the same holds true with the IRS.

This fact makes it all more important that donors get to know the charities that they intend to contribute beforehand, so as to avoid potential disputes and arguments after the contribution has been made and the charity already has the donor's contribution in hand.

APPEAL PENDING BEFORE THE NEVADA SUPREME COURT

Although it determined that Friends of Fiji breached express provisions of the donor-advised fund agreement and violated its duty of good faith and fair dealing to Mr. Styles, the Nevada District Court apparently believed that no damages could be awarded in this case because consistent with federal tax law, the express terms of the donor-advised fund agreement provide Friends of Fiji with ultimate control, authority and discretion over Mr. Style's contribution.

As argued in Mr. Styles' appeal filed with the Nevada Supreme Court on February 23, 2009, however, this appears to be contrary to the law. Rather, where a party that is provided with control under a contract does not exercise such control in good faith, the "dependent party" is, in fact, entitled to a remedy. Thus, contract damages must be awarded where a controlling party's actions fall outside the reasonable expectations of the dependent party.

Indeed, it has been specifically recognized in Nevada that contract damages are available where the party to a contract who has discretionary control over certain aspects of the contract wrongfully and deliberately takes advantage of the other dependent party. See also Cal. Lettuce Growers v. Union Sugar Co, 45 Cal.2d 474, 289 P.2d 785 (1955), where the court stated that "where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing."

Thus, where one of the contracting parties is in a position to either approve or disapprove a request made by the other contracting party made pursuant to the terms of the contract, "in deciding whether to exercise its approval or disapproval," the controlling party is "required to do so within the parameters of good faith." Mattel v. Hopper, 51 Cal.2d 119, 330 P.2d 625 (1958); Rodriguez v. Barnett, 52 Cal.2d 154, 338 P.2d 907 (1959).

Notwithstanding Friends of Fiji's ultimate control of the contributed funds, therefore, Friends of Fiji was not permitted to exercise such control in a way that wrongfully and deliberately took unfair advantage over Mr. Styles. Rather, Friends of Fiji was required to exercise such control in good faith, so as to be faithful to the purpose of the donor-advised fund agreement in a manner reasonably contemplated by the parties. And, what was contemplated by the parties was clearly spelled out in the donor-advised fund agreement, which was to use Mr. Styles' contribution to achieve his charitable goals. What was not contemplated was Friends of Fiji simply using Mr. Styles' contribution exclusively for those purposes determined by its directors and officers, although this is exactly what actually transpired.

Of course, the foregoing are only the positions taken in Mr. Styles' appeal, with the ultimate determination to be made by the Nevada Supreme Court. By that time, however, absent action of a State Attorney General (or possibly the IRS), it is likely that the remaining funds currently held by Friends of Fiji will have been fully dissipated.

As indicated above, however, this is a case of utmost importance, because if the decision of the Nevada District Court is not reversed by the Nevada Supreme Court, it essentially means that (at least under one State Supreme Court's opinion) charities across America holding billions of dollars in donor-advised funds have no obligation to carry out the terms of donor-advised fund agreements or fulfill the spirit and intention of such agreements, as even if they ignore a donor and a donor-advised fund agreement, the donor will not be entitled to damages or any other remedy.

Nevada is one of just 11 states in the country that does not have an intermediate appellate court, placing the burden on the Nevada Supreme Court to resolve all appeals. Currently, the seven-member Court must address more than 2,000 matters annually - one of the heaviest caseloads in the nation.

Editor's Note:

Richard Fox became professionally involved in the case when Ray Styles, the donor, sought out his legal advice after reading one of Richard's articles over the Internet, entitled "Planning for Donor Control and Other Strings Attached to Charitable Contributions," first published by Estate Planning, which was reprinted (Link) by the Nevada Lawyer in July 2004.

This same article was cited by the Tennessee Appeals Court for support in its January 5, 2005 decision in a highly publicized case involving donor intent, Tennessee Division of the United Daughters of the Confederacy v. Vanderbilt University (Link ).

Richard did not become involved in this case until December 2006, when he was first contacted by Mr. Styles and, therefore, had no involvement in any of the planning stages that occurred back in 2002.

Anyone wishing to file an Amicus Curiae Brief in this case can submit it to: Nevada Supreme Court, 201 South Carson Street, Carson City NV 89701-4702, referring to "Ray Styles, Individually, Appellant, v. Friends of Fiji, A Nevada Corporation; Gary Nerison; James Bickel, Respondents, No. 51642."

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Richard Fox

CITE AS:

LISI Charitable Planning Newsletter # 142 (March 19, 2009) at http://www.leimbergservices.com/ Copyright 2009 Leimberg Information Services, Inc. (LISI). Reprinted with permission.

CITES:

Ray Styles v. Friends of Fiji, A Nevada Corporation; Gary Nerison, James S. Bickel, District Court, Clark County, Nevada, No. 51642. IRC § 4966(d)(2) (definition of donor-advised fund); NRS 82.536, "Attorney general: Examination of corporate affairs; powers of enforcement;" Cal. Lettuce Growers v. Union Sugar Co, 45 Cal.2d 474, 289 P.2d 785 (1955); Mattel v. Hopper, 51 Cal.2d 119, 330 P.2d 625 (1958); Rodriguez v. Barnett, 52 Cal.2d 154, 338 P.2d 907 (1959).

Richard L. Fox

Richard L. Fox, Esq. is a partner in the Philadelphia-based law firm of Dilworth Paxson LLP, where he chairs the Philanthropic and Nonprofit Group. He concentrates his practice in the areas of charitable giving, private foundations, tax-exempt organizations, family planning, and trusts and estates. Mr. Fox is the author of the treatise, Charitable Giving; Taxation, Planning and Strategies, a Warren, Gorham and Lamont publication, writes a national bulletin on charitable giving and nonprofit topics, and writes and speaks frequently on issues pertaining to estate planning and philanthropy. He is a member of the advisory board of the Estate Planning Journal and BNA Tax Management. He is also currently an Adjunct Professor of Philanthropy at the American College in Bryn Mawr, Pennsylvania, in its Chartered Advisor in Philanthropy Program. Mr. Fox, who holds an LL.M. degree in taxation from New York University School of Law, is also the author of two tax management portfolios published by BNA Tax Management, and is a frequent contributor to the Estate Planning Journal. He represents a multitude of charitable organizations, including some of the largest private foundations in the United States. He was recently named by Worth Magazine as one of the Top 100 Attorneys in the country representing affluent families and individuals, including in the areas of private foundations and philanthropy, as well as a Pennsylvania Super Lawyer in these areas.

Recent Speeches by Richard L. Fox

Private Foundations: Governance, Duration and Other Hot Topics, Not for Profit Organization Symposium, Washington D.C., November 2008.

Nonprofit Governance and NFP Professionals Serving on Boards, Not For Profit Organization Symposium, Washington D.C., November 2008.

The Art of Philanthropy - Do You Know What You and Your Clients Don't Know: Tools & Techniques for Advisors and Their Clients, Central Indiana Community Foundation, March 2008.

Gifts of Property - Do You Know What You Don't Know?, Current Topics: Private Foundations and Supporting Organizations, Planned Giving Council of Houston, September 2007.

Using Philanthropy to Add Value to Your Clients Relationships, Presentation at the American College, Professional Advisors' Seminar, June 2007.

Luncheon Speech Regarding the Sallie B. and William B. Wallace Chair in Philanthropy at the American College, Advisors in Philanthropy Conference, Chicago, Illinois, April 2007.

Private Foundation Workshop, The Annenberg Foundation, Annual Retreat, November 2006.

Charitable Planning Ideas, Temple University School of Medicine Reunion Day, October 2006.

Donor-Created Entities to Support Public Charities Planned Giving Council of Greater Philadelphia, 2006 Planned Giving Day Conference, Greater Philadelphia Planned Giving Council, October 2006.

Gifts of Property - Do You Know What You Don't Know, Planned Giving Council of Greater Philadelphia, September 2006.

Getting to the Heart of Charitable Giving, Temple University Planned Giving Day, April 2006.

Donor-Created Entities to Support Public Charities, Lorman Educational Services and Penn State University 60th Annual Tax Conference, March and May 2006.

Hot Topics for Academic and Nonprofit Institutions: Essential Issues in Executive Compensation, Dilworth Paxson LLP Seminar, February 2005.

Recent Publications by Richard L. Fox

Charitable Giving: Taxation, Planning and Strategies, a Warren, a Warren, Gorham & Lamont (Loose Leaf) Publication on Charitable Giving, Monthly Bulletins For Same Publication.

A Guide to the IRS Sample Charitable Lead Trust Forms, Estate Planning, [to be published March and April 2009, Estate Planning]

Charitable Limitations and Reforms of the Pension Protection Act, Part 2, Estate Planning, December 2006.

Charitable Limitations and Reforms of the Pension Protection Act, Part 1, Estate Planning, November 2006.

A Guide to the IRS Sample Charitable Remainder Trust Forms, Estate Planning, January 2006.

Planning for Contributions to Foreign Charities by Individuals and Foundations, Estate Planning, July 2005.

Practical Charitable Planning for Employee Stock Options, Estate Planning, May 2005.

New Prop. Regs. On Distributions From CRTs Provide Opportunity, Estate Planning, April 2004.

Is a Basis Step-Up Available On Foundation Founder's Death?, Estate Planning, February 2004.

Planning for Donor Control and Other Strings Attached to Charitable Contributions, Estate Planning, September 2003.

Restrictions on Charitable Bequests of Art: Recent Ltr. Rul. Paints a Picture, Estate Planning, September 2002.

Responsible Person and Lender Liability for Trust Fund Taxes - Sections 6672 and 3505, BNA Tax Management, Inc., Portfolio No. 639

Compelled Production of Documents and Testimony in Tax Examinations, BNA Tax Management, Inc., Portfolio No. 123.

Labels: quatloos

Every issue of "Skeptic" magazine (Altadena, California, ed. Michael Shermer) is dedicated to some popular delusion -- from holocaust denial and 9/11 conspiracy theories to "Theraputic Touch" and ancient UFOs. The latest issue (vol. 14 no. 3, see www.skeptic.com for details) deals with Ponzi schemes and, in particular, with Madoff's scam. Pick it up!

Labels: bernie madoff, Ponzi schemes

Madoff's portrait was on the cover of Shiv'ah Yamim ("Seven Days"), the weekly magazine of Israel's most popular daily newspaper, Yediot Aharonot ("Latest News"), this past weekend. The title on the cover, in huge red letters: "The Traitor". Inside the tale of woe of Madoff's victims in the Jewish community.

In a sense, the fact that Madoff scammed so many Jews is a blessing. It gives the lie to the "Jews scamming the goyim [gentiles]" antisemitic routine. The last time the ethnicity of both parties in an event was so important to the American public's perception of the relationship between Jews and gentiles was probably during the Rosenbergs' trial in the 1950s. Then, that both the judge and the prosecutor were Jews went a long way toward stopping the trial from becoming, however unintentionally, a "Christians hanging the Jews" spectacle in the view of some people.

Labels: bernie madoff

Joe Francis, who created the Girls Gone Wild videos, is accused of pocketing some $20 million in business expenses that were claimed as deductions. He faces up to 10 years in prison if convicted.

Source: Click Here

Labels: joe francis, tax evasion

Prominent Houston trial attorney brought a lawsuit against many parties, including the Proskauer Rose law firm, relating to a tax shelter sold by Ernst & Young.
 

The action filed by Fleming and his company, Pelican Trading, alleged that the Personal Investment Corporation (PICO) tax shelters, which Ernst & Young developed -- and which Proskauer Rose allegedly said were more likely than not permissible under the federal tax code -- resulted in huge losses when an audit by the Internal Revenue Service found them unlawful.

However, the Texas judge granted the dismissal of the law firm, on the grounds that the court had no personal jurisdiction over the firm.

Source: Click Here

Labels: ernst and young, ernst young, tax shelter

Two California real estate investors went down the tube in the defense of their Son of BOSS tax shelter, involving options sold by AIG.
 

Thomas, a former Internal Revenue Service (IRS) attorney, and Fox owned real estate, including interests in the Library Tower, the Gas Company Tower and the Wells Fargo Center, all located in Los Angeles. In 2001 they sought out an abusive tax shelter that has become known as "Son of BOSS." In the Son of BOSS scheme used by Thomas and Fox, they purchased an exotic form of a financial option that they claim would have protected them against a catastrophic decline in real estate values, which they feared in the immediate aftermath of the terrorist attacks of September 11.

Source: Click Here

Labels: aig, son of boss, tax shelter