08 April 2012

One Cup of Regret

Last year I noted criticisms of high profile US philanthropist Greg Mortenson, author of a delightful work of faction titled Three Cups of Tea and the target of legal action by disgruntled donors.

The Montana Attorney General has now released a 44 page report [PDF] that comments
Mortenson’s pursuits are noble and his achievements are important. However, serious internal problems in the management of CAI [Mortenson's charity the Central Asia Institute] surfaced. As Attorney General, I’m tasked with overseeing nonprofit charities operating in Montana. Through our investigation, the Montana Department of Justice sought to determine whether Mortenson and the leadership of his organization had violated the law governing nonprofit corporations.
Our investigation centered on whether CAI’s officers and directors satisfied their legal duties with regard to Mortenson’s books and speaking engagements, and in managing the financial and operational affairs of the organization. We concluded that the board of directors failed to fulfill some of its important responsibilities in governing the nonprofit charity. Further, Mortenson failed to fulfill his responsibilities as executive director and as a member of the board.
Despite policies that committed him to do so, Mortenson failed to make contributions to CAI equal to the royalties he earned on the books the organization purchased. Nor did he and CAI devise an equitable way to split the costs to advertise and promote the book, which was required by his 2008 employment agreement. Mortenson also accepted travel fees from event sponsors at the same time that CAI was paying his travel costs. Moreover, he had significant lapses in judgment resulting in money donated to CAI being spent on personal items such as charter flights for family vacations, clothing and internet downloads.
Despite consistent and repeated warnings about a lack of financial controls for the money CAI spent abroad and here at home, the board of directors failed to close those gaps over a period of nearly ten years.
Nonprofits are big business in America. Charitable giving exceeds $300 billion a year. Americans continue to donate their money despite weathering challenging economic times. When charities take the money people give for specific purposes, it is essential that the money be spent as intended. When it is not, the underlying public trust erodes and can be difficult to restore.
Greg Mortenson and the Central Asia Institute can learn from their missteps. The settlement we negotiated provides an opportunity to make meaningful changes and reestablish the charity going forward. Despite the severity of their errors, CAI is worth saving. Its pursuit remains admirable, and it still has significant assets to advance its cause and fulfill the donors’ intent. As a nonprofit organization, it should be able to execute its mission well into the future.
That’s why the Montana Attorney General’s Office, under my direction, ultimately sought a resolution that would enable this organization to move beyond its troubles. We entered into a settlement agreement with Mortenson and CAI which guarantees in excess of $1 million in restitution from Mortenson for his past financial transgressions. We have also implemented stricter organizational and financial controls within CAI that will help ensure charity dollars are spent as intended so that the donating public’s trust can be restored.
This includes removing Mortenson from any position of financial oversight and as a voting member of the board of directors. He will be allowed to continue in a role that best complements his goals as they pertain to CAI’s mission. A new executive director will be hired to better manage the day-to-day operations. After a transitional period of 12 months, the settlement also calls for the two remaining board members to step down while, in the meantime, a new board consisting of at least seven members will be appointed.
CAI’s mission is worthwhile and important. Its accomplishments, driven by the vision and dedication of Mortenson, are significant – as even their harshest critics acknowledge. It has substantial assets which, if properly managed, can be used to pursue the charity’s mission and, in the process, improve the lives of people in a very challenging and complex region of the world. The settlement agreement allows CAI to move forward positively in pursuit of its mission. It includes monitoring provisions that will allow the Montana Attorney General to assure that the agreed-upon corrective measures are effectively implemented and that will allow donors to be confident that their contributions are being used properly.
The next chapter in this deeply unedifying saga is presumably Mortenson's reappearance, after time out of the limelight in the traditional period of repentance and reflection with his family, in a round of talkshows and media interviews and perhaps even a bestselling book about he learned from adversity and has become a stronger, better person.

It's worth recalling Krakauer's comment last year -
Mortenson's books and public statements are permeated with falsehoods. The image of Mortenson that has been created for public consumption is an artifact born of fantasy, audacity and an apparently insatiable hunger for esteem. Mortenson has lied about noble deeds he has done, the risks he has taken, the people he has met, the number of schools he has built. Three Cups of Tea has much in common with A Million Little Pieces, the infamous autobiography by James Frey that was exposed as a sham. But Frey, unlike Mortenson, didn't use his phony memoirs to solicit tens of millions of dollars in donations from unsuspecting readers, myself included. Moreover, Mortenson's charity, the Central Asia Institute, has issued fraudulent financial statements, and he has misused millions of dollars donated by schoolchildren and other trusting devotees. "Greg", says a former treasurer of the organisation's board of directors, "regards CAI as his personal ATM".
It is unclear whether Mortenson will take defamation action against Krakauer, the producers of 60 Minutes and other critics.


In a May 2012 postscript US federal judge Sam Haddon in Montana (Case 9:11-cv-00072-SEH) dismissed the class action - fraud and racketeering - against Mortensen and his publisher, based on the claim that they had conspired to fraudulently represent Mortenson as a hero in order to sell books and raise money.
Essentially, Plaintiffs contend that Defendants knew the truth, but portrayed Mortenson into a hero in order to persuade people to buy the Books, which financially benefitted the Defendants. ... Plaintiffs assert they suffered concrete financial loss when they paid full price for a nonfiction book when it was fiction. The financial loss is alleged to be "the out-of-pocket loss, ... minus the value of the false and fraudulent "nonfiction" books, which is [characterized as] zero.".
The court did not rule on the truthfulness of Three Cups of Tea. Instead it held that the class action fell short because it failed to identify the racketeering activity and failed to identify each defendant's role in the alleged fraud.

Haddon commented -
The RICO claims are fraught with shortcomings, including failure to satisfy causal elements, failure to specify the roles of the Defendants, not adequately pleading enterprise theories, and failure to specify an actionable, identifiable racketeering activity. Failure to adequately address the causal elements is the ultimate and fatal flaw.
Haddon criticised the argument that the plaintiffs suffered financial loss for paying “full price for a nonfiction book when it was fiction”, noting that they failed to address whether they would have purchased the same book as fiction.
Plaintiffs overly broad statements that they paid approximately $15 for the Books because they were represented as true does not suffice. Additionally, Plaintiffs fail to allege when they purchased the Books,which is crucial in analyzing this case. 
In fact, Plaintiffs never allege they visited CAI's website or saw or heard any statements made by it before purchasing the Books. The Complaint likewise does not differentiate allegations against each Defendant, nor does it inform Defendants separately of the allegations surrounding any alleged participation in the fraud. General statements that the enterprise caused Mortenson to make various false statements relating to his life experiences do not satisfy Twombly and Iqbal standards.
Pleaded examples of how the enterprise marketed and promoted the Books also fail to satisfy appropriate pleading standards. Members of the enterprise cannot be expected to defend against Plaintiffs claims, when each participants role is only vaguely described, if at all. ...
The Court has not found and the parties have not referenced controlling authority or persuasive case law in the Ninth Circuit directed to privity of contract between an author or publisher of abook and a reader who purchased such book. The Second Circuit's principle that a news publisher is not in privity with the publication's purchasers, absent "fraud amounting to deceit, libel, or slander" is, however, persuasive. ...
The Court cannot accept as true, and as a matter of sufficiency of pleading, Plaintiffs conclusory statement that "[b]y writing, publishing, advertising,marketing, and promoting (the Books] as nonfiction and true stories, the characteristics of said books became an implied contractual condition of sale." More is necessary if an implied contract is to be found....
In short, the Complaint fails and is deficient on several fronts. The RICO, fraud, and deceit claims are not pled with the requisite level of particularity. Plaintiffs fail to satisfy causal elements of RICO, do not identify each Defendant's role in the frauds, present highly questionable enterprise theories, do not adequately identify the alleged racketeering activity, and fail to identify the specific representations and materiality of such representations relied upon. An express contract is not pleaded. An implied contract is not found, as consent and consideration are missing. In the absence of adequate allegations of reliance, cognizable injury, and misconduct against the Defendants, the remaining claims fail. ... The case has been pending for almost a year. Thc Complaint before the Court is the fifth pleading filed. Plaintiffs have been accorded every opportunity to adequately plead a case, if one exists. Moreover, the imprecise, in part flimsy, and speculative nature of the claims and theories advanced underscore the necessary conclusion that further amendment would be futile.
One conclusion from an Australian perspective is that legal drafting matters. So does procedure.