NEW YORK v. NATIONAL RIFLE ASSOCIATION: A CASE OVERVIEW*
Shopping for Body Parts, Woodcut, 11.5” x 18”, Richard J Van Wagoner, 1992, Courtesy of Van Wagoner Family Trust*
Internal strife at the National Rifle Association (“NRA”) has been in the news for some time. That news included allegations of infighting among management and the board, LaPierre’s consolidation of power and control, lack of board input and oversight, conflicts of interest, financial improprieties and excesses, and efforts to suppress whistleblowers who raised some of these concerns. Oliver North resigned. Noteworthy was alleged misconduct that exceeded even his tolerance. The New York Attorney General Letitia James has been investigating.
According to James’s August 6, 2020 lawsuit, the alleged misconduct permeates the organization which no longer functions for the benefit of its membership and donors. The complaint alleges the entity now is perpetuated for the benefit of corporate insiders, all in violation of the New York laws governing not-for-profit, charitable organizations. Yes, the NRA is such an organization, or rather a group of such organizations under the NRA umbrella.
The spin from the right, of course, is the lawsuit is pure politics, something James has been vying for since her campaign for Attorney General and, in violation of the First and Second Amendments, she is abusing the power of her office to take out political opponents. According to some, including Jonathan Turley who wrote a scathing op-ed in The Hill, James previously showed her political colors and here is so motivated in bringing a lawsuit to attack and attempt to dissolve an organization she dislikes and with which she disagrees.
New York’s August 6, 2020 lawsuit to dissolve one of the most prolific and influential non-profit, charitable organizations in the history of the country sets up an epic, take-no-prisoners battle. In most high-profile cases, the parties stake out their respective positions early on to attempt to control the narrative. The Attorney General held a news conference the day she filed the lawsuit in which she characterized the NRA in very unflattering terms, consistent with the allegations in the complaint. The NRA immediately sued the Attorney General for violation of the First Amendment and for making extra-judicial slanderous statements during the news conference—statements of a defamatory nature that do not enjoy the judicial privilege with which in-court statements are shrouded.
As I read the complaint, however, and focused on the detailed allegations of massive financial excesses and improprieties, conflicts of interest, related party transactions, eliminating oversight and shutting down whistleblowers, I soon forgot politics. If any not-for-profit organization that is funded by the charitable contributions of people who believe in the organization’s charter and mission—whether it be the ACLU, the Sierra Club, the NRA or any other 501(c)(3) and or 501(c)(4) tax exempt organization—engaged in the level of misconduct alleged in the complaint, I would expect the attorney general of the chartering state to use the full force of the law to vindicate the rights and interests of the people who contributed their money. Donors give their money in the good faith belief and reasonable expectation that the organization’s leadership will exercise their fiduciary duties in using their contributions to advance the organization’s mission and not loot or waste the charitable assets.
This discussion is centered in the factual allegations of New York’s complaint and the legal theories the State advances in support of the relief it seeks. For the purpose of this discussion, I do not presume the allegations true. The defendants will have the opportunity to join issue, answer the allegations and have their day in court. The 164-page, 666-paragraph complaint, which has a degree of specificity rarely seen in civil cases, is “verified,” meaning an assistant to the Attorney General who is acquainted with the facts based on the investigation, transactions and NRA’s annual filings and other reports, swore under oath as follows: “To my knowledge based on such acquaintance with the facts, the complaint is true, except as to those allegations made upon information and belief.” Moreover, quoting extensively from individual named defendants (“Individual Defendants”), the complaint reveals the Attorney General took their depositions or sworn statements as part of New York’s investigation, which adds a level of credibility to the allegations and, frankly, an interesting wrinkle.
Given the potential underlying criminal conduct (allegations in the complaint strongly hint at tax crimes), I’m guessing the Fifth Amendment right to remain silent was a pre-deposition topic of conversation between each Individual Defendant and his counsel. A fact-finder in a civil case—as compared to a criminal case—is permitted to draw an adverse inference from a defendant’s invocation of the Fifth Amendment right against self-incrimination. The permissible adverse inference in that context is, the answer would have been against the defendant’s interests had he answered the questions put to him and not invoked the right to remain silent. So not invoking the Fifth Amendment and answering questions under oath avoids the problem of sending a clear message to a fact-finder in a civil or administrative setting that the allegations of wrongdoing are presumptively true.
That same testimony, however, could then be used in a subsequent criminal case against the defendant for any criminal conduct discovered as part of the investigation and perjury, if any, during the deposition or sworn statement.
The complaint names as a defendant the NRA, an umbrella charitable, not-for-profit corporation chartered in New York in 1871, with “responsibility for $197,212,080 in total assets as of December 31, 2018, which, as a New York charity, it is required to use to serve the interests of its membership and to advance its charitable mission.” Presumably those assets come from charitable donations and membership dues as well as earnings on investments. The complaint also names the following Individual Defendants:
• Executive Vice-President Wayne LaPierre who acts as the NRA’s Chief Executive Officer, and is and has been an ex officio member of the Board of Directors and of the Executive Committee;
• Wilson “Woody” Phillips who served as ex officio Director, Treasurer and Chief Financial Officer and key person of the NRA between 1993 and 2018;
• John Frazer who has been the Secretary and General Counsel and ex officio director of the NRA since 2015 and has worked at the NRA since 1993; and
• Joshua Powell who held the positions of Chief of Staff, Executive Director of General Operations, head of Compliance and “Senior Strategist” within the NRA.
What conduct could justify the Draconian relief the State of New York seeks? While the financial improprieties of the Individual Defendants, if proven as alleged, would certainly justify harsh consequences against them personally including restitution and disgorgement, does the alleged misconduct so permeate the organization that the NRA, in effect, ceased to function for the benefit of its membership and donors and is perpetuated for the benefit of corporate insiders? The New York Attorney General alleges so. And, the New York law of not-for-profit, charitable organizations gives her a type of derivative standing to sue to seek dissolution of the organization, removal of board members and an accounting and return of misspent funds—if she proves the factual predicate. Derivate standing in this context means the Attorney General is statutorily authorized to sue the organization and corporate insiders where those insiders lack the ability and incentive to sue themselves or the organization they manage to address their alleged malfeasance.
The complaint seeks the following relief, among others:
• A court order dissolving the NRA and use of its remaining assets in a manner consistent with its mission.
• A court declaration that the NRA conducted its business in a fraudulent or illegal manner and that its directors and members in management looted or wasted the NRA’s charitable assets and perpetuated the organization for their personal benefit.
• A court order removing LaPierre and Frazer from the NRA for cause.
• A court order barring the Individual Defendants from ever serving as officers, directors or trustees of any not-for-profit or charitable organization in the State of New York.
• A court order directing the Individual Defendants to account for their conduct in failing to perform their duties and requiring them to pay full restitution to the NRA for waste and misuse of its charitable assets and disgorgement of salaries for the period of the misconduct.
• A judgment for the benefit of the NRA for damages against the Individual Defendants for breach of fiduciary duties.
• An order voiding and rescinding certain “related party transactions,” which I explain below.
• A catch-all order directing “the Individual Defendants to pay the NRA restitution for all excessive, unreasonable, and excess benefits that were paid to and unjustly enriched the Individual Defendants in violation of law and NRA bylaws and policies. Directing the NRA, through its governing Board of Directors, to provide an accounting for its official conduct with respect to the NRA's institutional funds . . . .”
The right to conduct a not-for-profit, charitable organization in New York comes with statutory responsibilities and government oversight. Stripped of their complexity and volume, those responsibilities include following corporate formalities established by law and the entity’s corporate charter; board control and oversight of management; compensation in a reasonable amount to officers, directors and members for services actually rendered; timely and factual reporting to government agencies including accurate compensation disclosures; full disclosure by officers and directors of conflicts of interest to the board of directors; and a prohibition on related party transactions unless the board or an authorized committee of the board determines the transaction to be fair, reasonable and in the corporation’s best interest at the time of the determination. The board is required to implement policies to assure management and financial oversight, and to provide for an effective process to protect whistleblowers and receive and fairly consider their concerns.
The people who serve as officers and directors and key persons of not-for-profit, charitable organizations are fiduciaries, meaning they owe the highest duty recognized in law: they must put the interests of the organization before their own, exercising undivided loyalty to the corporation in the management and investment of the institutional funds of the corporation which include charitable donations and earnings on reserves from charitable donations.
As expected, the travel and business expense reimbursement policy for this not-for-profit charitable organization mandates the lowest practical and reasonable expenses, efficiency, timeliness and avoidance of even the appearance of impropriety. Such expenses must be “necessary to meet organizational objectives,” and “must be directly and principally related to NRA’s business, expected to produce a specific business benefit, and attended by both the employee and business associate.”
The Audit Committee, comprised of five NRA directors (from a total of 76), must exercise independence and have a working familiarity with finance and accounting practices. The Audit Committee is responsible to assist the board in oversight of the integrity of financial information, review the adequacy of internal controls for the accounting system and monitor the audit process. That committee is charged with reviewing all transactions involving potential conflicts of interest and determining whether to approve or ratify such transactions in the best interests of the organization. The Audit Committee was also charged with evaluating and responding to whistleblower complaints.
NRA policy prohibits employees, officers and directors from using “their position with the [NRA] in a manner that may create a conflict, or the appearance of a conflict, between the individual’s personal interest and those of the Association.” The policy directs that employees, officers and directors “refrain from knowingly engaging in any outside matters or financial interest incompatible with the impartial, objective, and effective performance of their duties” and prohibits related party transactions without written authorization by the NRA. Consistent with New York law, NRA policy defines related party transactions as any situation where “the interests of the NRA come into conflict with a financial or personal interest of [an officer, director, or key employee], or otherwise whenever [an officer, director, or key employee’s] personal or financial interest could be reasonably viewed as affecting his or her objectivity or independence in fulfilling their duties to the NRA.”
A primary focus of the complaint is LaPierre’s consolidation of power and control over all aspects of the organization for his personal financial benefit by, among other things, hiring people, including the other named Individual Defendants, whose primary loyalty was to him and their own financial interests over the mission and interests of the organization. LaPierre’s hires ignored, overrode or otherwise violated bylaws, internal policies and procedures and accounting controls they were obliged to enforce. LaPierre also, allegedly, doled out lucrative contracts to favored friends, vendors, ex-employees and board members, without board (including Audit Committee) oversight, as a means to hide improper expenditures, self-dealing and related party transactions. Individual Defendants also entered related party transactions on behalf of the NRA without proper disclosure and board approval. As a result, massive amounts of money, including charitable assets, were diverted to the benefit of certain insiders and favored vendors. The numbers are staggering.
One named Individual Defendant instituted a practice whereby the NRA’s largest vendor invoiced the NRA millions of dollars, which the NRA paid, in entertainment and travel expenses incurred by NRA executives. This pass-through arrangement to conceal private travel and other non-charitable costs and expenses of a personal nature raises concerns over potential liability to the IRS for violating reporting requirements. LaPierre spent millions in charitable assets for private plane trips for himself and his family, including trips when LaPierre was not present. Moreover, “[f]rom August 2014 to January 2020, the NRA paid LaPierre’s Travel Consultant more than $13.5 million. In 2018, the NRA paid LaPierre’s Travel Consultant $2,630,531.71. In the first six months of 2019 alone, the NRA paid LaPierre’s Travel Consultant $1,007,597.80.” His personal expense reimbursements and expenses for personal and home security were likewise substantial.
LaPierre, with the aid of the other Individual Defendants, provided personal financial benefits for board members, vendors and certain former employees. An Individual Defendant procured contracts for family members without disclosure of the relationship and permitted the NRA to secretly pay millions to a number of board members through consulting arrangements that were neither disclosed to nor approved by the NRA board. Once it received notice, the Audit Committee chose to “ratify” (rubber stamp?) the many related party transactions. Again, the numbers are staggering.
The NRA failed to follow necessary procedures to determine and set reasonable compensation for executives. The Individual Defendants received excessive compensation. The NRA’s compensation disclosures to the Attorney General and the IRS were false and misleading.
The Audit Committee failed to respond to whistleblowers and other dissidents who were retaliated against and silenced; failed to review and approve related party transactions and conflicts of interest; and failed to oversee external auditors. The Audit Committee also agreed to indemnify officers, directors and employees in what the Attorney General claims was ultra vires, meaning outside their corporate authority.
I could go on. And on. And on. . . . I plan to keep an eye on the case and in particular the defense strategy.
A unified defense, something the NRA may not have within its control, runs the risk of lumping together all wrongdoers and imputing their collective wrongdoing to the organization, potentially strengthening the Attorney General’s request for dissolution. Disaffected former officers, directors and employees and whistleblowers will not be within the NRA’s control. Some may even be interested in cooperation agreements that could benefit them in other contexts (helping to mitigate potential criminal exposure).
On the other hand, distancing itself from the Individual Defendants and their malfeasance, with finger pointing between and among Individual Defendants and corporate insiders, would likely help the Attorney General prove her case against some or all of the Individual Defendants, but that strategy could help salvage the organization if the best legal minds believe the organization is really at risk of dissolution.
My view from a distance is that regardless of the strength of the Attorney General’s case for dissolution of the organization, the board members should control the defense of the organization and take all necessary and appropriate steps to bring the entity into full compliance with the law and its charter, consistent with their fiduciary duties. They should clean house, terminating LaPierre and removing board members and key personnel who had undisclosed conflicts of interest and otherwise entered related party transactions that were not pre-approved by the Audit Committee. They should reconstitute that committee and mandate that it function as designed. And, the NRA should challenge any and all agreements for post-termination compensation to LaPierre and others.
*My brother the very talented fiction writer and novelist, Robert Hodgson Van Wagoner, deserves considerable credit for offering both substantive and technical suggestions to https://medium.com/@richardvanwagoner and https://lastamendment.com
**Richard J Van Wagoner is my father. His list of honors, awards and professional associations is extensive. He was Professor Emeritus (Painting and Drawing), Weber State University, having served three Appointments as Chair of the Department of Visual Arts there. He guest-lectured and instructed at many universities and juried numerous shows and exhibitions. He was invited to submit his work as part of many shows and exhibitions, and his work was exhibited in a number of traveling shows domestically and internationally. My daughter Angela Moore, a professional photographer, photographed more than 500 pieces of my father's work. On behalf of the Van Wagoner Family Trust, she is in the process of compiling a collection of his art work. The photographs of my father's art reproduced in https://medium.com/@richardvanwagoner and https://lastamendment.com are hers