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May 19, 2015

Miller and All 50 States, FTC Allege in Consumer Fraud Lawsuit that Four “Sham” Cancer Charities Bilked $187 Million from Consumers

Settlements with two corporations and three individuals net judgments of nearly $137 Million; litigation proceeds against others

(DES MOINES, Iowa) Attorney General Tom Miller, together with all 50 states plus the District of Columbia, and the Federal Trade Commission (FTC), have jointly filed a federal lawsuit alleging that four cancer charities and their operators scammed more than $187 million from consumers throughout the country.

The complaint alleges that the defendants—including Cancer Fund of America, Children’s Cancer Fund of America, Cancer Support Services and The Breast Cancer Society—portrayed themselves to donors as legitimate charities with substantial nationwide programs whose primary purposes were to provide direct support to cancer patients, children with cancer, and breast cancer patients in the United States.

“The conduct we’re alleging here is very serious,” Miller said. “These defendants raised money to help victims of cancer, and then used the money primarily on themselves,” Miller said. “This conduct was at the expense of legitimate charities and causes, and the many generous donors who wanted to alleviate suffering by cancer victims.”

According to the lawsuit, the overwhelming majority of consumers’ contributions benefitted only the defendants, their families and friends, and professional fundraisers, who often received 85% or more of every donation.

The lawsuit further alleges that the defendants wasted and misused consumers’ donations, furnished little or no significant help to cancer victims, and made false representations to the public that their charities were legitimate.

Among other things, the lawsuit alleges that the defendants or their telemarketers often told donors that they would use their contributions to provide pain medication to children suffering from cancer, transport cancer patients to chemotherapy appointments, and pay for hospice care for cancer patients. However, the suit branded these claims as false, alleging that the defendants did not operate programs that provided these services.

Complaint filed
The federal court complaint names:

  • Cancer Fund of America, Inc., Cancer Support Services, Inc. (which the complaint alleges operates as a common enterprise with Cancer Fund of America), the president of these two corporations, James Reynolds, Sr., as well as the CFO of both and the former president of Cancer Support Services, Kyle Effler
  • Children’s Cancer Fund of America, Inc., and its president and Executive Director Rose Perkins
  • The Breast Cancer Society, Inc., and its Executive Director and former president, James Reynolds, II

The state and federal plaintiffs today also filed stipulated judgments with five of these defendants: Children’s Cancer Fund and Rose Perkins; The Breast Cancer Society and James Reynolds, II; and Kyle Effler.

The complaint alleges that Cancer Fund of America, Cancer Support Services, Children’s Cancer Fund of America, and the Breast Cancer Society were sham charities, “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.” The individual defendants allegedly hired family members and friends, whether qualified or not, and used the organizations to provide them with steady, lucrative employment.

The charities, according to the complaint, spent more money on salaries than on the goods and services they provided to cancer patients. In addition, the complaint alleges that the defendants spent donations on luxuries such as cruises, personal watercraft outings, concert tickets, and dating site memberships—all approved by corporate boards that rubber-stamped the decisions of the individual defendants.

The joint state-federal complaint alleged wrongdoing in eight separate counts.

  • Count I charges the defendants with misrepresenting that donations would go to legitimate charities and would primarily fund charitable efforts.
  • Count II alleges that to raise money the defendants falsely described specific charitable programs that were exaggerated or did not exist.
  • Count III accuses the defendants of misrepresenting their handling of gifts-in-kind, in order to distort their revenues and the amount devoted to good works, and hide high administrative and fundraising costs from donors and regulators.
  • Count IV alleges that the defendants misled donors by promising that their charitable efforts were focused on cancer victims in the United States, while in fact manipulating an international gifts-in-kind program that typically had nothing to do with cancer victims in America.
  • In Count V, thirty-six states (not including Iowa, based on differences in state law) allege that the defendants had filed misleading financial statements under those states’ charitable regulation laws.
  • In Count VI, the FTC and thirty-six states (including Iowa) accuse Cancer Fund of America, Children’s Cancer Fund, and the Breast Cancer Society with assisting and facilitating telemarketing fraud, by providing their professional fundraisers with deceptive fundraising materials in violation of the federal Telemarketing Sales Rule (TSR).
  • In Count VII, the FTC and all the states charge American Cancer Fund, Children’s Cancer Fund, and the Breast Cancer Society with violating the TSR through their involvement in misleading solicitation pitches by contract telemarketers.
  • Count VIII alleges that Consumer Support Services, which existed primarily as a telefundraiser for Cancer Fund, was responsible for false and misleading telephone fundraising in violation of the TSR.

The lawsuit detailed a gifts-in-kind scheme that defendants used to make the corporate defendants seem larger and more effective than they really were.  Through this accounting scheme, the corporate defendants claimed to have received more than $223 million in donated gifts-in-kind goods, and then reported distributing these goods to international recipients. In fact, however, the complaint alleges that these defendants were merely pass-through agents, did not own the gifts-in-kind as they claimed, and should not have reported them as donated revenue or program expenses. By reporting the gifts-in-kind, the corporate defendants were made to appear far more legitimate and efficient to donors, regulators, and charity watchdog organizations that evaluate and rank charities.

Settlements dissolve organizations, ban individuals from fundraising and operating charities
In settlements filed concurrently with the complaint, five defendants agreed to leave the charity business and stop fundraising.

  • Children’s Cancer Fund of America and Rose Perkins agreed to entry of a judgment for $30,079,821, the amount that consumers donated to Children’s Cancer Fund between 2008 and 2012. The judgment against Children’s Cancer Fund will be partially satisfied by payment of the proceeds of the liquidation of all its assets by a receiver. In addition, the receiver will dissolve the corporate existence of Children’s Cancer Fund. The judgment against Perkins will be suspended based upon her documented inability to pay. In addition, Perkins will be banned from fundraising, from managing a charity, and from oversight of charitable assets.
  • Breast Cancer Society agreed to entry of a judgment for $65,564,360, the amount consumers donated to it between 2008 and 2012. Breast Cancer Society also agreed to the appointment of a liquidating receiver who will close its operations, liquidate its assets, and dissolve its corporate existence. The Breast Cancer Society settlement provides an option, subject to court approval, for the organization’s Hope Supply Warehouse program to be spun off to a legitimate, qualified charity unrelated to the current individual defendants and their family members, if such a charity willing to accept the program can be located. Remaining assets will be paid to plaintiffs to partially satisfy the judgment. In a separate order, Reynolds, II also agreed to a $65,564,360, judgment for the injury caused by the corporation he controlled, but that judgment will be suspended because of his limited ability to pay, upon payment of $75,000. In addition, Reynolds, II will be banned from fundraising, from managing a charity and from oversight of charitable assets.

In a separate settlement, the former Cancer Support Services president and chief financial officer of Cancer Fund, Kyle Effler, agreed to entry of a $41,152,231 judgment, the amount that consumers donated to Cancer Support Services between 2008 and 2012. That judgment will be suspended following a payment of $60,000. Effler, too, will be banned from fundraising, from managing a charity, and from oversight of charitable assets.

The action was filed in the U.S. District Court for the District of Arizona. The settlement agreements will not be final until approved by the Court.

Fundraiser Previously Barred in Iowa
Miller noted that the lawsuit also identified Michigan-based Associated Community Services, Inc. (ACS) as one of the primary fundraisers for all four charities.  Although ACS was not named as a defendant in this lawsuit, in 2013 a Polk County judge barred ACS from soliciting in Iowa.  “ACS had refused to answer questions about some missing recordings of its phone solicitations, and so the fundraiser is banned from Iowa until it does,” Miller said.  “That is shaping up to be a permanent ban.”

How to handle phone calls asking for support

  • Don’t be fooled by a sympathetic name.  Many causes clearly deserve generous public support, including veterans, law enforcement, fire fighters, and the fight against disease, but some marginal operations claim connections with such groups yet provide them with very little support.  Don’t be pressured into helping out until you have checked out a worthy-sounding organization.
  • Show healthy skepticism.  Be wary of claims that most of the money you send goes to a worthy cause, or that your donation will be used locally.
  • Get it in writing.  Check out the operation before you make a decision.  Be suspicious if they insist on a pledge before they’ll send you information. Charities can be checked out at the national Better Business Bureau’s “Wise Giving” site – www.give.org.
  • Don't give your credit card or checking account numbers over the phone to someone you don't know.
  • Give wisely!  Giving to a charity you know and trust is often the best option.

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