Why Did FEGS Funnel Millions To For-Profit Tech Subsidiary?
The Jewish social service charity FEGS dumped increasingly large sums into a for-profit subsidiary in the years prior to its mysterious downfall in January, the Forward has learned.
The AllSector Technology Group, a for-profit corporation owned by FEGS, was meant to earn money for FEGS. Instead, in 2011, FEGS began paying out massive sums to AllSector.
According to publicly available tax records, FEGS suddenly made net transfers of $8.6 million to AllSector in 2011, after paying the for-profit subsidiary far less each year for more than a decade. In 2012, FEGS gave AllSector $9.1 million.
The filings grow murkier in the fiscal year ending in June 2013. More than $14 million moved between FEGS and AllSector that year. But FEGS’s tax returns are marred by sloppiness. Though the tax documents state that AllSector paid $14 million to FEGS, inconsistencies in the filing suggest that the payments may have gone in the other direction. FEGS declined to respond to repeated requests from the Forward to reaffirm the accuracy of its 2014 filing.
The revelations about FEGS’s massive payments to AllSector come amid gathering signs that FEGS was hugely overextended in the years immediately before its collapse. FEGS doubled its annual expenditures to $229 million in a little more than a decade, swallowing competitors and becoming one of the largest charities in the country.
Even as FEGS was on the brink of disaster, the Forward has learned that the charity was still trying to grow. Last year, in the months before it announced an unexpected $19.4 million hole in its budget, FEGS management approached at least one not-for-profit organization to attempt a merger, according to an informed source.
FEGS management declined multiple requests to comment on this story. A FEGS spokeswoman would not comment on the 11th-hour merger attempt, nor would she respond to a detailed email about the huge growth in outlays to the group’s for-profit subsidiary.
FEGS announced in early February that it would shut down and attempt to transfer its programs to other agencies. Management has refused to provide a full explanation of the collapse. Staff, unsure whether they will keep their jobs, have filed a complaint with the National Labor Relations Board and planned a March 5 protest outside the organization’s offices.
AllSector appears to have been the largest of FEGS’s for-profit subsidiaries. FEGS owns 95% of the company; FEGS’s management would not say who owns the other 5%. AllSector’s spokesman and its former president did not respond to requests for comment.
Founded in 1998, the company was meant to provide cost savings to FEGS and to serve as a profit center to help support the organization’s philanthropic work. “If FEGS needed technology, then all other not-for-profits needed technology,” said Al Miller, CEO of FEGS from 1976 until 2005, of the decision to create AllSector. “If we could create a company that would provide technology that not-for-profits like FEGS needed, others would need it, too, and FEGS would be a customer and would benefit from the economy of scale… and hopefully someday [would] make money.”
By 2012, AllSector appeared to have moved beyond its original mission. That year, the for-profit partnered with FEGS to launch a “technology accelerator” called Center4, with its own office in Manhattan and a vague mission to “drive technology innovation to strengthen the capacity of nonprofit health and human service agencies.” Center4’s website is now offline.
Miller said that during his tenure, AllSector never lost money.
FEGS’s tax filings do not explain why the charity suddenly began pouring more and more cash into AllSector. The for-profit company’s president and CEO, Michael Davis, stepped down without explanation in July 2014.
FEGS’s annual payments to AllSector sums grew slowly but steadily between 2001 and 2010, going from $2.1 million to $4.9 million. Initially FEGS categorized those payments as “computer consulting”; later, as the IRS Form 990 changed, they were for “performance of services.”
The drastic jump in FEGS’s payments to AllSector began in the 2011 fiscal year, when FEGS reported paying AllSector $7.5 million for “performance of services” and $1.6 million for “purchase of assets.” AllSector transferred just a few hundred thousand dollars back to FEGS. The next year, FEGS reported paying AllSector $8.4 million for services and $1.6 million for assets. Again, AllSector paid back smaller amounts to FEGS.
In 2013, the most recent fiscal year for which FEGS’s tax filings are publicly available, the relevant section is riddled with inconsistencies. FEGS reports selling $4.1 million in assets to AllSector on one page, yet on another it reports not selling assets to any related organization. And while every other year, FEGS reported paying AllSector for “performance of services,” in 2013 FEGS reported being paid for “performance of services” by AllSector to the tune of $10.2 million. FEGS does report paying a related organization for “performance of services” that year, but fails to list that transaction.
“The [Form] 990 is supposed to be transparent, and when we’re reading this we’re coming up with more questions than answers,” said Sarah Avery, a CPA and director of the accounting firm Friedman LLP who specializes in not-for-profit issues, after reviewing FEGS’s 2013 Form 990 at the request of the Forward.
Asked whether FEGS stood by the jumbled filing’s claim that the charity received $14 million from its subsidiary, a FEGS spokeswoman wrote, “We aren’t going to be commenting on the questions you’ve sent.”
FEGS’s Form 990 was prepared by Loeb & Troper, an accounting firm with a disproportionate number of New York Jewish charities as clients. Among those clients are the Forward Association, which publishes this newspaper, and the New York Legal Assistance Group, whose president resigned amid a reported federal investigation. Loeb & Troper also audited YAI, a charity that was accused of filing false fiscal reports and paid state and federal authorities an $18 million settlement in 2011.
Loeb & Troper has not been accused of wrongdoing in any of these instances.
When it announced its surprise $19.4 million deficit last December, FEGS blamed another for-profit subsidiary for its financial troubles. FEGS said that the failure of SinglePoint Care Network, a joint venture with the not-for-profit Selfhelp, contributed to its loss. SinglePoint, a care management company, collapsed not long after its launch in 2012. Relative to AllSector, however, the cost appears to have been minor: FEGS reported losing just $215,000 on the investment in its 2013 financial report.
Contact Josh Nathan-Kazis at [email protected] or on Twitter, @joshnathankazis