Gambling on an Outside Fundraising Consultant--Case Study

Gambling on an Outside Fundraising Consultant for the “For the Kids” Shelter

Brittany Lohman, the twenty-something CEO of the “For the Kids” shelter for runaway teenagers, was getting angry at the intransigence of her board in refusing to approve her new fundraising proposal. She tried not to display her irritation. They kept raising questions, some of which made her uncomfortable. Some of these questions were good ones that she couldn’t answer. At best, she thought that the board would delay making a final decision on the proposal, which might make it too late to take advantage of what she saw as a great opportunity.

To Brittany, this should have been a “no brainer” for her board. After all, she felt certain there was absolutely nothing for the organization to lose from signing a contract with Bennett Fundraising Associates (BFA), a for-profit professional fundraising consulting and management company. At worst, the shelter would get a promised upfront payment of $400 from the arrangement, even if Vinny Bennett’s plans for generating thousands of dollars in new donations for the shelter ended up a total disaster, and the likelihood of that outcome was negligible. No shelter funds would be required either as startup capital or if the arrangement resulted in any financial loss—the contract language Mr. Bennett provided to Brittany clearly stipulated that Bennett Fundraising Associates would do all of the advance work, assume all the risk, and finance all upfront costs. What downside could possibly convince her board to disapprove of this?!

Well, now after more than an hour of contentious debate, she had a better idea of some of the downsides that she admitted she had failed to consider. Still, it made sense to just do it. The proposed contract ran for only a year, and if it didn’t work out, the shelter had the option simply to not renew it.

She vividly remembered the part of the pitch Bennett had made that had sold her on the concept.

“There is only one task we won’t do for you,” Bennett had shared with a conspiratorial smile. “You have to deposit the check we send you into your bank account. Anything else that is needed, we will do.” That had been an effective close. Now, she wished he was in the room to deal with her recalcitrant board members. He would not only have glib responses, but get a sense of what she was dealing with in order to get approval for the contract.

Brittany wasn’t prepared for the firestorm of opposition from board members who usually had been counted on to approve her proposals perfunctorily. This should not have even been controversial, she thought. Are they being oppositional for reasons having nothing to do with this proposal? There had to be something her board members found objectionable other than the contract. Every disadvantage of doing this was clearly counterbalanced by better reasons to forge ahead, she thought.

As Mr. Bennett himself had told her with confidence, it was not likely that this venture would lose money, and if it did, “For the Kids” would still receive $400. BFA would incur all of the losses, if any. Many other local organizations had received substantial checks from participating in this program, he intimated without naming any, because the names of his other clients, other than a handful who provided testimonials, were “proprietary.”

The shelter would receive $400 immediately from BFA as soon as the contract was signed. The check the shelter would receive within two weeks of the completion of the fundraising special event conducted on its behalf required virtually no work by the charity benefitting from the program, and it could potentially amount to thousands of dollars. All the organization had to do was sign the contract, give BFA access to its mailing list of current board members and contributors and those who received its newsletter, sit back, and then cash the checks it would receive. BFA would do all of the work in generating charitable contributions through its latest collaborative program for charities.

It was all perfectly legal, and Mr. Bennett had brandished an advisory opinion from an attorney’s office located in the state’s largest city, or so Brittany gathered from the stationery, certifying that a charitable organization would not be violating any state or federal gambling laws by participating in this program. Also in the information packet he provided to her were testimonials from staff members of several other local charities that had participated in Mr. Bennett’s program. She hadn’t recognized the names of any of the organizations, none of which were particularly well-known, but she had looked online at their Web sites, and they had appeared to be legitimate.

Basically, what BFA offered to do was hold a “Texas Hold ’em Tournament for Charity” night at a local volunteer fire hall in Harristown. BFA would send mailings and e-mails to stakeholders of the shelter inviting them to the fundraiser, supplementing that list with its own list of hundreds of “regulars” who would attend these BFA-managed fundraisers, regardless of the beneficiary.

State law expressly prohibited gambling other than the state lottery, administered by the state to benefit education, and pari-mutual betting on horseracing, heavily regulated with no opportunity for new entrants. But there was a loophole permitting charities with 501(c)(3) tax-exempt status to hold an annual, one-day-only, fundraising event that included gambling if all net proceeds were allocated to the charity. When the Legislature had passed this law, several safeguards were put in place. One such statutory requirement was that the event needed to be staffed and conducted entirely by employees of the charity. Few, if any, charities had the capacity or experience to stage events like this. The “one-time only annually” restriction made it not cost-effective for charities to purchase the equipment needed for these events, and few took advantage of this provision in the law, according to Mr. Bennett.

And that was where BFA came in, he explained.

What BFA offered was a service that involved doing all of the paperwork involved in hiring its own trained staff as employees of its charity clients for a single day, and having those employees reimbursed for the reasonable and actual expenses incurred in putting on the event. BFA would be in the background, orchestrating all of the management tasks, for which it would be paid a reasonable fee out of the proceeds from the fundraiser. The terms of the contract for BFA stipulated that if the event did not raise at least $400 for its charity client above any expenses paid out, that fee would be waived, and the expenses would be reimbursed by a donation made to the charity by BFA. And in the almost certain event that the fundraiser returned net “donations” in excess of this $400, BFA and the charity would split that amount 50-50 after expenses were deducted.

This arrangement was not dissimilar to a method of fundraising that had become very popular in recent years, involving arrangements between charities and local restaurants, Bennett said. Charities and cooperating restaurants would establish an evening during which the restaurant would donate a percentage of its receipts that night to a particular charity. That charity would cooperate in encouraging its supporters to patronize the restaurant on the designated evening. One difference in BFA’s model was that the restaurant might at most raise a couple of hundred dollars for the charity. A BFA-managed event could possibly attract a thousand people, many of whom hadn’t even heard of the charity. The funds raised typically could range from a thousand dollars to as much as twenty-thousand dollars.

“Imagine what the shelter could do with an extra $20,000,” he suggested. “There is, of course, no guarantee that this will be the amount you get out of this, but it wouldn’t be unusual, considering that some of our regular players attend with a roll of hundreds the size of your fist.”

Mr. Bennett had explained that playing poker was quickly becoming one of America’s most popular pastimes, with as many as 100 million adults playing regularly, more than double the number who had participated just a couple of decades earlier. It was quite expensive to travel to places such as Las Vegas or Atlantic City to play in states that had legalized casino gambling. Access to live, legal games had expanded as casinos on Indian reservations in additional states had expanded gambling opportunities.

Although the Internet provided virtual venues that were both legal and illegal, many players simply did not trust these sites, and there was only a minimal fraction of the excitement players felt by gambling in a lively social atmosphere.

Why should all of this money go to the government or for-profit entrepreneurs? Shouldn’t charities participate in getting a piece of this action? The State Legislature certainly agreed, as they had provided for this particular law to help charities finance their good works. The only barrier to diverting some of this money to charities was a simple action of asking for some of it. This is what BFA was all about, he had told her. Everyone wins. Even those who lost money gambling had an evening out with some of their money going to a good cause.

These BFA-managed events not only would mean donations to the shelter. Attendees would have the opportunity to learn about the shelter’s good work. Mr. Bennett had told Brittany that it was not unusual for the victor of the evening’s Texas hold’em jackpot prize to donate his or her entire winnings back to the charity sponsoring the event. And when they did that, the charity received 50% of that donation, a windfall it would never have received otherwise.

There was a group of dedicated recreational poker players who attended the circuit of events managed by BFA, and many of them had lots of disposable income, Bennett had pointed out. Their exposure to charities that were BFA clients came only from their participation in the poker games. When they sent a check directly to the charity, which happened often, ALL of those funds went to the charity.

As an added bonus, BFA would manage and run the concession stands at the event, and “For the Kids” would receive 10% of the net proceeds from that operation, he said.

This was a limited opportunity, as there were only so many open dates to have an event managed by BFA. Once these slots were filled with other charities, there would be no opportunity to add “For the Kids.” Unless the organization gave the go-ahead and signed a contract within 30 days, this opportunity would likely be lost.

But as Brittany sat in her board meeting trying to explain the details, she judged quickly that her board was less than impressed by the proposal. This was not the first time she could recall a lucrative opportunity being lost because a for-profit collaborator had been unable or unwilling to commit to a timeframe required for a nonprofit organization to process a binding decision. Many for-profit entrepreneurs became frustrated waiting for a board to approve a decision agreed to tentatively by an executive director, only to have the board delay a final decision until a board committee could make a full report at a subsequent board meeting. And board members, unlike those of a for-profit board, often did not share the same agenda.

Whereas everyone on a for-profit board shared the general goal of making as much profit as possible, there were typically many competing interests within a nonprofit board. The diversity of such a board, often viewed as an asset, also has a cost in that members often do not share the same values. As Brittany made the case for board approval of this contract, she had to concede that there were conflicting values among her board members that threatened what she thought should be routine approval.

She listened as the debate droned on and on.

“What message does this send to the community and to our young clients? Is gambling something we want to send a message to encourage?” asked Pete Hemphill, a real estate agent whom she knew was quite a gambler himself, albeit allegedly addicted to betting on sports events.

Anticipating some of these questions, Brittany had provided the board with a short position paper to justify participation, prepared using a template provided by BFA. In the paper, she noted some of the pros and cons of gambling. For example, for all but a small percentage of individuals, gambling was harmless entertainment. The event would keep dollars locally that might otherwise be diverted to other communities that permitted legalized gambling. It created jobs. It siphoned dollars away from illegal gambling, which would be available if the legal market did not satisfy its customers. And, in this particular case, it could provide an incentive for individuals to donate money that would support a worthy charity such as For the Kids.

On the flip side, there were studies that measured that 1-5% of those who gambled did so compulsively and destructively, and there were economic, psychological, and other costs involved, such as the social ills that accompanied the expansion of access to gambling.

Among these were the costs of policing and dealing with the infusion of organized crime figures who found gambling as an attractive method of generating relatively untraceable cash out of the reach of taxing bodies.

“Lots of charities have a casino night or Monte Carlo night, and I’ve been to a few of them myself,” added Harold Fallwell, III, a used car dealer who owned several lots in the poorer areas of town. “But I’ve never been to one that had cash prizes, and where those who attend aren’t somehow affiliated with the charity. My problem with this is that it appears to me that most of the money generated by this would go to BFA.”

“I agree that this is problematic. As I read this contract, For the Kids receives 50% of the ‘net revenue’ and BFA receives the other half,” commented Dorothy Willingham, a board member who also served as a volunteer in the shelter, playing the piano two nights each week to entertain the residents. “As I understand it, the way the contract defines ‘net revenue’ is revenue after expenses, and the term ‘expenses’ is defined in the contract in such a way that it covers the costs of personnel running the events, in addition to all of the other costs such as advertising, security, mailing, and hall rental. The way I interpret this contract is that it is possible that the ‘fundraiser’ for For the Kids, even if it generated let’s say $10,000 in ‘donations’ for the event, we might only get the base four hundred dollars once all of these expenses are taken into account. BFA could pocket thousands from the management fee and using the expenses to cover its overhead.”

“Okay, I would concede that, but that’s $400 more than we are receiving now, and if we did this every year, we could generate some real dollars without having to do any work or incur any costs or risks,” countered Steve Bartholomew, a new board member who worked as a state caseworker in the Department of Families and Youth. “I passed the fire house once when they were having one of these tournaments. I could tell the place was packed, and there were a bunch of police cars outside with their red lights flashing—I guess there was some altercation going on, which made me notice what was going on at the hall.”

“Well, that brings up another question then,” responded Ellen Simpson, a nurse from Harristown Hospital. “Would the shelter have any liability if something bad happened at this event? After all, the contract provides that everyone running the fundraiser is a shelter employee. I know volunteers have some protection, and nonprofit organizations have limited liability, but we have no idea who these employees would be. Would they have the same State Police background checks required of our own employees?”

“And another issue concerns me,” chimed in Marilyn Able, a major contributor to the shelter who had been a charter member of the board when it was first formed almost 20 years earlier. “Doesn’t anyone have any qualms about us sharing our mailing list with a for-profit provider who is using our organization’s good name to earn its living?”

“Good point, Marilyn. I share that concern,” responded Tim Hope, the owner of a local beer distributorship. “But even more of a concern to me, do we really want to raise money through gambling? What message does this send to the kids in the shelter, and to those in the community who we want to support us?”

There was general assent that this was an important issue. But Brittany refused to give up.

“This wouldn’t be my first choice of fundraising efforts,” Brittany responded. “If the board had approved the proposal I made at the last meeting, we would have invested $20,000 in hiring a part-time, in-house fundraiser who would find a way to generate enough funds to pay their salary while raising more. Fundraising takes a lot of work and effort. And money. Money we simply don’t have. And I don’t have the time to plan and execute the activities necessary to raise money while doing all the other things necessary to run the shelter and keep it afloat. I would prefer it if we had enough stable income from grants and donations to keep things going, but as you can figure out from hearing the Treasurer’s Report, we are building ourselves a deficit that will be difficult, if not impossible, to overcome unless we do something new.

“Now, here’s one way we can get a new source of revenue without any upfront costs—as we would have had if we had hired a staff person to do the fundraising in-house—or any risk. What is the problem with this! We have nothing to lose; the contract makes it clear that we will get a minimum of $400 simply by agreeing to partner with BFA, and the potential is there to get something substantial out of this!”

Rather than soothing the board, members appeared to become even more agitated, and peppered Brittany with even more questions and concerns, coming rapid fire.

I don’t see anything in this contract that says the mailing list we provide cannot be used for other purposes than what we authorize, and even if it did have such a clause, how do we know we can trust this company?

Is there a list of clients? How do we know we don’t have the stories of those who did not feel that this was such a good deal for them?

Have you talked with any staff of other organizations who have used the services of this company?

What is the background of Mr. Bennett? Has he operated this business in our state or other states without any problems? Who owns the company?

Is he or his company even registered as a professional fundraiser with the Bureau of Charitable Organizations? What more can we find out about him?

Brittany suddenly realized that the board would not likely give the approval she had needed, which she had all but promised Mr. Bennett would be routine. Well, maybe some of the concerns of the board were legitimate.

“Okay, I get the message,” Brittany conceded. “Let me get some more information about how this would work and about who we are dealing with. But I ask that the board authorize the executive committee to act on this matter in advance of the next board meeting, as this will no longer be an option by the time the board meets again in three months. I have less than 30 days to get this approved, or the offer will be withdrawn.”

“Sounds fair and reasonable, and I so move,” responded the chair. “All those in favor of the motion to do this indicate by saying ‘Aye,’ all opposed “Nay.” The motion has carried unanimously.

“Now,” continued the chair, “let’s move on to the next agenda item about what we need to do to raise the $20,000 we need to balance the current year’s budget….”

Discussion Questions:

1. What are some of the “red flags” in this story that might indicate that there is something not quite legitimate with BFA and its fundraising model?

2. What is the role of board and staff in deciding whether to participate in this proposed cooperative venture?

3. What are some of the ethical dilemmas involved in having a cooperative agreement with a for-profit company that seeks to exploit charities?

4. How inappropriate is it for this fundraiser to be a gambling event, compared to, for example, a meal at a local restaurant?

5. What might be some of the legal problems involved in this proposal?

6. What might Brittany have done to better research BFA and its President?

7. Discuss the problems that occur when decisions of a nonprofit organization must be made by a committee that may meet only every three months? What decisions should be the purview of the board, and when should staff have the authority to make decisions?