On January 6, Minnesota Attorney General (AG) Keith Ellison filed a lawsuit against the Minnesota nonprofit corporation Act for Cause (AFC) and its president, Rajesh Mehta. While the stated mission of AFC was to help needy individuals with securing employment and housing, the lawsuit alleges that Mehta used the charity for various self-dealing purposes.
In the operative complaint, Ellison alleges that Mehta engaged in numerous illegal practices under the Minnesota Nonprofit Corporation Act (the Nonprofit Act) and other statutes governing nonprofits. For example, Ellison accused Mehta of:
- Naming individuals to the board that he personally knew without informing them of their positions.
- Purchasing a commercial property without board approval and causing AFC to rent it to for-profit corporations.
- Pocketing hundreds of thousands of dollars in rent from the AFC-owned property for himself.
- Intermingling AFC’s funds with his own to pay for personal expenses, such as his son’s college tuition fees.
- Using AFC to avoid paying income taxes by claiming AFC’s expenses on his personal income tax return as losses incurred by a sole proprietorship.
On December 16, 2024, Ellison’s office issued a civil investigative demand (CID) to AFC, which sought information regarding AFC’s governance, finances, and other matters. Two weeks later, Mehta allegedly called a special meeting of AFC’s board of directors; it was the first and only meeting the board had held since AFC was founded. Without disclosing the AG office’s investigation to the board or following the proper procedure, AFC transferred its commercial property to an LLC owned by Mehta at no cost. At the time of the transfer, the property was valued at over $1 million.
Why It Matters
Ellison’s lawsuit against AFC underscores that an organization’s response to early warning signs of regulatory interest can dramatically affect the outcome of an investigation. Here, the December 2024 CID put AFC and Mehta on clear notice that their governance, financial practices, and use of charitable assets were under scrutiny. Despite receiving the CID, Mehta allegedly engaged in additional illegal activity that made the conduct appear even worse and suggested consciousness of guilt.
Regulators will evaluate not only the alleged misconduct but also how organizations respond to and remediate issues when they are identified. Companies should engage outside counsel to analyze a CID and strategically plan a course of action that benefits, rather than harms, their position with respect to the regulatory authorities.
