New York AG's Suit To Dissolve NRA Highlights Critical Reminders for Nonprofit Boards

Arent Fox
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Arent Fox

New York's Attorney General is suing to dissolve the National Rifle Association (NRA) based upon what the AG alleges are repeated violations of state laws regulating nonprofit corporations. The Attorney General's amended complaint paints a dramatic picture of CEO Wayne LaPierre running the NRA like a personal bank account, diverting millions away from the tax-exempt organization and toward his own benefit, including trips on private jets, excessive compensation, and lucrative, unvetted contracts with friends.
 

The amended complaint can be found here.

The AG alleges that the NRA's board of directors facilitated this conduct by turning a blind eye to LaPierre and other senior figures' self-dealing behavior. The complaint is a stark, 189-page reminder for nonprofit boards to exercise meaningful oversight of management.

The NY AG alleges that the board failed to oversee tens of millions in misspent funds and then attempted to hide the resulting mess.

The amended complaint details dozens of alleged legal violations by LaPierre and his hand-picked inner circle, who dominated upper management. The most egregious examples include:

Millions spent on private jets and other personal travel expenses 
NRA assets allegedly were routinely wasted on private travel and entertainment expenses. Over $10 million were used for flights on private jets, which included regularly transporting LaPierre and his extended family to and from their Nebraska hometown. In 2018, for example, LaPierre allegedly took a personal trip from Washington D.C. to Dallas, stopping in Nebraska both ways so that his niece and grandniece could join him, costing the NRA $59,790.

NRA leaders also allegedly concealed travel and entertainment expenses through outside vendors, who fronted the costs and later billed the NRA using generic-looking invoices. Under these "pass-through" arrangements, the charitable organization allegedly unwittingly paid millions of dollars for items such as cigar bar memberships and NASCAR tickets. 

Self-dealing in contracts and related party transactions
The Attorney General alleges a pattern of systemic self-dealing in the NRA's contracts with outside vendors and even its own board members. Among the most flagrant culprits is the former Chief of Staff, who allegedly entered multimillion-dollar oral contracts with companies where his wife was either an employee or investor. Further, at least five NRA board members contracted with the NRA to provide consulting, public speaking, and fundraising services. Each received up to $220,000 per year from the NRA. None of these contracts were approved by the NRA board or the board's audit committee before the fact, allegedly without consideration of their reasonableness.

Excessive executive compensation
The NRA board allegedly acted as a rubber stamp for senior executives' pay raises. The organization's assets declined by a startling $63 million between 2015 and 2018. Nevertheless, in 2018, the NRA board allegedly agreed to raise the salaries of LaPierre, the treasurer, and the general counsel.

Silencing whistleblowers and dissidents
Those who challenged the NRA's culture of mismanagement were allegedly swiftly silenced or ostracized. For example, a group of staff members allegedly came forward as whistleblowers in July 2018, alerting the NRA board to conflicts of interest and longstanding noncompliance with basic financial controls. The board's audit committee allegedly swept these revelations under the rug, keeping any mention of the complaints out of meeting minutes and concealing them from auditors. Officers who dissented were allegedly denied re-nomination to their positions, while board members who did the same were stripped of committee assignments.

The complaint highlights lessons for nonprofit boards in delivering crucial oversight of finances, conflicts, and compensation.

This case highlights what can happen when nonprofit corporations lack effective oversight of management. Providing this oversight is central to any board of director's duties of good faith, ordinary prudence, and loyalty. Here are some of the specific lessons that nonprofit directors should take from the NRA's legal troubles:

Directors should have a basic awareness of their legal obligations
Nonprofit directors are not expected to be experts in the law or in financial matters, but they should inform themselves of their oversight duties to avoid being asleep at the wheel.

The Attorney General's complaint describes a board of directors which lacked even a basic understanding of its oversight responsibilities. According to the AG, though the NRA board was legally obliged to oversee accounting and reporting processes, the board's audit committee chair had "no knowledge of New York law governing audit committees, whistleblowers, or conflicts of interest." Accordingly, no meaningful steps were ever taken to create or enforce internal safeguards that may have reined in the senior executives' alleged excesses. By way of easy example, the board allegedly failed to create a policy on charter travel or to monitor compliance with its reimbursement procedures.

Scrutinize related party transactions and possible conflicts of interest 
Nonprofit boards should exercise effective and prompt oversight through processes to review potentially problematic transactions as soon as they receive notice.

The NRA board allegedly allowed self-dealing to run rampant. Like most states' laws, New York law prohibits a nonprofit corporation from entering any related party transaction unless the board determines that the transaction is fair, reasonable, and in the organization's best interest. NRA policy, on paper, required the same review for any transaction that might implicate a conflict of interest. But the NRA board allegedly neglected both obligations.

Assess executive compensation levels thoroughly and objectively
Directors are required to adequately inform themselves before signing off on changes in executive compensation. Nonprofit boards should objectively consider benchmarks such as job performance, compensation at peer nonprofit organizations, and their own organizations' financial health when determining executive compensation. They typically will engage a specialized outside advisor to assist with this review. However, the amended complaint alleges that "the majority of the NRA board disregarded their responsibilities . . . concerning oversight of compensation of corporate officers." The NRA board allegedly conducted only cursory review before issuing one-page "pro forma" approvals of recommended compensation levels – figures often generated with data provided by the same executives whose pay is being considered.

Respond to dissent with fairness and transparency
Nonprofit boards should maintain documented whistleblower policies and apply them appropriately to protect whistleblowers from retaliation, to thoroughly investigate allegations of financial misconduct, and to facilitate the work of auditors.

In contravention of these duties, the NRA board allegedly not only failed to prevent retaliation but took affirmative steps to cover up whistleblower complaints. By not investigating these complaints, the NRA board also allowed the organization to continue to slide further into financial deterioration and mismanagement.

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