6/30/14 The NonProfit Times: Red Cross Calls Fundraising Operations ‘Trade Secrets’

Spending and disaster fundraising by the American Red Cross (ARC) is under the microscope again, this time after the charity sought to block the release of information it shared with state authorities from going to a nonprofit news site.

ProPublica had requested details about spending related to Superstorm Sandy but the ARC declined so the nonprofit news site filed a public records request for information that the nonprofit had provided to New York Attorney General’s Office.

An attorney for the New York City law firm Gibson, Dunn & Crutcher appealed to the attorney general to block disclosure of some Sandy information, requesting an exemption from the Freedom Of Information Law (FOIL) under trade secret exemptions. The Attorney General’s office granted part of that request and rejected another part in a June 23 letter to Gibson Dunn’s Gabrielle Levin.

New York Attorney General Eric Schneiderman and the ARC reached a settlement last fall that provided another $10 million to four charities that would address unmet needs resulting from Superstorm Sandy. The Charities Bureau reviewed some $575 million raised overall by charities in response to the October 2012 storm, including more than $300 million by ARC. The agreement also outlined how the ARC will solicit donations following future disasters.

The ARC said it provides information about its spending on disasters, pointing to several reports posted on its website but declined to say whether it plans to appeal the AG’s decision. The Washington, D.C.-based organization would not elaborate beyond a brief statement: “The vast majority of our 25-page July 29, 2013 letter to the New York Attorney General is being released and details our response efforts following Superstorm Sandy. We sought to keep confidential a small part of the letter that provided proprietary information important to maintaining our ability to raise funds and fulfill our mission.

Some critics said the Red Cross’ post-disaster reports on spending are not specific enough and lump Sandy-related expenses into just four general categories.

From a legal perspective, the public records fight might be less about the protection of so-called trade secrets and more about keeping under wraps information that was provided to state authorities.

“This amplifies the idea that disaster relief has turned into an industry and groups like the Red Cross are not putting the public interest first,” said Ben Smilowitz, executive director of the Disaster Accountability Project (DAP), which filed a complaint with the state attorney general’s office alleging mismanagement in handling of Sandy-related donations. “We had a suspicion that the Red Cross wasn’t sharing everything they knew. The Red Cross PR talking points jus didn’t add up given all the evidence we collected from numerous Red Cross staffers and over 200 survivors we interviewed,” he said. “This failure about what happened at Red Cross with their Sandy funds leaves me to believe that the Red Cross has not been forthcoming with the public,” Smilowitz said.

There are other considerations aside from “trade secrets” that both the attorney general and the charity might want protected, according to Greg B. Lam, a partner with the Kansas City, Mo., firm of Copilevitz & Canter. Those reasons include otherwise privileged or financial documents that the charity is not required to supply to the state but does so to help facilitate the investigation. The AG’s office might have an interest in redacting privileged or financial documents that the charity is not required to supply to the state but does so to help an investigation because if they don’t then it could discourage other charities from cooperating and supplying information in future investigations, Lam said, “forcing the state to either forgo the investigation or jumping straight to costly litigation.”

While it’s conceivable that ARC might not want to reveal details of fundraising methods, “there is no rational basis for not revealing” how they spent donors’ money, said Geoffrey Peters, president and CEO of CDR Fundraising and a member of the Association of Direct Response Fundraising Counsel (ADRFCO). “I would think, at a minimum, they could say ‘We raised $X through television, Internet and direct mail while spending $A on direct grants to individuals, $B on immediate relief like food and shelter, $C to support first responders, $D on overhead, and $ on fundraising costs.’ That type of statement would reveal very little to nothing about fundraising methods but would provide transparency to donors,” Peter said. He added that he believes the organization may be “stonewalling” to avoid embarrassment.

Bob Ottenhoff, president and CEO of the Center for Disaster Philanthropy (CDP), said donors are increasingly uneasy about the large sums of money contributed to disaster-related organizations because of concerns about a lack of coordination and the fact that some nonprofits can’t or won’t explain how the money is being used.

“Trust is the most important asset a nonprofit has and it is earned by being transparent about how the money was raised, how it was spent, and how effective it was. I don’t think there is anything inherently ‘secret’ about any of this,” Ottenhoff said.

“Donors often give money without knowing what they’re giving for or what they expected to have happen,” he said while there’s also a lack of understanding, and perhaps not even agreement, in the role of Red Cross during long-term recovery and rebuilding. “I think it is a challenge for Red Cross to figure out how to appropriately allocate funds for what kinds of activities. That may be part of the issue here,” Ottenhoff said.

“Donors give freely but for a lot of different reasons. They don’t always know why they’re giving or what they expect to have happen with their gift. For receiving organizations, it’s challenging for them to figure out how to allocate the money and for what activities,” Ottenhoff said. Donors don’t have clear expectations in their own minds as to what will happen, he added.

“Charities are still private corporate entities that can and do have trade secrets, ranging from special methodologies used to raise money that puts them at an advantage against similar organizations, to ways they can more effectively deliver charitable programs,” Lam said. “Just like any business entity that strives to gain a competitive advantage against those in the same industry, charities are constantly in competition for donor dollars and goodwill associate with their program service delivery,” he said.

“We wonder how much of this is couched in the desire to protect trade secrets and how much is grounded in practical, common sense desires for investigators to avoid chilling cooperation from those who can help the investigation,” Lam said.