fiduciary responsibilities of boards

Uncategorized

Quote Of The Day

February 2, 2024 by

While I have been following the NRA’s trial in New York, I have been holding off writing about it until the New York Attorney General’s Office has rested their case. Based upon what I have read, that appears to be this coming Monday, February 5th. There is a lot there and I want to make sense of it all before tendering my complete opinion.

That said, the quote of the day comes from Stephen Gutowski of The Reload. It involves the testimony of NRA Secretary and General Counsel John Frazer.

Stephen wrote:

In it, the NRA’s top lawyer defended his integrity. When asked if LaPierre had breached his trust when he failed to disclose his now-admitted use of NRA funds for personal expenses, Frazer said he wouldn’t characterize it that way.

“I think Mr. LaPierre has always been very open and honest with me in terms of communications that we would have and then trying to rectify the issues,” he said.

But, when asked if LaPierre breached the trust of NRA members, he took an agonized pause before responding.

“I’d have to say probably yes,” Frazer testified.

LaPierre walked slowly out of the courtroom–and the NRA–on that note.

While I am glad that Mr. Frazer is finally recognizing that Wayne LaPierre breached the trust of the NRA members, it is sad that Frazer is only now coming out and saying it. His fiduciary duty which included a duty of loyalty was to the organization which means the members and not to Wayne LaPierre. He is not alone in that breach of fiduciary duty. There are many members of the Board of Directors who likewise breached their duty in their loyalty to Wayne instead of the members. Whether it was due to ignorance or a willful choice, it really doesn’t matter.

The victim in this trial has never been the state of New York. It has always been the members of the NRA who paid their dues and donated what they could to the organization because they believed in the mission. In return, they were used as the personal piggy banks to support the avaricious lifestyles of the Millies, the Waynes, the Susans, and those of their ilk.

Uncategorized

A Wake-Up Letter To The NRA Board

April 14, 2023 by 4 Comments

Note: I want to emphasize that I did not obtain Frank Tait’s letter from Frank nor any member of the Board of Directors. He also did not give me permission to publish or quote from it. However, he was willing to answer questions about the letter for which I was appreciative.

Frank Tait sent a wake-up letter to the NRA Board of Directors a week ago. It asked for answers to many tough questions especially with regard to the NRA’s finances. Almost immediately, Marion Hammer went into “enemy within” mode and told the rest of the Board to delete the email. She also suggested they block Frank who is a member of the Board. In one of his few instances of showing a spine, NRA Secretary and General Counsel John Frazer had to step in and remind everyone of the existing records retention order.

Frank starts by saying:

Dear Fellow Directors,
I am humbled and honored to serve the members of our great Association. As I come to the end of my brief term on the NRA Board of Directors, there are observations and recommendations to share with the entire board. I attended the January Board meeting and made 4 visits to headquarters requesting and reviewing a wide number of documents to fulfill my obligations as spelled out in the NRA Director Reference Book and in the Right from the Start: Responsibilities of Directors of NOT-FOR-PROFIT Corporations issues by the Office of the New York State Attorney General Charities Bureau. I encourage you to familiarize yourself with the document and encourage you to review underlying documents to what management presents to assure yourselves of the health of our Association.
My overall impression is that Directors willingly serve in the area where they are asked to focus. And that only a select few long-term insiders such as the Executive Council members, focus on the overall financial health of the Association. Directors are ‘kept busy’ with outward facing activities and that Directors assume that “someone else” is handling the overall financial health of the Association. Only the officers, Executive Council members and management have a complete picture of the health and status of the Association. Directors need to recognize that it is THEIR responsibility to look at the overall
financial health of the Association IN ADDITION to their Committee assignments.

Two years ago I wrote a post about fiduciary duty and the responsibilities of the NRA Board of Directors. Every member of the NRA Board as well as the employed officers (CEO, CFO, Secretary, etc) is a fiduciary. As such, under New York law they have three duties that they must fulfill as a fiduciary. They are the duty of care, the duty of loyalty, and duty of obedience. Summarizing these duties, the duty of care means providing reasonable time, attention, and care to providing organization oversight. Loyalty means acting in the best interests of the organization and its members rather than their own self-interests. The duty of obedience means the board is fulfilling its fiduciary responsibility to ensure that the organization is abiding by its stated mission and is complying with all state and federal laws. New York law goes even further to include internal governing documents and policies such as the bylaws.

To assist board members in understanding their fiduciary duty, the New York Charities Bureau publishes a short booklet called “Right from the Start”. Frank referenced that publication in his letter to his fellow board members. Another publication from the Charities Bureau not referenced by Frank deals with internal controls and financial accountability. Both publications make reference to financial reports and the obligation of board members to review them. For example, in Right from the Start, it says one should “Obtain the current year’s budget and cash flow projections. Find out how they compare to actual income and expenses and what processes are in place to monitor these comparisons.” This was suggested to be done even before someone is seated on a board. After becoming a board member, Internal Controls says procedures should be in place “ensuring that timely and appropriate financial reports are distributed to all directors and officers and reviewed by them, as well as the president, chief executive officer, treasurer and chief financial officer.“

Frank points out it is the responsibility of all Directors to look at the overall financial health of the NRA and not just those of a specified committee such as the Finance Committee. He then makes recommendations on records transparency including a suggestion of a way to provide documents to the Board through a secure, electronic site. Since the Special Litigation Committee is a committee of the Board, it should be required to keep minutes and report out its decisions. One need only look to how they handled the abortive bankruptcy filing to see how they failed at providing transparency of their actions to the Board. That is, the Board didn’t know a bankruptcy filing was in the offing until after it was filed.

He then makes recommendations regarding compliance and cybersecurity. With regard to compliance, he says to move forward with appointing a Chief Compliance Officer and to bring that resolution to the members. I agree with Frank that the members would approve this move. Given it is adding an officer to the NRA, it must be approved by a members’ vote. That cannot happen until ballots go out in 2024. Also with regard to compliance, the lines of authority needs to be spelled out in a Delegation of Authority Matrix. Currently, these lines of authority are in various documents some of which have not been provided to the Board.

On cybersecurity, Frank notes the NRA has a significant amount of information on individual members including credit card numbers. He and Judge Phil Journey have submitted a resolution to the Board requesting a Cybersecurity Committee be established. You may remember that Russian hackers hit the NRA with a ransomware attack in the fall of 2021. Frank suggests a full Systems and Operation Control audit be part of the annual audit to keep members’ and employees’ data secure.

I spoke with Frank this afternoon after he attended the Finance Committee meeting. He and Judge Journey will be retracting their proposed resolution on the establishment of a Cybersecurity Committee. He said the NRA has taken some measure to improve cybersecurity including locking out thumb drive access to all computers and watermarking financial documents so that the recipient is known for each copy. They also have all computers emptying “trash” automatically as this was the way the hackers obtained some of their data.

Now to the meat of Frank’s letter – Financial Oversight. This is where Directors need to become involved in order to fulfill their fiduciary duties. Sec. 717 of the New York Consolidated Laws, Non-Profit Corporation Law outlines the duties of officers and directors. The law considers that directors, if acting in good faith, may rely on reports from officers, qualified professionals, and designated committees of the board. However, it is conditioned on officers being “reliable and competent” in the matter presented, the professionals having the professional expertise, and the committee “merits confidence.” It then goes on to say, “Persons shall not be considered to be acting in good faith if they have knowledge concerning the matter in question that would cause such reliance to be unwarranted.” The bottom line is that the Board cannot rely on “well, Wayne assured me” or “Charles and David said it was OK” anymore. That would not be consistent with the care that a ordinarily prudent person would exercise under these circumstances.

Frank continues:

Membership is down as is membership revenues. From 2021 to 2022, new memberships fell by 35%. The budget adopted assumed growth in both members and membership revenue. The actual numbers are going in the opposite direction. When Frank asked for a management response to this, he got a response from John Frazer that just infuriates me. It was arrogant and rude in my opinion.

John Frazer replied “your requests for responses to questions about budget projections and the NRA’s ability to meet its budget, outside the scope of a meeting of the Board, are redundant and therefore unnecessary. The NRA addresses directors’ questions of this type in the appropriate time, place, and manner-i.e., during meetings of its Board and duly appointed committees, rather than through ongoing, ad hoc responses to individual directors between Board meetings.”

With that type of response, is it any wonder that Frazer is a named defendant in the New York Attorney General’s lawsuit?

The balance sheet information above is from the annual reports. As with any balance sheet, it is for a spot in time unlike a cashflow or income statement.

As I noted above, I spoke with Frank after he met with the Finance Committee. He got some answers but not everything. The NRA will be starting a campaign to raise membership and membership revenues. However, they will be using extensive discounting which reduces the revenue impact of the campaign. He said the NRA is working hard to reduce costs by not filling positions and renegotiating contracts.

There is a saying that you cannot shrink yourself to prosperity. The cost cutting measures help but are not enough. Hypothetically, the NRA has a $50 million problem which new programs that generate revenue are the key. It would be next to impossible to come up with one $50 million program so it would be more likely to have 10 $5 million programs to generate the needed revenue. Realistically, you really need 20 as some programs will fail to generate the needed revenue. Where to find those 10-20 programs that can generate revenues is the issue. This weekend’s expo in Indianapolis will generate revenue but not in the $5 million range after expenses.

Frank went on to say in our conversation this afternoon that the two key factors are membership (revenue growth) and legal costs (cost reduction). While Frank won’t say it, I will. Bill Brewer and his team are sucking the NRA dry with their overpriced legal services that have continually failed to produce any results. A $12 million settlement with Ack-Mac, a ludicrous attempt at bankruptcy, $8 million in fees to avoid paying Chris Cox his $2 million severance package, and the list goes on.

I should make clear that I am only posting excerpts from Frank’s letter per his request. I did review what excerpts I would be publishing with Frank. Parts of this post were drafted before Frank met with the Finance Committee. Those specifically after I spoke with him are in bold italic.

Uncategorized

Not Good Signs For NRA

July 25, 2021 by 1 Comment

The blog NRA In Danger is reporting on two more indicators of trouble for the NRA.

First is regarding the NRA Annual Meeting scheduled for Labor Day Weekend in Houston. They report that only half of the booth space has been rented out with little more than a month to go. That in and of itself isn’t good. They also note that organizations like the Second Amendment Foundation which have traditionally had booths at the Annual Meeting are turning down the “opportunity”. I had known that and was told by my friends at SAF that they considered it a “waste of money” to be there.

The second is even more disturbing. It concerns upkeep of the NRA headquarters building in Fairfax. Even when not occupied or lightly occupied, you still have to do the upkeep or the building falls apart.

Second, the headquarters building is being allowed to deteriorate. Rain is penetrating the roof, sometimes pooling on the floor and running through passages through floors to soak lower stories. Most of the surviving employees are still working from home, so this is a building that has largely been unoccupied for over a year, and over two summers. Likely a major mold problem will follow, if it isn’t there already. There is money enough for tens of millions in legal fees, but no money to fix the headquarters roof.

NRA in Danger speculates that the board is unaware of these issues as they are being kept in the dark by Wayne and the rest of the Gang of Four. If so, it is malfeasance on the part of the leadership and a continued refusal by the board to do their fiduciary duty of care.

Uncategorized

Fiduciary Duties And The NRA Board

March 9, 2021 by 3 Comments

The term “fiduciary” is bandied about without much explanation or definition. That said, it is a critically important to understand what it means when it comes to an organization.

Investopedia defines it this way:

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.

While they are talking about a person who handles your finances, it is equally applicable to anyone who serves on the board of a non-profit like the National Rifle Association.

The website Charity Lawyer puts it this way when talking about the fiduciary responsibilities of a board member of a non-profit organization.

The board collectively, and directors/trustees individually, owe fiduciary duties to the nonprofit organization they serve. In essence, exercising fiduciary duties means that board members have a duty to act with care and in the best interest of the organization and remain loyal to its mission, as opposed to acting in their own interest or the interest of the CEO/Executive Director they supervise. (emphasis added)

So what are the fiduciary duties of a board member?

Under New York law a board member has three fiduciary duties: the duty of care, the duty of loyalty, and the duty of obedience. To assist new or potential nonprofit board members, the Charities Bureau publishes a booklet outlining what these mean. Using their words plus others let’s take them in order.

Duty of Care

The duty of care mean that board members should give give reasonable attention and care to providing organizational oversight. There is no precise definition of what is meant by reasonable but it should include, at the minimum, that members attend board meetings, they read the reports, and that they have knowledge of the organization’s finances. New York says that “directors must act in “good faith” using the “degree of diligence, care and skill” which prudent people would use in similar positions and under similar circumstances. (Remember the NRA still operates under NY law because the Board in 1992 ignored the warnings of Director and law professor Joe Olson.)

Among the item mentioned by the Charities Bureau on duty of care include a whistleblower policy, that the minutes reflect dissenting votes, that there is a clear process for major obligations, and that monthly financial reports are reviewed by board members.

I would say that Oliver North and Richard Childress were exercising the duty of care when they expressed concerns about the enormous legal billings from William Brewer III.

Duty of Loyalty

The duty of loyalty is owed to the organization meaning that directors are mandated to work in the interests of the organization and not their own self-interest. While the NRA does have a conflict of interest policy and disclosures are made, I have to wonder if it is anything more than lip service when someone like a Marion Hammer receives hundreds of thousands of dollars annually.

Charity Lawyer notes:

The fiduciary duty of loyalty of board members is the responsibility to act in the interests of the non-profit, those it serves, and those donating funds for operations, as opposed to their own self-interest…

It can also be said that board members have a duty not to act in the personal best interest of the non-profit CEO (lead staff member) where that interest conflicts with the nonprofit’s best interest. Hiring the CEO, setting the salary, and providing oversight and accountability of such CEO, is among the most important responsibilities of a non-profit board.

The duties of care and loyalty are the basics of all fiduciary responsibilities. The law recognizes what is called the “business judgment rule”. This protects board members if they exercise these two duties with diligence and prudence as courts have held.

I came across this from the major law firm IceMiller LLP with regard to the fiduciary duties when dealing with an insolvent or near insolvent corporation. While the NRA asserts it is far from insolvent, they are, however, in Chapter 11 bankruptcy proceedings.

Applying the business judgment rule, courts will ordinarily not scrutinize corporate decision-making if the decision was made through a valid exercise of the board’s business judgment. Essentially, corporate fiduciaries who act in good faith, make informed decisions, and do not personally benefit from their corporate actions can rest easier knowing their actions will not be scrutinized after-the-fact with the benefit of hindsight. The business judgment rule facilitates prudent risk-taking and forgives reasonable mistakes in judgment.

A recent interview that Michael Bane had with MidwayUSA’s Larry Potterfield brought something to mind. When Michael asked him about the NRA’s turmoil, Mr. Potterfield insisted that it was in fine shape and there wasn’t really any turmoil because that is what Wayne LaPierre assured him personally.

Think about that if you are a director and not merely a contributor like Mr. Potterfield. Would a court hold that the business judgment rule applied and that you fulfilled your fiduciary duties to make an informed decision if you merely relied on the assurances of Wayne LaPierre in the face of all the other contradictory information out there? I will get into more specifics in a moment.

Duty of Obedience

The duty of obedience means that the board has a fiduciary responsibility to ensure that the organization is abiding by its stated mission and is complying with all state and federal laws. New York goes further and includes abiding by its internal governance documents and policies. In this case, that would mean the NRA bylaws and its internal governance documents requiring board approval for major contracts such as that with Brewer, Attorneys and Counselors.

The NRA’s stated mission on its IRS Form 990 says:

Firearms safety, education, and training, and advocacy on behalf of safe and responsible gun owners.

You may remember that US District Court Judge William Campbell, Jr. allowed David Dell’Aquila’s class action lawsuit against the NRA over misuse of donor fund to continue. He did dismiss it against Wayne LaPierre and the NRA Foundation but found that the expenditures of the NRA for Wayne’s clothing and trips and Brewer’s legal fees may not have been in furtherance of the NRA’s mission. That suit is on administrative hold while the bankruptcy is still ongoing.

NRA Bankruptcy and Special Meeting

The Board of Directors is holding a called Special Meeting this coming Sunday, March 14th, in Dallas, Texas. It is widely assumed that one of the action items will be an explicit ex post facto approval of the bankruptcy filing.

The sole purpose of the meeting is to provide a briefing to the Board regarding the NRA’s reorganization plan and the legal matters overseen by the Special Litigation Committee, and to take any necessary action directly related to those matters.

Judge Phillip Journey, a Kansas state judge and NRA Director, has asserted, correctly in my opinion, that the Board was kept in the dark about the plan to declare bankruptcy. The formation of the Special Litigation Committee never mentioned a planned bankruptcy as he told Stephen Gutowski of the Free Beacon.

Journey said he had voted to support the committee, but had no idea the group’s leadership and legal advisers had planned to go into bankruptcy. He disputed NRA filings that claimed board members were properly informed. Those filings were signed by embattled executive vice president Wayne LaPierre, who was not present at the meeting when the committee was discussed, according to Journey. The Kansas jurist believes the law has been violated and he has a duty to report it to the court.

“It certainly was a fraud perpetrated on the court,” Journey said. “I told them all when I got on the board, ‘Look, I’m a judge. I’m a mandatory reporter. Whatever we do, we got to be on the up and up.'” 

I believe Judge Journey not only recognized his fiduciary duty of care but his duty as a officer of the court when he filed his Motion for an Examiner. He followed President Ronald Reagan’s dictum – “trust, but verify” – when it came to assurances from LaPierre and William Brewer. He looked at the New York Attorney General’s dissolution suit and recognized that there was too much there to just pass it off as a vendetta against the NRA.

The leads me to the the US Trustee’s filing in the bankruptcy case objecting to the appointment of William Brewer and his firm as “special counsel”. For those that don’t know, the US Trustee is an officer of the court whose primary rationale is to “promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders–debtors, creditors, and the public.” In other words, their job is to protect the process so it isn’t abused.

The US Trustee strongly objected to the appointment of Brewer, Attorneys and Counselors, as a special counsel to the NRA in the Chapter 11 bankruptcy proceedings. They assert that the services provided by Brewer do not fall within the constraints of bankruptcy law and that it has “divided loyalties and conflicts of interest.”

They go on to add:

These disqualifying conflicts are compounded by BAC’s failure to disclose them in the Application and by BAC’s failure to disclose all of its pre-petition compensation

Among the things the US Trustee asserts that Brewer did not disclose were the family relationship between Brewer and the McQueens, the allegations against the firm’s billing in two cases in which he was counsel (NYAG and Oliver North), and failure to disclose that Brewer himself was precluded from participating in any of the AckMac cases by the US District Court for Northern District of Texas. The Trustee said it shouldn’t be their responsibility to “ferret out” complete disclosures. This failure to make disclosures were grounds enough to prevent Brewer and his firm from serving as special counsel.

They detail what they call “adverse interests” against the estate. In other words, work that Brewer is doing that is not in the interest of the creditors nor in the real interests of the NRA as an organization. This is really the meat of their objection:

These adverse interests include:
a. potential claims by the Debtors’ estates against BAC for fraudulent conveyance based on allegations of billing improprieties raised by a former NRA president, a First VP, four members of the NRA’s Board of Directors, and the NYAG Action;
b. conflicted loyalties BAC may have between its own interests and those of the NRA in the NYAG Action, as well as in an action the NRA brought against its former president, Oliver North, in which Mr. North alleges he suffered retaliation from the NRA leadership when he raised concerns over BAC’s legal fees (the “Oliver North Action”);
c. conflicted loyalties BAC may have in the NYAG Action and generally between the interests of the NRA and those of Mr. LaPierre, based on BAC’s prior representations of Mr. LaPierre, and the steps Mr. LaPierre is alleged to have taken to stonewall internal inquiries regarding BAC’s fees; and
d. conflicted loyalties BAC may have because Ackerman McQueen is adverse to the Debtors in at least three lawsuits for which BAC is sought to be retained to represent the Debtors, when BAC’s named partner is married to the sister of Ackerman McQueen’s CEO.

The Board of Directors need to bear in mind that the US Trustee, despite wild accusations by Brewer and others with sweetheart deals, is independent and does not have an axe to grind. The US Trustee is neither anti-NRA nor pro-NRA but rather is pro-process and keeping it equitable for all involved.

So when doing their fiduciary duties of care, loyalty, and obedience, the Board of Directors should be asking themselves these questions.

Have I done my duty of care if all I’ve done is accept the assertions of Wayne LaPierre, William Brewer, and the Special Litigation Committee?

Am I performing my duty of loyalty to the members, the donors, the Second Amendment, and to the core values of the NRA?

Have I as a board member really overseen the actions of the CEO in the name of the organization or did I just go along?

Did I confuse my duty of obedience to the NRA with obedience and loyalty to certain individuals?

Will I be protected by the “business judgment rule” if I merely accepted the word of LaPierre and Brewer without going any further?

Finally, am I liable for a breach of fiduciary duties and what happens if I am?