New York may subpoena VDARE records related to alleged financial misconduct of nonprofit directors

From People v. VDARE Foundation, Inc.New York District Court Judge Sabrina Krauss ruled yesterday:

Defendant (VDARE) is a charitable, non-profit (and tax-exempt) New York corporation incorporated in New York in 1999…

In its application for federal tax exemption, Defendant stated plans to operate from offices in New York and listed two of its four directors with addresses in New York. The respondent stated that his primary goal was to create a web page publication and magazine with editorial content on foreign and domestic policy issues.

In 2019, Respondent reported a sixfold increase in revenue, from $700,000 in 2018 to approximately $4.3 million in 2019, including a one-time donation of $1.5 million from a donor-advised foundation. In early 2020, Respondent spent $1.4 million of these newly acquired funds to purchase Berkeley Springs Castle, a medieval-style castle located in West Virginia.

Public statements by the Defendant’s chairman, Peter Brimelow, and others indicate that he and his family have used the castle as their primary residence since at least March 2020. During the same period, the Defendant also substantially increased payments to the Brimelows and third parties for profit-making companies that he is in control. In 2019, Brimelow’s salary more than doubled to approximately one-third of Respondent’s operating expenses. Defendant separately reported spending tens of thousands of dollars in office expenses in 2019 and also paid hundreds of thousands of dollars to a third-party LLC controlled by Brimelow, which was located at Brimelow’s home address.

In December 2020, Defendant transferred all ownership of Berkeley Springs Castle to two West Virginia corporations incorporated by Lydia Brimelow, Peter’s wife and a director of Defendant, five months prior. Respondent deeded the castle itself and the land on which it stands to the Berkeley Castle Foundation (BCF), a non-profit corporation. The defendant transferred the remaining land, consisting of eight parcels, to BBB, LLC, a commercial corporation.

Based on the information received, the Attorney General began an investigation of the defendant and its management for potential violations of New York charity law. The subpoena requests: documents related to the organizational structure of the Defendant; compliance with conflict of interest requirements under New York law and financial transactions; acquisition and transfer of Berkeley Springs Castle; and transactions between the defendant and entities controlled by the Brimelows….

(VDARE partially complied with the subpoena, but later sued) in the U.S. District Court for the Northern District of New York… (VDARE Foundation, Inc. against James, 1:22-cv-01337 (FJS)), alleging, among other things, that Petitioner’s demands for disclosure of certain information threaten Respondent’s ability to conduct business; and that petitioner’s subpoena is a retaliatory plea seeking to interfere with respondent’s rights to freedom of speech and association. The federal complaint seeks a declaration that the subpoena violates the defendant’s First Amendment rights, an injunction preventing enforcement of the subpoena, and damages. (The government of New York then sought) an order compelling the defendant to comply with the subpoena….

The requirements for the issuance of a duces tecum investigative subpoena are that “(1) the issuing authority has the authority to participate in the investigation and to issue the subpoena, (2) that there is a genuine factual basis to justify the investigation, and (3) that the evidence requested is reasonably related to the subject matter of the investigation.’

The Attorney General has broad and well-established authority to issue subpoenas in connection with civil investigations into the conduct of nonprofit organizations to determine whether enforcement proceedings should be initiated. “Moreover, there is a presumption that s/he is acting in good faith when evaluating the validity of the Attorney General’s subpoena.” A party contesting a subpoena issued by the Attorney General bears the burden of establishing that the subpoena is invalid….

The applicant’s request must demonstrate a “reasonable relationship to the subject matter of the investigation and the public interest to be served.” A party must respond to an investigative subpoena unless the information requested is “totally irrelevant to the proper investigation.”

New York State’s public policy is concerned with ensuring robust regulation of tax-exempt charities such as Respondent and Appellant, empowered to monitor and investigate such organizations for suspected misconduct.

Petitioner’s subpoena focuses on subject areas covered by statutory provisions governing nonprofit corporations. The Nonprofit Corporations Act, for example, provides that organizations such as Defendant may be formed only for charitable purposes and that charitable assets may not be distributed to members, directors, or officers. Charities are also subject to clear requirements under the N-PCL for lawful activities, including requirements for a process for determining compensation; processes of acquisition and “sale or other disposition” of property; creating and presenting complete and accurate financial reports; the related party transaction review process; and the conflict of interest management process.

The subpoena requests require the type of material that will allow the Complainant to determine whether the Respondent has complied with these requirements, including complete copies of the Respondent’s annual regulatory filings, financial transaction records, compensation records, and records of Board meetings and reviews. The required documents will allow the applicant to determine whether any diversion of charitable assets has taken place, such as through illegal payments to for-profit corporations owned by the Brimelows or other VDARE fiduciaries. Section 7-A of the Executive Act authorizes the Attorney General to supervise charitable organizations that collect contributions in New York, and Section 7-A requires the Attorney General to supervise such organizations to ensure, in particular, that the charities do not collect contributions under falsely claim or use the contributions received in a way that is not “substantially consistent” with the stated purposes of the charity.

Respondent raised First Amendment constitutional objections and thus had the initial threshold burden of proving that providing the requested information would violate his First Amendment rights. However, the Respondent makes this argument on behalf of its donors, and the Applicant agreed initially to redact the identifying information of the donors and volunteers. Defendant has not shown that the subpoena violates Defendant’s own First Amendment rights.

In addition, the defendant’s statements alone emphasize the merits of the subpoena. The Respondent acknowledges the important facts which first came to the attention of the Claimant: Peter Brimelow, a founder and director of the Respondent, and his wife, Lydia Brimelow, also a director, used and continue to use the charitable assets of $1.4 million as a personal residence.

Defendant claims that the Brimelows have been paying rent to live in the cottage since April 2021, but the lease is between Lydia Brimelow and BBB, LLC, a West Virginia business corporation that she manages, and Lydia Brimelow signed the document as landlord and tenant.

The defendant’s petition and accompanying documents do not meet the obligation to establish the invalidity of the subpoena. Defendant, who has been partially complying with the subpoena for several months, has not established why providing a redaction log of his already produced documents would raise First Amendment concerns or why continued production would threaten his existence.

Although Respondent argues that the redaction is necessary to protect the identities of contractors—including authors who contribute to the website—these are precisely the records that Complainant seeks to examine in its investigation of Respondent’s alleged organizational misconduct. To the extent that anonymity is used to mask violations of the law, “it is not protected by the First Amendment.”

For example, the only member of the board of directors among the four who is not a member of the Brymelow family is a prominent shareholder. The Attorney General may review this member’s compensation as part of an investigation into conflicts of interest and board independence. And the attorney general may seek the identities of other participants to determine whether further conflicts of interest may exist.

Respondent’s reliance on Americans for Prosperity vs. Bonta (2021), is equally useless. That ruling only addressed donor disclosures in statewide annual filing requirements, but expressly authorized subpoenas demanding the same information as part of a targeted investigation. Moreover, the Complainant has indicated its willingness to accept a confidentiality clause/order to further address any concerns of the Respondent….

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