NY may subpoena VDARE records related to alleged financial self-dealing by nonprofit directors

From People v. VDARE Foundation, Inc.the judge of the first instance court in New York Sabrina Kraus decided yesterday:

Examinee [VDARE] is a New York charitable non-profit organization [and tax-exempt] corporation that was founded in New York in 1999.

In its application for federal tax-exempt status, the respondent stated its plan to operate from an office in New York and listed two of its four directors at addresses in New York. The respondent described its primary purpose as creating a publication and magazine website, with editorial content focused 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 lump sum donation of $1.5 million from a donor-advised fund. In early 2020, Defendant spent $1.4 million of these newly received funds to purchase Berkeley Springs Castle, a medieval-style castle located in West Virginia.

Public postings by Defendant’s president, Peter Brimelow, and others indicate that he and his family have used the mansion as their primary residence since at least March 2020. During that same period, Defendant also substantially increased payments to Brimelow and a third party, for the profit of companies he controls. In 2019, Brimelow’s reported salary more than doubled and accounted for approximately one-third of the defendant’s operating expenses. Respondent separately reported spending tens of thousands of dollars on office expenses in 2019, as well as paying hundreds of thousands of dollars to a third-party LLC controlled by Brimelow, which was located at Brimelow’s home address.

In December 2020, the Defendant transferred all ownership of Berkeley Springs Castle to two West Virginia corporations formed by Lydia Brimelow, Peter’s wife and a director of the Defendant, five months earlier. Respondent conveyed 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 for-profit corporation.

Based on the information he gathered, the Attorney General began an investigation of the respondent and its management for possible violations of New York law applicable to charitable organizations. The subpoena requests: documents concerning the organizational structure of the defendant; compliance with conflict of interest policy requirements under New York law and financial operations; his purchase and transfer of Berkeley Springs Castle; and transactions between the defendants and entities controlled by the Brimelows….

[VDARE partly complied with the subpoena, but later sued] in the United States District Court for the Northern District of New York… [VDARE Foundation, Inc. v. James, 1:22-cv-01337 (FJS)], stating, among other things, that plaintiff’s requests for certain discovery threaten defendant’s ability to conduct business; and that the plaintiff’s subpoena is a vindictive excuse aimed at interfering with the defendant’s right to freedom of speech and association. The federal lawsuit seeks a declaration that the subpoena violates the defendant’s First Amendment rights, an injunction preventing the plaintiff from enforcing the court order, and damages. [The New York government then sought] an order compelling the defendant to comply with an investigative court order ….

The conditions for the issuance of an investigative court order duces tecum are “(1) that the agency that issued it has the authority to join the investigation and issue the court order, (2) that there is an authentic factual basis that justifies the investigation, and (3) that the requested evidence reasonably related to the subject of the investigation.”

The Attorney General has broad and well-established authority to issue subpoenas in connection with a civil investigation of the conduct of a nonprofit organization to determine whether enforcement proceedings should be initiated. “Moreover, when assessing the justification of the Attorney General for issuing a court order, there is a presumption that (he) is acting in good faith.” The party contesting the subpoena issued by the Attorney General bears the burden of establishing the nullity of the subpoena….

A petitioner’s request for a subpoena must show 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 “wholly irrelevant to any proper investigation.”

The State of New York has a public policy interest in ensuring robust regulation of tax-exempt charitable entities such as Defendant, and Plaintiff has the authority to monitor and investigate such entities when misconduct is suspected.

The petitioner’s subpoena focuses on subject areas that fall under statutory provisions governing non-profit corporations. The Non-Profit Corporations Act, for example, provides that entities such as the Respondent may be incorporated only for charitable purposes and that charitable funds may not be distributed to members, directors or officers. Charities are also subject to specific requirements under the N-PCL to operate lawfully, including requirements for the process by which remuneration is determined; procedures for the acquisition and “sale or other disposition” of assets; creation and presentation of complete and accurate financial reports; procedure for consideration of related party transactions; and a process for managing conflicts of interest.

The court order requirements require the type of material that will enable the petitioner to determine whether the respondent has complied with these requirements, including complete copies of the respondent’s annual regulatory filings, records of financial transactions, records of fees, and records of board meetings and reviews. The requested documents will allow the petitioner to determine whether there has been any diversion of charitable assets—for example, through illegal payments to for-profit corporations held by the Brimelows or other VDARE fiduciaries. Section 7-A of the Executive Code authorizes the Attorney General to supervise charitable organizations that collect donations in New York, and Section 7-A requires the Attorney General to supervise such organizations to ensure that, among other things, the charity does not collect contributions under false pretenses. converts or uses the contributions received in a way that is not “substantially consistent” with the charity’s stated purposes.

Respondent raised constitutional First Amendment objections and thus had the initial threshold burden of proving that disclosure of the requested information would prejudice his First Amendment rights. However, the respondent makes this argument on behalf of its donors, and the petitioner agreed to first redact the identities of the donors and volunteers. The defendant has not shown that the subpoena would violate the defendant’s First Amendment rights.

In addition, defendant’s own submissions emphasize the reasonableness of the subpoena. Defendant admits the critical facts that first raised Plaintiff’s inquiry—Peter Brimelow, Defendant’s founder and director, and his wife, Lydia Brimelow, also a director, used and continue to use the $1.4 million charitable property as their personal residence.

Defendant claims the Brimelows paid rent to live in the cottage beginning in April 2021, but the contract is between Lydia Brimelow and BBB, LLC, a West Virginia for-profit corporation she manages, and Lydia Brimelow signed the document as both landlord and tenant.

The defendant’s motion and supporting documents do not meet their burden of establishing the invalidity of the subpoena. Defendant, who has partially complied with the subpoena for months, has not established why providing the redaction log of its already produced documents raises First Amendment concerns or why continued production would threaten its existence.

Although Defendant contends that the redactions are necessary to protect the identities of contractors—including writers who contribute to the website—Plaintiff seeks to examine those very records in its investigation of Defendant’s alleged organizational misconduct. To the extent that anonymity is used to conceal violations of the law, “it is not protected by the First Amendment.”

For example, the only board member of four who is not a member of the Brimelow family is a well-known contributor. The Attorney General may examine this associate’s compensation as part of his investigation into the conflict of interest and board independence. And the attorney general can request the identities of other associates to determine whether there are further conflicts of interest.

Respondent’s reliance on Americans for Prosperity v. Bonta (2021), is equally useless. That decision only addressed donor disclosures in state annual filing requirements, while expressly allowing subpoenas seeking the same information as part of a targeted investigation. Moreover, Plaintiff has indicated a willingness to enter into a confidentiality stipulation/order to further address any of Defendant’s concerns….

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