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Are directors liable if they cover up theft?

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Are directors liable if they cover up theft?

If nonprofit board members are aware that one of their own has stolen money from the organization and they do nothing about it, are they colluding in the wrongdoing and can they be held personally liable?  They are covering up the theft "for the sake of the organization's reputation."  Meanwhile, they are allowing the director who committed theft to remain on board.   

Normally a person aware of a crime has no responsibility to report it to the police, but the directors have other obligations here. First, they have a fiduciary duty to the organization to do what they can to recover the money, to make the organization whole, and to do what they can to see that it doesn’t happen again.  If they have insurance and make a claim, the carrier will probably require a report to the police. If they don’t have insurance or don’t file a claim, they could be found liable for breach of their fiduciary duty if they fail to act.  Voting members of the corporation (if there are any), a dissident director, or the attorney general would all be likely to have standing to sue them for their breach of this duty. They could be thrown out of office and could possibly be liable for the loss caused by their failure to act.

Second, if the organization files a Form 990 tax information return, there is a question about whether they learned about a significant diversion of funds during the last year.  (I think it is one of the most important questions on the revised form and one that will prevent serial thefts from organizations that don’t want the publicity.)  If the theft is large enough to affect the organization’s reputation, it is likely to be large enough to require disclosure.  If so, someone has to sign the form under penalty of perjury. The disclosure requires a statement of what the organization has done about the situation.  It wouldn’t be good public relations — and would hurt the organization’s reputation — if they report that they did nothing. The organization will recover if they take appropriate action.

But even if they don’t have to disclose on the Form 990, you might suggest that they worry less about the reputation of the organization and more about their own.   When this information becomes known — and they should assume that it will because someone will talk about it outside the board room — and when it becomes known that they did nothing and let the director stay on the board, they will be the ones who face the questions, maybe even more than the director who stole the money. They probably won’t go to jail as accessories to the theft, but they will surely have to answer a lot of uncomfortable questions from their friends.

Tuesday, September 26, 2017

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