Vanguard: What should the board have seen and done?
In August 2010, in a television-like drama, a limo was pulled over in Los Angeles by unmarked sedans and some 20 federal officers emerged — some with guns drawn — and arrested Samuel “Mouli” Cohen. A sealed indictment listed 19 counts of wire fraud, 13 counts of money-laundering, and accusations of defrauding 55 investors of $30 million.
The chief victims of this apparent con game? The Vanguard Public Foundation and its major donors.
Today, the Vanguard Foundation — once a daring, progressive leader — is little more than a telephone number, with its donors, leaders, and Cohen involved in multiple federal and state lawsuits.
The courts will eventually determine what Cohen did or didn’t do and how much insiders at Vanguard — including CEO Hari Dillon — are to blame. What concerns us here are the questions on everyone’s minds: What should the board have seen and done? Why didn’t anyone — staff, board members, donors, grantees — stop the downward spiral?
As part of the research for this story, we reviewed more than 300 pages of internal Vanguard documents, and interviewed some two dozen people including:
- Members of a group calling itself “Persons Directly Involved,” including former CEO Hari Dillon
- Current and former board members
- Former Vanguard staff
- Attorneys involved with the foundation, and
- National experts on progressive public foundations.
Nearly everyone interviewed requested that their comments be published only on an unattributed basis, citing concerns over litigation, fear of retribution, or to help them put their unhappy Vanguard experience into the past.
The story so far
We reported on this story in an earlier issue of Blue Avocado, but the synopsis is this: In 2002, leaders and advisors of the Vanguard Public Foundation met a high-flying businessman named Samuel “Mouli” Cohen (no relation to author), a self-described “billionaire” who moved in wealthy circles in Southern California. At a party, Mouli — whose outsized persona is reflected in the fact that everyone gives him one-name status — met actor Danny Glover who connected him to one of the actor’s favorite nonprofits, the Vanguard Public Foundation. Mouli pitched a deal to have Vanguard donors buy stock in a company called Ecast that he had founded, on the premise that Ecast was about to be purchased by Microsoft with a “sure thing” ten-to-one increase in Ecast’s stock value.
Foundation president Dillon served as intermediary between the donors and Mouli. He collected millions into a partnership called the Dillon Group (and another called the Glover Group) that would be invested in Ecast. The theory was that Vanguard donors could invest with Dillon and make a killing, and by pledging perhaps 40% of the proceeds to Vanguard, Vanguard would make a killing as well. But the process kept stalling, as Mouli demanded more money from investors, saying that approvals were needed from the European Union, and so forth. Ultimately the deal proved nonexistent: Mouli had left Ecast long before; there was no Microsoft deal, and Vanguard donor/investors have apparently lost tens of millions.
In the meantime, Vanguard’s own funds had dwindled. Fundraising for the deal took precedence over fundraising for the foundation, and the endowment and small donations were used to maintain operations. As a result, the foundation quickly moved into negative numbers starting in 2003. It continued to operate in deficit, ultimately reaching an annual operating loss of $1.28 million and a negative net worth of $3.5 million a few years later. Many politically progressive, small, community-based grantees even received award letters for Vanguard grants that went unpaid.
Why didn’t the board and donors stop the spiraling of money, time, and attention into the Mouli scheme?
For one thing, the donors and the organization got in too deep to get out.
Board members report that they were repeatedly told that Vanguard’s share of the profits from the Mouli deal would come to $20 million, but board minutes shown to Blue Avocado reveal that this expectation was never contractually confirmed with the investors (five of whom may have accounted for as much as $28 million that went to Mouli.) With Vanguard using its reserves at a rapid rate in the absence of incoming monies, and with virtually all the key donors deeply invested in the Mouli deal, it seemed too late to back out. Better to hope that it really would work out.
And, furthermore, they wanted to believe. Every con game requires a “mark” who wants to believe the overblown promises of the con. And Vanguard had more reasons than some to do so. First, it had watched the dot-com boom make other foundations wealthy and had itself, through the Dillon Group, tasted success in a small previous investment (with a firm called PurchasePro)… enough to whet the appetite. One former staff member described it as “the irrational exuberance of the time; you were rubbing shoulders with millionaires and billionaires. It was a weird time about what people thought they could do.”
The dream of political impact and leadership of a movement
Second, and just as compelling in a different way, the promise was not just personal wealth, but political power. Hari Dillon and the donors were frustrated with what they saw as relatively little impact through making small grants to others. Instead, they dreamed of the impact and profile they could have with millions of dollars deployed directly on Vanguard’s own staff-led initiatives.
Poignantly, donors and Dillon even became convinced that they had “converted” Mouli into a progressive left-winger. They brought him to a program of “urban peace awards” for the opportunity to observe his reactions. Later they congratulated one another on Mouli’s solemn statement that he was “moved.”
Setting aside good judgment
In late 2005, in the wake of continuing demands for more money, some of the major investors met with Mouli to hear his pitch directly rather than through Dillon. He won them over and the investment scheme continued.
Although Vanguard assets per se were not invested with Mouli, fundraising for the foundation stopped as fundraising shifted to acquiring funds for the Dillon Group to invest. One nonprofit helping quadriplegics, In Spirit, deposited over $300,000 with Vanguard, and now claims that Vanguard sunk its funds into the Ecast deal. This may not turn out to be true, but it may not really matter: it seems Vanguard spent money from groups like In Spirit on operations costs and donor funds were diverted to the Ecast deal. According to one reliable source close to the action, In Spirit had been promised a $50,000 bonus when the Mouli deal came through.
Board members and staff leaders admit that they made some incredibly bad financial calls. According to one staffperson, “We spent money we didn’t have… [Dillon] was very sure that this money would come in…. We were living as though we had money.”
Why didn’t the board act earlier about the direction, management, and oversight of the foundation?
More bluntly, why didn’t board members act to rein in their executive director as the foundation veered toward bankruptcy while they — and he — waited for the Mouli investment to pay off?
Several told Blue Avocado that they were concerned about the direction of the foundation even prior to the Mouli investment scheme, but the board seems to have been characterized by a general passivity. Board meetings became scarce, with rarely more than one face-to-face board meeting in a year, and agendas were more focused on political discussions than board oversight. Several board members were frustrated but were unable to gin up the energy to do much. Why?
An important clue is that the board was in many ways aligned with the direction of the foundation under Dillon, and impressed by Dillon’s accomplishments. According to one staff observer: “The board trusted Hari for a very good reason: he did bring the foundation from making little grants [to making larger grants]; he did triple the budget. There was a lot of trust in him, but there were no double checks.”
Many viewed Dillon as a “savior,” as one former board member put it.
In addition, Hari Dillon’s confidence was infectious, the kind of confidence that made him a perfect mark for Mouli. In a 2006 memo to the board, he described his Dillon Group — the investment vehicle for funneling money to Mouli — as having “developed into a vibrant, thriving, comradely entity in its own right,” but he deferred further explanation until his “speech at the victory dinner.”
A complex reluctance to question the executive director
A potpourri of reasons are given by board members as to why Dillon was not challenged more forthrightly by the board. Some described the board as mesmerized by his charm and vision; others were reportedly mesmerized by the African American celebrities Dillon knew. Dillon brought in Harry Belafonte to give speeches at Vanguard events; Sinbad and Dionne Warwick appeared at Dillon’s request; Danny Glover was a longtime friend.
At least one board member was afraid of being “race-baited.” When questions were raised about the emphasis on celebrities, a response was that “if we were a white organization, no one would say that we shouldn’t be so fancy.”
The board under Dillon also expanded — nearly doubled — with several new board members from community activist backgrounds. Many of them were grantees of Vanguard. This increase in size, along with fewer meetings, diluted the ability of the board to act cohesively.
And as one board member tellingly stated, “We [the nonprofit where she worked] were getting grants from Vanguard. We didn’t want to lose that.”
According to one board member who left only just before the end, “The board was meeting so infrequently that there was no accountability… there was a little discussion of grants, a little discussion of political moment, and big discussion that the Mouli promise was coming through.”
Critics on the board left, were eased out, told to hush up
Over time the critics felt more and more isolated and minimized. As recounted to Blue Avocado, the stories have a Rashomon feel: what one side sees as evidence of the foundation stepping out of marginality, the other side sees as becoming excessively self-indulgent. What one side describes as “black-baiting,” the other calls “white-baiting.”
As the situation spiraled downward in 2009, one email from a senior executive at Vanguard warned board members that “We need to stop all email discussions of any internal Vanguard matters… financial, political, personnel… unless we want to run the risk of seeing these emails in the Chronicle, SF Bay Guardian, or hear them being read on KPFA.” And the notes from one board meeting document one senior board officer advising board colleagues: “Do not say how terrible things were, how we have not been diligent.”
And the staff didn’t speak up: some left; others reportedly signed non-disclosure agreements as part of severance packages; and some simply kept quiet about their qualms, about financial reports that were seriously wrong, and about the shakiness of the Mouli scheme.
Naivete on the board
As Vanguard was running increasing deficits, one or more board members suggested that it was time to call a halt, at least temporarily, to awarding grants that couldn’t be paid, and to lay off staff to hold the line on the financial bleeding. But the board’s executive committee decided to keep on barreling down the highway. Why?
Some interviewees have suggested that the leadership was embarrassed, and perhaps concerned, that such actions would send a bad signal to donors: how can you raise money for an organization that isn’t functioning?
In hindsight, some board members’ inadequate understanding of the foundation’s business and their own responsibilities played an important role as well. Some admitted that they thought “foundation boards are different.” Vanguard used restricted funds for operating expenses, and spent donor-advised funds without donor advice. Fortunately, most of the donor-advised-fund donors were persuaded to forgive their balances retroactively rather than raise a stink. But as for the board, one board member said directly: “We were operating out of ignorance…. We assumed that we didn’t have a right to see the donor-advised-fund grants because that was between Hari and the donor.”
And neither board members nor staff apparently knew how to do appropriate investigation into investment propositions; a relatively cursory investigation would almost certainly have revealed Mouli to be a shady operator. It was not hard for Blue Avocado to find evidence of other litigation against Mouli in 2003 and 2004 with almost identical allegations to the current litigation around Vanguard. One private detective using the Vanguard investment scheme as a case study of inadequate due diligence discovered significant federal and state tax liens owed by Mouli.
Unfortunately, the board’s and the investors’ lack of due diligence didn’t just affect wealthy donors. As the demands for money from Mouli continued to grow, the Dillon Group reached out to a “second tier” of investors, middle-income people for whom the losses of thousands were much more painful than larger losses were to the top tier investors. One of the Persons Directly Involved calls the losses by middle income investors a “tragedy within tragedy, collateral damage.”
“Making” grants but not paying them out
Blue Avocado was given access to a detailed letter dated June 16, 2006, signed by seven grantees and addressed to the Vanguard board, that stated, “All of our organizations are waiting for disbursements of grants awarded by Vanguard over the past three years that have not been paid out in full. . . Between all the undersigned organizations, Vanguard has $79,000 in outstanding awards.”
They weren’t the only ones. Even grants to board members’ own organizations were going unpaid. When board members asked about the problem, they were eventually given a list of 34 grants totaling $494,405. According to one board member, “We got a list, but all of the names were blanked out and we didn’t know which ones were unpaid. [It would have been] almost funny if it weren’t so sad.”
Vanguard staff were surprisingly unapologetic about the non-payment of awarded grant funds. One said to us, “Some of these groups were just really angry because a $2,000 grant had to be cancelled, [but] we supported them for years and years… it was fifteen years of whenever you needed something, we [Vanguard] were there [for them].” And one of the Persons Directly Involved shrugged off the problem: “These were small grants… one $5,000 grant that didn’t arrive didn’t take anyone down.”
Like Vanguard, the grantees were waiting for Mouli. One former staff member said that the concerns of complaining groups were temporarily appeased by “the promise of much, much larger pieces of the pie… the hope that they could get funding of a size they could never [have] imagined.”
It’s impossible not to feel for one grassroots organization that sent a letter to the Vanguard board chair in 2006 saying it had finished its second audit where the auditor asked about its “non-receipt of funds [which caused the organization to tap its] little reserve.” A follow-up letter to Hari Dillon said that the “organization’s need for the grant funds owed to us is becoming dire.” A year later, the organization was still out of luck: “[We are] owed back grants and have not received any of it in spite of promises that it would be resolved by now.”
For such grantees, criticizing Vanguard in public seemed tantamount to attacking not just a funder but a movement ally. “Why would you damage the progressive wing by airing dirty laundry?” challenged the Vanguard leadership. So groups backed off.
And while Vanguard was politically left and countercultural — with a record of supporting anti-war marches and Free Mumia Abu-Jamal campaigns — it was still a foundation. Grantees knew that foundations don’t like nonprofits that complain about foundations. As one grantee worried, “It would come back to bite you in the butt.”
Changing the model at Vanguard
Vanguard had good reason to want to be bigger, more consequential, more powerful. Cumbersome procedures reflected the problem: a $5,000 grant would require a proposal, a site visit from a Vanguard staffperson and two Allocations Committee members, and then would pay out only half the funds until a six-month progress report had been received. One of the Persons Directly Involved said, “Part of the culture of the left is small is beautiful, but… small is marginal.”
Vanguard began to fund its own staff activities in “political initiatives,” as a result becoming less of a grantmaking foundation and more of an operating foundation. And they began soliciting donor-advised funds. Both actions moved Vanguard away from the idea of a general pool of dollars in which donors and community leaders shared in determining grant priorities.
In a way, the donor-advised funds divided the accountability of the foundation: community residents were not particularly connected to how the donor-advised monies were disbursed, and donors were not all that connected to the general or discretionary dollars.
Raising money for Vanguard’s own initiatives and looking for a donor or investor who could free the foundation from its fundraising/give-away cycle combined to make Mouli Cohen’s offer a philanthropic siren song that board and staff couldn’t resist, even as the good ship Vanguard foundered on the rocks.
There’s more to the story that has come to Blue Avocado‘s attention, including dimensions of the investments with Mouli; Vanguard’s use of real estate donations; rumors about operating expenditures and self-dealing; charges about dynamics between the African-American and Latino/immigrant constituencies in the foundation; confusion and contention about staff assignments, hirings, and departures; accusations about Vanguard monies in the aftermath of Hurricane Katrina; and more. But these are embroidery around the edges of the core questions of what the foundation was trying to do and how it got entangled with Mouli Cohen.
Adding up the damage
One of the self-critical insiders in the story sadly noted, “There are a lot of misguided people [in this story], but the monster is Mouli Cohen.” Described by the current lawyer for Vanguard as having once had “all the trappings of success,” Mouli may end up being seen by the courts as the financial ogre under the bridge.
But the conditions that enabled the Mouli debacle were present much earlier, in strategic choices made by the CEO, in staff behavior, in board passivity (although some individuals raised their voices ineffectively), and in the nature of foundation-grantee relations. At Vanguard, it was all compounded by a cascade of bad judgments and an inability to call a halt to things as the foundation spun out of control.
But the loss to the community is more than a fairy tale with a bad ending. As one former senior staff member said, “Vanguard gave money at the very, very basic grassroots level, to rent an office, get telephones… It gave people money when they had a vision, helped to put legs on those visions when nobody else would touch them. Vanguard would help people get to the point to apply to other [foundations.] It is really, really quite a blow.”
Editor’s note: Our thanks to the many former staff, former donors, and current and former board members who agreed to speak with us, gave us copies of internal documents, and helped us understand how the story unfolded. Your willingness to participate will encourage many others to speak up in the future, and help prevent similar futures for worthy organizations.
Update, May 24, 2013: The CNBC show American Greed did a full episode on the Vanguard Foundation story that includes interviews with our writer Rick Cohen and Susanna Moore, a Vanguard board member.
About the Author
Rick Cohen‘s investigative reporting appears in every other issue of Blue Avocado. His articles on the Decline & Fall of the Vanguard Foundation recently won a Min Award for journalism. A memory from his days as Director of Housing and Economic Development for an unnamed city in New Jersey includes giving a conference speech in Atlantic City on real etate tax abatements, and then playing blackjack at the “cheapo $5 table” the rest of the day while waiting for the mayor so they could go home.
Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. Views represented in Blue Avocado do not necessarily express the opinion of the publication or its publisher.