A.G. Schneiderman Announces Settlement Of Lawsuit Against Yisroel Schulman, Former President Of NYLAG, For Breaching His Fiduciary Duty To NYLAG And Other Charities

News from Attorney General Eric T. Schneiderman

FOR IMMEDIATE RELEASE
November 29, 2017

Attorney General’s Press Office / 212-416-8060
nyag.pressoffice@ag.ny.gov
Twitter: @AGSchneiderman

A.G. SCHNEIDERMAN ANNOUNCES SETTLEMENT OF LAWSUIT AGAINST YISROEL SCHULMAN, FORMER PRESIDENT OF NYLAG, FOR BREACHING HIS FIDUCIARY DUTY TO NYLAG AND OTHER CHARITIES

Schulman Failed to Properly Oversee NYLAG’s Assets by Placing Its Reserve Fund In Donor Advised Funds That Required NYLAG To Forfeit Legal Ownership Of Its Assets 

Lawsuit Alleges That Schulman Improperly Diverted NYLAG’s Assets For His Personal Benefit 

The Attorney General Has Also Reached Agreements With NYLAG And Related Entity to Improve Their Procedures

NEW YORK - Attorney General Eric T. Schneiderman announced today that his office has reached a settlement with Yisroel Schulman, the former President and Attorney-in-Charge of the New York Legal Assistance Group, Inc. (NYLAG), in which he admits to breaching his fiduciary duties to NYLAG and other charities with which he was affiliated. 

The settlement was reached after an extensive investigation by the Attorney General’s Charities Bureau, which led to the filing of a complaint against Schulman in New York State Supreme Court. As detailed in the complaint, the Attorney General’s investigation found that that beginning no later than 1998 and continuing through at least 2013, Schulman diverted millions of dollars from NYLAG, a charity that provides free legal services to low-income New Yorkers, to other charities that he controlled. In addition to reaping personal financial benefits, Schulman also made the transfers to enhance his reputation and standing in his community, so that he could appear to be a much greater benefactor of the organizations with which he was affiliated than he could be by using his own personal funds. 

Schulman settled with the Attorney General in an agreement that is being submitted for Court approval contemporaneous with filing the complaint. Pursuant to the settlement agreement, in which Schulman admitted that he committed numerous breaches of fiduciary duty and other legal violations. Schulman agreed to pay $150,000 to NYLAG. The settlement also bans Schulman from serving as an officer or director of not-for-profit organizations operating in New York for a period of 5 years. 

“Officers have a responsibility to the charities they serve and the donors who entrust them with their contributions,” said Attorney General Schneiderman. “Today we’re making clear that there are consequences when charities are used as personal slush funds.”

The Attorney General’s Complaint

The Attorney General’s investigation found, as detailed in the Complaint, that Schulman diverted millions of dollars of charitable funds from NYLAG’s Interest On Lawyer Accounts to various donor-advised funds and similar accounts (DAFs) that Schulman established as de facto “investments” at FJC: A Foundation of Philanthropic Funds. DAFs are accounts set up at a sponsoring organization such as FJC for which the donor may make charitable contributions over time. The donor establishing the DAF may take an immediate charitable deduction, but turns over legal control and ownership of the assets to the sponsoring organization. The sponsoring organization agrees, however, to allow the donor to make recommendations on the grants that are to be made with the donated funds. The grants the sponsoring organization makes must be to a qualified not-for-profit organization and may not benefit the donor setting up the DAF. 

Beginning in the mid- to late-1990’s and continuing over the next decade, Schulman opened over a dozen DAFs and similar accounts at FJC. While NYLAG’s Board approved the opening of DAFs for NYLAG’s benefit, the investigation found that Schulman set up two DAFs with NYLAG’s funds without the Board’s knowledge. From 1999 through 2013, Schulman diverted at least $2.3 million from NYLAG to the NYLAG DAFs he concealed, as well as to other DAFs unrelated to NYLAG which he established in his individual capacity. He transferred back approximately $1.7 million to NYLAG from DAFs he controlled, but did so in a manner designed to hide his actions. 

In choosing DAFs to hold NYLAG’s funds rather than a bank or investment account, Schulman breached his duty to safeguard and prudently invest NYLAG’s assets. The DAFs were not appropriate investment vehicles because unlike a true investment, when donors to DAFs contribute funds to the accounts, they give up legal ownership and control over those funds as a condition of the contribution. In addition, DAFs are not subject to anti-money laundering rules and other regulatory oversight applied to investment and bank deposits, as well as the internal controls that such financial institutions typically employ. Schulman avoided detection by, in part, exploiting FJC’s policies and procedures, which were not designed to ensure that DAFs held as “investments” for others are not misused.

Another consequence of the improper transfer of NYLAG’s charitable assets to DAFs at FJC was that it facilitated the underreporting on its financial statements of millions of dollars in assets that were, as a practical matter, available to and intended to be used by NYLAG.  As a result, the annual reports that NYLAG filed with the Attorney General’s Charities Bureau were materially misleading to potential donors, as well as to governmental regulators. This was not accidental; rather, it was intended to assist Schulman in his fundraising efforts.

In January 2015, after NYLAG received a federal grand jury subpoena, the NYLAG Board commenced an internal investigation and thereby learned of Schulman’s diversions. At that time, Schulman’s diversions exceeded the amount he had secretly returned to NYLAG by at least $800,000, including the interest that NYLAG could have earned on the diverted funds.

Click here to read the Attorney General’s complaint. Click here to read the settlement with Schulman.

The Settlement Agreement with Schulman

In the Settlement Agreement, Schulman admitted that he breached his fiduciary duties of care, loyalty and obedience to NYLAG, by, among other things, failing to invest NYLAG’s assets prudently, failing to ensure that the NYLAG DAFs were used exclusively for NYLAG’s benefit and failing to ensure that NYLAG filed accurate reports with the Charities Bureau.  Schulman also admitted that he improperly caused funds granted to FJC to be used for his personal benefit without disclosure to FJC.

As a result of his wrongdoing, Schulman has agreed to a 5-year ban on future service as a director or officer of not-for-profit organizations operating in New York and to pay $150,000 to compensate NYLAG for the expenses it has incurred after his wrongdoing was uncovered (in addition to the amounts already returned to NYLAG).

The Letter Agreements with NYLAG and FJC

The Attorney General has also entered into letter agreements with NYLAG and FJC, both of whom fully cooperated with the Attorney General’s investigation, pursuant to which each organization has agreed to enhance their policies and procedures to protect the charitable assets entrusted to their care. 

After Schulman’s wrongdoing was discovered, NYLAG commenced its own internal investigation and made a number of reforms, including hiring a new President, a new CFO and, in consultation with Attorney General’s office, modifying many of its policies. The letter agreement with NYLAG acknowledges these changes and requires NYLAG to keep its enhanced policies in place for at least three years. 

Similarly, FJC has also enhanced a number of its policies in response to concerns raised by the Attorney General and, in the letter agreement, FJC has agreed to cease offering DAFs and similar accounts to charities for investment purposes and to heighten its controls over the administration and monitoring of the DAFs and other accounts its sponsors.  The letter agreement with FJC also requires FJC to keep in place the enhanced controls over its accounts for at least three years. 

Click here to read the letter agreement with NYLAG. Click here to read the letter agreement with FJC.

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The Charities Bureau’s investigation in this matter was conducted by Enforcement Section Co-Chief Emily Stern and Assistant Attorney General Steven Shiffman under the supervision of James Sheehan, Charities Bureau Chief and Alvin Bragg, Executive Deputy Attorney General for Social Justice. Assistant Attorney Generals Sean Courtney and Kenneth Haim, Investigator Ismael Hernandez and paralegal Carolyn Fleishman also assisted in the investigation of this matter.