New York’s Schneiderman Accepts Red Cross’ “Trade Secrets” Excuse to Hide Sandy Spending

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It’s not clear what to make of an attorney general who opens an investigation and then accepts lame excuses for maintaining secrecy from its target, in this case, the American Red Cross. We’re flagging this example because it exemplifies an effort by organizations to use “trade secrets” as a pretext for hiding more and more of their dealings with governments. This is absurd, since the premise of Federal and state Freedom of Information Act laws is that government records should be open to the public, and that includes records of entities doing business with government agencies. In other words, if you want to have government bodies as your customers, one of the costs of doing business is having your formal interactions with them subject to public review.

The Red Cross has come under repeated criticism for poor performance at its core mission, disaster relief. The charity has an unusual quasi-public role by virtue of obtaining a Congressional charter in 1905 develop a system of emergency relief and disaster prevention. Thus, the Red Cross, as a charity, has long been a monopoly provider of national first/early responder services. No other charity has a similar stature or scope. While the Red Cross also receives a limited amount of funding from FEMA, the far more important aspect of its relationship with government is the considerable prestige and competitive advantage it has gained through its charter, which it had obtained through able performance under its founder Clara Barton in providing assistance in major calamities in the 19th century, such as the Great Fire of 1881 and the Jonestown Flood of 1889. The Red Cross also has a formal role in conjunction with FEMA in providing “mass care, emergency assistance, temporary housing” and other services.

Proof of the Red Cross’ de facto monopoly position comes through the fact that there is no organization to take over its role as its performance has faltered. The Red Cross was criticized for slow responses and waste of funds in 9/11 and Katrina. Congress forced governance changes on the Red Cross in 2007, but that was insufficient to lead to better results in Hurricane Sandy. As New York City readers may know, Occupy Sandy ran rings around the Red Cross in the hardest-hit areas here, particularly Staten Island.

That of course raised the obvious question: the Red Cross had solicited aggressively for funds during and shortly after the hurricane. Where did the $300+ million go? Why weren’t the relief services delivered well?

As ProPublca, which has been following this story diligently, complained that Red Cross spending was a “black box” and dug to find out what happened. From an April story:

When it comes to its Sandy spending, the Red Cross gives a dollar-figure breakdown in only the broadest of categories: Food and Shelter, Individual Casework, Housing and Community Assistance, and Relief Items are the four biggest.

The Red Cross also gives raw numbers of services provided in a different set of categories: emergency vehicles activated; relief items distributed; overnight stays in shelters provided; health and mental health contacts provided; meals and snacks served; and workers and volunteers mobilized.

Because the spending isn’t categorized in the same way as the numbers of services provided, one can’t calculate, for example, how much it cost for the Red Cross to provide 74,000 overnight shelter stays or what exactly it purchased for the $85 million it spent on individual casework.

Citing its finance tracking system, the Red Cross said it could not match up the categories for us.

This looks a lot like deliberate obfuscation, to make it impossible to calculate the cost of delivering particular services.

The latest sorry chapter is the New York State attorney general helping the Red Cross shroud its activities. Admittedly, Schneiderman has taken up an investigation of the Red Cross. However, when ProPublica tried to obtain a copy of the information that the charity sent to the Attorney General, the Red Cross’ law firm, Gibson Dunn, insisted that much of the material provided was a trade secret and thus not subject to disclosure under New York’s version of FOIA, the Freedom of Information Law, or FOIL.

Schneiderman’s response, which ProPublica published, shows how absurd and overreaching some of Gibson Dunn’s arguments were. For instance, the charity wanted the second line of a two line title redacted. The first line was “American Red Cross.” What could the second line possibly be that Gibson Dunn would contend that it deserved super secret status? The name of a legal entity?

But the troubling part is that Schneiderman, who has proven repeatedly to be an overly cautious prosecutor, took any of the Red Cross’ claims seriously. “Trade secret” status is based on the ability for competitor to do economic damage with the information. The only information in general that a charity possesses of this nature is related to donor giving: who the big donors are, what their giving patterns have been, and what sort of success they’ve had with various types of fundraising campaigns. Particularly for an organization as large and presumably as sophisticated as the Red Cross, that sort of know-how might be valuable, if it really were unique, as opposed to well-known and widely used solicitation and donor-grooming methods.

But with the Red Cross, you have to look at its monopoly provider status. Who can compete with them? The idea that some other organization is hot on its heels and eager to copy its methods is barmy. The closest direct competitor is Médecins Sans Frontières, which is not a player in US disasters, and local charities, which lack the clout and reach. So any claims regarding possible competitive harm should be regarded with extreme skepticism.

Yet Schneiderman took way too much of the Red Cross’ demand for special treatment at face value, and agreed to shield material related to “business strategies, internal operational procedures and decisions, and the internal deliberations and decision-making processes that affect fundraising and the allocation of donations.” I guarantee that like the private equity descriptions of their business strategies in limited partnership agreements that were released to the public, that there’s no special sauce in that, nor in anything else save possibly fundraising. The experts ProPublica quoted in its article also though the Red Cross claims were indefensible.

The good news is that fighting disclosure seems to have backfired on the Red Cross. As Barry Ritholtz at Bloomberg wrote:

I find it hard to believe that how a charity spends its money could possibly be a trade secret…

After Sandy, my wife suggested that instead of donating to the Red Cross as we usually do, we should consider local charities that could deploy money faster. We went with several local church groups that promised hot food and shelter for those whose homes were destroyed; for the rest of God’s creatures, it was the Little Shelter Animal Rescue & Adoption Center in Huntington, New York.

It is very disappointing to learn of this lack of transparency coming from the American Red Cross. I have no idea why it isn’t being more forthcoming about how it spent the $312 million in donations received after the storm. I’m left wondering if it failed to deploy that cash fast enough. Or perhaps more money was spent on administrative services and overhead than it claimed…

When giving to a charitable cause, donors want to know that their money is going to help victims of that tragedy. Historically, the Red Cross has said that 91 cents of every donated dollar reaches victims. That’s a good percentage, and it is no small part of why so many people feel comfortable donating to the Red Cross.

This isn’t the first time the Red Cross has balked at requests for greater transparency. There seemed to be a similar stonewalling after the Haiti earthquake, according to charity rater

Nobody is obligated to give money to a charity — we just do because we want to help people in need. The very least we expect from these charities is transparency in how our donations are spent. Shame on the Red Cross for failing to provide that transparency. And shame on Gibson Dunn for putting forth such an intellectually disingenuous and dishonest defense.

As poor as the Red Cross’ conduct is, it should also be shame on Schneiderman for enabling this unjustifiable position. His knuckling under to the Red Cross extends the bad precedent of having private equity contracts with government investors exempted from public scrutiny. Contract bids and terms are also competitively valuable, yet heretofore, no one would have thought it acceptable to keep them from the media and interested citizens. But public officials like Schneiderman are all too willing to accede to private sector secrecy demands, no matter how ludicrous, which will make it easier for these organizations to hide incompetence and looting.

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  1. Jim Haygood

    Another Congressionally-chartered entity. At least we haven’t had to bail it out like Fannie and Freddie.

    But when the Red Cross comes knocking, one can legitimately respond, ‘I gave at the office’ (via withholding tax).

  2. lakewoebegoner

    If you, or anyone you know, ever want to a disaster-relief-related donation, please consider Americares instead of the Red Cross.

    Americares uses 97% of contributions for actual aid as opposed to the Red Cross where ~20% of donations are used for administrative expenses (e.g. CEO pay, gala fundraising, etc).

    apologies for the plug, not related to either….just tired of the (perfectly legal) self-enrichment that goes on at some charities.

    1. diptherio

      Thanks for the tip. Various Occupy and Occupy-like groups seen to sprout up unbidden in disaster areas (Operation OK Relief springs to mind). These groups, despite lacking official status, also do a much more efficient job of distributing aid than the RC.

      It’s kind of mindblowing that RC can get away with this. When I worked for MontPIRG, we had muscle-bound goons from PP&L come into our offices a couple of times and demand copies of our financial records. My understanding at the time was that as a registered non-profit entity, we had to provide those records (which we did, having nothing to hide). I don’t see why any org should get tax-deductible, non-profit status if they refuse to be transparent about where their money is going.

      Every time you hear some lawyer or politician claim that secrecy about what they are doing is imperative, you can be sure that something illegal, or at least unethical, is going on. I honestly don’t know who Schneiderman, the RC, all those PE crooks and institutional investor dupes, etc. think they’re fooling when they make these claims. Everybody knows that it’s BS, that they’re just trying to hide their crimes. The media may play along, but most of us know better. It is because of this kind of stupidity that more and more people are coming to accept that our authorities are no longer legitimate.

      1. McMike

        Yes, most nonprofits in fact have transparency mandated into their bylaws under state model laws. Maybe someone should go after RC’s IRS exemption.

        Strong-arming and intimidating competition, sounds like something you’d expect from a potentially sociopathic large organization like Red Cross.

        I expect also they use local authorities to enforce their exclusive access to disasters, barring other people from entering emergency closed areas, setting up on public streets, access to schools, etc.

  3. McMike

    While not defending the ludicrous “trade secret” claim…

    It is possible that their accounting system is not set up to report cost of services in the fashion we might expect. Their system may well be scandalously simple and archaic, not updated since the 1940s, done on green column paper. It is possible in fact that they have actually no idea what services cost; the spending is recorded in a way that tells modern users nothing useful (i.e. captured by category of vendor, not nature of the service, or associated event).

    It may be a bit like the military, where they have no idea what things cost, and no real incentive to figure out. It may be that waste and fraud and embezzlement are rampant. Or like the military, after loading for indirect costs and hourly application rates, the simplest task costs a fortune; even hammers end up costing a thousand dollars.

    It could be that the red cross is using contractors for much of the spending – owned of course by Red Cross executives. Or they are rat-holing money away for future training and reserves. Or paying massive executive and administrative wages.

    To be fair, it is a bit like the military. There is a massive training, readiness, and support system underneath the direct services. It is not fair to weight the cost of a coffee wagon or shelter blanket on its own. That said, the efficiency of the RC, evaluated with that caveat, ought to be fair game.

    Money is fungible, and donors have what I think is an unhelpful fixation on donating only to direct specific services. Someone needs to support the red cross training system. Someone needs to pay for services at non-marquee disasters. The red cross should be evaluated indeed on the metrics of services provided (number of shelter beds, etc), on their responsiveness and coverage, and also on their efficiency and systems for spending monitoring. But not necessarily in the simplistic “how much does it cost to run a coffee and donuts van” question as the sole metric. Because that is only part of the picture.

    In any case, the trade secret canard is a huge red flag of an organization that need to be reformed, in one way or another.

    1. McMike

      Yeah, another red flag, an early modern example of the crony crapification patronage system.

  4. indio007

    Why , in gods name, would the Red Cross need trade secrets. They are supposedly not for profit.
    Why would they need “business stategies” when they are not a business.

    The only answer is they ARE FOR PROFIT. Namely profit for the administrators.

    It reminds of a local pool that is non-profit but charges $.75 to swim. That meager sum is only enough to pay the person hat collects the money. The operational costs are paid by a grant.

    So what you have are people collecting money for a charity but that money does not go for any operational cost other than the operation of collecting money. This money in turn is only enough to pay the people to collect the money. A useless operation that does nothing for the pool itself.

    1. McMike

      I am not following your example. That seems to be a swim pool with highly subsidized (low) cost to users, with the cost subsidized by charitable donations. One entity gives money, so a bunch of people can swim for cheap. That’s exactly how it is supposed to work. (Assuming that cheap swimming is the service advertized).

      1. indio007

        I didn’t explain that well.

        The people that collect the money for the pool. That’s all they do. They have no other duties. The 75 cents is a sum so low that it is only enough to pay the money collectors salary. It is akin to a random stranger that is not associated with the pool blocking the door and extorting 75 cents.

        The analogy I failed to make clearly was these non-profits come up with a sum certain to appropriate the rest will go to some one’s personal profit minus the ACTUAL administrative expense stamps,lights,heat etc…

        Any money collect in excessive of those 2 costs, sum of money that goes to ACTUAL charity plus ACTUAL operational expense goes to labor cost and/or is retained for future dispersal.

        Labor Costs:
        This is where profit from the non-profit are extracted.
        Excess labor cost (exorbitant pay or excess employees)

        The employees at the pool are utterly and completely excess employees.

    2. Art Eclectic

      That’s the dirty little secret of a lot of the big-name “non-profits”. As the non-profit grows and becomes a bigger household name, the exec team decides they are fund raising geniuses and should be compensated accordingly. Next thing you know, more and more of each donation dollar is going someplace other than the intended recipients. Red Cross has been there fora while, Habitat for Humanity followed suit, so did Susan G. Komen.

  5. snorky

    After Hurricane Katrina happened, I recall going into a Walgreen’s and seeing a Red Cross donation box at every check-out isle. Recalling stories of them collecting lots of money around the 9/11 attacks, but then not using the bulk of the proceeds towards anything 9/11 related, I refrained from donating. Then I went to the Lower Ninth Ward in New Orleans for 4 months to do some volunteer disaster relief work. There was no Red Cross presence in the Lower Ninth Ward, and I don’t recall seeing them anywhere in New Orleans. I heard that they viewed the area as being “too dangerous” to send personnel.

    Yet they had no trouble asking for money.

    If the Lower Ninth Ward, with a strong police presence and military presence (hummers were a common sight down there) is viewed as “too dangerous,” are we actually expected to believe that they go to war-torn third world countries with no security?

    I have absolutely NO faith or belief in the Red Cross as a relief agency after this experience. None at all. I suspect that they are nothing more than another continuing criminal conspiracy that preys on the pocketbooks of the gullible.

  6. steelhead23

    I have a fairly low opinion of many charities, including the American Red Cross, due to rampant elitism. What most folks don’t realize is how dependent some larger NGOs are on large donations and the extent to which they focus their fundraising on the wealthiest among us. This focus on the wealthy, strongly affects their behaviors. Why, if the CEO is going to hob-nob with the Hamptonites, he/she needs to have a salary that displays his/her importance. I would also expect the ARC to show more care, more compassion, to the Long Islanders who lost Fifi in the storm to poorer folks who lost homes. After all, poor folks who’ve lost everything aren’t big donors. Displaying this bias for the public to see is indeed a trade secret.

    1. JEHR

      I wonder if there is a field of study that shows that the larger an organization becomes the more it succumbs to corruption and fraud. Once the administration becomes a certain size, it then demands more of the proceeds that should go to the work that they are doing. This seems true for banks, for corporations like GE, and it does not surprise me that it seems true for charities also. Best to break them up and re-organize with new executives, or prosecute and throw them in jail awhile.

      1. hunkerdown

        I wish there were. It’s very interesting to look at organizations and how their dynamics change in the light of each power and half-power of Dunbar’s number, but I’ve only been noodling.

      2. Art Eclectic

        I read recently (might have been in Predictably Irrational?) that this has been the effect of executive pay disclosure laws, which was the opposite of what was intended. What happens is that CEO A sees that CEO B is making XX dollars and says “my company is that same size, I deserve XX dollars” and the board goes along because the board sees that the boards of company C are making XX dollars and they want theirs.

        Each new gross compensation package resets the bar on what even a crappy executive things he/she deserves. Works just the same for non-profits.

      3. Jack Parsons

        You can pay a CEO $1/year with stock options until the competitor’s CEO gets $2/year.

  7. McMike

    This whole thing reminds me of the emotional mindset to disaster aid. I have long said: if your house burns down, you should burn down the entire block.

    One tragedy (fire, flood, shooting, wind event, illness, or unemployment) goes barely noticed, its victims left to fend for themselves. But if it becomes a disaster, then bazallions of dollars in aid, grants, low interest loans, tax forbearance, extended social programs, etc are rained down on the victims.

  8. RUKidding

    ARC has long been known to skim a lot off the top for the fat cats, as well as typically having a crappy record anymore at really helping those in need from disasters. For ex, the local San Diego RC Chapter has been mired in scandals for at least a decade mainly due to not doing a good job assisting those affected by wild fires, which happen with stunning regularity in San Diego.

    I understand the Internat’l Red Cross is better and may be worthy of donations. I donate to other local groups, who I can vet and trust and see the job they do. Schneiderman’s “acceptance” of the ARC’s alleged “trade secret” is utterly bogus. How much did it cost the ARC to buy off Schneiderman? Don’t tell me he didn’t get his back scratched in some way or another.

  9. OIFVet

    So many charities are scams nowadays, why should the Red Cross be any different? It reminds me of all those “charities” to support the vets that sprung up during Iraq. Most all were/are atrocious in actually spending any money for their stated purpose, most of it went toward “administrative costs”, i.e. filling out the pockets of the crooks who founded them. Seems to me that the Red Cross is now not much different than those folks, simply a higher class enrichment scam for its administrators, cruising on its past reputation and name recognition. I once tracked down the info on one of those characters whose veteran “charity” wouldn’t stop calling me, his home address and cell/home number were helpfully available with basic Google search. Called him during dinner time and demanded that I be removed from the calling list, and that as a vet I found him despicable scammer ( and he was, that “charity” had atrocious ranking). Must have been pretty freaky to have his dinner interrupted in such manner, they never called again. Perhaps it might be useful to do the same to Red Cross administrators.

  10. lakewoebegoner

    “How much did it cost the ARC to buy off Schneiderman?”

    the non-profit world, at the mega scale, is incestuous as invariably the CEO, director of XYZ charity is married to, related to, or a close friend of ABC politician or businessperson.

    Likely, Schneiderman didn’t want to air someone’s incompetence (or worse), thereby getting cut off from future contributions, or worse—-invites to A-list dinner parties.

      1. hunkerdown

        Insiders don’t criticize other insiders. That’s not just a norm, but a remarkably useful heuristic for identifying them.

  11. Jack Parsons

    Someone volunteering at for the RC in Katrina said that the permanent local members were racist and reserved the good supplies for white refugees. If she complained up the chain, they would trash her volunteer record and ban her from volunteering.

  12. Paul P

    No reason under the sun that all government contracts should not be online for public examination.
    Ongoing public audits.

    Proposals to do this were rejected by the NYC Charter Commission, which held public hearings as part of the Charter Reform required when the Supreme Court found the NYC Board of Estimate unconstitutional in 1989.

  13. Skeptic

    Schneiderman is another Great Prosecuting Hope down in Flames. It is a helluva long list.

    How about this Rule: No discussions of any Prosecutors/System Savers until they have a proven track record of actual, successful prosecutions. My standard, since there are so many well heeled criminals out there, would be at least 10 Billionaires actually in jail serving Hard Time. Or the equivalent. Until then………

  14. Fíréan

    Red Cross Form 990 is available on their website.
    ‘ The Red Cross is committed to transparency; as it has for nearly the past decade, the Red Cross has posted its Form 990 in full on its public website, ‘, reads the text on the website, so i went looked. Not quite as transparent as one hope for as the text is de-faced making some parts unintellgible, yet the pages 12 thro’ 17 where finances, compensation and Statement of Functional Expenses are declared can be read ( for the most part).

    “Total number of individuals (including but not limited to those listed above) who received more than $100,000 of reportable compensation from the organization : 1010.”
    The highest being in the $300,000 to $500,000 plus bracket.
    Interesting reading.
    If ‘other salaries and wages’ , Part IX, section7, (page 15) comes in at $ 1,324,855,754, exactly how much does this organization make ?

  15. tomk

    When my house burned and our family lost just about everything, we heard from the Red Cross within hours. We met with the woman who was the top executive in our small New England state (no one else was available at the time). She did some quick figuring, and over our protests gave us a card with $800 on it to buy some clothes and temporary housing until our insurance kicked in. We offered to pay it back and she said we could do that by donating, but to never give to the national organization, because no one had any idea what happened to the money, but to donate to the local chapter only.

  16. Bunk McNulty

    Speaking of charities with dodgy financial governance, someday somebody oughta take a look at The Salvation Army. Unique among charities of its kind because it is recognized by the IRS to be a church. The link is from 1998.

    “While the parts of The Salvation Army that have been evaluated receive a high rating from AIP based on their financial performance, [American Institute of Philanthropy] AIP members should be aware that the organization lacks an independent governing board. AIP encourages all religious and secular nonprofit organizations to demonstrate good governance by electing an outside board of directors that consists predominately of members who do not receive compensation or other financial benefits from the organization that they are governing. Otherwise, nonprofit directors may be tempted to place their own interests over the best interests of the organization. The absence of outside directors at any nonprofit could also lead to serious problems being swept under the rug and away from public scrutiny.”

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