Charitable-annuity fund shuts down

A federal law intended to make it easier for charities to get donations through gift annuities may be making it too easy for organizations to avoid regulation.

The Mid-America Foundation Inc. in Scottsdale, Ariz., which had marketed charitable-gift annuities throughout the United States, paying financial planners commissions of 6% to 8%, abruptly closed down last month and sent annuitants a brief letter saying that it no longer had enough assets to make its annuity payments.

The closure of Mid-America has left officials in Arizona and other states with the task of picking up the pieces of an organization that they lacked the ability to regulate to begin with.

The Philanthropy Protection Act, enacted with little fanfare or opposition in 1995, exempts charities that take donations in exchange for charitable-gift annuities or other types of investments from being regulated by states. An estimated $2 billion to $3 billion is held in gift annuity assets.

Charitable-gift annuities are contracts between charities and donors under which donors make contributions, and the charity agrees to pay a specified amount each year to beneficiaries. The donors receive tax advantages, and the charities inherit assets that are left after the donor dies.

Mark Sendrow, the Arizona securities commissioner, says that his agency learned about the Mid-America situation only several weeks ago, when investors began calling with complaints. Mid-America began operating in Arizona in 1998, according to reports.

Mr. Sendrow says that hundreds of people throughout the country had invested money in Mid-America’s gift annuities, but he does not know the amount.

The federal law does not exempt organizations that pay commissions from coming under regulation, and sales agents that sell the annuities also are required to be regulated.

But, Mr. Sendrow says, “a lot of these things go under your radar if people are getting paid and you don’t have any complaints.”

Further, he says, “the salesmen weren’t the ones that had control of the money. The big issue is overseeing the company, not necessarily the people selling [the annuities]. They don’t have to file or do anything with us unless something happens. Based on the federal law, there’s nothing they have to do.”

Both the U.S. attorney’s office and the state attorney general’s office in Phoenix say that they can neither verify nor deny any investigation until complaints have been publicly filed.

The telephone at Mid-America has a voice mail message saying only, “Thank you. Goodbye.” Robert Dillie, executive director of the organization, has an unpublished number in Scottsdale and could not be reached for comment.

Mr. Dillie voluntarily surrendered his insurance agent’s license in Wisconsin about a decade ago after an investigation by the insurance department in that state, according to Eileen Mallow, assistant deputy commissioner. He was denied the license when he reapplied for it several years later, she says.

Erin Klug, spokeswoman for the Arizona Department of Insurance, says that Mr. Dillie entered into a consent order with that agency in 1999, and he was fined $2,000 for falsely stating on his license application that no administrative actions had been taken against him.

Ms. Klug says that Arizona insurance regulators also are prevented from regulating gift annuities issued by charities under state law. The agency’s consumer affairs division has received “a few calls” about Mid-America, she confirms. “We wouldn’t take the complaints, because we couldn’t do anything with them,” she says.

Mid-America’s website lists 11 trustees. Several on it are prominent people, such as former Kentucky Gov. Julian Carroll; Phillip Summers, president of Vincennes University; and Nelson Happy, former dean of the school of law at Regent University, of which evangelist Pat Robertson is chancellor.

Only four of the trustees listed returned phone calls. Mr. Carroll, now practicing law in Frankfort, Ky., Mr. Summers and Sheila Pena, a senior manager with Accenture in Scottsdale, says that they have not been associated with Mid-America for several years and are not aware that they are still listed as trustees.

Ms. Pena says that her father, Frank Crosby, also listed as a trustee, has not been involved with Mid-America since she ceased her association.

Bernard Wiczer, a Chicago lawyer, also says he has not been associated with Mid-America for some time.

At least some of the trustees initially were recruited by Herschel Gulley of Peru, Ind., who is listed as president of Mid-America. Mr. Gulley says that he resigned as president several years ago and that he is trying to get information on and recover assets for annuitants, which include his mother-in-law, whom he would not identify.

Mr. Gulley, executive director of the Hazel M. Gulley Foundation Inc., says that Mr. Dillie “has stolen and misused the assets of the Gulley Foundation.” He would not say how much money was involved.

“We were duped,” he says. “The advisory board that was there for a short time was totally duped, and advisers were duped, and it looks like annuitants were duped.” He says Mr. Dillie at one time claimed to have $35 million in assets.

Tami Torres, spokesman for the Florida Department of Insurance, says that the agency is preparing to take action against the Hazel M. Gulley Foundation for not filing its annual registration with the state this year.

The foundation, based in Scottsdale, was originally registered in 1998. The state will either suspend the registration or order it to stop selling gift annuities in Florida.

J.J. MacNab, an independent insurance analyst who operates MacNab Consulting in Bethesda, Md., says that she has talked to several advisers who sold the gift annuities for commissions of 6% to 8% of the gift amount. She would not identify them, saying only, “They’re afraid of being sued … The advisers I talked to didn’t know this was a problem.”

Organizations are widely advertising commissions for selling gift annuities in many publications aimed at advisers, says Ms. MacNab. “Nobody really is following it,” she says. “It’s a hybrid product. For the first few years, they assume someone else will deal with it. It’s a charity thing, and nobody wants to be nasty to charities.”

The two primary groups that represent the planned-giving industry oppose commission sales of gift annuities, according to Frank Minton, vice president of the American Council on Gift Annuities in Indianapolis, which suggests gift annuity rates.

Both the council and an affiliated organization, the National Committee on Planned Giving, condemned commission sales for the annuities in 1998, says Mr. Minton, who is also president of a charity consultant, Planned Giving Services in Seattle.

The ACGA and the NCPG pushed for passage of the Philanthropy Protection Act as a result of a class action filed in federal court in Texas in 1995 against some Missouri Synod Lutheran organizations.

The suit alleged, among other things, that charities that serve as trustees of pooled investment funds were violating securities laws by not registering the investments as securities. The legislation exempted charities from securities regulations as long as the gifts are not sold on commission, Mr. Minton says.

Mr. Minton says that no changes need to be made to the federal law, nor does the industry need more regulation. But he says that the Mid-America case “may raise concerns about gift annuities in general, which I really don’t think are warranted when a person deals with an established charity.”

Defaults on gift annuities are “exceedingly rare,” he says. The federal law does not preempt state insurance departments from regulating gift annuities, as is done in California, Oregon and Washington, he says.

“There’s simply a responsibility of the charity that issues gift annuities to comply with existing law and to conduct itself responsibly,” Mr. Minton says. “We feel, if a foundation like Mid-America recruits agents to sell gift annuities on commission, it no longer qualifies for the exemption under the Philanthropy Protection Act.”