Flawed lawsuit against Mortenson and CAI is bad for school children, good for attorneys.
May 7, 2011Shahid Haque
Class action lawsuits are an important vehicle to ensure that large groups of people, each of whom have a small claim for damages, are nevertheless able to get justice when they are harmed. However, the recent federal class action lawsuit against Greg Mortenson and the Central Asia Institute (“CAI”) is premature and unproductive. Rather than redirecting funds to benefit young Afghani and Pakistani schoolchildren, this lawsuit will only serve to benefit attorneys, who will make millions of dollars at their expense.Montana Attorney General Steve Bullock has opened an investigation into CAI to look into some of these allegations. The investigation and any potential litigation should be left to the Attorney General, who is better suited to pursue any punishment and mandate changes in their practices.
Alleged Fraud Committed by Mortenson
Mortenson and CAI have recently come under fire for alleged falsehoods in Mortenson’s books, “Three Cups of Tea” and “Stones into Schools.” These allegations are outlined in detail in Jon Krakauer’s book “Three Cups of Deceit.” I have carefully read this material. Below, I have outlined the essential allegations that Krakauer makes against Mortenson. However, none of these allegations are referenced with specificity in the Plaintiffs’ lawsuit.Many of the criticisms against Mortenson and CAI appear to be substantiated, although other allegations are based on second hand sources that cannot be verified with any greater accuracy than Mortenson’s claims. Mortenson has responded to some of these allegations in an interview, admitting mistakes in some instances, and denying others.The following is a fairly comprehensive account of the allegations against Mortenson:
- Mortenson is alleged to have lied, embellished, and exaggerated facts in his two books, so that his stories would be more effective fundraising tools to accomplish his mission of building schools in the mountains of Pakistan and Afghanistan. Here are the specific allegations, with some of my comments in italics:
- Krakauer says that some of the details of Mortenson’s “creation myth” are false. Mortenson’s story begins as follows: In 1993, he fails to climb K2 – a goal that he embarked upon after his sister died. On his journey home, he gets lost and winds up in Korphe, a small village. He is touched by the hospitality he experiences and is devastated by their lack of a school. He promises to build a school. Krakauer states that after Mortenson failed to climb K2, he wound up in a different village, Khane, where he promises to build a school. It was not until a year later that he went to Korphe, and decided to build a school there instead. He then embellished his story so that Korphe was originally the intended site of the school. While the published version of the story may not be completely true, it is difficult to see how this amounts to fraud, or how this would be a material falsehood.
- In Mortenson’s book, he recounts a harrowing incident from 1996 in which he was kidnapped by the Taliban, but ultimately released eight days later when the Taliban became aware of his plans to build schools in the region. According to Krakauer, this whole story is false, and Mortenson spent these days under the hospitality and protection of some friends. If Mortenson has lied about this, then that reflects very badly on his character. However, the evidence presented by Krakauer is not conclusive, and is based on hearsay.
- In one chapter of his first book, Mortenson claims that his salary in 2002 was $28,000, when Krakauer claims that his salary was actually over $75,000.
- Mortenson is alleged to have exaggerated the extent to which his schools were built in fundamentalist regions where the Taliban operated. Krakauer claims that Mortenson used this imagery as a fundraising tool, as he claimed that his schools were keeping children out of Taliban hands.
- Krakauer claims that Mortenson lied about meeting the King of Afghanistan on a plane in 2003. The King himself is dead, but Krakauer contacted his grandson, who denied that the meeting took place. The allegation of the King’s grandson cannot be taken as conclusive proof that Mortenson was lying. After all, a meeting could have occurred without his knowledge.
- Krakauer claims that Mortenson and CAI developed certain projects specifically to create a narrative around Mortenson’s second book. He states that Mortenson took creative liberties in creating drama about a dying Kyrgyz leader who wanted to see a school built before his death. Mortenson’s story involved a touching meeting with the leader. Someone later spoke to the dying leader, and he couldn’t remember Mortenson. However, he was able to produce one of Mortenson’s business cards, proving that Mortenson did, in fact, meet with him. Some do not believe that this leader considered the school to be of utmost importance, as portrayed in the book.
- Mortenson is alleged to have wantonly disregarded corporate formalities by refusing to maintain receipts, document expenses, and conform to IRS guidelines. He is alleged to have stonewalled the board to prevent them from exercising proper oversight. Many board members and financial officers of the organization are reported to have quit because they could not do their job effectively.
- Mortenson is alleged to be habitually late, and Krakauer takes offense that this trait is presented in the book “as if it were an endearing quirk.”
- Mortenson is alleged to have used CAI funds for personal expenses, including:
- From 2007-2010, Mortenson travelled extensively at CAI’s expense to promote his book. Krakauer says that Mortenson speaks at many events pro bono, but collects fees for others. He is alleged to have kept his speaking fees, instead of giving them to CAI. He is also alleged to have kept his reimbursements of travel expenses, even though he didn’t pay them out of pocket. Krakauer explicitly admits, however, that CAI benefited greatly from these book tours and the publicity generated by Mortenson. He states that from 2006 to 2010, CAI’s total revenue increased from $1.6 million to $20 million.
- Mortenson is alleged to have used CAI funds to buy his books for distribution at events, and to keep the sales figures high on the NY Times bestseller lists. Krakauer states that he was surprised to learn that CAI doesn’t receive any of the proceeds from the sale of the books. Mortenson wrote the book personally, and never stated that CAI would get proceeds or royalties. This doesn’t seem surprising to me, or fraudulent. As far as distributing the books at events, I think the books are good fundraising tools, and while the practice might need to be evaluated, it hardly seems fraudulent.
- Krakauer reports that CAI’s administrative expenses exceed 50% of its annual budget. In 2009, an audited report shows “just under $4 million” went to building and operating schools, while CAI spent $4.6 million on outreach, education, lectures, and book tours.
- Mortenson is alleged to have badly managed the schools he has built, and that some of them are now “ghost schools” that are not occupied. Mortenson is criticized for not ensuring that schools are filled with qualified teachers and continue to operate after being built. However, Krakauer does acknowledge the difficulties of operating in these remote regions of Pakistan and Afghanistan.
- Krakauer states that “a significant number of CAI schools exist only on paper.” The allegation that Mortenson and CAI lied about building schools is a very significant allegation to most donors. However, this particular allegation is especially undeveloped by Krakauer. He only provides one example: On an undisclosed date, CAI’s website said that there are 8 schools in the Konar province of Afghanistan. In an interview on an undisclosed date, Mortenson claimed that there were 11 schools there. At that unknown time, Krakauer says there were only 3-4 schools. The book lacks any additional evidence about other allegedly non-existent schools.
To succeed in their lawsuit, the Plaintiffs will need to establish that the misrepresentations cited above are not only true, but that they constitute fraud that they relied upon to their detriment when donating to CAI or purchasing the books. The Plaintiffs will also need to explain why other accomplishments by Mortenson and CAI were not sufficient to justify their investments. This may be difficult, considering that many important facts are not disputed by Krakauer:
- Krakauer admits as fact that by the end of 2000, when the organization was still young, Mortenson had built more than 20 schools.
- He says that Mortenson “has been a tireless advocate for girls’ education.”
- He commends Mortenson, saying: “He’s established dozens of schools in Afghanistan and Pakistan that have benefited tens of thousands of children, a significant percentage of them girls.”
To the extent that some of Krakauer’s allegations turn out to be true, Mortenson’s readers and donors may choose to reevaluate his reputation as a humanitarian hero. Mortenson may have violated the tax code, and CAI may be subject to penalties. However, this class action lawsuit is not a productive means of addressing any wrongdoing by Mortenson and CAI.
High Cost of Litigation
The stated goal of this lawsuit is to ensure that CAI funds are spent on school building (such as building materials, teacher salaries, and scholarships). However, by the time this litigation is resolved, CAI will have spent significant sums of money on its legal defense. I believe that CAI will be forced to spend at least $15,000 to $20,000 every week on this lawsuit (and this estimate is on the low side). Lawsuits of this nature continue for years, racking up millions of dollars for the attorneys. If a settlement is ultimately reached, it will include attorneys fees for the Plaintiffs’ lawyers as well.At the end of the day, attorneys may siphon away as much money as was allegedly misused by Mortenson and CAI.Class action lawsuits require extensive legal work on both sides. Between motions to dismiss, discovery (and disputes about what materials have to be disclosed), copycat lawsuits, and issues about class certification, the billable hours will pile up exponentially. To provide an idea of what we will be seeing in this case, I will describe some of the next stages in the process.Within the month, we will see a motion to dismiss this lawsuit for failure to state a claim that warrants relief. In a motion to dismiss, the court has to assume that all of the Plaintiffs’ allegations are true. Nevertheless, the court will look the elements of the alleged offenses and see if the Plaintiffs have stated a claim for relief. I believe that much of the complaint will be dismissed, but some of it may survive. The following are some of the issues that I believe will be litigated.
Failure to Plead Fraud with Specificity
Most claims in federal court only need to be pled generally, in order to put the defendant on notice of the charges. However, when one is alleging fraud, the alleged misrepresentations or omissions must be pled specifically. In this complaint, the Plaintiffs repeatedly say that they were defrauded by false statements in the books and statements made by the defendants, but they don’t provide a single concrete example. The courts typically don’t require a high degree of specificity, but this complaint is very sparse on details. Its not hard to see why — the full factual details are yet to be determined. However, if Plaintiffs cannot point to specific false statements, perhaps this lawsuit is premature.Bottom line: It is possible that the allegations of fraud in this complaint are simply too vague to put the defendants on notice of exactly what is being alleged.
The Plaintiffs’ lawsuit includes an extremely clumsy claim under the Racketeer Influenced and Corrupt Organizations Act (“RICO”). RICO law is complex and often misunderstood, as was clearly the case here. However, it is appealing to plaintiff’s attorneys because it allows for treble damages (i.e. three times the plaintiff’s actual damages) and recovery of attorney’s fees. Although I won’t address each and every way in which the Plaintiffs have failed to state a claim under RICO, I will explain many of the fatal flaws.It is important to note that a RICO plaintiff may only recover economic damages relating to injury to its business or property; personal injuries are not compensated under RICO. This limits recovery to specific business or property interests have been affected. In this case, it appears that damages would be limited to the cost of the books that were purchased ($12 in this case), and the specific donations that were made (not stated in the complaint).On a fundamental level, the complaint fails to state a proper RICO claim because it doesn’t articulate a RICO “enterprise.” RICO is designed to protect legitimate business enterprises from being infiltrated to commit racketeering activity. A person or entity violates RICO by willfully or knowingly committing racketeering activity through a pattern involving a separate “enterprise.” The defendants and the “enterprise” cannot be one and the same — the plaintiff must show that the defendant used its control over a separate enterprise to commit a pattern of racketeering. One does not violate RICO by operating one’s own affairs through a pattern of racketeering (this can be fraud or any number of other offenses, just not RICO). Therefore, a RICO plaintiff must prove that the alleged enterprise is an entity or group that is distinct from each defendant.In this case, the Plaintiffs allege that “Mortenson, an individual, and CAI, a corporation, acted as an enterprise which affected interstate commerce.” Mortenson and CAI are being alleged to be both the defendants and the RICO enterprise. This is a clear violation of the person/enterprise distinction, and defeats the claim. This isn’t a defect that can be fixed by amending the complaint. Even if the “enterprise” was defined as CAI, and Mortenson was the “person” who was operating the enterprise to commit racketeering, they would need to drop CAI from the complaint in order to state a claim. Of course, the Plaintiffs don’t want to drop CAI from the lawsuit because they provide a bigger “target” for damages than Mortenson individually.The complaint may also fail what is known as the pattern/enterprise distinction, i.e. that a RICO plaintiff must prove that the members of an association-in-fact enterprise are joined for some common purpose apart from the alleged commission of racketeering. The enterprise cannot be simply a group that has assembled to commit racketeering — there must be an organization with a structure and goals that are separate from the racketeering activities. Of course, we all know that CAI has done more than simply defraud people; it has also built schools. However, the way the complaint is written, it seems to allege that the whole purpose of this “enterprise” was to commit fraud, which would not be what RICO was designed to address.There are many more problems with the RICO claim that will surely be addressed in a motion to dismiss.
The Plaintiffs’ attorneys were not satisfied to pursue a class action solely on behalf of people who donated to CAI; they also wanted to pursue the much larger group of people who bought the books. In doing so, they made the class of plaintiffs much larger, and made the lawsuit potentially more lucrative. However, they also created huge hurdles in getting the class certified.The basic requirement for certifying a class action is that there must be common questions of law or fact for every member of the class. This is referred to as “commonality” of the class. Those who donated directly to CAI stand on different footing than those who simply purchased the books. By including two different types of class members, with very different legal and factual issues, I believe that they have destroyed the commonality of the class.The claims of the representative parties must also be typical of the class. Plaintiffs Michele Reinhart and Jean Price both attended speaking events held by Mortenson and CAI, and relied on statements they heard. They will have to prove that typical members of their class also did so. This seems unlikely, as most people read the book or donated without having attended any speaking events. This exposes a major problem in the lawsuit, which is that different members of the class may have relied on different representations of fact, and been impacted in different ways.With regard to the RICO claim, plaintiffs in RICO actions have had mixed results in attempting to have their RICO claims certified for class treatment. In order to be certified, the alleged injuries generally must have been caused by a common set of misrepresentations (usually written) as opposed to a variety of disparate misrepresentations (often oral). In addition, class certification will not occur if there are any intervening facts that bear upon the alleged injuries sustained by some of the plaintiffs, and thus require an individual examination of the facts.Bottom line: This will be a difficult class to certify, because individual examination of the facts will be necessary, and this will make the class unmanageable and inappropriate for class treatment. Surely, not everyone who read the books or donated to CAI specifically relied on alleged misrepresentations and was defrauded. Many read the book without specific expectations as to its accuracy, and may not feel that the sale of the book was a fraud. To determine who is a member of the class, one would need to individually interview each class member and determine what statements, if any, they relied upon to their detriment.
Class action lawyers aren’t the most original people in the world. It is very common for class action layers to see a potentially lucrative complaint and then simply re-file it in their own jurisdiction. Some of them literally involve slapping a new caption on the lawsuit (with their own representative plaintiffs) and then filing it under their own names. These “copycat” lawsuits are legally permitted, and require defendants to contend with ongoing litigation in multiple districts — at great expense.I would be surprised if there were no duplicate lawsuits filed. (If there wasn’t, it would be an indication that class action litigators don’t believe this is an actionable case.) Depending on how many copycat lawsuits are filed, the defendant can contend with them in two ways. First, they can file motions to transfer venue to a district where other suits are already pending, in an effort to consolidate them. However, this is a more difficult task than it sounds, as every representative Plaintiff has reasons for keeping the case in their own jurisdiction. There is also a federal panel on Multidistrict Litigation that is tasked with handling situations like this. Of course, this process takes many months to resolve.
There Has to Be a Better Way
Regardless of whether Mortenson and CAI lied about certain events in the books, or spent too much money on “outreach and development” as opposed to actually building schools, I think we can all agree that the solution should involve building more schools — not redirecting more funds away from schools and towards attorneys pockets. While action may need to be taken against Mortenson or CAI if they have committed any wrongdoing, this lawsuit is simply not an effective or productive means of resolving the issue.It has been reported that only 41 percent of CAI’s expenses were put towards building schools. Surely, this number could be higher. But, next year, we will only see this number decrease because of the millions of dollars in legal fees that will be spent defending this flawed lawsuit. Government regulators have many tools at their disposal to more effectively resolve any issues with CAI’s practices.The lawsuit’s stated goal is to dislodge funds from CAI and create a constructive trust, and ultimately funnel the money into “an appropriate third-party institution to be selected by the Court” to build schools for Afghani and Pakistani children. Of course, the lawsuit is silent as to the fact that private attorneys will also be dislodging funds that would be better spent on the Afghani and Pakistani school children they were intended for. Perhaps members of the Plaintiffs’ purported class have something to say about their donations being used to pay lawyers instead of build schools.