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Tag Archive for 'legal'

“Legal and financial status”, Pickwick’s Q&A

Pickwick raises some interesting questions and answers them:

With hesitation I take on the task of writing a summary with my view on legal and financial issues, because I’d rather do something more pleasant on this public holiday in Germany. I’ll try to be brief, and I won’t bother with lots of links to documents I’ll mention. If you want to see them in the original, and check whether you agree with my assessment, please ask the management to publish them, and not me. They have them all, and most are public information by law.

What does 501(c)(3) mean?

The term 501(c)(3) relates to a clause in US tax law which gives federal tax exemption to certain organisations, both charitable and non-charitable (eg certain types of family trust funds which serve as a tax shelter for private wealth). Having 501(c)(3) status does not automatically mean the organisation is a charity. But if a charity wants federal tax exemption, and especially if it wants the ability to issue tax deductible donation certificates to US tax payers, or if it wants public funds (grants), it needs 501(c)(3) status. That status requires the organisation to file annual reports, including full financial statements on a form called ‘990’, to the US tax authorities (IRS), and to publish those reports and a number of other legal documents (on a web site, or in print, and send a copy on request). The status also imposes a number of rules on how the funds are used. Charity status does not change the private nature of an organisation, but in fact puts its funds under public supervision.

What is Couchsurfing’s legal status?

It was registered under the name “Couchsurfing International Inc” on 02 April 2003 by Casey Fenton, with four hired straw men as fellow incorporators to make up the legally required number, in the form of a Non-Profit corporation in the US state of New Hampshire. He was sole director and officer at least until 28 January 2007. Non-Profit does not automatically equal charity. Primarily it means that the corporation does not distribute any profits as dividends to its owners or share holders. It can, however, make profits and accumulate them, and if one wants money out of it, one has to pay oneself salaries, in addition to expenses. That’s what Casey Fenton started doing in 2005.

Was Couchsurfing a charity from the start?

That remains a little unclear. The original incorporating document, the Articles of Association, dated and signed March 2003, allow “charitable, religious, educational and scientific purposes” or purposes according to 501(c)(3), which is wider than just saying “charitable”.

One concern, however, is that none of those dedications of the corporation’s income or assets are stated with the qualification “irrevocable”. It may therefore be possible in future to change the purpose of the corporation, or indeed change its status from Non-Profit to For-Profit altogether.

Another concern is that Casey Fenton did not register the organisation as charity immediately with the Attorney General, as required by New Hampshire law, thereby avoiding certain filing and reporting duties, similar to those that come with 501(c)(3) status. As a result the organisation succeeded from April 2003 until November 2007 to keep secret from all members such documents that have to be filed with the Attorney General, and are public information by law, especially the corporate bye-laws, and the annual and full financial reports. This breached the law, and an investigation by the Department of Justice in New Hampshire is still pending, which might still result in the organisation and individuals being fined. In other words: Couchsurfing may, or may not, have been designed as a charity from the start, but unfortunately for several years it certainly did not behave like one. The general understanding in the community initially was that it’s Casey Fenton’s private company; he could do with it what he wanted; and it seems that he did for a long time.

How did Couchsurfing finally get on the official list of charities?

Following discussions in the community it seemed clear around September 2007 that Couchsurfing either indeed was a charity, but had breached charity law by not registering, or it was not a charity, in which case soliciting donations might have been fraudulent. As the management remained unresponsive to urgent questions, a complaint was placed before the Attorney General of New Hampshire on 05 November 2007, with a final warning and advice to the management to try and get their act together now.

On 14 November 2007 the Attorney General then received the registration and reports for 2003 to 2006. As a result Couchsurfing was then added to the official list of registered charities in New Hampshire, despite some remaining concerns. This has for instance made it possible for attendees of the Alaska collective to obtain volunteers’ visa or the US, whereas the earlier collective in Thailand still largely relied on volunteers taking the risk of breaking the local law and entering on tourists’ visa.

What are the remaining legal concerns?

At the time of filing on 14 November 2007 Casey Fenton was President (chairing the board of directors) and paid employee at the same time, and there is no indication that the situation has changed since. New Hampshire law expressly forbids that. As a result his employment contract may be nil and void, and the organisation may be entitled to reimbursement for all or part of the salaries paid to him.

From the time of incorporation until at least the middle of 2007 Couchsurfing did not have the legally required minimum of five members on its board of directors, for at least until the end of 2005 Casey Fenton remaining sole director and officer. This may mean that legal decisions and contracts from those years may be invalid, with all sorts of unforeseeable consequences. It may also cast additional doubts on the validity of Casey Fenton’s employment contract, if it was entered into by him as sole director contracting with himself as employee, which may also have violated legal “conflict of interest” rules.

Some of the documents filed on 14 November 2007 (under penalty of perjury) appear to be materially false or backdated, especially the full corporate bye-laws, “conflict of interest policy” documents signed by directors and officers, and the listings of directors for 2003 to 2006. The filed documents may create the wrong impression as if a full, legally composed board of directors had been in office throughout, and may disguise the facts leading to concerns about Casey Fenton’s employment especially. The other current four members of the board of directors have been made aware that they have been listed as serving during years when they were in fact not, and they appear to condone this, which may, if any of the above mentioned constitutes a criminal offence, in itself be a criminal conspiracy in that context.

What is the history of the 501(c)(3) application?

Even before incorporation, from at least 11 February 2003 to at least 15 July 2004, Casey Fenton stated on the web site that Couchsurfing was “a 501(c)3 Non-Profit Company”, when there is no evidence that an application had ever been filed, let alone approved, at that time. The management have never responded to questions about this with an explanation. (Incidentally this also shows that the company’s name was used at least two months before incorporation, which may constitute fraud.)

Amongst all subsequent statements are these: On 27 January 2007 Casey Fenton states: “We are in the process of moving to 501c3 and hope to do so in the next couple months”. On 13 April 2007 he stated: “We are filing for 501c3 status practically tomorrow”.

The management stated on 24 November 2007 that the application was filed. On 28 April 2008 General Manager Matthew Brauer stated he had to “Edit supplemental statements for our 501c3 application”. Today, 03 October 2008, ‘desaparecida’ states in the Brainstorm group: “CouchSurfing has been asked for more information and additional papers … at least twice … This is what I heard in July in an informal talk”.

The above mentioned concerns held on state level may very well adversely affect the result of the application for 501(c)(3) status. Reversely, a failure of the 501(c)(3) application may ultimately affect the organisation’s status in New Hampshire.

Will Couchsurfing always stay a charity?

So far there is no guarantee for that. As already mentioned, the purpose of the corporation, or even its non-profit status could possibly still be changed. The discussion in the community has therefore come forward with the suggestion to introduce the word “irrevocable” into the ‘dedication of assets’ clause in the corporate bye-laws. This would simply require a documented resolution by the board of directors, but unfortunately this has not found any response from the management.

Once the 501(c)(3) status is obtained this may change, but that will depend on the precise nature of the application, and the particular sub-case of 501(c)(3) exemption. It is unfortunate that the management refuse to publish the application, which may lay all doubts to rest, and would enable the community to add their expertise and help. However, the organisation is legally only obliged to publish the application once it has been approved. This means that if the application remains unsuccessful, they will never be legally obliged to publish it, so that it may never become transparent why it was rejected.

If the organisation has applied for genuine charity status according to 501(c)(3), then everything is fine. If it has made use of one of the other options of tax exempt status, that may in theory be given back voluntarily in future, and the organisation could still be changed into a commercial enterprise. However, at that point all tax benefits received so far would have to be repaid. Practically speaking the crucial point after receiving 501(c)(3) status would probably be when they start issuing tax deductible donation certificates to US tax payers; from that time it may well be impractical and too expensive to try and get out of tax exempt status again. This is the reason for some sceptics to fear that the management may not earnestly want the tax exempt status.

What about the financial statements on the web site?

Couchsurfing has published skeleton financial statements on its web site since 2004. Despite promises to have them independently audited, they remain unaudited. No budget forecasts are published, despite Casey Fenton’s statement on 15 June 2007: “we hope to have ready before mid July … our budget forecast for 2008”.

The published statements only show income and expenditure, and omit all assets and liabilities accounts. This raises the concern whether the substantial amounts of accumulated funds have in actual fact been held in corporate bank accounts at all times, or whether irregular personal “loans” have been made, which are expressly forbidden by New Hampshire law. These concerns are aggravated by comparatively low figures for interest income being shown, given the total of funds that should have been in bank accounts over time. It was communicated in May 2008, as an achievement resulting from the General Manager’s presence at the collective in Thailand (sic!), that a higher interest bearing savings account had been set up in the US.

So far the organisation is under no legal obligation to publish financial accounts themselves, although they have to file the information with the charity regulators, and it is public by law (meaning: everybody can ask the Department of Justice in New Hampshire for a copy), so those listings on the web site are voluntary. However, the figures on the web site are incorrect and often don’t match the figures in the official filings. Whilst there are no significant deviations, accountancy is supposed to be an exact science, and any irregularity, however small, is cause for concern.

What information is public by law and how to get it?

Couchsurfing has to file annual reports and full financial statements for the previous calendar year by 15 May of each year. As already mentioned, according to New Hampshire law they have no obligation to publish those themselves, but the information is public by law, and everybody can request a copy from the Department of Justice in New Hampshire. This includes the documents submitted for registration, especially the corporate bye-laws.

Should 501(c)(3) tax exempt be granted, similar reporting duties will apply, and the report to the federal tax authorities can then just be copied to the state agencies. One important difference will be that then the organisation itself will have the duty to publish, and everybody can ask the organisation for a copy. Once the status is given this will, as mentioned above, also include the full initial application.

At the moment Couchsurfing appears to be complying with the legal minimum requirements for disclosure of public information. Publishing skeleton financial statements without being required to may see as if they went above and beyond the minimum requirements, but that is not really the case, as the published figures are wrong. However, in the world of charities, voluntary and non-government organisations it is generally seen as good practice to be forthcoming and cooperative in disclosing information in which there is a justified public interest.


It would be in the interest of building trust and stability in the community if the management changed its policy from doing the minimum required by law to doing the maximum permitted by law. For an organisation with the core purpose of running a web site there really is no excuse for not having all the information on there.

As there seems to be a policy of ignoring discussions in the groups, and insisting on submitting all “questions” through ‘Contact Us Questions’, I will submit a copy of this posting in that way, stating that I would like a response to all issues raised, and I will post here any response I will receive.

And now I need a drink. Sorry for the length. ;-P – the real background!

This blog is mostly run by BW-lovers with a clear agenda (make CS and HC look bad so their “oh-so-moral” alternative looks attractive). For all others, who still have a somewhat open mind and don’t fall so easily for Kasper & Co’s constant propaganda, here a link to our side of the story:

The real background about this “democratic, transparent, legal” (sic) network.

Cease and desist à la CouchSurfing

I’m still reading Brainstorm group at times (too much in fact, should just wait and see what happens). I’ve managed to restrain from replying (well, somewhat) as I feel I really don’t feel like getting angry yet again. But sometimes there’s just no helping a reaction.

This post quotes the complete gag order (I don’t feel comfortable quoting the rest right now, maybe they’ll throw a infringement of copyrights on me ;) :

“CouchSurfing’s new policy is to end all correspondence and immediately suspend the account of any member who notifies CouchSurfing of an intent to pursue a legal action. This policy is for the protection of CouchSurfing members.”

My reply:
“So the options are
a) just take it and shut up about standing up for your legal rights (can CS *really* ditch the laws of every other country except for the US for all eternity?)

b) NOT tell CS if you are going to take legal action – isn’t it more protective of the members to at least give a fair warning before said action takes place?

IF I didn’t know how crooked some of the stuff is and has been at times (not saying all of it, and everyone of the leadership team / whoever in charge all the time), this just tops it.

So let’s get this straight: I’ve in fact donated time and money (multiple times) to an organization that will NOT give half a thought about protecting its members’ legal rights internationally, in the form of not being in any way responsive to any kinds of inquiries (considered threats in here in any way you state them I assume) of getting them enforced? Am I getting it right?”

Casey, please comply with the law

Please note that this post does not necessarily reflect views shared by all OCS posters and sympathisers. I put it here on my own initiative.

Norbert has placed the following post in the brainstorm forum on CS. I felt it should be cross-posted here, so that it can be given due public support by those who feel that’s appropriate. It sure has mine!

“This is my final appeal to Casey and the Leadership Team. I haven’t filed my report yet with the Attorney General of New Hampshire. I would prefer not to do it. I don’t like the role. And I don’t like the fact that this may divert resources into legal procedures, costs, and possible fines. Don’t get me wrong, though: I’m not making any excuses for myself. I will do it if I have to, whether I like it or not. It will not be my fault for reporting it, but the fault of those who broke the law. Yet I feel there is still time to ‘heal’ the situation. CouchSurfing has been represented as a charity without being one, and has thus violated the law. It has failed to comply with registration, reporting and disclosure duties. It has obtained donations of money, time and skills under false pretenses. It has broken the law. It has done the wrong thing. The best defence against those charges obviously is to make it a real charity immediately. That would not undo the legal violations, but it would make them ‘technical’ rather than substantial, and I suppose they could then be overlooked.

This would have to be done with credibility. Mere words will no longer be enough, especially when they are cold, and don’t show an intention to reach out. It would be good to hear an admission of mistakes here and there, or at least an acknowledgment that help from members could be useful. I would like to see the true message of strength from the Leadership Team that comes with admitting they’re not perfect. How could they be? They are mostly young, motivated people, at the beginning of their professional lives, working for us in exchange for a bag of peanuts! So be who you are; don’t claim to be Bill Gates! If you say: this is what I’m good at, and here’s where I need assistance, people will come and help you. If you claim to be perfect, and are arrogant with it, people will try to prove you’re not so perfect after all. If we disagree, by all means do it your way, and not mine, as you’re the ones doing the work, but don’t lie and don’t bully.

I believe a genuine charity is the best way forward, as it will allow motivating future volunteers. This organisation has to spend a lot of time and effort on finding out what it wants from volunteers, and more importantly: what it wants to offer them. It needs to learn urgently that volunteering is a give and take situation, and not a one way street. That doesn’t negate that many volunteers are perfectly happy. They have found rewards for their work, mostly in their own local communities. But that is their own achievement, just like the volunteering itself. The organisation does not seem to be offering much. Where’s the volunteer training? Where are the written testimonials given for thousands of hours of dedicated services, that people might use for job applications in their CV, proving they exercised and acquired skills? Instead cold emails are sent out that “your services will no longer be retained due to personal differences”. Wrong way. Volunteers need to be at the very heart of the organisation. Please treat them as ‘human resources’, not as free labour without minds. I fear there is no ‘healing’ of the wounds suffered by some ex-volunteers, as some of them seem too deep. The effort here will need to be: not to let it happen again.

CouchSurfing, and a number of individuals, may face serious legal consequences, and real pressure can be put on you to honour your word and become a charity. That will happen unless you make it obsolete by doing the right thing now. You can’t, however, be forced legally to put the word ‘irrevocable’ in your bye-laws asset dedication, but you may realise it’s the ‘open sesame’ that leads forward and restores trust. In any event, the obligations that come with genuine charity status (irrevocable or not) to adopt acceptable (team) corporate governance instead of a one-man-band, to have annual reporting and disclosure duties, in other words: public supervision, will be a huge improvement. It will be both: control and support mechanism, to ensure you’ll do the right thing. Please do it.”

CS organisational policies vs the risk of litigation

As posted in the politics and policy group

As Norbert points out here, the LT’s apparent unwillingness to make haste with the 501c3 application for tax exempt status, as well as their unwillingness to publish corporate bylaws or make drafts of these available for discussion, may well be construed as an (attempt at) fraud, because donations and services are and have been obtained under the (currently false) pretense that CS is a charity.

Needless to say, this renders CS extremely vulnerable to all sorts of liability suits, interestingly of the kind that is likely not to be covered by the ToA. Basically, any user who has donated volunteer work or money (besides the verification fee) to CS can claim that he has been the victim of this fraud; add to this the easy access to legal representation in the US (due to no cure, no pay) and Norbert’s prediction that liability is likely to extend to all natural persons working in, and owning CS, and you can easily grasp the size of the time bomb Casey’s currently sitting on.

And how do you reckon that Casey, Jim and Mattthew were to produce the funds needed for compensation if this happens? Precisely, from the sale of CS to a commercial third party, which is entirely within Casey’s right…