Hartford Business Journal

www.HartfordBusiness.com • February 5, 2018 • Hartford Business Journal 17 Knights acknowl- edge years of business contacts with UKnight but strongly deny any contract, written or otherwise, ever existed or that they stole the company's trade secrets. They sev- ered the relation- ship because UK- night's product was substandard, court records say. "The true nature of this action is that the plaintiff (UKnight) is a disappointed pro- spective vendor that offered the order inferior and outdated website services that the order refused to endorse," the Knights said in a recent court filing. "UKnight is now trying to accom- plish through this lawsuit what it could not get through product development and sales negotiations." Alleged membership fraud UKnight, however, tells a different story. The Knights dumped the company after top executives realized UKnight's sys- tems, if widely adopted, would expose to others within the order a long-standing attempt to conceal falling membership, the suit alleges. Specifically, Knights insurance agents would have had for the first time a full listing of who does and does not pay dues in their territories. UKnight became aware of the fraud during and after its work for the Knights' national leadership, company attorney Vail said. Based on informa- tion provided by agents, UKnight es- timates that the order's membership is at least 100,000 fewer than the 1.9 million it claims, court records show. That could have serious conse- quences for the Knights' insurance business, giving them a strong incen- tive to conceal it, the suit alleges. Because the Knights are a tax-exempt mutual benefit society, they can only sell insurance to their American and Canadian members. That means their North American membership is their risk pool, and a shrinking risk pool can be bad news for an insurer, potentially leading to rating-agency downgrades and other possible financial issues, the suit says. (UKnight also claims the Knights have a rapidly aging member- ship, which also poses a risk to a life insurance company.) By hiding its true membership, the suit alleges, the Knights are mis- representing the company's fiscal health. Methods the Knights use, ac- cording to the suit, to prevent local councils from removing members include: an overly drawn- out, complicated and confusing removal process; caps on how many members a council can drop in one year; and requir- ing a new member to join before a departed member is dropped. In its court filings, UKnight, which still pro- vides website ser- vices to hundreds of local Knights councils, says "nu- merous" councils have told it they are forced to carry lapsed members on their rolls (and pay their fees to the state and national organiza- tions) and cites examples: a New Jersey council list- ing 316 members, but having only 54; a Texas council denied a request to remove 200 inactive members — half its listed membership; and another Texas council that attempt- ed to purge 80 long-lapsed members, but was allowed to remove only eight. Another method for concealing declining membership is the mainte- nance of "phantom" councils com- posed entirely of dead or long-depart- ed members, a practice "numerous" former Knight insurance agents have told UKnight about, the suit alleges. One former agent told UKnight he stumbled across one such council listed in Georgetown, Ill., according to court papers. When he called members to drum up business, he discovered all were either dead or lived elsewhere and had not been involved with the Knights for years, the suit says. The agent reported his findings to Knights Chief Insurance Officer Thomas P. Smith Jr. and others, but he was ignored, court papers allege. Later, Smith and the agent's supervi- sor manufactured false allegations to fire him, according to court papers. The Knights denied allegations of "phantom" councils in court filings and, when asked by HBJ, didn't com- ment on the allegations against Smith. Falling membership claims 'not logical' Shinkle declined to directly ad- dress UKnight's specific allegations, but strongly denied that member- ship fraud is occurring. He cited the Knights' record-breaking growth in recent years of insurance in force — it went from $40 billion to $105 billion between 2001 and 2016 — charitable donations and hours devoted to char- ity as proof membership could not be declining. "It's inconceivable to me that if the numbers were off to the extent that the plaintiffs argue … that we could be setting those types of records," Shinkle said. "It's just not logical, and it's im- plausible, if not downright impossible, and yet we are (setting records) year after year after year." Shinkle added that local councils must follow "a strict retention protocol that requires a thorough examination of whether a member truly intends to leave the order." That includes safeguards to assure members who missed a renewal letter or failed to pay their dues as a result of personal or economic hardship or illness are not precipitously dropped from the rolls, he said. "If there are specific allega- tions that those (retention pro- tocols) were not followed, we will be looking into those," he added. Asked if the Knights have looked into the allegations made in the year-old lawsuit, Shinkle declined com- ment. He also de- clined to provide HBJ with the retention protocol. Common knowledge In late September and October, not long before the two sides agreed to mediation that later failed, UKnight submitted court documents con- taining new information backing its membership-fraud claims. They alleged about two dozen councils had recently told UKnight that 43 percent of their members are lapsed, but they are not allowed to remove them. One of the documents includes emails from Knights in Minnesota and Texas backing up allegations of a campaign to inflate membership. In interviews with HBJ, two Knights whose emails are cited in the court papers confirmed that their councils are compelled to carry and pay dues for large numbers of long-lapsed members. They do not fall into the categories of hardship cases or older members who no longer have to pay dues, they said. Ten to 20 percent of their councils' memberships are lapsed, they said. "Any time you get a bunch of treasur- ers and financial secretaries together, it's common knowledge that you've got (lapsed) members you can't get rid of," said George Lawshe, former treasurer and current deputy grand knight of Council 11414 in Dallas, Texas. "Most say 'to hell with it' because it's so dif- ficult to get them off the rolls." Georges Montillet, grand knight of Council 13027 in Rochester, Minn., called the removal process "byzantine" and said it appears designed to thwart removals. "It takes six months to a year to remove a lapsed member — if you do all the paperwork just right," Montil- let said. "It's such a burdensome and complicated paperwork process that it's almost impossible to do it right. I'm quite sure that's intentional." The pair said their dealings on membership issues were with the Knights' state organizations, not the national order. Montillet added that the Minnesota state organization made it clear it was following rules set down by the group's New Haven-based headquarters. Knight spokesman Shinkle declined to specifically comment on the two local Knights' statements or say if the Knights would investigate their complaints. A defense Not all Knights, however, see a problem. Charles Craw- ford of Marietta, Ga., the Knights' Georgia member- ship retention chairman, said in an interview he knew of no council in his state compelled to carry lapsed members and no member- ship decline. Councils some- times build up backlogs of lapsed members, but most remain thanks to the Knights' multi-step retention process, Crawford said. Often it emerges that lapsed members are sick, have moved or have money problems, in which case the Knights grant them forbearance on dues, he said. Priests and life members also don't pay dues, he said. Crawford said members can leave the order with a resignation letter, adding he has never seen one rejected. In their latest legal filing in late January, the Knights sought to remove the membership fraud allegations from the case by arguing they are irrelevant. They also argued that the freedom of religion and other provi- sions of the First Amendment prohibit the courts and UKnight from delving into their membership practices. UKnight has also upped the ante since litigation resumed in early January, filing a court challenge to the order's tax-ex- empt status. Among the reasons is what it calls excessive compensation for top Knight executives, given the organiza- tion's status as a charity. According to federal tax filings, Supreme Knight Carl Anderson, the organization's head, earned more than $2.2 million in 2014 and more than $1.2 million in 2015. Shinkle said Ander- son's salary is reasonable, given the Knights are a Fortune 1000 entity and a ministry. Knights of Columbus Snapshot The Knights of Columbus is a fraternal organization that promotes and conducts educational, charitable, religious and social welfare works and also sells insurance products to its members. Here's a snapshot of their most recently available financial performance. 2015 2014 Employees 3,413 3,462 Revenues $2.23B $2.29B Expenses $2.17B $2.17B Margin $68.9M $115.08M Assets $22.22B $21.47B Liabilities $20.37B $19.56B Source: GuideStar Form 990 "Strip away all the absurd claims, and this case boils down to a garden-variety business dispute by a website vendor that failed to close a business deal." The Knights of Columbus' response in court filings to UKnight's lawsuit claims. PHOTO | CHRIS HOFFMAN

• Cover