A Minnesota lawsuit shows what a board is For.

On October 1, Minnesota Attorney General Keith Ellison sued Refocus Recovery, a Minneapolis nonprofit that provided peer support to people recovering from addiction, and its founder, Daniel Larson. The civil complaint says Larson set up the charity as a pass-through so that Medicaid money could flow to Kyros, a for-profit company he founded and, at the start, owned outright.

The claims are allegations that a court has not yet tested. But the complaint reads like a list of the safeguards a nonprofit board is supposed to provide, and of what can happen when none of them work.

What the state alleges

Under Minnesota law, a recovery community organization must be an independent nonprofit, led and governed by representatives of local communities of recovery, to be paid by Medicaid for peer recovery services. As a for-profit, Kyros could not bill Medicaid directly. According to the complaint, Larson incorporated Refocus Recovery in May 2021 and described it to Kyros investors as a legal entity the company was "using strictly for licensing purposes."

On its 2022 Form 990, Refocus Recovery reported paying about $4.5 million to two Kyros companies. The state says that was more than 85 percent of the charity's $5.3 million in expenses and more than 96 percent of its reported revenue. Kyros paid Larson at least $395,515 while he led it, according to figures Kyros gave the state.

In September 2024, the Minnesota Department of Human Services stopped payments to Refocus Recovery, citing a credible allegation of fraud. Kyros shut down shortly afterward, and Refocus Recovery ceased operations that month. The attorney general wants the court to dissolve the nonprofit, send its remaining assets to charitable purposes, and order restitution and civil penalties.

Six safeguards that failed

1. A board that governs. The complaint says no board meetings were held at first and that a board was not formally appointed until 18 months after the charity began operating. Its first board meeting took place on November 17, 2022. Two early board members resigned, frustrated that they could not do their jobs as directors.
2. Officers besides the founder. Until May 2022, Larson was the only officer. Until August 2022, no one served as treasurer or did a treasurer's work.
3. A real conflict-of-interest process. The charity adopted a conflict-of-interest policy in August 2022, which the state says was timed for its application for 501(c)(3) status. Its contracts with Kyros were signed in March 2023 and backdated to May 2021, so for nearly two years money moved without written terms. The complaint says the board never sought competing bids, never required Larson's interest to be disclosed, never held a vote of only disinterested directors, and never established that the deal was fair to the charity.
4. A valuation that is actually independent. In 2023 the charity obtained a valuation of the fees Kyros charged. The complaint quotes a Kyros representative telling the valuation firm to put the engagement letter in Refocus Recovery's name so that it could be an "'independent' valuation Refocus can rely upon."
5. Control of the money. Refocus Recovery kept no bank accounts separate from Kyros, the state says, and until the attorney general's investigation no officer or director other than Larson had access to the charity's own funds.
6. Listening to outside warnings. The Alliance for Recovery Centered Organizations revoked the charity's membership in 2022, citing undue influence by Kyros. A 2023 audit found a material weakness in its finances and warned about its reliance on Kyros. The arrangement continued until the state stopped payments.

What your board can check this month

Hiring a company tied to a founder or director is not wrong in itself. Founders often own businesses that can provide a needed service at a fair price. What protects the charity is the process, and that process can be written down and checked.

Ask whether every director and officer has filed a current conflict-of-interest disclosure, and whether the minutes show that anyone with an interest left the room before the vote. Ask who can sign checks and read the bank statements, and make sure at least one person on that list has no ties to any major vendor. If one vendor receives most of your spending, ask when the contract was last compared with other bids. Our guides to what a board treasurer does and to building a board cover the basics.

The Minnesota attorney general's office enforces the state's nonprofit and charitable solicitation laws through civil cases, not criminal ones. It says nonprofit executives owe a fiduciary duty to put the charity's interests ahead of their own, and it takes complaints from the public about directors and officers who do not.