April 6, 2012 3:39 PM

Caplin & Drysdale Advises Three Cups of Tea Author on Settlement with Montana AG

Posted by Brian Baxter

UPDATE: 4/30/12, 7:00 p.m. EDT. Reuters reports that a federal judge has dismissed a class action fraud suit against Mortenson over Three Cups of Tea.

Caplin & Drysdale is advising Three Cups of Tea author Greg Mortenson in connection with an agreement that calls for him to repay $1 million to the Bozeman, Montana–based nonprofit he founded, the Central Asia Institute (CAI), after an investigation by Montana attorney general Stephen Bullock's office found that Mortenson misspent charity funds.

Ex-mountain climber Mortenson followed up the best-selling Three Cups of Tea, which chronicles his travels through rural Afghanistan and Pakistan, with Stones into Schools. The latter book details Mortenson's transition from adventurer to humanitarian and his efforts to build schools and promote literacy as a way of helping the children of those hard-pressed regions.

But a scathing broadcast a year ago this month by 60 Minutes questioned Mortenson's credentials as an author and philanthropist. In the 60 Minutes report, various critics, including best-selling author Jon Krakauer, accused Mortenson of fabricating portions of his books, mismanaging CAI funds to promote those books, and personally benefiting from his leadership of the charity (he served as its executive director).

The 60 Minutes segment prompted Bullock's office, which regulates charities in the state, to launch a yearlong probe of CAI's finances. That probe ended Thursday with the announcement that while no criminal activity had been detected, Mortenson had spent $4 million in CAI funds buying copies of his books, though the charity received no income from the sales.

The royalties went instead to Mortenson, who, despite pledging to reimburse CAI for those payments, had not repaid the charity as of April 2011, according to the attorney general's report. 

Mortenson—a nominee for the 2009 Nobel Peace Prize—made $177,851 in total compensation as executive director of CAI in 2010, according to the charity's Form 990 filed with the Internal Revenue Service that year, as well as $38,696 in estimated compensation from the organization and related entities. CAI's tax filings also show that the nonprofit was carrying a $75,276 loan to Mortenson on its books in 2010. The attorney general's report found that Mortenson and his family spent the CAI loan money on personal items like clothing and holiday vacations.

CAI also spent more than $2 million on travel arrangements—including charter flights—for Mortenson to attend various speaking engagements. The attorney general's report states that those costs were paid even when event hosts said they would compensate Mortenson for his expenses.

Mortenson has agreed to reimburse CAI for $1 million in money the charity paid to help promote his books. He has already repaid about half that sum and plans to pay the balance, plus interest, within three years, according to the attorney general's report. The funds are to come from Mortenson's MC Consulting firm.

A copy of the settlement agreement provided by Bullock's office shows that Caplin & Drysdale partner Marcus Owens in Washington, D.C., represented Mortenson in the investigation. Owens, a former director of the IRS's exempt organizations division, was out of the office Friday and not immediately available for comment.

Caplin & Drysdale is also representing Mortenson in a class action suit filed in federal court in Bozeman last May by Democratic state lawmakers Jean Price of Great Falls and Michelle Reinhart of Missoula, who claim they were tricked into buying Mortenson's books. (Alexander Blewett III of Great Falls's Hoyt & Blewett is representing the lead plaintiffs in the class action.)

Bozeman's Kasting, Kauffman & Mersen is serving as local counsel to Mortenson in the litigation, while Cooley chairman Stephen Neal and of counsel Robert Eisenbach III are advising CAI, along with local counsel from Billings-based Matovich, Keller & Murphy.

Mortenson's publisher, Penguin Books, has turned to Dorsey & Whitney partners Jonathan Herman and F. Matthew Ralph, while his coauthor on Three Cups of Tea, David Oliver Relin, is being advised by Portland’s Elliot, Ostrander & Preston and Missoula's Garlington, Lohn & Robinson. Federal court records show that a hearing on the defendants' motion to dismiss the case has been scheduled for April 18.

As part of Mortenson's settlement with Bullock's office, CAI must nominate a new board of directors to run the charity. Mortenson stepped down as CAI's executive director last summer; he was undergoing heart surgery at the time. While Mortenson can stay on CAI's payroll and remain the public face of the organization, he cannot assume a managerial role, according to the agreement. (CAI officials have publicly called Mortenson their "chief inspiration officer.")

The Montana attorney general's office will continue to monitor CAI over the next three years to ensure compliance with the settlement.

In addition to Bullock, the state inquiry was led by assistant attorneys general James Molloy and Kelley Hubbard. Gregory Blam, a partner with Kansas City, Missouri–based Copilevitz & Canter, served as outside counsel to CAI in connection with the attorney general's probe.

Photo: Satpara Lake in Pakistan's Gilgit-Baltistan region, Waqas Usman, Wikimedia Commons

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