Knights of Columbus Sued for Fraud, Racketeering

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by Stephen Wynne  •  ChurchMilitant.com  •  June 1, 2018   

CIO departs as order fights allegations of fraud, breach of contract in court

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BOULDER, Colo. (ChurchMilitant.com) - A top Knights of Columbus executive — responsible for overseeing the organization's multibillion-dollar insurance operation — has abruptly stepped down from his position. The sudden departure comes as the world's largest fraternal Catholic organization is in court fighting accusations of fraud, racketeering, theft of trade secrets and breach of contract. 

The Hartford Business Journal reports that on May 11, Chief Insurance Officer Thomas Smith, Jr. notified Supreme Knight Carl A. Anderson of his retirement, effective immediately. According to Kathleen Blomquist, senior director of corporate communications for KC, Smith's departure is unrelated to an ongoing legal battle with UKnight Interactive (UKnight), a Colorado-based IT firm KC had once employed.  

The lawsuit claims KC is hiding the true numbers of its members in order to keep up the appearance that it has sufficient numbers in its rolls to ensure future insurance payouts.

In 2017, UKnight filed suit in U.S. District Court against the Knights of Columbus, accusing executives of breach of contract. As part of its complaint, UKnight alleges that the organization is concealing a declining membership base in order to safeguard its multibillion-dollar insurance operation. In short, the lawsuit claims KC is hiding the true numbers of its members in order to keep up the appearance that it has sufficient numbers in its rolls to ensure future insurance payouts.

Speaking to Church Militant, UKnight spokesman Robert Siegfried, Vice Chairman of Communication for Kekst and Company, explained the IT firm "created a website that interconnects parties" — a valuable tool for an organization with 15,000 regional and local "councils," or chapters. The project was UKnight's "first entry into the business world, in terms of developing a customer base," Siegfried said. "In fact, Knights of Columbus was the only party they were marketing their services to."


 

But "after working for several years with the Knights of Columbus, getting their system in place with the Knights of Columbus, the Knights didn't go forward with their system," he said.

According to the complaint

In 2009, UKnight began designing and implementing websites for independent, local Knights of Columbus councils in the Dallas, Texas area. UKnight's work was so successful at helping local councils increase membership, improve communication with members, and increase sales of insurance products that it was encouraged to make a proposal directly to KC for adoption by the entire Order.

The suit alleges that in September 2011, KC executives informed UKnight they had selected the IT firm as their "designated vendor for the entire Knights of Columbus fraternity," offering to "formally announce UKnight as such in exchange for UKnight accommodating certain requests (such as adding legal disclaimers to the websites) made by the KC legal department," as well as "allowing KC to make certain graphic design changes to its platform." UKnight notes that the contract was oral — the firm moved ahead without a signed written contract.

UKnight alleges that according to the terms of the agreement, KC "was not required to make any payment" for its services. Instead, the company's revenue would come from subscriptions to these services, "paid individually by each subscribing insurance agent, local council, assembly, and others." 

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Tom Smith, Jr., former CIO

This arrangement meant KC's endorsement of UKnight as dedicated vendor was critical to its business model. But, the suit alleges, the endorsement never came; instead, as UKnight worked to build a complex interactive, interconnective system to "serve the specific needs" of KC, the vendor received only repeated promises the endorsement was on the way.

According to the complaint, in January 2016, KC suddenly informed UKnight it was launching a search for a new vendor — a devastating blow to the IT firm. "Knights of Columbus decided not to continue moving forward," Siefgried told Church Militant. "That severely impaired the business potential of UKnight and ultimately the value of its business."

The suit alleges UKnight was dismissed because KC executives discovered that UKnight's system would reveal fraudulent membership figures. 

According to papers filed in court, as its relationship with UKnight was developing, "KC, its independent local councils, and outside ratings agencies and software companies" collaborated to "artificially inflate the Knights of Columbus' insurable membership numbers, to artificially improve the demographic structure of this risk-pool, and to conceal this scheme."  

Demographic analysis suggests the Catholic Church in the United States and Canada is in the beginning stages of an unprecedented retraction, with millions of its most dedicated, active members entering the last phase of their lives, while younger generations abandon the Church for other faiths or none at all. As pews empty, coffers drain and parishes and schools shut down. 

[A] shrinking membership and aging demographic would severely threaten its insurance rating as payouts to members' families upon death depend on a steady stream of new premiums and payments from younger members.

The complaint suggests that the Knights of Columbus is beginning to suffer from this same demographic collapse: "While KC has earned on average less than 5% returns on its $22 billion invested, the number of death benefits paid out has increased 5.67% year-on-year, demonstrating both a downward financial spiral and the effect of its rapidly-aging demographic." 

If true, this would have major financial implications. "The Knights of Columbus has two major sources of revenue," Siegfried explained. "One is membership; one is financial products. In particular, insurance sold to members of Knights of Columbus."

And KC's insurance products are "sold exclusively to members of the Knights of Columbus local councils in the United States and Canada only":

[A] shrinking membership and aging demographic would severely threaten its insurance rating as payouts to members' families upon death depend on a steady stream of new premiums and payments from younger members. Indeed, because KC currently has over $105 billion of insurance in force written against only $22 billion in assets, its insurance program must demonstrate that the Order's membership is growing and that its demographic is not aging in order to maintain the perception of viability to meet its future payout obligations.

The suit alleges KC inflates its membership numbers to maintain a veneer of sustainability. It accuses the organization of preventing its 15,000 local councils from deleting inactive members from their rolls, creating "phantom" councils of dead and lapsed members: 

Numerous agents and former agents of the Knights of Columbus have reported to Plaintiff that most councils have at least 15 to 20 members they would like to drop but are not permitted to by KC, suggesting that there are more than 300,000 "phantom members" in existing councils in the US and Canada. 

The Knights of Columbus reject these allegations, denouncing them as "scandalous" and "utterly false." 

"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," KC declared in a recent court filing. 

"The true nature of this action is that the plaintiff (UKnight) is a disappointed prospective vendor that offered the order inferior and outdated website services that the order refused to endorse," it added. "UKnight is now trying to accomplish through this lawsuit what it could not get through product development and sales negotiations."

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Carl Anderson, Supreme Knight

In March, U.S. District Court Judge R. Brooke Jackson ruled against UKnight's racketeering claim and its challenge to KC's tax-exempt status. But he also ordered KC to release its membership information, writing: "I find no merit in the hodge-podge of arguments the Knights of Columbus have put forth in what appears to be an almost desperate attempt to preclude any discovery concerning membership information."

KC has not yet turned over its membership figures. In April, the suit was stayed to allow UKnight to secure new counsel, after the firm's original attorney was forced to step down from the case for health reasons. It is expected to resume soon. 

On May 1, UKnight founder Leonard Labriola sent a letter to Anderson accusing KC senior management of "executive misconduct." In it, he noted his company took legal action only after a half-dozen letters sent to Anderson in 2016 went unanswered. 

Church Militant asked Siegfried if Labriola had received any response to his seventh letter.

"He's not heard from Mr. Anderson," he replied. 

The letter was published in a May 10 press release summarizing UKnight's allegations against the Knights of Columbus. The following day, Smith stepped down as Chief Insurance Officer. 

--- Campaign 32075 ---

 

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