Story highlights Charity's officers were "lining their pockets," attorney general says

California sues Help Hospitalized Veterans, accusing it of misspending donors' money

The state seeks $4 million in penalties for solicitations it calls misleading

The charity's president says it "looks forward to the chance to tell its story"

California authorities are taking a controversial veterans' charity to court, accusing it of paying officers "excessive" salaries and making "imprudent" loans, totaling hundreds of thousands of dollars, to a leading conservative activist's company.

In a civil lawsuit announced Thursday, the state attorney general's office asked a judge to remove the president and the entire board of directors of Help Hospitalized Veterans. The complaint asks for the board and president to pay more than $4 million in penalties to compensate for "misrepresentations" in solicitations by the charity.

The charity "has helped some veterans," Attorney General Kamala Harris told CNN's "Anderson Cooper 360." But she said nearly two-thirds of its revenue went to overhead, and the officers named in the complaint "have basically been lining their pockets off the compassion that Americans have for our veterans and servicemen and women."

"They have really tugged, I think, at the heartstrings of Americans who want to help our veterans," Harris said. "And, instead, they've had golf club memberships and condominiums, and they've been lining their pockets -- their personal pockets."

The complaint accuses the charity -- which reported more than $31 million in donations in 2010 -- of making false statements on its tax filings, paying "excessive" compensation, using donors' funds to buy a country club membership and a suburban Washington condominium, and unlawfully diverting money to start another nonprofit.

Its former president, Roger Chapin, was paid more than $2.3 million from 2002 and 2009, the complaint states, while Michael Lynch, the group's current president, has been paid more than $900,000 -- nearly $390,000 in 2010 alone, according to HHV's public tax disclosure forms.

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And the state accuses the nonprofit of making $800,000 in loans to the direct-mail company owned by Richard Viguerie, one of the founders of the modern conservative movement and a friend of Chapin's.

According to tax filings, HHV uses Viguerie's company, Virginia-based American Target Advertising, as its principal fund-raiser. The California lawsuit calls the loans "imprudent and insecure" and states that ATA has never paid back all of the loans.

The lawsuit was filed late Wednesday in Riverside County, outside Los Angeles. Thursday, in a statement read to CNN, Lynch said the charity hopes "these unproven allegations will not diminish the more than 40 years of service HHV has provided to our nations most valuable treasure, our veterans."

"HHV looks forward to the chance to tell its story, and we hope this action will not impede its ability to add its support to hospitalized veterans nationwide," he said.

Viguerie's company said would have "no statement at this time" on the allegations.

The attorney general's office says it will distribute any judgment against HHV to state programs that aid veterans.

The charity was the focus of a contentious 2008 hearing by the House Committee on Oversight and Investigations. The groups's former president, Roger Chapin, was found to have purchased a condominium in Virginia with donated funds and received $1.96 million in pension payments from HHV, according to committee lawyers.

In its complaint, the California attorney general's office cites that payment among a long list of abuses it says HHV has committed over recent years.

The state lawsuit also accuses Chapin of using $500,000 from Help Hospitalized Veterans to start another charity, called Conquer Cancer and Alzheimer's Now. The complaint says Chapin was also president of that charity and that the half-million used to start it was "an unlawful diversion of HHV's assets, because it was not in furtherance of HHV's charitable purpose."

According to its website and tax filings, HHV says its main mission is the distribution of "arts and craft kits" to patients at the nation's 155 Veterans Administration hospitals. The kits are designed to help rehabilitation efforts, and the charity values the kits it has distributed at $8 million a year.

A VA spokesman confirmed to CNN that the kits are given out at 152 of the agency's hospitals. In a written statement, the Department of Veterans Affairs said it expects every organization that works with the agency "follows proper procedures and does the utmost to support the men and women who have served this country."

"We will continue to carefully review partnering organizations to ensure they adhere to all applicable laws, are meeting our expectations, and Veterans are being served appropriately," the department said.

U.S. Rep. Henry Waxman, the California Democrat who held the 2008 hearing, told CNN that officials of HHV were using donated funds from "well-meaning Americans" to pay for "high overhead, salaries, golf club memberships and money that basically went into the pockets of people running the organization."

"As far as I'm concerned, they ought to be put in jail," said Waxman.

But while the State of California is pursuing substantial financial penalties, none of the individuals being sued will face jail time, since the complaint is a civil action.