Mr. Schnare acknowledged in a letter to Free Market’s board last December that he had “made some significant errors.” But the lawsuit states that Mr. Schnare offered conflicting explanations and produced “different versions of organizational documents, as circumstances dictated.” The suit suggests that those papers, some filed with the court, were faked.
An outside lawyer warned Free Market that the I.R.S. could force the group to return contributions, require donors to amend their tax returns and expose Free Market to legal liability. He advised dissolving the group, a resolution favored by Mr. Hardin and Mr. Horner, who created a new group that would get Free Market’s money. But the disposition of the Free Market bank account, which was tied to Mr. Schnare’s Social Security number, is still in contention.
Discussions reached a breaking point in January, during a meeting between Mr. Hardin, Mr. Schnare and Chaim Mandelbaum, a lawyer Mr. Schnare had installed as executive director of Free Market before his brief return to the E.P.A.
According to Mr. Hardin’s suit, Mr. Mandelbaum suggested that the “Democratic attorney general of Virginia” would love to investigate the conservative group, and Mr. Schnare demanded “approximately a quarter of a million dollars in order to ‘keep things quiet,’” including money to buy out Mr. Mandelbaum’s contract, along with an agreement that they would not be sued.
In a recording of the meeting reviewed by The New York Times, Mr. Schnare can be heard saying that if Mr. Hardin and Mr. Horner did not comply, he could take control of the money. But, he added, “that’s not what I want to have to go in front of a judge and have to deal with.”
After that meeting, Mr. Hardin, who also serves as commonwealth’s attorney for Greene County, Va., alerted the I.R.S. to the group’s problems.
Mr. Hardin and Mr. Horner declined to comment. Mr. Mandelbaum said he did not recall making the comment about the Virginia attorney general. “All I can say is I believe their allegations are without merit,” he said.