This is the twenty-ninth in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Various Installments of this series have analyzed new disclosure requirements for public charities adopted by the Internal Revenue Service (“IRS”) in 2008 for its new Form 990 (the “New Form 990”) against the backdrop of the Madoff scandal. The Forms 990, including the Form 990 (the “HHMI Form 990”) of Howard Hughes Medical Institute (“HHMI”) for the fiscal year ended August 31, 2009 (“Fiscal 2009”), are universally available on the Internet on Guidestar and other sites.
HHMI is one of the largest and most highly respected charitable organizations in the world, as a leading philanthropic organization dedicated to serving society through biomedical research and science education. On February 5, 2009, in the early aftermath of the arrest of Madoff in December 2008, HHMI was on a 163-page list of customer account names produced by the Madoff Bankruptcy Court and reproduced by many Web sites such as The New York Times. In a commentary on every page of its list, The Times notes the following:
The list of customer account names found by the court-appointed trustee in the records of Bernard L. Madoff’s wealth management firm, as well as names of people who contacted the trustee to say they believed they had been Madoff customers and wanted to file a claim. Some of the names on the list are those of lawyers, accountants, foundation trustees and agents who set up the accounts on behalf of the actual investors in the Madoff fund, which investigators are calling the biggest Ponzi scheme ever. Some people on the list have said publicly that they were included in error.
Other Madoff-related media reports respecting charities such as charitygovernance.com identified HHMI as having been a direct or indirect victim of Madoff. Genetic Engineering & Biotechnology News published an article on March 15, 2009 on the effects of the Madoff scandal on life sciences research. It featured the following relative to HHMI:
Howard Hughes Medical Institute (HHMI) is looking resolutely forward. “That was long ago and far away,” VP for communications and public affairs Avice Meehan says of the Madoff scandal. “It will have no impact at all on our operations, although it has had consequences on the institutions where our researchers work. At HHMI, we’re assessing the result of the ongoing financial challenge on our endowments and operations. At this point, despite ongoing volatility, we expect to meet our commitment to our grantees, investigators, and Janelia Farm [Research Campus], and are proceeding with new initiatives with some degree of caution.”
Except for the aforementioned and similar items, there appears to be virtually no publicly available information as to the extent, if any, to which HHMI had direct or indirect exposure to losses with Madoff. There are no references to the Madoff matter in the HHMI Form 990, the on-line Annual Report of HHMI for Fiscal 2009 or the financial statements of HHMI for Fiscal 2009 audited by PricewaterhouseCoopers LLP.
In light of the relatively scarce public information available and the stature and leadership position of HHMI in the charities field, I contacted HHMI to solicit clarification and information from them relative to the status of HHMI as a potential direct or indirect victim of Madoff. I was advised, “It has long been HHMI’s practice to decline comment on specific investments and we have decided, after some discussion, to adhere to that practice.”
The absence of any information in the HHMI Form 990 regarding losses by HHMI with Madoff is surprising in light of the changes made by the IRS in New Form 990. Part VI of the New Form 990, entitled “Government, Management and Disclosure” has the following question on Line 5 for an answer of “Yes” or “No” by the organization:
“Did the organization become aware during the year of a material diversion of the organization’s assets?” [Emphasis supplied] In the HHMI Form 990, Line 5 was answered “No” by HHMI.
The final revised instructions for completing the New Form 990 for 2008 (the “Form 990 Instructions”) provided the following, in part, as to Line 5:
Answer “Yes” if the organization became aware during the organization’s tax year of a material diversion of its assets, whether or not the diversion occurred during the year. If “Yes,” explain the nature of the diversion, amounts or property involved, corrective actions taken to address the matter, and pertinent circumstances in Schedule O, though the person or persons who diverted the assets should not be identified by name.
A diversion of assets includes any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to an embezzlement or theft. . . .
For this purpose, a diversion is considered material if the gross
dollar amount (not taking into account restitution, insurance, or similar recoveries) exceeds the lesser of (1) $250,000 or (2) 5 percent of the lesser of the organization’s gross receipts for its tax year or total assets as of the end of its tax year. [Emphasis supplied]
In my view, it is likely that a diversion, if any, by Madoff of assets of HHMI would have been immaterial on a relative basis as compared to the $14 billion in endowment funds as of August 31, 2009 and the $3.5 billion decline of endowment funds during Fiscal 2009 reported by HHMI. However, relative immateriality is not the standard for disclosure under New Form 990. The standard for disclosure is the lesser of (1) $250,000 or (2) 5 percent of the lesser of the organization’s gross receipts for its tax year or total assets as of the end of its tax year.
In light of HHMI’s vast scale of operations and $14 billion investment portfolio, if HHMI had any diversion of assets attributable to Madoff, it would likely have not been less than the threshold for New Form 990 disclosure of $250,000. Perhaps there may be an explanation or interpretation for the non-disclosure by HHMI that is not readily evident from the materials publicly available; we would invite anew any clarifying comment from HHMI.
[To be continued in Installment 30]
(With appreciation to Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm’s Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics)