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White Collar Defense & Compliance Developments in Criminal Law, Federal Case Law and Statutory Developments

Ponzi Schemes and Charities: A Postscript to Malvern Preparatory School and its Consent Order – Precedent for Other Charities? – Installment 37

Posted in Bernard Madoff

This is the thirty-seventh in a series of Installments on this blog that is discussing issues that have arisen for charities in the aftermath of the Bernard L. Madoff (“Madoff”) scandal and other smaller Ponzi schemes. Installments 30 and 35 of this series discussed a Ponzi-scheme run by former Trustee Joseph S. Forte (“Forte”) of Malvern Preparatory School (“Malvern” or the “school”). Malvern, among other charities, had claimed that it was a victim of the Ponzi scheme, even though the school had received hundreds of thousands of dollars in donations from Forte.

Installment 35 of this series discussed a September 17, 2010 article by Harold Brubaker, who has written several articles on the subject in The Philadelphia Inquirer.  The Brubaker article reported that Malvern had agreed in a consent order (the “Consent Order”) to return $700,000 received as contributions from Forte of the $900,000 originally sought by the court-appointed receiver.

On the same day as the Brubaker article, the President of Malvern and the Chairman of its Board of Trustees issued a joint statement about the Consent Order entitled “Resolution of Forte Ponzi Scheme Litigation” (the “Malvern Statement”). Included in the Malvern Statement was the avowal that Malvern Prep had no knowledge of Mr. Forte’s Ponzi scheme and accepted his donations under the assumption that he acquired them entirely from legitimate sources. In addition, although Malvern received charitable donations from Mr. Forte, it did not invest any monies with him.

One of the interesting aspects about the Consent Order and the Malvern Statement as to the return of donations by Malvern is the precedent that it may set, not only for other charities that may have innocently received contributions from Forte in the belief that they were from legal sources, but also for charities that received contributions in other Ponzi schemes such as that of Madoff.

Another interesting aspect is the following quotation from the Malvern Statement:

Be assured that none of the money paid to the receiver will be taken from any of the charitable or other funds established by the School’s generous benefactors, and Malvern’s many excellent programmatic and financial aid programs will not be affected.

The meaning of the term “charitable or other funds established by the School’s generous benefactors” is somewhat perplexing. Query whether the general endowment funds of Malvern, which may include not only donations and bequests but also increases from investment earnings and income from operations of the school, fall within the quoted categories. Another potential source for the payment possibly would be current operations.

Installments 30 and 35 of this series pointed out that the Form 990 dated February 9, 2010, filed by Malvern for its fiscal year ended June 30, 2010 with the IRS made no reference (i) to Forte or the fate of his unfulfilled personal pledges and (ii) as to whether the school had written off all or a portion of a Forte outstanding pledge of $500,000.

As stated in Installment 35, it will be interesting to see to what extent Malvern discloses and explains its losses with Forte and the Consent Order in its Form 990 for the fiscal year ended June 30, 2010 to be filed with the IRS. It may provide some guidance for other similarly affected charities.

Installment 30 pointed out that the Form 990 questions and instructions may need some refinement by the IRS to enhance the clarity and consistency of definitions and promote greater and speedier transparency by charities. Further developments in this case may be instructive as to the effectiveness of the current IRS Form 990 and instructions in generating meaningful disclosures.

[To be continued in Installment 38]

(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)