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Michael J. Kline writes:

This blog series has often used Forms 990 and Forms 990-PF filed with the Internal Revenue Service (“IRS”) by public charities and private foundations, respectively, which have been victims in the Ponzi schemes of Bernard L. Madoff (“Madoff”) and others, to highlight areas where improvement in compliance may be undertaken. For example, a previous blog entry pointed out that there is evidence that some charities may be exercising greater caution in their gift acceptance policies as a result of having suffered from involvement with Ponzi schemes.  

This posting will address the question of what officer should sign the Form 990 in light of the requirements of the IRS contained in the Form 990 itself and the IRS Instructions for Form 990 (the “IRS Instructions”). The Form 990 Signature Block at the bottom of the first page states the following, which is substantially the same language as is present in income tax returns for individuals and business corporations:

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete.

The IRS Instructions add the following further requirements as to the Signature Block: 

The return must be signed by the current president, vice president, treasurer, assistant treasurer, chief accounting officer, or other corporate officer (such as tax officer) who is authorized to sign as of the date this return is filed [Emphasis supplied] . . . . The definition of "officer" for purposes of Part II is different from the definition of officer (see Glossary) used to determine which officers to report elsewhere on the form and schedules, and from the definition of principal officer for purposes of the Form 990 Heading (see Glossary).

This is a very serious standard and a high bar for the officer executing the Form 990 to achieve. As early as February 2010, this blog series recognized the diverse and somewhat perplexing nature of the individuals who signed Forms 990 on behalf of two charities that were victims of Madoff: Yeshiva University and Hadassah.   In the case of Yeshiva University, its Vice President and CFO, who was a compensated full-time employee, executed the Form 990. On the other hand, the National Treasurer of Hadassah, who sign its Form 990 contemporaneously with the Yeshiva filing, appeared to be an uncompensated volunteer and reflected less than 10 hours per week of time for Hadassah. 

Query: should a volunteer officer who devotes relatively little time to the charity be undertaking the responsibility to sign for a charity of the international scope of Hadassah? Would not the CFO or other full-time compensated officer of Hadassah be more appropriate for the task? (While the uncompensated National Treasurer of Hadassah again signed its 2011 Form 990, such Form 990 does indicate that she devotes 34.00 hours per week to Hadassah.)

Below are some concepts that charities and their officers should consider in determining who should sign their 2012 Forms 990. Subject to the size and human and financial resources available to a charity, the officer who executes the Form 990 should be one who

1. can demonstrate active input and involvement in the Form 990 and financial statement preparation process;

2. has the skill and experience to evaluate personally the quality of the preparation process for both the financial statements and the governance, management, policies and disclosure portions of the Form 990;

3.  holds such a position that his/her input will be meaningfully received by the other internal and external preparers of the Form 990;

4. understands and is comfortable with the seriousness of signing the Form 990 on the basis that it is true, correct and complete and executed under penalty of perjury; and

5.  is authorized to sign. 

While I believe that item 5 has been rarely done on a formal basis by charities, the formal granting of authority to sign the Form 990 will assist the governing body and the executing officer in comprehending the gravity of the Form 990, its filing with the IRS and universal availability on the Internet.

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 89]

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Michael J. Kline writes:

It is perplexing that Forms 990-PF for 2011 (“2011 Forms 990-PF”) filed with the Internal Revenue Service (“IRS”) by various Wilpon family private foundations (the “Schedule 1 Foundations”), which are now beginning to appear on GuideStar, provide no reference to the assignment to Madoff Trustee Irving Picard of allowed net equity claims. While only two of the six Schedule 1 Foundations have had their 2011 Forms 990-PF posted on GuideStar to date, each of them has chosen to omit any reference to encumbering their “Estimated SIPC Recovery – Madoff Theft Loss,” even though such 2011 Forms 990-PF were filed after the execution of the Settlement Agreement, dated April 13, 2012, between Picard and the Wilpons (the “Settlement Agreement”), that was approved by the Federal District Court on May 31, 2012.

This blog series, particularly Installments 75 and 76 and prior Installments referred to therein, has been monitoring the participation by the Schedule 1 Foundations in the global Settlement Agreement.   (Capitalized terms not otherwise defined herein shall have the meanings assigned to them in Installment 76.)   

The Schedule 1 Foundations for which 2011 Forms 990-PF have been posted to date on GuideStar are The Tepper Family Foundation (the “Tepper Foundation”) and the Valerie and Jeffrey S. Wilpon Foundation (the “JW Foundation” and, collectively with the Tepper Foundation, the “Posted Foundations”).  Notably, each of the Schedule 1 Foundations, including the Posted Foundations, has one or more Fiduciary Defendants who, in one capacity and/or another, was (i) a defendant in the Wilpon Litigation, (ii) listed on Schedule 2 to the Settlement Agreement as a recipient of transfers from Madoff in excess of principal invested and (iii) a signatory to the Settlement Agreement. 

Each of the Schedule 1 Foundation Claims, which would otherwise be receivables payable in cash to the respective Schedule 1 Foundation as part of distributions by the Trustee, has been assigned to the Trustee and will, to some extent, fund a portion of the monetary clawback exposure of its respective Fiduciary Defendants. (The form of “Assignment of Net Equity Claims” (the “Assignment”) is the final page attached to the Settlement Agreement.)  Installment 76 went into some detail as to the problematic aspects of the participation by the Schedule 1 Foundations in the Settlement Agreement process and the question of potential prohibited “private benefit and inurement” under IRS rules. 

A number of observations can be made as to the 2011 Forms 990-PF of the Posted Foundations:

1.         Each of the 2011 Forms 990-PF of the Posted Foundations reflects on line 15 of its Part II Balance Sheet as a substantial “other asset” an item that is explained in a later statement as “Estimated SIPC Recovery – Madoff Theft Loss.” For the Tepper Foundation, the amount reflected is $47,093, and for the JW Foundation, the amount reflected is $137,690. However, by April 13, 2012, and prior to the time of filing with the IRS of their respective 2011 Forms 990-PF (June 25, 2012 as to the Tepper Foundation and May 16, 2012 as to the JW Foundation (collectively, the “Forms 990-PF Filing Dates”)), the Settlement Agreement had already been signed, and each of the Posted Foundations had agreed on a fixed amount for the Schedule 1 Foundation Claim at a materially lower figure than that reflected on the respective Form 990-PF.  The amount reflected and its percentage of the original estimate is $30,895 (65.6%) as to the Tepper Foundation and $70,050 (50.8%) as to the JW Foundation. It would appear that an explanation of the difference or substitution of the known agreed-upon figure would be better disclosure than continuing the higher estimated amount that the Posted Foundations had carried in their Forms 990-PF for several years.

2.         Neither of the 2011 Forms 990-PF of the Posted Foundations reflects any offset, encumbrance or liability, either in the Part II Balance Sheet or an explanatory statement, as to its having assigned its Schedule 1 Foundation Claim to the Trustee pursuant to the Settlement Agreement and the Assignment, which were executed well before the Forms 990-PF Filing Dates. If the Posted Foundations reported the estimated Schedule 1 Foundation Claim as an asset on the accrual basis as discussed in item 1 above, it would appear that the Assignment should be reported as well, even if as a subsequent event statement.

3.         It is interesting that, while neither of the 2011 Forms 990-PF of the Posted Foundations evidences a “paid preparer” on page 13 (as is also the case for the 2010 Forms 990-PF of each of the Schedule 1 Foundations for that matter), each shares the same address, provides the identical reporting format for the Schedule 1 Foundation Claim and reflects no compensated employees. The IRS Instructions for Form 990-PF provide the following on page 30:   

Generally, anyone who is paid to prepare the organization’s tax return must sign the return and fill in the Paid Preparer Use Only area. An employee of the filing organization is not a paid preparer.

By implication, an employee of another entity who prepares the organization’s tax return may be a paid preparer. The Instructions do invite the organization to consult with the IRS as to whether a preparer is required to sign the return.

4.         In light of considerations such as those in items 1 through 3 above, an officer or trustee of a private foundation, such as the Presidents of the Posted Foundations, should be aware that he or she signs a Form 990-PF with the following affirmation:  

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete.

Preparation of Forms 990-PF can be complex, especially when concerns may be potentially present about imposition of excise taxes, duty of loyalty, possible conflicts of interest of fiduciaries and the IRS rules regarding private benefit and inurement. Because the Forms 990-PF are permanently and universally available on the Internet, private foundations and their fiduciaries are well-advised to seek competent guidance and counsel in their preparation and filing.

Now that the November 15, 2012 final IRS filing date (including permitted extensions) for 2011 Forms 990-PF by calendar year foundations has passed, the 2011 Forms 990-PF of the remaining Schedule 1 Foundations should be appearing on GuideStar within the next several months. 

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 88]

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Michael J. Kline writes: 

On November 13, 2012, the U.S. Department of Labor (the “DOL”) issued a press release entitled “US Labor Department Recovers Nearly $220 Million for Madoff Victims.” On the same day New York Attorney General Eric T. Schneiderman (the “NYAG”) issued a press release entitled “A.G. Schneiderman Obtains $210 Million Settlement With Ivy Asset Management In Connection With Madoff Ponzi Scheme.”  Both the DOL and the NYAG are to be congratulated and each press release refers to the other regulatory authority. However, it is not immediately clear that the press releases are addressing a single $220 million settlement with Ivy Asset Management (“Ivy”) and other defendants of a number of consolidated lawsuits in which the DOL and NYAG are principal plaintiffs. The settlement is pending approval by the U.S. District Court for the Southern District of New York.

An interesting statement in the NYAG press release is the following:

When added to future amounts Madoff investors anticipate receiving from the Madoff bankruptcy proceeding, today's settlement is expected to return all or nearly all the original investment to those defrauded by the Ponzi scheme in this case.

This statement should provide some measure of holiday comfort and joy to all Madoff victims who hold claims that have been allowed by Trustee Irving Picard in the Madoff bankruptcy proceeding. It should be especially satisfying to the members of the Wilpon/Katz/Mets/Sterling (collectively, “Wilpons”) consortium. As pointed out in Installment 85 of this blog series and many earlier Installments, the Wilpons’ timely and foresighted settlement with Picard may virtually absolve them of any out-of-pocket payments as a group to Picard in the Madoff proceeding.

One final observation on the Ivy matter. This blog series discussed in Installments 34 and 38 certain issues respecting Ivy that had surfaced in the summer of 2010 about the time that the NYAG and the DOL filed suit against Ivy. The interest in Ivy by this blog series earlier in 2010 had been triggered by the identification of Ivy as an investment adviser that appeared to have involved Howard Hughes Medical Institute (“HHMI”), in investing with Madoff. There has been no public information readily available to date as to the extent of the investment by HHMI with Madoff. Moreover, as discussed in Installment 29, it was clear that HHMI does not intend to provide voluntarily any light on the subject. Installment 29 did raise a question as to whether HHMI was required to provide such information in its Form 990 filed with the Internal Revenue Service. 

Almost four years after Madoff was arrested, his massive Ponzi scheme still has unresolved and undisclosed issues.

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

 [To be continued in Installment 87]

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Michael J. Kline writes:

As reported on September 21, 2012 in Installment 84 of this blog series, Trustee Irving Picard distributed nearly $2.5 billion in checks on September 19, 2012 (the “2012 Picard Distribution”) to victims in the Madoff scandal. (Capitalized terms not otherwise defined herein have the meanings as defined in Installment 84.)  It was not, however, until more than a week later on September 28, 2012, that the Trustee’s Web site reported the actual dollar impact on the Wilpon Liabilities of the 2012 Picard Distribution and the earlier, much smaller, Picard Distribution on October 5, 2011:

Under terms of the settlement, the Defendants’ [the Wilpons’] allowed claims of approximately $178 million . . . will be unconditionally assigned to the SIPA Trustee [Picard] until the $162 million settlement number is reached. Distributions made to the allowed claims assigned to the SIPA Trustee will reduce the amount owed by the Defendants and will be added to the Customer Fund. On September 28, 2012, the first and second pro rata interim distribution payments of approximately $67.3 million were made with respect to the allowed claims assigned to the SIPA Trustee and added to the Customer Fund. The remaining balance of the settlement payment is approximately $94.7 million.

Installment 84 and earlier Installments in this blog series have been discussing the potential impacts that such Picard Distributions may have on the diverse economic, business, charitable, family, trust and individual interests among the Wilpons and how the Wilpons might reasonably address such impacts.  Installment 84 had also conjectured, albeit incorrectly, that perhaps up to $123 million of the aggregate Wilpon Liabilities may have been offset as a result of the first two Picard Distributions, substantially in excess of the actual amount of approximately $67.3 million later reported by Picard. (Perhaps the Trustee will be able to post more contemporaneously with future Picard Distributions the dollar amount of reduced Wilpon Liabilities that will result therefrom.) Even though the actual amount of reduced Wilpon Liabilities turned out to be substantially lower than the amount discussed in Installment 84, the $67.3 million was certainly material for the Wilpons. In fewer than four months after court approval of the Wilpon/Picard Settlement Agreement, 41.5% of the Wilpon Liabilities had disappeared.    

While the external liabilities of the Wilpons are being materially reduced by Picard Distributions, an internal reshuffling of assets among the Wilpons may also be occurring. Installment 82 had suggested that, to minimize conflicts and controversies and with adequate advice of counsel to the involved parties, an Allocation Agreement be entered into among all the Wilpons that are affected by the Settlement Agreement with Picard, in order to provide for Allowed Entities to be compensated for the use of their Allowed Claims (already $67.3 million to date) for the benefit of the Wilpons as a group and the specific Liable Defendants. It will be interesting to see what further developments may surface in this continuing saga and whether the ownership of various Wilpon assets, including the New York Mets, could ultimately be affected by the Picard Distributions.

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

 [To be continued in Installment 86]

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Michael J. Kline writes:

The Securities Investor Protection Corporation (SIPC) issued a news release that “[n]early $2.5 billion in checks were mailed Wednesday (September 19, 2012) to victims in the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS).” In doing so, SIPC also applauded Trustee Irving Picard for his efforts in making the distribution possible.  According to SIPC, 

Approximately $17.3 billion in principal is estimated to have been lost in the Ponzi scheme by direct BLMIS customers who filed claims.  When combined with the funds already returned to BLMIS customers, the second interim distribution satisfies more than 50 percent of the total Madoff accounts with allowed claims. 

Previous Installments in this blog series, most recently Installment 82 and Installments referenced therein, discussed the potential impact that such Picard Distributions may have on the diverse and somewhat divergent interests among the Wilpons and how the Wilpons may try to address such impact. (Capitalized terms not otherwise defined herein have the meanings as defined in Installment 82.)  

The earlier Installments focused on possible conflicts and controversies that may be created among the interests of those of the Wilpons who are Allowed Parties holding the aggregate $178 million in Allowed Claims against the Madoff Estate that will not be actually paid out of Picard Distributions but have been or will be offset against the $162 million in aggregate Wilpon Liabilities of the Liable Defendants. 

It would appear that the SIPC news release focused on the 53% of specific accounts of allowed claimants that have been satisfied, not the percentage of total allowed claims that have been paid.  However, Section 2(c) of the Settlement Agreement among the Wilpons and Picard retroactively credited the Allowed Claims of the Wilpons (and required a corresponding offset against Wilpon Liabilities) in the amount of $8,171,451 or 4.602% of the first Picard Distribution that was made on or about October 5, 2011. Therefore, let us assume that, at this point, there has not been a great change over the last year in the total allowed claims of “good faith” customers of BLMIS. In such a case, application of the deemed percentage of 4.602% to the current $2.5 billion Picard Distribution for the Allowed Claims of Allowed Parties among the Wilpons would yield approximately $115,000,000. 

When the two Picard Distributions are added together, the deemed offset against the Wilpon Liabilities would appear to be as much as approximately $123,000,000, with $39,000,000 of the total of $162,000,000 in Wilpon Liabilities remaining. Even if the deemed percentage is considerably less than 4.602%, a substantial portion of the Wilpon Liabilities has already been satisfied. (As an aside, that event provides no satisfaction to the hapless New York Mets baseball fans who suffered through a heart-wrenching three-game home series sweep at the hands of the Philadelphia Phillies, the final straw of which was an ignominious 16-1 defeat last night.)

Installment 82 had suggested that, to minimize conflicts and controversies and with adequate advice of counsel to the involved parties, an Allocation Agreement be entered into among all the Wilpons that are affected by the Settlement Agreement with Picard, in order to provide for Allowed Entities to be compensated for the use of their Allowed Claims for the benefit of the Wilpons as a group and the specific Liable Defendants under the Settlement Agreement. Payments among the Wilpons under such an Allocation Agreement to date could be as much as $123,000,000. While the Wilpons may have successfully limited (and perhaps have already been deemed to have substantially satisfied) their external cash outlays to the Madoff bankruptcy estate under the Settlement Agreement with Picard, resolving rights and obligations among the holders of Allowed Claims and Liable Defendants could be challenging and result in a significant shifting of assets among the Wilpons.

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

 [To be continued in Installment 85]

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Michael J. Kline writes:

There is evidence that some charities may be exercising greater caution in their gift acceptance policies as a result of the dramatic and sometimes devastating consequences that highly respected charities have suffered from involvement in the Ponzi schemes of Bernard L. Madoff (“Bernard”) and others.  It would appear that Fidelity Charitable Gift Fund of Boston, Massachusetts (“Fidelity”) has moved in that direction from actions it has taken respecting grants received from the private foundations formed by Bernard’s sons Andrew and Mark and their respective spouses. This blog series has been following for almost four years the misfortunes of charities flowing from involvement in  Ponzi schemes, and apparently some charities have responded to reduce exposure to potential risks in this area.

The Forms 990-PF for 2010 filed with the IRS and posted on GuideStar by the Deborah and Andrew Madoff Foundation (the “Andrew Foundation”) and the Mark and Stephanie Madoff Foundation (the “Mark Foundation,” and, collectively with the Andrew Foundation, the “Madoff Sons Foundations”) reveals that each of the Madoff Sons Foundations made grants to Fidelity in December 2010  $176,000 by the Andrew Foundation and $79,000 by the Mark Foundation. Andrew serves as a trustee of both of the Madoff Sons Foundations, as did Mark until his tragic death from an apparent suicide on December 11, 2010. The death of Mark was exactly two years to the day after Andrew and Mark turned their father Bernard over to authorities for arrest and was in the same month that the Madoff Sons Foundations made their respective grants to Fidelity. 

Each of the 2010 Forms 990-PF of the Madoff Sons Foundations contains the following “General Explanation Attachment”:

In December 2010, the Foundation made a grant of $ . . . to the Fidelity Charitable Gift Fund in order to satisfy its distribution requirements . . . [under IRS regulations]. In February 2011, such amount was returned to the Foundation by the charitable organization. The Foundation will reflect this amount . . . as a recovery of a qualifying distribution on its 2011 annual return.

Why did Fidelity return the money to the Madoff Sons Foundations in early 2011? Was it to avoid potential adverse publicity that could flow from continued association with the scandal-ridden Madoff name and the recent death of Mark? In this regard, the 2009 Form 990-PF of the Andrew Foundation (but not that of the Mark Foundation) reflected a grant on December 29, 2009 of $207,000 to Fidelity, already more than a year after the arrest of Bernard. However, Fidelity did not return the 2009 grant.

Alternatively, or in addition, could the return of the 2010 grant have resulted from a concern by Fidelity that, even though the funds in the Madoff Sons Foundations had not been invested in the Bernard scheme, the assets of the Madoff Sons Foundations were derived from contributions by Andrew and Mark and could possibly be traced to monies from the Bernard scandal? If that turned out to be the case, the grants may be subject to "clawback” by Irving Picard, the Trustee of the Bernard bankruptcy estate. Picard had already sued Andrew and Mark for millions of dollars that he alleged they received from the Bernard Ponzi scheme. 

This blog series has discussed the unfortunate experience of Malvern Preparatory School with a charitable pledge and grant from a donor/trustee who was later accused of operating a Ponzi scheme. The charitable pledge became worthless, and substantial grants already received by the School were recovered by the trustee in bankruptcy for the former donor/trustee who then was already in prison. 

(As an aside, it is interesting to note that, in contrast to the Madoff Sons Foundations, which did not invest in the Bernard Ponzi scheme, the now-defunct Bernard L. and Ruth Madoff Foundation did invest in the Bernard Ponzi scheme, according to GuideStar Form 990-PF postings.)

In this blog series, we have advocated that every charity should respond pro-actively in the wake of scandals involving the Bernard and other Ponzi schemes. Such actions include heightened transparency in disclosures in Forms 990, examination and upgrading of charitable gift acceptance policies and improvement of governance practices. It appears that Fidelity has already adopted some of these measures.  

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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Michael J. Kline writes:

There have been recent media reports respecting efforts of Trustee Irving Picard to make a substantial distribution of up to several billion dollars to Madoff victims in the near future. This Installment will discuss a potential impact that such a distribution may have on the diverse and somewhat divergent interests among the Wilpons that are parties to the global Settlement Agreement with Picard and how the Wilpons may address such an impact. 

Installments 75 and 76 in this blog series, which may be read for context with this Installment, discussed concerns about the inclusion of the Wilpons' private charitable Foundations in the Settlement Agreement. (Capitalized terms not otherwise defined herein shall have the meanings assigned to them in Installment 75.)  

Such earlier Installments focused on a possible dichotomy between the interests of the Foundations and the individuals who are their fiduciaries and suggested an analysis of (i) the duty of loyalty of such fiduciaries and (ii) their need to avoid conflicts of interest and prohibited “private benefit and inurement” under U.S. Treasury Regulations. What is clear is that many individual Wilpons beyond the Foundation Fiduciaries should be addressing concerns respecting potential duties of loyalty and the need to avoid conflicts of interest, including fiduciaries (collectively, “Fiduciaries”) of the numerous business entities, family trusts that may even include minors and unborn children as beneficiaries, estates and other entities or multi-party arrangements that are affected by the Settlement Agreement (collectively, the “Entities”). Numerous signatories of the Settlement Agreement were acting not only in their individual capacities, but as partners, officers, trustees, executors or members or in some other fiduciary capacity.

Simply stated, how can the Wilpons as a group fairly treat the Entities and individuals who are signatories to the Settlement Agreement and have been recognized by Picard (the “Allowed Parties”) to have $178 million in aggregate allowed net equity claims against the Madoff Estate (“Allowed Claims”)? The Allowed Parties would receive a pro rata share of future cash distributions to Madoff victims by Picard (“Picard Distributions”) but for the Settlement Agreement, which requires that Picard Distributions on account of the Allowed Claims will not be paid but will serve as offsets against the $162 million in aggregate Wilpon liabilities to the Madoff Estate (“Wilpon Liabilities”) by those of the Wilpons that had received six-year transfers from Madoff in excess of principal (“Wilpon Obligors”).

In reaching their global Settlement Agreement with Picard (which included representations by the Wilpon signatories that they had the right to execute and carry out the Settlement Agreement in their respective individual and fiduciary capacities), the Wilpons should have considered resolving potential duty of loyalty and conflicts of interest issues of the Fiduciaries. Otherwise there can be a myriad of future complaints from beneficiaries of Entities, especially those of the Allowed Entities, that their Picard Distributions should not have been used for the benefit of the Wilpon Obligors to pay for Wilpon Liabilities. Additionally, destruction of numerous Wilpon estate and gifting plans and incurrence of gift tax exposure for certain of the Wilpons could result from the use of Allowed Claims to satisfy Wilpon Liabilities.

One way to have addressed such a complex and diverse situation would appear to be an agreement among all of the Wilpons similar to that of a “tax sharing agreement” (a sample appears here). A tax sharing agreement, as discussed in U.S. Treasury Regulations, allocates the federal income tax liability of individual members of a consolidated group for which a single tax return is filed and a single amount is paid to the Internal Revenue Service. Under a tax sharing agreement, each of the individual members of the consolidated group has its own tax obligation or tax loss calculated as if it were taxed separately and not as a member of the group. A member of the consolidated group that individually would have had a loss for tax purposes is entitled to compensation for the use of the loss to reduce the tax liability for the consolidated group. Conversely, a member of the group that individually would have had taxable income would be required to compensate another member(s) for using such other member’s loss to reduce or eliminate the tax liability of the consolidated group. Under the Treasury Regulations, if one member owes a payment to a second member, the first member is treated as indebted to the second member. If the obligation is not paid, the amount not paid generally is treated as a distribution, contribution, or both, depending on the relationship between the members.

Similarly, to avoid future uncertainties, the Wilpons could forge an agreement ( “Allocation Agreement”), with adequate advice of counsel for the involved parties, to provide a method for Allowed Entities to be compensated for the use of their Allowed Claims for the benefit of the Wilpons and the Wilpon Obligors to offset Wilpon Liabilities under the Settlement Agreement. The Allocation Agreement would reduce potential exposure of Fiduciaries to objections from beneficial holders of Allowed Claims that they were denied their cash Picard Distributions. However, if the Wilpon Obligors cannot or do not make immediate cash payments under an Allocation Agreement to Allowed Entities (and individuals with Allowed Claims) when Picard Distributions are made, the terms as to when and how deferred payments are to be made and provisions for any interest or other consideration for such deferrals can be problematic and complex.  

Payments among the Wilpons under such an Allocation Agreement could prove to be significant. While the Wilpons may have successfully limited their external cash outlays to the Madoff Estate under the Settlement Agreement with Picard, resolving rights and obligations among Allowed Parties and Wilpon Obligors could result in an appreciable shifting of assets among the Wilpons.

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 83]

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Michael Kline writes:

Installment 63 of this blog series reported that New Jersey Tax Court Judge Gail Menyuk, in an unpublished memorandum opinion (Dalton v. Director, Division of Taxation, NJTC Docket No. 020540-2010) (the “Dalton Case”), disagreed with the position of the Division of Taxation of New Jersey (the “Division”) to find that, under the circumstances of the Dalton Case, investors in the long-running Ponzi scheme of Bernard L. Madoff and his related entities (collectively, “Madoff”) could file amended tax returns for income tax refunds applicable to open tax years.  Installment 63 pointed out limitations on the value as a precedent of the Dalton Case in that it was an unpublished memorandum opinion and that there may have been other cases pending in the New Jersey Tax Court involving the same or similar facts that can be decided differently.

The Division, undaunted by the outcome of the Dalton Case, continues to try to retain collected tax monies from Madoff victims. The recent opinion and decision of New Jersey Tax Court Judge Joseph M. Andresini in the case of Estate of Theodore Warshaw v. Director, Division of Taxation, No. 4000-2009 (the “Warshaw Case”), like the Dalton Case, found in favor of the taxpayer, the Estate of Warshaw (the “Estate”) and against the Division. There are, however, a number of significant differences from the Dalton Case that can be summarized as follows:

1. Having been approved for publication in the New Jersey Tax Court Reports, the opinion in the Warshaw Case has substantially greater weight as a precedent than the Dalton Case.

2. The Warshaw Case dealt with a refund claim by the Estate of an estimated New Jersey Estate Tax payment of almost $90,000 (the “Tax Payment”), not a New Jersey income tax refund claim as in the Dalton Case.

3. The Warshaw Case was one involving the question of a loss of what was a fictitious value of an account according to Madoff statements as opposed to distribution by Madoff of fictitious profits to an investor as in the Dalton Case.

The area of dispute in the Warshaw Case centered around the valuation for an Individual Retirement Account ("IRA"), as of May 27, 2006, the date of death of the Estate decedent (the "Decedent”).  The valuation of the IRA owned by the Decedent as of the date of death that was reported by the Estate in its tax return was $1,463,373. The amount reported was based on figures provided to the Estate in Madoff monthly statements. The IRA had been invested with Madoff, and was supposedly funded with investment securities managed by Madoff. Following Madoff's December 2008 arrest, the Estate representatives learned that the IRA was worthless and the monthly IRA statements from Madoff were fictitious.

Contrary to the monthly statements from Madoff that showed a single line aggregate fictitious value for the IRA assets, it turned out that there were no securities or other assets ever held by Madoff in the name of the IRA. The elimination from the Estate of any valuation for the IRA had the effect of reducing the value of the Estate at the date of the Decedent's death from $1,847,893 to $384,520, which was well below the $675,000 New Jersey estate taxable threshold. 

Imagine the shock and dismay for the Estate representatives, especially the widow, since the Estate had even received post-death distributions from Madoff of $273,626.34 (the “Distributions”) prior to his arrest. As the Judge observed, however, even if the Distributions were to be added to the shrunken Estate valuation as a deemed value of the IRA, the Estate was still below the $675,000 threshold. The Estate filed a refund claim with the Division for the almost $90,000 balance of the Tax Payment.

After giving his analysis, Judge Andresini agreed with the Estate that the IRA had no value as of the date of death of the Decedent, and without it, the assets fell below the $675,000 threshold for paying New Jersey estate taxes. Furthermore, the discovery of the Madoff scheme within 30 months of the date of was also found to be reasonable by the Judge to allow the Estate to receive a full refund of the Tax Payment.

The significant aspects of the Warshaw Case that enabled Judge Andresini to find in favor of the hapless widow included the following analysis. The Judge relied on precedent and painstakingly distinguished the case of Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S. Ct., 291 (1929), which stood for the long-standing principle that “subsequent events may not be considered to determine date of death value for assets in the taxable estate” (the “Ithaca Trust Rule”). The Judge relied on precedents to reason that the arrest of Madoff and the revelation of the Madoff scheme in December 2008 was not a post date of death event that caused or effected a decline or disappearance of value of the IRA but rather was a subsequent event that “provided evidence of value of the assets on the date of death.” [Emphasis supplied]

Judge Andresini pointed out that valuation for federal estate tax purposes is defined as fair market value at date of death, which is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” 26 C.F.R. Section 20.2031-1(b) (2012). In finding for the Estate, the Judge rejected the Division’s argument that the willing buyer and seller could not have known of the Madoff scheme at the date of death and found that “the hypothetical willing buyer need not discover the Ponzi scheme, but need only discovery [sic] that the Plaintiff had no assets to sell.” The Judge reasoned that a willing buyer would have undertaken due diligence to ascertain what individual securities were the basis of the single line gross amount reflected on what turned out to be fictitious Madoff statements.

While the Warshaw Case may be appealed by the Division, it currently stands as a significant decision in a case to prevent the Division from being a beneficiary of the Madoff scheme at the expense of a widow who, like many Madoff victims, found herself to be much less wealthy than she had believed. Even if the case were to stand or be upheld on appeal, its scope of coverage and facts may be too case-specific to benefit many other Madoff victims. It may, however, be of significant value to other estate tax litigants as it expands the type of post-death evidence that may be adduced for determining valuation at the date of death in the face of the Ithaca Trust Rule. As has been true of so many issues generated by Madoff, more on this matter can be expected to unfold in the future.

[To be continued in Installment 82]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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Michael Kline writes:

On June 25, 2012, the Securities Investor Protection Corporation issued a press release reporting and applauding the Supreme Court’s refusal to review the net equity calculation formula used by Irving H. Picard, the Trustee in the Madoff liquidation.  The consequence is that his method of calculating “winners” and “losers,” which was also adopted by Federal District Court Judge Jed S. Rakoff and others in various cases in the Madoff bankruptcy proceedings, will stand. 

The effect of the Supreme Court refusal will be to decrease substantially the aggregate number of claimants and amounts of claims against the pool of money that has already been recovered, and may be recoverable in the future, by Picard in the Madoff cases.  The Supreme Court refusal should also accelerate the distribution of the substantial funds already collected by Picard.

As discussed in Installments 78 and 79 of this blog series, another effect will be to enhance greatly the financial position of the Wilpon-Katz-Mets individual, business, family trust and charitable interests (collectively, the “Wilpons”), who were former defendants of Picard in their celebrated but now-settled case. The Wilpons will be able to receive almost immediate gratification for their recent settlement by having Picard reduce their aggregate deferred settlement payments of $162 million through offset of the allocable share of distributions that would have otherwise been received by some of the Wilpons, based upon the $178 million of their claims that Picard has allowed.

As also discussed in Installment 79, Picard will now also be continuing his appeal in the Second Circuit Court of Appeals, which, to the extent successful, would further benefit the Wilpons.

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 81]

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 Michael Kline writes:

On June 22, 2012, Bill Rochelle reported in Bloomberg BusinessWeek that Madoff Trustee Irving Picard had filed a mass appeal asking the U.S. Court of Appeals for the Second Circuit “to revive about $10 billion in lawsuits against 635 customers that have been or will be dismissed by U.S. District Judge Jed Rakoff.”  Rochelle quoted Judge Rakoff as allowing the mass appeal to “avoid protracted, expensive and potentially duplicative litigation proceedings and facilitate the prompt resolution of the case.”  The appeal by the Madoff Trustee will test the validity of a number of Judge Rakoff’s earlier orders and opinions in the now-settled case among Picard and the numerous defendants, constituting the Wilpon-Katz-Mets individual, business, family trust and charitable interests (collectively, the “Wilpons”). 

This blog series has been covering for several years the often acrimonious proceedings between Picard and the Wilpons that were finally settled on May 31, and voluntarily dismissed on June 6, 2012. Installment 74 highlighted the highly positive results for the Wilpons in the settlement, including the Wilpons' ability to reduce their aggregate deferred settlement payments to Picard of $162 million by offsetting the share of Picard recoveries that will be available to some of the Wilpons based upon $178 million of their claims which Picard has allowed. Now the Wilpons are cheering Picard from the bleachers to recover every dollar that he can.

According to the Rochelle article, the earlier rulings of Judge Rakoff that Picard is seeking to overturn include the following:

(1) a limitation by Judge Rakoff to two years, rather than six years, for the period during which Picard can seek to recover “fictitious profits” from Madoff investors (the $162 million settlement amount between the Wilpons and Picard actually covered six years of alleged fictitious profits);

(2) denial by Judge Rakoff of recovery by Picard of “preferences” in bankruptcy received by certain Madoff investors within 90 days prior to the filing of the bankruptcy proceedings; and

(3) the assumption by Judge Rakoff of jurisdiction over the multitude of Madoff cases rather than leaving them to the bankruptcy court to decide.  

Picard will now be playing on a new ball field in the Second Circuit Court of Appeals while the Wilpons are happy to be fans vigorously encouraging him all the way.

 (Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 80]

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Michael Kline writes:

On May 31, 2012, Federal District Judge Jed S. Rakoff issued his much-anticipated and delayed Order approving the settlement agreement (the “Settlement Agreement”) between Madoff Trustee Irving Picard and the numerous defendants, constituting the Wilpon-Katz-Mets individual, business, family trust and charitable interests (collectively, the “Wilpons”).  However, would the great Yogi Berra, who is famous for saying, “It ain't over till it's over,” be likely to agree that it is over? There appear to be a few loose strands still present, within the Wilpons’ case itself and generally for the many unresolved Madoff/Picard matters.

This blog series has been chronicling the progress of the Picard/Wilpons battle in Federal Court through approval of the Settlement Agreement one year and five days after it began. In particular, some of the loose strands that exist or could still surface include the following:

1.   Installment 74 of this blog series pointed out that Judge Rakoff committed that he would issue an explanatory Opinion “later” with respect to his March 5 and 12, 2012 Orders that lacked accompanying Opinions when rendered. To date the Judge has not yet published such Opinions. Because such Orders may have played a crucial or even decisive role in leading to the Settlement Agreement between the litigants, such Opinions would be helpful in understanding the legal foundations for Judge Rakoff’s Orders and the Settlement Agreement. As Judge Rakoff is a respected and thoughtful jurist, his Opinions could assist in guiding other Madoff cases.

2.  Prior settlements by the Trustee in other  Madoff cases, such as the Picower settlement and the Hadassah settlement, have been appealed by other claimants without success. It is possible that such a challenge could occur in the Wilpons’ matter as well. Such challenges could be assisted by the Opinions referred to in item 1 above.

3. The U.S. Supreme Court could agree to hear a case during the appeal period in the Wilpons’ matter, in which the Supreme Court could consider the method of calculating “winners” and “losers” that was adopted by Judge Rakoff and others in various cases in the Madoff bankruptcy proceedings. (On May 26, 2012, Bloomberg.com reported that the Securities and Exchange Commission opposed the hearing of such a case by the Supreme Court.)  

4.   Installments 75 and 76 raised questions as to the inclusion of the private charitable foundations of the Wilpons in the global Settlement Agreement. It remains to be seen how the inclusion of such private foundations will be reported, if at all, in future Forms 990-PF to be filed with the Internal Revenue Service (the ”IRS”) by such foundations. It is possible that there could even be excise taxes imposed by the IRS with respect to such foundations' inclusion  for the reasons raised in Installments 75 and 76.

5.   If the Settlement Agreement remains undisturbed, it will be a number of years, perhaps as many as six, before we know, what, if anything, the Wilpons will be required to pay out of pocket.  

In light of the foregoing, the approval of the Settlement Agreement by Judge Rakoff may not be the final word that would satisfy Yogi that the Wilpons' matter is "over."

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 79]

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Michael Kline writes:

Those who were eagerly anticipating the final dénouement on May 15, 2012, in the epic battle between Madoff Trustee Irving Picard and the numerous defendants, constituting the Wilpon-Katz-Mets individual, business, family trust and charitable interests (collectively, the “Wilpons”), will apparently have to wait at least until May 31, 2012. The approval of the final Settlement Agreement by Federal District Judge Jed S. Rakoff, originally scheduled to occur at a hearing on May 15, 2012 at 4 p.m., has been postponed until May 31, 2012 at 4 p.m.

Counsel for the Trustee filed a “Notice of Rescheduled Hearing For Entry of Order” (the “Notice”)and an explanatory letter to Judge Rakoff (the “Letter”) on May 4 and May 7, 2012, respectively. The Letter stated:

[T]he Court granted the request [in the Notice] and rescheduled the hearing date to May 31, 2012, at 4:00 p.m., fixed May 24, as the date for any objections to be filed and served, and May 29 as the date on which any reply may be filed and served. 

The Letter further provided the following in response to Judge Rakoff’s request for an explanation of the Notice filing:

The reason for the postponement is to ensure that notice has been properly given in accordance with the applicable Bankruptcy Rules. . . . 

Because the notice of hearing was not filed and docketed in the main SIPA proceeding [in the Bankruptcy Court], the master service list did not receive notice in accordance with Bankruptcy Rules 2002(a)(3) and 9019(a) and the Bankruptcy Order Limiting Notice. We requested the postponement to provide all those on the master service list in the main SIPA proceeding with a copy of the “Notice of Rescheduled Hearing,” a copy of which is attached. We also will serve notice of the rescheduled hearing date and related dates to all interested parties in this action and file affidavits of service in the Bankruptcy Court and this Court before the rescheduled hearing date.

We regret any inconvenience to the Court and the parties.

[Installments 75 and 76 in this blog series had raised some questions relating to the inclusion in the global Settlement of charitable private foundations formed by the Wilpons.]

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 78]

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Michael Kline writes:

This Installment raises some questions relating to the inclusion of the Defendant Foundations, which the Trustee had sued for recovery of “fictitious profits” and principal, as parties to the global Settlement Agreement between Picard and the Wilpons. Installment 75 (Part 1) of this blog series, which should be read together with this Installment, discussed the “Schedule 1 Foundations” and concerns about their inclusion in the Settlement Agreement. (Capitalized terms not otherwise defined herein shall have the meanings assigned to them in Installment 75.)   

Unlike the Schedule 1 Foundations, the Defendant Foundations are defendants in the Litigation, and each of them is a signatory to the Settlement Agreement, with Fred Wilpon having signed as Director for the Wilpon Family Foundation and Saul B. Katz having signed as Director for the Katz Family Foundation. Moreover, the Defendant Foundations are listed on Schedule 2 of the Settlement Agreement as recipients of transfers from Madoff in excess of principal, as are the other defendants in the Litigation. 

However, the fact that the Defendant Foundations are literally “on the same page” as the other defendants in the Litigation, including Fred Wilpon and Saul B. Katz as individuals defendants, should not finish the analysis as to whether the Defendant Foundations are properly parties to the Settlement Agreement. The analysis utilized in Installment 75 for the Schedule 1 Foundations should be considered for the Defendant Foundations as well.

Simply stated, there is a possible dichotomy between the interests of the Defendant Foundations and the individuals who occupy the same status with respect to the Defendant Foundations as the “Fiduciary Defendants” of the Schedule 1 Foundations. (Such individuals will be defined as Fiduciary Defendants with respect to the Defendant Foundations.) While more subtle in the case of the Defendant Foundations, there is a potential divergence of interests that calls for analysis of (i) the duty of loyalty of fiduciaries and (iii) the avoidance of conflicts of interest and prohibited “private benefit and inurement” that was discussed respecting the Schedule 1 Foundations.  To reiterate, as indicated in the IRS Compliance Guide,

A private foundation is prohibited from allowing more than an insubstantial accrual of benefits, including non-monetary benefits, to individuals or organizations. The intent is to ensure that a tax-exempt organization serves a public interest, not a private one. If a private benefit is substantial, it could jeopardize the organization’s tax-exempt status.

Excise taxes for such violations can also be imposed by the IRS on both the non-complying private foundation and its fiduciaries. Basically, the allegation could be made that the inclusion of the Defendant Foundations in the Settlement Agreement benefited on a monetary and/or a non-monetary basis their respective Fiduciary Defendants in settling the Litigation on the most favorable terms on a global basis. 

Query, did the Trustee and the Fiduciary Defendants explore reasonably the question as to whether the Defendant Foundations could have and should have made a better deal by themselves outside of the framework of the global Settlement Agreement? Installment 60 of this blog series (and prior Installments linked therein) give examples of the flexibility and financial accommodations that the Trustee has provided in other cases of charities that realized fictitious profits in the Madoff scheme and would have suffered serious or even irreparable adversity if they were to be fully clawed back.

In conclusion, in the cases of both the Schedule 1 Foundations and the Defendant Foundations, greater scrutiny of their participation in the Settlement Agreement may be called for in order to promote an appearance of propriety for the Settlement Agreement and the Fiduciary Defendants. In addition to the questions at the end of Installment 75, query whether the Trustee, as the party moving for approval of the Settlement Agreement, has a responsibility to be pro-actively bringing the matters of the Involved Foundations to the attention of Judge Rakoff for inclusion in the court’s full and fair review and approval of the Settlement Agreement in this widely-followed Litigation.

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

(To be continued in Installment 77)

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Michael Kline writes:

This Installment addresses some of the effects on, and implications for, certain charitable private foundations (collectively, the “Involved Foundations”) and their respective officers, directors, trustees and foundation managers (collectively, the “Fiduciaries”) under the proposed settlement agreement dated April 13, 2012 (the “Settlement Agreement”), between Madoff Trustee Irving Picard and the numerous defendants, constituting the Wilpon-Katz-Mets individual, business, family trust and charitable interests (collectively, the “Wilpons”). Installment 74 and prior postings in this blog series discussed certain aspects of the Settlement Agreement. 

The Settlement Agreement, which would terminate all existing litigation between the Trustee and the Wilpons (the “Litigation”), is subject to the approval of Federal District Judge Jed S. Rakoff at a hearing scheduled for 4 PM on May 15, 2012.  Further information, including Forms 990-PF filed with the Internal Revenue Service (the “IRS”), respecting each of the Involved Foundations and their Fiduciaries may be found on the GuideStar Web site.

A recurring theme in this blog series has been the relatively inconsistent and sometimes perplexing manner in which the Trustee has dealt with charities that invested with Madoff. Installment 60 and prior Installments discussed some of the differences in the way Picard was dealing with the Judy & Fred Wilpon Family Foundation (the “Wilpon Family Foundation”) and the Iris & Saul Katz Family Foundation (the “Katz Family Foundation” and collectively with the Wilpon Family Foundation, the “Defendant Foundations”), as contrasted to other public charities and charitable private grant-making foundations. 

The Defendant Foundations are listed on Schedule 2 to the Settlement Agreement, which is the “Summary of Six-Year Transfers from BLMIS [Madoff] to Defendants in Excess of Principal,” respecting persons subject to “clawback” efforts by the Trustee of “fictitious profits” and principal. A number of the Fiduciaries of each of the Defendant Foundations also are defendants listed on Schedule 2 for whom the Trustee was seeking clawback. The Defendant Foundations will be discussed more fully in a future Installment in this blog series. 

The remaining Involved Foundations (the “Schedule 1 Foundations”) appear on Schedule 1 to the Settlement Agreement, which is the “Summary of Allowed Net Equity Claims Against the BLMIS Estate.” Therefore, the Schedule 1 Foundations are not defendants in the Litigation; nor are they signatories to the Settlement Agreement. They are claimants that have been recognized to be entitled to share in the funds recovered by the Trustee in the Madoff bankruptcy.

The Schedule 1 Foundations include, among others, The Dayle H & Michael Katz Foundation Inc. (the “Michael Katz Foundation"). Notably, each of the Schedule 1 Foundations has one or more Fiduciaries who, in one capacity and/or another, is (i) a defendant in the Litigation, (ii) listed on Schedule 2 to the Settlement Agreement and (iii) a signatory to the Settlement Agreement. The Foundation Fiduciaries of each of the Schedule 1 Foundations have an aggregate larger amount of clawback exposure on Schedule 2 than the allowed net equity claim of the related Schedule 1 Foundation (a “Schedule 1 Foundation Claim”). Except for the Michael Katz Foundation, the amount of  the Schedule 1 Foundation Claim of each Schedule 1 Foundation is relatively small, less than $100,000. In the case of the Michael Katz Foundation, however, the Schedule 1 Foundation Claim is $617,000, while the maximum aggregate exposure reflected on Schedule 2 for clawback against the Michael Katz Foundation Fiduciaries exceeds that amount.

In the Settlement Agreement, each Schedule 1 Foundation Claim falls within the definition of a “Defendant Net Equity Claim” under Section 1(c) of the Settlement Agreement. Each of the Fiduciaries who is also a signatory to the Settlement Agreement (a “Fiduciary Defendant”) is defined as a “Defendant” in the Settlement Agreement, who, under Section 2(a) of the Settlement Agreement, has agreed, among other things, to assign all Defendant Net Equity Claims (which would include a Schedule 1 Foundation Claim) to the Trustee.  In addition, each Fiduciary Defendant has represented and warranted under Section 6(b) of the Settlement Agreement that he or she has full power, authority and legal right to assign his or her respective Defendant Net Equity Claim (which would include a Schedule 1 Foundation Claim).

The foregoing acts by the Fiduciary Defendants may be problematic. In effect, each of the Schedule 1 Foundation Claims, which would otherwise be a future unencumbered expectancy to be paid to the respective Schedule 1 Foundation by the Trustee, is being assigned under the Settlement Agreement to the Trustee to fund a portion of the monetary clawback exposure of its respective Fiduciary Defendants.   As stated earlier, the Schedule 1 Foundations are not defendants in the Litigation; nor are they directly signatories to the Settlement Agreement.

This dichotomy between the interests of Schedule 1 Foundations and their respective Fiduciary Defendants sets up a classic divergence of interests that calls for consideration of compliance requirements flowing from the duty of loyalty of fiduciaries and the potential for conflicts of interest. Moreover, the question of potential prohibited “private benefit and inurement” respecting the Schedule 1 Foundations under IRS rules can be raised as indicated in an IRS Compliance Guide:

A private foundation is prohibited from allowing more than an insubstantial accrual of benefits, including non-monetary benefits, to individuals or organizations. The intent is to ensure that a tax-exempt organization serves a public interest, not a private one. If a private benefit is substantial, it could jeopardize the organization’s tax-exempt status.

In addition, no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual. This means that an organization is prohibited from allowing its income or assets to accrue to insiders. An example of prohibited inure­ment would include payment of unreasonable compensation to an insider. An insider is a person such as an officer, director, or a key employee who has a personal or private interest in the activities of the organization. Any amount of inurement may be grounds for loss of tax-exempt status.

In addition to loss of the organization’s section 501(c)(3) tax-exempt status, activities constituting inurement may result in the imposition of self-dealing excise taxes on individuals benefiting from certain transactions with a private foundation.

The laws regarding duty of loyalty and conflicts of interest of fiduciaries and the IRS rules regarding private benefit and inurement are highly complex. Presumably, each of the Schedule 1 Foundations and its respective Fiduciaries would have been well advised to seek separate guidance and counsel as to their respective rights and obligations under the Settlement Agreement and its impact on a Schedule 1 Foundation Claim and the clawback exposure of the Defendant Fiduciaries.

Query, should Judge Rakoff be inquiring into these Schedule 1 Foundation matters as part of his review and approval of the Settlement Agreement?  Should the Schedule 1 Foundations properly be dropped from Schedule 1 of the Settlement Agreement altogether in order to resolve the potential issues? If the Schedule 1 Foundations were to be excluded from involvement in the Settlement Agreement, should the Defendant Fiduciaries be expected to provide substitute funding sources? Whether these questions will be addressed remains to be seen.

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 76]

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Michael J. Kline writes:

Shortly before midnight last night Adam Rubin of ESPN reported that Madoff Trustee Irving Picard had filed court papers seeking approval of the settlement (the “Settlement”), which was reached on March 19, 2012 with numerous defendants, constituting the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). A posting on this blog series earlier in the day had discussed prospects for the parties’ finalizing arrangements by the deadline set for yesterday.

The account by Rubin reflects the efforts made in the Trustee’s press release (the “Press Release”) to establish on a point-by-point basis that all of the required conditions for consummating the Settlement had been achieved to request final approval of Federal District Judge Jed S. Rakoff. Rubin’s posting states that the Trustee gave the following as his reasons for agreeing to the Settlement:

The Settlement Agreement represents a good faith, complete and final settlement between the two parties. It is a practical and fair compromise of complex litigation issues and avoids a protracted and expensive trial and lengthy appeals. The settlement is in the best interests of the BLMIS [Madoff bankruptcy] Customer Fund and the BLMIS customers with allowed claims – who were defrauded by the Madoff Ponzi scheme – who will ultimately receive distributions of recovered monies from the Customer Fund.

Rubin reports that a hearing for approval of the settlement before Judge Rakoff has been scheduled for Tuesday, May 15, 2012, at 4:00 p.m. Such approval appears to be the only condition for implementation of the Settlement. With all of the painstaking preparation that has gone into achieving the Settlement to this point, one would expect such approval to be primarily a formality.

There is, however, an open item for those who are interested in the legal reasoning and judicial thinking put forth by Judge Rakoff during the proceedings. An earlier blog posting in this series noted that Judge Rakoff had issued significant Orders on March 5 and March 14, 2012 (the "Orders") without accompanying Opinions. In rendering the Orders, Judge Rakoff had stated that an Opinion to explain the Orders would be forthcoming later. To date, the Judge has not yet published such an Opinion. Because the Orders may have played a pivotal role in leading to the Settlement by the litigants, such an Opinion would be helpful for future legal guidance on important issues.

(Michael J. Kline is the author of this entry and the 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.)

[To be continued in Installment 75]

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Michael J. Kline writes:

In a posting on March 19, this blog series reported that a settlement (the “Settlement”) was reached between Madoff Trustee Irving Picard (the "Trustee") and the numerous defendants, the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). While the Memorandum of Understanding (the “Memorandum”) respecting the Settlement stated that it was a legally binding document, the Memorandum contained a number of conditions to finalizing the Settlement to be completed on or before Friday, the 13th of April, 2012. 

Although this matter has been relatively quiescent in the media since the Settlement, the parties have undoubtedly been working around the clock to meet the deadlines. There is a possibility that some of the conditions will not be resolved by April 13 as discussed below. The conditions required for the parties’ resolution by tomorrow under the Memorandum include the following:

1. The obligations of the Trustee Irving Picard in reaching the Settlement are subject to the approval of District Judge Jed S. Rakoff. (Presumably such approval cannot occur until all other conditions for the Settlement have been resolved.)

2. The approval of the Settlement by all required lenders to the Wilpons is to be obtained by the Wilpons. (Because it may be assumed that such lenders were part of the original process of entering into the Memorandum, this condition should be satisfied by the deadline.)

3. The parties to the Memorandum are to enter into definitive documentation reflecting the terms of the Settlement and “other terms customary for agreements of this type as expeditiously as reasonable possible, but in no event later than April 13, 2012.” If the parties cannot reach agreement on such definitive documentation by April 13, the Memorandum calls for differences to be resolved by binding arbitration to be conducted by a lawyer selected by former Governor Mario Cuomo. (This arbitration process contemplates potential delay of finalization of the Settlement and approval of Judge Rakoff but does not change the fact that the Settlement is said to be “binding on the parties.”)

4. The Memorandum provides that from March 19, 2012 to April 13, 2012, the Wilpons are to provide the Trustee with reasonable access to information that enables the Trustee to confirm the basis for the Settlement and the representations of the Wilpons. (Query: If the Settlement is not fully finalized by April 13, 2012, does the Trustee lose his right of “reasonable access to information” thereafter?  What if the Trustee cannot confirm the basis for the Settlement and the representations of the Wilpons?)

There still may be items of interest or surprise flowing from this case before (or even after) final approval is given by Judge Rakoff.

(Michael J. Kline is the author of this entry and the 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.)

[To be continued in Installment 74]

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Michael J. Kline writes:

Today, before the start of a jury trial and after months of intensive and often acrimonious exchanges of briefs and motions in court and posturing in the media, a settlement was reached between Madoff Trustee Irving Picard and the numerous defendants - the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). While the agreed upon Memorandum of Understanding (the “Memorandum”) requires the Wilpons to pay $162 million (the “Settlement Payment”) to Picard, a closer review of the terms of the Memorandum reveals that the Wilpons appear to have negotiated a very favorable result, perhaps actually an outright victory, in their efforts to keep control of the Mets for reasons including the following:

1. Rather than the Wilpons’ risking a potentially distasteful and embarrassing public jury trial that could have resulted in an adverse judgment of more than $380 million, followed by an almost certain appeal, the Wilpons agreed to a Settlement Payment of “only” $79 million more than the $83 million judgment already outstanding in the case.

2. The Wilpons will pay no money toward the $162 million out of their own pockets for three years; the only payments during that period would come from potential recoveries for the Wilpons by Picard from the Wilpons’ collective claims as victims in the Madoff scheme(“Customer Claim Recoveries”) as victims in the Madoff scandal, aggregating an estimated $178 million.

3.  The Trustee agreed to a two-year installment payment plan for the Wilpons beyond the first three years for any remaining unpaid amounts on the Settlement Payment (less any additional Customer Claim Recoveries during such two-year period).

4. The fact that Picard is allowing the Wilpons to offset Customer Claim Recoveries against the Settlement Payment is a valuable and perhaps unexpected dividend that has established the Wilpons as stakeholders in the ultimate Picard recoveries and has likely converted the Wilpons into cheerleaders for future Picard successes.

5. The certainty that has been brought about by the Memorandum now quantifies the liability of the Wilpons and promotes their ability to sell minority interests in the Mets that have been so far delayed and postponed for many months.

6. The focus on the litigation and the accompanying expenses and angst will now be dissipated, and the Wilpons can concentrate on refinancing and rebuilding the Mets.

7. The personal guarantees of the Settlement Payment by Fred Wilpon and Saul Katz are limited to a total aggregate amount of up to $29 million.

8. Potential dissension and conflicting testimony at trial among the families, businesses, family trusts, charities and friends of the Wilpons has been avoided.

9. The risks and sensationalism of a jury trial have been avoided.

There are a number of contingencies in the Memorandum to be satisfied by April 13, 2012, including the receipt of required approvals to the terms by lenders to the Wilpons and the parties’ agreement upon definitive documentation. These would not appear to be major obstacles at this point. 

On the eve of the jury trial, almost no journalist had written about the possibility of settlement, except Richard Sandomir and Ken Belson of The New York Times in their article on March 18, 2012, “Prospect of Jury Trial in Mets’ Madoff Case May Push Sides Toward Settlement.” Why then, would Picard have agreed to what appears to be such a favorable result for the Wilpons? Some of the possibilities are as follows:

1. While there have been a number of important rulings by Judge Jed S. Rakoff that are adverse to the Trustee in this case, it is at the trial court level. Although such rulings have value as authority in other cases, they are not binding precedent for any other judge or case. If Picard had to appeal an adverse final result in the Wilpons’ case, he could have received a negative result at the appellate level that would have been binding precedent.

2. Picard has taken increasing public criticism for the legal fees in the Madoff matter, which have now exceeded a quarter billion dollars.  As large a number as the Settlement Payment may be, it pales in comparison to a number of other cases brought by Picard with potential billions of dollars at stake. The Trustee can now focus on these cases more fully.

3. The Trustee wanted to obtain a significant recovery from the Wilpons, not drive them out of business, in view of the many new complexities that such a result would have brought.

4. The risks and sensationalism of a jury trial have been avoided.

There still may be items of interest or surprise flowing from this case before the final definitive agreement is inked between Picard and the Wilpons.  This blog series will follow them.

(Michael J. Kline is the author of this entry and the 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.)

[To be continued in Installment 73]

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Michael J. Kline writes:

Yesterday, Judge Jed S. Rakoff issued a new Order (the “March 14 Order”) without an accompanying Opinion, almost on the eve of the trial by jury between the plaintiff, Madoff Trustee Irving Picard, and the numerous defendants, the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). The March 14 Order is certain to create consternation in the Wilpons’ spring training camp.

The March 14 Order states “the burden of proving, by a preponderance of the evidence, that the defendants [the Wilpons] received the aforementioned transfers in good faith rests on the defendants.” As a result Judge Rakoff has now placed on the Wilpons the burden of proving the absence of willful blindness rather than placing the burden of proving the presence of willful blindness on the Trustee. The March 14 Order also states that, in issuing the Order, “the Court adheres to its prior determination.” However, there was no reference in the Order as to when and where the “prior determination” was made by Judge Rakoff.

This blog series reported previously on the Order issued by Judge Rakoff on March 5, 2012 (the “March 5 Order” and, collectively with the March 14 Order, the “Orders”). In his March 5 Order, Judge Rakoff denied the Wilpons’ motion for summary judgment, while expressing that "the Court remains skeptical that the Trustee can ultimately rebut the defendants' showing of good faith, let alone impute bad faith to all the defendants.” The language of the March 5 Order is somewhat perplexing in light of the March 14 Order, as it would appear to require the Trustee to prove bad faith by the Wilpons at least with respect to actions of defendants on an individual basis.

In each of the Orders, Judge Rakoff promised to issue an explanatory Opinion later. More complete clarity may have been accomplished by Judge Rakoff through issuance of Opinions contemporaneously with the Orders on these major trial matters. The preparation of such Opinions may have been forestalled at least in part by the “firmly scheduled” trial date of March 19, 2012 that Judge Rakoff imposed last fall on the litigants. The trial date may have been ambitious in light of the many complex issues that required pre-trial resolution.

[To be continued in Installment 72]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

This blog series has been monitoring key milestones in the epic battle of Madoff Trustee Irving Picard against the Wilpon-Katz-Mets individual, business, family trust and charitable interests (the “Wilpons”). Yesterday Judge Jed S. Rakoff issued an Order (the “March 5 Order”)  (sans Opinion, which he said will come some time later) in the ever-heating litigation that will culminate with an upcoming March 19 trial date. Even after a trial, however, either or both sides can be expected to appeal. The effect of the continuing uncertainty on efforts of the Wilpons to sell minority interests in the Mets remains unclear.

In his March 5 Order, Judge Rakoff denied the Wilpons’ motion for summary judgment while expressing the view that “the Court remains skeptical that the Trustee can ultimately rebut the defendants' showing of good faith, let alone impute bad faith to all the defendants.” Therefore, absent a settlement, which appears unlikely, Judge Rakoff’s jury trial commencement date of March 19 looms ahead for the Wilpons and Picard.

Additionally, Judge Rakoff granted Picard’s partial summary judgment motion, subject to determination of “the exact amount thereby due the Trustee (though capped at the $83,309,162 that the Trustee expressly seeks on this motion), and how payment should be apportioned among the defendants.”

In writing about the March 5 Order in his article entitled “Mets Must Pay, Go to Trial,” Adam Rubin pointed out,

. . . how the judge apportions the money owed among the cash-strapped Wilpon family, its business and charities will be “critical.” Any member of Wilpon's party seeking to appeal the ruling likely will be required to post a bond worth 110 percent of Rakoff's verdict against them. That would ensure that Picard ultimately will collect the money if the ruling is not overturned by a higher court.

Installments 69 and 58 of this blog series discussed earlier postings by Mr. Rubin and Richard Sandomir of The New York Times regarding the often-alleged continuing efforts of the Wilpons to sell for $20 million each, up to 10 minority 4% pieces of the Mets (the “Minority Sales”). The earlier Installments discussed the legal complexities for Minority Sales, which were originally rumored to be scheduled for the end of January, then the end of February and now still indefinite in time frame. Each time an important trial date surfaces for the Wilpons, discussion of putative Minority Sales becomes almost inaudible.

As stated in Installment 69,

Minority Sales could be delayed indefinitely by the concerns of cautious lawyers for the potential buyers about the pricing of the Minority Interests that theoretically gives the Mets a total value of $500 million. If such value can be found to be inadequate under some credible valuation standard, Picard could possibly attack the sales under New York law as inadequate.

This case clearly will have many more developments in the near future.
 

[To be continued in Installment 71]

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This posting will focus on the implications of recent postings on ESPN.com regarding multiple events that are occurring with respect to the continuing economic and legal challenges facing the New York Mets and their owners in the Madoff aftermath. While most journalists are focusing on the March 19, 2012 date for the scheduled commencement of the Wilpons-Katz-Mets jury trial in their litigation against Madoff Trustee Irving Picard, Andrew Marchand recently discussed the earlier significant February 16 and 23 motion dates that can be crucial in either terminating the litigation in Federal District Judge Jed S. Rakoff’s court room or setting the stage for the issues to be addressed in a later jury trial. 

More recently, Adam Rubin has published several postings about the often-alleged continuing efforts of the Wilpon/Katz group to sell for $20 million each, up to 10 minority 4% pieces of the Mets (the “Minority Sales”).  His January 31 posting highlights the delay that has developed for such potential Minority Sales until the end of February.

It is not surprising that there is a further delay in sales of Minority Interests. Installment 58 of this blog series described the potential under certain circumstances for Picard to upset such sales before or after they take place.

Potential buyers of Minority Interests would appear to be waiting before committing any funds at least until the outcome of the Wilpon-Katz summary judgment motion and the Picard partial summary judgment motion to be considered in late February by Judge Rakoff.   The outcome of those cross-motions could, although unlikely, end the matter completely on Judge Rakoff's playing field. However, it is more likely that, whatever disposition Judge Rakoff makes of the cross-motions, the potential sales of Minority Interests, if any, could be further delayed by a jury trial in Judge Rakoff's court commencing on March 19 or an almost certain appeal by Picard to the Second Circuit should the Wilpon-Katz motion for summary judgment be granted. 

In fact, the Minority Sales could be delayed indefinitely by the concerns of cautious lawyers for the potential buyers about the pricing of the Minority Interests that theoretically give the Mets a total value of $500 million. If such value can be found to be inadequate under some credible valuation standard, as discussed in Installment 58, Picard could possibly attack the sales price under New York law as inadequate.

While time is clearly not on the side of the Mets and their owners, sales of Minority Interests continue to progress in their knuckleball style.

(Michael J. Kline, Esq., is the author of this entry and the 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.)

[To be continued in Installment 70]

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Previous Installments in this blog series, the most recent of which was Installment 64, have followed key rulings of Federal District Court Judge Jed S. Rakoff in the battle between Irving Picard, the Trustee in the Madoff bankruptcy proceeding, and the Wilpon Interests. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 64.) In his latest Opinion and Order of January 17, 2012, Judge Rakoff denied the motion of Picard for an immediate interlocutory appeal to the Second Circuit Court of Appeals of Judge Rakoff’s earlier ruling on September 27, 2011 that greatly limited the amount that Picard could seek to recover from the Wilpon Interests. As a result Judge Rakoff’s “fixed and firm” trial date of March 19, 2012 remains unaffected.

As pointed out by Richard Sandomir in his New York Times article today entitled “Mets Owners Can Look Forward to Trial During Spring Training,”

The following picture, then, is a near certainty: a month into spring training, Wilpon and Katz, while fielding a team with a reduced payroll, minus its best player, Jose Reyes, and swimming in debt, will be under oath in Rakoff’s Manhattan courtroom. The trial could take at least four weeks.

Therefore, the Wilpon Interests will likely be consumed more with an ongoing trial than baseball on Thursday, April 5, the scheduled opening day of the Mets season at home against the Atlanta Braves, unless the parties can settle before then. (On a more positive note for the Wilpon Interests, March 19 itself appears to be an open date during spring training.)

The possibility of settlement, however, presently seems unlikely, since as Sandomir states, the Wilpon Interests view a trial as “a chance to formally rebut claims that they profited improperly from investing with Madoff and built their fortunes on his fraud.”

Pitchers, catchers and injured players can report as early as Valentine’s Day. Stay tuned for new developments in the ever-evolving case of Picard vs. the Wilpon Interests.

[To be continued in Installment 69]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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Installments 66 and 65 in this blog series were earlier postings of aspects of the effects and aftermath, three years after disclosure, of Hadassah’s unfortunate decades-long involvement with Bernard Madoff (“Madoff”).

This posting will utilize recent publicly-available consolidated financial statements and Forms 990 of Hadassah, the Women’s Zionist Organization of America, Inc. and its related affiliated entities (collectively, “Hadassah”) to review the impact over the last several years of the Madoff scandal on the membership and dues and legal fees of Hadassah.

Membership and Dues

The following information on membership and dues is gleaned from the Hadassah Forms 990 for the respective indicated years:

The information above bears some further analysis. The short seven-month year ended 12/31/2008 resulted from a change in fiscal year by Hadassah to a calendar year. The disclosure of the Ponzi scheme of Madoff occurred December 11, 2008, so that almost all of the dues money had been received for 2008 by that time. Hadassah had a major increase in membership revenues in 2009 that perhaps was attributable, at least in part, to early sympathy that may have resulted from initial reports of millions of dollars in losses suffered by Hadassah in the Madoff scandal. Later in 2009 it surfaced that Hadassah had benefited in cashing out at least $77,000,000 in “fictitious profits” from Madoff.

Perhaps as a consequence of increased information about Hadassah’s involvement with Madoff made 2010 a relative disaster for Hadassah membership revenues as compared to the earlier years. It had such an impact that, as reported in at least one Hadassah publication in South Jersey to members in early 2012,

Hadassah had an amazing 2011 membership year with its “once in a lifetime” $100 deal for life memberships. Over 38,000 life memberships and associate enrollments were processed nationwide.

That membership drive may have yielded as much as $3,800,000 for 2011. However, it was clearly a one time event that was achieved by mortgaging potential future life and annual membership dues, as dues will no longer be generated from the 38,000 new life members. There may be an enduring positive benefit, however, of an increase in the total membership rolls and in volunteer enthusiasm through the 2011 life membership drive. The Hadassah web site quotes $212 as the cost of a life membership during 2012.

Finally, it is clear that Hadassah responded differently in the short fiscal year ended 12/31/2008 as compared to 2009 and 2010.

Legal fees

The following information on legal fees paid is reflected in the Hadassah Forms 990 for the respective indicated years:

Clearly, the costs of legal services for Hadassah were driven up substantially in 2009 and 2010 following the disclosure of the Madoff scandal. However, the legal fees had already started to subside in 2010, as Hadassah was moving toward its settlement with Picard that was completed in 2011.

In conclusion, the effects of the Madoff scandal on Hadassah and its mission have been materially adverse. It will take Hadassah some time for a complete recovery and reduce the effect to nothing more than a bad memory.

(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.)

(To be continued in Installment 68)
 

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Installment 65 in this blog series was Part 1 of a review of the effects and aftermath, three years after disclosure, of Hadassah’s unfortunate decades-long involvement with Bernard Madoff (“Madoff”).

Several days after our posting of Part 1, ynetnews.com published a report from Calcalist (the “Calcalist Report”) about Hadassah Medical Organization (“HMO”), the Hadassah hospital in Israel that is supported and owned by Hadassah Medical Relief Association, Inc., which is the non-profit Hadassah affiliate that actually paid the $45,000,000 in cash settlement to Trustee Irving Picard in the Madoff bankruptcy, as reported in earlier Installments in this blog series. The Calcalist Report stated that

several of the [Hadassah] hospital's suppliers have been complaining that the center has yet to transfer payments worth tens and even hundreds of thousands of shekels, due weeks ago. Hadassah's debt to suppliers is said to amount to nearly NIS 10 million (about $2.65 million).

For its part, Hadassah was quoted by Calcalist as responding as follows:

[U]nlike other hospitals, Hadassah does not receive any budgeting from the government or the State health system. This is a temporary setback in a minor portion of the payments due to the fact that Hadassah has not received all of its due payments from various parties.

Those familiar with hospital finances in the United States and the delays in revenues from third party payers that can often exist, thereby causing adverse cash flow effects and the necessity to delay vendor payments, can appreciate the unfortunate plight of HMO. Nonetheless, the fact that HMO’s delay in payments is deemed newsworthy underscores the adversity that continues to beleaguer the Hadassah organization in the aftermath of Madoff. The Calcalist Report cannot serve to generate confidence among HMO patients, professionals, support staff, donors and vendors that Hadassah has successfully put the effects of the Madoff scandal to rest.
 

(Installment 67 will provide Part 3 of this Hadassah report.)

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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Numerous Installments, including Installments 48 and 42, in this blog series about the Ponzi scheme of Bernard L. Madoff (“Madoff”) have discussed Hadassah, its unfortunate decades-long involvement with Madoff and the aftermath. The matters covered include Hadassah’s original potential “clawback” exposure of up to $77,000,000 or more; the payment in early 2011 by Hadassah of $45,000,000 (the “Payment”) in a final settlement (the “Settlement”) with Irving H. Picard, the Trustee in the Madoff bankruptcy, who thereby permitted Hadassah to keep $32,000,000 in “fictitious profits” from the Ponzi scheme; the limited public transparency by Hadassah of developments in the Madoff scandal, especially in its filings of Forms 990 with the Internal Revenue Service (“IRS”) and other matters.

With the recent passage of the third anniversary of the arrest of Bernard Madoff, it appears appropriate to review where Hadassah currently stands in light of the Settlement and the Payment, as reflected in publicly available documents. Last week we obtained from Hadassah copies of its Forms 990 for the fiscal year ended December 31, 2010 (the “2010 Forms 990”) that were recently filed with the IRS, as they are not yet available on GuideStar. Along with the 2010 Forms 990, we obtained from Hadassah its consolidated financial statements for 2010 as audited by KPMG (the “2010 Financial Statements”). Hadassah should be commended for its commitment to make available its annual audited consolidated financial statements upon request, as there is no legal obligation for it to do so.

The Settlement and Payment by Hadassah to Trustee Picard is reflected in the financial statements for 2010 in both the 2010 Forms 990 and the 2010 Financial Statements. The actual disbursement of the Payment was made by Hadassah Medical Relief Association, Inc., one of the affiliated Hadassah entities (“HMRA”) included in the 2010 Financial Statements, and did not occur until the first quarter of 2011. Nevertheless, in line with Hadassah’s history of minimal public reporting on the Madoff matter, which, to say the least, constituted a major watershed event in recent Hadassah history, Hadassah’s discussion of the Settlement and the Payment in the 2010 Financial Statements is terse and is even less descriptive in the 2010 Forms 990 filed with the IRS.

The following is “Footnote (14) - Subsequent Event” to the 2010 Financial Statements that describes the Settlement and the Payment:

In December 2008, Hadassah learned that it had been a victim of the fraudulent scheme perpetrated by Bernard L. Madoff Securities LLC (Madoff). Madoff has been placed in bankruptcy. The bankruptcy trustee (the Trustee) has informed creditors that substantially all amounts recorded in accounts with Madoff, like those of Hadassah’s, were worthless. The Trustee’s responsibilities include the recovery of Madoff’s assets from any available sources. Under certain circumstances, the Trustee may be able to recover amounts from account holders who, like Hadassah, received direct or indirect distributions from Madoff within the six-year period prior to the date of the commencement of the bankruptcy case. Hadassah has communicated with representatives of the Trustee concerning its accounts with Madoff. On February 16, 2011, Hadassah and the Trustee reached a final nonappealable settlement in the amount of $45,000,000, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet as of December 31, 2010. The settlement payment was made to the Trustee in March 2011.

In contrast, the following is the disclosure of the Settlement and Payment in the 2010 Form 990 of HMRA (“Form 990 Disclosure”):

SETTLEMENT PAYMENT
FORM 990, PART IX, LINE 24A
PART IX, LINE 24 A "SETTLEMENT PAYMENT" IN THE AMOUNT OF $45,000,000 WAS A PAYMENT MADE TO TRUSTEE OF THE MADOFF BANKRUPTCY ESTATE TO SETTLE ALLEGED CLAIMS OF THE ESTATE AGAINST HADASSAH PURSUANT TO A SETTLEMENT AGREEMENT.

The Form 990 Disclosure does not give context or background to the $45,000,000 Payment as did Footnote (14) to the 2010 Financial Statements. The abbreviated Form 990 Disclosure does not seem to do justice to a sum which dwarfs the figures in the 2010 Financial Statements reflected for total 2010 Hadassah consolidated (i) program services expenses of $29,051,633 and (ii) fund-raising and management and general expenses of $25,956,921. The total shown in the 2010 Financial Statements for all Hadassah consolidated expenses for 2010, which excludes the Payment, was $55,008,554, only 22% higher than the Payment.

As discussed in Installment 42 of this series, the December 2008 Forms 990 of Hadassah (the “2008 Forms 990”), which reported a short-year seven-month period ended December 31, 2008 because of a fiscal year change to the calendar year, contained a detailed statement of the Madoff matter. The statement was similar to that contained in the 2008 audited consolidated financial statements. Ironically, however, the 2008 Forms 990 have never been posted on GuideStar to this point, although I have brought the fact to GuideStar’s attention in the past. While Hadassah is not responsible for the omission by GuideStar, the result is that none of the Forms 990 of Hadassah posted to date on GuideStar has any reference to the Madoff matter.

(Installment 66 will provide Part 2 of this Hadassah pulse report.)
 

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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This Installment addresses last week’s Memorandum Order on Thanksgiving Eve (the “Order”) by Judge Rakoff in the Wilpon Case that has been discussed in a number of recent blog entries in this blog series. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 59.)  In the Order, Judge Rakoff granted the request of Irving Picard, the Trustee in the Madoff bankruptcy proceeding, for a jury trial on those of the Trustee’s claims that seek to avoid transfers from Madoff to the Wilpon Interests as fraudulent.

This posting will focus on discussions regarding the Order by Adam Rubin on ESPN.com in his article on November 23, 2011 and his follow-up on Thanksgiving and other considerations.

During my discussions with Mr. Rubin, we agreed that the past history for Picard with respect to Judge Rakoff’s rulings has not been very favorable to Picard. While Picard did win a procedural victory regarding his desire for a jury trial, even this Order by Judge Rakoff is fraught with uncertainty. As quoted by Mr. Rubin in his Thanksgiving article,

. . . not only is a jury totally unpredictable, this case is highly complex and has created significant controversy among legal experts. Understanding of material aspects by a lay jury may be difficult or even impossible. In such a case a jury may feel more comfortable in grasping hold of simpler or limited concepts to which it can relate and can comprehend. This can lead to unexpected results.

This concern that both the Trustee and the Wilpon Interests should have regarding a jury trial is presented in a November 29, 2011 Law360.com article by Kaitlin Ugolik entitled “The Downside To An Aggressive Defense.”  In the article Ms. Ugolik points out that some attorneys see attacking witness credibility as an integral part of defense strategy, but legal experts caution that tactics a jury may see as too harsh or aggressive can have the opposite of their desired effect, eliciting sympathy for the witness. In the Wilpon Case, it is not clear whether Picard or the Wilpon Interests, if either, will have a sympathy advantage with a jury. Moreover, the past history of open hostility between the two parties may well lead to the harsh or aggressive tactics about which Ms. Ugolik cautions, which could materially tilt the jury consensus.

On top of these factors, Judge Rakoff can still have the last word on the facts in a trial if he were to choose to take the case from the jury through a directed verdict or a judgment notwithstanding the jury verdict. As discussed in earlier blog postings there are potential material downside risks and uncertainties for both Picard and the Wilpon Interests if they cannot settle the claims in their current settlement discussions before the jury trial that Judge Rakoff has “firmly scheduled” for March 19, 2012.
 

[To be continued in Installment 65]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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About a year ago, Installment 39 of this blog series, on the aftermath of the Madoff scandal, discussed an article by Harold Brubaker in The Philadelphia Inquirer. His article dealt with the fact that the Pennsylvania Department of Revenue had made it extraordinarily frustrating and difficult for victims of Ponzi schemes to recover state tax refunds for tax payments on income that turned out to be “fictitious profits” and illusory. Brubaker quoted a tax expert as saying that New Jersey did not even have a state tax refund process for such victims. The Brubaker article also pointed out that this approach was totally contrary to the “relatively simple process” for refunds established by the Internal Revenue Service.

Now New Jersey Tax Court Judge Gail Menyuk, in an unpublished memorandum opinion (Dalton v. Director, Division of Taxation, NJTC Docket No. 020540-2010), has disagreed with the position of the State of New Jersey to find that Madoff investors under the circumstances of the Dalton case can file amended tax returns for refunds applicable to open tax years. As discussed below, the decision has limited value as precedent for other cases. Nonetheless, Judge Menyuk provided a detailed analysis of the arguments of the parties, including the similarities and differences between federal and New Jersey income taxation principles and how they endeavor to treat losses from Ponzi schemes. In granting the plaintiff taxpayer’s motion for summary judgment and denying the Division of Taxation’s similar motion, Judge Menyuk said the following:

Because . . . [Madoff] generated no earnings and profits, the distributions reported on plaintiffs’ income tax returns could not and were not made out of earnings and profits. Moreover, the monies plaintiffs’ account was credited with receiving were not corporate distributions at all, since there were no securities in plaintiffs’ account with . . . [Madoff]. . . . The court cannot find a statutory reason why plaintiffs should not be permitted to amend and correct their returns to remove income that was never properly taxable under the GIT [New Jersey Gross Income Tax] Act and to recalculate the tax. . . .

Plaintiffs received no economic gain from the dividend and gains income reported
on their 2005, 2006, and 2007 GIT returns. They were nevertheless taxed on it. The court can find no statutory basis for prohibiting them from recovering the tax paid on that phantom income.

In a footnote to the opinion, Judge Menyuk differentiated between the case before her court and one in which the taxpayer received more in Madoff distributions than the actual principal such taxpayer invested with Madoff:

Where there was actual receipt of money in excess of capital investment, those monies could conceivably be characterized as “[i]ncome, gain or profit derived from acts or omissions defined as crimes or offenses under the laws of this State or any other jurisdiction.” N.J.S.A. 54A:5-1(o). That issue is not present in this case and the court does not decide it.

While the case is helpful guidance as to how Judge Menyuk may view the efforts of her state to retain “tax” revenues, it has very limited value as precedent for other cases, even in New Jersey. It is an unpublished memorandum opinion and can be appealed by the Division of Taxation to the New Jersey Appellate Division. Moreover, there may be other cases pending in the New Jersey Tax Court involving the same or similar facts that can be decided differently. As is true of so many issues generated by Madoff, more on this matter an be expected to unfold in the future.

[To be continued in Installment 64]
 

(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.)

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Installment 61 of this blog series on Madoff discussed the $5.2 million clawback lawsuit (the “JASA Lawsuit”) recently filed by Trustee Irving Picard against Jewish Association for Services for the Aged (“JASA”), reaffirming the perplexing and inconsistent manner, virtually to the point of arbitrariness and unfairness, with which Picard has handled charities that invested with Madoff.

This posting will focus on and discuss the disappointing lack of transparency evidenced by JASA in its failure to provide meaningful public disclosures of the magnitude of its investments with Madoff and its loss and exposure to risk, either in media releases or in filings of Forms 990 with the Internal Revenue Service (“IRS”). In response to the recent filing of the JASA Lawsuit, David Warren, President of the JASA Board of Trustees did post a statement on the JASA web site stating that “JASA will vigorously defend its position.” It would appear that no other prior postings were made on the JASA Web site regarding the impact of the Madoff scandal.

This blog series has previously examined the manner in which other charities, such as Hadassah, Yeshiva University, American Jewish Congress and the Lautenberg Foundation, have handled public disclosure in the aftermath of their investing with Madoff. The purpose of this post is to provide a similar analysis for JASA.

Virtually the only reference to the JASA investment with Madoff prior to the JASA Lawsuit that can be located on the Internet is on page 66 of the original 162-page alphabetical list of the thousands of Madoff customers that was first published in February 2009. Even in that listing the name of JASA was not that obvious, as it was not given in full but was truncated to “JEWISH ASSOCIATION FOR.”

The most perplexing area, however, where JASA has been silent on the effects of the Madoff scandal is with respect to its filings of Forms 990 with the IRS. Since the Madoff scandal came to light in December 2008, JASA has filed Forms 990 for three fiscal years that are available on GuideStar:

(1) the Form 990 for the fiscal year ended June 30, 2008, dated February 2, 2009 (the “2007 Form 990”);
(2) the Form 990 for the fiscal year ended June 30, 2009, dated August 25, 2009 (the “2008 Form 990”); and
(3) the Form 990 for the fiscal year ended June 30, 2010, dated February 15, 2011 (the “2009 Form 990”).

JASA has had three opportunities so far to provide meaningful explanatory disclosures in Forms 990 as to the effects of its investments with Madoff and has chosen not to do so. A review of material differences in the financial statements (the “Differences”) as reported in the 2007 Form 990 and the 2008 Form 990 as to the single fiscal year ended June 30, 2008 (“Fiscal 2008”) emphasizes the need for explanatory notes. Each of the unexplained Differences listed below would be consistent with write-downs by JASA, effective as of June 30, 2008, that related to losses incurred as a result of the Madoff scandal. (There were several reclassifications of items in the financial statements for Fiscal 2008, the interpretation of which would also be aided by explanatory notes.)

The Differences include the following:

1. The 2007 Form 990 reflects a net gain from investment transactions during Fiscal 2008 of $586,579, while the 2008 Form 990 reflects an investment loss for the same Fiscal 2008 of $491,559, for a total reduction of $1,078,138.

2. The 2007 Form 990 reflects “investments – publicly-traded securities” of $7,194,170 as of June 30, 2008, while the 2008 Form 990 reflects “investments – publicly-traded securities” of $3,209,730 as of June 30, 2008, for a total reduction of $3,984,440.

3. The 2007 Form 990 reflects total assets of $34,020,186 as of June 30, 2008, while the 2008 Form 990 reflects total assets of $30,013,294 as of June 30, 2008, for a total reduction of $4,006,892.

4. The 2007 Form 990 reflects net assets after liabilities of $16,564,650 as of June 30, 2008, while the 2008 Form 990 reflects net assets after liabilities of $12,557,758 as of June 30, 2008, for a total reduction of $4,006,892.

Additionally, the absence of any information in the 2008 Form 990 regarding losses by JASA with Madoff is surprising in light of the following question under “Government, Management and Disclosure” 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?”

In the 2008 Form 990, covering Fiscal 2008, Line 5 was answered “No” by JASA. A comprehensive discussion of the IRS instructions and related issues regarding the question on Line 5 is contained in Installment 29. In summary it is disappointing that JASA has not been more forthcoming and transparent with its donors in its public statements and IRS filings as to its involvement and losses in the Madoff scandal. As stated in earlier Installments respecting other charities, JASA would be far better served to make prompt, visible, clear and consistent disclosures and explanations to justify the faith of its supporters and regain the confidence of its donors who faithfully fund its historic mission.

[To be continued in Installment 63]
 

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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A continuing theme of this blog series on Madoff has been the perplexing and inconsistent manner, virtually to the point of arbitrariness and unfairness, with which Trustee Irving Picard has handled charities that invested with Madoff.  Installment 60 in this series had only been posted for a few hours when Picard again reaffirmed his erratic behavior in this area. This time, however, Picard may have other purposes for his actions as well.

On October 14, 2011, Picard filed a lawsuit (Picard v. Jewish Association, 11-ap-02773, U.S. Bankruptcy Court, Southern District of New York (Manhattan) (the “JASA Lawsuit”) against Jewish Association for Services for the Aged (“JASA”) to recover $5.2 million in “fictitious profits” allegedly withdrawn by JASA during the Madoff scam for a six year period prior to the Madoff bankruptcy proceeding. Founded in 1968, the nonsectarian mission of JASA is to sustain and enrich the lives of the aging in the New York metropolitan area so that they can remain in their homes and communities with dignity and autonomy.

The JASA Lawsuit is in stark contrast to the continuous and relentless efforts of Picard to recover both alleged fictitious profits and principal distributed to the charitable private foundations of the Wilpon/Katz families, the owners of the New York Mets. Moreover, absent other purposes, the JASA Lawsuit is in inexplicable contrast to the settlement that Picard made with Hadassah in March 2011 to allow Hadassah to keep permanently $32 million of a stated $77 million of fictitious profits that it received from Madoff, as described in Installment 48 and earlier Installments of this blog series,

Installment 47 reported that the Forms 990 for 2009 of Hadassah posted on GuideStar showed total unrestricted consolidated net assets for Hadassah of almost $653,000,000 and more than $1,000,000,000 in total net assets as of December 31, 2009. Yet Picard allowed Hadassah to keep $32 million of Madoff fictitious profits. Picard’s diverging treatment for JASA is evidenced by its Form 990 (the “JASA Form 990”) for the fiscal year ended June 30, 2010 (“Fiscal 2010”) that reflects net assets of $8,856,783. A successful clawback from JASA by Picard of $5.2 million, plus the costs of the litigation to JASA, would eliminate 60% or more of its net assets as of June 30, 2010, clearly a crushing or even death blow to its mission.

In Installment 45 and Installment 17 of this series, Diana B. Henriques, author of an acclaimed book on Madoff, was quoted as having written on May 28, 2009 in The New York Times:

There is the widespread fear among some — unfounded, Picard says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.

It is clear that in the case of JASA, the fear was not at all unfounded.

A closer look at the circumstances of the JASA matter reveals that Picard appears to be using the JASA Lawsuit for several potential purposes:

1. Commencing a new case against a venerable, visible and vulnerable charitable defendant to counteract or overturn the ruling issued by Judge Jed S. Rakoff in the Wilpon/Katz/Mets case that limited to two years (rather than the six years that Picard is seeking in the JASA Lawsuit and generally) the period for recovery of fictitious profits in the Madoff case. There are many potential defendants other than JASA against whom Picard could have brought such a lawsuit.

2. Placing a new type of external pressure on, and discomfiture for, Saul B. Katz, one of the owners of the Mets, who is a long-time major donor to, and, according to the JASA Form 990, a JASA Board member and Chair of its Executive Committee. The Form 990-PF for the fiscal year ended June 30, 2008 of the Saul and Iris Katz Family Foundation that is posted on GuideStar reveals contributions totaling $75,000 to JASA that year, the fiscal year immediately prior to the Madoff bankruptcy, and the last fiscal year for substantial contributions by the Foundation. The continuance of the Board relationship of Katz is confirmed by a June 2011 filing by JASA.

3. Subjecting JASA to heightened pressure to (a) distance itself from Katz in light of the costs and adverse media publicity of the JASA Lawsuit and (b) settle the JASA Lawsuit on terms acceptable to Picard that can damage materially the future viability of JASA.
Contrary to his earlier quoted statement, the new initiative by Picard against JASA endangers the financial stability of a struggling charity and its long time charitable mission. Shame on you, Mr. Picard.
 

[To be continued in Installment 62]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)
 

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This Installment addresses one aspect of the firestorm that is raging in the aftermath of the highly controversial and complicated September 28 opinion and order in the Wilpon Case of Judge Jed S. Rakoff in the U.S. District Court for the Southern District of New York (the “Rakoff Opinion”).  The Wilpon Case has been discussed in numerous recent entries in this blog series, most recently in Installments 59 and 58. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 58.)

After Trustee Irving H. Picard received a favorable opinion in the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) and enjoyed numerous victories in the bankruptcy court of Judge Burton R. Lifland, he suffered a major setback from the potential impact of the Rakoff Opinion, not only for the Wilpon Case but also many other pending cases in the Madoff proceedings. This posting will focus on the position of Mr. Picard that the Rakoff Opinion is arbitrary and unfair, especially in view of the inconsistent decisions, perhaps to the point of unfairness, that Picard himself has made relative to certain charities that invested with Madoff, as discussed in earlier postings in this blog series.

In his Memorandum of Law filed on October 7, 2011, in which Picard is seeking an interlocutory appeal to the Second Circuit to challenge the Rakoff Opinion, Mr. Picard stated the following:

This ruling [the Rakoff Opinion] arbitrarily provides one class of [Madoff] customers—those with avoidance liability — the benefit of the fictitious trades that all customers were previously denied. In direct contravention of the [Second] Circuit’s ruling, this result places "some claims unfairly ahead of others.” [Emphasis supplied.]

It is ironic that the view of the Picard team is that Judge Rakoff has acted “arbitrarily” to provide some Madoff customers with the benefit of fictitious trades that all customers were previously denied. The Trustee has himself “arbitrarily” provided some charities that invested with Madoff “the benefit of the fictitious trades” while relentlessly pursuing others.

As discussed in Installment 48 of this blog series and earlier Installments,

Picard and Judge Lifland have allowed Hadassah to keep $32,000,000 [of a total of $77,000,000] of fictitious profits at the expense of other Madoff victims. . . . However, the inconsistent manner in which Picard is treating charitable investors with Madoff warrants further monitoring. As stated in Installments 46 and 47 of this series, Picard is seeking a total of $7,000,000 or more (which is actually more than the amount of fictitious profits subject to clawback) from the Wilpon/Katz [private charitable] Foundations, which have given away millions of dollars each year to highly respected and worthy charities. . . .

Similarly, Installment 50 and earlier Installments highlighted the seemingly favorable treatment that Picard has arbitrarily provided to the private charitable foundation formed by Senator Frank R. Lautenberg. Picard apparently determined not to claw back hundreds of thousands of dollars in revenues of the Lautenberg Foundation that appear to have been generated by distributions of fictitious profits from its investment with Madoff.

Hadassah and the private foundations are all tax-exempt charities. While Hadassah and the Lautenberg Foundation apparently receive passes from Picard, he continues his pursuit of the Wilpon/Katz Foundations and seeks to overturn the Rakoff Opinion in the Second Circuit. The Madoff proceedings move ever onward.
 

[To be continued in Installment 61]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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This Installment addresses some results that came out of yesterday’s opinion and order (the “Opinion”) by Judge Rakoff in the Wilpon Case that was discussed in recent blog entries in this blog series. The most recent discussions were in Installments 58 and 57. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 58.)

This posting will focus on an apparent misunderstanding among the Wilpon Interests’ team as to the meaning of one aspect of the Opinion relating to the size of their potential exposure to fictitious profits, as reported by Adam Rubin for ESPN.com in an article yesterday entitled “Part of Case vs. Mets owners Tossed.” In that article Rubin stated as follows:

A statement released by Wilpon-owned Sterling Partners [the Wilpon Interests] disputed Kline's assertion that the statute of limitations is an open question. In Sterling Partners' view, Rakoff ruled that the two-year statute of limitations is the standard, leaving only $83 million at stake with respect to the potentially recoverable profits from the Ponzi scheme.

It is quite perplexing that the Wilpon Interests would have arrived at their conclusion regarding a limit of $83 million in their exposure for fictitious profits claimed by the Trustee to be $295 million in light of the following footnote on page 11 of the Opinion in which Judge Rakoff clearly says the opposite:

6. Although, given the difficulty defendants will have in establishing that they took their net profits for value, the Trustee might well prevail on summary judgment seeking recovery of the profits, how to determine which profits the Trustee can recover remains an open question. Specifically, the Court does not resolve on this motion whether the Trustee can avoid as profits only what defendants received in excess of their investment during the two year look back period specified by section 548 or instead the excess they received over the course of their [the Wilpon Interests] investment with Madoff. According to the Amended Complaint, defendants' profits amounted to $83,309,162 in the two years preceding the bankruptcy and $295,465,565 over the course of their investment. Amended Complaint. [pars.] 1105, 1108." [Emphasis supplied]

The Judge not only says that he did not rule in the Opinion on the amount of fictitious profits in play; he punctuated his statement by repeating the potential range of liability in his view: “. . . $83,309,162 in the two years preceding the bankruptcy and $295,465,565 over the course of their [the Wilpons Interests] investment.”

While the Wilpon Interests should be commended for their optimism, the favorable rulings in the Opinion by Judge Rakoff did not go as far as they would like to believe.
(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

[To be continued in Installment 60]
 

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

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This Installment will address the potential legal disabilities that exist under the New York Debtor and Creditor Law for the Wilpon/Katz families, the owners of the New York Mets (collectively, the “Wilpon Interests”), in their effort to sell a minority interest(s) in the Mets, in light of the existence of the lawsuit against them (the “Wilpon Case”) by Irving Picard, the Trustee in the Bernard L. Madoff bankruptcy. Installment 57 in this blog series focused on the whirlwind of court proceedings in mid-August respecting the Madoff bankruptcy and their potential impact on the Wilpon Case.

Two weeks after these courtroom events, it was reported that negotiations had been terminated between the Wilpon Interests and David Einhorn (the “Einhorn Negotiations”) that could have provided $200 million to the Wilpon Interests in exchange for a minority interest in the Mets. Such minority interest, however, reportedly could have ripened under the Einhorn Negotiations into a majority interest under certain circumstances after the passage of time. A number of journalists who are closely following the Wilpon Case have discussed a variety of reasons for the breakdown in the Einhorn Negotiations.

On September 1, 2011 Richard Sandomir, with the contribution of Ken Belson, published an article in The New York Times entitled “Deal to Sell Piece of Mets to Einhorn Falls Apart,” which provided insights into the termination of the Einhorn Negotiations. Among other things, the Sandomir article ascribed the breakdown to:

(i) Mr. Einhorn’s view that “the Mets sought changes to their agreement. . ., setting the stage for the rupture”;

(ii) “[H]is [Mr. Einhorn’s] disappointment at the Mets’ opposition to a provision that would have given him preapproval [by Major League Baseball] to be the team’s majority owner; and

(iii) The Mets owners’ shift in tactics to “seeking to attract people willing to buy what amounts to a vanity share in the Mets,” rather than one large buyer.

On the same day, Adam Rubin wrote an article for ESPN.com entitled, “David Einhorn, Mets fail to reach deal.” The Rubin article pointed out that, among other things including items covered in the Sandomir article, a source also said that "Einhorn's claim that the Mets kept changing terms at the last minute was not accurate and that it was actually Einhorn who thought the Mets were in a compromised position and tried to bend the terms to his advantage."

Clearly there are differing perceptions and reports as to the fundamental reasons for the breakdown in the Einhorn Negotiations. However, one area that was not addressed was the potential impact that the pending Wilpon Case may have on the ability of the Wilpons to make a single large deal as opposed to multiple potential smaller deals with “vanity” investors. 

It is likely that there should be concern by Mr. Einhorn and similarly situated large potential purchasers of interests in the Mets that a conveyance by the Wilpon Interests, in light of the serious financial stress that the Wilpons are experiencing and the pending Picard lawsuit, could come under possible attack by Picard as a "fraudulent conveyance" lacking "fair consideration" under Section 273-a of Article 10 of the New York Debtor and Creditor Law (the “Law”). provides the following:

§ 273-a. Conveyances by defendants. Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.

Section 272 of the Law defines "fair consideration" in relevant part as follows:

§ 272. Fair consideration. Fair consideration is given for property, or obligation, a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, . . .

Section 279 of the Law reads as follows:

§ 279. Rights of creditors whose claims have not matured. Where a conveyance made or obligation incurred is fraudulent as to a creditor whose claim has not matured he may proceed in a court of competent jurisdiction against any person against whom he could have proceeded had his claim matured, and the court may,

a. Restrain the defendant from disposing of his property.
b. Appoint a receiver to take charge of the property,
c. Set aside the conveyance or annul the obligation, or
d. Make any order which the circumstances of the case may require. 

Using the Einhorn transaction as an example, this posting will show the potential application of the foregoing provisions of the Law. If Mr. Einhorn or another single investor were to sink $200 million or more in the future prospects of the Mets, there is a real possibility that the transaction can be attacked under the previously cited Sections of the Law by the Trustee. Because Mr. Einhorn was reportedly seeking ultimate control or ownership of the Mets for the $200 million if the Wilpon Interests failed to repay the amount after some passage of time, there may be arguments made by the Trustee that what is being really currently conveyed now is future control of the Mets and what should be “fair consideration” for the prospective current sale of control of the Mets. It is certainly arguable by him that the Wilpon Interests are not currently ready, willing and able sellers of Mets interests with no constraint to sell; therefore, the $200 million may be a bargain price for the to control the Mets in the future.

Smaller sales to “vanity” purchasers with no prospects to characterize the sales as a potential future change in control of the Mets may be less susceptible to attack under the Law.

While the questions of "fraudulent transfer" and "fair consideration" may be challenging, complex and difficult in this context or, even a stretch because of the countless personal and business involvements of the Wilpon Interests, the creative arguments and inclinations of Picard in the Wilpon Case and other cases have had few limits so far.
 

[To be continued in Installment 59]

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

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This Installment in the series on this blog will focus on the whirlwind of activity this past week that had sports writers and fans of the New York Mets buzzing about an appellate opinion rendered by the Second Circuit Court of Appeals on Tuesday and a hearing in a Federal District courtroom in Manhattan at 4 P.M. on a Friday afternoon in mid-August about the Bernard L. Madoff scandal (“Madoff”).

Second Circuit Court Opinion Issued August 16, 2011

Last Tuesday, the U.S. Court of Appeals for the Second Circuit (the “Circuit Court”) issued its long-awaited opinion (the “Opinion”) regarding the method of calculating the amount that net “losers” in the Madoff enterprise are entitled to recover. The Circuit Court adopted the “Net Investment Method” proposed by the Trustee Irving Picard rather than the “Last Statement Method” for the Madoff case, which

limits the class of customers who have allowable claims against the [Madoff] customer property fund to those customers who deposited more cash into their investment accounts than they withdrew because only those customers have positive “net equity” under that method.

The Last Statement Method had been put forth by some Madoff victims to allow the “losers” to use the fictitious amounts reflected in their final Madoff account statements as the basis for the amounts that they lost in the scandal.

The Opinion immediately set off a plethora of conjecture by Mets fans, sports writers, attorneys and legal scholars as to what impact, if any, the Opinion would have on the hearing (the “Hearing”) to be held in the Trustee’s case against the Wilpon/Katz families, the Mets owners, in the Federal District courtroom in Manhattan of Judge Jed S. Rakoff last Friday (the “Wilpon Case”).

On August 18, 2011 Richard Sandomir and Ken Belson published an article in The New York Times entitled “Madoff Decision Is Significant Setback for Owners of Mets,” that provided analysis of the impact of the Opinion. The article pointed out that the Opinion dealt with alleged net “losers” in the Madoff scandal, who were trying to recover more from the Trustee, and not those parties who were alleged net “winners,” such as the Wilpons, who were trying to resist the Trustee’s $300 million “clawback” efforts and his attempt to recover $700 million in principal as well for alleged “willful blindness” of the Wilpons to the Madoff scheme.

The Sandomir/Belson article pointed out that the Opinion itself stated it was not addressing the issue of alleged willful blindness of the Wilpons: ‘It is not contended on this appeal that any [Madoff] victim knew or should have known that the investment and customer statements were fictitious.’ As to the question of the impact of the Opinion on clawback in the Wilpon case, the Sandomir/Belson article observed, “legal experts were divided on whether the appeals court ruling would embolden Picard in his bid to recoup as much money as possible from Wilpon and Katz.”

Hearing on Wilpon Case on August 19, 2011

The frenzy of activity affecting the Wilpon case continued last Friday. Installment 54 of this series pointed out that there was a new playing field and environment to be confronted by the Trustee with the entry by Judge Rakoff into the picture. By his actions at the Hearing, Judge Rakoff confirmed that the game in his court will differ from the home field advantage that Mr. Picard has enjoyed in the bankruptcy court.

On Friday, Adam Rubin wrote an article for ESPN.com entitled, “Ruling on Tossing Suit vs. Wilpons Will Wait,” in which he said “[Judge] Rakoff set a trial date for March but cautioned not to read into that about his likelihood of tossing the case beforehand.” Therefore, after summoning all parties to his courtroom for the Hearing on the eve of a late summer weekend, Judge Rakoff heard lengthy arguments by the attorney teams for the Trustee and the Wilpons but reserved ruling on any of the matters before him.

Among other things Mr. Rubin reported that “[e]xperts believe the $700 million portion [of principal return] may ultimately be rejected by Rakoff, but they still expect the Wilpons to be on the hook for a $300 million ‘clawback’. . . .” The Wilpons had argued at the Hearing that the Opinion was not applicable to the Wilpon Case.

As a consequence, under the specter of the potential for dismissal of all or part of the Wilpon Case by Judge Rakoff in late September at the earliest, the parties must now preliminarily prepare for the possibility of a highly extensive and expensive public trial, while being admonished to vigorously seek settlement. Mr. Rubin noted that former New York governor Mario Cuomo, who has been appointed mediator in the Wilpon Case, was in the courtroom.

One thing is clear. The Wilpon Case is not over and will continue to generate considerable interest and potentially new legal precedents. After his article was published, Mr. Rubin said, “Hopefully I'm done for a few days with the topic.” Presumably he desires to return his attention to the fields on which Mets baseball is usually played.

[To be continued in Installment 58]
 

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

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We received a comment from a person whom I will call “N.P.” in response to Installment 55 in this series on the Bernard L. Madoff (“Madoff”) scandal. N.P.’s question was based on an article by Linda Sandler posted on June 1, 2011 on Bloomberg.com. In essence, N.P. was asking why Installment 55 had raised a question as to whether the courts will continue to approve the fees of Trustee Irving Picard and his law firm as has been done in the past. Based on the Sandler article, N.P. observed the following:

Even though a federal judge described Trustee Picard and his law firm's billing as ‘profligate,’ neither the federal nor the bankruptcy courts have the power to review bills when SIPC [Securities Investor Protection Corporation] is paying or, more accurately, when SIPC is imposing fees on broker-dealers to pay.

I respond to N.P. that I respectfully take a different view from him and Judge Burton Lifland in the bankruptcy court, which, to this point, District Court Judge Jed S. Rakoff appears to have embraced at first blush. First, if “approval” of any kind by the bankruptcy judge is needed for the fees “recommended” by SIPC, logic dictates that, at the very least, the judge has the inherent flexibility to review whether such fees are arbitrary, capricious and/or unreasonable and not require him to approve fees that fall into such categories. Otherwise a review is a foolish and meaningless exercise.

More importantly, however, is the question as to whose money is really being spent here. The Sandler article states the following:

Picard has filed 1,000 suits and is processing more than $17 billion in claims, lawyers told Lifland today. Through March [2011], Picard was personally paid $3.6 million and his law firm was paid $145.6 million, bringing fees for all professionals to $318 million since Madoff’s 2008 arrest, according to court filings.

About $346.3 million of the money advanced by SIPC for use by the Madoff estate was consumed by fees and other administrative expenses, while about $779.3 million was used to pay customer claims, according to court filings. [Emphasis supplied.]

The key to my concerns and disagreement with N.P. is the reference to the amount of “money advanced by SIPC for use by the Madoff estate.” It does not say that the SIPC paid the fees and other administrative expenses. In this regard, a visit to the SIPC Web site on the page entitled “Who We Are” has the following single-sentence paragraph: “Recovered funds are used to replenish SIPC's reserve in the event that the reserve is tapped in the early stages of a liquidation proceeding.” This statement would lead one to reasonably conclude that the $346.3 million in legal fees and administrative expenses advanced by SIPC in the Madoff proceeding, or at least a meaningful portion thereof, will not be paid by broker-dealer members of SIPC, but rather will be recouped by SIPC out of recoveries by Picard. That would mean, in effect, that funds otherwise available to pay victims are being depleted by the substantial legal fees and administrative expenses.

I would urge Judge Rakoff to take a second look at who is really paying for the expenses of the Madoff proceeding.

[To be continued in Installment 57]

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

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This is the fifty-fifth in a series of Installments on this blog  that are discussing issues arising from the Bernard L. Madoff scandal (“Madoff”). A number of Installments in this series, most recently Installment 54, have highlighted the apparently inconsistent and peremptory approach that Irving Picard, the Trustee in the Madoff bankruptcy (“Mr. Picard”) has taken with respect to the Wilpon/Katz families, the owners of the New York Mets, and their Section 501(c)(3) private foundations (collectively, “Wilpon/Katz”), in contrast to other charitable organizations.

Installment 54  pointed out that there was a new playing field and environment to be confronted by Picard with the entry by Federal District Court Judge Jed S. Rakoff into various lawsuits brought by Mr. Picard. Judge Rakoff has now already indicated that the game in his court will differ from the home field that Mr. Picard has enjoyed for over 2 ½ years in the bankruptcy court. Last week there were two new developments for Mr. Picard, one in the Federal District Court and the other from a new team - the General Accountability Office (the “GAO”).

Diana B. Henriques wrote in a July 29, 2011 article in The New York Times  about Judge Rakoff’s ruling that Mr. Picard did not have the right to sue HSBC and other banks on behalf of the victims. Ms. Henriques observed that:

The opinion [in the HSBC case] will most likely be closely read by lawyers for the owners of the New York Mets baseball team, who are also before Judge Rakoff challenging a case Mr. Picard has filed that seeks $1 billion in fictional profits and damages from the team’s owners, the Wilpon family.

At a hearing on the HSBC issue earlier this year, Judge Rakoff indicated that he saw a different set of issues arising in the challenge by the Wilpon family, so it was not clear what effect this new ruling would have on that suit.

On July 29, 2011, Joe Nocera observed in his column in The New York Times entitled “The Madoff Trustee’s Bad Day”:

Ultimately, Picard and Sheehan [one of Mr. Picard’s chief attorneys] were trying to do something that has been sorely lacking in the aftermath of the financial crisis. They were trying to bring about some justice, using the only weapon at their disposal: litigation. That’s not their job, of course, and that is partly why they were handed such a stinging defeat. But at least they were trying, which is more than you can say for the Justice Department.

Mr. Picard can certainly appeal Judge Rakoff’s ruling. Nonetheless, it is clear that Judge Rakoff will be bringing a bold new perspective to issues in the Madoff bankruptcy, perhaps including the Wilpon/Katz matter. Additionally, Mr. Nocera’s article brings to mind the question as to whether the Madoff trustee should be expending millions in legal fees approved by the bankruptcy court for embarking on an adventure “that’s not their job.”

This last week also saw the entry of the GAO as a new player in the Madoff aftermath. An article written by Michael O’Keefe in the NY Daily News on July 28, 2011 reported:

A federal watchdog agency [the GAO] has agreed to investigate allegations that Irving Picard . . . is punishing the Ponzi scheme scammer's victims by filing “clawback”" lawsuits, Rep. Scott Garrett (R-N.J.) announced Wednesday.

The “comprehensive evaluation” of Picard's work as the Madoff trustee will also include a review of the legal investigative costs Picard and his firm, Baker & Hostetler, have incurred during the cost of the investigation.

This development raises a new wrinkle for Mr. Picard in that, for the first time, he and his team will be playing defense. If the review of the GAO is broad enough, then it may get into some of the decisions made by Mr. Picard in pursuing clawback in selected cases and in specific instances, such as Wilpon/Katz, even principal recovery.

Other questions may arise out of the new GAO investigation. For example, who will foot the inevitable legal bills of Mr. Picard and his law firm, potentially both internal and external, in their responses to inquiries by the GAO? Will Mr. Picard seek payment or reimbursement from the bankruptcy court of all or part of the legal time spent as reasonable and necessary costs of the Madoff proceeding? If Mr. Picard were to do so, will the bankruptcy court approve the payments requested, as it has done for his fee applications to date?

One thing is clear. The Madoff bankruptcy is far from over and will continue to generate considerable interest and new legal precedents.

[To be continued in Installment 56]
 

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

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This is the fifty-fourth in a series of Installments on this blog that are discussing issues arising in the aftermath of the global Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). A number of recent Installments in this series, such as Installment 52 and, earlier, Installment 17 have used public filings and media publications to highlight the apparently inconsistent and peremptory approach that Irving Picard, the Trustee in the Madoff bankruptcy (“Picard”) has taken with respect to the Wilpon/Katz families, the owners of the New York Mets, and their Section 501(c)(3) private foundations (collectively, “Wilpon/Katz”), in contrast to other charitable organizations.

Now, however, there will be a new playing field and environment to be confronted by Mr. Picard and his army of attorneys in his crusade against the Wilpon/Katz families. In contrast to the friendly home field advantage for Mr. Picard in the bankruptcy court, Judge Jed S. Rakoff, a Federal District Court judge in Manhattan, has taken jurisdiction of the Wilpon/Katz matter. A July 6, 2011 article by Richard Sandomir in The New York Times characterized Judge Rakoff as

a former federal prosecutor and defense lawyer with an independent streak and a flair for phrase-making. He has been called an activist judge. He has been called a maverick. He has been called other things, a number of them probably unprintable. But few observers of the federal bench would dispute that he is capable of the unexpected.

The article by Mr. Sandomir goes on to say that “lawyers familiar with Rakoff and his appetite for novel rulings said this week that they would not be shocked if he tried try to say something larger about the law.” Indeed Judge Rakoff indicated some skepticism as to “a question that is critical to Katz and Wilpon’s case. How, he wondered, can investors like them not be judged by the securities laws that governed their 25 years of investing with Madoff, but by the bankruptcy laws that came into play after Madoff’s collapse.”

It is clear that Judge Rakoff may bring a bold new and perhaps refreshing and enlightening direction to the Wilpon/Katz matter. He does not appear to be willing to limit his review to the scope that has been so far carefully defined by Mr. Picard and the bankruptcy court. His involvement may have significant impact on the entire Madoff case. It is hoped that an enlarged field of inquiry by Judge Rakoff will address some of the peremptory and perplexing decisions of Mr. Picard in the Madoff bankruptcy that appear to be inconsistent and perhaps even unfair.

[To be continued in Installment 55].

(Michael J. Kline, the author of this entry and a co-author of this blog, 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.)

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This is the fifty-third in a series of Installments on this blog that are discussing issues arising in the aftermath of the global Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Installments 51 and 52  and earlier Installments of this series have discussed the apparently inconsistent and peremptory approach that Irving Picard, the Trustee in the Madoff bankruptcy (“Picard”) has taken with respect to the Wilpon/Katz families, the owners of the New York Mets, and their Section 501(c)(3) private foundations (collectively, the “Wilpon/Katz Families”), in contrast to the Lautenberg Foundation, a Section 501(c)(3) private foundation (“Lautenberg”) formed by Senator Frank R. Lautenberg.

As early as Installment 17 this series raised the question as to whether the Wilpons would be treated differently from Hadassah and other charities by Picard. There has been continuing publicity regarding the spectacle of the Wilpon/Katz Families v. Picard.

In Installment 52, this series observed the following:

Thus it would appear that Picard has made peremptory and perplexing decisions not only as to the Madoff investors that he has chosen to pursue but also the extent of recoveries that he is seeking. While the Wilpon/Katz families, including the Wilpon/Katz Foundations, will spend millions of dollars in legal fees and most likely hundreds of millions in settlement or satisfaction of judgments, other Madoff investors like Hadassah and the Lautenberg Foundation will keep millions in fictitious profits or even recover payments in the Madoff bankruptcy proceeding.

Recently, I had the privilege and pleasure of hearing Jeffrey Toobin, a senior analyst for CNN Worldwide since 2003 and a staff writer at The New Yorker since 1993, who is one of the country’s most esteemed experts and authors on politics, media and the law, especially the U.S. Supreme Court. His book “The Nine: Inside the Secret World of the Supreme Court (2007),” was highly acclaimed. Mr. Toobin’s forthcoming book, “The Oath: The Secret Struggle for the Supreme Court,” will be published in 2012. He was the featured speaker on the subject of the U.S. Supreme Court at a luncheon during the partners’ retreat of my law firm earlier this month. Because I knew of Mr. Toobin’s interest and fan support of the New York Mets, I asked him a question about Picard and the Wilpon/Katz Families.

I inquired whether he thought that the aggressive and somewhat incongruous approach taken by Picard against the Wilpon/Katz Families in seeking not only fictitious profits but also principal was part of a larger strategy of Picard to use a success in recovering more than fictitious profits from these highly visible and vulnerable victims as a segue and steppingstone to his attacks on JPMorgan Chase, HSBC and other institutions.

Mr. Toobin responded that he believed that Picard is treating the Wilpon/Katz Families quite unfairly and manifestly different from other individual investors with Madoff. He added that it is possible that Picard is using the case of the Wilpon/Katz Families to set a precedent of a recovery in excess of fictitious profits to use in cases of banks that have much more financial ability to oppose Picard for an extended period of time. Mr. Toobin added that, based on published information, it appeared that the banks should have known that Madoff was operating a Ponzi scheme.

I extend my thanks to Mr. Toobin for his response.

[To be continued in Installment 54]
 

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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This is the fifty-second in a series of installments on this blog that are discussing issues arising in the aftermath of the global Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Installment 51 of this series presented a tabular comparison of financial information derived from the 2007, 2008 and 2009 Forms 990-PF filed with the Internal Revenue Service by (i) The Lautenberg Foundation, a Section 501(c)(3) private foundation (“Lautenberg”) formed by Senator Frank R. Lautenberg, and (ii) the Section 501(c)(3) private foundations formed by the owners of the New York Mets: the Judy & Fred Wilpon Family Foundation, Inc., and the Iris & Saul Katz Family Foundation, Inc. (collectively, the “Wilpon/Katz Foundations”). (The Lautenberg Foundation and the Wilpon/Katz Foundations are sometimes collectively referred to herein as the “Foundations.”)

The table in Installment 51 shows that the Lautenberg Foundation and the Wilpon/Katz Foundations suffered crushing losses in fair market value of assets from the end of 2007 to the end of 2009. During that two year period each of the Foundations lost at least 80% of its fair market value of assets as a result of write-offs attributable to the revelations regarding Madoff. In addition, each of the Foundations saw disastrous losses or declines in investment income during 2008 and 2009 from the level achieved in 2007 as a result of the losses recognized from investments with Madoff.

The Form 990-PF filed by each of the Foundations for 2007 (the last full fiscal year for the Foundations before the Madoff scandal erupted in December 2008) indicated that an appreciable portion of income and contributions reflected for that year were attributable to the fictitious profits from investments with Madoff and distributions from such “profits” to the Foundation. The largest amount of Madoff "profits" so reflected for 2007 was $947,565 that was reported by the Lautenberg Foundation.

While Picard continues his relentless pursuit of the Wilpon/Katz families, including the Wilpon/Katz Foundations for not only “clawback” of $300 million of fictitious profits but also return of principal of $700 million, there is no such pursuit of the Lautenberg Foundation, even for clawback. Moreover, there is even evidence (while not conclusive because of a lack of an explanatory note) in the 2009 Form 990-PF filed by the Lautenberg Foundation that it received a cash recovery of $500,000 in the Madoff proceeding. See Installment 50 of this series for further discussion.

Thus it would appear that Picard has made peremptory and perplexing decisions not only as to the Madoff investors that he has chosen to pursue but also the extent of recoveries that he is seeking. While the Wilpon/Katz families, including the Wilpon/Katz Foundations, will spend millions of dollars in legal fees and most likely hundreds of millions in settlement or satisfaction of judgments, other Madoff investors like Hadassah and the Lautenberg Foundation will keep millions in fictitious profits or even recover payments in the Madoff bankruptcy proceeding.

[To be continued in Installment 53]
 

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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This is the fifty-first in a series of installments on this blog that are discussing issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”).  Installments 49 and Installment 50 of this series and several prior Installments have discussed The Lautenberg Foundation, a private foundation (“Lautenberg”) formed by Senator Frank R. Lautenberg, and its investment with Madoff.  

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This is the fiftieth in a series of installments on this blog that are discussing issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Installment 49,  Installment 41 and several prior Installments in this series have discussed The Lautenberg Foundation, a private charitable foundation (the “Foundation”) formed by Senator Frank R. Lautenberg, and its investment with Madoff. The 2008 Form 990-PF (the “2008 Form 990-PF”) and the 2009 Form 990-PF (the “2009 Form 990-PF” and, collectively with the 2008 Form 990-PF, the “Foundation Forms 990-PF”) filed by the Foundation with the Internal Revenue Service (the “IRS”) are the vehicles for the analysis on this blog of the financial impact on the Foundation of its relationship with Madoff . The Foundation Forms 990-PF are available to the public on the charity information Web site GuideStar.

Comparing the 2009 Form 990-PF to the 2008 Form 990-PF, which was filed with the IRS 15 days earlier, reveals some interesting new financial information, as follows:

The 2009 Form 990-PF reflects a fair market value of assets for the Foundation as of
December 31, 2009, of $967,302, almost the same amount as the fair market value of assets for the Foundation as of December 31, 2008 of $1,001,517. Yet the Foundation reported an excess of expenses over revenues of ($365,087) (the “Loss”) for 2009. The major source of the Loss was explained in Statement 3 to the 2009 Form 990-PF as a charge for “Madoff Theft Loss Balance Remaining” of ($296,072) to “Revenue per Books” and “Net Investment Income.”

Statement 6 to the 2009 Form 990-PF reflected Corporate Stock holdings of the Foundation in Bernard L. Madoff Investment Securities LLC with zero book and market values as of December 31, 2009. As observed in Installment 41 of this series, Statement 9 to the 2008 Form 990-PF, which was filed with the IRS 15 days earlier than the 2009 Form 990-PF, reflected Corporate Stock holdings of the Foundation in Bernard L. Madoff Investment Securities LLC with a book value of $696,072 and a fair market value of $400,000 as of December 31, 2008. No statement was given in either of the Foundation Forms 990-PF as to the basis for the valuations.

No contributions, gifts, grants, etc. were reported in the 2009 Form 990-PF by the Foundation as having been received during 2009, and the only positive income was interest and dividends aggregating $13,909.

Notwithstanding the foregoing items, the 2009 Form 990-PF discloses a new asset on line 2 of its Balance Sheet of $500,239 in “Savings and temporary cash investments.” Statement 2 to the 2009 Form 990-PF reflects $239 in “Interest on Savings and Temporary Cash Investments” from Bank of America. Nowhere, however, in the 2009 Form 990-PF is there any explanation or statement about the $500,000 cash item on the Balance Sheet.

Installment 41 raised the following question: In light of the filing of the 2008 Form 990-PF in November 2010, almost two years after the Madoff arrest, with a wealth of information available about the Madoff bankruptcy/liquidation proceeding (the “Madoff Proceeding”), was the $400,000 in fair market value reflective of an anticipated amount recoverable or already recovered in the Madoff Proceeding by the Foundation?

One can reasonably speculate that $500,000 of the cash reflected on line 2 of the Balance Sheet in the 2009 Form 990-PF may be a distribution to the Foundation in the Madoff Proceeding of the $500,000 maximum amount payable to a securities customer by the Securities Investor Protection Corporation.

In contrast to a potential payment to the Foundation in the Madoff Proceeding, Installment 41 observed that the 2008 Form 990-PF reflected charitable contributions aggregating $330,445 during 2008. It is unclear whether such contributions were made in whole or in part from cash distributions received by the Foundation from Madoff during 2008 before his arrest in December 2008. Installment 41 asked whether any or all of such amounts could be subject to “clawback” by Irving Picard, the Trustee in the Madoff Proceeding (the “Trustee”). (Similar questions could be raised about the charitable contributions reported in the Foundation’s Forms 990-PF for 2005, 2006 and 2007 in light of the fact that, in each of those years, 70% or more of the investment income and fair market value of assets were reported by the Foundation as attributable to Bernard L. Madoff Investment Securities LLC.)

Finally, a principal theme of this series on Madoff is that Irving Picard has been treating charitable organizations inconsistently in the Madoff Proceeding. Installment 48, for example, highlighted the difference in treatment by the Trustee of Hadassah and the Wilpon/Katz private charitable foundations. It would have been helpful to this analysis if an explanation had been provided by the Foundation for the $500,000 cash item that appeared on its Balance Sheet as of December 31, 2009 without a corresponding item in the Analysis of Revenue and Expenses in Part I of the 2009 Form 990-PF.
 

[To be continued in Installment 51]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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This is the forty-ninth in a series of installments on this blog  that are discussing issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Many of the Installments in this series have focused on specific problems and concerns respecting public charities and private foundations that were victims of this and similar schemes.

Installment 40 and Installment 41, among others, of this series have discussed the fact that The Lautenberg Foundation, a private charitable foundation (the “Foundation”), which was formed by Senator Frank R. Lautenberg and had invested with Madoff, was one year past due in filing its 2008 Form 990-PF (the “2008 Form 990-PF”) with the Internal Revenue Service (the “IRS”).

Apparently the 2009 Form 990-PF (the “2009 Form 990-PF” and, collectively with the 2008 Form 990-PF, the “Foundation Forms 990-PF”) was also filed past due with the IRS, albeit 15 days after the final IRS due date of November 15, 2010 (after all available extensions). Both the 2008 Form 990-PF and the 2009 Form 990-PF are now available to the public on the charity information Web site GuideStar.

The availability of the 2009 Form 990-PF on GuideStar was surprising to me. As reported in the earlier Installments, I had been requesting by email from the Lautenberg Foundation a copy of the 2009 Form 990-PF virtually every time that I had requested the 2008 Form 990-PF, including a November 16, 2010 email thanking the Foundation for supplying me with the 2008 Form 990-PF. This thank-you email request of November 16, 2010 preceded the filing by the Foundation of its 2009 Form 990-PF by 14 days.

General Instruction Q entitled “Public Inspection Requirements” of the IRS instructions for completion of Form 990-PF (the “IRS Instructions”) requires a private foundation to mail a Form 990-PF within 30 days to a person who makes a request for such Form by electronic mail. General Instruction Q also refers to IRS Rules that provide for potential penalties for failure of a foundation to file timely or to comply with the public inspection rules. Obviously, since I never received the Foundation’s 2009 Form 990-PF in response to my numerous email requests, the Foundation did not comply in my case with the 30-day response requirement of General Instruction Q. Yet, perplexingly, in both the 2008 Form 990-PF and the 2009 Form 990-PF filed in November 2010, the Foundation answered “Yes” to the following question on line 13 in Part VII-A: “Did the foundation comply with the public inspection requirements for its annual returns and exemption application?”

It is my belief that in one or both years the Foundation’s answer should have been “No” for failure to deliver the Foundation Forms 990-PF on a timely basis in response to my requests.

In a related matter, Installment 41 discussed Statement 8 to the 2008 Form 990-PF provided to me by the accountant for the Foundation. Statement 8 stated the following as to the reason for the late filing and the potential for penalties for late filings:

This return is being filed late due to the uncertainty caused by the majority of the Foundations [sic] assets being loss [sic] to Bernard L. Maddoff [sic] in December 2008. We respectfully request that all late filing penalties be abated.

While the 2008 Form 990-PF supplied to me contained Statement 8 on page 16, for whatever reason, Statement 8 and page 16 of the 2008 Form 990-PF available to the public on GuideStar are missing, with page 17 immediately following page 15.

For the above reasons, the Foundation should consider filing amendments to the Foundation Forms 990-PF in order that the apparent deficiencies can be remedied. This blog series will provide a Part 2 that will discuss further the Foundation Forms 990-PF.
 

[To be continued in Installment 50]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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Several Installments in this series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”), the most recent of which was Installment 47, have discussed the proposed settlement with Hadassah (the “Hadassah Settlement”) by Irving Picard, the Bankruptcy Trustee for the Madoff Estate (“Picard”) in contrast to his vigorous pursuit of the Wilpon/Katz Family private charitable foundations.

On March 10, 2011, as requested in the Motion filed by Picard, the Honorable Burton R. Lifland, Bankruptcy Judge for the Madoff Estate, approved the Hadassah Settlement, whereby Hadassah will pay, within 60 business days, $45,000,000 of its alleged $77,000,000 clawback exposure. This grants Hadassah the benefit of retaining $32,000,000 of the fictitious profits that it withdrew from the Madoff scheme.

As I have stated previously, while I agree that Hadassah is a very worthy charity and deserves to survive and thrive, it is perplexing that Picard and Judge Lifland have allowed Hadassah to keep $32,000,000 of fictitious profits at the expense of other Madoff victims. Nevertheless this chapter of the decades-long involvement by Hadassah with the Madoff scandal appears to be concluded.

What does remain is to see how many millions of dollars the effort to retain the fictitious profits probably cost Hadassah in professional fees to lawyers, accountants and consultants in 2010 and 2011. The 2010 costs will not likely become public until Hadassah publishes its financial statements and files its Forms 990 for 2010 with the Internal Revenue Service (“IRS”) later this year.

However, the inconsistent manner in which Picard is treating charitable investors with Madoff warrants further monitoring. As stated in Installments 46 and 47 of this series, Picard is seeking a total of $7,000,000 or more (which is actually more than the amount of fictitious profits subject to clawback) from the Wilpon/Katz Foundations, which have given away millions of dollars each year to highly respected and worthy charities according to their Forms 990-PF filed with the IRS.

[To be continued in Installment 49]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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Several Installments in this blog series  about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”), the most recent of which was Installment 46, have discussed the proposed settlement with Hadassah (the “Hadassah Settlement”) by Irving Picard, the Bankruptcy Trustee for the Madoff Estate (“Picard”) in contrast to his vigorous pursuit of the Wilpon/Katz Family private charitable foundations.

As set forth in the Motion filed by Picard respecting the Hadassah Settlement (the “Motion”), Picard is seeking approval by the bankruptcy court of the Hadassah Settlement. The terms of the Hadassah Settlement would allow Hadassah to pay $45,000,000 of its alleged $77,000,000 clawback exposure for the final six years that Hadassah invested with Madoff. This would allow Hadassah to keep at least $32,000,000 of the Fictitious Profits that it withdrew from the Madoff scheme. The hearing on the Hadassah Settlement is scheduled before the bankruptcy court on Thursday, March 10, 2011.

Paragraph 16 of the Motion states the following:

A review of the Financial Statements and other information provided by Hadassah supports Hadassah’s contention that it does not have sufficient
assets and free cash to both satisfy the potential judgment the Trustee could obtain in a lawsuit . . . and continue to meet its charitable mission domestically and abroad, including completing construction and continued support of the Hospital Project [a new hospital to be built in Jerusalem, Israel with a cost to Hadassah of $318 million plus $45 million for equipment and furnishings over the next three years].

Paragraph 26 of the Motion adds:

While the Trustee believes that he would have prevailed in recovering all transfers to Hadassah [$77 million in the last six years before the arrest of Madoff on December 11, 2008], in the instant case the litigation risk and potential dissolution of an historic charitable organization, nominated in 2005 for a Nobel Peace Prize, outweighs any potential additional recovery from Hadassah.

Finally, Paragraph 29 of the Motion concludes by stating the following:

In sum, the Trustee submits that the [Hadassah Settlement] Agreement should be approved for two reasons (a) because it represents a reasonable compromise . . . that benefits the [Madoff] estate . . . and (b) to avoid burdensome and time consuming litigation with a historic charitable organization, litigation which would result in the demise of the organization and its worthy causes. Accordingly, since the Agreement is well within the “range of reasonableness” and confers a substantial benefit on the estate, the Trustee respectfully requests that the Court enter an Order approving the Agreement.

Paragraph 14 of the Motion mentions in passing that there was “a Bankruptcy Rule 2004 examination of Sheryl Weinstein, former chief financial director of Hadassah; . . . .” Among other Installments of this series, Installment 23 and Installment 14 of this series reported on the alleged close personal relationship of Ms. Weinstein with Madoff while she was the chief financial officer of Hadassah and Hadassah was investing heavily with Madoff.

The Hadassah Settlement appears to be based largely on the subjective conclusions of Picard that Hadassah, as a former nominee for a Nobel Peace Prize with substantial charitable commitments in future years, is a venerable charity that should be preserved but would be destroyed if it were subjected to the full measure of clawback that Picard is aggressively seeking from many other investors with Madoff.

I agree that Hadassah is a very worthy charity and deserves to survive and thrive. Nevertheless, I find it to be perplexing that Picard has apparently concluded that Hadassah should be allowed to keep $32,000,000 of fictitious profits at the expense of other Madoff victims who may be already impoverished and deserving of recovery.

Additionally, in my view, it is an overstatement for Picard to conclude that the payment by Hadassah of the full $77,000,000 “would result in the demise of the organization and its worthy causes.” As of December 31, 2009, the audited Consolidated Balance Sheet of Hadassah showed total unrestricted net assets of almost $653,000,000 and more than $1,000,000,000 in total net assets. With that level of equity, it would appear that Hadassah could finance relatively easily over a period of years the additional $32,000,000 (approximately 8.8% of the total Hospital Project) in fictitious profits that Picard is willing to provide them.

Moreover, Picard’s willingness to let Hadassah keep $32,000,000 in potential clawback amount highlights the inconsistency of his personal approach to charitable victims. As stated in Installment 46, Picard is seeking a total of $7,000,000 or more (which is actually more than the amount of fictitious profits subject to clawback) from the Wilpon/Katz Foundations, which have given away millions of dollars each year to worthy charities according to their Forms 990-PF filed with the Internal Revenue Service. This developing scenario warrants continued monitoring.

[To be continued in Installment 48]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, 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.)

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Several Installments in this blog series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”), the most recent of which was Installment 45,  have discussed certain aspects of the scheme’s impact on the Wilpon Family, who are best known as the owners of the New York Mets. The Installments revolved primarily around potential “clawback” exposure from investments with Madoff of Judy & Fred Wilpon Family Foundation, Inc., a charitable Section 501(c)(3) private foundation (the “Wilpon Foundation”).

Installment 45 discussed the vigorous pursuit of the Wilpon Family by Irving Picard, the Bankruptcy Trustee for the Madoff Estate (“Picard”), in contrast to his proposed settlement with Hadassah (the “Hadassah Settlement”). On February 17, 2011, Picard moved for approval by the bankruptcy court of the Hadassah Settlement, under which Hadassah would pay $45,000,000 of its alleged $77,000,000 clawback exposure for the final six years of the reported 20 years that Hadassah invested with Madoff.

The Forms 990-PF filed with the Internal Revenue Service (the “IRS”) by the Wilpon Foundation in recent years provide helpful information on its distributions from the Madoff scheme and may be accessed on GuideStar. The Forms 990-PF filed with the IRS by Iris & Saul Katz Family Foundation, Inc. (the “Katz Foundation”), a charitable Section 501(c)(3) private foundation formed by members of the Katz Family, are also accessible on GuideStar.

Installment 45 of this series also discussed the Complaint filed by Picard against dozens of Defendants comprised of members of the Wilpon and Katz Families, their business associates and business investments, including the New York Mets, numerous real estate ventures and others (collectively, the “Defendants”). The Complaint revealed Picard’s determination to seek not only alleged “Fictitious Profits” relating to clawback but also additional hundreds of millions in principal transfers from Madoff to named Defendants. Two of the Defendants named in the Complaint are the Wilpon Foundation and the Katz Foundation (collectively, the “Foundations”).

The Complaint alleges on pages 264-265 that the Wilpon Foundation received not only $2,230,588 in Fictitious Profits from Madoff, but also “other direct transfers . . . of principal in an amount subject to discovery and proof at trial [‘Principal Transfers’].” The Katz Foundation numbers alleged in the Complaint are even higher. Pages 262-264 of the Complaint alleges that the Katz Foundation received $3,272,382 in Fictitious Profits from Madoff and other direct Principal Transfers. In addition, the Complaint seeks from the Katz Foundation alleged indirect Fictitious Profits and Principal Transfers as a subsequent transferee.

A review of the 2008 Forms 990-PF filed with the IRS by the Wilpon Foundation (the “Wilpon Form 990-PF”) and the Katz Foundation (the “Katz Form 990-PF” and, collectively with the Wilpon Form 990-PF, the “Forms 990-PF”) sheds some light on at least a portion of the Principal Transfers that Picard is seeking from the Foundations.

Each of the Foundations filed as Appendix A to its Form 990-PF an IRS “Statement by Taxpayer Using the Procedures in Rev. Proc. 2009-20 to Determine a Theft Loss Deduction Related to a Fraudulent Investment Arrangement.” It applies to information only as to tax years of the Foundations that were still open to tax audit.

Appendix A to the Wilpon Form 990-PF revealed for open tax years an initial investment of $114,227 with Madoff, subsequent additional investments of $1,963,189 and income reported in prior years of $1,312,617, for a total of $3,390,033. More significantly, the Wilpon Foundation Appendix A reports withdrawals of $3,296,500. The withdrawal figure of $3,296,500 presumably is the least that Picard would be seeking from the Wilpon Foundation in Fictitious Profits and Principal Transfers for the years covered by Appendix A to the Wilpon Form 990-PF.

Appendix A to the Katz Form 990-PF disclosed for open tax years an initial investment of $1,335,000 with Madoff, subsequent additional investments of $1,376,702 and income reported in prior years of $1,030,854, for a total of $3,742,556. More significantly, the Katz Foundation Appendix A reflected withdrawals of $3,742,122. The withdrawal figure of $3,742,566 would be presumably be the least that Picard is seeking from the Katz Foundation in Fictitious Profits and Principal Transfers for the years covered by Appendix A to the Katz Form 990-PF.

It would appear that Picard is seeking $7 million or more from the Foundations, which have given away millions of dollars each year to worthy charities according to their Forms 990-PF. The Wilpon Foundation reported charitable contributions, gifts and grants paid totaling $6,318,421 in the three years ended December 31, 2010, while the Katz Foundation reported charitable contributions, gifts and grants paid totaling $4,038,879 in the same period. Nevertheless, Picard is willing to settle for approximately 58% of the Fictitious Profits reported for Hadassah, presumably because they may be a worthier charitable vehicle in his eyes than the Foundations. This developing scenario warrants further monitoring.

[To be continued in Installment 47]
 

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders, 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)

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Several Installments in this blog series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”) have discussed certain aspects of the scheme’s impact on the Wilpon Family, who are best known as the owners of the New York Mets. Installment 27 was the most recent to discuss the involvement of the Wilpon Family with Madoff. These Installments revolved around potential “clawback” exposure and the investments of the Judy and Fred Wilpon Family Foundation with Madoff.

Similarly, numerous other Installments, the most recent of which was Installment 44, 
have discussed Hadassah and its unfortunate involvements with Madoff. The matters covered include Hadassah’s potential “clawback” exposure, the questionable approach that Hadassah has used to disclose its investments with Madoff in Forms 990 filed with the Internal Revenue Service, its proposed settlement with the Madoff Trustee and other matters.

Installment 17 of this series, published on October 26, 2009, was entitled “The Madoff Profit Game: Will the Mets End up Losers Off the Field While Charity Stakeholders Become Winners?” In Installment 17, Diana B. Henriques was quoted as having written on May 28, 2009 in The New York Times, “There is the widespread fear among some — unfounded, [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

I stated the following in Installment 17:

Will Picard choose to pursue the Mets and the Wilpon family while passing on Hadassah? All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While the position earlier stated by Picard as to charities may be humanitarian and emotionally appealing, there is little basis in the law for the disparity in treatment between charities and for-profit entities. This inequality of approach will more likely than not lead to protracted litigation and uncertainty in the Madoff matter.

Picard has now fulfilled my concerns beyond my expectations. Both the Wilpons and Hadassah have made news recently relating to how Picard is dealing with their status as “winners” under his formula for determining “Fictitious Profits” from Madoff that were subject to clawback. Most recently, on February 4, 2011, the Madoff bankruptcy court unsealed a 796-page Complaint, including Exhibits, against dozens of Defendants comprised of members of the Wilpon Family, their business associates and their respective families, business investments including the New York Mets, numerous real estate ventures and others (collectively, the “Wilpons” or the “Defendants”).

The Complaint revealed Picard’s determination to seek recovery from the Wilpons of not only $300,000,000 of identified transfers of Fictitious Profits but also additional hundreds of millions in principal transfers from the named Defendants. The Complaint describes the alleged existence of many “red flags” from which the Defendants knew or should have known over decades that Madoff was operating a Ponzi scheme as the basis for recovery beyond Fictitious Profits.

Contrast this dramatic Complaint of Picard with the disclosure in early December 2010 from Nancy Falchuk, National President of Hadassah in a letter respecting the Madoff scandal. The letter stated that Hadassah was voluntarily paying $45,000,000 to settle, subject to approval of the bankruptcy court, a potential clawback claim for Fictitious Profits by Picard of as much as $97,000,000. Installment 42 of this series reported on the Falchuk letter and the fact that Hadassah had been investing with Madoff for a period of 20 years. Moreover, Hadassah had sophisticated investment advisers over the period of their Madoff investments.

It is difficult to rationalize the stark disparity in approach to these cases by Picard, other than the fact that Hadassah is a charity. In the case of the Wilpons, Picard is seeking hundreds of millions of dollars beyond the alleged Fictitious Profits. In the case of Hadassah he has agreed to let Hadassah retain $55,000,000 of Fictitious Profits at the expense of other Madoff victims. Both the Wilpons and Hadassah had been investing with Madoff for decades. This perplexing matter warrants further monitoring.

[To be continued in Installment 46]
 

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders, 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)

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Several Installments in this series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”), the most recent of which was Installment 42, have discussed Hadassah and its unfortunate involvements with Madoff. The matters covered include Hadassah’s potential “clawback” exposure, the questionable approach that Hadassah has used to disclose its investments with Madoff in Forms 990 filed with the Internal Revenue Service (the “IRS”), its proposed settlement with the Madoff Trustee and other matters.

On December 21, 2010, my spouse, who has been a life member of Hadassah for decades, received in the mail (the “Mailing”) from Nancy Falchuk, National President of Hadassah, the letter respecting the Madoff scandal that Installment 42 reported Hadassah had posted on its website (the “Posting”). The Mailing and the Posting (collectively, the “Falchuk Letter”) reported the $45 million Hadassah settlement in the Madoff matter (the “Settlement”).

The Mailing is identical to the Posting with one notable exception. In the Mailing the second sentence of the following paragraph is in bold type while it is not in bold type in the Posting:
“Hadassah’s fiscal discipline will allow it to pay this obligation from existing unrestricted funds. As always, Hadassah gifts will continue to be used for their intended purpose.”

The paragraph, and especially the bold sentence, suggest that the payment of the Settlement will be made from funds other than gifts to Hadassah. In my view, the suggestion is specious, almost to the point of being disingenuous. Hadassah’s “existing unrestricted funds” are the aggregation of gifts over many years from the generosity of past donors to the mission of Hadassah, together with the income earned on such gifts.

In addition, the Falchuk Letter does not shed light on the entire Settlement picture, as the costs of achieving the Settlement go far beyond the actual payment of the $45 million dollars to be made to the Madoff bankruptcy estate. Statement 4 of the Hadassah Form 990 for the fiscal year ended December 31, 2009 (the “2009 Form 990”), which has not yet been posted on GuideStar, reports the compensation of the five highest paid independent contractors that received $100,000. The 2009 Form 990 reveals that during 2009 Hadassah spent an aggregate of $2,753,922 on legal, accounting and consulting fees.

In contrast, Statement 4 of the Form 990 filed by Hadassah for its newly-designated fiscal year ended December 31, 2008 (the “December 2008 Form 990”), revealed a total of $497,280 for legal and accounting fees for the seven month short period that was covered. (The Madoff scandal did not come to light until December 11, 2008.) The December 2008 Form 990 was the first year that the Form 990 required reporting of compensation for professional services of the type reported on Statement 4.

Even if the amount for professionals reported in the December 2008 Form 990 is doubled to $1 million to take into account a full year, the huge increase in 2009 in professional costs for Hadassah must be largely attributable to the legal, accounting, governance and public relations issues flowing from the Madoff matter.

One can only speculate as to the amount of professional fees that are likely to be reported by Hadassah for 2010, as the Falchuk Letter points out that the Settlement of the “clawback” issue involved “many months of negotiation.” This would certainly translate into substantial professional fees, again perhaps running into the millions of dollars. The professional fees, like the Settlement itself, will have to be paid, presumably from “existing unrestricted funds.” Hadassah should be forthcoming in revealing such costs of the Settlement to its donors.

Nonetheless, the professionals will have certainly earned their fees if, as noted in the Falchuk Letter, the required bankruptcy court approval is obtained by Hadassah. However, even that remains to be seen. For example, Thom Weidlich reported on January 6, 2011, in businessweek.com that a group of Madoff victims has already objected in the bankruptcy court to a settlement in which the estate of Jeffry Picower agreed to return $7.2 billion he allegedly made in the Madoff scandal. An objection to the Settlement could be filed in the Hadassah case as well.

Many, like my wife, who support or belong to this venerable charitable organization should be acutely disappointed that Hadassah has not been more accurate and forthright with its donors in its public statements and IRS filings. As stated in earlier Installments, I believe that Hadassah would be far better served to make prompt, visible, clear and consistent disclosures to regain the confidence of its loyal supporters who faithfully fund its historic mission.

[To be continued in Installment 45]

(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.)

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This is the forty-third in a series of Installments on this blog that discuss issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal, especially for the charities that invested with him. In particular, Installment 33 and Installment 31 of this series provided analysis of American Jewish Congress, Inc. (“AJCongress”) and the consequences of its reported huge losses from investing with Madoff.

Installment 31 stated that, on July 22, 2010, AJCongress President Richard S. Gordon (“Mr. Gordon”) reported on the AJCongress Website that the organization was suspending operations after, among other things, “Bernie Madoff stole approximately $21 million from our organization. . . .” [Emphasis supplied]

An article on December 13, 2010 by Jacob Berkman in “The Fundermentalist” quotes Mr. Gordon as having said the following, in response to an earlier media report that AJCongress was subject to “clawback” by Irving Picard, Trustee for the Madoff bankruptcy (“Mr. Picard”):

There is no talk of a clawback from us with the trustee . . . . Madoff stole approximately $23 million from us. There has been no discussion about [the American Jewish Congress] paying back money. . . . Hadassah signed for a completely different reason. . . . I can in all honestly [sic] say [a clawback] never seriously crossed my mind once.... We are operating and working on a number of different projects. Obviously we are in a period of evaluating how to move forward.... the nature of how we go forward has not been determined yet.

Perplexingly, however, on December 9, 2010, four days earlier, AJCongress, like Hadassah (as reported in Installment 42 of this series) entered into a stipulation with Mr. Picard in the Madoff bankruptcy case (the “Stipulation”) to toll the statute of limitations on potential claims against AJCongress (Case Number: 08-01789-brl Document Number: 3328 in the United States Bankruptcy Court for the Southern District of New York). Presumably, Mr. Picard deemed the Stipulation to be necessary to reserve potential rights to file suit against AJCongress in the future.

While AJCongress does not appear to be continuing its mission as usual, it is certainly continuing business on its website in soliciting memberships and donations. As reported in Installment 33, on August 5, 2010, I became an individual member in AJCongress online with a credit card payment. On December 15, 2010, I made a donation online with a credit card payment.  An unknowing visitor to the AJCongress website could easily become a member or make a donation without any alert on those solicitation pages as to the current limbo status of the AJCongress mission.

The only obvious change in disclosure since July 22, 2010 on the AJCongress website was the deletion of its 2009 Annual Report, which, as reported in Installment 31, conflicted in its narrative with other statements of Mr. Gordon as to the current state of AJCongress affairs.

The AJCongress website ends its “About Us” page with the words: “We are an effective voice defending Jewish interests and advancing Jewish hopes, values, and aspirations.” In my view, its voice would be more effective and credible if the disclosure deficiencies on the AJCongress website were addressed and rectified promptly.

(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.)

[To be continued in Installment 44]
 

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Several Installments in this blog series about the long-running, global Ponzi scheme of Bernard L. Madoff (“Madoff”) have discussed Hadassah and its unfortunate involvements with Madoff. The matters covered include Hadassah’s potential “clawback” exposure, the questionable approach that Hadassah has used to disclose its investments with Madoff in Forms 990 filed with the Internal Revenue Service (the “IRS”) and other matters.

Now, on the eve of the expiration of the two-year statute of limitations for Trustee Irving Picard to bring a lawsuit for clawback against Hadassah, in the midst of the holiday season for multiple faiths and the rush to generate end-of-year donations, Nancy Falchuk, President of Hadassah, published a letter on the Hadassah website in which she reported the following:

Hadassah was introduced to Bernard Madoff Securities in 1988 by a French donor, through a $7M gift. In addition to the gift, between 1988 and 1996, we deposited $33M in our accounts, and by April 2007 had withdrawn $137M. . . .

Like so many, for those who withdrew more than they had invested, we faced a “clawback.” After many months of negotiation, and as a direct result of good faith cooperation of Irving Picard, the Madoff Trustee, and his counsel, we arrived at an agreement, allowing us to continue our commitment to Israel. According to that agreement, subject to approval of the bankruptcy court, Hadassah will pay back $45M (emphasis added).

Therefore, Hadassah is voluntarily paying $45 million to settle a potential clawback claim by Mr. Picard of as much as $97 million. This follows two years of perplexing and conflicting public statements and filings by Hadassah. Originally, as reported in Installment 14 of this series, Hadassah reported publicly a loss from Madoff investments of $90 million. In contrast, more recently Installment 32 stated the following:

Installment 16, posted in September 2009, discussed the fact that it is alleged that Hadassah had received $40 million more in distributions from Madoff than it had invested with him. Additionally, an article by Diana B. Henriques in The New York Times was quoted in Installment 16 as having said, “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

Apparently the fear has been anything but unfounded in the case of Hadassah.

The continuous shifting of public information made available by Hadassah has been exacerbated by the mystifying disclosure or lack thereof in the Hadassah Form 990 filings with the IRS. Installment 14 of this series reported that the Form 990 of Hadassah posted on GuideStar for the fiscal year ended May 31, 2008 (the “May 2008 Form 990”) was filed with the IRS in April 2009. This filing was well after the Madoff scandal broke on December 11, 2008, and after publication of reports in the media that Hadassah had withdrawn $130 million from its Madoff account. While the May 2008 Form 990 had no reference to the Madoff scandal, Installment 23 of this series reported that

the [Hadassah] financial statements audited by KPMG for the fiscal year ended May 31, 2008 (and the [newly-changed] fiscal year ended December 31, 2008), disclosed in a lengthy footnote that Hadassah wrote off, as of May 31, 2008, $88,725,362 of carrying value of Madoff-related investments.

Installment 23 went on to observe that the Form 990 filed by Hadassah for its newly-designated fiscal year ended December 31, 2008 (the “December 2008 Form 990”) reported the following:
in a lengthy footnote (substantially similar to those in the financial statements audited by KPMG for the years ended May 31, 2008 and December 31, 2008) . . . Hadassah wrote off, as of May 31, 2008, $88,725,362 of carrying value of Madoff-related investments. . . . Hadassah management was unable to determine whether, or the extent to which, distributions to Hadassah from Madoff-related investments are recoverable by the trustee for Madoff.

(As an aside, for some unknown reason the December 2008 Form 990 has never been posted on GuideStar to this date, although I have brought the fact to GuideStar’s attention.)

I have this week obtained from Hadassah copies of its Form 990 for the fiscal year ended December 31, 2009 (the “2009 Form 990”) that was recently filed with the IRS. Again, as was true of the 2008 Form 990, there is perplexingly no reference to the Madoff scandal or its potential impact on Hadassah.

Along with the 2009 Form 990, I obtained from Hadassah its audited consolidated financial statements for 2009 (the “2009 Financial Statements”). The date of the Independent Auditors’ Report of KPMG in the 2009 Financial Statements was November 29, 2010, just days before the letter from Ms. Falchuk was posted and a stipulation between Mr. Picard and Hadassah on December 9, 2010. entered in the Madoff bankruptcy case (the “Stipulation”) to toll the statute of limitations on potential clawback claims against Hadassah (Case Number: 08-01789-brl Document Number: 3327 in the United States Bankruptcy Court for the Southern District of New York). Presumably, the Stipulation was necessary to preserve Mr. Picard’s right to file suit against Hadassah should the settlement not become final.

In stark contrast to the 2009 Form 990, the second paragraph in Note 14 “Contingency” to the 2009 Financial Statements gives the following information as to the Madoff scandal:

Hadassah has begun settlement discussions with the Trustee [Mr. Picard] with respect to any claims that the bankruptcy estate believes it can assert against Hadassah for the recovery of any amounts previously received. The Trustee has not commenced litigation at this time. These discussions are in the early stage and the outcome is not reasonably estimable. If a settlement is reached in the present discussions, the amount of the settlement could be material to Hadassah. Hadassah intends to defend vigorously if no settlement is reached and the Trustee attempts to enforce the claims. If Hadassah is not successful in its defense of the claims, should they be made, the amounts recoverable by the Trustee could be material (emphasis added).

The limited disclosure in the 2009 Financial Statements is better than no disclosure at all in the 2009 Form 990, especially since the December 2008 Form 990 raised a question of uncertainty as to the effect of the Madoff scandal on Hadassah’s financial statements. I believe that, in light of the preliminary nature of the December 2008 Form 990 disclosure, Hadassah has a duty to make a full, fair and accurate clarification and update in the 2009 Form 990 and succeeding Form 990 filings. The lack of consistency between the 2009 Form 990 and the 2009 Financial Statements is also a concern.

Nonetheless, the limited disclosure in Note 14 to the 2009 Financial Statements is itself seriously deficient. The date of the auditors’ report of KPMG is November 29, 2010. In her letter, Ms. Falchuk wrote that the discussions that led to the $45 million settlement followed “many months of negotiation.” By November 29, 2010, the discussions were clearly no longer “in the early stage” and the outcome “not reasonably estimable” as stated in Note 14.

Many who support or even belong to this charitable organization must be acutely disappointed that Hadassah has not been more accurate and forthright with its donors in its public statements and IRS filings. During 2009 Hadassah received $32.3 million in contributions and bequests according to the 2009 Financial Statements. How would those donors have felt had they known that their contributions would in effect fund a $45 million settlement with Mr. Picard, and not promote the mission of Hadassah? How should 2010 donors feel about the settlement? I believe that Hadassah would be far better served to make visible, clear and consistent disclosures to regain the confidence of its loyal supporters who faithfully fund its historic mission.

[To be continued in Installment 43]

(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.)
 

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This is the forty-first in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”). Many of the Installments in this series have focused on specific problems and concerns respecting public charities and private foundations that were victims of this and similar schemes.

Installment 40 of this series discussed the fact that The Lautenberg Foundation, a private charitable foundation (the “Foundation”) formed by Senator Frank R. Lautenberg was almost one year past due in filing its 2008 Form 990-PF (the “2008 Form 990-PF”) with the Internal Revenue Service (the “IRS”). Apparently the 2008 Form 990-PF has now been filed with the IRS as of November 10, 2010, as the Foundation’s accountant provided a copy on the following day. The due date after, all available extensions, for the Foundation’s 2009 Form 990-PF (the “2009 Form 990-PF”) is November 15, 2010.

The 2008 Form 990-PF reveals some interesting information as follows:

The 2008 Form 990-PF reflects a fair market value of assets for the Foundation as of December 31, 2008, of $1,001,517, as compared to a fair market value of assets for the Foundation as of December 31, 2007 of $15,000,792, as reported in the Foundation’s 2007 Form 990-PF, a decline of $13,999,275, or 93.3%.

Statement 3 to the 2008 Form 990-PF states that the Foundation recognized a “Madoff Theft Loss 95%” of $13,225,367 in “Revenue per Books” and “Net Investment Income.”

Statement 8 to the 2008 Form 990-PF reflects the following as to the reason for the late filing and the potential for penalties for late filings as raised in Installment 40 of this series:

This return is being filed late due to the uncertainty caused by the majority of the Foundations [sic] assets being loss [sic] to Bernard L. Maddoff [sic] in December 2008. We respectfully request that all late filing penalties be abated.

Statement 9 reflects the following Corporate Stock holdings of the Foundation, among others, as follows:

Bernard L. Madoff Investment Securities LLC
Book Value: 696,072
Fair Market Value 400,000

The Foundation was continuing to carry on its books as of December 31, 2008 a value of $400,000 for the Madoff-affiliated securities firm. Query: in light of the fact that the filing of the 2008 Form 990-PF was made in November 2010 almost two years after the Madoff arrest and the wealth of information available about the Madoff bankruptcy/liquidation proceeding (the “Madoff Proceeding”), was the value reflected an anticipated amount recoverable or already recovered in the Madoff Proceeding by the Foundation?

The 2008 Form 990-PF reflected that the Foundation made charitable contributions aggregating $330,445 during 2008. It is unclear whether such contributions were made in whole or in part from cash distributions received by the Foundation from Madoff during 2008 before his arrest in December. Query: could any or all of such amounts be subject to “clawback” by Irving Picard, the Trustee in the Madoff Proceeding, as pointed out in Installment 40?

When the 2009 Form 990-PF for the Foundation is available, some of these issues may be further clarified.

(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.)

[To be continued in Installment 42]  

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This is the fortieth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Bernard”). Many of the Installments in this series have focused on specific problems and concerns respecting public charities and private foundations that were victims of this and similar schemes.

Installments 15 and Installment 28 of this series discussed a lawsuit brought by two children of, and the private charitable foundation (the “Foundation”) formed by, Senator Frank R. Lautenberg, its President, seeking recovery from Peter Madoff (“Peter”), the brother of Bernard, of an alleged $9 million lost in the Madoff scandal (the “Foundation Lawsuit”). This Installment is intended to provide an update as to the Foundation’s involvement with the Madoff morass.

Installment 28 noted that, as of June 8, 2010, a check of the charity information website Guidestar indicated that the Form 990-PF of the Foundation for 2007 (the “2007 Foundation Form 990-PF”) was the most recent Form 990-PF filed with the Internal Revenue Service (the “IRS”). The 2008 Form 990-PF of the Foundation (the “2008 Foundation Form 990-PF”) had not yet been posted, even though the latest date (after all permitted extensions) for timely filing with the IRS was November 16, 2009, as computed in accordance with the IRS instructions for completion of Form 990-PF (the “IRS Instructions”).

From June 2010 until the current time, a period of over 4 months, I have been regularly requesting copies of the 2008 Foundation Form 990-PF by telephone and email from the Assistant Secretary of the Foundation, who is the person who has care of the books of the Foundation, according to the 2007 Foundation Form 990-PF. She has been highly pleasant, cooperative and courteous and has responded promptly to my various inquiries. However, she advised that the 2008 Foundation Form 990-PF could not be provided, as the accountant for the Foundation had not yet completed it or the Form 990-PF of the Foundation for 2009 (the “2009 Foundation Form 990-PF” and, collectively with the 2008 Foundation Form 990-PF, the “Foundation Forms 990-PF”), which has a final filing date (after all permitted extensions) of November 15, 2010. The Assistant Secretary committed to provide me with a copy of the Foundation Forms 990-PF as soon as they become available from the accountant.

I have postponed the posting this Installment until after Election Day 2010 in order (i) to give the Foundation and its accountant ample opportunity to complete and file the Foundation Forms 990-PF with the IRS, even though the 2008 Foundation Form 990-PF is almost a year overdue, and (ii) to make it clear that this Installment relates to compliance and governance considerations, not politics. As further disclosure, I have voted for Senator Lautenberg in each of his Senatorial elections.

Section M of the General Instructions in the IRS Instructions provides for separate penalties for late filings of Forms 990-PF and for failure to respond within 30 days to requests from the public for copies of Forms 990-PF. The penalty for late filings without reasonable cause is $20 for each day ($100 per day for “large organizations” with $1 million or more in gross receipts), up to a maximum of the lesser of $10,000 ($50,000 for large organizations) or 5% of gross receipts during the tax year. There are also other potential penalties for the Foundation and for “responsible persons” for late filings.

The IRS Instructions also require that “[t]hose filing late (after the due date including extensions) must attach an explanation to the return.” The “reasons” for late filing by the Foundation of the 2008 Foundation Form 990-PF may be diverse as further discussed below. However, the late filing should not be for lack of sufficient funding for the Foundation for losses, excise taxes or potential penalties, as Senator Lautenberg was identified by The New York Daily News on October 28, 2010 as the fourth wealthiest Senator with a net worth of $49.7 million.

Nor should the late filing be for lack of knowledge by Senator Lautenberg and his advisers as to the filing requirements, deadlines and potential penalties. Prior to becoming a Senator, Mr. Lautenberg was, according to a Columbia Business School Alumni publication, an MBA graduate and a founder of Automatic Data Processing (ADP), which became a public company with a “complete portfolio of human resources and employer services” and, ultimately, after he left to become a Senator, “the world’s largest payroll and tax-filing processor.”

Some of the reasons for late filing by the Foundation of the 2008 Foundation Form 990-PF may include the following:

.  the continuation of the Foundation Lawsuit with Peter and the desire of the Foundation not to comment publicly on pending litigation;

.  the desire of the Foundation not to comment publicly on, or provide in financial statements for, pending or completed results of its application for recovery of funds from the Securities Investor Protection Corporation in the Madoff bankruptcy proceedings;

.  the difficulty in accounting in the Foundation financial statements for 2008 actual cash receipts from Madoff and subsequent contributions by the Foundation to charities out of such cash receipts;

.  the possibility of “clawback” in the Madoff bankruptcy proceedings of cash received by the Foundation in the latter years of the Madoff scheme;

.  the discomfiture of publishing in the Forms 990-PF the allegation that virtually all of the assets reflected for the Foundation at December 31, 2007 in its 2007 Foundation Form 990-PF were wiped out in the Madoff scandal; and/or

.  as identified in Installment 38, the disclosure of the potential liability for the Foundation and/or its managers under the Internal Revenue Code for excise taxes resulting from investment with Madoff that may be deemed a “jeopardizing investment” that unreasonably endangered the carrying out of the Foundation’s exempt purposes.

I believe that the Lautenberg Foundation and Senator Lautenberg as its President have a duty to comply with IRS requirements by filing the 2008 Foundation Form 990-PF as soon as possible and filing the 2009 Foundation Form 990-PF on a timely basis on or before November 15, 2010. It is essential that our public servants add credibility to the IRS self-reporting process by meeting filing requirements. Even if there are difficult or uncertain aspects of disclosure by the Foundation with respect to the Madoff scandal, there may be alternatives available. Should circumstances change, amendments to Forms 990-PF can also be filed. Future Installments of this series will cover some of the methods used by other charities in their public IRS filings to confront the difficulties and uncertainties flowing from the Madoff scandal and its aftermath.
 

(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.)

[To be continued in Installment 41]
 

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This is the thirty-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 discussed the impact of the Madoff scheme on individuals.

On October 17, 2010, Harold Brubaker, who has written several articles on the subject of Madoff and other Ponzi schemes in The Philadelphia Inquirer, reported that the Pennsylvania Department of Revenue has made it extraordinarily frustrating and difficult for victims of Ponzi schemes to recover state tax refunds for tax payments on income that turned out to be illusory. He quotes a tax expert as saying that New Jersey does not even have a state tax refund process for such victims.

The Brubaker article points out that this approach is totally contrary to the “relatively simple process” for refunds established by the Internal Revenue Service. He cites a number of legislative, administrative and judicial efforts in Pennsylvania that victims of Ponzi schemes have been undertaking to get state tax refunds.

It appears clear that initiatives to secure state tax refunds by victims of Madoff and other Ponzi schemers are likely to be stonewalled in the current economic, political and social climate. The reasons are many and varied:

. States are laboring under huge deficits and are not motivated to undertake new methods to facilitate tax refund payments.

. Legislators are struggling with election year politics and are seeking ways to raise tax dollars, not return them.

. The general economy is still reeling from the Deep Recession with high unemployment and losses in the stock market, real estate values and retirement accounts generally; there is little sentiment for meeting the desires and needs of the relatively small population of Ponzi victims.

. Victims of Madoff and other Ponzi schemers are viewed as “rich” people who took risks, speculated and lost; this may be a simplistic view because many victims “aggregated” funds with friends and family to amass enough to qualify for minimum investment amounts with Madoff and have now lost their entire retirement funds.

. Some of the “victims” appear to have actually been involved with the Ponzi schemes and should be punished, not assisted financially.

. It is now approaching two years since the Madoff scandal originally surfaced, followed by publicity about a parade of Ponzi schemes of lesser magnitude; the shock and sympathy factor for victims is becoming a memory.

Nonetheless, equitable application of the state tax laws demands the establishment of reasonable procedures for victims of Ponzi schemes to secure justifiable refunds. Otherwise the states will have successfully made themselves real “winners” of the Ponzi schemes.

(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.)

[To be continued in Installment 40]
 

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This is the thirty-eighth 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 discussed the impact of the Madoff scheme on public charities and private foundations.

On October 21, 2010 Andrew M. Harris reported on Bloomberg.com that the U.S. Department of Labor has sued four investment firms for allegedly failing to examine Madoff’s business practices before entrusting him with hundreds of millions of dollars in pension funds. According to the Harris article, the action was brought under ERISA to restore to the plans all losses suffered as a result of alleged fiduciary breaches by the defendants related to Madoff investments.

One of the defendants in the Department of Labor action is Ivy Asset Management LLC, a unit of Bank of New York Mellon Corp. (“Ivy”), which was discussed in Installment 34 of this series, insofar as Ivy was involved in the reported investment with Madoff of Howard Hughes Medical Institute. The Harris article and Installment 34 also noted that, in May 2010, the New York Attorney General sued Ivy and two former officers for allegedly misleading clients about Madoff-related investments. These two officers have also been named as defendants in the Department of Labor suit.

It is interesting to consider whether private foundations and their fiduciaries could become similar targets of the Internal Revenue Service (“IRS”) for having invested with Madoff. If a private foundation makes any investments that would financially jeopardize the carrying out of its exempt purposes, both the foundation and the individual foundation managers may become liable for excise taxes under Section 4944 of the Internal Revenue Code.

"Jeopardizing investments" generally are investments that show a lack of reasonable business care and prudence in providing for the long- and short-term financial needs of the foundation for it to carry out its exempt function. No single factor determines a jeopardizing investment. Excise taxes of up to 35% percent of the amount involved (the jeopardizing investment) can be imposed on the foundation for each tax year, or part of a year that the jeopardy exists.

Additionally, an excise tax of up to 20% percent of the jeopardizing investment involved is also imposed on any foundation manager who knowingly, willfully and without reasonable cause participated in making and maintaining the jeopardizing investment.

These heavy excise taxes on private foundations and their fiduciaries are designed to discourage investments that endanger the charitable mission. The IRS should be considering imposing them in appropriate cases where fiduciaries of private foundations invested with Madoff, just as the Department of Labor is doing with pension funds. Otherwise the jeopardizing investment excise tax provisions have little teeth and are not useful in deterring such speculation.

[To be continued in Installment 39]
 

(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)

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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)

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This is the thirty-sixth in a series of Installments on this blog that discusses issues that have arisen for charities in the aftermath of the Bernard L. Madoff (“Madoff”) Ponzi scheme scandal. A number of Installments have analyzed the Forms 990 and Forms 990-PF filed with the Internal Revenue Service (“IRS”) by specific public charities and private foundations, respectively, that had been involved in investing with Madoff. Forms 990 and Forms 990-PF that are filed with the IRS are universally available on the Internet on GuideStar and other sites.

On September 24, 2010, Bloomberg.com published an article by Patricia Hurtado entitled “Litwin Foundation Sues SEC for ‘Negligence’ Over Madoff Investment Losses,”  The Hurtado article reported that the Litwin Foundation (the “Foundation”) has sued the United States Securities and Exchange Commission (the “SEC”) for the recovery of at least $19 million and other unspecified damages for alleged negligence of the SEC in failing to uncover the Madoff scheme years earlier when it had had countless opportunities to do so. Ms. Hurtado observed that the lawsuit alleged further that the SEC had countless opportunities to stop the Ponzi scheme operated by Madoff over a 16 years period and “botched all of them.”

A review of the Foundation’s Forms 990-PF for the calendar years 2006, 2007 and 2008 (the “2008 Form 990-PF,” and, collectively with the Forms 990-PF for 2006 and 2007, the “Foundation Forms 990-PF”) reveals that the delay in discovery of the Madoff scheme did result in losses for the Foundation and Leonard Litwin, its President (“Mr. Litwin”), in recent years.

The 2008 Form 990-PF reports a “Theft Loss Bernard Madoff Securities” of $68,815,242.  However, that is not necessarily the complete and accurate story of what the Foundation and Mr. Litwin lost with Madoff. As we have learned repeatedly from other investors with Madoff, the write-down on a balance sheet of large carrying values of assets invested with Madoff may be primarily the result of fictitious returns reported over the years on statements provided by him.

However, the Foundation Forms 990-PF further reveal that Mr. Litwin made personal cash contributions to the Foundation of $34 million in 2006 and $6 million in 2007 for a total of $40 million. The Forms 990-PF also disclose that, in turn, the Foundation made charitable cash contributions of $3,714,003 in 2006, $9,450,882 in 2007 and $8,227,099 in 2008, for a total of $21,391,984 for the three years. The difference is $18,608,086 in actual cash that the Foundation and Mr. Litwin might not have lost with Madoff had the Ponzi scheme been terminated earlier than 2006.

Nonetheless, the future fate of this Foundation lawsuit and others against the SEC is at best uncertain and complex. There are potentially causation, market volatility, tracing of assets, sovereign immunity and contributory negligence issues, among others, that may confront the Foundation before it can prevail.

[To be continued in Installment 37]

(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)

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This is the thirty-fifth in a series of Installments on this blog discussing issues that have arisen for charities in the aftermath of the Bernard L. Madoff scandal and other smaller Ponzi schemes. Installment 30 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.

Harold Brubaker, who has written several articles on the subject in The Philadelphia Inquirer, published an article on September 17, 2010, entitled “Malvern Prep to return $700,000 received from Ponzi schemer.” The Brubaker article reported that Malvern had agreed in a consent order to return $700,000 received as contributions from Forte of the $900,000 originally sought by Marion A. Hecht, the court-appointed receiver (the “Receiver”). According to Mr. Brubaker, the Receiver is seeking recovery of substantial sums from other charities that also received donations from Forte.
Installment 30 pointed out that the Form 990 dated February 9, 2010, filed by Malvern for its fiscal year ended June 30, 2010 with the IRS (the “Malvern 2009 Form 990”) made no mention of Forte or the fate of his personal pledges, although the Forms 990 filed by the school for the immediately prior two fiscal years had clearly listed him among its Trustees. Moreover, Installment 30 noted that no reference had been made in the Malvern 2009 Form 990 as to whether the school had written off all or a portion of a Forte pledge of $500,000, which may have been a “diversion of assets” requiring a specific explanation if more than $250,000 had been written off.

It will be interesting to see whether, and to what extent, Malvern makes a disclosure and explanation of its losses and settlement with the Receiver respecting Forte in its Form 990 for the fiscal year ended June 30, 2010 to be filed with the IRS. 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 in that regard.

[To be continued in Installment 36]

(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)

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This is the thirty-fourth 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 discussed the impact of the Madoff scheme on public charities in the context of new disclosure requirements for Form 990 adopted by the Internal Revenue Service in 2008.  Installment 29 of this series featured the limited public disclosures made available by Howard Hughes Medical Institute (“HHMI”) regarding its reported investments with Madoff.

In light of the relative paucity of public information regarding the investments by HHMI with Madoff, a study of public filings of its stated investment adviser might be helpful. As reported in Installment 29 , on February 5, 2009, in the early aftermath of the arrest of Madoff in December 2008, HHMI was on a 163-page list of “victims” produced by the Madoff Bankruptcy Court and re-published by Data360.org.

According to that list, HHMI was an investor with Madoff through “RELATIVE VALUE STRATEGIES LLC C/O IVY ASSET MANAGEMENT CORP.” Just as one may learn significant information about charities from the publicly available Forms 990, one may acquire considerable information from Form ADV, the Uniform Application for Investment Adviser Registration, that is required to be filed with the Securities and Exchange Commission (“SEC”) and updated by all investment advisers registered with the SEC. The current form of a filed Form ADV may be obtained universally through the SEC Website.  Forms ADV of earlier years may be obtained by making a request to the SEC under the federal Freedom of Information Act (“FOIA”).

My search on the Internet for “Relative Value Strategies LLC” yielded only that it is a limited liability company formed in Delaware in 1997. There was no record of its being an investment adviser registered with the SEC.  Rather, “relative value strategies” may be found on the Internet primarily as a generic term for an investment strategy of hedge funds that seek profit by exploiting irregularities or discrepancies in the pricing of stocks, bonds or derivatives.  Such hedge funds, which take a position on forward interest rates, the spread between different yields and the price differences between related securities, are also called “market neutral” or “arbitrage” funds.

Therefore, it appears that Relative Value Strategies, LLC was used by Ivy Asset Management Corp., now known as Ivy Asset Management LLC (collectively, “Ivy”), primarily as a fictitious name under which it operated.  However, there is much information available about Ivy on the Internet and as a registered investment adviser on the SEC Website.  An example is an April 1, 2010 article in The Wall Street Journal, which reports Ivy’s extensive executive restructuring, staff layoffs, acquisition by BNY Mellon and investigation by the New York Attorney General.

The most recent information on Ivy of note is the disclosure in Schedule D to the Ivy Form ADV on the SEC Website (the “Current Ivy ADV”) that the New York Attorney General filed a complaint on May 11, 2010 and a summons on July 22, 2010, against Ivy and two of its officers, alleging violations of New York law by Ivy in “concealing material information concerning Bernard L. Madoff from certain clients, allegedly contributing to losses by individuals or entities for whom those clients provided investment-related services.”

What is equally interesting, however, from the perspective of one who is analyzing HHMI and its investment with Madoff is a consistent response in the Current Ivy ADV and Forms ADV filed by Ivy during early 2008 and 2009 that were obtained under a FOIA request. Item 5.C. requires an investment adviser to identify each type of client that it advises and the approximate percentage that such type of client constitutes in number. One possible response is “None” with the next higher category being “Up to 10%.”

In each of Ivy’s Form ADV filings during 2008, 2009 and 2010, for the category “(7) Charitable organizations,” Ivy responded “None.” This is clearly and totally inconsistent with the type of client that HHMI was as an investor. On HHMI’s Internet page “About HHMI,” HHMI prominently has the following excerpt from its Code of Conduct: “As a non-profit charitable organization, HHMI is committed to conducting its activities in accordance with the highest standards of integrity and ethics.”

If HHMI had examined the Form ADV filed in 2008 by Ivy, it could have seen a red flag. Ivy has consistently reported that it did not advise clients that were charitable organizations. Either Ivy failed to carry out the requirement as to HHMI of “knowing its customer,” or Ivy simply inaccurately reported its composition of clients. By referring to the Forms ADV, HHMI could have become alerted earlier as to a potential problem in utilizing the services of Ivy. Clearly by Ivy’s own disclosures to the SEC, it lacked sufficient experience to provide advice on investment strategies for an organization of the stature of HHMI in the context of HHMI’s overall charitable mission.

In any event, a message is clear. Every investor, whether or not a charitable organization, should consider obtaining current and past Forms ADV filed by their investment advisers with the SEC as part of due diligence to consider whether the stated purposes, classes of clients and scope of operations are compatible with the needs of such investor.

[To be continued in Installment 35]
 

(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)

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This is the thirty-third in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal.  Against the backdrop of the Madoff scandal, various Installments of this series have analyzed new disclosure requirements for public charities adopted by the Internal Revenue Service (“IRS”) in 2008 with its new Form 990. In particular, Installment 31 of this series provided analysis of the Form 990 for 2008 (the “2008 Form 990”) of American Jewish Congress, Inc. (“AJCongress”), which, like other Forms 990, is universally available on Guidestar.

Installment 31 stated that, on July 22, 2010, AJCongress President Richard Gordon reported on the AJCongress Website (the “Gordon Statement”) that the organization was suspending operations after, among other things, “Bernie Madoff stole approximately $21 million from our organization. . . .”

Installment 31 reported incorrectly that the only reference to Madoff and the AJCongress losses on the AJCongress website is the Gordon Statement.  Another reference to the Madoff losses for AJCongress may be found in the 2009 Annual Report of AJCongress (the “2009 Annual Report”), which may be reached directly from the AJCongress Homepage by clicking on the link “Click here to view Annual Report of Accomplishments- 2009.”

Unfortunately, in stark contradiction to the Gordon Statement, the first two paragraphs of the 2009 Annual Report read as follows:

As a difficult year—our 91st—draws to a close, it is appropriate to bring our friends and supporters up to date on our accomplishments. These are considerable, although the year began so inauspiciously with the looting of AJCongress endowment funds by Bernard Madoff.

We acted promptly to contain the damage, but the price the Madoff fraud exacted was high—we were forced to let go many valued and long-time AJCongress employees; we reduced spending to a minimum; and we relocated to smaller quarters. We have completed these actions, stabilized our finances and have begun to look forward to expanding the agency so that it may continue its historic role as attorney general of the American Jewish community.

The 2009 Annual Report concludes as follows:

The past year [2009] was a time for consolidating and reorganizing. This coming year [2010] must be a time of vigorous growth for AJCongress. But that can happen only if you contribute generously as this year comes to a close. We are counting on you.

The 2009 Annual Report paragraphs are seriously outdated, create a mistaken impression and belie the Gordon Statement. Even more concerning is the fact that the link to the 2009 Annual Report on the Homepage is placed directly below an active “Donation” link.  The Gordon Statement is not on the AJCongress Homepage or the pages seeking donations or memberships. Nor is there any cross-reference on those pages to the Gordon Statement, as there is to the 2009 Annual Report and its contradictory information.

As reported in Installment 31, AJCongress appears to be continuing business as usual on its Website in soliciting donations and memberships. As a personal matter, on August 5, 2010, I became an individual member in AJCongress online with a credit card payment. An unknowing visitor to the AJCongress Website could easily do that without seeing any information about the organization’s current distressed status. These disclosure matters should be addressed and rectified by AJCongress promptly.

As a final point, Charity Navigator,,a website that rates charities based on their Form 990 filings with the IRS, has made AJCongress number one on its list of “10 Charities Drowning in Administrative Costs.” Charity Navigator states that each of the 10 named charities

directs more than 44% of its budget towards administrative costs. That means most of your money goes toward such expenses as liability insurance, accounting and legal services, administrative salaries, and investment expenses, not the programs you aim to support.

Out of fairness to AJCongress and its venerable charitable history, it should be observed that the 2008 Form 990, upon which the organization’s Charity Navigator rating was based, included the results of the financial devastation that emanated from the Madoff revelations.

Nevertheless, AJCongress should consider correcting the disclosure deficiencies on its Website cited above by appropriately highlighting the curtailment of its charitable activities.

[To be continued in Installment 34]
 

(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)

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This is the thirty-second in a series of installments on this blog  that have focused substantially on issues of charities arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”) and others. All potential stakeholders should consult professional advisors to have their positions evaluated.

Installments 14 and 16 of this series, among others, discussed Hadassah and its relationships with Madoff, as well as to how the organization has chosen to disclose publicly its involvement and investments with Madoff.  Defined terms and links not otherwise contained herein are included in such Installments.  Readers are encouraged to consult the earlier blog posts as a background for this Installment.

In particular, Installment 16, posted in September 2009, discussed the fact that it is alleged that Hadassah had received $40 million more in distributions from Madoff than it had invested with him.  Additionally, an article by Diana B. Henriques in The New York Times was quoted in Installment 16 as having said, “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

On July 26, 2010, Michael Rothfeld reported in The Wall Street Journal that Mr. Picard is preparing new lawsuits against approximately 1,000 individuals to claw back funds from investors with Madoff who received more in principal distributions than they had invested with him. According to the article, Mr. Picard is trying to commence such lawsuits in advance of the expiration of the two-year statute of limitations in December 2010.

Mr. Rothfeld states in his article that Mr. Picard is suing several types of Madoff investors, including “15 civil suits seeking more than $15 billion on a combined basis from Mr. Madoff's brother and sons, investment funds that fed money to the [Madoff] firm, wealthy investors close to Mr. Madoff who redeemed large amounts of cash, and other defendants.”

No mention is made in the article as to whether the “wealthy investors close to Mr. Madoff who redeemed large amounts of cash and other defendants” may or will include Hadassah or other charities that have been alleged to have received more in distributions from Madoff than the dollars they had invested with him.  Again, as observed in Installment 16, the criteria that Mr. Picard will use to separate those from whom he will seek clawback and those “struggling” charities and “people of limited means” from whom he will not raise fundamental questions of fairness, size and relative value that will likely lead to much more controversy and potential litigation.

[Continued in Installment 33]
 

(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)

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This is the thirty-first 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 against the backdrop of the Madoff scandal.  The Forms 990, including the Form 990 (the “2008 Form 990”) of American Jewish Congress, Inc. (“AJCongress”) for the calendar year 2008 discussed below are universally available on the Internet on Guidestar and other sites.

AJCongress was founded 91 years ago to fight anti-Semitism and protect civil rights. The organization was one of the charities that was identified early as a major victim of Madoff when the scandal became public in December 2008, at which time AJCongress said it would not close. 

On July 22, 2010, AJCongress President Richard Gordon reported on the AJCongress Website that the organization was suspending operations after, among other things, “Bernie Madoff stole approximately $21 million from our organization. . . .”

A review of the current AJCongress Website reveals that the statement of Mr. Gordon is the only reference to Madoff and the AJCongress losses.  Further, in spite of the suspension of activities by AJCongress and some reports that it is seeking to merge with at least one other charity, AJCongress appears to be continuing business on its Website as usual in soliciting donations and memberships, including life memberships that cost $1,000.  The statement by Mr. Gordon is only contained under the AJCongress tab for “Press Statements,” not on its Homepage or the pages seeking AJCongress donations or memberships.  A visitor to the Website would have to visit that tab specifically in order to learn about the dire financial straits of AJCongress.

Clearly “best practices” in transparency would mandate that the statement by Mr. Gordon as to suspension of AJCongress activities be placed on the AJCongress Homepage and/or the fund solicitation pages, or at least prominently cross-referenced on those pages.

Probing deeper into the AJCongress disclosure process, a review of the 2008 Form 990 filed with the IRS on November 23, 2009 reveals that AJCongress properly answered “Yes” to the following question on Line 5 under the heading “Government, Management, and Disclosure”: “Did the organization become aware during the year of a material diversion of the organization’s assets?”

On Schedule O to the 2008 Form 990, AJCongress gave the following explanation for the foregoing “Yes” answer:

Approximately $2.2 million of investitures with Bernard Madoff Securities were stolen by Mr. Madoff. Additionally, some $16 million in trust funds were administered by AJCongress officers and employees (in one case, the Trusts’ [sic] were for the benefit of AJCongress) were also taken by Mr. Madoff.

The 2008 Form 990 shows that the net assets of AJCongress declined from $16,925,097 to December 31, 2007 to $3,764,412 as of December 31, 2008.

Therefore, while, the 2008 Form 990 appropriately called attention to the financial debacle that the organization had suffered during 2008, as discussed earlier, no attention was called to this fact on the AJCongress Website until the statement of suspension of activities by Mr. Gordon was posted.

Further, the 2008 Form 990 is unusually incomplete, with omissions in several areas.  For example, there were two pages attached at the end of the Form 990 of AJCongress for 2007 that named almost 100 volunteers who were on its Executive Committee and Governing Committee.  However, no volunteers were named in the 2008 Form 990 in response to Part VII, Section A, which called for a list of all current officers, directors, trustees (whether individuals or organizations), regardless of compensation.  The response in the table in Part A was cut off after the word “See -” in the 2008 Form 990 but appears that it would have directed the reader to other pages for a list of the volunteers, which have not been included.

Even more significantly, AJCongress answered “Yes” to the following question on Line 4 under the heading “Government, Management, and Disclosure” in the 2008 Form 990: “Did the organization make any significant changes to its organizational documents since the prior Form 990 was filed?”

On Schedule O to the 2008 Form 990, AJCongress gave the following explanation for the foregoing “Yes” answer: “See attached amendment to the Constitution of the American Jewish Congress.”

Again, as in the case of the members of the Executive Committee and the Governing Committee, no amendment to the Constitution was attached to the 2008 Form 990.

The omission of the amendment to the AJCongress Constitution is perplexing, as it has been reported by JTA that “the group [AJCongress] has money in the bank but cannot access it now due to the constraints of its constitution.” Had the constitutional amendments been included with the 2008 Form 990, it would have been possible for readers to analyze more meaningfully the status of AJCongress.

One final observation regarding the preparation of the 2008 Form 990 relates to the following question on Line 10 under the heading “Government, Management, and Disclosure”: “Was a copy of the Form 990 provided to the organization’s governing body before it was filed?  All organizations must describe in Schedule O the process, if any, the organization uses to review the Form 990.”

Not only did AJCongress answer the question on Line 10 “No,” there was no description in Schedule O of the process that the organization used to review the 2008 Form 990.  Perhaps if the AJCongress Executive Committee and Governing Committee had had the opportunity to see the  2008 Form 990 prior to its filing with the IRS, the omissions of the list of governing board members and the amendment to the AJCongress Constitution discussed above could have been discovered.

Although AJCongress has made disclosures of its financial status and direction since the Madoff scandal surfaced, the organization could have improved their timeliness, quality, consistency and completeness. It is not too late to improve the transparency, however, perhaps by placing a complete 2008 Form 990 on the AJCongress Website Homepage.

[This Installment has been amended from its original posting to reflect a change to "AJCongress" in the defined term for American Jewish Congress, Inc., in order to avoid potential confusion with any other organization.  We apologize for any misunderstanding that may have taken place.]

[To be continued in Installment 32]
 

(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)

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This is the thirtieth in a series of Installments on this blog that discusses issues that arose for charities in the aftermath of the Bernard L. Madoff (“Madoff”) scandal.  For example, Installment 29 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 and its relationship to Howard Hughes Medical Institute (“HHMI”).  Forms 990 that are filed with the IRS, including the New Form 990 of HHMI and those discussed in this Installment, are universally available on the Internet on Guidestar and other sites.

Madoff, however, was not the only person to have operated an alleged Ponzi scheme that materially and adversely affected charities.  The Philadelphia Inquirer published an article by Harold Brubaker on July 7, 2010, entitled “A Workout in Court over Ponzi-scheme Gift.”  The Brubaker article reported that Malvern Preparatory School (“Malvern” or the “school”), among other charities, is claiming that it is a victim of a Ponzi-scheme run by its former Trustee Joseph S. Forte (“Forte”), even though the school had received hundreds of thousands of dollars in donations from him.  Malvern is a venerable 167-year old independent Catholic middle and high school for boys in Malvern PA.  Forte is reported to be serving a 15-year prison term for investment fraud, having pleaded guilty on June 5, 2009.

Mr. Brubaker stated that, unlike other Forte charities that have chosen to negotiate with the receiver for Forte’s estate on donated monies that the receiver is endeavoring to “clawback,” Malvern is suing to retain the money donated by Forte.  The Brubaker article explains that the basis of the Malvern claim for victim status is complicated:

The school, known for its sports programs, went into debt constructing a strength-and-conditioning center at Forte's urging and after he pledged $1 million to pay for it. But Forte only paid $500,000 of his pledge, according to the school, leaving Malvern Prep in debt for the rest. The school's June 30 [2010 lawsuit] filing asserted a counterclaim for $630,000, which includes $565,000 for a portion of a term loan needed to pay for the center plus $65,000 in fees and interest.

The facts in the Malvern case are unusual because Malvern was not just a charitable beneficiary of Forte as was the Archdiocese of Philadelphia, which was mentioned in the Brubaker article.  Nor was the school simply a direct or indirect investor with Forte as, for example, Hadassah and Yeshiva University were with Madoff, as reported in Installments 22 and 23 of this series.

The discovery of the Forte scandal, his guilty plea and conviction, the Securities and Exchange Commission actions, and the appointment of Marion A. Hecht, CPA, CFE, CIRA, CFF, and MBA, Managing Director of the forensic litigation and valuation division of Goodman & Company, LLP, as receiver for Forte’s assets, all occurred during Malvern’s fiscal year ended June 30, 2009 (“Fiscal 2009”). A review of the balance sheet in the New Form 990 dated February 9, 2010, filed by Malvern for Fiscal 2009 with the IRS (the “Malvern 2009 Form 990”) reveals a decline in the category of “Pledges Receivable” during Fiscal 2009 of approximately $1.2 million from $2,003,004 to $785,992.  Because there is no note or explanation by Malvern in the Malvern 2009 Form 990 regarding the category, it is impossible to tell whether all or any portion of the $500,000 Forte pledge was written off by the school during the Fiscal 2009.

Malvern’s financial association with Forte was a complex “hybrid” case in that Malvern not only received direct donations from Forte that were presumably proceeds from his investment scheme; in effect, Malvern also was a type of investor with him. Malvern dedicated the proceeds of Forte’s bounty for the purpose of the strength-and-conditioning center that the school was reluctant to build in the first place and, in doing so, incurred its own new debt in reliance upon the anticipated payment of the remainder of the Forte pledge. Therefore, Malvern has suffered a real investment loss from the failure of Forte to satisfy his $500,000 pledge to pay for the indebtedness incurred by the school to build the project that Forte had induced it to undertake.

It is somewhat perplexing that the Malvern 2009 Form 990 makes no mention of Forte or the fate of his personal pledge, although the Forms 990 filed by the school for the immediately prior two fiscal years clearly listed him among its Trustees.

The matter is further complicated by the fact that, as discussed in Installment 29 of this series, Part VI of 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?”

In the Malvern 2009 Form 990, Line 5 was answered “No.”

The instructions for completing the New Form 990 (the “Form 990 Instructions”) provides 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.

If the decline in the Pledges Receivable in the Malvern 2009 Form 990 was attributable in part to a write-off of at least $250,000 of the outstanding $500,000 Forte pledge because of the repudiation of the Forte pledge by the receiver, the school should have considered making an explanation on Schedule O. If such a write-off of the Forte pledge did actually occur during Fiscal 2009, Malvern and its professional advisers apparently employed a narrow interpretation of the definition of “diversion of assets.”

While such a narrow interpretation may be supportable, I believe that the desirability of Malvern’s having taken a broader view of the term “diversion of assets” was heightened by the fact that Forte had been a Trustee of the school. As a matter of fact the Form 990 Instructions make a specific point that the category Pledges Receivable should include pledges of trustees, after any amounts estimated to be uncollectible:

Line 3. Pledges and grants receivable, Net. Enter the total
of (a) all pledges receivable, less any amounts estimated to be
uncollectible, including pledges made by officers, directors,
trustees, key employees, and highest compensated
employees and (b) all grants receivable.

As a final note, even if no write-off of all or a portion of the Forte receivable occurred during Fiscal 2009, in my view, Malvern should have considered making an explanation in the Malvern 2009 Form 990 as to why it was continuing to carry the Forte pledge in Pledges Receivable at full value.

In summation, the New Form 990 questions and Form 990 Instructions may need some refinement by the IRS to enhance the clarity and consistency of definitions and promote greater transparency by charities, as has been recommended in this and earlier Installments of this series.

[To be continued in Installment 31]
 

(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)

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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)

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This is the twenty-eighth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the Ponzi scheme perpetrated by Bernard L. Madoff (“Bernard”). Many of the Installments in this series have focused on specific problems and concerns respecting public charities and private foundations that were victims of this and similar schemes.

Installment 15 of this series, posted on September 15, 2009, discussed a lawsuit (the “Foundation Lawsuit”) brought by two children of, and the private charitable foundation (the “Foundation”) formed by, Senator Frank Lautenberg, its President. The claims in the Foundation Lawsuit include allegations that Peter Madoff (“Peter”), the brother of Bernard, violated the Securities Exchange Act of 1934 by failing to disclose to investors with whom Peter had been involved that Bernard’s company was engaged in fraudulent activities. The plaintiffs in the Foundation Lawsuit claim losses aggregating almost $9 million.

Installment 15 discussed some concerns regarding the likelihood of success of the Foundation Lawsuit against Peter. One of the questions asked was whether the preliminary success of the Foundation Lawsuit would spur other stakeholders to sue members of the Madoff family, thereby exposing them to the potential for very large claims that could precipitate bankruptcy filings for Peter and other family members. Indeed, there have been a number of lawsuits filed against members of the family of Bernard, as reported in a recent article by Bloomberg Business Week.

The Bloomberg Business Week article also reported that a new threat to the success of the Foundation Lawsuit has emerged. Specifically, Irving Picard, the trustee in the liquidation of Bernard’s bankrupt estate, is seeking to block a dozen lawsuits against relatives of Bernard, including the Foundation Lawsuit. Mr. Picard has asked a U.S. bankruptcy court to halt the suits, arguing that they are an attempt by the claimants to “leapfrog” other victims to recover more than they are due. The article quotes Mr. Picard’s pleadings as alleging that there is only “one pool of customer property,” and plaintiffs, such as the Foundation, should not be allowed to obtain preferential recoveries.

Installment 15 also reported that as of September 15, 2009, a check of the charity information website Guidestar indicated that the Form 990-PF Internal Revenue Service (IRS”) filing of the Foundation for 2008 had not yet been posted. Surprisingly, a current check of Guidestar indicates that the Form 990-PF of the Foundation for 2008 had still not yet been posted, even though the latest date (with permitted extensions) for timely filing with the IRS was November 16, 2009.

Readers should stay tuned for further developments in this matter, as the nature and extent of disclosures that are made by the Foundation in its 2008 Form 990-PF, especially with respect to the Foundation Lawsuit and the financial status and contingencies respecting the Foundation, should be interesting.

[To be continued in Installment 29]
 

(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)

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This is the twenty-seventh in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Against the backdrop of the Madoff scandal, Installment 26 of this series discussed certain disclosure requirements for public charities adopted by the Internal Revenue Service (“IRS”) in its new Form 990 (the “New Form 990”) and contrasted such requirements with those of the Form 990-PF filed with the IRS by private charitable foundations. The Forms 990 and 990-PF (including those discussed in this Installment) are universally available on the Internet on Guidestar and other sites.

Installment 26 of this blog series observed that, for 2007, the Carl & Ruth Shapiro Family Foundation (the “Shapiro Foundation”) filed a Form 990-PF (the “Shapiro 990-PF”) and an amended Form 990-PF (the “Shapiro Amendment”). The Shapiro Amendment reflected a disappearance for the Shapiro Foundation of (i) $191,003,929 in fair market of assets and (ii) $38,953,906 in investment income previously reported in the Shapiro 990-PF. However, the Shapiro Amendment gave no explanation for the disappearances or that they had resulted from events that came to light in December 2008 and thereafter; even more troubling was the fact that the Shapiro Amendment contained no reference to Madoff whatsoever, even though the schedules in the original Shapiro 990-PF had referred to him 10 times by name.

The Shapiro Foundation filed its 2008 Form 990-PF with the IRS on November 20, 2009. Again, as in the Shapiro Amendment, no reference was made to the substantial investments with, or losses attributable to, Madoff.

This somewhat perplexing approach to disclosure adopted by the Shapiro Foundation regarding its involvement with Madoff is in stark contrast to the filing with the IRS on September 23, 2009, by the Judy & Fred Wilpon Family Foundation (the “Wilpon Foundation”) of its 2008 Form 990-PF (the “Wilpon Form 990-PF”). The Wilpon Form 990-PF did not merely disclose the fact that the Wilpon Foundation had investments with, and losses from, Madoff; the Wilpon 2008 Form 990-PF attached as Appendix A the Wilpon Foundation’s “Statement by Taxpayer Using the Procedures in Rev. Proc. 2009-20 to Determine a Theft Loss Deduction Related to a Fraudulent Investment Arrangement.” That Statement discloses the calculation of the Wilpon Foundation’s losses attributable to Madoff.

Each of the filings by the Shapiro Foundation and the Wilpon Foundation may be in compliance with current IRS requirements for Forms 990-PF; however, we are in an era of ever greater expectations by society for transparency in the operations and activities of charitable organizations. The Wilpon Foundation’s filing came much closer to achieving these expectations than the filings by the Shapiro Foundation.

As was stated in Installment 26, the IRS has greatly enhanced the quality of disclosure required in the New Form 990. It should review and consider revisions for the Form 990-PF to enhance consistency and transparency of reporting by private foundations and require more meaningful explanation of material matters and events.

[To be continued in Installment 28]
 

(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)

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This is the twenty-sixth in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Against the backdrop of the Madoff scandal, prior Installments of this series have discussed and analyzed new disclosure requirements for public charities adopted by the Internal Revenue Service (“IRS”) in its new Form 990 (the “New Form 990”). Forms 990 filed by public charities and Forms 990-PF filed by private charitable foundations are universally available on the Internet on Guidestar and other sites.

One important change in the New Form 990 that has received relatively little notice, perhaps because it has not yet been greatly utilized, is the following highlighted addition to the first paragraph of instructions for filing an amended Form 990.
 

G. Amended Return/Final Return

To change the organization’s return for any year, file a new return including any required schedules. Use the version of Form 990 applicable to the year being amended. The amended return must provide all the information called for by the form and instructions, not just the new or corrected information. Check the Amended Return box in the heading of the return. Also, state in Schedule O which parts and schedules of the Form 990 were amended and describe the amendments.

The addition to the New Form 990 amendment instructions was clearly intended to give reviewers a roadmap to isolate and analyze why an amendment was necessary and the changes that were made. Since many New Forms 990 can run 40 pages or more, such assistance to the reader is vital for a meaningful review.

In contrast, the Form 990-PF and its instructions for preparation and filing with the IRS by private charitable foundations has not gone through a recent major revision. The instructions for filing an amended Form 990-PF read in part as follows:

To change the organization's return for any year, file an amended return, including attachments, with the correct information. The amended return must provide all the information required by the form and instructions, not just the new or corrected information. Check “Amended Return” in block G at the top of page 1.

Clearly, the Form 990-PF instructions do not require the identification and a description of amendments as the New Form 990 instructions do. My view is that an amended Form 990-PF should have the same mandatory roadmap for identifying and explaining changes in an amendment as New Form 990.

Amendments to Forms 990-PF for private foundations that were affected by Madoff are now becoming available on Guidestar.  A number of private foundations have filed amended Forms 990-PF to reflect losses in fair market value of assets and investment income on Madoff investments that they had previously reported to the IRS, presumably to recover refunds from the IRS for excise tax paid on the Madoff “investment income” that turned out to be fallacious. These foundations may have been fully compliant with the instructions for amended Forms 990-PF but have not necessarily demonstrated “best practices” in meaningful disclosure.

A case in point is the 2007 Form 990-PF originally filed on May 15, 2008 (the “Shapiro 2007 990-PF”), by the Carl & Ruth Shapiro Family Foundation (the “Foundation”). The Shapiro 2007 990-PF reflected fair market value of assets at the end of 2007 of $323,912,042 and investment income of $43,654,002.

On November 18, 2009, the Foundation filed an amended Form 990-PF (the “Shapiro Amendment”) that reported fair market value of assets at the end of 2007 of $132,908,113 and investment income of $4,700,096.

Therefore, the Shapiro Amendment reflects the disappearance for the Foundation for 2007 of (i) $191,003,929 in fair market of assets and (ii) $38,953,906 in investment income previously reported in the Shapiro 2007 990-PF.

The Shapiro Amendment gave no explanation for the disappearances and said nothing of Madoff, even though the schedules in the Shapiro 2007 990-PF had referred to him 10 times by name. Unless a reader has both documents available side-by-side, it is virtually impossible to understand the changes. The Shapiro Amendment may have been compliant with the Form 990-PF instructions; however, had the Foundation been a public charity, it would have presumably been required to make significantly greater disclosure in a Form 990 amendment.

As a side note, the Foundation changed its Paid Preparer to Caras and Shulman, PC of Burlington, MA for the Shapiro Amendment from Konigsberg, Wolf & Co., P.C., the Paid Preparer for the Shapiro 2007 Form 990-PF. Query whether that change would have required a description if the filing had been an amendment to a Form 990.

In conclusion, the IRS has greatly enhanced the quality of disclosure in the New Form 990. It should review and consider some revisions for the Form 990-PF to require more meaningful explanation of material matters and events.

[To be continued in Installment 27]
 

(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)

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This is the twenty-fifth in a series of installments on this blog that are discussing issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Defined terms and links not otherwise contained in this Installment are included in Installments 22, 23 and 24.   This Installment will continue the Yeshiva/KPMG discussion that was begun in Installment 24, and readers are encouraged to consult the earlier blog posts as a background for this Installment.

This Installment is Part IV of an analysis of recent public financial reporting of Hadassah and Yeshiva. In earlier Installments, I had stated my view that Yeshiva provided significantly greater credibility, disclosure and transparency relative to Madoff and related matters through its Form 990 filings than Hadassah did in its Forms 990. However, Installment 24 introduced the question whether recent moves by Yeshiva to improve its compliance program and processes, including the retention of Alan Kluger as Director of Tax and Compliance at Yeshiva soon after his departure from KPMG, may have compromised the independence of Yeshiva’s auditor KPMG.

An observation was also made at the end of Installment 24 that Yeshiva did not observe the one-year cooling off period for such retentions by public companies as mandated by the Office of the Chief Accountant (the “OCA”) of the SEC. While Yeshiva, as a 501(c)(3) public charity, is not a public company and is not governed by the OCA, Installment 24 ended by asking whether the audit or other appropriate board committee or the Board of Trustees of Yeshiva sufficiently considered the question of auditor independence in the circumstances of the hiring of Mr. Kluger.

The importance of Yeshiva’s utilizing best practices in avoiding even a question as to auditor independence is highlighted by Footnote 17 to the 2009 Yeshiva Financial Statements.  Footnote 17 discloses that in July 2009 the Dormitory Authority of the State of New York (“DASNY”) issued $140,820,000 of Revenue Bonds on behalf of Yeshiva (the “Yeshiva Bonds”).

The minutes of the June 24, 2009 DASNY Board meeting (the “Minutes”) disclose the discussion by the DASNY Board of the authorization of the Yeshiva Bonds. The Yeshiva Minutes evidence the deep concerns of the DASNY Board relative to the quality of the Yeshiva financial statements and other financial events surrounding Yeshiva.

Specifically mentioned in the Minutes was the downgrade of the Yeshiva credit rating by Moody’s and a potential further downgrade by Moody’s. Additionally, the Secretary of the Board, Jacques Jiha, noted that he found it surprising that Yeshiva “did not have an investment officer in place in light of what has happened.” Presumably Mr. Jiha was referring to the decline in the endowment funds of Yeshiva, a substantial portion of which was directly attributable to losses from investments made with Madoff through Ezra Merkin, both of whom were formerly Trustees of Yeshiva.

As an aside, the description of Mr. Kluger’s position at Yeshiva cited in Installment 24 calls for him to consult with the Yeshiva Chief Investment Officer.

Most significantly, however, was the following extract from the Minutes:

[Board Member] Mr. [Anthony B.] Martino explained that the question is whether the [Yeshiva] University’s cash forecast included what was needed for calls on investments. Mr. Martino asked about the status of the University’s audited financial statements. Mr. [David L.] Kvam [Director, Financing Coordination of DASNY] responded that the June 30, 2008 statements had been issued, albeit late.

Mr. Martino asked for confirmation that the University was given an unqualified opinion. Mr. Kvam responded in the affirmative.

Just prior to the close of the Yeshiva fiscal year ending June 30, 2009, in which the Yeshiva Bonds were authorized, and to which the Yeshiva 2009 Financial Statements related, the DASNY Board demonstrated concern about the integrity of the financial statements of Yeshiva.
The DASNY Minutes also reflect that two representatives of KPMG were in attendance at the DASNY Board meeting, presumably relating to Yeshiva. It would appear that none of the other institutions addressed at the DASNY meeting utilized KPMG as its auditor.

It is clear from the foregoing discussion that Yeshiva and KPMG were well aware of the concerns and scrutiny to which the financial activities of Yeshiva were being subjected during 2009. To ensure continued auditor independence, they each should have utilized “best practices” in evaluating and authorizing the relatively fast track transitioning of Mr. Kluger from Tax Managing Director of KPMG to Director of Tax and Compliance at Yeshiva.

[To be continued in Installment 26]
 

(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)

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This is the twenty-fourth in a series of installments on this blog that are discussing issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Defined terms and links not otherwise contained in this Installment are included in Installments 22 and 23.

This Installment is Part III of an analysis of recent public financial reporting of Hadassah and Yeshiva. In earlier Installments 22 and 23, I stated my view that Yeshiva provided significantly greater credibility, disclosure and transparency relative to Madoff and related matters through its Form 990 filing than Hadassah did in its Forms 990. However, information now obtained from the Internet may indicate that recent moves by Yeshiva to improve its compliance program and processes may have compromised the independence of its auditor KPMG LLP (“KPMG”).

The facts identified are as follows:

1. On April 3, 2009, Alan Kluger, an attorney and Tax Managing Director of KPMG, executed, as Preparer on behalf of KPMG, the Form 990 of Yeshiva for the year ended June 30, 2008 (the “Yeshiva Form 990”).

2. On April 24, 2009, Bloomberg.com reported, “Yeshiva University’s trustees approved new conflict of interest measures after the school lost millions of dollars in the fraud involving Bernard Madoff, a former trustee.”

3. On November 12, 2009, Alan Kluger executed, as Preparer on behalf of KPMG, the Forms 990 of The Hadassah Foundation, Inc. and of Hadassah Medical Relief Association, Inc., for the short year ended December 31, 2008, copies of which were obtained upon request from Hadassah.

4. On November 18, 2009, KPMG signed its Independent Auditor’s Report for Yeshiva relating to its Consolidated Financial Statements for June 30, 2009 and 2008 (the “2009 Yeshiva Financial Statements”).

5. Mr. Kluger’s LinkedIn entry indicates that he served KPMG as Tax Managing Director from August 2006 to November 2009.

6. There is a description on “indeed®” that describes a former job posting on Jobs.com from seven months ago for the position of Director of Tax and Compliance at “Yeshiva University Alumni [sic?] - Bronx, NY” that is no longer available. The posting described the position at Yeshiva University in part as follows:

Reporting to the Executive Director of Financial Services, the Director of Tax and Compliance will plan, develop and lead tax management activities for the University in consultation with the Vice President for Business Affairs and CFO and staff (Treasurer, Chief Investment Officer, Director of Internal Audit, and Executive Director of Financial Services and will consult regularly with the University’s General Counsel.

[Emphasis supplied. Note that the position relates to the University, not its “Alumni.”]

7. The LinkedIn entry for Mr. Kluger indicates that he currently holds the position of “Director of Tax & Compliance, Yeshiva University.” No commencement date is given in the entry.

Clearly the sequence of events indicates efforts by Yeshiva to upgrade and expand its compliance activities.  In recruiting Mr. Kluger, Yeshiva retained a highly experienced attorney from a “Big 4” accounting firm.  However, there are questions raised by the departure of Mr. Kluger from his senior position at KPMG in November 2009 to his new senior position at Yeshiva, contemporaneous with the completion by KPMG of the 2009 Yeshiva Financial Statements.  Even if Mr. Kluger had no involvement from July 1, 2008 to November 18, 2009 with the preparation of the 2009 Yeshiva Financial Statements, which is difficult to believe in light of his position with KPMG and his history with Yeshiva as a client, he had signed the Yeshiva Form 990 on April 3, 2009.

Yeshiva is a non-profit corporation and is not subject to the rules of the Securities and Exchange Commission (the “SEC”) as to auditor independence.  Nevertheless, Yeshiva should have sufficient concerns in the aftermath of the Madoff scandal and as an entity with $1.6 billion in consolidated net assets as of June 30, 2009, to raise awareness and effectiveness of its compliance program by using “best practices” in maintenance of auditor independence. In this regard, the Office of the Chief Accountant (the “OCA”) of the SEC has stated the following as to “Audit Committees and Auditor Independence”:
 

Prohibited Relationships

Certain relationships between audit firms and the companies they audit are not permitted. These include:

 Employment relationships. A one-year cooling off period is required before a company can hire certain individuals formerly employed by its auditor in a financial reporting oversight role.  The audit committee should also consider whether the hiring of personnel that are or were formerly employed by the audit firm might affect the audit firm's independence.

Clearly, Yeshiva did not observe the one-year cooling off period mandated by the OCA for public companies.  Query whether the audit or other appropriate board committee or the Board of Trustees of Yeshiva considered the question of auditor independence in the circumstances of the hiring of Mr. Kluger.

[To be continued in Installment 25]

(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)

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This is the twenty-third in a series of installments on this blog that are discussing issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 22 of this series focused on the concerns of charities that were investors with Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated. 

This Installment presents in tabular form and expands Installments 14 and 22 relative to the comparison as to how Hadassah and Yeshiva have disclosed publicly their respective investments with Madoff. Defined terms and links not otherwise contained herein are included in Installments 14 and 22. Readers are encouraged to consult the earlier blog posts as a background for this Installment.

As stated in Installments 14 and 22, it is my view that Yeshiva provided significantly greater disclosure and transparency relative to Madoff and related matters through its Form 990 filing than Hadassah did in its Forms 990.  As a result I believe that Yeshiva has been more successful than Hadassah in using the Form 990 reporting process proactively to build new credibility. 

The following table updates the tabular information contained in Installment 14 based upon the December Hadassah Form 990 that was first discussed in Installment 22. 

A COMPARISON OF HADASSAH AND YESHIVA FORMS 990

(Information in the Hadassah and Yeshiva columns is from the Hadassah Forms 990 and the Yeshiva Form 990, unless otherwise noted; readers may access Forms 990 by visiting Guidestar after making a free online registration. The table below should be read in conjunction with the definitions, links and discussion in Installments 14 and 21 of this series.)

[To be continued in Installment 24]

(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 its Princeton, NJ office, and 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)

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This is the twenty-second in a series of installments on this blog that are discussing issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 21 of this series focused on the concerns of charities that were investors with Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

Installment 14 of this series compared and contrasted recent Forms 990 filed with the Internal Revenue Service (the “IRS”) for fiscal 2008 by two of the most significant and respected charities that invested with Madoff: Hadassah, The Women’s Zionist Organization of America, Inc. (“Hadassah”), and Yeshiva University (“Yeshiva”). While the missions of Hadassah and Yeshiva (collectively, the “Charities”) are different, they provide a basis for comparison of transparency, and share as part of their missions the advancement of education and Jewish awareness in the United States and Israel. For disclosure purposes, readers are again advised that the spouse of the author of this blog contributor has been a Life Member of Hadassah for many years.

Because of the decision by Hadassah to change its fiscal year from a year ending May 31 to the calendar year, Hadassah was required to file a Form 990 with the IRS for the seven-month period ended December 31, 2008 (the “December Hadassah Form 990”). The filing by Hadassah of the December Hadassah Form 990 within approximately seven months after having filed its Form 990 for the fiscal year ended May 31, 2008 (the “May Hadassah Form 990” and, collectively with the December Hadassah Form 990, the “Hadassah 2008 Forms 990”) within such a short period has enabled an unusual insight into Hadassah’s public financial disclosure decisions.

These Forms 990 filings come at a time in history when Hadassah has been endeavoring to repair its post-Madoff image. In a widely-reprinted January 2010 Associated Press article by David B. Caruso, Hadassah President Nancy Falchuk was quoted as saying that the group has sought to streamline and refocus itself and that she has worked hard to rebuild the nonprofit's reputation.

Nonetheless, it would appear that positive image-building for Hadassah did not extend to best practices in transparency in the May Hadassah Form 990 regarding its dealings with Madoff. The May Hadassah Form 990 contained no disclosure relative to Madoff investments and distributions for Hadassah.

As stated in Installment 14 of this series, Hadassah did not measure up to the level of transparency regarding Madoff provided by Yeshiva in its Form 990 filing with the IRS for the fiscal year ended June 30, 2008 (the “Yeshiva Form 990”). While Hadassah did not mention its Madoff financial complexities at all in the May Hadassah Form 990, the Yeshiva Form 990 clearly laid out the dollar amounts involved with Madoff. Curiously the contrasting methods of presentation were in Forms 990 whose professional Preparer was the Park Avenue, New York, office of KPMG LLP, and the same professional at KPMG signed all of such Forms 990.

There is an even more perplexing point about the Hadassah 2008 Forms 990 when they are compared to Hadassah’s consolidated financial statements for the fiscal years ended May 31, 2008 and December 31, 2008, with the auditors’ report of KPMG LLP (collectively, the “2008 Financial Statements”). Hadassah is to be commended for voluntarily making the 2008 Financial Statements available to the public on request.

Both of the 2008 Financial Statements contains a note as to the Hadassah/Madoff involvement. The note in the Hadassah December 31, 2008 financial statements about Madoff is substantially the same as the note in the December 2008 Hadassah Form 990. However, the May Hadassah Form 990 was silent as to Madoff, and that Form 990 actually related to the fiscal year in which Hadassah took the substantial write-down in Madoff “assets”. In contrast to the May Hadassah Form 990, the following statement is part of Note (15) Subsequent Events to the Hadassah May 31, 2008 audited financial statements (“Note 15”):

Subsequent to year-end, Hadassah learned that it has been a victim of the fraudulent scheme perpetrated by Bernard L. Madoff Securities LLC (Madoff) which resulted in write-off of an investment amounting to $88,725,362 as of May 31, 2008. Investor statements received from Madoff reported total investments at fair value of $88,725,362 and $80,684,460 at May 31, 2008 and 2007, respectively, and investment return of $8,040,902 and $11,405,448 for the years ended May 31, 2008 and 2007, respectively. . . .
 

It is puzzling that Hadassah and its Form 990 Preparer would determine not to include in the May Hadassah Form 990 the language of Note 15 when they deemed it material enough to explain the substantial write off in the corresponding 2008 Financial Statements. It is especially perplexing that the contemporary Yeshiva Form 990 for which KPMG LLP was also the Preparer did have a comprehensive note explaining its write-down of investments with Madoff. Again, I believe that Yeshiva has been more successful than Hadassah in using the Yeshiva Form 990 to build new credibility and repair a damaged reputation than Hadassah has done with the Hadassah 2008 Forms 990.

[To be continued in Installment 23]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the twenty-first in a series of installments on this blog that are discussing some issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 20 of this series focused on the concerns of charities that were investors with Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

Installment 19 of this series pointed out that Monday, November 16, 2009 was a critical day for Section 501(c)(3) public charities and private foundations (collectively, “501(c) Entities”) with a calendar fiscal year. It was the final day on which such 501(c) Entities could file their Forms 990 and 990-PF (collectively, “Forms 990”) with the Internal Revenue Service (the “IRS”) for calendar year 2008 on a timely basis to avoid possible IRS penalties.

There were reports that there was such a high volume of Forms 990 filed electronically with the IRS that day that some charities experienced substantial delays in their filing efforts.

Installment 19 also pointed out that over the course of the next several months it will be interesting and informative to visit www.guidestar.org to review and analyze the 2008 Forms 990 filings as they are posted. Many calendar year Forms 990 have not yet been posted on www.guidestar.org, presumably because of the crush of last minute November filings,

Nonetheless, for those who want or need to get the Forms 990 information immediately, including potential donors who want to make decisions about 2009 charitable gifts, there are other alternatives. Generally the IRS says that the Forms 990 copies should be made available by the 501(c)(3) Entity for public inspection and copying on the same day if the request is made by appearing in person at the principal offices of the charity. The charity has up to thirty (30) days to respond to written requests made by regular mail, e-mail, facsimile or private delivery. The charity is allowed to charge for actual postage and modest copying fees.

A request for Forms 990 made at the principal headquarters of 501(c)(3) Entities should get a prompt response within 24 hours. Many charities are highly sensitive to their obligations to make Forms 990 available and may even respond within a day to a telephone, facsimile or e-mail request.

Other 501(c)(3) Entities may be unaware of their Forms 990 public inspection responsibilities or may even be evasive or unwilling to provide the Forms 990. Potential donors should have a healthy skepticism about such behavior and can advise the IRS, if necessary. 501(c)(3) Entities can be subject to IRS penalties and potential adverse publicity for failure to respond promptly.

Best wishes to all for a happy and healthy holiday season.

[To be continued in Installment 22]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the twentieth in a series of installments on this blog that are discussing some issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 19 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

On December 15, 2009, United States District Court Judge Paul S. Diamond for the Eastern District of Pennsylvania raised serious questions in the case of the Securities and Exchange Commission (“SEC”) et. al. v. Forte, regarding limitations on recoveries from those who received distributions in Ponzi schemes like that of Madoff. Specifically, Judge Diamond questioned the position of the SEC and the Commodity Futures Trading Commission (“CFTC”) that “clawback” from early investors in Ponzi schemes was limited to the illusory “profits” but not the principal that such investors had recovered. In analyzing the impact of the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”) in a lengthy Memorandum Opinion, Judge Diamond observed,

The SEC and CFTC have apparently adopted a nationwide policy that there can be no recovery of principal from winning Ponzi scheme investors even when the investors should have seen “red flags” alerting them to the true nature of their “investments.” . . . Accordingly, it could well be more equitable and legally supportable for the SEC and the CFTC to support . . . as PUFTA provides, [to file] suit to recover the entire fraudulent transfer from all . . . net winners - both the profits and the principal.

The position of Judge Diamond may be starkly contrasted to statements made on October 27, 2009, by Irving Picard, the trustee in the Madoff liquidation proceeding. During the course of the questioning by reporters, the “clawback” issue was raised and the following response was given by Mr. Picard, as previously reported in Installment 18 of this series:

At the moment, as I indicated of the accounts that were active at the end of last December, there were 2,568 accounts that received more than was deposited. . . . That’s an area that we are looking at. . . . No final decisions have been made; it’s a matter that again, over a period of the next six to eight or nine months, we’re going to be taking a very close look and, quite frankly, those will be looked at virtually on an individual basis before we make some final decisions. . . . if we determine that that’s a matter that we’re going to pursue, then we will pursue them for what we believe is the appropriate amount that we should be seeking from them.

It is noteworthy that Mr. Picard simply assumed that he would be limiting recovery efforts from “winners” to their excess distributions but not to the principal that these winners would have recovered in full. He did not address at all in his response whether he will pursue the widely-publicized “profits” from investing with Madoff that have been reported for some charities like Hadassah, as discussed in Installment 14 of this blog series. If Judge Diamond’s position were to be followed in the Madoff proceeding, the result could be to expose such charities to millions of dollars more in potential “clawback.”

Mr. Picard interestingly went even further in his statements regarding pursuit of “winners” than the SEC and CFTC. He has indicated that he will pick and choose among the winners, depending on currently unstated individual qualitative and quantitative standards that may have no firm legal basis.

It is clear that the Madoff case will continue to create controversy and new law as it unfolds.

[To be continued in Installment 21]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the nineteenth in a series of installments on this blog that are discussing some issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 18 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

Monday, November 16, 2009 is a critical day for Section 501(c)(3) public charities and private foundations with a calendar fiscal year that invested with Madoff. As a matter of fact, it is a critical day for all Section 501(c)(3) charitable organizations with a calendar fiscal year. It is the final day on which such public charities and private foundations can file their Forms 990 and 990-PF, respectively, with the Internal Revenue Service (the “IRS”) for calendar year 2008 on a timely basis after using both of the two potentially available extension periods. A fling after that date is delinquent and can lead to penalties by the IRS.

While this blog series has strongly advocated filings with the IRS by charitable organizations for 2008 as early as possible, many have delayed their filings until the deadline. A number of factors may have led to this approach, including the following:

1. The new Form 990 for 2008 added probing questions on governance, executive compensation, charitable mission, policies, etc., which required many of the charities to institute or update protocols and procedures.

2. The accounting and auditing firms that assist charities in preparing Forms 990 and 990-PF were under great pressure to deal with the complexities of the new Forms and the financial challenges facing many charities.

3. During 2008 many charities suffered substantial losses in endowment fund values and declines in fundraising that led some of them to delay potentially embarrassing disclosures to the public as long as possible.

4. A number of those charities that invested with Madoff and similar alleged Ponzi schemes had hoped that the IRS would give greater guidance on the uncertainties in treatment of losses and distributions in their filings for 2008 and prior years.

5. Charities that have invested with Madoff or suffered large losses during 2008 may have wanted to see how other Forms 990 and 990-PF filers that filed earlier in the year with the IRS treated the subjects in their financial statements and textual materials.

6. Even charities that did not suffer losses in 2008 may have wanted to see how other Forms 990 and 990-PF filers that filed earlier treated subjects such as description of mission, conflicts of interest and whistleblower policies, executive compensation and other potentially sensitive new areas of disclosure.

Over the course of the next several months it will be interesting and informative to visit Guidestar to review and analyze the 2008 Form 990 and 990-PF filings as they are posted. This blog series will continue to monitor and report on such developments.

[To be continued in Installment 20]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the eighteenth in a series of installments on this blog that are discussing some issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 17 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

On October 27, 2009, Irving Picard, the trustee in the Madoff liquidation proceeding under the Securities Investor Protection Act (the “Madoff Proceeding”), together with Securities Investor Protection Corporation (“SIPC”) President Stephen Harbeck, held a telephone briefing with reporters on progress to date of the Madoff Proceeding. During the course of his prepared remarks, Mr. Picard did not discuss efforts in the Madoff Proceeding to “clawback,” that is, recover assets from Madoff investors who received more in cash distributions than they invested with him.

During the course of the questioning by reporters, the “clawback” issue was raised and the following response was given by Mr. Picard:

At the moment, as I indicated of the accounts that were active at the end of last December, there were 2,568 accounts that received more than was deposited. . . . That’s an area that we are looking at. We’re not going to be suing people who don’t have money. We’re not going to be able to collect. We’re not going to sue people where we become familiar with the fact that they have hardships, medical problems, losing their homes and other things like that. No final decisions have been made; it’s a matter that again, over a period of the next six to eight or nine months, we’re going to be taking a very close look and, quite frankly, those will be looked at virtually on an individual basis before we make some final decisions. . . . if we determine that that’s a matter that we’re going to pursue, then we will pursue them for what we believe is the appropriate amount that we should be seeking from them.

It is noteworthy that Mr. Picard did not address in his response the widely-publicized “profits” from investing with Madoff that have been reported for charities like Hadassah, as discussed in Installment 14 of this series.  

Mr. Picard’s response may be compared to the report by Diana B. Henriques on May 28, 2009 in The New York Times that “[t]here is the widespread fear among some — unfounded, Mr. Picard says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

Has Picard now evidenced by his silence a subtle shift from his earlier position with respect to not pursuing ‘struggling charities” that made profits from investing with Madoff? The October 29,2009 issue of The Chronicle of Philanthropy has disclosed that Hadassah suffered a decline of almost 50% in donations during 2008 to just over $85 million as compared to the 2007 level. Does that loss in revenues qualify Hadassah to be exonerated from clawback as a “struggling charity” under Mr. Picard’s earlier position? A significant portion of the decline in Hadassah donations may be due to the economy generally. However, ironically, some of the decline may be attributable to the adverse publicity for Hadassah from having invested with Madoff. Moreover, a number of its major donors may have incurred heavy losses with Madoff and could not maintain their contributions to Hadassah.

As the Madoff Proceeding continues to unfold, these issues should become clearer.

[To be continued in Installment 19]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the seventeenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 16 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

On October 21, 2009, an article in The New York Times by Ken Belson and Richard Sandomir disclosed that a Madoff bankruptcy proceeding report had contradicted earlier information about large losses with Madoff purportedly suffered by the New York Mets and their owners, the Wilpon family. The article states that the report shows that

Mets LP, one of the team’s financial arms, withdrew $570.5 million from two accounts it held with Madoff’s company, $47.8 million more than it put in. The accounts were part of a list of more than 30 in which more money was withdrawn than was deposited with Bernard L. Madoff Investment Securities. As a result, Mets LP and the others were deemed “net winners” ineligible for compensation and potentially liable to being sued by Irving H. Picard, the court-appointed liquidator who is trying to recover money lost in Madoff’s $65 billion Ponzi scheme. A spokesman for Picard declined to comment.

Thus the Mets and the Wilpon family may become the subject of “clawback” by Mr. Picard and end up losers, especially if they have paid now-unrecoverable federal and state income taxes on the illusory Madoff “gains.” This situation can be contrasted to the position stated by Picard with respect to seeking recovery from charities. As reported in Installment 16 of this blog series http://whitecollarcrime.foxrothschild.com/, Diana B. Henriques wrote on May 28, 2009 in The New York Times that “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

Installment 14 of this blog series discussed reports of large profits by Hadassah from its investments with Madoff. Will Picard choose to pursue the Mets and the Wilpon family while passing on Hadassah? All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While the position earlier stated by Picard as to charities may be humanitarian and emotionally appealing, there is little basis in the law for the disparity in treatment between charities and for-profit entities. This inequality of approach will more likely than not lead to protracted litigation and uncertainty in the Madoff matter.

[To be continued in Installment 18]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the sixteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8 and Installments 10, 14 and 15 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

On September 22, 2009, the Associated Press reported that federal prosecutors had disclosed in New York that approximately 50% of the Madoff stakeholders had withdrawn more money than they invested with him and about 50% had invested more money than they had withdrawn. There have been many reports that among those stakeholders which received more in distributions from Madoff than they invested were charities. Installment 14 of this blog series reported on allegations that Hadassah received $40 million more in distributions from Madoff than they had invested with him.

Diana B. Henriques wrote an article on May 28, 2009 in The New York Times  entitled “It’s Thankless, but He Decides Madoff Claims,” in which Ms. Henriques reported that “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

The May statement by Mr. Picard now presents him with a fascinating quantitative and qualitative dilemma and conundrum. All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While some smaller charities have already gone out of business from the Madoff fiasco, others large organizations like Hadassah still have meaningful endowment funds, even if depleted. The criteria that Mr. Picard will use to separate “struggling” charities and “people of limited means” from whom he will seek funds and those from whom he will not raises fundamental questions of fairness, size relative value that will likely lead to much more controversy.

[To be continued in Installment 17]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the fifteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Bernard”). Installments 3 through 8 and Installments 10 and 14 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

A Cliffview Pilot report on September 15, 2009 by Jerry DeMarco reported that U.S. District Judge Stanley Chesler in Newark declined to dismiss a lawsuit brought by two children of, and the private charitable foundation (the “Foundation”) formed by, Senator Frank Lautenberg, who was its President. The claims in the lawsuit include allegations that Peter Madoff violated the Securities Exchange Act of 1934 by failing to disclose to investors that the company of his brother Bernard was engaged in a fraud. The plaintiffs are claiming losses aggregating almost $9 million.

Concerns about the profound financial and other impacts on charities, both public and private, from investments with Bernard were published soon after the Bernard scandal became public in December 2008. See, for example, “Charities Now Seek Bankruptcy Protection,” by Stephanie Strom in The New York Times on February 20, 2009.

The progress of the lawsuit brought by the Foundation raises several interesting points, some of which were discussed in previous Installments of this blog series.

First, it does appear that actions brought against other members of the Madoff family than Bernard may bear some fruit, separate and apart from the much-publicized Bernard bankruptcy proceedings in New York. Query whether the preliminary success of the Foundation will spur other stakeholders to sue members of the Madoff family, thereby exposing them to the potential for very large claims that could precipitate bankruptcy filings for them as well.

Second, as was discussed in an earlier Installment, private foundations such as the Foundation and their managers have potential liability for excise taxes that may be levied by the Internal Revenue Service (“IRS”) for improvident investing. Query whether success in the lawsuit would generate a compelling argument for the Foundation and its managers for avoidance of the excise taxes because of the alleged securities fraud. Alternatively, if the lawsuit is lost by the Foundation, does it increase the potential for success by the IRS in possibly imposing excise taxes on the Foundation and its managers?

Third, a check of the charity information website Guidestar indicates that the Form 990-PF of the Foundation for the 2007 calendar year was filed with the IRS on August 15, 2008. The Form 990-PF for the Foundation for 2008 has not yet been posted on Guidestar. The nature and extent of disclosures that will be made regarding the Foundation in its 2008 Form 990-PF should be illuminating about the litigation, financial status and contingencies respecting the Foundation.

[To be continued in Installment 16]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the fourteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff. Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. It generally advocated that every charity should respond pro-actively in the wake of the Madoff scandal and the current adverse economic climate. Such action should include a filing of its Form 990 with the Internal Revenue Service (the “IRS”) as promptly as practicable with appropriate disclosures, whether or not it was a Madoff stakeholder itself. All potential stakeholders should consult professional advisors promptly to have their positions evaluated. 

This Installment 14 is designed to compare and contrast the most recent Forms 990 filed with the IRS for fiscal 2008 by two of the most significant and respected charities that invested with Madoff: Hadassah, The Women’s Zionist Organization of America, Inc. (“Hadassah”) and Yeshiva University (“Yeshiva”). While the missions of Hadassah and Yeshiva (collectively, the “Charities”) are different, they provide a basis for comparison, and share as part of their missions the advancement of education and Jewish awareness in the United States and Israel. For disclosure purposes, readers are advised that the spouse of the author of this blog post has been a Life Member of Hadassah for many years.

Concerns about profound financial and other impacts on these Charities from their investments with Madoff were published soon after the Madoff scandal became public in December 2008.  For example, an article by Stewart Ain entitled “Hadassah Reveals $130 Million Windfall from Madoff,” was published in The Jewish Week on January 14, 2009 (the “Ain Article”). A more recent article on Hadassah and its involvement with Madoff that contains some is “Woman Tells of Affair with Madoff in New Book,” by Diana B. Henriques and Stephanie Strom, published in The New York Times on August 13, 2009 (the “Henriques/Strom Article”). An article about the impact of Madoff on Yeshiva entitled “Betrayed by Madoff, Yeshiva U. Adds a Lesson,” by Javier C. Hernandez was published in The New York Times on December, 23, 2008 (the “Hernandez Article”). 

Several weeks ago, the charity information website GuideStar posted the Hadassah Form 990 for the fiscal year ended May 31, 2008 (the “2007 Hadassah Form 990”). This past weekend the Website posted the Yeshiva Form 990 for the fiscal year ended June 30, 2008 (the “2007 Yeshiva Form 990” and collectively with the 2007 Hadassah Form 990, the “2007 Forms 990”).

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This blog series has already covered the newly-designed Form 990 for 2008 (the “2008 Form 990”) that requires 501(c)(3) entities to provide greatly expanded disclosure through answering questions that require “yes” or ‘no” responses about governance and business operations of charities. Questions that are answered “no” require explanation in the 2008 Form 990.

One of the questions for each of the Charities that would have required a response in the 2008 Form 990 (but not the 2007 Forms 990 recently filed with the IRS by the Charities) is whether the respective Board of Trustees and Audit Committee reviewed the 2007 Form 990 prior to its filing with the IRS. Because both Hadassah and Yeshiva have fiscal years other than the calendar year, they were able to use the old Form 990 for 2007. 

Some circumstances differ, and some are similar, for the Charities. As will be shown in the table below, it is my view that the 2007 Yeshiva  Form 990 has significantly greater disclosure and transparency relative to Madoff than the 2007 Hadassah Form 990. Either of the divergent approaches to disclosure chosen by each of the Charities in its 2007 Forms 990 may be compliant and supportable and were reviewed by the same “Big Four” accounting firm. However, this blog series has strongly recommended that early and complete transparency is advisable to maximize the value of utilizing the Form 990 in rebuilding public confidence in a charity that was affected by Madoff. Earlier disclosure will also get the “bad news” out into the open faster and allow the charity to move on. I believe that Yeshiva has been more successful than Hadassah in using its 2007 Form 990 for this purpose. 

The following table will highlight a comparison of some of the relevant factors drawn from the respective 2007 Forms 990 of the Charities that led to the views of the author. 

A COMPARISON OF HADASSAH AND YESHIVA 2007 FORMS 990

(Information in the Hadassah and Yeshiva columns is from their respective 2007 Form 990 unless otherwise noted; readers may access the 2007 Forms 990 by visiting GuideStar and completing a free online registration. Other noted sources in the table have the Internet links designated in the foregoing article.)

[To be continued in Installment 15]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the thirteenth in a series of installments on this blog that is discussing issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. This installment is a little different in that it does not relate directly to the Madoff morass but rather addresses a recent court decision on a Ponzi/Madoff scheme operated as a charitable gift annuity (“CGA”) program by a purported charity. The victims and stakeholders in this case were not bona fide charities that were duped but rather well-meaning donors who were misled into purchasing bogus CGAs. It is being included to underscore the endless varieties of investment vehicles that are in reality Ponzi/Madoff schemes.

A CGA is a contract under which a charity, in return for a transfer of cash, marketable securities or other assets by a donor, contracts to pay a fixed amount of money to one or two individuals, usually 60 years of age or older, for their lifetime(s). A person who receives payments is called an “annuitant”. The payments are fixed and unchanged for the term of the contract. The CGA payments are not “income”, because a portion of the payments are considered to be a partial tax-free return of the donor's gift, which are spread over the life expectancy of the annuitant(s).
The contributed property (the gift), given irrevocably, becomes a part of the charity's assets, and the payments are a general obligation of the charity. The CGA is backed by the charity's entire assets, not just by the property contributed. In these uncertain and risky economic times, a number of charities, including some that have invested with Madoff, have declared bankruptcy, which would cause severe economic loss to annuitants.

A CGA should be deemed by the donor to be primarily a gift to the charity, not an investment. The total return on a CGA is significantly less than that which could be earned through an annuity issued by a commercial insurance company. The gift annuity rates recommended by the American Council on Gift Annuities (“ACGA”), which are widely used by bona fide charities, have been computed to produce an average gift to the organization at the expiration of the annuity agreement of approximately 50% of the amount originally donated under the contract.

On June 24, 2009, the United States Court of Appeals for the Ninth Circuit decided the case of Warfield v. Alaniz, wherein the Court held that “CGAs” sold in this case (“Sham CGAs”) were investment contracts illegally sold under federal securities laws. Outside contractors such as financial planners and insurance agents had sold Sham CGAs aggregating $55 million on a commission basis for an organization that was a putative charity but in reality was using funds raised from the Sham CGAs solely to pay contractual returns to earlier annuitants and make payments to the promoters and contractors. Selling materials used by the sellers trumpeted high rates of returns, tax benefits, and superiority to commercial annuities, not a charitable intent for the Sham CGAs.

This type of Ponzi/Madoff scheme unfortunately seeks to prey on senior citizens who have a charitable motivation while seeking to maintain a secure return for their lifetimes. Those who would purchase CGAs should visit the Web site of the ACGA at the link above for explanations on CGAs and how to be aware of risk and dangers in purchasing CGAs.

In addition, points raised in earlier installments of this blog series should be followed by those interested in purchasing a CGA, including the following:

1. Go to websites for Guidestar or Charity Navigator to obtain the most recent Forms 990 filed by the charity with the Internal Revenue Service and read about the charity’s mission, analyze its financial statements, see how much it pays for administrative and fundraising expenses and learn about its governance structure.

2. Contact the charitable registration agency or attorney general of the state in which you live to ascertain whether the charity that is selling the CGA is in good standing in the state.

3. If your state is one that requires registration and annual filings for CGA programs, contact the state office that oversees this process.

4. Buy a CGA directly from the charity that you wish to benefit through an officer, employee, trustee or director of the charity (each a “Charity Representative”). Never purchase a CGA through a third party, whether or not on commission.

5. To the extent possible, meet in person with the Charity Representative - find out how long the CGA program of the charity has been in existence and the number of annuitants that exist.

6. Ask the Charity Representative for the current disclosure statement for the CGA program under the Federal Philanthropy Protection Act of 1995. If the Charity Representative does not have such a statement or does not know what you are talking about, you may be well advised to consider another charity.

7. Take into account your total assets, income and obligations to carefully limit the amount of money you commit to a CGA, as you should for all charitable contributions and investments.

8. Seek advice from a lawyer, accountant, financial planner or other adviser that you trust to advise you on the purchase of the CGA.

9. If the CGA program returns sound too good to be true, they should be suspect.

10. If after doing all of the above, you do not understand how a legitimate CGA works or you have pause on making what should primarily be a charitable donation, your purchase of a CGA may be inadvisable.

[To be continued in Installment 14]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the twelfth in a series of installments on this blog that is discussing issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. Installments 9 and 11 addressed concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal, but not as a result of a direct investment with him.

This Installment is intended to recognize the noteworthy unrelated events of this week in the Madoff scandal. On Monday, June 30, Federal District Judge Denny Chin in Manhattan sentenced Madoff to 150 years in federal prison for his crimes that were characterized by the Judge as “extraordinarily evil.” The Judge cited three symbolic reasons for the maximum sentence that he imposed on the 71-year-old Madoff. They were retribution, deterrence and justice for the victims. I would add a fourth need arising from the Madoff matter itself: the warning to any potential co-conspirators to come forward and cooperate in order to avoid a harsh sentence if later convicted. Such cooperation could raise the level of assets that can be made available to provide restitution to stakeholders.

There may be finality to the criminal case involving Madoff himself, except for his possible appeals to reduce the length of the sentence, which may be moot in any event in light of his age. However, while this result may give some closure and perhaps even “psychic income” for stakeholders who were victimized by Madoff, it provides no economic benefit to assuage their losses, other than perhaps encouraging collaborators to cooperate. More important for their situation is that on Thursday, July 2, the deadline came for filing claims by victims for recovery under the Securities Investor Protection Corporation (“SIPC”), the federal insurance agency for the securities brokerage industry.

On June 29, 2009, Eric Konigsberg wrote an article in The New York Times entitled “Investors Compete for a Piece of the Madoff Pie,” in which Mr. Konigsberg chronicled the staking out of claims for a portion of the limited funds available for victims with highly diverse and complex factual patterns as to how and how much money they lost with Madoff. Those who are IIIs, for example, have been told by Irving H. Picard, the trustee for Madoff’s assets, that they cannot make a separate SIPC claim. Mr. Konigsberg describes these stakeholders as believing that “they are being treated as members of a lower caste, in that many of them went through feeder funds because they lacked the requisite $1 million or $2 million minimum to go straight to Mr. Madoff.” The article reports that Mr. Picard encouraged such IIIs to file claims in any event for later court cases and that 8,800 claims were already filed of an estimated tens of thousands.

The criminal case against Madoff is finished; other criminal or regulatory actions may be brought against putative collaborators with Madoff in the future. However, those who are economic stakeholders must maintain close contact with the economic developments in the matter as they occur. Because the ultimate “pie” will be far less than the aggregate of slices that are being sought, victims should seek professional interpretations and advice as the inevitably complicated processes and determinations unfold.

[To be continued in Installment 13]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)
 

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This is the eleventh in a series of installments on this blog that is discussing some of the issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. This Installment is continuing the discussion from Installment 9 on the concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal, but not as a result of a direct investment with him.

Such IIIs may have invested with a fund, investment manager or other vehicle, such as a hedge fund that was a “feeder” for Madoff, or even a partnership of family and friends that was formed to aggregate funds sufficient to invest with him. Each of these types of entities will be defined in this series as a Direct Entity Investor (“DEI”), even though some DEIs may have invested their money with a feeder fund for Madoff that in turn invested directly or indirectly with him.

Those that are IIIs and were “fortunate” enough to have secured distributions from the DEI through indirect redemptions from Madoff in the past may believe that they were either lucky or brilliant to have withdrawn money before his arrest on December 11, 2009. However, such IIIs must be concerned about the extent to which the Madoff bankruptcy trustee or federal or state regulators may be intensifying efforts to recover money or seek criminal prosecutions from those who withdrew money from their Madoff investments. While the initial efforts by the trustee can be expected to be focused upon DEIs that received large distributions and were close to Madoff in making direct investments with him, the focus can be expected to go further down the line to IIIs as well.

The word most commonly used for such monetary recovery efforts in the Madoff morass is “clawback.” Distributions from a DEI to an III are potential targets for the bankruptcy trustee because they may be materially disproportionate to the withdrawals of the average investor (“Clawback Targets”). The word clawback actually covers a number of scenarios and theories for recovery by the bankruptcy trustee under the Federal Bankruptcy Code and various state laws that may have varying degrees of likely exposure for the III.

The basis of clawback is that all of the investors who were engaged in a single, unitary, integrated, failed Ponzi enterprise should have a relatively level playing field and that those that received disproportionate distributions should disgorge their excess receipts.

To a certain degree, the energy that will be undertaken by the bankruptcy trustee for Madoff to pursue an III will depend on (i) the absolute amount in dollars of the distribution to such III, especially in relation to the actual hard dollars invested (net of the nonexistent “returns” reported to the III by Madoff), (ii) how recently the redemption(s) took place and/or (iii) the individual factual circumstances that exist relative to the redemptions by the III. The “clawback” process may become highly complex and may be affected by state law, which may differ from state to state. Competent professional advice for IIIs is a necessity in this area.

[To be continued in Installment 12]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the tenth in a series of installments on this blog that are discussing some of the issues that face the manifold stakeholders that have been materially affected by the long global Ponzi scheme of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. It generally advocated that every charity should respond pro-actively in the wake of the Madoff scandal and the current adverse economic climate, including a filing of its Form 990 for 2008 (the “2008 Form 990”) with the IRS as promptly as practicable, whether or not it was a Madoff victim itself. This Installment 10 is designed to extend the discussion in Installment 6 on calendar year filers of the 2008 Form 990 to the many 501(c)(3) entities that have fiscal years other than calendar years (“Fiscal Year Charities”).

This blog series has already pointed out that the 2008 Form 990 contains new questions that require “yes” or ‘no” answers about governance and business operations of 501(c)(3) entities. In some respects it emulates the passive regulatory schemes present in Canada and many European countries to “comply or explain why.” By requiring an explanation if an answer is in the negative, the regulator promotes the desired affirmative behavior.

As has been discussed previously, the 2008 Form 990 includes a series of questions, among others, as to whether the charity has (i) a conflicts of interest policy, (ii) a whistleblower policy, (iii) an audit committee and (iv) a document retention and destruction policy. The 2008 Form 990 also asks whether the audit committee and governing board has reviewed the 2008 Form 990 before it was filed and information about executive compensation and transactions with insiders.

If the charity answers “yes” to a question, it can go on to the next question. If the answer is “no,” the charity must explain why. Obviously the universal availability of the 2008 Form 990 makes it desirable to answer all or almost all of the questions “yes.” Otherwise potential donors and other stakeholders may have questions and draw conclusions of their own about the operating practices of the charity and whether it is worthy of a contribution.

It is further interesting to note that the many Fiscal Year Charities have even longer than May 15, 2009 as their initial due date for filing their 2008 Forms 990 for 2008. Numerous nonprofit colleges and universities, for example, are on fiscal years that begin on June 1 or July 1 of each year.

As an illustration, a Fiscal Year Charity for which its current fiscal year commenced on July 1, 2008, would end such fiscal year on June 30, 2009. Its 2008 Form 990 for the current fiscal year will not be initially due until November 15, 2009. If it were to extend the due date for the 2008 Form 990 by the theoretical maximum of six additional months discussed earlier in Installments 6 and 7, the due date would be May 15, 2010.

A Fiscal Year Charity will have an ample opportunity to acquire samples from the internet of examples of 2008 Forms 990 filed earlier by calendar-year-end charities. Moreover, it has additional time to do what it deems necessary and appropriate to implement “best practices” in order to respond “yes” to the questions and answers posed in the 2008 Form 990. A charity will be well-served to file its 2008 Form 990 as promptly as possible as was recommended in Installment 7 of this blog series.

[To be continued in Installment 11]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the ninth in a series of installments on this blog that is discussing some of the issues that face the manifold stakeholders that have been materially affected by the long global Ponzi scheme of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes and advocated that every charity should respond pro-actively in the wake of the Madoff scandal and the current adverse economic climate, whether or not it was a Madoff victim itself.

We will now undertake a discussion of the concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal not as a result of a direct investment with him The III may have invested in an entity that was either (i) a fund, investment manager or other vehicle, such as one of the well-publicized hedge funds that were “feeders” for Madoff, or (ii) an investment vehicle, such as a partnership or limited liability company, that was formed for the express purpose of aggregating sufficient funds from multiple investors to meet the minimum investment thresholds established by Madoff from time to time. There can be other permutations or combinations of these types of entities. Each of these types of entities will be defined in this series as a Direct Entity Investor (“DEI”).

This series will not address in detail the potential tax issues facing the III, as there has been extensive discussion in numerous other publications and internet postings on the tax consequences flowing from losses on investments with Madoff.

As is true of the Direct Individual Investor (“DII”) with Madoff who was discussed in early installments of this blog series, the III should be doing or have already done a number of things. However, the effort by the III must be on two levels: his or her investment in the DEI and the DEI’s investment in turn with Madoff

The III should collect every scrap of hard copy, digital or electronic information and communication that can be located relative to the investment in the DEI and the DEI’s investment with Madoff (collectively, “III Investment”), including statements, financial or otherwise, from the DEI or Madoff, tax statements such as Forms 1099 from the DEI, annual reports, press releases or other media statements by the DEI or Madoff as to the nature of the investments and returns, etc. Such information will prove to be valuable in identifying the scope of the loss by the III and the sequence of events that gave rise to the loss.

The III has many more complex issues, however, that the DII, who only has to deal with the records relating to a direct investment with Madoff. The III must seek out all formation documents filed with state agencies relative to the DEI and any agreements, such as partnership agreements and operating agreements, DEI tax returns, brokerage reports, DEI tax returns, copies of checks or other records of all payments respecting the III to and from the DEI, requests for distributions by the III, records of the DEI regarding its investments with Madoff and distributions from Madoff, if any. The DEI partnership, operating or similar agreement with its IIIs as to the provision of information and other rights of the IIIs and their III interests is of paramount importance.

To the extent that the DEI is not fully forthcoming with information requested by III or is unable to locate records regarding the III Investment, the III should contact the managers of the DEI in writing or by other means that will evidence the communication to the DEI and its date. Should the III not receive a meaningful response, he or she should contact an attorney or other competent professional to advise on the matter.

[To be continued in Installment 10]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the eighth in a series of Installments on this blog that will discuss some issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

In this Installment we will complete the current discussion that focuses on charitable organizations and foundations (collectively, “501(c)(3) Entities”) that were affected by the Madoff scandal. Future developments in the Madoff matter respecting 501(c)(3) Entities may lead to additional Installments in this area. Again, we reiterate that the unfortunate experiences of many 501(c)(3) Entities that were directly involved in losses and potential “clawback” from the Madoff morass should be poignant object lessons for all charitable organizations and their fiduciaries and supporters, whether or not victims of Madoff.

Governance Principles Raised in the 2008 Form 990 Filing (the “2008 Filing”)

Installment 7 introduced the new governance disclosures for 501(c)(3) Entities that have been introduced or expanded in the 2008 Filing. Before these changes, matters of corporate governance of 501(c)(3) Entities were generally left to state corporate statutes and case law. The 2008 Filing has broadened the scope of federal scrutiny of the way 501(c)(3) Entities operate. In the 2008 Filing this is done through a series of questions to the 501(c)(3) Entities, together with a request for explanations in certain areas

A number of 501(c)(3) Entities had close ties with Madoff and his associates, including in some cases, their membership on boards. If some of the new inquiries in the 2008 Filing had been in place in earlier years and had been fully and accurately answered, the potentially inappropriate relationship of Madoff and his associates to such 501(c)(3) Entities may have been brought to light. The following questions in the new 2008 Filing fall in this category:

1. Are there any family or business relationships among officers, directors, trustees and key employees of the 501(c)(3) Entity?

2. Is there any “material diversion” of the 501(c)(3) Entity’s assets?

3. Does the 501(c)(3) Entity prepare contemporaneous documentation of all board and committee meetings?

4. Does the 501(c)(3) Entity have a written conflict of interest policy with annual disclosure of related transactions with the 501(c)(3) Entity by officers, directors, trustees and key employees? (New Schedule O to the 2008 Filing asks for information about regular monitoring and enforcement of compliance with this policy.)

5. Was the 2008 Filing provided to the board before it was filed? (New Schedule O to the 2008 Filing asks for the process used by the 501(c)(3) Entity to review the 2008 Filing by the board and its audit committee, if any.)

6. New Schedule O to the 2008 Filing asks how governing documents, conflicts policy, the 2008 Filing and financial statements will be made available to the public.

While the 2008 Filing does not mandate that the 501(c) Entity have all of these and other governance policies in place or the type of policy that is required, the universal availability of the 2008 Filing makes it almost a necessity for a 501(c) Entity to take sufficient preparatory steps to be able to answer all of the questions in the affirmative as a matter of “best practices.” Otherwise potential donors, granting organizations and foundations, and governments may choose not to provide funding to a 501(c) Entity that has less than fully adequate responses.

Moreover, in future years it can be expected that the Form 990 will become even more stringent in its disclosure requirements, perhaps even setting minimum standards for conflicts of interest and other policies.

Conclusions Respecting Governance of 501(c) Entities after Madoff

The unfortunate Madoff scandal, an adverse economy and other events have combined to create challenging times for charities and their stakeholders. A properly prepared Form 990 that reflects recent proactive changes in governance and operations under the leadership of the governing board will go far in repairing the damage to the images of those that invested with Madoff and in enhancing the reputations of those that avoided the Madoff morass.

The next Installment will discuss the impact of the Madoff morass on those that invested with him indirectly through “feeder funds,” other vehicles or even unwittingly.

[To be continued in Installment 9]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the seventh in a series of Installments on this blog that will discuss some issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

We will continue the discussion of charitable entities and foundations that were affected by the Madoff scandal. Again, we believe that the unfortunate experiences of many charitable organizations and foundations (collectively, “501(c)(3) Entities”) that were directly involved in enormous losses from the Madoff morass should be poignant object lessons for all charitable organizations and their fiduciaries and supporters, whether or not victims of Madoff. This Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities, against the backdrop of the new Form 990 that has been adopted by the IRS for 501(c)(3) Entities.

Reasons Why a 501(c)(3) Entity Should File its 2008 Form 990 as Early as Possible

We have already discussed in Installment 6 the reasons why a 501(c)(3) Entity may choose or be induced to file its Form 990 for 2008 (the “2008 Filing”) on as late a date as possible in 2009, which may be extended to November 15, 2009. We believe that it is advisable for a charity to make its 2008 Filing as soon as practicable, so that it may commence an initiative for building and repairing bridges with stakeholders as soon as possible.

Many 501(c)(3) Entities will be showing relatively dismal results for 2008. Those charities that invested with Madoff will show losses that are devastating, both from economic and public image points of view. Even a charity that did not invest with Madoff most likely has suffered severe financial losses in its endowment funds since the beginning of 2008. Additionally, the deepening recession during 2008 had a materially negative impact on fundraising revenues. A charity that delays the 2008 Filing until almost 2010 will raise questions among those analysts, foundations and regulatory agencies that review and use Form 2008 Filings. The charity will also highlight late in 2009 a charity’s negative results for 2008. Getting the “bad news” out and in circulation earlier in 2009 will enable a charity to start afresh.

An early filing of the 2008 Filing with positive answers to the new questions and in the new schedules discussed hereafter can disclose a charity’s strong commitment to a defined mission, appropriate governance and investment policies, appropriate engagement by the board and other matters. The new changes to 2008 Filing will allow a charity to use the IRS items as a checklist of “best practices” and tell its positive story in its own words. Additionally, a 501(c) Entity can post its Forms 990 on its own website, together with principal governance documents, that demonstrate its commitment to best practices.

General Outline of New Areas Covered in the 2008 Filings

The new thrust for Form 990 is to emphasize compliance, transparency and accountability for 501(c)(3) Entities. As discussed in earlier Installments, the initiatives by the Senate Finance Committee in the last several years with respect to charities, especially hospitals and colleges and universities, led the IRS to make the changes in the 2008 Filing to appropriately take advantage of its public nature, widespread availability and accountability aspects.

However, the 2008 Filing also affords 501(c)(3) Entities with opportunities to explain and supplement their responses, to define and amplify their mission statements and tell their stories in a place that is universally available.

The principal design of the 2008 Filing changes are outlined below. Not all of them necessarily relate to the Madoff scandal that is the subject of this series, but they are worth mentioning.

1. Increased focus on activities, not just the financial results and other metrics respecting the 501(c)(3) Entity

2. A summary page on which a 501(c)(3) Entity can provide highlights of the 2008 Filing

3. A checklist of the comprehensive new schedules that may be required for certain types of 501(c)(3) Entities, e.g., hospitals

4. A governance section relating to the governing board, policies and disclosure items

5. A compensation and insider transactions section

6. A section on foreign activities

7. A description of related organizations, joint ventures, and unrelated business income

8. A description of non-cash contributions and fundraising

Governance Disclosures under the 2008 Filing

A number of new inquiries on the 2008 Filing could have brought to light the dealings by some charities with Madoff, if they had been in existence on Form 990 in earlier years and had been answered completely and accurately,. This is the new part of Form 990 that requires comprehensive disclosures of the governance policies and practice of a 501(c)(3) Entity. Some of the areas that are addressed in the 2008 Filing include explanatory and descriptive schedules if (i) the charity has loans or other transactions with “insiders” including officers and directors and highly paid individuals, (ii) there are “related organizations” and (iii) compensation in excess of defined thresholds is paid to current and former officers, board members and key employees.

The next Installment will continue in greater detail the aftermath of the Madoff scandal for 501(c)(3) Entities and its relationship to the new compliance, transparency and accountability obligations for 501(c)(3) Entities in the 2008 Filing.

[To be continued in Installment 8]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)
 

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This is the sixth in a series of Installments on this blog that will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

We will continue the discussion of charitable entities and foundations that were affected by the Madoff scandal. However, we believe that the unfortunate experiences of many charitable organizations and foundations (collectively, “501(c)(3) Entities”) that were directly involved in enormous losses from the Madoff morass should be poignant object lessons for all charitable organizations and their fiduciaries, whether or not victims of Madoff. This Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities, with an emphasis on the review and analysis of governance and investment policies that charitable organizations should be conducting to repair and/or enhance their standing among their peers and competitors for contributions.

Installment 5 and prior Installments raised certain problems that exist for private foundations that are 501(c)(3) Entities which invested with Madoff. Such private foundations face the “triple jeopardy” of actual losses of investment value, the possibility of penalty excise taxes for imprudent investments and/or the potential for “clawback” by the trustee for the Madoff assets if the private foundation received substantial and disproportionate payments as compared to the average return for all other investors.

While 501(c)(3) Entities that are public charities and not private foundations do not have the potential for penalty excise taxes, they are subject to loss of investment value and clawback from Madoff investments. Therefore, all 501(c)(3) Entities have similar concerns.

This series of Installments will discuss a number of issues arising from the Madoff scandal in the context of an expanded and more comprehensive Form 990 that 501(c)(3) Entities must file annually with the IRS. The adverse publicity that many charities have suffered from having been involved with Madoff, combined with the substantial losses in market value that charitable endowment and trust funds have incurred over the last year, make it critical that all 501(c)(3) Entities review, analyze and reform their operating policies and procedures. Only by demonstrating their commitment to best practices in governance and operations can they succeed in the increasingly competitive environment for shrinking donor dollars in an adverse economic climate.

Required Filings by 501(c)(3) Entities with the IRS

501(c)(3) Entities that achieve certain minimum sizes as to revenues and/or assets are required to file annual tax returns with the IRS. The filing form for public charities is Form 990 and for private foundations is Form 990-PF. This Installment will focus on Form 990 for public charities because of the dramatic changes that have occurred in the requirements for a 2008 Form 990 filing to be made in 2009 (“2008 Filing”).

It is a coincidence that the uncovering of the Madoff scandal occurred in the year relating to the 2008 Filing and its comprehensive changes to Form 990. However, the Madoff scandal has raised the stakes for a charity to be sufficiently proactive in reviewing, analyzing and revising its compliance, transparency and accountability to enable it to file on a timely basis a complete and accurate 2008 Filing. The changes in the 2008 Filing, which will be hereafter described in greater detail, will require disclosures for a charity that relate directly to the Madoff investments and scandal as to governance and decision-making by their boards. The changes for 2008 Filings may only be the beginning of an evolution in Form 990 that will require even more comprehensive disclosures by charities in the future.

Form 990 as a Financial Reporting Document

For many years Form 990 was viewed as an annual financial report by a 501(c)(3) Entity to the IRS on the charity’s operations for the prior fiscal year. The financial statements track very closely the annual audited financial reports of the 501(c)(3) Entity. The annual financial statements of 501(c)(3) Entities in the 2008 Filing can be expected to be generally dismal because of significant losses in market values of charitable endowment and trust funds during 2008. Both the balance sheet and statement of revenues and expenses in the 2008 Filing will reflect such losses. The financial statements of 501(c)(3) Entities that invested with Madoff will be even more negative to the extent that the Madoff investments may prove to be almost worthless. Such 501(c)(3) Entities will have a need to explain clearly and carefully in the 2008 Filing the steps that they have taken and will take to avoid a repetition of serious mistakes of the past. The changes in the Form 990 for 2008 encourage that approach.

In effect, the changes in Form 990 have converted the Form 990 to much more of a disclosure document for 501(c)(3) Entities akin to the Form 10-K Annual Report filed by public business corporations on an annual basis with the federal Securities and Exchange Commission.

Universal Transparency and Filing Dates for Forms 990

Form 990 is required to be filed with the IRS by the 15th day of the month following the end of a charity’s fiscal year, e.g., May 15, 2009 for the 2008 Filing by a charity with a fiscal year ended on December 31, 2008 (“Calendar Year Filer”). It must be understood that, unlike federal tax returns filed by business corporations, the Form 990 filed by 501(c)(3) Entities can be accessed anonymously by anyone in the world at any time. It becomes a matter of public record after it is filed with the IRS. Web sites, perhaps the most well known of which is www.guidestar.org, publish Forms 990 on line, ordinarily within two months after they are filed. Potential donors, competitors, governmental agencies, beneficiaries and many others easily and routinely access the Forms 990 to analyze operations and other aspects of a 501(c)(3) Entity.

A Calendar Year Filer can have up to two extensions for filing its 2008 Filing that would allow it to delay filing until November 15, 2009. It can be anticipated that many 501(c)(3) Entities will extend their filing dates as long as they can. First of all, those 501(c)(3) Entities that invested with Madoff will most likely require extra time to determine the extent to which the value of the Madoff investment has deteriorated. Such valuation may be closely tied to the prospects for recovery of monies and progress with related civil and criminal cases.

A second reason is that the new requirements for disclosure in 2008 Filings will make it necessary for a 501(c)(3) Entity to generate new material and respond to new questions, perhaps only after the implementation of new policies by its governing board, so that the responses reflect best practices in the Form 990.

Another reason for the likely delays in filing of the 2008 Filings will be that many 501(c)(3) Entities will endeavor to see what types of responses to the new 2008 Filing questions other 501(c)(3) Entities will make. In a number of cases the larger, more seasoned 501(c)(3) Entities may be among the early filers of 2008 Filings. For example, a hospital that is a 501(c)(3) Entity may have obligations under trust indentures for outstanding bond issues that require provision to the trustee of the Form 990 by a specified time based upon the original due date of the Form 990. The early filers of 2008 Filings will, therefore, in some cases be setting some unofficial benchmarks for responses to new questions in the 2008 Filings.

Penalties for Violations of Provisions Covering Form 990 Filings

There are potential serious adverse consequences for a 501(c)(3) Entity that fails to file on a timely basis a complete and correct Form 990. The Internal Revenue Code provides for civil monetary penalties of $20 per day for failure to file a complete and correct Form 990 by its original due date (or permitted extension date for filing). The maximum penalty for any one Form 990 is the lesser of $10,000 or 5% of the gross revenues of such 501(c)(3) Entity. However, for a 501(c)(3) Entity that has gross receipts exceeding $1,000,000 for any year, the penalty for failure to file a complete and correct Form 990 by its required due date is $100 per day up to a maximum of $50,000 for any one Form 990.

Additionally, a private IRS ruling released on February 27, 2009 revoked the tax exempt status of a 501(c)(3) Entity that did not observe the conditions for its continued exempt status by failing to file a Form 990 for each of the preceding two fiscal years. Accordingly, the 501(c)(3) Entity was no longer exempt from federal income taxation and contributions by donors were no longer tax deductible.

The civil monetary penalties and revocation of tax-exempt status cover the new disclosure requirements for Form 990.

The next Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities with an emphasis on its relationship to the 2008 Filings and the related compliance, transparency and accountability obligations of the 501(c)(3) Entities.

[To be continued in Installment 7]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the fifth in a series of Installments on this blog that will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

We will continue the discussion of charitable entities and foundations that were affected by the Madoff scandal. However, we believe that the unfortunate experiences of too many charitable organizations and foundations (collectively, “501(c)(3) Entities”) that were directly involved in enormous losses from the Madoff morass should be poignant object lessons for all charitable organizations and their fiduciaries, whether or not victims of Madoff, especially in the year 2009, which is the first year of the expanded Form 990 that 501(c)(3) Entities must file with the IRS.

Potential Tax Penalties for Private Foundations that are 501(c)(3) Entities and Their Fiduciaries

On February 11, 2009, Lynnley Browning wrote an incisive article in The New York Times entitled, “For Investing with Madoff, Private Foundations Could Face Tax Fines.” In the article, Browning explains clearly the massive penalty excise taxes of 10 percent to which 501(c)(3) Entities that are classified as private foundations and their fiduciaries on a personal basis can be subject. Browning points out the following:

Under an obscure tax rule, private foundations can be penalized for failing to vet their investments properly, to heed red flags or to diversify properly. While foundations are exempt from federal income taxes, they are subject to excise tax,
intended to keep them from taking outsize risks that could threaten their very survival.

Browning goes on to explain that, “The foundation’s officers, directors and trustees also face a 10 percent penalty, and a 5 percent additional penalty if they ignored red flags or did not thoroughly vet Mr. Madoff’s investments and proposals.”

As indentified by Browning, the tax penalties for foundations can be monumental, especially when added to the basic losses that they incurred with Madoff directly. It is not clear, however, that the IRS would invoke the provisions, across-the-board, according to Browning.

Implications of Private Foundation Penalties for Governance Principles for All 501(c)(3) Entities

While the potential tax penalties that may flow to private foundations from Madoff investments is serious, the matter is not the primary thrust of this installment. Irrespective of whether or not private foundations are penalized for their investing with Madoff, the are numerous significant governance and compliance principles that may be extrapolated from the experience of 501(c)(3) Entities that invested with Madoff. The need to vet investments properly, heed red flags and diversify properly is mandatory for public charities as well as private foundations, even though public charities do not have the looming specter of IRS excise taxes for themselves and their fiduciaries.

This need for 501(c)(3) Entities to exercise appropriate care in its investing policy is heightened by the fact that 501(c)(3) Entities have a mission and a societal goal that was the basis for their receiving tax exempt status in the first place. The earning of income should only be a means to achieving the mission, not an end in itself. Losing sight of the mission and failing to maintain the highest standards can subject the 501(c)(3) Entities to harmful media publicity, public embarrassment, loss of donor support or even lawsuits by donors or regulatory authorities in flagrant cases of mismanagement.

The 501(c)(3) Entities and their boards are entrusted with the monies of donors that they have the obligation to safeguard reasonably. Such 501(c)(3) Entities must demonstrate their commitment to standards of appropriate governance with sufficient up-to-date compliance and governance codes, charters and/or programs that will provide protection for the 501(c)(3) Entities and guidance for their fiduciaries.

An Outline of Obligations of Fiduciaries of 501(c)(3) Entities and Some Failures with Respect to Madoff

Every officer, director and trustee of a 501(c)(3) Entity has a number of obligations and standards that are imposed upon them by statute or common law principles and business ethics. Such obligations and standards have become increasingly burdensome for uncompensated volunteers who serve as fiduciaries of 501(c)(3) Entities and in effect earn only “psychic income.” They are held to as standard of conduct that encompass many of the same principles and potential liabilities as fiduciaries of major corporations who are highly compensated. These principles and obligations include the following:

Honesty – the so-called business judgment rule that is the presumption that the fiduciary acted in the honest belief that actions taken were in the best interest of the 501(c)(3) Entity

Integrity – the obligation of a fiduciary to act consistently, reasonably and in good faith and to maintain confidentiality of proprietary information of the 501(c)(3) Entity

Loyalty – the obligation of a fiduciary to avoid conflicts of interest with the 501(c)(3) Entity

Responsibility – a fiduciary has a duty to exercise such diligence, care and skill which ordinarily prudent people would exercise under similar circumstances in the position

Citizenship – compliance with laws and understanding of the need for carrying on activities with ethical awareness

Fairness - relatively recent adoption in many states of “stakeholder” principles that encourage fiduciaries to take into account not only the interests of the direct beneficiaries of the 501(c)(3) Entity but also the interests of many constituencies, e.g. employees, customers, suppliers, the community, the government and others

A number of these principles were apparently not complied with by a number of 501(c)(3) Entities and their fiduciaries in the course of their investing with Madoff. Perhaps the most egregious case reported to date was of a highly respected Eastern university that invested, by its own admission, many millions of dollars with Madoff for years when he was a member of the board of trustees and an officer of the university. Madoff himself clearly violated virtually all of the obligations for fiduciaries listed above.

What is more concerning, however, is the fact that the other trustees of the university also did not comply with many of the obligations in the foregoing list, intentionally or because they were not sufficiently clear on their fiduciary duties. The obligations that such board members may have breached arguably include many elements of the list when appropriate questions are raised. For example, even if Madoff was investing in the exotic vehicles that he stated he was, were these the types of investments that a board charged with overseeing donations from the public should be condoning or even approving? Did the board members even understand or have the background or experience to understand the nature of the investments? Would they have invested in these vehicles for their own accounts? Did they have sufficient knowledge of the facts or ask Madoff legitimate questions to make a determination on the quality of the investments? Did the board members ever concern themselves with the potential appearance of impropriety of investing with Madoff when he was a fiduciary of the university? Did the board ask for an accounting as to how much Madoff or his affiliates earned in fees or other income from his relationship with the university? If they did ask any or all of these questions, is it sufficiently documented in the minutes of university board or committee meetings or other records?

As discussed in Installment 4, Madoff preyed upon the various business and tax advantages that many 501(c)(3) Entities saw in an investment with him. Then the 501(c)(3) Entities became subject to the glare of adverse publicity and embarrassing questions as to how and why the staggering losses that they suffered had taken place. This blog will continue the discussions as to how 501(c)(3) Entities should be dealing with lessons learned from the Madoff scandal, especially in preparing to meet their obligations in filing Forms 990 with the IRS for 2008.

[To be continued in Installment 6]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the fourth in a series of Installments on this blog that will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

We will continue the discussion of charitable entities and foundations that invested with Madoff. This series has already discussed in Installment 3 some generally accepted accounting principles specific to 501(c)(3) Entities that aided Madoff in extending the life and increasing greatly the scope of his operation. Hand in hand with the GAAP principles for 501(c)(3) Entities that assisted Madoff are federal income tax rules that are applicable to 501(c)(3) Entities.

Direct Entity Investors (“DEI”) that are charitable entities and foundations (“501(c)(3) Entities”)

Certain Income Tax Rules Applicable to 501(c)(3) Entities that Inured to the Benefit of Madoff

The most important tax principle for 501(c)(3) Entities that benefited Madoff is that their investment income is exempt from federal and state income taxes. Charities can therefore stay fully invested and roll over investment income into further investments. This was a powerful tool for Madoff. Because of the apparent safety, consistency and stability of his relatively high “returns,” Boards and Investment Committees of 501(c)(3) Entities would be disinclined to redeem either principal or “returns” in accounts with Madoff because they did not even have to pay taxes on their reported returns from Madoff. Such 501(c)(3) Entities would seek to use funds from other areas of their endowment funds to remain as fully invested as practicable with Madoff.

Madoff preyed upon the various business and tax advantages that many 501(c)(3) Entities saw in an investment with him. As a result Madoff was able to count on the fact that charities would be resistant to request redemptions of principal and would even reinvest their reported “returns” for a long period of time. It was only when the rest of the financial markets collapsed that 501(c)(3) Entities began to demand large distributions that Madoff could not meet. Then the 501(c)(3) Entities became subject to the glare of adverse publicity and embarrassing questions as to how and why the staggering losses that they suffered had taken place.

Summary of the benefits for Madoff’s operations of the credibility and stability that he projected to 501(c)(3) Entities
The next discussion in this series will focus on the proactive review and responses that 501(c)(3) Entities should be considering in governance and investment policies to the shocking losses and other harmful aftermath of investing with Madoff. Such a proactive review makes good sense for all 501(c)(3) Entities, irrespective of whether or not they were investors with Madoff. The increased regulatory scrutiny under which charities will be operating in the future makes “best practices” a necessity.

As a prelude to that discussion, it should again be observed that 501(c)(3) Entities have been on the lookout for many years for investment vehicles in which to place their endowment funds that appear to have a high degree of safety and stability and provide a consistent and relatively high rate of return. An investment with Madoff appeared to be ideal to many 501(c)(3) Entities on all of these levels, especially with his track record of 12% average annual returns over decades, combined with the added credibility flowing from the fact that many other highly respected 501(c)(3) Entities were also long time investors. Moreover, for 50 years Madoff had been a leader and innovator in the investment industry and had been Chairman of the NASDAQ Stock Market. This prominence enhanced his stature and trustworthiness as an investment advisor. Therefore, Boards and Investment Committees of many 501(c)(3) Entities felt comfortable with entrusting millions of their endowment dollars with Madoff for extended periods.

Such comfort was heightened by the fact that Madoff appeared to be one with them, that is, he was the epitome of the famous “Three W’s” that are the most desirable attributes for Board members of 501(c)(3) Entities: Wealth, Wisdom and Work. Madoff evidenced personal wealth and largesse in personally contributing large sums to numerous charities; he appeared to unselfishly share his wisdom, experience and business acumen with those 501(c)(3) Entities in which he was interested; and finally he was deeply involved in rising to leadership roles in charities because of his work effort and apparent wealth and wisdom. All of these factors, combined with the apparent business and tax benefits of an investment with Madoff for 501(c)(3) Entities, enhanced the scope and longevity of his enterprise.

The next Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities with an emphasis on the review and analysis on governance and investment policies that charitable organizations should be conducting to repair and/or enhance their standing among their peers and competitors for contributions.

[To be continued in Installment 5]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the third in a series of Installments that will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

We will continue by discussing Direct Entity Investors.

Direct Entity Investors (“DEI”) that are charitable entities and foundations (“501(c)(3) Entities”)

General

Perhaps the most perplexing and concerning group of Madoff victims is the long list of charitable organizations that have reportedly lost many millions of dollars in their endowment funds through investments with Madoff. A number of 501(c)(3) Entities have even been forced to abruptly cease their operations.

There are a number of reasons that Madoff may have targeted 501(c)(3) Entities as potential investors, some of which will be discussed in these Installments. The harm that has been inflicted upon many charities, with respect to finances and image, requires discussion beyond the level of other classes of Madoff victims. 501(c)(3) Entities occupy a unique position in society, as tax exempt organizations to which contributions are deductible, thereby imposing on their governing boards a higher standard for operating and investing. These boards have the responsibility for overseeing, protecting and dealing with contributions of others to serve charitable missions that society deems to be of high value. There are important principles on governance and compliance that may be drawn from the Madoff scandal, which should be considered by all 501(c)(3) Entities and their governing boards, whether or not they were direct or indirect investors with Madoff.

In recent years, legislators like Senator Charles Grassley (R-Iowa), the Ranking Member of the Senate Finance Committee, have been questioning whether charities, especially hospitals and colleges and universities are adequately carrying out their charitable missions at a sufficiently high level to warrant their continued favored tax exempt status. One of his principal criticisms is that these institutions are more interested in enhancing their endowment funds than spending such funds on the charitable missions that qualify them for tax-exempt status. The losses to charities with Madoff investments, some of which had appurtenant overtones of conflicts of interest, are almost certain to raise further calls for greater controls on tax exempt organizations and how they use and invest their endowment funds to achieve their charitable missions. The Madoff scandal greatly exacerbated the massive endowment losses in 2008 of 501(c)(3) Entities.
 

Charitable Involvements of Madoff

Madoff enhanced his reputation and standing in the community of wealthy potential investors by being a leader of and heavy contributor to highly visible charitable organizations. Such organizations included those with humanitarian, educational and religious missions. By identifying himself with such charities, Madoff was able to associate with wealthy individuals and leaders involved in foundations, business entities and government. This enabled him to get access to a diverse group of investors, including the charities themselves.

The investment by charitable organization with Madoff held certain advantages for Madoff in furtherance of his alleged Ponzi scheme. These include certain accounting rules and tax laws that are specific to public charities and private foundations.

Certain Accounting Rules Applicable to 501(c)(3) Entities that Inured to the Benefit of Madoff

The first accounting principle that is worthy of note in the Madoff context is the requirement under generally accepted accounting principles for 501(c)(3) Entities (“GAAP”) that 501(c)(3) Entities “mark investments to market.” Therefore, under this GAAP principle, unrealized gains and losses on investments by 501(c)(3) Entities are recognized on the income statement and the current value of investments is reflected on the balance sheet. This principle inured to the benefit of Madoff, because his reporting of consistently high, stable “returns” over years would encourage 501(c)(3) Entities to simply reinvesting and rolling over their Madoff “returns.” It became clear to Madoff than 501(c)(3) Entities would predictably seek to maintain the Madoff investments intact to get the maximum benefit for revenues on their income statements and balance sheet values. To the extent that a 501(c)(3) Entity needed endowment funds or returns, it would be inclined to draw upon assets other than Madoff investments. This in turn enhanced the ability of Madoff to extend the life of his enterprise by avoiding redemptions and even distribution of current “returns.”

Another GAAP principle that would inure to the benefit of Madoff is the requirement that financially credible pledges to 501(c)(3) Entities of multi-year gifts are all recognized as revenues in the year the pledge is first made. To the extent that donors or even Madoff himself expected to use Madoff investments to satisfy such multi-year pledges, the 501(c)(3) Entities would recognize the full amount of the gift in the year of the pledge and then receive interests in Madoff investments over a number of years to satisfy the pledges. Madoff would again benefit by the stability of the investment that would stay in place over years from the donor to the receiving 501(c)(3) Entity, which would be inclined to keep the investment in place for the reasons set forth in the immediately preceding paragraph.

The next Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities.

[To be continued in Installment 4]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the second in a series of installments on this blog that will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Bernard L. Madoff scandal, allegedly the longest, most widespread and financially devastating Ponzi scheme on record. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

We will begin by discussing further Direct Individual Investors (“DII”) and then move on to Direct Entity Investors (“DEI”).

Direct Individual Investors (“DII”) (continued)

Those who are DIIs and were “fortunate” enough to have secured distributions through redemptions from Madoff in the past may believe that they were lucky or brilliant to have withdrawn money before his arrest. However, they may confront efforts by trustees or regulators to “claw back” such distributions to the extent they were materially disproportionate to the withdrawals of the average investor. The likely theory for a “claw back” would be that all of the investors were engaged in a unitary integrated failed enterprise and that no single investor should have fared better proportionately than the average investor, whether wittingly or unwittingly. To a certain degree, the energy that will be undertaken to pursue a DII will depend on (i) the absolute amount in dollars of the disproportionate distribution to such DII, (ii) how long ago the redemption(s) took place and/or (iii) the relative level of disproportion. The “claw back” process may become complex and could even be affected by state law, which may differ from state to state. Competent professional advice for DIIs is a necessity in this area.

There may be some DIIs that have been so adversely affected by the aftermath of the Madoff scandal that they could be considering bankruptcy, selling their residences to raise funds or other precipitous measures. For example, housing prices are deeply depressed in many areas, which can greatly limit the recovery on a sale, especially if there is a mortgage present. Moreover, in some states, there are strong homestead laws that exempt houses from being included in bankruptcy or other insolvency procedures. Again, competent professional advice for DIIs is a necessity in this area.

Direct Entity Investors (“DEI”)

There are many types of potential DEIs that may have invested with Madoff. These include trusts, hedge funds or other investment managers and vehicles, charitable organizations, etc. This blog will endeavor to cover some of the DEIs that have been most prominent in recent publications.

Hedge funds, investment managers and other investment vehicles (“Funds”) have surfaced as major victims of investing with Madoff. While such Funds may be victims, the managers of these Funds may have their own problems in that they charge their own investors a management fee, generally tied to the level of assets under management (1% to 2%) and/or a performance fee that may be as much as 20% of returns or returns above a specified threshold (“Fees”). In cases where such Funds simply turned over substantial assets to Madoff for investment by him and such Funds took their standard Fees on such assets, investors in the Funds may have a legitimate objection that such Fees should be disgorged in light of the fact that the managers of such Funds did not perform investment management services that warranted the Fees. Additionally, depending on the publications by the Funds of their purpose, investment style and other disclosures, there may be a potential cause of action against the managers of such Funds for investing outside of the stated investments for the Funds or even negligence or breach of fiduciary duty in the selection of an investment with Madoff. The issues are complex for both the Funds and their managers and individuals who invested in the Funds and became indirect victims of Madoff.

[To be continued in Installment 3]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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The Madoff investment scandal was allegedly the longest, most widespread and financially devastating Ponzi scheme on record. On almost a daily basis since the arrest of Bernard L. Madoff on December 11, 2008, there are new disclosures of victims and classes of victims. Over the next few days this blog will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Madoff scandal. In many cases there may be limited time for victims to act to protect themselves to the maximum. Some of the potential self-protective actions will be identified during the course of identifying the stakeholders. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Direct Individual Investors (“DII”)

This class of victim may be the largest in numbers, although not necessarily in potential dollar losses. A DII should collect every scrap of hard copy, digital or electronic information and communication that can be located relative to an investment in Madoff (a “Madoff Investment”), including statements, financial or otherwise, from Madoff, tax statements such as Forms 1099, annual reports, statements by Madoff as to the nature of the investments and returns, etc. Such information may prove to be valuable in isolating the scope of the loss and the factual basis that gave rise to the loss. The factual basis may determine whether or not the DII is a potential class plaintiff should any classes be certified in actions against Madoff and/or his controlled business entities.

Other immediate concerns for DII include the mailing on January 2, 2009, by the Securities Investor Protection Corporation (“SIPC”) of formal claims packages to potential claimants of Bernard L. Madoff Investment Securities LLC, a licensed broker-dealer affiliate of Madoff. The liquidation case is set in the Southern District of New York. Claims by customers must be filed with the trustee in the liquidation case, not SIPC, by March 4, 2008. The notice from SIPC relates to claims of customers of the broker-dealer who may have lost money or securities registered in “street name” or in the process of being registered. It does not relate to investors who may have lost money in the alleged Ponzi scheme that was extraneous to the broker-dealer.

Another immediate consideration for DII are potential claims for refunds that may be filed with federal and state taxing authorities. Generally the statute of limitations for the filing of refunds is a three-year period from the filing date of the original income tax return. For example, in the case of a taxpayer who filed his or her federal and state returns on April 15, 2006 for a 2005 calendar year, no claims for refund can be made after April 15, 2009. Since the income reflected on Forms 1099 that were supplied to DII cannot be correct to the extent there was negligible real income earned from the investment with Madoff, taxes paid based on the Forms 1099 were excessive and can be available for refunds.

[To be continued in Installment 2]
 

(With appreciation to Michael J. Kline, Esq. for contributing this entry)

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