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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:

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:

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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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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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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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 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 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 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 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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