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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:

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

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

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

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

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

 [To be continued in Installment 86]

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Michael J. Kline writes:

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

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

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

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

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

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

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

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

 [To be continued in Installment 85]

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Michael J. Kline writes:

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

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

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

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

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

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

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

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

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

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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Michael J. Kline writes:

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

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

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

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

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

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

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

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

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 83]

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Michael Kline writes:

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

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 82]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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Michael Kline writes:

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

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

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

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

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 81]

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 Michael Kline writes:

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

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

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

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

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

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

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

 (Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 80]

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Michael Kline writes:

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

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

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

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

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

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

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

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

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 79]

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Michael Kline writes:

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

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

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

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

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

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

We regret any inconvenience to the Court and the parties.

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

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 78]

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Michael Kline writes:

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

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

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

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

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

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

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

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

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

(To be continued in Installment 77)

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Michael Kline writes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 76]

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Michael J. Kline writes:

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

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

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

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

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

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

[To be continued in Installment 69]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

Membership and Dues

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

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

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

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

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

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

Legal fees

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

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

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

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

(To be continued in Installment 68)
 

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

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

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

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

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

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

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

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

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

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

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

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

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

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

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

[To be continued in Installment 65]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

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

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

[To be continued in Installment 64]
 

(With appreciation to Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

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

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

The Differences include the following:

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

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

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

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

Additionally, the absence of any information in the 2008 Form 990 regarding losses by JASA with Madoff is surprising in light of the following question under “Government, Management and Disclosure” on Line 5 for an answer of “Yes” or “No” by the organization:

“Did the organization become aware during the year of a material diversion of the organization’s assets?”

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

[To be continued in Installment 63]
 

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 62]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)
 

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

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

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

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

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

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

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

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

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

[To be continued in Installment 61]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

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

While the Wilpon Interests should be commended for their optimism, the favorable rulings in the Opinion by Judge Rakoff did not go as far as they would like to believe.
(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 60]
 

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

[To be continued in Installment 49]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

Paragraph 16 of the Motion states the following:

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

Paragraph 26 of the Motion adds:

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

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

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

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

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

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

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

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

[To be continued in Installment 48]

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 47]
 

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics)

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

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

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

I stated the following in Installment 17:

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

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

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

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

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

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

[To be continued in Installment 46]
 

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics)

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