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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:

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

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

In Installment 52, this series observed the following:

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

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

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

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

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

[To be continued in Installment 54]
 

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

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

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

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

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

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

[To be continued in Installment 53]
 

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

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 51]

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 50]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 42]  

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

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

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

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

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

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

[To be continued in Installment 37]

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

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

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

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

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

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

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

[To be continued in Installment 29]
 

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

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

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

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

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

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

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

[To be continued in Installment 28]
 

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

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

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

G. Amended Return/Final Return

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

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 27]
 

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

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