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Michael J. Kline writes: 

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

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

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

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

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

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

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

 [To be continued in Installment 87]

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This is the thirty-eighth in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Various Installments of this series have discussed the impact of the Madoff scheme on public charities and private foundations.

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

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

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

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

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

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

[To be continued in Installment 39]
 

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

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