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

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

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 In addition to the gift, between 1988 and 1996, we deposited $33M in our accounts, and by April 2007 had withdrawn $137M.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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 43]

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

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This is the thirty-seventh in a series of Installments on this blog that is discussing issues that have arisen for charities in the aftermath of the Bernard L. Madoff (“Madoff”) scandal and other smaller Ponzi schemes. Installments 30 and 35 of this series discussed a Ponzi-scheme run by former Trustee Joseph S. Forte (“Forte”) of Malvern Preparatory School (“Malvern” or the “school”). Malvern, among other charities, had claimed that it was a victim of the Ponzi scheme, even though the school had received hundreds of thousands of dollars in donations from Forte.

Installment 35 of this series discussed a September 17, 2010 article by Harold Brubaker, who has written several articles on the subject in The Philadelphia Inquirer.  The Brubaker article reported that Malvern had agreed in a consent order (the “Consent Order”) to return $700,000 received as contributions from Forte of the $900,000 originally sought by the court-appointed receiver.

On the same day as the Brubaker article, the President of Malvern and the Chairman of its Board of Trustees issued a joint statement about the Consent Order entitled “Resolution of Forte Ponzi Scheme Litigation” (the “Malvern Statement”). Included in the Malvern Statement was the avowal that Malvern Prep had no knowledge of Mr. Forte’s Ponzi scheme and accepted his donations under the assumption that he acquired them entirely from legitimate sources. In addition, although Malvern received charitable donations from Mr. Forte, it did not invest any monies with him.

One of the interesting aspects about the Consent Order and the Malvern Statement as to the return of donations by Malvern is the precedent that it may set, not only for other charities that may have innocently received contributions from Forte in the belief that they were from legal sources, but also for charities that received contributions in other Ponzi schemes such as that of Madoff.

Another interesting aspect is the following quotation from the Malvern Statement:

Be assured that none of the money paid to the receiver will be taken from any of the charitable or other funds established by the School’s generous benefactors, and Malvern’s many excellent programmatic and financial aid programs will not be affected.

The meaning of the term “charitable or other funds established by the School’s generous benefactors” is somewhat perplexing. Query whether the general endowment funds of Malvern, which may include not only donations and bequests but also increases from investment earnings and income from operations of the school, fall within the quoted categories. Another potential source for the payment possibly would be current operations.

Installments 30 and 35 of this series pointed out that the Form 990 dated February 9, 2010, filed by Malvern for its fiscal year ended June 30, 2010 with the IRS made no reference (i) to Forte or the fate of his unfulfilled personal pledges and (ii) as to whether the school had written off all or a portion of a Forte outstanding pledge of $500,000.

As stated in Installment 35, it will be interesting to see to what extent Malvern discloses and explains its losses with Forte and the Consent Order in its Form 990 for the fiscal year ended June 30, 2010 to be filed with the IRS. It may provide some guidance for other similarly affected charities.

Installment 30 pointed out that the Form 990 questions and instructions may need some refinement by the IRS to enhance the clarity and consistency of definitions and promote greater and speedier transparency by charities. Further developments in this case may be instructive as to the effectiveness of the current IRS Form 990 and instructions in generating meaningful disclosures.

[To be continued in Installment 38]

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

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

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

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

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

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

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

[To be continued in Installment 37]

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

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This is the thirty-fifth in a series of Installments on this blog discussing issues that have arisen for charities in the aftermath of the Bernard L. Madoff scandal and other smaller Ponzi schemes. Installment 30 of this series discussed a Ponzi-scheme run by former Trustee Joseph S. Forte (“Forte”) of Malvern Preparatory School (“Malvern” or the “school”). Malvern, among other charities, had claimed that it was a victim of the Ponzi scheme, even though the school had received hundreds of thousands of dollars in donations from Forte.

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

It will be interesting to see whether, and to what extent, Malvern makes a disclosure and explanation of its losses and settlement with the Receiver respecting Forte in its Form 990 for the fiscal year ended June 30, 2010 to be filed with the IRS. Installment 30 pointed out that the Form 990 questions and instructions may need some refinement by the IRS to enhance the clarity and consistency of definitions and promote greater and speedier transparency by charities. Further developments in this case may be instructive in that regard.

[To be continued in Installment 36]

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

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This is the thirtieth in a series of Installments on this blog that discusses issues that arose for charities in the aftermath of the Bernard L. Madoff (“Madoff”) scandal.  For example, Installment 29 analyzed new disclosure requirements for public charities adopted by the Internal Revenue Service (“IRS”) in 2008 for its new Form 990 (the “New Form 990”) against the backdrop of the Madoff scandal and its relationship to Howard Hughes Medical Institute (“HHMI”).  Forms 990 that are filed with the IRS, including the New Form 990 of HHMI and those discussed in this Installment, are universally available on the Internet on Guidestar and other sites.

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

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

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

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

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

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

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

The matter is further complicated by the fact that, as discussed in Installment 29 of this series, Part VI of New Form 990 entitled “Government, Management and Disclosure” has the following question on Line 5 for an answer of “Yes” or “No” by the organization: “Did the organization become aware during the year of a material diversion of the organization’s assets?”

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

The instructions for completing the New Form 990 (the “Form 990 Instructions”) provides the following, in part, as to Line 5:

Answer “Yes” if the organization became aware during the organization’s tax year of a material diversion of its assets, whether or not the diversion occurred during the year. If “Yes,” explain the nature of the diversion, amounts or property involved, corrective actions taken to address the matter, and pertinent circumstances in Schedule O, though the person or persons who diverted the assets should not be identified by name.

A diversion of assets includes any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to an embezzlement or theft. . . .

For this purpose, a diversion is considered material if the gross
dollar amount (not taking into account restitution, insurance, or similar recoveries) exceeds the lesser of (1) $250,000 or (2) 5 percent of the lesser of the organization’s gross receipts for its tax year or total assets as of the end of its tax year.

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

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

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

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

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

[To be continued in Installment 31]
 

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

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This is the twenty-ninth in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Various Installments of this series have analyzed new disclosure requirements for public charities adopted by the Internal Revenue Service (“IRS”) in 2008 for its new Form 990 (the “New Form 990”) against the backdrop of the Madoff scandal. The Forms 990, including the Form 990 (the “HHMI Form 990”) of Howard Hughes Medical Institute (“HHMI”) for the fiscal year ended August 31, 2009 (“Fiscal 2009”), are universally available on the Internet on Guidestar and other sites.

HHMI is one of the largest and most highly respected charitable organizations in the world, as a leading philanthropic organization dedicated to serving society through biomedical research and science education. On February 5, 2009, in the early aftermath of the arrest of Madoff in December 2008, HHMI was on a 163-page list of customer account names produced by the Madoff Bankruptcy Court and reproduced by many Web sites such as The New York Times.  In a commentary on every page of its list, The Times notes the following:

The list of customer account names found by the court-appointed trustee in the records of Bernard L. Madoff's wealth management firm, as well as names of people who contacted the trustee to say they believed they had been Madoff customers and wanted to file a claim. Some of the names on the list are those of lawyers, accountants, foundation trustees and agents who set up the accounts on behalf of the actual investors in the Madoff fund, which investigators are calling the biggest Ponzi scheme ever. Some people on the list have said publicly that they were included in error.

Other Madoff-related media reports respecting charities such as charitygovernance.com identified HHMI as having been a direct or indirect victim of Madoff.  Genetic Engineering & Biotechnology News published an article on March 15, 2009 on the effects of the Madoff scandal on life sciences research. It featured the following relative to HHMI:

Howard Hughes Medical Institute (HHMI) is looking resolutely forward. “That was long ago and far away,” VP for communications and public affairs Avice Meehan says of the Madoff scandal. “It will have no impact at all on our operations, although it has had consequences on the institutions where our researchers work. At HHMI, we’re assessing the result of the ongoing financial challenge on our endowments and operations. At this point, despite ongoing volatility, we expect to meet our commitment to our grantees, investigators, and Janelia Farm [Research Campus], and are proceeding with new initiatives with some degree of caution.”

Except for the aforementioned and similar items, there appears to be virtually no publicly available information as to the extent, if any, to which HHMI had direct or indirect exposure to losses with Madoff. There are no references to the Madoff matter in the HHMI Form 990, the on-line Annual Report of HHMI for Fiscal 2009 or the financial statements of HHMI for Fiscal 2009 audited by PricewaterhouseCoopers LLP.

In light of the relatively scarce public information available and the stature and leadership position of HHMI in the charities field, I contacted HHMI to solicit clarification and information from them relative to the status of HHMI as a potential direct or indirect victim of Madoff. I was advised, “It has long been HHMI’s practice to decline comment on specific investments and we have decided, after some discussion, to adhere to that practice.”

The absence of any information in the HHMI Form 990 regarding losses by HHMI with Madoff is surprising in light of the changes made by the IRS in New Form 990. Part VI of the New Form 990, entitled “Government, Management and Disclosure” has the following question on Line 5 for an answer of “Yes” or “No” by the organization:

“Did the organization become aware during the year of a material diversion of the organization’s assets?” [Emphasis supplied] In the HHMI Form 990, Line 5 was answered “No” by HHMI.

The final revised instructions for completing the New Form 990 for 2008 (the “Form 990 Instructions”) provided the following, in part, as to Line 5:

Answer “Yes” if the organization became aware during the organization’s tax year of a material diversion of its assets, whether or not the diversion occurred during the year. If “Yes,” explain the nature of the diversion, amounts or property involved, corrective actions taken to address the matter, and pertinent circumstances in Schedule O, though the person or persons who diverted the assets should not be identified by name.

A diversion of assets includes any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to an embezzlement or theft. . . .

For this purpose, a diversion is considered material if the gross
dollar amount (not taking into account restitution, insurance, or similar recoveries) exceeds the lesser of (1) $250,000 or (2) 5 percent of the lesser of the organization’s gross receipts for its tax year or total assets as of the end of its tax year. [Emphasis supplied]

In my view, it is likely that a diversion, if any, by Madoff of assets of HHMI would have been immaterial on a relative basis as compared to the $14 billion in endowment funds as of August 31, 2009 and the $3.5 billion decline of endowment funds during Fiscal 2009 reported by HHMI. However, relative immateriality is not the standard for disclosure under New Form 990. The standard for disclosure is the lesser of (1) $250,000 or (2) 5 percent of the lesser of the organization’s gross receipts for its tax year or total assets as of the end of its tax year.

In light of HHMI’s vast scale of operations and $14 billion investment portfolio, if HHMI had any diversion of assets attributable to Madoff, it would likely have not been less than the threshold for New Form 990 disclosure of $250,000. Perhaps there may be an explanation or interpretation for the non-disclosure by HHMI that is not readily evident from the materials publicly available; we would invite anew any clarifying comment from HHMI.

[To be continued in Installment 30]
 

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

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

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

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

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

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

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

[To be continued in Installment 29]
 

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

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

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

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

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

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

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

[To be continued in Installment 28]
 

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

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

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

G. Amended Return/Final Return

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

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 27]
 

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

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

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

The facts identified are as follows:

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

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

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

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

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

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

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

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

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

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

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

Prohibited Relationships

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

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

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

[To be continued in Installment 25]

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 23]
 

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

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

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

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

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

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

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

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

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

[To be continued in Installment 22]
 

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

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

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

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

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

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

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

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

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

[To be continued in Installment 21]
 

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 20]
 

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

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

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

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

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

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

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

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

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

[To be continued in Installment 19]
 

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

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

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

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

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

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

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

[To be continued in Installment 18]
 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[To be continued in Installment 14]
 

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

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

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

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

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

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

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

[To be continued in Installment 13]

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

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

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

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

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

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

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

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

[To be continued in Installment 12]
 

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

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

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

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

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

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

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

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

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

[To be continued in Installment 11]
 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusions Respecting Governance of 501(c) Entities after Madoff

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

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

[To be continued in Installment 9]

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

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

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

Installment 5 and prior Installments raised certain problems that exist for private foundations that are 501(c)(3) Entities which invested with Madoff. Such private foundations face the “triple jeopardy” of actual losses of investment value, the possibility of penalty excise taxes for imprudent investments and/or the potential for “clawback” by the trustee for the Madoff assets if the private foundation received substantial and disproportionate payments as compared to the average return for all other investors.

While 501(c)(3) Entities that are public charities and not private foundations do not have the potential for penalty excise taxes, they are subject to loss of investment value and clawback from Madoff investments. Therefore, all 501(c)(3) Entities have similar concerns.

This series of Installments will discuss a number of issues arising from the Madoff scandal in the context of an expanded and more comprehensive Form 990 that 501(c)(3) Entities must file annually with the IRS. The adverse publicity that many charities have suffered from having been involved with Madoff, combined with the substantial losses in market value that charitable endowment and trust funds have incurred over the last year, make it critical that all 501(c)(3) Entities review, analyze and reform their operating policies and procedures. Only by demonstrating their commitment to best practices in governance and operations can they succeed in the increasingly competitive environment for shrinking donor dollars in an adverse economic climate.

Required Filings by 501(c)(3) Entities with the IRS

501(c)(3) Entities that achieve certain minimum sizes as to revenues and/or assets are required to file annual tax returns with the IRS. The filing form for public charities is Form 990 and for private foundations is Form 990-PF. This Installment will focus on Form 990 for public charities because of the dramatic changes that have occurred in the requirements for a 2008 Form 990 filing to be made in 2009 (“2008 Filing”).

It is a coincidence that the uncovering of the Madoff scandal occurred in the year relating to the 2008 Filing and its comprehensive changes to Form 990. However, the Madoff scandal has raised the stakes for a charity to be sufficiently proactive in reviewing, analyzing and revising its compliance, transparency and accountability to enable it to file on a timely basis a complete and accurate 2008 Filing. The changes in the 2008 Filing, which will be hereafter described in greater detail, will require disclosures for a charity that relate directly to the Madoff investments and scandal as to governance and decision-making by their boards. The changes for 2008 Filings may only be the beginning of an evolution in Form 990 that will require even more comprehensive disclosures by charities in the future.

Form 990 as a Financial Reporting Document

For many years Form 990 was viewed as an annual financial report by a 501(c)(3) Entity to the IRS on the charity’s operations for the prior fiscal year. The financial statements track very closely the annual audited financial reports of the 501(c)(3) Entity. The annual financial statements of 501(c)(3) Entities in the 2008 Filing can be expected to be generally dismal because of significant losses in market values of charitable endowment and trust funds during 2008. Both the balance sheet and statement of revenues and expenses in the 2008 Filing will reflect such losses. The financial statements of 501(c)(3) Entities that invested with Madoff will be even more negative to the extent that the Madoff investments may prove to be almost worthless. Such 501(c)(3) Entities will have a need to explain clearly and carefully in the 2008 Filing the steps that they have taken and will take to avoid a repetition of serious mistakes of the past. The changes in the Form 990 for 2008 encourage that approach.

In effect, the changes in Form 990 have converted the Form 990 to much more of a disclosure document for 501(c)(3) Entities akin to the Form 10-K Annual Report filed by public business corporations on an annual basis with the federal Securities and Exchange Commission.

Universal Transparency and Filing Dates for Forms 990

Form 990 is required to be filed with the IRS by the 15th day of the month following the end of a charity’s fiscal year, e.g., May 15, 2009 for the 2008 Filing by a charity with a fiscal year ended on December 31, 2008 (“Calendar Year Filer”). It must be understood that, unlike federal tax returns filed by business corporations, the Form 990 filed by 501(c)(3) Entities can be accessed anonymously by anyone in the world at any time. It becomes a matter of public record after it is filed with the IRS. Web sites, perhaps the most well known of which is www.guidestar.org, publish Forms 990 on line, ordinarily within two months after they are filed. Potential donors, competitors, governmental agencies, beneficiaries and many others easily and routinely access the Forms 990 to analyze operations and other aspects of a 501(c)(3) Entity.

A Calendar Year Filer can have up to two extensions for filing its 2008 Filing that would allow it to delay filing until November 15, 2009. It can be anticipated that many 501(c)(3) Entities will extend their filing dates as long as they can. First of all, those 501(c)(3) Entities that invested with Madoff will most likely require extra time to determine the extent to which the value of the Madoff investment has deteriorated. Such valuation may be closely tied to the prospects for recovery of monies and progress with related civil and criminal cases.

A second reason is that the new requirements for disclosure in 2008 Filings will make it necessary for a 501(c)(3) Entity to generate new material and respond to new questions, perhaps only after the implementation of new policies by its governing board, so that the responses reflect best practices in the Form 990.

Another reason for the likely delays in filing of the 2008 Filings will be that many 501(c)(3) Entities will endeavor to see what types of responses to the new 2008 Filing questions other 501(c)(3) Entities will make. In a number of cases the larger, more seasoned 501(c)(3) Entities may be among the early filers of 2008 Filings. For example, a hospital that is a 501(c)(3) Entity may have obligations under trust indentures for outstanding bond issues that require provision to the trustee of the Form 990 by a specified time based upon the original due date of the Form 990. The early filers of 2008 Filings will, therefore, in some cases be setting some unofficial benchmarks for responses to new questions in the 2008 Filings.

Penalties for Violations of Provisions Covering Form 990 Filings

There are potential serious adverse consequences for a 501(c)(3) Entity that fails to file on a timely basis a complete and correct Form 990. The Internal Revenue Code provides for civil monetary penalties of $20 per day for failure to file a complete and correct Form 990 by its original due date (or permitted extension date for filing). The maximum penalty for any one Form 990 is the lesser of $10,000 or 5% of the gross revenues of such 501(c)(3) Entity. However, for a 501(c)(3) Entity that has gross receipts exceeding $1,000,000 for any year, the penalty for failure to file a complete and correct Form 990 by its required due date is $100 per day up to a maximum of $50,000 for any one Form 990.

Additionally, a private IRS ruling released on February 27, 2009 revoked the tax exempt status of a 501(c)(3) Entity that did not observe the conditions for its continued exempt status by failing to file a Form 990 for each of the preceding two fiscal years. Accordingly, the 501(c)(3) Entity was no longer exempt from federal income taxation and contributions by donors were no longer tax deductible.

The civil monetary penalties and revocation of tax-exempt status cover the new disclosure requirements for Form 990.

The next Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities with an emphasis on its relationship to the 2008 Filings and the related compliance, transparency and accountability obligations of the 501(c)(3) Entities.

[To be continued in Installment 7]
 

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

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

We will continue the discussion of charitable entities and foundations that invested with Madoff. This series has already discussed in Installment 3 some generally accepted accounting principles specific to 501(c)(3) Entities that aided Madoff in extending the life and increasing greatly the scope of his operation. Hand in hand with the GAAP principles for 501(c)(3) Entities that assisted Madoff are federal income tax rules that are applicable to 501(c)(3) Entities.

Direct Entity Investors (“DEI”) that are charitable entities and foundations (“501(c)(3) Entities”)

Certain Income Tax Rules Applicable to 501(c)(3) Entities that Inured to the Benefit of Madoff

The most important tax principle for 501(c)(3) Entities that benefited Madoff is that their investment income is exempt from federal and state income taxes. Charities can therefore stay fully invested and roll over investment income into further investments. This was a powerful tool for Madoff. Because of the apparent safety, consistency and stability of his relatively high “returns,” Boards and Investment Committees of 501(c)(3) Entities would be disinclined to redeem either principal or “returns” in accounts with Madoff because they did not even have to pay taxes on their reported returns from Madoff. Such 501(c)(3) Entities would seek to use funds from other areas of their endowment funds to remain as fully invested as practicable with Madoff.

Madoff preyed upon the various business and tax advantages that many 501(c)(3) Entities saw in an investment with him. As a result Madoff was able to count on the fact that charities would be resistant to request redemptions of principal and would even reinvest their reported “returns” for a long period of time. It was only when the rest of the financial markets collapsed that 501(c)(3) Entities began to demand large distributions that Madoff could not meet. Then the 501(c)(3) Entities became subject to the glare of adverse publicity and embarrassing questions as to how and why the staggering losses that they suffered had taken place.

Summary of the benefits for Madoff’s operations of the credibility and stability that he projected to 501(c)(3) Entities
The next discussion in this series will focus on the proactive review and responses that 501(c)(3) Entities should be considering in governance and investment policies to the shocking losses and other harmful aftermath of investing with Madoff. Such a proactive review makes good sense for all 501(c)(3) Entities, irrespective of whether or not they were investors with Madoff. The increased regulatory scrutiny under which charities will be operating in the future makes “best practices” a necessity.

As a prelude to that discussion, it should again be observed that 501(c)(3) Entities have been on the lookout for many years for investment vehicles in which to place their endowment funds that appear to have a high degree of safety and stability and provide a consistent and relatively high rate of return. An investment with Madoff appeared to be ideal to many 501(c)(3) Entities on all of these levels, especially with his track record of 12% average annual returns over decades, combined with the added credibility flowing from the fact that many other highly respected 501(c)(3) Entities were also long time investors. Moreover, for 50 years Madoff had been a leader and innovator in the investment industry and had been Chairman of the NASDAQ Stock Market. This prominence enhanced his stature and trustworthiness as an investment advisor. Therefore, Boards and Investment Committees of many 501(c)(3) Entities felt comfortable with entrusting millions of their endowment dollars with Madoff for extended periods.

Such comfort was heightened by the fact that Madoff appeared to be one with them, that is, he was the epitome of the famous “Three W’s” that are the most desirable attributes for Board members of 501(c)(3) Entities: Wealth, Wisdom and Work. Madoff evidenced personal wealth and largesse in personally contributing large sums to numerous charities; he appeared to unselfishly share his wisdom, experience and business acumen with those 501(c)(3) Entities in which he was interested; and finally he was deeply involved in rising to leadership roles in charities because of his work effort and apparent wealth and wisdom. All of these factors, combined with the apparent business and tax benefits of an investment with Madoff for 501(c)(3) Entities, enhanced the scope and longevity of his enterprise.

The next Installment will continue the discussion of the aftermath of the Madoff scandal for 501(c)(3) Entities with an emphasis on the review and analysis on governance and investment policies that charitable organizations should be conducting to repair and/or enhance their standing among their peers and competitors for contributions.

[To be continued in Installment 5]
 

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

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The Madoff investment scandal was allegedly the longest, most widespread and financially devastating Ponzi scheme on record. On almost a daily basis since the arrest of Bernard L. Madoff on December 11, 2008, there are new disclosures of victims and classes of victims. Over the next few days this blog will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Madoff scandal. In many cases there may be limited time for victims to act to protect themselves to the maximum. Some of the potential self-protective actions will be identified during the course of identifying the stakeholders. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Direct Individual Investors (“DII”)

This class of victim may be the largest in numbers, although not necessarily in potential dollar losses. A DII should collect every scrap of hard copy, digital or electronic information and communication that can be located relative to an investment in Madoff (a “Madoff Investment”), including statements, financial or otherwise, from Madoff, tax statements such as Forms 1099, annual reports, statements by Madoff as to the nature of the investments and returns, etc. Such information may prove to be valuable in isolating the scope of the loss and the factual basis that gave rise to the loss. The factual basis may determine whether or not the DII is a potential class plaintiff should any classes be certified in actions against Madoff and/or his controlled business entities.

Other immediate concerns for DII include the mailing on January 2, 2009, by the Securities Investor Protection Corporation (“SIPC”) of formal claims packages to potential claimants of Bernard L. Madoff Investment Securities LLC, a licensed broker-dealer affiliate of Madoff. The liquidation case is set in the Southern District of New York. Claims by customers must be filed with the trustee in the liquidation case, not SIPC, by March 4, 2008. The notice from SIPC relates to claims of customers of the broker-dealer who may have lost money or securities registered in “street name” or in the process of being registered. It does not relate to investors who may have lost money in the alleged Ponzi scheme that was extraneous to the broker-dealer.

Another immediate consideration for DII are potential claims for refunds that may be filed with federal and state taxing authorities. Generally the statute of limitations for the filing of refunds is a three-year period from the filing date of the original income tax return. For example, in the case of a taxpayer who filed his or her federal and state returns on April 15, 2006 for a 2005 calendar year, no claims for refund can be made after April 15, 2009. Since the income reflected on Forms 1099 that were supplied to DII cannot be correct to the extent there was negligible real income earned from the investment with Madoff, taxes paid based on the Forms 1099 were excessive and can be available for refunds.

[To be continued in Installment 2]
 

(With appreciation to Michael J. Kline, Esq. for contributing this entry)

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