Two Dozen Nonprofits Face Lawsuits Over Madoff Fraud

From The Chronicle of Philanthropy, December 10, 2010

By Ben Gose

The trustee representing victims of Bernard Madoff’s fraud has filed more than two dozen lawsuits in recent weeks against foundations and charities that invested directly with Madoff and allegedly profited from the scheme.

But to the relief of many charities, it appears that Irving Picard, the trustee, has decided not to file so-called clawback lawsuits against organizations that benefited indirectly from the fraud by receiving grants from individuals or foundations that earned a profit on their Madoff investments.

The flurry of lawsuits by the trustee are timed to beat the two-year anniversary of Mr. Madoff’s arrest, which marks the deadline by which the trustee must file claims against those who are believed to have profited from the Ponzi scheme.

Some charities and individuals that profited—by getting back more than they put in, before the fraud was uncovered—have entered into settlements to avoid lawsuits. On Thursday, the Jewish women’s charity Hadassah announced that it had struck an agreement to give back $45-million, slightly less than half of its profit from investing with Madoff.

Mr. Picard has until midnight on Saturday, December 11, to file recovery claims, but as of early Friday afternoon, it did not appear that he had filed any lawsuits against charities that benefited indirectly by receiving grants from Madoff investors.

The American Civil Liberties Union, for example, received support from the JEHT Foundation and the Picower Foundation, both of which invested heavily with Madoff and closed in the wake of the fraud. Anthony Romero, executive director of the ACLU, expressed concern in the months following the fraud about the possibility of lawsuits that would attempt to force the return of such grants. The ACLU never held any of its own funds with Madoff.

On Thursday an ACLU spokesman said the charity has not faced any such lawsuits.

“When this whole thing unfolded two years ago, there was tremendous nervousness that the trustee was going to go after the grantees,” says Richard A. Marker, a senior fellow at New York University’s George H. Heyman Jr. Center for Philanthropy and Fund-raising and a consultant who works with foundations and charities. “My sense is that he decided not to do so, that he drew the line at those that directly benefited from the fraud.”

Kevin McCue, a spokesman for Mr. Picard, did not respond to calls and e-mails this week.
Targets of Lawsuits

Under federal and state laws, the trustee can seek to claw back funds from net winners that were withdrawn during the six years of before the discovery of the fraud. One of the hundreds of lawsuits filed by Mr. Picard in recent weeks seeks $5.32-million from the America-Israel Cultural Foundation, which raises money to support artists and cultural institutions in Israel.

The lawsuit, which is typical of the latest claims filed against foundations and nonprofit groups, states that $5.32-million of the $6.68-million withdrawn by the cultural organization from 2002 to 2008 was “fictitious profit” from the Ponzi scheme.

“This action is brought to recover the fictitious profit amount so that this customer property can be equitably distributed among all of the victims,” the lawsuit says.

In a statement, David Homan, the charity’s executive director, called the lawsuit “unfortunate” and said the cultural foundation would enter discussions with Mr. Picard and his legal team. The charity thought it had an account worth $13-million with Madoff when the fraud was revealed.

“AICF was and remains a victim of the fraud perpetrated by Bernard Madoff,” Mr. Homan said.

None of the charities and foundations in the latest round of lawsuits is alleged to have been aware of the fraud before the fund collapsed.

The trustee is suing the Phileona Foundation, based in Minneapolis, even though its founder claims that it was a net loser in the fraud. Phileona, which thought it had assets worth $54.5-million prior to the fraud, withdrew $2-million within a 90-day period before the Madoff fund collapsed.

That withdrawal, coming just before the demise of the fund, puts Phileona “in a more favorable position than other defrauded customers,” according to the lawsuit. Mr. Picard wants the $2-million returned so that it can be distributed equitably among all victims.

Marshall Miller, who established the foundation with his wife, Marlene, declined to say how much the foundation had lost in the fraud. The foundation’s most-recent tax form listed assets of just $6.2-million as of September 2009. “We’ll get something back,” Mr. Miller says. “Nobody knows how much the trustee will recover.”
Moving Forward

Mr. Picard has said that he hopes to recover as much as 50 cents for every dollar that victims lost in the scheme.

The settlement with Hadassah will add to the recovery fund. Hadassah was introduced to Bernard Madoff Securities in 1988, when it received a $7-million gift from a French donor. Over the next eight years, it deposited an additional $33-million with Madoff and by April 2007 had withdrawn $137-million.

In a letter to supporters, Nancy Falchuk, Hadassah’s president, said the charity agreed to return nearly half of its $97-million Madoff profit after months of negotiations with Mr. Picard. Although Hadassah emerges as a winner, the charity doesn’t see things that way: It thought it had a Madoff account worth $90-million at the time the fraud was revealed. In addition to seeing those funds vanish, Hadassah is paying back an additional $45-million.

“As painful as it is, this settlement is in the best interest of Hadassah,” Ms. Falchuk wrote. “It allows us to put this chapter behind us and move forward with our critical life-affirming mission.”

Also this week, Carl Shapiro, a Boston investor and philanthropist and close friend of Bernard Madoff’s, agreed to return $625-million to the trustee. Mr. Picard had maintained that Mr. Shapiro, an early investor with Madoff, withdrew more than $1-billion in the six years preceding the exposure of the fraud. Tax forms for the Carl and Ruth Shapiro Foundation listed assets of $345-million in 2007 but just $112-million at year-end 2008.

Foundations established by Bernard Madoff’s sons were also among those that were targets in the latest round of clawback suits. On December 8, the trustee sued the Mark and Stephanie Madoff Foundation and the Deborah and Andrew Madoff Foundation for $2-million each to recover transfers that were made to the foundation from Bernard Madoff accounts.