Lack of Legal Protections
Causes Trouble for Charities
against the thief’s victim,” the
judge wrote. “It does not.”
Some charity officials and le-
gal experts say that while they
understand the intent of the
laws, they think fraud legis-
lation ought to be changed to
better accommodate nonprofit
groups that were not investors
in the schemes; had no involve-
ment with or knowledge of the
crimes; and spent the gifts they
received to advance their chari-
table causes.
“The laws need to include
protections for charities in certain cases where they have acted reasonably and in good faith
in accepting and spending the
money,” says Michael J. Kline,
a New Jersey lawyer who specializes in corporate and securities law. Though, he adds, when
cases of fraud include donations
made around the country and
through the Internet, it is difficult for state laws to prevail.
Jon Pratt, executive director of the Minnesota Council of
Nonprofits, agrees that “
innocent charities that get burned”
Continued from Page 17
need better protections, but he
says that going after broad legislative change would be impractical. For now, his association is
setting its sights on decreasing to one or two the number of
years authorities in Minnesota
can reach back to reclaim contributions. Most states’ fraud
laws have a statute of limitations of four years. In Minnesota, it is six.
The change, Mr. Pratt says,
would serve to shrink the number of donations subject to clawbacks when cases of fraud do occur.
In the absence of other legal
protections, Mr. Pratt and other
charity officials and observers
say that a nonprofit group’s best
move is to minimize the risks of
accepting what could turn out
to be tainted donations. (For
suggestions, see box on bottom
right.)
Hassan Nemazee
How he got in trouble:
Pleaded guilty to leading a
nearly $300-million fraud.
How charitable donations
were affected: He donated
$1.1-million to charities that
have now been asked to
return the money.
Spotless Reputations
But charity and legal ex-
perts familiar with clawbacks
acknowledge that even organi-
zations that took those kinds
of precautions would probably
not have been protected from
the recently uncovered Ponzi
schemes.
Minnesota Funds Face Call for Return
of More Than $450-Million in Fraud Case
WHEN charities find themselves the sub- ject of clawbacks—
government calls for the return
of illicit gains from financial-fraud cases—it is usually for
one of two reasons: Either they
had invested charitable assets
in what turned out to be a scam
or they received donations from
people who ran or improperly
benefited from a scam.
Since the notes were donated
to the foundations by entities
that were involved in or had
benefited from Mr. Petters’s
Ponzi deal, the complaints say,
both the principal of the investments—in these cases, the
gifts—and the interest paid on
them must be returned.
A typical investor would be
subject to clawbacks only in the
amount of the profits received
above the initial investment or
loan.
Interest Payments
The lawsuits say that the
Minneapolis Foundation, a
community foundation, owes
$6.9-million in principal and
roughly $4.1-million in interest payments; the Northwestern Foundation, connected with
Northwestern College, in St.
Paul, owes $3.2-million in principal and nearly $2-million in
interest; and the Sabes Family Foundation, run by a family
that individually and through
its businesses had dealings with
companies related to Mr. Petters, owes $6-million in principal and about $14-million in interest.
The complaint filed against
the Fidelis Foundation, a Minneapolis grant maker that supports Christian groups and that
has ties to Mr. Petters, says the
foundation could be on the hook
to repay more than $400-mil-
lion in principal investments
and more than $5-million in
profits.
A spokesman for Fidelis says
that the foundation has not
been asked to return the initial
loan amounts and that it did
not earn any money above its
investments. It has asked the
court to dismiss the case.
A lawyer for the Minneapolis
Foundation, which also has also
sought dismissal of the lawsuit
against it, says the loans should
not be subject to clawbacks and,
in any case, the clawback effort
exceeds Minnesota’s six-year
statute of limitations.
What’s more, he says, the
foundation, which in 2001 received two gifts of promissory
notes totaling $6.9-million from
the Sabes Family Foundation,
two years later, at the request
of the donor, gave the entire
gift and the interest to another
charity.
The Sabes Family Foundation
could not be reached for comment. A Northwestern Foundation spokesman declined to
comment.
The three lawsuits (Sabes and
Minneapolis are included in one,
along with other defendants)
were filed by Douglas A. Kelley,
the court-appointed trustee and
receiver in Mr. Petters’s bankruptcy and fraud cases.
The lawsuits are among more
than 200 complaints, mostly
against businesses and individual investors, seeking the return of about $1.7-billion in so-called phantom profits from Mr.
Petters’s illicit operations.
Tom Petters
How he got in trouble: Was
found guilty of running a $3.5-
billion Ponzi scheme.
How charitable donations
were affected: A court
trustee is seeking more than
$459-million from nonprofits
associated with Mr. Petters.
Scott Rothstein
How he got in trouble:
Pleaded guilty to running a
$1.4-billion Ponzi scheme.
How charitable donations
were affected: He gave at
least $2-million to Florida
charities that have now been
asked to return the money.
doings that had otherwise escaped authorities. And in many
of the cases, the perpetrators
who were eventually caught had
been respected business leaders
and sought-after donors.
“It was not considered irre-
sponsible of us to accept his
gift,” says Mike Mullin, presi-
dent of Cathedral High School, a
Catholic institution in St. Cloud,
Minn., which received about a
third of a $750,000 pledge from
Mr. Petters before his financial
empire unraveled. “It actually
would have been considered ir-
responsible for any organiza-
tion not to get in front of Tom in
the last few years and give him
their proposal.”
Mr. Forte, in Pennsylva-
nia, was well known to Mal-
vern Preparatory School, where
he volunteered as a strength
and conditioning coach before
he pledged $1-million to help
the school build a new weight
room.
“We knew Joe,” says James H.
Stewart, Malvern’s president,
“and we could still have done
our due diligence, checked ré-
sumés, checked references, and
not have found anything about
him that wasn’t positive.”
That’s what scares David
Donell, chief financial officer of
the X Prize Foundation, espe-
cially since his organization re-
lies on large gifts from a small
number of donors. One claw-
back, he says, would be very fi-
nancially damaging.
“We could still
have done our due
diligence and not
have found
anything.”
guard against repayments in a
fraud case but can’t find insurers interested in providing such
coverage. That may be just as
well, he says, noting that donors
might resent the idea of insuring against their being criminals—and especially using a
portion of their gifts to pay the
premiums.
“I’m sure the 99.99 percent
of donors who are legitimate
wouldn’t be happy,” Mr. Donell
says. “Insurance is just not a
feasible response. Unfortunately, what it comes down to is: It’s
just every recipient beware.”
AVOIDING TROUBLED GIFTS: TIPS FROM THE EXPERTS
n Adopt a solid and comprehensive policy for accepting gifts
that requires criminal checks of donors for gifts of a certain
size as well as other efforts to know more about where a
donation is coming from.
n Seek feedback from trustees when accepting a sizable gift.
“Board members can serve as feelers in a community with
respect to donations and donors,” says Heidi Neff Christian-son, a lawyer in Minneapolis and a former assistant attorney
general in the state’s charities division.
n Be sensible. “Is the donor suddenly driving around in a Ferrari? Is that new wealth?” says David Donell, chief financial
officer of the X Prize Foundation, in Playa Vista, Cal. “Ask
these questions and be aware if something looks like it’s too
good to be true.”
