The Litwin Foundation and Madoff: A Review of the Foundation’s Forms 990-PF in Light of Its New Lawsuit Against the SEC – Installment 36

September 28, 2010Articles White Collar Defense & Compliance Blog

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, 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]