Madoff-related risks grow for some N.J. foundations

February 25, 2009

© 2009 NJBIZ, author Martin C. Daks

At least three New Jersey-based charitable foundations at risk of losing millions of dollars to Bernard Madoff could be walloped with even more expenses in the form of Internal Revenue Service penalties, said a New Jersey lawyer.

Madoff confessed to running a giant Ponzi scheme that fleeced an estimated $50 billion from corporate, personal, charitable and institutional investors.

“Directors and other fiduciaries involved with [tax-exempt] private foundations must exercise appropriate oversight regarding the investments made by the foundations,” said Michael J. Kline, a partner in the Lawrenceville office of the law firm Fox Rothschild LLP. “If a private foundation makes any investment that would financially jeopardize the ability of the organization to fulfill its tax-exempt purpose, an excise tax is imposed on the foundation of 10 percent of the amount of the jeopardizing investment for each year.”

The foundation’s manager may also have a 10 percent personal liability if the manager “knowingly, willfully and without reasonable cause” participated in making the bad investment, Kline added.

The Lautenberg Foundation, a charitable organization associated with New Jersey Senator Frank Lautenberg; Union-based Eisenberg Foundation, and the Billig Foundation from Englewood all had substantial investments with Madoff that may be at risk, according to a report that appeared in The New York Times.

Lautenberg’s foundation had $14.9 million, out of a total of $15 million of assets, invested with Madoff, according to the report. The Eisenberg organization had $5.1 million invested with Madoff, out of a total of $105 million, while $1.9 million of the Billig foundation’s $5.2 million were at risk.

Although the charitable foundations and their executives could face IRS penalties, it’s not a certainty, Kline said.

“The standards for the excise tax are fact-sensitive, and the private foundation and its manager will endeavor to show that the investment with Madoff was reasonable at the time made, and did not jeopardize the charitable purpose,” he said.

The IRS likely will “pick and choose those individual private foundation cases involving Madoff that have the most flagrant facts and are likely to yield the greatest return,” Kline added.

So far, the IRS has not contacted the Lautenberg foundation, said Michael R. Griffinger, director of the business and commercial litigation group at Gibbons PC, a Newark-based law firm that represents the charitable organization.

NJBIZ was unable to reach representatives of the other foundations. The IRS did not return a reporter’s call seeking comment.

Even if the IRS does not levy penalties, the foundations may be at risk in the Madoff bankruptcy proceedings, Kline said. That’s because early investors in a Ponzi, or pyramid scheme, sometimes get paid from the money pumped in by investors who join later. A bankruptcy court may be able to force the early investors to pay back investment returns they received.

“I think that the ‘clawback’ potential for those Madoff investors who received substantial and disproportionate distributions is a much more immediate concern,” Kline said.