Investment Adviser Ivy Asset Management Settles Madoff Lawsuits for $210 Million – Installment 86

November 17, 2012Articles White Collar Defense & Compliance Blog

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.

[To be continued in Installment 87]

The Picard/Wilpon Settlement: Should there be Disclosure in 2011 Forms 990-PF Filed with the IRS by Wilpon Private Foundations? - Installment 87

2012-11-26 10:23

It is perplexing that Forms 990-PF for 2011 (“2011 Forms 990-PF”) filed with the Internal Revenue Service (“IRS”) by various Wilpon family private foundations (the “Schedule 1 Foundations”), which are now beginning to appear on GuideStar, provide no reference to the assignment to Madoff Trustee Irving Picard of allowed net equity claims. While only two of the six Schedule 1 Foundations have had their 2011 Forms 990-PF posted on GuideStar to date, each of them has chosen to omit any reference to encumbering their “Estimated SIPC Recovery – Madoff Theft Loss,” even though such 2011 Forms 990-PF were filed after the execution of the Settlement Agreement, dated April 13, 2012, between Picard and the Wilpons (the “Settlement Agreement”), that was approved by the Federal District Court on May 31, 2012.

This blog series, particularly Installments 75 and 76 and prior Installments referred to therein, has been monitoring the participation by the Schedule 1 Foundations in the global Settlement Agreement. (Capitalized terms not otherwise defined herein shall have the meanings assigned to them in Installment 76.)

The Schedule 1 Foundations for which 2011 Forms 990-PF have been posted to date on GuideStar are The Tepper Family Foundation (the “Tepper Foundation”) and the Valerie and Jeffrey S. Wilpon Foundation (the “JW Foundation” and, collectively with the Tepper Foundation, the “Posted Foundations”). Notably, each of the Schedule 1 Foundations, including the Posted Foundations, has one or more Fiduciary Defendants who, in one capacity and/or another, was (i) a defendant in the Wilpon Litigation, (ii) listed on Schedule 2 to the Settlement Agreement as a recipient of transfers from Madoff in excess of principal invested and (iii) a signatory to the Settlement Agreement.

Each of the Schedule 1 Foundation Claims, which would otherwise be receivables payable in cash to the respective Schedule 1 Foundation as part of distributions by the Trustee, has been assigned to the Trustee and will, to some extent, fund a portion of the monetary clawback exposure of its respective Fiduciary Defendants. (The form of “Assignment of Net Equity Claims” (the “Assignment”) is the final page attached to the Settlement Agreement.) Installment 76 went into some detail as to the problematic aspects of the participation by the Schedule 1 Foundations in the Settlement Agreement process and the question of potential prohibited “private benefit and inurement” under IRS rules.

A number of observations can be made as to the 2011 Forms 990-PF of the Posted Foundations:

1. Each of the 2011 Forms 990-PF of the Posted Foundations reflects on line 15 of its Part II Balance Sheet as a substantial “other asset” an item that is explained in a later statement as “Estimated SIPC Recovery – Madoff Theft Loss.” For the Tepper Foundation, the amount reflected is $47,093, and for the JW Foundation, the amount reflected is $137,690. However, by April 13, 2012, and prior to the time of filing with the IRS of their respective 2011 Forms 990-PF (June 25, 2012 as to the Tepper Foundation and May 16, 2012 as to the JW Foundation (collectively, the “Forms 990-PF Filing Dates”)), the Settlement Agreement had already been signed, and each of the Posted Foundations had agreed on a fixed amount for the Schedule 1 Foundation Claim at a materially lower figure than that reflected on the respective Form 990-PF. The amount reflected and its percentage of the original estimate is $30,895 (65.6%) as to the Tepper Foundation and $70,050 (50.8%) as to the JW Foundation. It would appear that an explanation of the difference or substitution of the known agreed-upon figure would be better disclosure than continuing the higher estimated amount that the Posted Foundations had carried in their Forms 990-PF for several years.

2. Neither of the 2011 Forms 990-PF of the Posted Foundations reflects any offset, encumbrance or liability, either in the Part II Balance Sheet or an explanatory statement, as to its having assigned its Schedule 1 Foundation Claim to the Trustee pursuant to the Settlement Agreement and the Assignment, which were executed well before the Forms 990-PF Filing Dates. If the Posted Foundations reported the estimated Schedule 1 Foundation Claim as an asset on the accrual basis as discussed in item 1 above, it would appear that the Assignment should be reported as well, even if as a subsequent event statement.

3. It is interesting that, while neither of the 2011 Forms 990-PF of the Posted Foundations evidences a “paid preparer” on page 13 (as is also the case for the 2010 Forms 990-PF of each of the Schedule 1 Foundations for that matter), each shares the same address, provides the identical reporting format for the Schedule 1 Foundation Claim and reflects no compensated employees. The IRS Instructions for Form 990-PF provide the following on page 30:

Generally, anyone who is paid to prepare the organization’s tax return must sign the return and fill in the Paid Preparer Use Only area. An employee of the filing organization is not a paid preparer.

By implication, an employee of another entity who prepares the organization’s tax return may be a paid preparer. The Instructions do invite the organization to consult with the IRS as to whether a preparer is required to sign the return.

4. In light of considerations such as those in items 1 through 3 above, an officer or trustee of a private foundation, such as the Presidents of the Posted Foundations, should be aware that he or she signs a Form 990-PF with the following affirmation:

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete.

Preparation of Forms 990-PF can be complex, especially when concerns may be potentially present about imposition of excise taxes, duty of loyalty, possible conflicts of interest of fiduciaries and the IRS rules regarding private benefit and inurement. Because the Forms 990-PF are permanently and universally available on the Internet, private foundations and their fiduciaries are well-advised to seek competent guidance and counsel in their preparation and filing.

Now that the November 15, 2012 final IRS filing date (including permitted extensions) for 2011 Forms 990-PF by calendar year foundations has passed, the 2011 Forms 990-PF of the remaining Schedule 1 Foundations should be appearing on GuideStar within the next several months.

[To be continued in Installment 88]