Ponzi Schemes and Charities: A Revisit to Malvern Preparatory School, its Former Trustee Joseph Forte and Form 990 Disclosures – Installment 35

September 24, 2010Articles White Collar Defense & Compliance Blog

This is the thirty-fifth in a series of Installments on this blog discussing issues that have arisen for charities in the aftermath of the Bernard L. Madoff scandal and other smaller Ponzi schemes. Installment 30 of this series discussed a Ponzi-scheme run by former Trustee Joseph S. Forte (“Forte”) of Malvern Preparatory School (“Malvern” or the “school”). Malvern, among other charities, had claimed that it was a victim of the Ponzi scheme, even though the school had received hundreds of thousands of dollars in donations from Forte.

Harold Brubaker, who has written several articles on the subject in The Philadelphia Inquirer, published an article on September 17, 2010, entitled “Malvern Prep to return $700,000 received from Ponzi schemer.” The Brubaker article reported that Malvern had agreed in a consent order to return $700,000 received as contributions from Forte of the $900,000 originally sought by Marion A. Hecht, the court-appointed receiver (the “Receiver”). According to Mr. Brubaker, the Receiver is seeking recovery of substantial sums from other charities that also received donations from Forte.

Installment 30 pointed out that the Form 990 dated February 9, 2010, filed by Malvern for its fiscal year ended June 30, 2010 with the IRS (the “Malvern 2009 Form 990”) made no mention of Forte or the fate of his personal pledges, although the Forms 990 filed by the school for the immediately prior two fiscal years had clearly listed him among its Trustees. Moreover, Installment 30 noted that no reference had been made in the Malvern 2009 Form 990 as to whether the school had written off all or a portion of a Forte pledge of $500,000, which may have been a “diversion of assets” requiring a specific explanation if more than $250,000 had been written off.

It will be interesting to see whether, and to what extent, Malvern makes a disclosure and explanation of its losses and settlement with the Receiver respecting Forte in its Form 990 for the fiscal year ended June 30, 2010 to be filed with the IRS. Installment 30 pointed out that the Form 990 questions and instructions may need some refinement by the IRS to enhance the clarity and consistency of definitions and promote greater and speedier transparency by charities. Further developments in this case may be instructive in that regard.

[To be continued in Installment 36]