The trustee representing victims of Bernard Madoff’s fraud has filed more than two dozen lawsuits against foundations and charities that invested directly with Madoff and allegedly profited from the scheme.
But to the relief of many charities, it appears that Irving Picard, the trustee, has decided not to file so-called clawback lawsuits against organizations that benefited indirectly from the fraud by receiving grants from individuals or foundations that earned a profit on their Madoff investments.
The flurry of lawsuits by the trustee were timed to beat the two-year anniversary of Mr. Madoff’s December 11, 2008 arrest. The anniversary marked the deadline by which the trustee had to file claims against those who are believed to have profited from the Ponzi scheme.
Meanwhile, some charities and individuals that profited—by getting back more than they put in, before the fraud was uncovered—entered into settlements to avoid or end lawsuits. The largest settlement to date is the $7.2-billion that Barbara Picower, the widow of Jeffry Picower, agreed to return to the trustee in December.
Mr. Picard had alleged in a May 2009 lawsuit that Mr. Picower, as a close associate of Mr. Madoff’s, had received some of the highest fictitious returns from the fraud.
The Picower Foundation had reported assets of nearly $1-billion in 2008 but closed after the Ponzi scheme was revealed. Mr. Picower died following a heart attack in October 2009.
Also in December, the Jewish women’s charity Hadassah announced that it had struck an agreement to give back $45-million, slightly less than half of its profit from investing with Mr. Madoff.
Nonprofits that had benefited indirectly by receiving grants from Madoff investors, meanwhile, have avoided lawsuits.
“When this whole thing unfolded two years ago, there was tremendous nervousness that the trustee was going to go after the grantees,” says Richard A. Marker, a senior fellow at New York University’s George H. Heyman Jr. Center for Philanthropy and Fundraising and a consultant who works with foundations and charities. “My sense is that he decided not to do so, that he drew the line at those that directly benefited from the fraud.”
Kevin McCue, a spokesman for Mr. Picard, did not respond to calls and e-mails.
Under federal and state laws, the trustee can seek to claw back funds from net winners that were withdrawn during the six years before the discovery of the fraud. One of the hundreds of lawsuits filed by Mr. Picard seeks $5.32-million from the America-Israel Cultural Foundation, which raises money to support artists and cultural institutions in Israel.
The lawsuit, which is typical of the latest claims filed against foundations and nonprofit groups, states that $5.32-million of the $6.68-million withdrawn by the cultural organization from 2002 to 2008 was “fictitious profit” from the Ponzi scheme.
“This action is brought to recover the fictitious profit amount so that this customer property can be equitably distributed among all of the victims,” the lawsuit says.
In a statement, David Homan, the charity’s executive director, called the lawsuit “unfortunate” and said the cultural foundation would enter discussions with Mr. Picard. The charity thought it had an account worth $13-million with Madoff when the fraud was revealed.
“AICF was and remains a victim of the fraud perpetrated by Bernard Madoff,” Mr. Homan said.
None of the charities and foundations in the latest round of lawsuits is alleged to have been aware of the fraud before the fund collapsed.
The trustee is suing the Phileona Foundation, in Minneapolis, even though its founder says that it was a net loser in the fraud. Phileona, which thought it had assets worth $54.5-million before the fraud, withdrew $2-million just before the Madoff fund collapsed.
That withdrawal puts Phileona “in a more favorable position than other defrauded customers,” according to the lawsuit. Mr. Picard wants the $2-million returned so that it can be distributed equitably among all victims.
Marshall Miller, who established the fund, declined to say how much the foundation had lost in the fraud. The foundation’s most-recent tax form listed assets of just $6.2-million as of September 2009.
“We’ll get something back,” Mr. Miller says. “Nobody knows how much the trustee will recover.”
Mr. Picard has said that he hopes to recover as much as 50 cents for every dollar that victims lost in the scheme, and the settlement with Picower is expected to make that possible.
The settlement with Hadassah will also add to the recovery fund. The group was introduced to Bernard Madoff Securities in 1988, when it received $7-million from a French donor. Over the next eight years, it deposited an additional $33-million with Madoff and by April 2007 had withdrawn $137-million.
In a letter to supporters, Nancy Falchuk, Hadassah’s president, said the charity agreed to return nearly half of its $97-million Madoff profit after months of negotiations with Mr. Picard. Although Hadassah emerges as a winner, the charity doesn’t see things that way: It thought it had a Madoff account worth $90-million at the time the fraud was revealed. In addition to seeing those funds vanish, Hadassah is paying back an additional $45-million.
“As painful as it is, this settlement is in the best interest of Hadassah,” Ms. Falchuk wrote. “It allows us to put this chapter behind us.”
Foundations established by Bernard Madoff’s sons were also among those that were targets in the latest round of clawback suits.
In December, the trustee sued the Mark and Stephanie Madoff Foundation and the Deborah and Andrew Madoff Foundation for $2-million each to recover transfers that were made to the foundations from Bernard Madoff accounts. Mark Madoff committed suicide a few days after the lawsuit was filed.