Time to end foundations’ weekend at Bernie’s

Rick Cohen
Rick Cohen

Rick Cohen

Is there anyone in the nonprofit sector who hasn’t read and been overcome by revulsion about the pyramid scheme run by hedge fund investor Bernard Madoff?

Among the investors in Madoff’s $50 billion scam were legitimate nonprofits and foundations that have lost millions, some shutting down entirely.

Big name losers include foundations like JEHT and Picower, and charitable givers like Stephen Spielberg, Mort Zuckerman, U.S. Sen. Frank Lautenberg, and Elie Wiesel.

Focusing on Madoff as an evil charlatan who snookered a boatload of unsuspecting investors, the press has missed the most important lessons for nonprofits and foundations:

* The Madoff swindle is not an aberration and won’t be the only one to be encountered in this still downward-plunging recession:  As John Kenneth Galbraith noted in his classic book on the Depression, “The Great Crash”, embezzlements multiply during boom periods, as everyone is trying to hustle his or her way to wealth, but are discovered during declines.

The first ones get succeeded by the discovery of larger and larger scams. Madoff’s $50 billion may be trumped and trumped again in due time.

* The foundations and charities were dead wrong to sink huge proportions of their assets, in some cases all of their assets, into Madoff’s fund.

Many foundation bigwigs simply put their due diligence judgments on ice, dispensed with prudent investment standards, and ditched the most elementary notions of diversifying their investments.

* The foundations that put all their eggs in Madoff’s basket were risking tax-exempt resources — funds that would have been public funds but for the charitable tax

The public has a right to inquire whether these investment decisions between philanthropists and their social partner Madoff — or the “feeder funds” that invested in Madoff’s hedge fund — represent not just bad investments, but misappropriations by the people the taxpayers trusted with the stewardship of their charitable

The Connecticut attorney general is tentatively asking that question, as he and his colleagues in other states should be.

* Madoff and his foundation investors escaped oversight and responsibility until now because of huge gaps in our nation’s regulatory schemes: There is paltry regulation of
hedge funds, an increasingly favored investment vehicle of foundations, and paltry oversight of foundations’ investment behavior.

Madoff’s fund violated tons of due diligence standards regarding transparency, audits and reporting, but everyone turned a blind eye while counting on Bernie’s promised
double-digit returns.

Our nation’s government monitors and our sector’s self-regulators should have been on the ball, but they were missing in action.

* The Madoff scandal may represent the end of the idealization of the cowboy economy of unregulated hedge funds and their corollary of cowboy donors, who imagine they
can do whatever they want with tax-exempt funds, including blowing it all in Madoff-like pyramid schemes.

Madoff’s firm, like many of the now semi-comatose foundation investors, was basically run by family members, with little or no third-party oversight.

Some outside investment advisors warned their clients to run for the hills instead of investing in Madoff’s incestuous operations, but some foundations whose governance structures looked pretty much like Madoff’s couldn’t hear much less heed the advice.

It’s time for a new approach to regulating foundations.

It’s not just their administrative spending and grantmaking that merits tough scrutiny.

It’s their investment behavior, most of which is hidden from the public’s view — the investment pieces of foundations’ Form 990 tax returns are not digitized and hard to access — and ignored by government agencies.  The foundation sector’s weekends of investment parties with Bernie and his ilk need to end.

These foundations have just tossed away not their money, but yours, the taxpayer’s, because once the funds were in the tax-exempt foundation endowments, they were the public’s funds entrusted to the stewardship of the donors and managers of Chais, Lappin, JEHT, and others.

It wasn’t Bernie Madoff’s money, and it wasn’t the charities’ or the foundations’ money that was lost.

It was yours.

Rick Cohen is national correspondent for The Nonprofit Quarterly.

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