December 24, 2008
Big legal trouble ahead for victimized charities and investors
Their hunt will unquestionably lead them to the doors of many well-known Jewish charities and wealthy investors who had the misfortune of investing with or receiving donations from Madoff.
In the eyes of the American judicial system, said fraud investigators and asset hunters, some innocent victims of Madoff's massive Ponzi scheme are legitimate targets for government and civil actions seeking to compel them to disgorge any gains they derived.
"[The government's] interest is that nobody should benefit, even unwittingly, from criminal conduct," said Blake Coppotelli, a senior managing director with Kroll, the large New York-based risk consulting company.
What the government doesn't seize, civil attorneys most certainly will try to wrest back for their growing legion of clients.
Arthur A. Greenberg, senior partner in the Encino law firm Greenberg & Bass, said, "It's enough you have lost your stake -- now you face uncharted territory in the nature of litigation where you have absolutely no upside and where you may be required to go to another jurisdiction."
The cost of such forfeitures and litigation expense either has not yet dawned on many charities, such as Yeshiva University (YU) and Hadassah, or they have not been anxious to draw attention to any further potential liabilities as they make public disclosure of their known Madoff losses. YU has acknowledged losing $110 million, or 8 percent of its endowment; Hadassah's known damage is $90 million. Dozens of other established Jewish nonprofits have likewise disclosed multimillion dollar losses.
Charities and individual investors who continue to have well-funded post-Madoff endowments or significant personal assets make tempting defendants for plaintiffs' attorneys, especially if those lawyers can establish that the nonprofits or individuals benefited -- directly or indirectly -- from Madoff's alleged wrongful conduct.
One of the first civil lawsuits to be filed is from Hagens Berman Sobol Shapiro (HBSS), a Seattle-based law firm. It is representing investors and groups that claim they placed funds with Stanley Chais, a longtime Jewish philanthropist in Los Angeles, who, the suit contends, acted as a "feeder" for Bernard L. Madoff Investment Securities (BMIS).
Reed Kathrein, an HBSS attorney, said that beyond seeking recovery from Chais and key players like him, hunting down other Madoff investors is "not something that I would like to do," although he added that such recovery efforts "may be something that is the right thing that you'd have to do for the client."
Kathrein said he has not yet discussed any such scenarios with his clients. He observed that Madoff's victims likely support many of the charities that could be vulnerable to civil recovery lawsuits and hence might not wish to pursue them during litigation. Still, he added, the temptation would be there to tell these nonprofits, "Put my name on the bricks on the wall instead of Stanley Chais."
Kathrein sees Chais and other such BMIS feeders as fair game for his asset hunt, even if Chais was not a knowing participant in Madoff's purported scheme.
"I don't need to prove criminal conduct," the plaintiff's attorney said. Instead, he believes his complaint against Chais and others will center on "breach of fiduciary duty or negligence."
Sorting out who are victims, who should forfeit funds and who should recover money will be a long, complex process that balances federal criminal and civil statutes, Department of Justice and Securities and Exchange Commission policies, the discretion of judges and juries and even individual religious beliefs and teachings.
Greenberg, the Encino lawyer who has helped defend the victims of previous large Ponzi schemes from asset seizures, forecast that the bulk of the legal claims will be consolidated and worked out under the jurisdiction of a federal bankruptcy court and bankruptcy trustee. Due to the unprecedented size, duration and scope of Madoff's alleged scam, Greenberg and others also believe legislation may be required to help define who are victims and to place limits on prosecutors' and plaintiffs' ability to recover damages from nonprofits and other innocents.
None of which, said some observers, obviates the need for charities and individual investors who may have benefited from Madoff's alleged fraud to consider the moral issues that surround their decision to keep or disgorge their Madoff-derived gains.
"How you give is as important as the act of giving," said Julie Salamon, author of "Rambam's Ladder -- A Meditation on Generosity and Why It Is Necessary to Give." "You can't be Robin Hood, even though we like the Robin Hood myth of robbing from the rich to give to poor, you are not supposed to do it."
Nor, said Salamon, are the poor supposed to accept such misbegotten generosity.
Wrestling with the ethical questions facing charities that have received and likely even spent such ill-gotten donations is a task fit for a great scholar such as the Rambam, a.k.a. Moses Maimonides, a 12th-Century Jewish philosopher. "Maimonides was very concerned with corruption," Salamon noted.
In addition to her research on Maimonides and the Jewish concept of charity, Salamon is chair of BRC, a $40 million social services organization in Manhattan that provides care for the homeless.
Salamon said organizations such as hers would be hard-pressed to conduct due diligence on their donors, much less those donors' investment managers. (BRC was not a direct or indirect Madoff beneficiary.)
While Salamon feels asking charities to return donations emanating from a fraud is "punitive on the charities that spent the money ... and couldn't know [its source]," she is less sympathetic to feeders and other well-heeled investors, such as Chais, even if they, too, were victims.
"If you want to go to Maimonides, the middleman holds the highest responsibility," Salamon said. "If the middleman was corrupted, that was the worst possible thing. If [he] hasn't lived up to that trust -- through willfulness or ignorance -- if he screwed it up one way or another," then he deserves to forfeit his own wealth, she believes.
The fact that it is a university or charity that received ill-gotten gains stemming from the Madoff scandal trucks no pardon from John Steele Gordon, a financial and economic historian who has studied the history of large-scale frauds.
"I think those donations should be given back because it was stolen money," said Gordon, author of "An Empire of Wealth: The Epic History of American Economic Power." "Morally, it never belonged to the donor."