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Same as It Ever Was...

December 26, 2008

(Kathryn Pyle is producing a documentary film about the post-conflict period in El Salvador. In August, she wrote about Grantmakers in Film & Electronic Media and the documentary Traces of the Trade.)

Scam23Déjà vu -- that's the feeling in Philadelphia philanthropic circles this week, as staff at foundations and nonprofits count the similarities between the Bernie Madoff Ponzi scheme and the scam created by Jack Bennett, founder of the Foundation for New Era Philanthropy, which operated in the Philadelphia area for about ten years before it was exposed in 1995.

Although New Era defrauded nonprofit organizations of only $135 million -- until then, the largest charity fraud ever -- compared to the $50 billion Madoff is alleged to have vaporized, the impact was just as shocking. About a hundred and fifty organizations had invested a total of roughly $350 million in New Era, believing that they would double their money within three months as "secret donors" matched their investment; the "profits" could then be donated to charity, in the case of individuals, or, in the case of charities, added to the organization's coffers.

"I wasn't that familiar with New Era but I thought, That's great: A plan to increase charitable contributions. Like many people, I thought it was a good thing," said Harry Cerino, then president of the William Penn Foundation. Unlike Madoff, whose operation was strictly for-profit, Bennett described New Era as a charitable enterprise. Both men, however, cultivated wealthy philanthropists whose participation was in large part motivated by their desire to give back to their community. "I didn't have any reason to be suspicious," said Cerino, "and since he wasn't asking for a contribution from William Penn, we never investigated the organization."

Under a court settlement, the charities caught up in the New Era scam eventually recovered more than 90 percent of the funds they lost, with the presiding judge ordering organizations that made money early on to give up their profits to groups that came in later and suffered huge losses. Those organizations included universities, museums, social service entities, and many evangelical Christian groups. The key to Bennett's "success" was gaining the confidence of organizations' board members and their advisors, many of whom were members of the same church and community networks that Bennett belonged to. (Madoff operated in much the same way, cultivating key investors early on and insuring their success, then, according to the New York Times, "drawing in small individual investors, charities, pension funds, prominent billionaires and European banks.")

"It sounded too good to be true," said Theodore T. Newbold, then a board member at the Fleisher Art Memorial and the Philadelphia Museum of Art (where he continues to serve). Both organizations were approached to invest with New Era, he recalled, but something didn't seem right. "You don't double your money in some mysterious way you can't understand." Newbold's suspicions were shared by other board members, and the two organizations eventually decided to take a pass.

In an article published in 2005, at a time when Bennett was appealing for early release from prison (he had been sentenced in 1997 to twelve years for bank, mail and wire fraud, making false statements, filing false tax returns, and money laundering), the NonProfit Times revisited the events of a decade earlier. Among the lessons learned from the fiasco, it concluded, was that "a nonprofit's financials [especially the 990] is one of the most effective ways to prevent being taken [in] by such a scam." But while "improved public disclosure laws and an enhanced enforcement focus on tax-exempt groups have made financial information more readily available," the NPT noted, "the sector is still susceptible to another New Era scam.”

And so here we are. Last week, the JEHT Foundation, funded by a family with extensive exposure to Madoff's operation, announced that it was freezing all grants and would close at the end of January. Indeed, JEHT is one of several foundations that will be forced to close as a result of the fraud -- and one of the most important nationally in the area of criminal justice reform and electoral participation, with a grantee roster that's a who's who of innovative projects in the areas of juvenile justice, prison reform, sentencing disparities, neighborhood crime prevention, immigrant rights, alternative detention, international justice, and related issues and causes. The vast experience of the foundation's staff made it a resource not just for funding but for ideas and other support.

"Bob Crane and the grants officers are creative, smart people; they helped us in long term planning and expanding our funding base," said Bob Schwartz of the Juvenile Law Center, the only current JEHT grantee in Philadelphia. "We've received funding for six years, well over a million dollars, partly for a multi-state initiative to insure kids are treated fairly while they're in the system, plus our work at the appellate court level to shape juvenile justice policy in the US."

JLC had just received a one-year, $250,000 grant prior to the announcement. "We'll feel the hit eventually but we're one of the lucky ones right now. We expected, based on our track record and JEHT's interests, that we'd go back to them next year for continued support. Like many other JEHT grantees, we appreciated their long term commitment to these issues." Sadly, Schwartz sees no chance of replacing JEHT funding. "We'll have a lot to make up."

JLC won't be the only one. Let's hope courts and the federal government are able to reclaim some of the billions that Madoff scammed from investors and return it to well-meaning organizations that were victimized by advisors who should have known better.

-- Kathryn Pyle

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Posted by richard  |   January 04, 2009 at 10:12 PM

Maybe this will bring Philadelphia's Philanthropies back down to earth and get them to start supporting meaningful causes instead of the bizarre and controversial proposal to move the Barnes Foundation from Merion. Voices from the Smithsonian, The Wall Street Journal, The New Yorker, The LA Times and more have cried out against this disturbing Barnes Move, but our 'charities' seem to turn a deaf ear to them. STOP THE MOVE, PUT MORE CHARITY BACK INTO THE MEANING OF CHARITABLE GIVING! GUARD THE BARNES GATE! KEEP THE BARNES IN MERION! Barnesfriends.org Artjail.org

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