12/22/08

Forbes: Robert Blumenthal, AG for Connecticut, Wants to Make Reckless Charity Board Members Pay for Madoff Scandal Losses

You thought being a charity board member was a great honor. The AG of Connecticut Robert Blumenthal, wants to make you reckless charity board members pay for your Madoff Scandal losses based on the Prudent Investor Act.

Imagine that! Someone like you might be responsible for losing money that was supposed to help the the destitute, the ill, the infirm, widows, orphans and children.
Blumenthal May Investigate Charities Ripped Off By Madoff
Carrie Coolidge

The list of victims who have fallen prey to Bernie Madoff's alleged $50 billion Ponzi scheme is growing longer by the day. Among its victims are countless nonprofit organizations, ranging from Yeshiva University and Tufts University to the North Shore-Long Island Jewish Health System Foundation.

Now at least one attorney general is asking for records to determine if trustees sitting on nonprofit boards failed to perform their fiduciary responsibility to do proper due diligence.

Robert Blumenthal, attorney general for the state of Connecticut, has asked the court-appointed trustee responsible for Madoff's liquidation for the names of Connecticut-based victims, including nonprofit organizations. The attorney general says the issue of nonprofit board liability "is, obviously, by no means crystal clear."

"If they failed recklessly to do the necessary due diligence, we would certainly investigate and take action," Blumenthal told Forbes.com. "If the claim is that a trustee or a board member or that the board itself failed in its fiduciary responsibilities, there would be legal action and they could be held personally and financially responsible."

"A number of nonprofit organizations are very severely impacted by loss of grants or endowments, and obviously we are looking to any one who may bear responsibility to that loss," he adds. "We are also looking into what we can do to help the charities recover the money, which is our paramount objective."

Charity losses from an alleged ponzi scheme run by Madoff are expected to be substantial....

"In the charitable sector, there tends to be more trust and less scrutiny," says Michael S. DeLucia, director of charitable trusts and senior assistant attorney general at the New Hampshire Attorney General's Office. "The Achilles heel in the charitable sector is that people appear to be more trusting and have less internal controls and oversight. That is a weakness."

"A board has a fiduciary duty to protect their charitable assets," adds DeLucia. "If they do not take the steps to prevent fraud, then they are in breach of their fiduciary duties."

Indeed, 30 states, including New York, Massachusetts and Connecticut, have adopted the Prudent Investor Act, which applies to all trustees, including those who oversee charitable organizations. According to the statute, a trustee or board member must act in good faith and exercise the degree of diligence, care, caution and skill that an ordinary prudent individual would use under similar circumstances in a like position. None of the nonprofit organizations that invested with Madoff seemed to be alarmed that he used a three-person accounting firm in New City, N.Y., to perform his audits, which should have been a red flag.

Jurisdiction over charitable organizations typically falls under the state attorney general, who is responsible for supervising charitable organizations to insure donors and beneficiaries of those charities are protected from unscrupulous practices in the solicitation and management of charitable assets. It is not beyond the realm of possibility that an attorney general will investigate and pursue litigation against trustees for their failure to perform their fiduciary duties for a charitable organization that fell prey to Madoff...

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