6/29/09

Times' Deal Professor Steven Davidoff: Charities Can Keep Money Tainted by Madoff Scandal

As Davidoff rightly describes ("Should Charities Repay Their Madoff Money?") aside from those who lost their endowments, numerous Jewish charities benefited in a big way from the cash donations they received out of the tainted Madoff monies.

Even charities (or is it especially charities) are subject to temptation when large sums of money are waved before them. How many charities can you name that - regardless of the source - refused or returned gifts of cash?

Sigh of relief. Davidoff concludes that any clawback legal actions against charities are unlikely to succeed.

Davidoff does ask, "Do the charities have a moral obligation" to return the tainted money?

He does not answer that. He correctly leaves that hanging since he is not a moralist, a philosopher or a theologian.
...The bottom line is that there were net winners in the Bernie Madoff scandal, and many charities received money that was at best tainted by Mr. Madoff, and at worst directly attributable to his crime. In the coming months, many of the people who benefited from Mr. Madoff, inappropriately or otherwise, are going to be sued or otherwise asked to return the money they received.

What about the charities who received this money after it was distributed?

In some cases, the money is not even there. The charities have already distributed it. In other cases, the money will be untraceable. For example. Carl Shapiro allegedly lost over a half a billion with Mr. Madoff (his profits, if any, are not public) — but before Mr. Madoff’s scheme was discovered, Mr. Shapiro was mightily generous with his money, millions of which he made himself. How do you differentiate between tainted and untainted money that he distributed — if indeed Mr. Shapiro did know what was occurring, or profited?

Charities, particularly Jewish ones, have been hit hard by Madoff. In some respects, this was a false bubble for them — these charities were benefiting from money that never should have been there. This is not to diminish the hurt they received. But they may have (or perhaps should have) to grapple with a much more difficult question. Do they legally have to return this money?

Under the law of fraudulent conveyance, there is a six-year lookback, and they could conceivably be sued to return the money. However, traceability of the money here will be a problem, and in many cases protect the charities.

But if they are not legally liable to return the money, do the charities have a moral obligation to do so? And can the charities even do it?

Mr. Madoff and those who collaborated or assisted him have left more pain and suffering in their wake that will continue to reverberate. These charities simply do not have the money to return and, in any event, it would affect the worthy causes to which they contribute. It is for this reason alone that I believe that this is more a rhetorical — but still necessary — exercise, and that the majority of charities as a practical matter will not be asked to return the money.

Still, this is part of bigger problem, which charities involved in the Madoff scandal need to come to grips with. They not only need to more formally organize their investing and giving along more official corporate governance lines — Yeshiva University in particular has been cited for this type of needed reform. But they may need to address their own unwitting complicity in the dissipation of the assets of Mr. Madoff’s victims. I do not envy them: they are now also unwitting victims.

But there is still the lingering and disturbing question of how much they benefited.
We are not sure, and he does not tell us, why -as a lawyer - he finds this question "disturbing."

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