Wednesday, September 2, 2009

Madoff Liquidator May Claw Back Profits from Charities

As we reported in early July, charities who profited from Madoff’s
Ponzi scheme may be subject to “claw back” suits, which attempt to
regain those profits.  According to Bloomberg, the law requires Irving
Picard, the liquidator for Madoff’s investment business, to sue
investors that profited from the fraud.  Until now, Mr. Picard has
focused on charities that likely knew about the fraud, but he recently
said that he might sue any charity that took more money than they gave
to Madoff.  If he pursues charities, Hadassah, a Jewish charity that
builds hospitals in Israel, may be liable to a $90 million claw back.

Senators Criticize NGOs’ High Executive Compensation

Senator Chuck Grassley (R-IA), the ranking Republican on the Finance
Committee, and Senator Patrick Leary (D-VT), the chairman of the
subcommittee that funds foreign aid are criticizing the excessive
compensation of several NGOs receiving federal funding
.  Topping
their complaint list are the CEO of American Institutes for Research,
Sol Pelavin, who received $1.1 million in 2007 and the president of
Academy for Education and Development, Stephen Mosley, who received
$879,530 in 2007.  Both organizations are funded by USAID.  The two
NGOs formed a operated a joint educational program in Yemen that,
according to the USAID inspector general, had “not achieved its
intended results,” despite a $13.5 million budget, $2 million of which
went to overhead costs.

The Status of L3C Companies Remains Ambiguous

At a national conference of the American Institute of Certified Public Accountants, an IRS senior technical advisor, Ron Schult, warned foundations against investing in L3Cs, while “the IRS is in the process of studying the issue to determine the tax consequences of L3Cs.”  An L3C, or low-profit limited liability company is a legal business entity designed in part to bridge the gap between for profit and nonprofit structures, allowing it to retain profits through socially minded activities and investments.  The statement was criticized by Marcus Owens, a former director of the IRS’s Tax Exempt and Government Entities Division.  In a letter to Schult, Owens argued that the IRS allows foundations to make Program Related Investments (PRIs) in for-profit entities, notably LLCs, so long as they fulfill certain requirements, and the IRS’s guidance on those requirements are applicable to L3Cs.

B Corporations Bring Public Benefit to the Marketplace

According to the Christian Science Monitor, there are approximately 200 “B” Corporations, which are companies whose charters promise to base decisions not only on the interests of stockholders, but also on the best interest of the environment, the community, or other business partners to create, in addition to profits, a “public benefit,” from which the name B corporation derives its “B.”  While being certified as a B Corporation by nonprofits such as B Lab can give a company an advantage in raising funds from socially minded investors, serious legal questions remain about B Corporations.  The B Corporation designation gives them no special status with the IRS, and more importantly, designating multiple groups with potentially opposing interests as stakeholders may lead to lawsuits as their interests conflict.