Foundation Friday: Ponzi and his progeny

H/t (as we say in the blog biz) to colleague Kathryn Vanden Berk for reminding us of the New Era Philanthropy Foundation scam now unwinding in the courts.  (The Foundation’s receiver won a multi-million dollar jury verdict against a bank and broker participating in the scam, though the judgment will bring down the bank without necessarily yielding any recompense to Foundation investors.  The FDIC covers deposits rather than investments, and then only for much smaller sums.)  This article explains the scheme cogently and in some detail, but its essence is that a group of charities–many of them substantial and established enough to know better–put their endowments at risk by parking money with the Foundation based on the promise of doubling that money in six months.  Given the congenital cash shortage among charities, who could resist? 

Very few, apparently.  But New Era turns out to have been a Ponzi scheme–a type of fraud in which early investors get their returns from the money put in by later investors.  There is no actual business, just a pass-through of funds to which the scam artist helps him/herself along the way.  Eventually these schemes always collapse, because the amounts become so big that it’s impossible for new investors’ money to cover the debts to old investors.  But by the time a Ponzi scheme is uncovered (in the case of New Era by a fighting accounting professor at the University of Pennsylvania, persisting despite pressure from University officials who’d placed their trust and the University’s  money in New Era’s hands), many of the investors are out considerable sums.  At nonprofits, these sums come from the endowment pot.  And if the nonprofit’s Board isn’t paying attention, the contents of that pot can quickly evaporate into a tiny pathetic puddle. 

The Nonprofiteer is at the very least agnostic about the utility of endowment.  She’s for spending as much money as is reasonably available in the service of mission, rather than saving huge sums for some uncertain future purpose.  But she certainly doesn’t advocate destroying endowment through gambling.  Many investments are uncertain, but as any broker will tell you, the more uncertain the higher the returns–and vice versa.  If it seems too good to be true ("Double your money in six months!"), it doubtless is.

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2 Responses to “Foundation Friday: Ponzi and his progeny”

  1. Sam Davis Says:

    Ponzi schemes are not new at all, which makes this situation even more deplorable. A certain Mr. Ponzi, as I remember, invented this scandal preying on immigrants to the US in the early 20th century. Those immigrants of decades past can be much more readily forgiven for falling prey to this than supposedly sophisticated nonprofit executives.

    Nonprofit executives need to understand that it is the mission of the organization that prompts giving, not any other agenda. Like the Nonprofiteer, I am agnostic about endowments for that reason. Technically, an endowment is not about current mission so much as it is preservation of the organization. While the latter, it can be argued, is about keeping the mission alive in the future, all too often it morphs into being about keeping the organization alive, and executives employed, regardless whether the mission is served.

    If the nonprofit executives in question had merely been bilked of their own personal money, that would be one thing. But using endowment funds from their nonprofits is quite another. It may well mean these executives have agendas other than the mission of the organization. If so, they should be looking for other lines of work.

    Once the mission is superceded by someone’s personal agenda, the reason for the existence of the nonprofit is over.

  2. Nonprofiteer Says:

    An historic occasion: Sam and I agree! You’re right, the Ponzi scheme is about the oldest scam still in operation–I think it’s the chain letter, or three-card monte game, of the business world. It’s always amazing when people who should know better fall into these traps; but in addition to the temptation to get rich quick (or get your pet charity rich quick) there’s probably susceptibility to personal flattery, which all of us have and the successful con artist knows how to manipulate.

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