As Beth Healy in the Boston Globe reported yesterday, the Carl & Ruth Shapiro Family Foundation filed an amended 2005 990  with the IRS to account for losses of more than $140 million from its Madoff investments. The original and the amended 2005 990s are posted here and here.

On May 19th, the Wall Street Journal reported that Carl Shapiro and two other wealthy philanthropists are under investigation in the Madoff case. The article came out very soon after the amended 2005 990 was submitted to the IRS. Since then, the Foundation has not filed any other amended returns, although it appears the Foundation would be entitled to a substantial refund on the more than one million dollars it paid in income taxes in 2006 and 2007. 

Several features of the Foundation's operations make it stand out against other similar foundations with Madoff investments.

The most obvious difference is that Bernie's now infamous split strike conversion strategy was not employed to manage the Foundation's investments. In 2005, the Foundation reported a net loss of $6k from four separate sales of corporate (stock) and government securities (treasury bills) which were the only sales of securities for the entire year. This is unusual because Bernie's strategy was to buy and sell a basket of stocks several times a year which resulted in numerous transactions. But the big thing is that Bernie never incurred a net loss on the sale of securities over the course of a year for his other customers.

Who did the Shapiros think made the decision to buy and hold but not sell any of the Foundation's stock in 2005? Frank DiPascali?

From 2003 to 2007, the Foundation's cash balance increased from $6 million to $100 million from a combination of $82 million in cash contributions, interest earned and money pulled out of the Madoff accounts. The Foundation preferred to earn relatively low money market rates on the cash balance rather than invest more money with Bernie.

(The 2004, 2006 and 2007 990s are posted here, here and here.)

Between 2006 and 2007, the Shapiros contributed $46 million in stock to the Foundation. If that stock was transferred from another Madoff account owned by the Shapiros, the stock was non-existent and there was no legitimate contribution. My guess is the Shapiros would now have to pay income taxes on the phantom $46 million contribution if they originally took a charitable tax deduction for it (which may be one reason for not rushing to amend the 2006 and 2007 990s).

In 2006, the Foundation's investment activity resembled Bernie's split strike conversion strategy minus a key component -  the stock options that were supposed to hedge the stocks.

Bernie's performance in 2006 was stellar. The Foundation recognized a net profit of $52 million on $285 million in sales of securities.  There were 45 separate sales and, out of the 45, only five represented losses and the total was less than $15k. 

By the end of 2006, the Foundation had sold all of its stock. 

In 2007, the Shapiros contributed $31 million in cash and $40 million in stock to the Foundation which was the largest donation by far in at least six years.  

That year. the Foundation recognized a gain of $32 million on the sale of $452 million in securities but almost all of the gain was generated by the sale of $40 million in stock.. Unlike other years, the individual stocks were not listed.

Presumably, the $40 million of stock sold was the $40 million in stock donated. However, at the end of the year, the Foundation reported owning $14 million in stock and on a line item on the statement of changes in fund balance, there is a negative balance of $31 million that purportedly represents the difference between the cost and fair market value of donated stocks.

In effect, the Foundation is claiming that it owned $45 million in donated stock at the end of 2007 that had lost $31 million of its value in the preceding 12 months.

I checked the prices of some of the stocks donated in 2007 and none of them appeared to have plummeted in price during 2007. 

As the Boston Globe article pointed out, the Foundation fired its former tax preparer, Paul Konigsberg, a senior partner at Konigsberg Wolf in New York and hired a small Boston firm to prepare the amended 2005 990. (The 990 did not provide any evidence that the Foundation's books were audited after Bernie's fraud was exposed.)

Paul Konigsberg, of course, was a close business associate and personal friend of Bernie's who prepared 990s for a number of private foundations and charities with Madoff investments. In fact, Konigsberg's own foundation, the Westlake Foundation, had money invested with Bernie but whether the money was still invested with Bernie at the end of 2007 is not clear in the 2007 990 which is online here.

Interestingly, the Westlake Foundation generated a loss of $7k in 2007 from the sale of $4.2 million in securities held in a Madoff account. But if Westlake Foundation transferred its Madoff investment to another entity during the year, the 2007 990 might not reflect a full year of Madoff account activity.

Geri Denterlein, CEO of Denterlein Worldwide Public Affairs, a p.r. firm, is representing the Shapiro Foundation. Denterlein, no doubt, will be fielding more calls about the Foundation in the months to come.