The last twelve months have been exciting ones for those following the independent sector. The last several weeks have seen some major stories come to conclusions. As we approach the end of the year, we thought it appropriate to highlight these developments.
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Cabot Trust: In a 2003 spotlight series, the Boston Globe revealed that Paul C. Cabot Jr. of Needham, Massachusetts had been taking more than $1 million in annual pay from his family foundation, whose assets had dwindled to less than $5 million by 2003. Massachusetts Attorney General Thomas F. Reilly subsequently investigated the Cabot Trust. In a December 17, 2004 article, the Boston Globe reported that Mr. Cabot entered into an agreement with the Massachusetts Attorney General to repay more than $4 million to the trust. The Globe reports that Cabot, Jr. had been using Trust assets to make mortgage payments on two homes, and to pay bills for yacht and golf club memberships. The Attorney General apparently released documents revealing the payments, but we have not found those posted on the Attorney General’s website. The Attorney General decided not to pursue two co-trustees because they apparently had no knowledge of the facts.
New Jersey Symphony Orchestra: On December 16, 2004, the New Jersey Symphony Orchestra released a report by the Trustee Review Panel, the group that was charged with investigating the purchase of the Golden Age Collection of String Instruments from Dr. Axelrod. The report uses polite language, but is critical of the trustees, particularly the group that stage-managed the NJSO’s decision to buy the collection. Specifically, the report provides:
1. The Instrument Committee did not have a complete and objective appraisal of the Collection.
The seller provided the only complete appraisal. Informal opinions were sought on behalf of the Orchestra but, mostly as a result of the serial deadlines presented by Dr. Axelrod and the uniqueness of the assets, this process fell short of the evaluation of each instrument that we now believe would have been more desirable for a transaction of this magnitude.
We nevertheless do not recommend a complete appraisal now because we believe that it would be impossible to arrive at an objective opinion in the current climate. For example, one respected appraiser has told us that at this point he would no longer be willing to get involved in valuing the instruments and would only assess them for authenticity, for which we believe sufficient information has already been gathered. Even if a qualified appraiser could be found, the cost would be substantial and, since the Orchestra already owns the instruments, would be of little consequence.
2. The Board of Trustees was led to believe the Collection was worth more than the alternate opinions suggested.
The alternate and informal opinions obtained by the Instrument Committee suggested that the Collection might be valued at between $15.3 million and $26.4 million, but the full Board was told that the value was approximately half the seller’s valuation of $50 million, clearly at the high end of the range. Many on the board were not even aware of that fact, and were only aware of the seller’s publicity that kept referring to a $50 million Collection. Therefore, we conclude that the Instrument Committee did not ensure that the Board understood the value of the Collection. Given the size of the transaction, there was too much concern to avoid conflict with the seller – understandable given his great generosity to the Orchestra in the past – and not enough to ensure that the Board understood what it was getting for the money it was investing. The NJSO Board of Trustees is characterized by having a small group of a dozen or so members who are actively involved in the running of the Orchestra and who regularly attend Board and Committee meetings. The remaining members have significantly less involvement.
It is understandable that the Orchestra did not publicly challenge the seller’s $50 million valuation. But that number was used by the NJSO in the press release and in the 2004- 2005 season brochure, further exacerbating the problem. The Orchestra clearly wanted publicity to put itself “on the map” but should have refrained from use of the $50 million number.
3. The Board of Trustees was not told of questions of provenance on several of the instruments.
The independent opinions obtained by the Instrument Committee revealed concerns with the authenticity of parts of several of the instruments, but this information was not provided to the full Board. By not informing the Board of the existence of questions of authenticity of the instruments, the Instrument Committee did not meet its obligation to the Board for a thorough presentation of the proposed transaction.
4. The entire Instrument Committee and Board of Trustees were not told about warnings that had been received about the seller.
There is evidence that some members of the Instrument Committee were aware of rumors that the seller was being investigated by Federal agencies over concerns about over-valuation of gifts of rare stringed instruments. Those members made some inquiries independent of Dr. Axelrod and were led to believe that the rumors were just that – rumors. In hindsight, more investigation of the allegations should have taken place, and all information should have been given to the entire Instrument Committee and the Board.
5. Certain key members of the Violin Valuation Committee were not told of the above concerns, leading that Committee to recommend that the NJSO Instrument Conservancy record the Collection on their books in the amount of the seller’s appraisal of $48.99 million.
In light of the information that was available to the Orchestra at the time of the acquisition, this decision needs to be revisited.
The Report then goes onto to make the typical reform recommendations. Those recommendations always seem so logical after the horse is out of the barn.
James Beard Foundation: For a January 24, 2005 update, click here. The James Beard Foundation issued a press releases describing (i) an independent audit that had been completed in the wake of allegations involving misappropriations of funds and (ii) governance reforms. The full report is to be posted on the Foundation’s website, but that has not yet happened as far as we can tell. As for reforms, the press release provides the following information:
1. The Foundation retained new auditors, Goldstein Golub Kessler LLP, to audit the Foundation's 2003 financial statements.
2. The Foundation Implemented a strict set of guidelines and review procedures for cash management and expense reimbursement.
3. The Foundation appointed an Executive Trustee Committee to oversee restructuring of the Board of Trustees.
4. The Foundation plans to hire an Executive Director for the first time in the Foundation's history.
5. The Foundation plans to institute an ethics compliance policy for Board members, employees and volunteers.
6. The Foundation will make public subsequent financial reports to ensure transparency.
We will discuss the full report once it is made available on the Foundation’s website. But once again, the reforms come after the horse is out of the barn and the money is missing.
D. Xelan: The New York Times reported on December 20, 2004 that the Department of Justice had dropped its lawsuit against Xelan for the promotion of questionable tax shelters. The Times noted that there is still an ongoing grand jury investigation and that the IRS is still seeking to recover taxes from those who participated in the arrangement. This dropping of the case suggests that the government was a bit too aggressive, but we suspect the reports regarding charitable contributions that came out of the original story may still influence the Senate Finance Committee as it looks into the entire non-profit sector in 2005.
E. Facade Easements. Senators Chuck Grassley and Max Baucus said on December 17, 2004 that they planned to put forth legislation in 2005 that would increase and impose additional fines on promoters and appraisers who assist in the donation of a facade easement found to be significantly overvalued. Grassley put the public on notice that the effective date of these new fines will be December 17, 2004 in an effort to prevent promoters and appraisers from getting deals done before the end of the year. What we can't figure out is why the press release was limited to facade easments when conservation easements have raised similar issues.
F. Car Donations. And the final question for the year: Will we hear car donation ads on the radio in 2005?
| THE
FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL
ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD
SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2004, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog. |
