You Can't Cheat an Honest Man - James Walsh [108]
Even though he lost the case, the FHC trustee did have one legitimate point. Like most Ponzi perps, Sutcliffe had had a long history of run-ins with the law. The accounting firms—or someone connected to the FHC bond offerings—could have looked up Sutliffe’s background. But, then again, they were inclined to trust the NFP. That’s why it was such a successful scam.
Case Study: The Foundation for New Era Philanthropy FHC was unusual, in that it used an NFP mechanism to commit a Ponzi fraud. Most NFP Ponzis play on misplaced idealism.
Hundreds of non-profit groups, philanthropists like Lawrence Rockefeller and prestigious organizations like the Philadelphia Orchestra were duped by a structurally simple Ponzi scheme called the Foundation for New Era Philanthropy.
New Era stands out as a shining example of how well suited the nonprofit sector is for buying into Ponzi schemes. The Pennsylvania-based scheme was started, as a tax-exempt charity, in 1989. Founder John G. Bennett1 solicited contributions from a variety of nonprofit organizations. He said that New Era had assembled a small group of anonymous donors that would match the funds that participants deposited with New Era for three to six months.
Bennett described the process as a hard-headed approach to charitable fund-raising. If the non-profits were willing “to put your money to work” with New Era, it would reward the investment with huge returns. Exactly what “work” the money was doing was never explained. Most of the investors assumed it was some sort of charity.
1 This Bennett is no relation to the family of Ponzi perps in New York who ran the equipment-leasing scam Bennett Funding Group. (At least none that either side will admit.)
In most situations, this kind of offer would be laughed off as too weird and too sketchy to be taken seriously. But the non-profit world is insular and trusting. Bennett knew a few key people in the Philadelphia non-profit world; these contacts gave him credibility.
Large and experienced entities fell for New Era’s pitch. Among the investors: the University of Pennsylvania, Harvard University, Princeton University, the Nature Conservancy, several foundations controlled by former U.S. Treasury Secretary William E. Simon and foundations controlled by mutual fund guru Peter Lynch.
Bennett played on the close quarters of NFP circles. He encouraged prospective investors to talk with the early participants. They were usually impressed with the stature of these players. The phone calls almost always sealed the deal. All the while, Bennett pocketed millions. The one-time high school chemistry teacher entertained highbrows at his Main Line home, drove a big Mercedes, traveled to Caribbean resorts and dressed...expensively.
The first groups to invest money with New Era did, of course, double their returns. About 600 charities and non-profits invested about $350 million in New Era between 1989 and 1995.
Albert Meyer, an accounting professor at Spring Arbor College in Michigan, burst the balloon. He was suspicious of New Era’s big promises and vague explanations. Meyer contacted the American Institute of Certified Public Accountants (AICPA) and explained why he thought New Era was a Ponzi scheme. When he concluded the AICPA hadn’t moved decisively, Meyer contacted the SEC.
SEC investigators examined New Era’s structure and finances and realized that Meyer might be right. The Feds contacted several banks and brokerages doing business with New Era.
The downward spiral accelerated when Prudential Securities demanded immediate repayment of a $44.9 million margin loan that Bennett had personally guaranteed. When he didn’t pay off the loan