After details of the Bernie Madoff Ponzi scheme came to light, many observers questioned why someone who had donated so much money to worthy causes would concurrently destroy many charities through his fraudulent actions. Madoff's family foundation had donated over $19 million to various health care, cultural, religious and educational charities. He also contributed about $6 million to lymphoma research. Yet, Madoff's firm, Bernard L. Madoff Investment Securities LLC, was simultaneously orchestrating a massive investment fraud that destroyed a multitude of charitable foundations and resulted in massive losses for many others.
Rather than being a rare occurrence, this odd partnership of corporate wrongdoing and philanthropy has been quite common. The following is a list of ten well known examples:
1. Bernie Ebbers, Founder and former C.E.O. of Worldcom: The man behind Worldcom's financial deception that cost investors about $100 billion was convicted of fraud and conspiracy in 2005. Yet, prior to his convictions, Ebbers had donated over $100 million dollars to various charities, though approximately $35 million of this related to his Worldcom stock, which had achieved great value due to Ebbers' wrongdoing. Ebbers is currently serving a 25 year prison sentence and will not be eligible for release until 2028 when he will be 87 years old.
2. Cliff Baxter, former Vice-Chairman of Enron: Baxter pled guilty to various counts of fraud and conspiracy in connection with the Enron accounting scandal that preceded its bankruptcy. He was known for his generous donations to organizations such as Junior Achievement of Southeast Texas, the American Diabetes Association, the American Cancer Society and Sunshine Kids, a charity dedicated to providing activities and trips for young cancer patients. Baxter committed suicide in his car in 2002 in the wake of the Enron debacle. He was 43.
3. Ken Lay, former C.E.O. and Chairman of Enron: Lay was found guilty of ten counts of securities fraud and related charges in 2006 for his role in Enron's accounting scandal. He had donated more than $2.5 million to more than 250 organizations through his family's foundation and was behind Enron's policy of donating 1% of its profits to local charities. Lay died of a heart attack while awaiting sentencing.
4. Dennis Kozlowski, former C.E.O. of Tyco International: In 2005, Kozlowski was convicted of grand larceny, securities fraud and other crimes related to his receipt of $81 million in unauthorized loans and bonuses, improper payments and Tyco's fraudulent financial disclosure. He gave generously to charities, though $106 million of his donations were made with Tyco's money. He is eligible for parole in 2014.
5. Michael Milken, financier known as the junk bond king: Milken was charged with 98 counts of racketeering and securities fraud in 1989. He reached a plea bargain agreement whereby he admitted guilt to six securities violations and was sentenced to ten years in prison. He also paid a $600 million fine. Milken was released after serving just two years behind bars. At the time of his misdeeds, Milken was known as a generous philanthropist. His Foundation of the Milken Families has donated millions of dollars to various causes including $60 million dollars in educator awards and sizable donations to educational institutions such as the University of Pennsylvania and charities such as the United Way. His philanthropy has led to a Fortune Magazine cover story calling him "The Man Who Changed Medicine" due to his large health care donations.
6. Richard M. Scrushy, founder and former Chairman and C.E.O. of HealthSouth Corporation: Scrushy was convicted of bribery and mail fraud in connection with payments he made to Alabama's governor in exchange for appointment to the state board that regulated hospitals. He was sentenced to 82 months in federal prison and was fined $2.87 billion. Scrushy co-founded Computer Help for Kids, a charity that collected, refurbished and donated computers to school students and community groups. He also established a ministry to feed African children, though this occurred as he was awaiting trial. Scrushy is appealing his conviction.
7. Lord Conrad Black, former C.E.O. of Hollinger International: Black was convicted of mail fraud and obstruction of justice in 2007 and was sentenced to 78 months in prison. He is currently out on bail pending a Supreme Court review of his case. His Black Family Foundation has donated millions of dollars to charities, including $3.4 million to Toronto's Hospital for Sick Children and significant amounts to various educational institutions.
8. John Rigas, founder and former C.E.O. of Adelphia Communications Corporation and majority owner of the Buffalo Sabres ice hockey team: Rigas was convicted of multiple counts of fraud and tax evasion for concealing $2.3 billion in liabilities from shareholders and making personal use of corporate funds. When these misdeeds were uncovered, many people came forward to provide anecdotes portraying Rigas as a giving person who constantly helped needy neighbors. However, many of Rigas' donations were made with Adelphia funds. At his sentencing, Rigas pled for leniency and noted his charity work. The judge responded by stating, "To be a great philanthropist with other persons' money is not very persuasive." Rigas was sentenced to 15 years in prison. He is scheduled to be released in 2018 when he will be 93 years old.
9. Ivan Boesky, businessman and stock trader: Boesky became famous by amassing a fortune by trading on inside information regarding pending corporate takeovers. He admitted to insider trading through a plea arrangement that involved him testifying against Michael Milken. He was sentenced to 3.5 years in prison and paid a $100 million fine. Boeksy became involved in insider trading schemes even though he had more money than he could spend at the time. Boesky donated $20 million for the Jewish Theological Seminary's library that was named for him.
10. Gary Winnick, founder and former Chairman of Global Crossing Limited: Winnick made over $700 million by selling his shares of Global Crossing shortly before the company collapsed. While the SEC decided not to bring charges against him, shareholders brought a class action lawsuit against Winnick and others alleging fraud. The defendants settled the lawsuit by paying the shareholders $325 million. Winnick, to his credit, also donated $25 million to employees who lost their 401K's as a result of Global Crossing's demise. Through his family foundation, Winnick funded the Winnick Family Clinical Research Center at Cedars-Sinai Medical Center. He also donated $40 million for the Simon Wiesenthal Center's international conference center in Jerusalem and funded various scholarships.
Why would all these men who were accused or convicted of fraud or criminal activity also have philanthropy as a common denominator? One key factor is that these businessmen all generated millions of dollars through their actions and had the means to make sizable donations without impacting their standard of living.
Other explanations delve into the psychological realm. For some, making these gifts was a means to attaining greater notoriety. Donations were often publicized and, as in the case of Boesky and Winnick, often led to buildings or scholarships bearing the name of the donor. These businessmen may have simply wanted to draw attention to their generosity. It is also likely that many of these fraud artists also saw charity as a means for offsetting the guilt that they harbored for the harm they had caused investors and others by perpetrating their scams. They felt that if they did something supererogatory with their funds, this would make their ethical transgressions more acceptable.
With respect to Bernie Madoff, I do not believe that he ever set out to create a Ponzi scheme that would ultimately be exposed. It is more likely that his firm was unable to provide the investment returns that Madoff had promised and dipped into other investors' funds rather than admit to clients that he missed expectations. However, instead of replacing these lost funds with excess future gains, the deficit grew larger until it was insurmountable. Thus, Madoff never intended to bankrupt these charities. It was an unintended consequence of his inability to admit failure to his clients and friends. However, regardless of his true motives, the fact remains that Madoff's fraud destroyed many charitable organizations. He now joins these other businessman that have mixed fraud and philanthropy. Welcome to the list, Bernie Madoff.
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