Foundation Embroiled in Madoff Scandal Is Target of $5.1-Billion Lawsuit

The Picower Foundation, one of the nation’s largest foundations until it collapsed in December as part of the Bernard Madoff investment scandal, and its founders have been sued by the trustee who is overseeing the liquidation of the Madoff investment firm.

The trustee, Irving Picard, is seeking the return of $5.1-billion — the amount that was withdrawn by Jeffry and Barbara Picower and their foundation in excess of what they had invested.

The lawsuit may intensify speculation about whether Mr. Picard will try to retrieve or “claw back” — a term often used to describe such legal efforts — some of the grants to charities that were made by the Picower Foundation.

William Zabel, a lawyer for the Picowers, was not immediately available for comment last week. In a Wall Street Journal story about the lawsuit, Mr. Zabel said the Picowers were “totally shocked” by Mr. Madoff’s fraud and “were in no way complicit in it.”

The Picower Foundation, which reported assets of nearly $1-billion in 2007, was the largest of several foundations to implode when the Madoff fraud was revealed last December. Even after the foundation’s collapse, its former grantees continued to offer high praise for the foundation’s officers and employees, especially Barbara Picower (The Chronicle, April 9).

Through a spokesman, Mr. Picard declined to comment.

Nonprofit and legal experts say any such attempt to retrieve money from charities would be extraordinary.

Mr. Picard “would face very high legal hurdles,” says Philip Bentley, a lawyer representing direct investors in Madoff funds who are likely to face “claw back” suits.

Business Entities Sued

The lawsuit alleges that Mr. Picower or one of his employees, April Freilich, instructed Madoff employees to “backdate” his accounts for investment gains more than a year in the past.

In one example, the suit says that on May 18, 2007, Ms. Freilich told the Madoff firm that the Picower Foundation “needed ‘$20 mil in gains’ for January and February and ‘want[ed] 18% for year 07 appreciation,’ but that she had to check the numbers ‘with Jeff.’” Five days later, Ms. Freilich told the firm that those numbers were wrong, and that the foundation “needs only $12.3 mil [in gains] for” January and February 2007.

The foundation’s May 2007 statement included millions of dollars of stock trades in January and February — trades that had not appeared on the foundation’s January and February statements — and resulted in a purported gain of $12.6-million, the complaint says.

The lawsuit lists as defendants numerous business entities controlled by Mr. Picower, as well as the Picower Foundation and the Picower Institute for Medical Research, which had been based in New York and is now defunct.

Mr. Picower “exercised complete dominion” over those organizations in dealing with the Madoff firm, which he “knew or should have known was predicated on fraud,” the lawsuit says. “As a result, the Picower Entities functioned as alter egos of Picower and no corporate veil can be maintained between them,” the complaint says.

Grantees at Risk?

With the Picower Foundation virtually penniless, charity experts were left to speculate last week about whether Picower grantees would become ensnared in lawsuits.

“What do you gain by naming the foundation?” asked Jack Siegel, a Chicago lawyer who advises charities. “Is there some sort of attempt to jump from the foundation to the recipient?”

However, Mr. Siegel said he believes it is unlikely Mr. Picard would ever sue the grantees. “It’s not an appealing lawsuit to go back to a charity that’s already spent the money and say, ‘You have to give it back,’” he says. “I think the trustee is only going to go so far.”

Experts also said it was possible Mr. Picard named the Picower Foundation even though he doesn’t expect to recover funds from the foundation, simply because it would raise questions if any Picower entities were left out of the complaint.

Mr. Madoff pleaded guilty in March to running a giant Ponzi scheme. He faces a prison term of as much as 150 years when he is sentenced next month.