BULL STREET - The art of the Con

New Era Philanthropy Tries an Old Con

John G. Bennett Jr., 57, was chief executive officer of the Foundation for New Era Philanthropy, a charity based in Radnor, Pennsylvania, which he began in 1989. A former drug-program administrator, who advised nonprofits on management and fund-raising techniques, Bennett became a popular and influential figure in Philadelphia’s philanthropic and cultural circles, thanks in part to the prayer breakfasts he often held.

New Era soon became the answer to numerous prayers: Bennett promised charitable organizations and wealthy individuals that he approached, a 100% return on their contributions within six months ([38]), thanks to anonymous donors who would match their gifts.  New Era would only keep the interest earned during the search.  It sounded too good to be true, especially since the mysterious benefactors were known only to Bennett.  However, when Bennett delivered on his early promises, the news spread and donations in New Era increased exponentially; last year it rivaled the Rockefeller Foundation in its largesse (total: $100 million).  Cathryn Coate, executive director of the Greater Philadelphia Cultural Alliance, says; ‘the word on the street was that Bennett was a super credible man, impeccable.  You hear things like, ‘Oh, I’ve known Bennett for 15 years.’  It’s not like a bunch of quick-fix guys duped a bunch of bozos.’

Bennett was only doing what Charles Ponzi did in Boston back in 1919, paying back one wave of investors with money he received from ensuing waves.  Like Ponzi, Bennett was something of a civic hero for a while, and like Ponzi, he was careful not to draw attention to himself with a flamboyant life-style.

Listed among New Era’s creditors and or donors were sophisticated people such as Laurance Rockefeller ($11.4 million) and William E. Simon, former U. S. Treasury Secretary ($6.5 million).  They were joined in their misery by the former head of Goldman Sachs & Co., John Whitehead, The entertainer, Pat Boone, The Mayor of Philadelphia, Edward Rendell, world-renowned hedge fund boss, Julian Robertson and mutual fund guru, John Templeton.  Although not as famous, the biggest loser of all was the Reverend Glenn Blossom of Dresher, Pennsylvania who lost almost $30 million trying to get enough money to build a seminary.  Other charities were taken in and a few of the more prominent ones were The University of Pennsylvania, The Nature Conservancy, and the American Red Cross and the Detroit Institute of Arts.  Overall, New Era claimed $555.1 million in liabilities against just $80 million in assets.

One of the non-believers was Albert Meyer, who taught accounting at Spring Arbor College in Michigan.  He was dumbfounded when he found out that his own school had joined the silly parade of investors in the New Era swindle.  He took it upon himself to call Bennett personally and when he was not satisfied at what he heard on the phone, Meyer proceeded to write to the Securities & Exchange Commission, The Internal Revenue Service, the U. S. Attorney General’s office, and the Wall Street Journal.  In spite of this gaggle of mail going to serious people, nothing happened immediately to thwart Bennett’s New Era.  It was only when the lawyers for the supposed charity were not forthcoming with necessary backup documentation that many began to get cold feet.   

“Bennett’s secret was that he was able to marry two powerful but seemingly contradictory human instincts: greed and charity.  Those who threw in with New Era were so anxious to give, and to get, that they overlooked the obvious.  However, greed and charity have met before.  Charles Ponzi’s biggest extravagance was a $100,000 donation he made to an orphanage.”  ([39]) Furthermore, he was able to convince his lawyers, accountants, and investment bankers to wave the flag for him with investors whenever they had the opportunity.  They all got a little too carried away with their roles, and eventually each paid a horrific price for his involvement.

Particularly hard hit in the settlement was the investment banker, Prudential Securities, which seized more that $40 million in New Era funds that was placed by donors in a margin account at that firm for future charitable donations.  The hold was put on the account when the Securities & Exchange Commission announced that it was conducting an investigation into the affairs of New Era.  One could well wonder what was going through the brokerage firm’s collective mind when they knew that something must be wrong or the SEC would not be all over the account, but yet, they continued taking in money “from charities and philanthropists into the account, without notifying them of the account’s status.”  Whew!!!

For whatever reason, the money had been placed in that account to cover a loan taken out by New Era.  When Prudential thought that something might be amiss, they glommed onto the account.  On the other hand, Prudential’s office in Kenosha, Wisconsin was part of the fraud’s epicenter.  Participants in the scheme were told that their money was safe because it was held in “quasi-escrow” accounts at the brokerage firm.  They received written confirmation of that fact in spite of substantial commingling within a single brokerage account.  Prudential, when they found out about the fact that their employees were erroneously telling people that the co-mingled account was an escrow account sent a series of backdated letters to New Era categorizing the situation correctly.  On the other hand, neither New Era nor Prudential ever said one word about the matter to the people whose money they were collecting, and after the initial correspondence with New Era, the problem was literally forgotten about.  Moreover, it was this account that was used for money (loans) to make payouts.  The trustee went on to charge that Prudential, “without instructions, approval, or written authorization from New Era, converted it into a margin account and began charging interest.”  ([40])

The trustee in bankruptcy charged that Prudential Securities “overlooked repeated and obvious signs the charity was fraudulent out of a desire to earn commissions and “excessive” interest…the lawsuit, filed in U.S. Bankruptcy Court in Philadelphia, is the third New Era-related suit against Prudential since the charity collapsed into bankruptcy in May 1995.  But unlike the first two suits - filed by nonprofit organizations and a philanthropist who lost money in the debacle - the trustee’s suit contains what is alleged to be extensive behind-the-scenes details of Prudential’s dealings with New Era gleaned from interviews with some of the firm’s employees.”  ([41])

The trustee charged in a lawsuit that “Prudential knew, should have known, or had a reasonable basis to suspect that New Era was operating…a scheme to defraud its creditors,” The trustee went further by saying that because of Prudential’s knowledge of what was going on they should not only return $160 million in funds that the loaned New Era or held for them in a brokerage account but when the dust had cleared, they should be obligated to stand at the end of the creditors line before collecting one penny back. Eventually, Prudential settled out their involvement at a cost of almost $20 million.

Early donators instructed that the money New Era received from their largesse go to charities of their choice.  These original donors received literally, what had been represented to them, two dollars donated to the charity for each dollar the donor gave.  As word of the munificence of certain unidentified people that were matching the funds spread, it caused a stamped of well-heeled benefactors to cross New Era’s palm with a torrent of funds.  The problem that the matching donors were really funds that came from suckers that were getting in too late in the game, thus the charity was no different from what Ponzi had done decades earlier.

On the other hand, when the scheme fell apart and a bankruptcy trustee was appointed by the federal court to sort out the mess, Arlin Adams has asked that the charities that had received the double-donations early in the game, give the money back.  This has met with substantial resistance and many usually laid back charities have shown what they were really made off but playing hardball with stolen funds.  Some of the charities that have been reported to profit from the swindle were “Southfield Christian School, Baptists for Life in Grand Rapids, Young River Ministries in Farmington and Marantha Bible & Missionary Conference in Muskegon.”  ([42]) Adams points out that there were several very unusual twists to this bizarre happening.

The first is the fact that over 1,300 charities were beneficiaries of New Era’s donations.  Secondarily, Bennett did not particularly pocket any substantial part of the money as did Ponzi and others that succeeded him in the classic device for separating people from their money.  The only reason for the fact that Adams was able ultimately to pay back victims of the massive fraud is because of the fact that the money for the most part had not walked.  It was in the hands of the charities that got into the deal early on.  Because the money trail was so clear, charitable institutions that were scammed were able eventually to recover approximately 63 cents on every dollar.  On the other hand, the philanthropists, many of whom had filed claims in court—will not get a cent.

Hey, that’s a pretty good gimmick.  Pretend the money is going to charity; give everyone $2 in deductions for every $1 they put up.  Not bad, but nobody would get suckered into another real Ponzi Scheme, and any it couldn’t happen because the SEC would catch them before anyone got hurt.  The charity didn’t have anyone watching over their shoulders.  Mr. Bennett pleaded no contest to 82 counts of fraud, money laundering, and received 12 years in prison without any possibility of parole in exchange for raising $354 million based totally on fraudulent premises.  For whatever it is worth Mr. Bennett’s attorneys are saying that he meant no harm, he was only a person that suffered from delusions and was not sure what he was doing most or the time.

The Securities and Exchange Commission put what happened into perspective in their Litigation Release No. 15095, United States of America V. John G. Bennett:

“The indictment states that, in order to obtain funds from benefactors and nonprofit organizations, Bennett made various representations about the operation of New Era, all of which were false.  Some of these representations are: 1) That the anonymous donors existed, that they provided matching funds, and that there were trust agreements with these anonymous donors, when, in fact, there were no anonymous donors and money from later donors provided the matching payments for earlier donors; 2) That Bennett was not paid for his work at New Era, when, in fact, he transferred over $3.3 million from the New Era accounts to the accounts of Bennett-related entities; 3) that money from benefactors and non-profits was being held in escrow or “quasi-escrow” accounts at Prudential Securities, Inc. during the holding period, when, in fact, the funds were being used to secure a large loan at Prudential, and some of the funds used to repay contributors to New Era were paid from the loan account; and 4) that New Era had a board of directors of prestigious individuals, when, in fact, Bennett was the only director.”

Nevertheless, the guys that make the frauds really work to perfection are the accountants.  Without their help in leading the lambs to the slaughter, most financial crimes could not be committed.  In this case, John McCarthy & Company out of Lafayette Hill, Pennsylvania was the New Era accounting firm and were in not for the friendly accountant assigned to the New Era audit, Andrew Cunnigham, the whole affair could have never have progressed as far as it did.  The federal court said that Cunnigham knowingly issued false financial information that he provided potential investors in Bennett’s fraud received 30 months in jail for his efforts.  He had violated the public trust by filing false audits and federal tax returns.  It was these documents, which ultimately convinced investors that their money could be doubled in six months.  Originally, Cunningham was scheduled by federal sentencing guidelines to be going up the river for 46 to 57 months but the accountant ratted on his former employer, Bennett, and received the reduced sentence in exchange for squealing. 

 

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