Say it ain't so!
The sky might be falling (on gift annuities), or it might not be.
I think it is reasonable to say that planned giving and fundraising professionals see gift annuities as the primary planned gift we are "selling" these days and its been that way for over 10 years (regardless of the never changing fact that bequest dollars generally overwhelm all other planned gift dollars by far).
But it wasn't always the case and it probably will not be the case in the future. The question is only when will the shift take place? A change in the field away from gift annuities may be sooner than you think.
Background
Pooled income funds were the planned giving chic of the 1980s. Why? Interest rates were sky high - over 10% much of the time. A good friend of mine even wrote a manual about setting up and running pool income fund programs (I found multiple copies of it lying around the UJC offices, written on a typewriter, pages melded together after a decade or more of sitting unused on the shelves or in boxes, gathering dust).
Their downfall: interest rates eventually dropped and other vehicles offered donors higher fixed rate or annuity returns.
Charitable remainder trusts (CRTs) were chic of the 1990s. Why? In addition to offering donors fixed rate/annuity payments, capital gains avoidance coupled with financial adviser self interest in retaining investment management control over their clients' assets caused CRTs to rule the planned giving world.
Their downfall: big slowdown in capital gains avoidance (i.e. stock market crashes) coupled with the discovery of easier, cheaper, fixed income, better tax-treatment CGAs.
So CGAs rule the roost, for now. But, where are the cracks in their lead position in the planned giving world? This blog has already touched on some of the potential for underwater gift annuity programs (http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html) and other serious issues with gift annuity pools and the challenge of finding good administrative services (http://plannedgift.blogspot.com/2009/07/gift-administration-revolving-door.html). And, as a consultant working with a few national charities, I can say that CGA licensing across the country is a bear! These facts alone should probably scare off most medium and smaller charities from getting in or staying in the CGA business.
And, how can we forget the recent Warfield case (Robert Dillie ponzi scheme) from the U.S. Court of appeals, with a new specter of investment/SEC regulation hanging over the head of CGAs again. (see http://plannedgift.blogspot.com/2009/08/important-legal-ruling-impacting.html)
Why this post and why I am announcing that the heyday of CGA programs may really be over?
In a conversation with one of the most prominent planned giving attorneys in the field this morning, my eyes were further opened to additional colossal problems that CGAs are facing as a result of the Warfield case.
I personally had sent a copy of the Warfield case to this attorney early in the summer, when I was claiming that the sky was falling on CGAs. He didn't read it carefully until a few weeks ago and his reaction was what I feared.
Here is the colossal problem. The Philanthropy Protection Act (PPA) of 1995 provides exemptions from various securities regulations for all types of charitable funds/investment pools (including CGAs, of course). One caveat was that CGA funds/pools in particular would not be exempt if they were sold with commissions.
What I couldn't figure out about the Warfield case was why didn't the court just cite the PPA, note that the parties in that case were selling CGAs with commissions, and just conclude that they no longer had the exemptions of the PPA. Why the analysis of CGA marketing and other practices to determine that CGA agreements were investment contracts? And, as one critic to my posts on the topic noted - since charities sell CGAs WITHOUT commissions, wouldn't the Warfield case have no impact on the good guys anyway?
I heard the answer to my question this morning from one of the best attorney in this area. It is a very subtle point, easy to miss. The PPA exempts charitable FUNDS, pools of investments, from various SEC regulations if you follow the disclosure rules found in the PPA itself. The PPA did not address, or exempt, CGAs from being considered investment contracts. That actual decision is one that generally falls under state law jurisdiction over contracts (even though the real scary investment laws are the federal ones).
This needs repeating so that readers won't miss it: CGA contracts are not exempt by the PPA from being considered investment contracts by any court, the IRS or Congress. And, the U.S. Court of Appeals (second only to the U.S. Supreme Court) very easily determined that CGAs were investment contracts (regardless of whether they are sold with commissions or not).
The ramifications: In theory, CGA contracts need to follow all of the disclosure requirement of investments. In theory, there could be investment licensing issues for charities and/or planned giving/fundraising professionals who sell these investment products. In theory, CGAs could really be sitting ducks for disgruntled families once your CGA donors pass away - assuming they pick a sharp attorney.
And, to top it all off, the word out there in the planned giving legal universe is that the IRS is sitting on a letter ruling request addressing whether CGA programs can offer CGAs in which the contract specifies another charity (related or not) as the ultimate remainder beneficiary (common among community foundations, Jewish federations and large university/hospital systems).
Not that this narrow question of issuing CGAs for other organizations is that big - but it opens the door for some serious thought by the IRS, and maybe others in the government, as to this whole CGA business.
Honestly, CGAs have been under the radar of regulators for a long time. Except for a short time in the mid-90s with a class action price fixing suit against the ACGA that partially resulted in the PPA's enactment, gift planners have been somewhat free from serious regulations (besides annoying departments of insurance in NY, NJ, California and a few other states).
Yet, running a CGA program is harder than ever before (based on investment, administration and licensing issues). How about after the IRS finally puts some thought into this area and issues a letter ruling that may not be so favorable to current practices?
Put all of these factors together: tougher state licensing issues, concerns over investments and administration, faltering investment performance, and throw in the new investment contract issues. It is a recipe for the end of the CGA generation and on to the next chic planned gift vehicle.
I think it is just a matter of time before we start seeing another planned giving options as the favored child of the planned giving world. Maybe it will be the good old bequest - not like it ever really went out of style.
Showing posts with label ponzi schemes. Show all posts
Showing posts with label ponzi schemes. Show all posts
Thursday, November 5, 2009
Thursday, September 17, 2009
Comments on ponzi scheming CGA promoter case
I am somewhat surprised that the recent federal appeals court running that I reported on about Robert Dillie (http://plannedgift.blogspot.com/2009/08/important-legal-ruling-impacting.html) hasn't been discussed (besides the republishing of my post on OnPhilanthropy.com and the Planned Giving Design Center).
One of the comments I heard from a colleague was that "it was an old case." Of course, I wanted to scream.
True, the actual facts of the case were old news but the facts have nothing to do with the problems that might be caused by the ruling (published just this summer). It is the ruling that matters; the level of the court (just below the Supreme Court) and their approach to analyzing whether gift annuities are investments or not. It is not even whether the court was correct in its approach or not(it may very well have been wrong).
You have to put yourself into the mind of a plaintiff's attorney. I should know - I was one and I spent several years making people feel miserable (especially older attorneys resting on their laurels). I didn't always need the law or logic on my side - all I needed was an inch. Something to give us standing to start the case, negotiations, etc.. Admittedly, we bluffed our way into many situations. Sometimes we "won" on air - sometimes we got crushed, but we always caused trouble for someone.
One thing that I have learned since joining the non-profit world full time in 1998, charities sit in an extremely weak legal position. Law suits (or even threats of law suits) never go well for them - even with top pro-bono counsel. I can't tell you how many litigation situations I have been involved with where the charity had the better case but opted to settle or not pursue a rightful claim. Maybe it was the potential public relations fallout, maybe charitable executives who didn't want the entanglement, maybe it was fear over costs or staff time.
No matter the reason, charities are sitting ducks in general when faced with potential litigation. Here comes a U.S. Court of Appeals which flat out says that most of the standard gift annuity marketing is our proof that gift annuities are investment products. It is just nice and dry firewood for attorneys of unhappy CGA donors, or worse yet, unhappy children or other beneficiaries of CGA donors.
One of the comments I heard from a colleague was that "it was an old case." Of course, I wanted to scream.
True, the actual facts of the case were old news but the facts have nothing to do with the problems that might be caused by the ruling (published just this summer). It is the ruling that matters; the level of the court (just below the Supreme Court) and their approach to analyzing whether gift annuities are investments or not. It is not even whether the court was correct in its approach or not(it may very well have been wrong).
You have to put yourself into the mind of a plaintiff's attorney. I should know - I was one and I spent several years making people feel miserable (especially older attorneys resting on their laurels). I didn't always need the law or logic on my side - all I needed was an inch. Something to give us standing to start the case, negotiations, etc.. Admittedly, we bluffed our way into many situations. Sometimes we "won" on air - sometimes we got crushed, but we always caused trouble for someone.
One thing that I have learned since joining the non-profit world full time in 1998, charities sit in an extremely weak legal position. Law suits (or even threats of law suits) never go well for them - even with top pro-bono counsel. I can't tell you how many litigation situations I have been involved with where the charity had the better case but opted to settle or not pursue a rightful claim. Maybe it was the potential public relations fallout, maybe charitable executives who didn't want the entanglement, maybe it was fear over costs or staff time.
No matter the reason, charities are sitting ducks in general when faced with potential litigation. Here comes a U.S. Court of Appeals which flat out says that most of the standard gift annuity marketing is our proof that gift annuities are investment products. It is just nice and dry firewood for attorneys of unhappy CGA donors, or worse yet, unhappy children or other beneficiaries of CGA donors.
Thursday, August 6, 2009
Important Legal Ruling Impacting Planned Giving Marketing
Charitable gift annuity marketing scrutinized
The U.S. Court of Appeals for the 9th Circuit issued an opinion in a case involving Robert Dillie, this past June. Mr. Dillie operated a fraudulent foundation between 1996 and 2001. This foundation was in actuality a ponzi scheme which issued $55 million in gift annuities to over 400 donors, sold through investment advisers who were receiving commissions on the sales of new gift annuities. He is now serving 121 months in prison for his crimes but the legal fallout from his nefarious operation lives on.
The receiver assigned to recover any remaining funds to repay defrauded donors sued the investment advisers for the return of their commissions. The Federal Court of Appeals, the highest level court below the U.S. Supreme Court, rejected the various arguments by counsel for the investment advisers and concurred with lower court rulings requiring the return of the commissions.
While the underlying facts of this case were truly unique, the significance of this ruling is how the Court viewed gift annuities in light of the marketing techniques used. This can be best exemplified in the first few sentences of the opinion:
This appeal presents the question, inter alia, of whether the charitable gift annuities sold in this case were investment contracts under federal securities law. We conclude they were, and we affirm the judgment of the district court.
Not only did Robert Dillie promise his investors “a gift for your lifetime and beyond,” he pledged “preservation of the American way of life,” “preservation of your assets,” and “preservation of the American family.”
The Court looked at the various gift annuity promotional advertisements used by Mr. Dillie, all of which are very similar to those used in the marketing of gift annuities throughout the non-profit community. And, the Court had no difficulty at all in concluding that gift annuities were in fact an investment contract under federal securities law, despite specific exemption from such laws under the Philanthropy Protection Act of 1995 (“PPA”).
While Mr. Dillie’s scheme specifically violated the PPA by offering commissions, this point was not used as a reason for its conclusions and the case certainly raises the specter of potential Securities and Exchange Commission regulations for charitable gift annuities. Even more troublesome for charitable entities is the potential for a disgruntled gift annuity donor to use legal standards from the area of investments and securities in any legal conflict with a charitable institution over a gift annuity.
The “take home” conclusion of this case is that charities should be very careful in their marketing of gift annuities and other life income vehicles. A court will certainly look at advertisements and direct mail pieces in any potential litigation. Therefore, it is extremely important to emphasize that charitable gift annuities and other life income vehicles are first and foremost gifts.
A copy of the opinion can be viewed at:
http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf
The U.S. Court of Appeals for the 9th Circuit issued an opinion in a case involving Robert Dillie, this past June. Mr. Dillie operated a fraudulent foundation between 1996 and 2001. This foundation was in actuality a ponzi scheme which issued $55 million in gift annuities to over 400 donors, sold through investment advisers who were receiving commissions on the sales of new gift annuities. He is now serving 121 months in prison for his crimes but the legal fallout from his nefarious operation lives on.
The receiver assigned to recover any remaining funds to repay defrauded donors sued the investment advisers for the return of their commissions. The Federal Court of Appeals, the highest level court below the U.S. Supreme Court, rejected the various arguments by counsel for the investment advisers and concurred with lower court rulings requiring the return of the commissions.
While the underlying facts of this case were truly unique, the significance of this ruling is how the Court viewed gift annuities in light of the marketing techniques used. This can be best exemplified in the first few sentences of the opinion:
This appeal presents the question, inter alia, of whether the charitable gift annuities sold in this case were investment contracts under federal securities law. We conclude they were, and we affirm the judgment of the district court.
Not only did Robert Dillie promise his investors “a gift for your lifetime and beyond,” he pledged “preservation of the American way of life,” “preservation of your assets,” and “preservation of the American family.”
The Court looked at the various gift annuity promotional advertisements used by Mr. Dillie, all of which are very similar to those used in the marketing of gift annuities throughout the non-profit community. And, the Court had no difficulty at all in concluding that gift annuities were in fact an investment contract under federal securities law, despite specific exemption from such laws under the Philanthropy Protection Act of 1995 (“PPA”).
While Mr. Dillie’s scheme specifically violated the PPA by offering commissions, this point was not used as a reason for its conclusions and the case certainly raises the specter of potential Securities and Exchange Commission regulations for charitable gift annuities. Even more troublesome for charitable entities is the potential for a disgruntled gift annuity donor to use legal standards from the area of investments and securities in any legal conflict with a charitable institution over a gift annuity.
The “take home” conclusion of this case is that charities should be very careful in their marketing of gift annuities and other life income vehicles. A court will certainly look at advertisements and direct mail pieces in any potential litigation. Therefore, it is extremely important to emphasize that charitable gift annuities and other life income vehicles are first and foremost gifts.
A copy of the opinion can be viewed at:
http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf
Monday, July 20, 2009
You have been warned! Finally, a legal decision that hits directly at gift annuity promotion
Gift planning lawyers are starving for case law because people don't seem to take our warnings very seriously. How many times have you heard lawyers at planned giving conferences warn about how we are promoting charitable gift annuities? About avoiding investment language, how we should be emphasizing the charitable gift in the gift annuity, how we really shouldn't mix up CGAs with anything related to securities (and their SEC regulations).
And, how often do we see gift annuity advertisements extolling "attractive rates." Or, how about "a gift that offers lifetime income ... and beyond." Or, "your annuity payment is determined by your age and the amount you deposit. The older you are, the more you'll receive." Or, language like "current average net-yield."
The thing is, these quotes could be right out of our CGA promotions. But, they were actually taken directly from a U.S. Court of Appeals (Ninth Circuit) opinion in a case just published.
I'll sum up the case for you: there was once a CGA program that was a true ponzi scheme. A guy named Robert Dillie (now serving 121 months in jail) pushed CGAs through investment advisers - giving the investment advisers commissions (big time "no no" under the Philanthropy Protection Act (PPA) of 1995). They raked in $55 million from more than 400 CGAs between 1996 and 2001, and then went belly up. Receiver gets appointed to save what he can to pay back those defrauded. Sues to get back commissions from the investment advisers. Investment advisers claim every thing under the sky, including PPA of 95 protection (interesting to note that the PPA specifically does not exempt CGAs where commissions are involved). Bottom line - court says CGAs are securities and the advisers need to return the commissions they collected.
It is an interesting read for those interested:
http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf
What startled me was the ease at which a court found CGAs to be securities! And the proof - see the quotes above and read the case - that could be any of our charities promoting CGAs.
A couple more Heritage Foundations or real CGA ponzi schemes, and the world of CGAs could easily be headed to SEC regulations. Pretty scary stuff considering we in the charitable world can barely handle insurance department licensing in California, New York and New Jersey. I would venture to say that SEC regulations would be generally be a deathblow to CGAs as a viable planned giving vehicle. It wouldn't be worth it anymore to be in the business.
This case hits home that we in the planned giving business need to be vigilant to avoid promoting CGAs as financial investments. Who knows what the consequences could be? Maybe a disgruntled donor will demand his/her money back, hire a smart lawyer, and use the investment product/securities issue against your organization. There are legal risks involved in all planned gifts. Leaving our CGA programs open to be lumped into regulated securities is just plain foolish.
The behind the scenes talk I have had with prominent attorneys in this field, since this most recent financial collapse, is how vulnerable planned giving program are to potential law suits. And, this case exemplifies how close CGAs in particular are to be dragged into a whole new realm of legal disasters for charities.
And, how often do we see gift annuity advertisements extolling "attractive rates." Or, how about "a gift that offers lifetime income ... and beyond." Or, "your annuity payment is determined by your age and the amount you deposit. The older you are, the more you'll receive." Or, language like "current average net-yield."
The thing is, these quotes could be right out of our CGA promotions. But, they were actually taken directly from a U.S. Court of Appeals (Ninth Circuit) opinion in a case just published.
I'll sum up the case for you: there was once a CGA program that was a true ponzi scheme. A guy named Robert Dillie (now serving 121 months in jail) pushed CGAs through investment advisers - giving the investment advisers commissions (big time "no no" under the Philanthropy Protection Act (PPA) of 1995). They raked in $55 million from more than 400 CGAs between 1996 and 2001, and then went belly up. Receiver gets appointed to save what he can to pay back those defrauded. Sues to get back commissions from the investment advisers. Investment advisers claim every thing under the sky, including PPA of 95 protection (interesting to note that the PPA specifically does not exempt CGAs where commissions are involved). Bottom line - court says CGAs are securities and the advisers need to return the commissions they collected.
It is an interesting read for those interested:
http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf
What startled me was the ease at which a court found CGAs to be securities! And the proof - see the quotes above and read the case - that could be any of our charities promoting CGAs.
A couple more Heritage Foundations or real CGA ponzi schemes, and the world of CGAs could easily be headed to SEC regulations. Pretty scary stuff considering we in the charitable world can barely handle insurance department licensing in California, New York and New Jersey. I would venture to say that SEC regulations would be generally be a deathblow to CGAs as a viable planned giving vehicle. It wouldn't be worth it anymore to be in the business.
This case hits home that we in the planned giving business need to be vigilant to avoid promoting CGAs as financial investments. Who knows what the consequences could be? Maybe a disgruntled donor will demand his/her money back, hire a smart lawyer, and use the investment product/securities issue against your organization. There are legal risks involved in all planned gifts. Leaving our CGA programs open to be lumped into regulated securities is just plain foolish.
The behind the scenes talk I have had with prominent attorneys in this field, since this most recent financial collapse, is how vulnerable planned giving program are to potential law suits. And, this case exemplifies how close CGAs in particular are to be dragged into a whole new realm of legal disasters for charities.
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