How many good causes will suffer for the failures of the SEC?

By now you have surely read about Bernard Madoff and his $50 billion Ponzi scheme. For background, here’s a collection of New York Times articles on the scandal.

The Securities Exchange Commission is conducting an internal investigation to find out why Madoff’s criminal enterprise went undetected for so long. It’s already obvious that this was a massive regulatory failure.

The SEC was warned about Madoff:

The SEC had the authority to investigate Madoff’s investment business, which managed billions of dollars for wealthy investors and philanthropies. Financial analysts raised concerns about Madoff’s practices repeatedly over the past decade, including a 1999 letter to the SEC that accused Madoff of running a Ponzi scheme. But the agency did not conduct even a routine examination of the investment business until last week.

No one knows yet how many people were involved in helping Madoff conceal his fraud. And while Madoff’s operation was particularly massive, no one knows how many other fraudulent investment firms are out there, because the SEC lacks the resources to enforce compliance with financial securities laws.

Those who had invested with Madoff have lost the entire value of their accounts, and they are not the only victims of his crimes. In fact, Madoff may have indirectly harmed more victims than any other white-collar criminal in history. His clients included many non-profit organizations and charitable foundations, some of which have already ceased operations. Numerous Jewish non-profits have been hit hard, but the fallout will extend far beyond the Jewish community. The Picower Foundation alone gave out tens of millions of dollars in grants every year. Within months, the education, human rights and arts non-profits that relied on those funds are likely to be in financial crisis.

The JEHT Foundation was much smaller than the Picower Foundation but “was a leading supporter of civil rights causes, including groups working to expand voting rights in the South.” Its outgoing president noted when announcing plans to shut down operations that

The issues the Foundation addressed received very limited philanthropic support and the loss of the foundation’s funding and leadership will cause significant pain and disruption of the work for many dedicated people and organizations. The Foundation’s programs have met with significant success in recent years – promoting change in these critical areas in partnership with government and the non-profit sector. Hopefully others will look closely at this work and consider supporting it going forward.

We can hope that others will step in to support the worthy causes whose funders were defrauded by Madoff, but that is extremely unlikely. Just about every grant-making foundation has suffered a significant decline in assets this year because of the stock market’s slide. Individuals of great wealth have also seen their net worth shrink. Non-profit organizations were already bracing for a difficult fundraising year in 2009. The Madoff scandal makes it even more likely that many non-profits will not survive this downturn.

Consider them casualties of “small government” at the SEC, and remember what happened to them the next time conservatives whine about big, bad regulators.  

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Give to good causes, but not via telemarketers

What would charitable organizations and other non-profits do without the holiday season? Many groups bring in more donations during December than during any other month of the year. Without holiday giving, meeting basic expenses would be a challenge. If you get a mailing from a group you support, I encourage you to give what you can afford.

Responding to telephone solicitations isn’t such a good idea, as Lee Rood reported in the Sunday Des Moines Register:

The Register’s examination of more than 80 professional fundraisers serving more than 500 charities – often for little-known nonprofits but sometimes for well-known charities – also shows:

– The median percentage of proceeds that wind up with a charity is about 24 percent, according to reports to Iowa’s attorney general by fundraisers that made disclosures in 2007. Just five charities received more than 75 percent of the proceeds from fundraising campaigns.

– One fundraiser, Aria Communications, reported charging nonprofits more than the company raised last year.

– Most for-profit fundraisers do not disclose how much money is given to a charity after they take their cut for fees and expenses. Although Iowa law requires such disclosure, companies fail to report the actual costs of telemarketing or direct-mail efforts and the amounts given to the charities in about four out of five cases.

– About a half-dozen fundraising companies continue to do business in Iowa even though they have been subject to cease-and-desist orders, hefty fines and multiple court actions for breaking solicitation rules or financial disclosure laws, or for deceiving would-be donors. (See related article on this page.)

– Many of the charities that benefit from the fundraising are poorly rated by watchdog groups or give a tiny fraction to the individuals or groups that solicitors claim donations will benefit.

The whole article and related sidebar are worth reading. If you want to support a group, find the organization’s address on the web or in the phone book and mail a check. That way your full donation will go to a good cause, instead of paying mostly for telemarketer fees.

Speaking of telemarketers, a funny story appeared in the Register a few days ago:

Gov. Chet Culver told Iowa school administrators a story on Monday about an experience he had with the New York Times early in his political career.

Culver, who ran for Iowa secretary of state in 1998, said shortly after he announced his candidacy, he received a telephone call from Bob Smith with the New York Times.

Culver said he was surprised a reporter from the newspaper was calling him when he hadn’t yet done an interview with The Des Moines Register or other media outlets in the state.

Culver said he asked Smith if he could call him back, and the man said yes. The governor said he was relieved because it would give him more time to prepare for an interview. He asked Smith what he wanted to talk to him about.

“This is regarding your Sunday subscription to the New York Times,” Smith told him.

UPDATE: Here’s a link to the Charity Navigator website in case you want to look up a group before you donate.

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