Friday, July 31, 2009

Sign of the Times: What So Wrong with a Nonprofit Loaning Money to Its Board Members or Officers?

Apropos of our blog post on July 28, 2009, concerning a Florida Nonprofit that is in trouble with that state for allegedly loaning money to its President, here is an interesting story from the July 25 issue of Press Democrat which looks at this issue in depth. According to the story, a nonprofit university foundation loaned millions of dollars to individuals. One such loan was made to a board member who resigned from the board just two days prior to receiving a $500,000 loan. The nonprofit now has millions in outstanding loans to individuals and some of these individuals, including the former board member, have indicated that the loans will not be repaid. Here is an excerpt from the Press Democrat story:

The foundation's investment practices came to light after Santa Rosa developer and financier Clem Carinalli, the key recipient of foundation loans, said he could no longer repay a $1.25 million loan from the foundation. Carinalli served on the foundation board and resigned in 1995 — two days before he received his first foundation loan for $500,000.

Carinalli and his mortgage company would arrange more than half of the 19 private loans to local landowners that followed — including one as large as $4.5 million. By 2003, the foundation had placed half of its $40 million investment portfolio in private loans — a policy it continued despite warnings from its auditors and its own board members.

Last week Carinalli returned to the foundation a 10-acre field outside Windsor used to secure the loan he cannot repay. The group's attorney said it now is worth less than the amount of the loan.

Some donors, SSU faculty and foundation experts now question the foundation's governance, asking whether the loans were advantageous deals made at favorable terms that resulted in the foundation being excessively vulnerable to a downturn in property values.

"They were operating as a bank," said county Supervisor Shirlee Zane, a Sonoma State University graduate and donor to the foundation. "It was very careless. The foundation board should be held accountable for this, absolutely."

For the entire story, see "SSU foundation's private land loans" in the July 25, 2009, issue of the Press Democrat.

DAB

http://lawprofessors.typepad.com/nonprofit/2009/07/sign-of-the-times-what-so-wrong-with-a-nonprofit-loaning-money-to-its-board-members-or-officers.html

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