Settlement Reached in New Era Pyramid Scheme
After an arsonist torched two-thirds of their campus in 1990, administrators at the Christian School of York in Pennsylvania saw the Foundation for New Era Philanthropy as a godsend.
The foundation said it would match contributions to the school dollar for dollar with donations from anonymous donors. New Era netted the school $268,500, a shot in the arm after reconstruction left it about $400,000 in the red.
But now, under a recent bankruptcy settlement, the 710-student private K-12 school must return most of the foundation money.
Investigators have said New Era operated a pyramid scheme, matching contributions from such charities as the Christian School of York not with gifts from anonymous donors but with later contributions from similar groups hoping to double their money in a few months.
The Radnor, Pa., foundation declared bankruptcy in May 1995, leaving about 1,200 churches, schools, colleges, and other nonprofit groups wondering what would happen to the roughly $500 million in outstanding claims against the foundation. ("Nonprofits in Fund-Raising Hoax Asked To Return Grants," Jan. 31, 1996.)
A local benefactor has lessened the blow to the York school by donating $87,000. The school will pay $25,000 of the refund out of savings, and officials there have started a drive to raise the rest from parents, alumni, and others. If they need to, they'll borrow the rest.
Even if the school hadn't received the donation, officials there intended to return any funds required by the settlement, said Peter W. Teague, the school's superintendent.
"From the very beginning we thought we'd cooperate," he said. "We knew we wanted to do the right thing."
The settlement approved in late August by a federal bankruptcy judge in Philadelphia has begun to unravel the work of a scheme that took in dozens of private elementary and secondary schools in the Northeast, along with such varied groups as Harvard University and the Special Olympics.
Drafted with the help of United Response to New Era, a coalition of the charities that gave money to the foundation, the agreement was an attempt to avoid scores of individual lawsuits between those who lost funds and those who made money with New Era.
Under the settlement, groups with a net gain from New Era must pay back at least 65 percent--totaling about $39 million--of the money they received from the foundation.
The bankruptcy judge overseeing the case approved an Oct. 22 deadline for returning the funds. Groups that are unable to return the money may qualify for hardship waivers.
"The idea is that no charity be forced out of business because of New Era, and that was a very real possibility from the beginning," said Paul Nelson, the president of the Evangelical Council for Financial Accountability. The Herndon, Va., watch-dog group helped form United Response.
Word of the settlement sent waves of relief through the many organizations that have remained afloat by cutting programs, canceling construction projects, and otherwise limiting expenses since losing their money to New Era last year.
When New Era's bankruptcy swallowed up $400,000 they invested with the foundation, officials at the Meadowbrook Christian School in Milton, Pa., postponed several renovation projects.
"The week of the collapse we were expected to get our first check," said Pastor Arlie Davis, the superintendent of the 330-student, K-12 school.
Mr. Davis was told he could expect to receive 65 percent of the school's lost funds by Christmas. After the money comes in, he plans to add the new gym students have been waiting for. Meadowbrook officials also have pledged to contribute 10 percent of whatever they get back to missions.
But those hoping to recoup lost money are wondering if the redistribution might be delayed by Prudential Securities' recent announcement of plans to appeal the settlement's approval. Prudential, which maintained accounts for New Era, believes all of the funds netted from New Era should be returned, not just 65 percent.
Late last week, United Response began alerting those affected by the settlement that an appeal could slow the settlement it helped draft. Nonetheless, officials there expressed optimism that the process had gone so far in a few months, when the case threatened to last far longer.
"The prospect of multiple lawsuits involving thousands of groups was real," Mr. Nelson said. "That would set up a legal gridlock that would last for 10 years, and no one would get any money."
Like many of the schools that gave to New Era, officials at Meadowbrook and the Christian School of York were shaken to have been taken in by what apparently was a well-orchestrated scam.
After doing a background check on the foundation, the schools found New Era's founder, John G. Bennett Jr., had an excellent reputation among evangelical groups for doubling their contributions. Mr. Bennett is now the subject of a grand jury investigation in Pennsylvania. Neither he nor attorneys who have represented him could be reached for comment.
"Our board is made up of very savvy business people, and they voted unanimously to do this," Mr. Teague said. "Our faith has been hurt. Something like this can cause you to lose balance temporarily."