Ex New Era President Seeks Early Prison Release

June 1, 2005       Jeff Jones      

John G. Bennett, Jr., who spearheaded one of the largest charity frauds in history as president of the Foundation for New Era Philanthropy, recently filed a motion to vacate, set aside, or correct his sentence, according to court records.

Bennett, 67, was sentenced Sept. 22, 1997 to 12 years at Fort Dix Federal Correctional Institute after pleading nolo contendere to charges of bank fraud, mail fraud, wire fraud, false statements, filing false tax returns, money laundering and money laundering to promote unlawful activity, according to a federal Bureau of Prisons (BOP) spokeswoman and court documents. Bennett is scheduled to be released March 2008, but his sentence could be reduced due to good conduct time, a BOP spokeswoman said.

Attempts to reach Bennett via a letter and several telephone calls to a Fort Dix prison official were unsuccessful. Gino Benedetti, Bennett’s attorney, did not make himself available for comment despite several telephone calls.

Judy Smith, assistant U.S. Attorney in Philadelphia, said her office responded to Bennett’s motion. A decision was pending as this issue went to press.

The scam

The New Era scandal broke 10 years ago, effectively blowing the lid o ff one of the largest charitable frauds in history. It ensnared elite nonprofits and smaller evangelical organizations alike.

The Hon. Rollin Van Broekhoven, a sitting federal judge and board chair of the Evangelical Council for Financial Accountability (ECFA) at the time of the New Era scandal, said it appealed to two classes of charitable organizations — the “blue bloods” of Philadelphia society, such as the symphony, and religious organizations.

The scam was based on a promise to double organizations’ investments after a six-month holding period through anonymous matches. It was later discovered that the anonymous donors didn’t exist. At its most basic, a Ponzi scheme pays off original investors by using the funds from new recruits. Eventually new recruits dry up and the scheme collapses.

New Era filed for bankruptcy in May 1995 after Prudential Securities called a $50 million margin loan that Bennett had obtained to cover increasing costs, according to a United States Securities and Exchange Commission release and court documents.

The take

The six-year long Ponzi-turned-pyramid scam defrauded roughly 150 charities out of more than $100 million. Hundreds more nonprofits participated in the scheme. At the time it was uncovered, victims’ losses were roughly $135 million, and the total amount taken was $354 million, according to court documents.

Victimized charities later recovered more than 90 percent of their losses in an unprecedented bankruptcy settlement orchestrated by leaders at ECFA who formed the United Response to New Era, according to officials familiar with the settlement.

At the heart of the New Era scandal was a charismatic and passionate man who created an exclusive philanthropic program that lured nonprofit officials through early returns, word-of-mouth credibility, and a close-to-the-vest operating style.

“We knew New Era existed because many of our member organizations began to talk among themselves as Ponzi schemes do,” said Paul Nelson, president of ECFA in Winchester, Va.

Unlike many proposals that bubble up through an organization’s hierarchy, this one was a top-down process in which board members and CEOs brought the investment opportunity to the organization, Nelson said.

“It was almost masterful in the way (New Era) made it exclusive,” Nelson said. “You had to be invited. People began waiting for an invitation to participate. (It) was almost to the point when they did get the letter, it wasn’t how much do I have to put in, but how much will you take.”

It captured a community and caught like “wildfire,” Nelson added.

When the fire burned out, elite nonprofits along with smaller religious organizations were caught with their coffers pillaged and nothing but questions.

The lessons

A decade later, lessons from the New Era scandal still apply as the charitable sector deals with accountability and governance issues.

Reviewing a nonprofit’s financials is one of the most effective ways to prevent being taken by such a scam. In fact, New Era’s Form 990 was the key that unlocked the fraud for one certified public accountant.

Albert Meyer was instrumental in helping uncover the New Era scandal. Now a general partner at 2nd Opinion Research in Plano, Texas, Meyer was teaching at a Michigan college during the 1990s. One summer while helping out in the college’s business office he discovered the college had sent money to New Era.

That New Era held the money for a certain amount of time before doubling it raised concerns for him, he said. Meyer also wondered why the foundation wasn’t listed in the Foundation Directory.

Meyer obtained New Era’s Form 990s from the Internal Revenue Service after several attempts. There, Meyer found the evidence to support his hunch that New Era was nothing more than a Ponzi scheme, he said.

The foundation’s income statement said it had received $40 million and paid out $38 million, Meyer said.

Meyer created a spreadsheet that revealed New Era should have shown a minimum of $500,000 in interest if it had received $20 million from charities. Further, it should have millions of dollars in deposits that it was holding for charities. Meyer said he pointed out to people that New Era didn’t have liabilities on its balance sheet.

“To me it didn’t matter who was involved,” Meyer said. “To me it was so clear that” the financial statements confirmed this was a Ponzi scheme.

Meyer said charities must trust their auditors and get them to do due diligence to avoid getting caught in such a scheme.

“When confronted with such a scheme, defer it to auditors,” Meyer said. “That places auditors in a place of liability.” An outside auditor may also bring a more suspicious and objective perspective than a board member, he said.

Nelson, of ECFA, suggested nonprofit boards adopt an investment policy to prevent becoming involved in such a scheme.

“(Nonprofits) should take away from what happened in that particular situation a very important lesson that it is important to carefully vet any involvement with outside organizations where the promises sound too good to be true,” said Seth Perlman, a New York City-based attorney specializing in nonprofit law. “Nonprofits need to look at these situations in a more businesslike manner and bring in outside professionals if necessary to do the appropriate due diligence.”

Charities need to be discriminating about proposed opportunities and review them carefully, Perlman added. “I don’t believe that this is a common problem, which is why most nonprofits never consider the possibility that something like the New Era scheme could occur,” he said.

The future

Improved public disclosure laws and an enhanced enforcement focus on tax-exempt groups have made financial information more readily available, but the sector is still susceptible to another New Era scam, according to several nonprofit experts.

“There’s no question in my mind that it could happen again,” Perlman said. “A vast majority of states still rely on news reports, complaints received by disgruntled insiders and whatever small amount of information they can actually glean from registration filings, all of which would not prevent another New Era-type scandal from occurring in many of these states.”

Karl Emerson, director of the Pennsylvania Bureau of Charitable Organizations in Harrisburg, was hired September 1995 in the wake of the scandal. Emerson’s office now has a staff of five investigators, four auditors and an in-house prosecuting attorney, he said. The state recently went over 8,500 registered charities, a jump from the roughly 3,700 registered when he arrived, Emerson said.

Still, Emerson acknowledged that “without a doubt” a New Era-type scandal could happen today.

Emerson added that Pennsylvania probably reviews more Form 990s than any other state in the country, but there’s no way its staff can look in great detail at the 8,500 organizations registered. “The main factor is that states collectively do not have the resources to do the critical review” of nonprofits’ financial statements, Emerson said.

The prisoner

“I’m not sure Bennett set out to commit a fraud,” Perlman said. “I think the situation got away from him. These things aren’t necessarily set up to defraud charities or the public, but the philanthropic community is about power and reputation … not so much about money. And that’s very enticing.”

At least one person in the evangelical community, who was deeply hurt by the New Era scandal, is willing to let bygones be.

“An interesting sideline is the community that he hurt on this thing has come back and petitioned President Clinton and President Bush to pardon him,” Nelson said, adding that he’s personally sent a letter. “Many caught in this thing have come back and said the man has paid his price. He’s no longer a threat.”