Blowing the Whistle on Madoff
(Added 4/8/2009)
Over the past few months, the subject of how Bernard Madoff's Ponzi scheme has affected charities' investments has frequently been the topic of interest in several discussions in my nonprofit ethics and governance classes at New York University. After one of the classes, one student, who is in the development office of a charity, privately said to two professors that her charity had been asked to invest in the Madoff funds but, after conducting due diligence, the charity's finance committee determined that Madoff was doing something wrong. One of the professors said that she had dodged a bullet and congratulated her board for doing the due-diligence all charities should but often don't. But the other professor asked her why, after she learned of Madoff's way of doing business, she didn't tell everyone else in the charitable community. Didn't she feel an ethical responsibility to blow the whistle? She then asked me what she should have done.
She had no obligation to blow the whistle. As context plays a large role in ethical decision-making, we have to remember that many people had questions about Madoff before the news broke, but only a few went to any lengths to expose him - and those efforts went largely unnoticed. Furthermore, according to one attorney I spoke with, had the charity sent out a letter to other charities or in any other way took their concern public - the charity took the chance of being sued by Madoff under the legal doctrine of 'slander per se,' which is intended to curb untruthful statements made to the public. In this litigious society, I can't blame the charity for not communicating its concerns in writing to the charitable community.
But Bill Josephson, the former head of the Charities Bureau at the New York State attorney general's office, as well as a colleague of mine on the NYU faculty, says that anyone could report potential misgivings to the attorney general's office in the state where the charity resides or in those it does business without fear of improperly accusing the potential offending party in the way that 'slander per' se is intended to prevent. The attorney general is the protector of the public's interest, he says, when it comes to issues like this. He also confessed that neither he nor anyone else he knows in the regulation world had ever even heard of Bernard Madoff before December 2008 - so under the radar Madoff kept himself.
Despite the hindsight that tells us charities that knew better about Madoff's Ponzi scheme, or who even had legitimate doubts about his investment (or lack thereof) methods, had an obligation to shout it from the rafters, the woman's charity chose correctly in not doing that. But for those concerned about this kind of thing in the future, don't overlook the option of reporting your concerns to your attorney general.