Will The Southern Poverty Law (And Investing) Center Return Its Madoff Money?

[See also: Good News: SPLC loses $50 Million. Bad news: $PLC can afford it, by Patrick Cleburne]

The incredible Southern Poverty Law Center money machine just keeps rolling on and on, according to its latest Form 990 filing with the IRS [PDF] and its Financial Statement.  

But the SPLC ($PLC to VDARE.COM) is rolling in an increasingly bizarre direction. For example: why exactly is it piling up its extraordinary, illiquid, secretive, never-touched money mountain? This kind of thing risks unfavorable IRS attention. And why does it need a bank account in the Cayman Islands?

Donations to the $PLC in the year ending October 31st 2009 were down 11.1%—to a mere $28.8 million. But, because of a massive $32.49 million (19.6%) increase in the value of its securities portfolio, the $PLC's "Net Assets" rose to $199.95 million.

In contrast, according to one report, many charities faced contractions in funds available of 20-30% over this period.

Operationally, things weren't too bad for the $PLC either. Despite fundraising expenses of $5.677 million, according to the 990, and despite supporting 206 employees (payroll $12.312 million), the $PLC still managed to transfer a remarkable $4 million (the same amount as last year) to its reserves—its so-called "Endowment Fund".

In contrast, many, probably most, foundations must have had to invade their reserves in the arduous conditions of 2008-9.

With most charities, the term "Endowment Fund" would mean a pool of funds to which access is restricted, perhaps to income or a small percentage of assets.

This is not the case with the $PLC. Only a tiny proportion of its assets are restricted. The nomenclature is just camouflage. As Dan Borochoff, President of the watchdog American Institute of Philanthropies told Bill O'Reilly in 2001:

"It's not really an endowment [just] because the board called it that." ["The O'Reilly Factor," interview with Daniel Borochoff, February 23, 2001.](See NPI/SPLC Report II, Pp17-18)

What this means: approximately 13.9 cents of every dollar that the public gave to the $PLC in 2008-9 was promptly squirreled away into a management-controlled hoard from which, on the available public record, it never emerges.

Difficult times did call for grave measures, however. The $PLC apparently did not feel able to accept VDARE.com's helpful suggestion of last year that it make some donations (which it is quite entitled to do) to other leftist 501(c)(3) charities less wealthy than itself—many of whom were certainly suffering.

The $PLC also cut back its much-touted grants to school districts to encourage them to accept the egregiously-misnamed Teaching Tolerance anti-majority brainwashing kits by a striking 44.6%, to $108,144—a miniscule 0.3% of the Center's receipts from the public in 2009.

And (in a step that no doubt grieved the hearts of the senior management, given their actual priorities) the "unfunded commitments to invest…in limited partnerships and LLC's under capital commitment agreements" referred to in Note 4 of both the 2008 and 2009 audited Financial Statements fell by 15%, to $7.056 million.

This brought these "unfunded capital commitments" down to 86.6% of 2009's "Legal Services" expense from 103.8% in 2008.

What is this curious "unfunded capital commitments" item? It arises from the $PLC's enthusiasm for putting its "Endowment Fund" booty in highly sophisticated investment pools, rather than just in simple equities, bonds, or (Heaven forbid!) deposit accounts. Generally, it is not uncommon for these investment pools, for instance in the venture capital or real estate fields, to get incoming investors to commit to a funding schedule as the underlying projects get under way.

What does this tell us about the $PLC?

It tells us that in the last two years the Center was budgeting to spend at least as much on arcane financial investments as it spent on its eponymous legal activity. Or, to put it another way, of every $1 received from the public in 2009, 28.3 cents was spent on legal services, while the "capital commitment" for limited partnerships and LLCs at the end of the year equaled 24.5 cents.

As I said last year, the $PLC is in effect a modest public interest law firm and fundraising operation, linked to a very large, wildly aggressive investment pool. It's really the Southern Poverty Law and Investing Center!

One wonders if the $PLC's apparently very credulous donors realize this.

Contemplating the "Endowment Fund" reveals a great deal about the motives and outlook of the $PLC's management.

In brief, they appear obsessed with manipulating money to make money. This is particularly in view of recent changes evident in the 2009 reports. The structure of the portfolio looks like it could belong to a retired Goldman Sachs Partner, or possibly a very aggressive Family Office managing the fortune of an ultra-rich clan. There can be very few legal charities with this extraordinary appearance.

Usually one would expect that a charity with a large endowment would be interested in income, liquidity and perhaps a little growth—interest-bearing instruments, bonds, possibly a moderate amount of high grade equities.

Not the $PLC!

As of October 31st 2009, of the $PLC's total investment portfolio of $197,902,331, only $48,772,162 (24.6%) was held in cash, interest bearing instruments, Treasuries or equities for which its accountants could establish "active market" values.

The balance (75.4%) was in various types of "alternative investments", which needed less transparent valuation techniques. In 2008, only 49% of the portfolio was in such things.

What are these "alternative investments"? Note 4 in the Accounts says

"The Center's endowment fund investments include limited partnerships, limited liability companies, and offshore corporations…The Center's alternative investments themselves have interests in limited partnerships, U.S. and international public equities, private equity fixed income, real estate and commodities…Because alternative investments are not readily marketable, their estimated fair values are subject to judgment and uncertainty…"

On Wall Street, "alternative investments" got a bad name for illiquidity in the disruptions of 2008-9. The accounting profession developed a new way of valuing them.

The more transparent category (Level 2—"Inputs other than quoted prices…fair value is determined through the models or other valuation methodologies") is used for $119.1 million of the total $PLC portfolio (60.1%).

Level 3 ("Inputs are unobservable…and include situations where there is little, if any market activity…investments included in Level 3 include…alternative investments which are not redeemable…in the near term." is used for a material $30.08 million (15.2%) of the total portfolio.

Some might question the $PLC having such a large proportion of its reserves in illiquid (and presumably more risky) assets. It would certainly look odd for a normally-motivated charity.

But this would be to misunderstand what seems to be the purpose of these holdings in the $PLC's case. There is no history and probably no intention of ever using these resources to sustain the Center's operations. They are there to make the $PLC richer. In this context, a strategy of swinging for the fences makes sense.

Still, it has to be asked: why, in 2009, increase the proportion of "alternative investments" by half—to 78% in the case of the "Endowment Fund" narrowly defined? This was not a year in which this type of investment was favored. If more market gearing was desired, more speculative listed securities could easily have been used instead.

The VDARE.com hypothesis: privacy. As the $PLC increasingly moves into smearing other 501 (c) (3) charities such as the patriotic immigration reform groups, it can expect more attention to be paid to its peculiar finances. (For one thing, everyone is jealous!) By burying its holdings in these "alternative investment" entities, gains could be hidden for years, instead of immediately showing up in market valuations.

This is analogous to the Center's real estate holdings: gross book value $25.3 million, $16.8 million after depreciation—but very likely worth far more than net book. (Real estate usually is.)

Increasingly, what the $PLC is really worth will be known only to insiders.

One matter for which VDARE.com does not have a hypothesis: the new disclosure, on Page 5 of the latest 990, that the $PLC now has an account in the notorious tax haven and money-laundering location of the Cayman Islands! (The previous year the answer to this question was "N/A.")

Why would a tax-exempt American charity need any involvement in such a place? Appetite for exposure to a particular manager seems an implausible reason.  Even quite small Hedge Fund and other "alternative investment" managers usually have look-alike onshore and investment offshore pools, the latter to accommodate investors who are able to avoid possible US tax involvement. But the $PLC is tax-exempt.

At the very least, the Cayman Islands account demonstrates the extraordinary scope of the $PLC's investing activities.

The $PLC carries no less than 95.8% of its investment assets in its piously misnamed "Endowment Fund". The American Institute of Philanthropies, which exists to rank the financial efficiency of charities, is quite reasonably very hostile to excessive accumulation of reserves. It said in the April/May edition of its Charity Rating Guide:

"AIP strongly believes that your dollars are most urgently needed by charities that do not have large reserves of available assets. AIP therefore reduces the grade of any group which has available assets equal to three to five years of operating expenses."[VDARE.COM emphasis added]

The $PLC in 2009 had an investment portfolio equivalent to a thumping 6.6 years of what its 990 calls "Total functional expenses". So it gets a resounding overall F grade from the AIP, in contrast to C- based on its operating ratios alone. This has been the case for quite some years.

The lowest grade ranked by the AIP as "Satisfactory" is C-. The only other politically-oriented charity to get an F based on excessive assets is President Carter's Carter Center—which, however, was ranked A- on the basis of operations. (The only patriotic immigration charity to be ranked was FAIR, which got a B on operations—its endowment is apparently not large enough to matter.)

The $PLC cannot claim unstable inflows as the reason for its hoarding. In the last five years the "Gifts, grants, contributions…" has ranged between last year's low of $28.8 million to the previous year's high of $32.4 million.

The $PLC appears to have an odd compensation structure. In 2009, its 206 employees were paid an average of $59,765 (which is high: median household income in Montgomery, Alabama is about $42,000; the cost of living is 77.4% of the US average.)  But only two of its officers were paid more than $300,000. Of the two SPLC enforcers with most public visibility, Mark Potok is only 7th in compensation at $144,099. Poor Heidi Beirich once again does not make the "Highest Compensated Employee" list.

Highest paid duo Richard Cohen (President/CEO: $345,490) and founder and evil genius Morris Dees (Chief Trial Counsel: $348,420) occupy an unusual shared compensation perch. If the two incomes are amalgamated to give the high pinnacle structure more normal in U.S. charities and corporations, the resultant $693,910 income would make its recipient 22nd highest paid Charity Executive, according to the AIP's latest Charity Rating Guide—narrowly ahead of the ADL's Abe Foxman at $688,215.

How active can Morris Dees be at 74? Enough to need an unspecified amount of Chartered Air transport, according to the 990, and to "accidently" spend $2,144 from a corporate credit card on personal travel.

When reviewing the $PLC's accounts last year, I suggested it might have been expected that the moderate return/low risk strategy alleged by Ponzi scheme operator Bernard Madoff might have attracted their investments. This is especially so given the ethnicity of the $PLC's funding, reported in a recent Center For Immigration Studies backgrounder to be

"anchored by wealthy Jewish contributors on the East and West coasts."

Of course, it turned out the $PLC's investment objectives were much too ambitious for it to be attracted by Madoff.

But there is a Madoff angle.

The Picower Foundation, set up by Jeffry Picower, is reliably reported to have been the biggest beneficiary of the Madoff scam [Picower's Madoff Take Now Estimated to Be $7.2 Billion By Jake Bernstein Propublica, October 1, 2009] apparently gave the $PLC a total of $2.9 million. [De-funder of the Left, By Matthew Vadum, American Spectator, January 5, 2009].

Picower was found dead in his Palm Beach swimming pool last fall. His estate is reportedly about to settle with the court-appointed Madoff trustee by returning at least $2 billion. [Madoff fund to swell by $2bn, by James Quinn, Daily Telegraph (U.K.), May 4, 2010]

Helpful VDARE.com suggestion: Madoff left many destitute elderly in his wake. The $PLC should return its Picower money to the Madoff trustee for their benefit. After all, it's conventional for politicians to return tainted campaign donations. (Suggest this to the Madoff trustee.)

So what is the $PLC's mad scramble for enrichment all about?

Does the controlling clique at the Center one day intend to throw off its mask, perhaps after Dees' death, let fundraising wither, and draw out massive salaries with minimal activity—a pattern not unknown in foundations with inherited endowments? (My personal guess.)

Or must America continue to put up with its reckless and dishonest allegations stinking up our public discourse in order to keep the $PLC trough replenished?

Are these people as crazy as they are mendacious?