Are the board members of nonprofits that put money into the vaporized funds of Bernard Madoff legally vulnerable for the losses? Possibly. Some individual donors may go after the trustees if charities they supported invested that money in a Madoff fund. So might the attorneys general of states where the nonprofits are based.
… Directors of nonprofits are legally shielded from monetary liability unless they engage in criminal acts or are grossly negligent or reckless. “You’re not liable for bad judgment; you’re not liable for mistakes; you’re not liable if things just don’t go well,” says Jack B. Siegel, head of Charity Governance Consulting LLC, a Chicago outfit that advises nonprofits on governance issues. Still, the dollar amount that Madoff made off with has invited new consideration of what constitutes gross negligence or recklessness. “My personal view is that this is an area of the law that’s going to be tested heavily as you see more and more nonprofits suffer significant losses in their investment portfolios,” says Keith Freid, a senior vice president with American International Group, a leading underwriter of directors’ and officers’ liability insurance for nonprofit organizations. Donors who see that universities invested their donations badly rather than using the money in the way they intended, for instance, might sue the college trustees for legal redress.
… Directors of nonprofits who have business relationships with the outfits—or “wear more than one hat,” as Steven Scholes, a partner with the law firm of McDermott Will & Emery, puts it—face the greatest risk of being accused of breaching a fiduciary duty. Both Madoff and hedge fund manager J. Ezra Merkin, for example, were members of the board of trustees of Yeshiva University in New York City, which lost a $14.5 million investment with Madoff, along with some $95.5 million in phantom profits. Merkin was chairman of Yeshiva’s investment committee and managed a portion of the school’s money, apparently by simply turning it over to Madoff…