October 18, 2007 | Read Time: 4 minutes
A California court has ordered a former foundation executive and his associates to repay $35-million to a grant maker after losing millions of dollars of its money in shaky investments and creating bogus religious organizations to hide improper dealings.
A lawsuit filed by the Schlinger Foundation claimed that Evert I. Schlinger Sr., who was president of the foundation, as well as his son and three of their advisers, mismanaged and defrauded the family foundation, which has granted millions of dollars to universities, museums, and other nonprofit groups nationwide.
After a five-week trial, a jury in April said it agreed with the foundation’s allegations, and in a court ruling last month Mr. Schlinger and his associates were ordered to repay the lost funds.
Lawyers for Mr. Schlinger and his son, Evert I. Schlinger Jr., say the two plan to appeal the decision. The Schlingers, the lawyers say, were victims of bad advice. They say they never profited from any of the questionable financial transactions and never intended to; they say their main interest was in carrying out the charitable purposes of the foundation.
The foundation has more than just the court issue to deal with: The Internal Revenue Service has opened its own inquiry into the grant maker.
UPS Inheritance
The Schlinger Foundation, in Santa Barbara, was created in 1985 by Mr. Schlinger Sr.’s parents, who had amassed a fortune in United Parcel Service stock. When his parents died in 1988, the foundation received $10-million worth of stock, and Mr. Schlinger Sr. and his brother, Warren, were put in charge.
In 1995, the assets of the foundation were split in two, with Warren Schlinger and his wife setting up a separate foundation, and Mr. Schlinger continuing to manage the Schlinger Foundation.
According to tax filings, the Warren and Katharine Schlinger Foundation, in Pasadena, Calif., which has nothing to do with the recent lawsuit, had about $61-million in assets last year.
The Schlinger Foundation, which in 2000 was worth as much as $43-million, according to court documents, now has assets valued at between $6-million and $7-million.
Church Deal
The lawsuit, filed in 2003, asserted that under Mr. Schlinger’s leadership the foundation lost more than $26-million to speculative investments, and more than $10-million to schemes involving bogus churches set up to avoid taxes and the oversight of charity regulators.
In one deal detailed in the lawsuit, the Schlingers used foundation assets, funneled through one of the fake churches set up with Evert I. Schlinger Jr. as the head, to buy a $2-million farm from his father and his wife, allowing the elder Mr. Schlinger to continue to reside on the farm at no cost.
Along with the Schlingers, the court ruling calls on three other individuals to repay the foundation for its losses: Geoffrey Thayer, a former lawyer, who masterminded the plans to create the fake churches, and Blair Smith and Timothy Pettinger, who both helped steer the foundation into the bad investments at the same time they were making money from the deals.
Edward M. Bialack, a California lawyer who represents the younger Mr. Schlinger, says the Schlingers are guilty of nothing but what he called “naïveté” in following the bad advice of Mr. Thayer, Mr. Smith, and Mr. Pettinger.
In the case of the farm purchase, for example, he says the Schlingers were convinced that conducting business through the churches was the best way to streamline the foundation’s administrative burden. In addition, he says, before the finances of the farm collapsed, the Schlingers had intended to use it to carry out charitable work by raising organic crops to help feed impoverished local residents.
The lawsuit did not represent the first time the foundation has come under scrutiny for its dealings. In 1998, California’s attorney general opened an inquiry into the foundation, concerned about its high-risk investments and the lack of outside directors on its board.
A spokesman for the attorney general’s office, which was listed as a party to the lawsuit, said state officials are pleased with the outcome of the legal case, and that the attorney general’s investigation is now closed.
Even through all its troubles, the Schlinger Foundation has made sizable charitable contributions.
According to tax filings, the foundation made charitable expenditures totaling more than $10.5-million from 1998 through 2004. Much of that money went to support research work in the field of entomology.
In 2004 and 2005, for example, the foundation gave a total of more than $1-million to the California Academy of Science, in San Francisco, where it supports a postdoctoral fellowship in entomology, among other programs and research efforts.
Mr. Schlinger, 79, is a retired professor of entomology.
“The lesson here is that he hurt the thing he is most passionate about, entomology,” Scott B. Campbell, the foundation’s lawyer, says of Mr. Schlinger. “They would have had millions and millions more to give to entomology and related causes, but because of his stubborn refusal to follow prudent advice, his very own family’s foundation has much, much less.”
