Nonprofits Try Many Tactics to Fight Requests for Return of Tainted Gifts

Following are the approaches charities have used to handle efforts by court-appointed authorities to recover gifts made to nonprofit groups by donors who have obtained money through Ponzi schemes or other scams.

Go public. Many charities that are subject to clawback lawsuits quietly return the donations to avoid embarrassment or any further connection with a donor who turned out to be a criminal. But other groups see a benefit to telling their story.

Family Central, a social-services group in North Lauderdale, Fla., told anyone who would listen that the organization was being forced to return a $25,000 gift from Scott Rothstein, a lawyer who was accused of running a Ponzi scheme.

The group was counting on using the money to help secure a nearly $1.5-million federal matching grant that would provide child-care assistance to needy families.

New donors stepped in to replace the funds, and Family Central ended up raising about $40,000, including a generous sum from a car dealer who had read about the group’s plight in a local newspaper.

Fight back. When the court-appointed receiver trying to recoup money for investors duped by Joseph S. Forte called on officials at Malvern Preparatory School, in Pennsylvania, Malvern balked. The boys’ institution challenged the court’s accounting of how much was to be repaid ($1.3-million) and argued that it was as much a victim of Mr. Forte’s fraud as any of the investors.

The school went to court to charge that Mr. Forte had paid only half of a $1-million pledge, and that he actually owed the school more than $600,000 because it went into debt to build the weight room the pledge was meant to cover. Malvern’s charges were rejected, but the school did reach an agreement in September to pay a lesser sum: $700,000.

Wait for more facts. When the Minnesota affiliate of Volunteers of America received a letter in August asking for the return of $57,500 it had received from companies associated with Tom Petters, the Minnesota businessman who operated a $3.5-billion investment scam, charity officials were dismayed. But when Michael Weber, chief executive of the organization, took a closer look, he found that it was unclear whether the companies that had made the gifts (over three years to support an annual fund-raising golf tournament) were even involved in Mr. Petters’s Ponzi scheme. Now, Mr. Weber says, his organization is reviewing the results of a court-ordered financial forensic report.

“Our hope is that the companies that made the contributions didn’t handle the fraudulent funds,” Mr. Weber says, pointing out that that would make the group immune from the demand to return the money. “That’s what will save us,” he says.

Plead poverty. Cathedral High School in St. Cloud, Minn., used a roughly quarter-million-dollar gift from Mr. Petters to install an elevator for disabled students in one of its classroom buildings. Now, more than two years after the elevator’s completion, Cathedral has been asked to return the $252,400 as part of the government’s recovery efforts in Mr. Petters’s fraud case.

“We converted a liquid asset, cash, to a nonliquid asset—namely, an elevator,” says Mike Mullin, Cathedral’s president.

He says the school has been in touch with the court-appointed receiver looking to reclaim the money, explaining that Cathedral has no cash reserves and nowhere to turn for the money. Mr. Mullin says he has provided financial statements and balance sheets and other materials demonstrating how the school has fallen short of recent fund-raising goals and operates frugally, barely making payroll every two weeks.

“We are a bare-bones operation,” Mr. Mullin says. “I respect [the receiver] and the legal process, but we are one of the victims here and we are asking to be heard on the subject of extreme hardship.”