February 9, 2023

FTX founder Sam Bankman-Fried’s aggressive embrace of “effective philanthropy” has led to donations to dozens of nonprofits, but now those groups face the prospect that they may be asked to give the money back.

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The collapse and bankruptcy of the crypto exchange means that groups that receive funds from FTX’s charitable entities can be asked to return that money – a legal move known as clawback – so FTX’s account holders and Creditors can be repaid.

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Jason Lillian, a partner at the law firm Loeb & Loeb, LLP, said, “The unfortunate reality is that charities are vulnerable to clawback claims when a funder enters bankruptcy, which is usually the case for nonprofits and clawback claims.” were talking about, not the FTX case.” especially. While there may be exceptions in certain circumstances, Lillian said, generally, the law does not allow nonprofits to avoid clawback efforts.

There is potentially bad news for nonprofits in FTX’s orbit. Bankman-Fried has made charitable giving a central piece of his public image and FTX’s. The company’s website states that it was “founded with the goal of being the world’s most effective charity.”

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Bankman-Fried championed “Effective Altruism,” A philosophy of giving that strives to make evidence-based decisions about what is best for humanity. FTX reportedly donates 1% of “net fees” to charity and both employees and account holders are encouraged to donate to the FTX Foundation, the philanthropic arm of the company.

leader of the FTX Foundation’s Future Fund, Joe launched In February the undisclosed FTX collectively resigned, with plans to commit $100 million “to ambitious projects to improve the long-term prospects of humanity”. He said in a public post that the fund was pausing new donations amid “fundamental questions about the legality and integrity of the business operations that finance the FTX Foundation and the Future Fund.” The groups that received the Future Fund and FTX Foundation grants are now on hold, waiting to see how the bankruptcy may affect them.

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‘I assumed FTX to be a reputable company’

They include a nonprofit that helps children in rural northern Karnataka, India, connect with mentors for online classes to help them study math, science, engineering or medicine. Rajalakshmi Children Foundation A spokesperson told Marketwatch that it received a $200,000 grant from the FTX Foundation’s Future Fund in the spring of 2022 and is looking forward to more funding to expand the program.

Akash Kulgod, spokesperson for the Rajalakshmi Children’s Foundation, wrote, “Given their prominence in the public domain (such as naming the Miami Heat’s stadium, sponsoring high profile events) I assumed FTX to be a reputable company.” “None of us on the team are well-versed in financial markets/cryptocurrencies, so it was a shock to learn of the collapse and suspected foul-play,” Kulgod said. (To be clear, FTX has not been accused of fraud by US authorities.)

Facebook co-founder says he’ll step in

Some nonprofits questioning their financial future after the closure of the Future Fund may find help from Facebook Meta,
Co-founder Dustin Moskovitz. philanthropic fund Moskovitz runs with his wife, Carrie Tuna, he says will Consider funding requests Future Fund grantees who never received the money they were supposed to receive from the Future Fund; grantees who “received money but want to set it aside to pay back to creditors or depositors”; or grantees “whose funding was otherwise affected by recent events.” After Bankman-Fried, Moskovitz and Tuna are some of the largest funders of influential philanthropy-focused groups. Moskovitz has an estimated net worth of $6.3 billion. Like Bankman-Fried, the couple have signed the Giving Pledge, pledging to give away most of their wealth to the public during their lifetime or in their wills.

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Dan can fight claw claims

Although charities are subject to clawback claims, they are not required to pay money immediately if asked to do so by a trustee (the person in charge of returning assets to creditors in the case of bankruptcy or fraud).

Nonprofits can contest and defend clawback claims by arguing why they should not be subject to clawback. This happened after the Bernie Madoff Ponzi scheme, when the trustees sought to withdraw millions of dollars from major national charities that had invested with Madoff.

Several donors returned the money, but at least one successfully negotiated a smaller clawback. According to the US Government Accounting Office, the trustees originally filed a $77 million claim against the non-profit Hadassah, but settled for $45 million to avoid the failure of an Israeli hospital funded by Hadassah. report good On the Madoff liquidation.

An Unsettled Question: Should Philanthropists Be Protected?

Lillian said situations in which philanthropic funding gets caught up in bankruptcy proceedings present an unresolved public-policy question: Should nonprofits get special protection from clawbacks?

He added that there are arguably two sets of “innocent players” in these scenarios. On the one hand there are charities that operate in good faith, “trying to do the right thing, trying to do good,” which may have already spent money for their charitable purposes. On the other side are “innocent investors, innocent creditors and sellers who were hoping to get the benefit of their bargain or a return on their investment.”

The question is, “When is it appropriate to favor the interests of the charitable and charitable beneficiaries over the interests of creditors?” Lillian said. “Is the public interest being better served by protecting charities against claims of malpractice than by ensuring that charity funds are used for charity? We haven’t seen that legislative response yet, And until there is a legislative response at the federal and state levels, charities will remain vulnerable to claims.

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