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SPOTLIGHT REPORT | CHARITY BEGINS AT HOME

Foundation lawyers enjoy privileged position

This article was reported by the Globe Spotlight Team -- reporters Beth Healy, Francie Latour, Sacha Pfeiffer, and Michael Rezendes, and editor Walter V. Robinson. It was written by Rezendes and Pfeiffer.

Fourth in a series of occasional articles.

A Minnesota lawyer finds a legal way to boost his annual fee as a foundation trustee tenfold -- to $206,000 -- after the last member of the founding family dies. A New Jersey attorney reports that he works full time for one foundation and 30 hours a week for a second, and still has time to bill a third for legal fees. And a prominent Boston attorney helps direct millions of dollars in donations to his alma mater from a foundation his firm administers.

In the insular world of private charitable foundations, lawyers enjoy special stature, mostly for the good they do: They counsel wealthy people with philanthropic impulses. They offer specialized advice that has led to the creation of tens of thousands of private foundations, which funnel billions of dollars to charities every year. And when they join foundation boards as trustees, their advice is eagerly sought and often followed.

But a Globe Spotlight Team investigation has found many cases in which attorneys have taken advantage of their privileged positions. Some charge enormous fees, often at high-end corporate rates, for uncomplicated tasks that trustees at most foundations perform for little or no compensation. Others are paid by two or more foundations and claim weekly workloads of 70 hours or more.

In Massachusetts, where seafaring captains and enterprising Brahmins began entrusting their financial affairs to lawyers as far back as the 1800s, the relationship between wealthy philanthropists and their attorneys can be especially close.

In Boston, a cluster of white-shoe law firms maintain in-house investment management subsidiaries that often serve foundations that their lawyers help direct as trustees. It is a lucrative arrangement that some foundation experts and legal ethicists find troubling. In addition, some foundation lawyers also take part in awarding grants to charities where they have a personal interest.

Still, it is the size of the fees attorneys take from foundations that has raised the most concern among foundation specialists and, occasionally, law enforcement officials. Under IRS rules, lawyers, along with accountants and financial advisers, are allowed to bill foundations for their services while also serving as trustees -- but only if their fees are reasonable.

At the Edelstein Family Foundation in Minneapolis, the fees collected by attorney Thomas A. Keller III were reasonable for decades -- only $3,849 in 1997, for example. But after the last Edelstein family member died in 1998, Keller's position as co-trustee with a bank quickly became more lucrative, paying him fees of $130,624 in 1999 and $206,498 in 2000.

"We felt that amount was excessive," said Stephen K. Warch, an assistant state attorney general who went to court to have the payments reduced. Keller's fee was based on a provision adopted in 1974 by the Edelstein family, when foundation assets were small, that called for Keller to receive a payment equivalent half of the bank trustee's fee. Bank trustees are typically paid a percentage of assets for investment management and other services. Later, when the foundation's assets mushroomed to nearly $50 million, Keller's fee arrangement resulted in a windfall.

Under an agreement with the attorney general's office, Keller, a partner in the law firm of Moss & Barnett, agreed to drop his fee to more accurately reflect the number of hours he spends working for the foundation. In 2001 and 2002, his annual fee averaged $108,000 - for about 300 hours of work each year, he said.

Still, Keller's duties are vague. The bank trustee handles the investments and writes the checks to charities. Keller doesn't even pick the charities, or set the amounts they receive, because founder David Edelstein long ago selected the permanent recipients -- there are only 10, including Brandeis University -- and set a formula that determines how much each receives. "With each and every beneficiary, I monitor what they do to honor the memory of the Edelsteins," Keller said.

Other lawyers who receive extraordinary fees report working extraordinarily long weeks. One example: The tax returns filed by the Elizabeth Morse Charitable Trust assert that Chicago lawyer James L. Alexander works full time, while tax returns for the Elizabeth Morse Genius Charitable Trust, a separate foundation, report that Alexander works 20 hours a week. The overtime is worthwhile: Alexander is paid combined annual trustee fees of more than half a million dollars.

And working for the Morse foundations has other rewards: Last year, under Alexander's leadership, one of the two foundations celebrated its 10th anniversary with a $49,000 party.

Alexander declined to be interviewed about his foundation work.

New Jersey attorney John P. Keegan is another who reports working long hours for more than one foundation.

He is the full-time president of the Charles Edison Fund of Newark, N.J., established by the son of inventor Thomas Alva Edison. There, Keegan oversees $30 million in assets, honoring the inventor's legacy with grants to institutions that teach science and perform medical research, and to groups dedicated to preserving Edison properties in New Jersey and Florida. His compensation: $213,203 in 2002.

On a separate foundation tax return, Keegan also reports working a 30-hour work week at the Thomas Alva Edison Preservation Foundation, which received many of the grants awarded by the Edison Fund. For that, Keegan was paid $170,000. And for work performed for an unrelated New Jersey foundation, the Elsie E. and Joseph W. Beck Foundation, Keegan receives about $17,000 a year.

In addition, from 1998 through 2002, the Edison Fund also paid more than $400,000 in legal fees, much of that -- Keegan has refused to say how much -- to Keegan's law firm for additional legal work Keegan said he performed. "I even work weekends on this thing," Keegan said, referring to the work he performs for the three foundations. "It's unbelievable."

One-stop-shopping approach

In Massachusetts, some attorneys and their law firms have developed a one-stop-shopping approach to foundation management, billing for grant-making services as well as legal, accounting, and investment management work. One example is Hale and Dorr attorney Martin S. Kaplan, a founder of Hale and Dorr Capital Management, the law firm's investment management affiliate.

At the V. Kann Rasmussen Foundation, a $100 million foundation established to fund environmental and medical research and education, Hale and Dorr and its investment business collected more than $3.5 million in fees over four years through mid-2002, according to the foundation's tax returns. And although the bill for investment management dropped during that time, as assets declined, the bill for legal and other administrative work climbed steadily -- from $447,950 to $603,050 during the same period, an increase of 35 percent.

Kaplan, a former chairman of the state board of education, defended both the fees and Hale and Dorr's integrated approach to foundation management. He attributed the rise in fees to an increase in grant applications and grants. And he said that if Kann Rasmussen did not use Hale and Dorr, it would have to pay more for office space and a foundation staff.

Kaplan also said that, as a foundation trustee, he has not investigated whether other firms could provide legal or investment management services at lower cost, and thereby increase funds available for charitable giving. "Our goal hasn't been to figure out how can we do things more cheaply," he said. "Our goal has been to be an effective foundation."

Some legal experts said they are troubled by the idea that a lawyer serving as a foundation trustee would approve the hiring of his own firm for legal and investment management work. Attorney trustees should recuse themselves from decisions to hire their law firms, these experts said, and the decision should be based on what is best for the foundation.

"There is an inherent conflict of interest in making the decision to employ his own firm to do this work," said Stephen Gillers, a professor of legal ethics at New York University Law School, speaking generally about lawyer-trustees. Gillers added that lawyers serving as foundation trustees should rely on other board members to decide whether they or their law firms receive foundation business. "That's the cleanest way to do it," he said.

Kaplan said that, in the case of the Kann Rasmussen Foundation, the other trustees asked that Hale and Dorr perform all management services when the foundation was established, in 1991.

Kaplan, who alone among the Kann Rasmussen trustees lives in the United States -- the other three, children of the Danish founder, live in Denmark -- has also played a role in directing millions of dollars from the foundation to his alma mater, Columbia University, where he received his bachelor's degree and, in 2000, the John Jay Award, the university's highest honor for professional achievement.

Over the four years from 1998 through 2002, the Kann Rasmussen foundation gave more than $4.5 million to Columbia University and affiliated organizations -- considerably more than it gave to any of the other colleges and universities that received Kann Rasmussen grants.

Kaplan said much of the money was donated after he hired a Columbia faculty member as a grant consultant and later adopted the consultant's proposal that Kann Rasmussen make a 10-year grant of $12 million to a consortium of New York environmental groups overseen by Columbia. The $4.5 million represents four years of the 10-year grant, plus additional donations. Kaplan described the donations to Columbia as "eminently appropriate and fair," calling the school a "role model university," while insisting that the grants were awarded to further the mission of the foundation: preserving the environment. "These are not grants from the foundation to make me look good at Columbia," he said.

Conflicts of interest

Sometimes, the potential conflicts of interest for attorneys are even more obvious.

The Boston-based Mabel Louise Riley Foundation, which has been administered by the same three attorneys since the 1970s, is a case in point.

With $45 million in assets, the foundation has long been a significant player in Boston philanthropy and one of the leading funders of innovative urban programs, including the Dudley Street Neighborhood Initiative.

But in 2002, the foundation awarded $250,000 to the Massachusetts Golf Association to help buy a small golf course used during summer months to teach golf to underprivileged youths. One of the foundation trustees supporting the grant was Robert W. Holmes Jr., who was at the time legal counsel for the Massachusetts Golf Association.

"I'm not saying that connection didn't matter," said Thomas E. Landry, the association's executive director.

Holmes did not return telephone calls from the Globe. But Andrew C. Bailey, a retired attorney who devotes much of his time to the foundation, said Holmes's dual role as Riley Foundation trustee and Massachusetts Golf Association counsel had nothing to do with the foundation's grant, adding that he saw no reason for Holmes to recuse himself from the award decision.

The grant, Bailey said, "was a slam dunk. It's a good program."

Massachusetts Attorney General Thomas F. Reilly, whose office oversees private foundation and charities, says trustees should draw a bright line between grant-making and their personal interests.

In a case involving the Yawkey Foundation, funded with proceeds of the sale of the Boston Red Sox, Reilly said, trustees should not propose grants to charities where they have ties. And trustees confronting such potential conflicts should not take part in discussions about such proposals, lobby other board members, vote, or even be in the room when the vote occurs.

The Globe has found numerous, examples, in Massachusetts and across the country, where trustees routinely involve themselves in grants to charities they are affiliated with.

Lawyers are not the only professionals permitted by the IRS to bill foundations for professional services while serving as foundation trustees. Accountants and financial advisers also enjoy a privileged relationship with foundations, and in several cases reviewed by the Globe, accountants working with attorneys also have taken hefty fees from foundations they serve as trustees.

Still, lawyers typically are the ones receiving the more eye-catching fees.

Three years ago, in New Jersey, the $108 million Blanche and Irving Laurie Foundation paid attorney Gene R. Korf a $50,000 trustee fee, while his law firm billed the foundation another $189,910 in legal fees.

By 2002, the assets of the foundation had dropped by almost half, to $56 million. Yet Korf's trustee fee remained at $50,000. And billings by his law firm, Korf & Rosenblatt, rose to $206,651. Two other trustees from the accounting firm Harvey Rich and Co. also continued to collect $50,000 each in trustee fees. And the firm's accounting bill climbed to $117,050.

Korf defended the $1.23 million in trustee and legal fees he and his law firm received over five years as "far from out-of-line" and "quite reasonable." He also insisted that an additional $100,000 annual salary paid to the 84-year-old foundation president, Adelaide Marcus Zagoren, is justified because Zagoren works full-time.

But Zagoren said in a Globe interview that she works less than half-time. Asked to explain the fees paid to Korf and his law firm, she replied: "Gene does an awfully good job."

Globe staff writer Matt Carroll contributed to this story.

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Spotlight Report The Boston Globe Spotlight Team would like to hear from readers who have information about this issue. The Spotlight telephone number is 617-929- 3208.

Confidential messages can also be left at 617-929- 7483.

The e-mail address for the Spotlight Team is spotlight@globe.com

Foundation tax returns are available for public viewing at www.guidestar.org
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