FTX founder Sam Bankman-Fried’s aggressive embrace of “effective altruism” spewed donations at dozens of nonprofits, but now those groups are facing the possibility that they may be asked to give the money back.
The crypto exchange’s collapse and bankruptcy means groups that received funding from FTX’s philanthropic entities could be asked to return that money — a legal move known as a clawback — so FTX’s account holders and creditors can be repaid.
“The unfortunate reality is that charities are vulnerable to clawback claims when a funder enters bankruptcy,” said Jason Lilien, a partner at the law firm Loeb & Loeb, LLP, who was speaking generally about nonprofits and clawback claims, not about the FTX case specifically. While there can be some exceptions in certain circumstances, Lilien said, generally speaking, the law does not let nonprofits avoid clawback attempts.
That’s potentially bad news for nonprofits swept up 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 donating to the world’s most effective charities.”
Bankman-Fried has championed “effective altruism,” a philosophy of giving which attempts to make evidence-based decisions about how to do the most good for humanity. FTX reportedly donated 1% of “net fees” to charity and both employees and account holders were encouraged to donate to the FTX Foundation, the company’s philanthropic arm.
The leaders of the FTX Foundation’s Future Fund, which launched in February with plans to give out $100 million “to ambitious projects in order to improve humanity’s long-term prospects,” resigned en masse as FTX unraveled. They said in a public post that the fund was halting new donations amid “fundamental questions about the legitimacy and integrity of the business operations that were funding the FTX Foundation and the Future Fund.” Groups that received Future Fund and FTX Foundation grants are now in limbo, waiting to see how the bankruptcy could affect them.
‘I had assumed FTX to be a reputable company’
They include a nonprofit that helps children in rural Northern Karnataka, India connect with mentors in online classrooms to help them study math, science, engineering or medicine. The Rajalakshmi Children Foundation received a $200,000 grant from the FTX Foundation’s Future Fund in spring of 2022 and was hoping for more funding to expand the program, a spokesperson told MarketWatch.
“I had assumed FTX to be a reputable company, given their prominence in the public sphere (such as Miami Heat’s stadium name, sponsorship of high profile events),” wrote Rajalakshmi Children Foundation spokesperson Akash Kulgod. “None of us on the team are well-versed in financial markets/cryptocurrencies, so it came as a shock to learn of the collapse and suspected foul-play,” Kulgod said. (To be clear, FTX has not been accused of fraud by U.S. authorities.)
Facebook co-founder says he’ll step in
Some of the nonprofits questioning their financial futures following the Future Fund’s closure could get a hand from Facebook
co-founder Dustin Moskovitz. The philanthropic fund Moskovitz runs with his wife, Carrie Tuna, says it will consider funding requests from Future Fund grantees who never received money they were supposed to get from the Future Fund; grantees who “received funds, but want to set them aside to return to creditors or depositors”; or grantees “whose funding was otherwise affected by recent events.” Next to Bankman-Fried, Moskovitz and Tuna are some of the biggest funders of effective altruism-focused groups. Moskovitz’s estimated net worth is $6.3 billion. Like Bankman-Fried, the couple has signed the Giving Pledge, the public promise to give away most of their wealth either in their lifetimes or in their wills.
Charities can fight clawback claims
Though charities are subject to clawback claims, they aren’t required to instantly fork over money if asked to do so by a trustee (the person in charge of returning assets to creditors in a bankruptcy or fraud case).
Nonprofits can fight clawback claims and assert defenses arguing why they shouldn’t be subject to the clawback. This happened in the aftermath of the Bernie Madoff Ponzi scheme, when the trustee sought to reclaim millions of dollars from prominent national charities that had invested with Madoff.
Several charities returned money, but at least one successfully negotiated a smaller clawback. Originally the trustee filed a $77 million clawback claim against the nonprofit Hadassah, but settled for $45 million to avoid causing the failure of an Israeli hospital funded by Hadassah, according to a U.S. Government Accounting Office report on the Madoff liquidation.
An unresolved question: Do charities deserve protection?
Situations where charities’ funding is ensnared in bankruptcy proceedings pose an unresolved public-policy question, Lilien noted: Do nonprofits deserve special protection from clawbacks?
There are arguably two sets of “innocent players” in these scenarios, he said. On one side are charities that operated in good faith, “trying to do the right thing, trying to do good,” who may have already spent the funds for their charitable purposes. On the other side are “innocent investors, innocent creditors and vendors who were expecting 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 charities and the charitable beneficiaries over the interest of creditors?” Lilien said. “Is the public interest being better served by protecting charities against clawback claims to ensure that funds intended for charity remain used for charity? We just haven’t seen that legislative response yet, and until there is a legislative response at the federal and state level, charities are going to remain vulnerable to clawback claims.”
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