Lessons from New Era - largest, non-profit Ponzi scheme fraud committed by Foundation for New Era Philanthropy founder John G. Bennett, Jr

Internal Auditor, Oct, 1998 by Robert Allen, Marshall B. Romney

John Bennett scammed hundreds of respected institutions and individuals by adopting one of the simplest and oldest fraud schemes - the Ponzi. Are there lessons for internal auditors in this classic case? Between 1989 and 1995, 180 organizations and 150 of the most financially-savvy philanthropists in America fell victim to the largest fraud ever to occur in the non-profit sector. More than $400 million was invested with New Era Philanthropy and John G. Bennett, Jr. in what turned out to be a grand Ponzi scheme. How was Bennett able to perpetrate such a massive scam among such an impressive list of participants? The answers reveal some of the most common tactics employed by fraud perpetrators, tactics that internal auditors should fully understand as they search for fraud in their own commercial and non-profit organizations.

THE RISE OF BENNETT AND NEW ERA

In 1989, Bennett established the Foundation for New Era Philanthropy to advise non-profits on management and fundraising techniques. Bennett had been operating in non-profit circles since 1982 when he began advising corporations on what charitable organizations deserved support. But it was New Era's matching gifts program that made Bennett's name within charity circles.

DOUBLE THE MONEY

Bennett's program provided for a group of anonymous and extremely wealthy donors to match funds raised by non-profit institutions and philanthropists. After being invited to participate in the program, non-profit institutions would raise funds and deposit them with New Era. Similarly, philanthropists would deposit funds earmarked for designated charities.

One major requirement was that New Era hold the funds for six months. During this time, New Era would deposit the funds in a "quasi-escrow" account with Prudential Insurance, where they were to be invested in T-bills. This holding period was designed to give New Era time to collect enough interest to cover administrative expenses and find a matching donor.

The anonymous donors would contribute funds to New Era, doubling the original amounts raised by the institutions and donated by the philanthropists. After six months, the deposited funds, plus the matched funds, would be transferred to the appropriate non-profit organization.

TRIPLE THE GROWTH

In its first year, New Era reported contributions of $306, 210. Growth was reasonable until late 1993, when an official at the Academy of Natural Sciences in Philadelphia asked if New Era could match $250,000. New Era agreed, and soon many of Philadelphia's major institutions, such as the University of Pennsylvania, the public library, and several evangelical Christian organizations, churches, and colleges, joined the program. Increasing numbers of philanthropists also signed on, seeking to double their donations to designated charities. As Bennett watched contributions explode to $41.3 million in 1993 and $100 million in 1994, he often boasted, "We give away more money than the Carnegies, Mellons, and Rockefellers!"

Bennett's efforts earned him great respect in the non-profit community. He rapidly ascended through Philadelphia's philanthropic circles and was invited to serve on the boards of several impressive organizations. Bennett befriended many prominent people, including Philadelphia Mayor Edward Rendell, who believed New Era was the answer to Philadelphia's prayers. "I was counting on Jack to push us over the top, to make Philadelphia the best destination city in the Northeast."

Many savvy and successful business people were also attracted to Bennett, some because of his reputation for Christian principles, others for his genuine interest in charitable causes. Dan O'Neill, president and co-founder of Mercy Corps International described him:

[Bennett] seemed like a very cordial and engaging guy - not a shark. He certainly did not seem like a manipulator or someone who was out to get rich. He dressed like the average businessperson working for IBM...I believe the man at his heart is genuinely moved by charity. When he took me out to lunch, I think it was in a Toyota. It was not a Rolls-Royce. It was not a Mercedes. He did not flash dollars, and he did not talk big-money payoffs that seemed exorbitant.

Bennett's charisma, charm, and religious dedication captured the trust and attention of those around him, and he was perceived as a saint with a mission to rescue charities in need of funds. It was this unchallenged public trust that allowed Bennett to perpetuate his massive Ponzi operation.

THE SCAM

Bennett's scheme was ingenious. Only a small amount of funds deposited with New Era were ever actually invested. Instead, some of the money was used to secure a large loan at Prudential. The rest of the invested funds, along with the borrowings from the Prudential account, were used to pay off previous promises whose six-month terms had expired. At some point, New Era raised the six-month waiting period to nine and ten months, claiming that the time lapse was "specified" by the anonymous donors and was therefore non-negotiable.