Business

Reporter’s Notebook

How to squander $52m of charitable money in 6 months

Mark Avery (right) posed with Joe Kapper at Security Aviation Inc. in Anchorage.

Melissa Campbell/Alaska Journal of Commerce/AP/File 2005

Mark Avery (right) posed with Joe Kapper at Security Aviation Inc. in Anchorage.

This may set a record for most belated Spotlight follow-up story ever.

An e-mail recently landed in my inbox from a surprise correspondent: a federal prosecutor in Anchorage.

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“Ms. Pfeiffer,” began the message from Assistant US Attorney Steven E. Skrocki of the Department of Justice, “a long time ago you authored a Spotlight piece on inheriting trustee seat positions.”

He was referring to a 2003 Boston Globe Spotlight Team story I wrote about an insidious yet common practice at private foundations, which are tax-exempt funds set up to support charitable causes. Foundation trustee jobs, as I reported, are routinely handed down from relative to relative, even though those heirs may have no family ties to the wealthy founders.

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And trustees are often highly paid for little work.

One of those well-compensated hand-me-down trustees was Mark J. Avery, then 44 years old, who inherited the position when his father died. Avery’s job at the $350 million May and Stanley Smith Charitable Trust and $150 million May Smith Trust paid a handsome $600,000 a year. On top of that, he billed the San Francisco-based trusts for legal work by his law firm.

When I called Avery to inquire about his compensation, this was his reply: “I get sick and tired of people wondering about how much I get paid and why.”

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Back to that e-mail. “We’ve never forgotten the piece you did back then, nor Mr. Avery’s quote,” Skrocki wrote, “and [we] thought you may appreciate the end result so many years after your article.”

Then Skrocki told me this made-for-Hollywood story: In March, an Anchorage jury convicted Avery of numerous counts of fraud and money laundering, and on Monday he was sentenced to 13 years in prison. His crime? Burning through $52 million of May Smith Trust money in six months, the biggest private fraud case in Alaskan history. The trust was intended to support an elderly widow and go to charity after she died.

Avery’s blizzard of spending in 2005 included purchasing an air charter company (despite having no background in aviation), Gulfstream executive jets, World War II military aircraft, Czech fighter planes, helicopters, rocket launchers, a patrol boat, and a yacht. He also paid off more than $600,000 in personal debt and bought a $700,000 home.

In the small town of Anchorage, it was an unusual orgy of spending that quickly drew the attention of the FBI, IRS, and other law enforcement officials. One of them was Skrocki, who questioned the source of Avery’s funds — and became even more suspicious after reading my Globe story.

“We started Googling him,” he told me, “came upon your article, and thought: Maybe this is where he’s getting the money.”

Skrocki and others launched a federal investigation in 2005, and discovered that Avery had persuaded his two fellow trustees — now dead, but at the time in their 70s and “medically challenged” — to “loan” him $52 million in Smith funds. Avery told them he planned to use the money to start an aviation company that would be used for trustee travel, according to court documents.

Instead, he went wild, making extravagant purchases that prosecutors said “did nothing” to benefit the trusts. Within months, the company was crumbling, Avery was on the cusp of bankruptcy, and the $52 million was gone.

At trial this February, Avery claimed he was simply an ambitious entrepreneur bamboozled by an untrustworthy business partner. The aircraft, he said, were meant to be used for legitimate money-making ventures, including training the Philippine Air Force and conducting US security details in Africa.

I requested an interview with Avery through his federal public defender, Mike Dieni, who told me he advised Avery not to talk with me. He also said Avery will appeal. But court records are damning.

“Avery used this money as his personal piggy bank,” prosecutors wrote. “The defendant in this case is a fraud and a thief.”

A jury agreed, and Avery, now 57, is headed to jail — back to jail, actually, because he served time after pleading guilty in 2007 to related charges, but his conviction was vacated when a US Supreme Court ruling changed the definition of a certain type of fraud, setting him free.

My first reaction to Avery’s fate was that justice, although delayed, had finally been served. But then I began to feel more pessimistic. Here’s why:

Trustee positions continue to be inherited

A current Smith trustee is Ruth M. Collins, whose late father, John P. Collins, was one of the trustees who gave Avery the $52 million loan. Her grandfather was also a Smith trustee. In other words, hand-me-down trusteeships remain commonplace. Asked about this practice, Ruth Collins said in an e-mail exchange that “I don’t see how being an ‘outsider’ would ensure competency.”

Trustee positions continue to allow double-dipping

Ruth Collins is paid less as a Smith trustee — about $125,000 annually for 10 hours of work per week — than her father, Mark Avery, and their colleague Dale Matheny. But just as those men billed the trusts for additional services (Avery for legal, John Collins for investing, and Matheny for accounting), so does Ruth Collins. Her Corte Madera, Calif., company, Adminitrust, billed the Smith trust nearly $1.3 million in 2014 for “trust administration.” Collins told me that amount is “not excessive.”

In IRS terms, this is known as self-dealing and is usually prohibited, but a loophole allows it. Still, in the view of Lisa Ranghelli of the National Committee for Responsive Philanthropy, self-dealing is “hard to justify.” Added Ranghelli: “You’re really not doing your due diligence as trustees if you’re allowing other trustees and yourself to profit from these kinds of services.”

There are still insufficient safeguards over private foundations

My 2003 Spotlight story was part of a larger series of articles on financial abuses at private foundations, which are ostensibly philanthropic but often spend money on lavish office space, luxury cars, and, in at least one case, a corporate jet. They also frequently pay high salaries to trustees for minimal work.

The Smith case shows that these shenanigans continue, largely because government officials aren’t equipped to properly monitor the philanthropic sector. Kathy Postel Kretman, director of Georgetown University’s Center for Public & Nonprofit Leadership, agrees. “It seems to me the situation hasn’t changed a whole lot, particularly compensation for trustees,” she said. “The state attorneys general just don’t have the resources to really pay attention as much as they should.”

Her Georgetown colleague Pablo Eisenberg, a vocal critic of the philanthropic sector, has an even stronger opinion: “There’s absolutely no oversight by the AGs, the IRS is dead in the water and has been for 15 years, and newspapers are bleeding reporters and killing off investigative reporters, so the field is wide open for crooks and scandals.”

When your wealth outlives you, it may not be spent as you’d hoped it would

There’s a debate in the philanthropy world over whether private foundations should be spent down during the lifetimes of their creators. Many wealthy people want their foundations to carry on after they die. But Stanley and May Smith — a married couple, he made a fortune mining iron ore in Malaysia after World War II and she never remarried after his death in 1968 — are a cautionary tale.

When she died in 2006 at age 83, after suffering from Alzheimer’s and needing round-the-clock care, their trusts contained nearly a half-billion dollars. They didn’t intend their charitable funds to be spent on jets and yachts, but that’s what happened. The Smiths illustrate the perils of your money outliving you: You can’t be sure your charitable mission will be carried out once someone else is in charge of the purse strings.

How did Mark Avery spend some of the May Smith Trust’s money?

A 37-foot Carver yacht. Price tag: $237,000.

US Department of Justice

A 37-foot Carver yacht. Price tag: $237,000.

A Moose Boat patrol boat. Price tag: $500,000.

US Department of Justice

A Moose Boat patrol boat. Price tag: $500,000.

A P-51D Mustang fighter. Price tag: $1.4 million.

US Department of Justice

A P-51D Mustang fighter. Price tag: $1.4 million.

A F4U-4 Corsair fighter. Price tag: $2.4 million.

US Department of Justice

A F4U-4 Corsair fighter. Price tag: $2.4 million.

Sacha Pfeiffer can be reached at pfeiffer@globe.com. Follow her on Twitter @SachaPfeiffer.

Correction: A previous version of this story misattributed a quote by Lisa Ranghelli to Yna Moore, both of the National Committee for Responsive Philanthropy.

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