A workout in court over Ponzi-scheme gift

Malvern Preparatory School is waging a court battle against demands that it return $900,000 donated by Joseph S. Forte, a former trustee and volunteer strength coach at the school who is serving a 15-year prison term for investment fraud.

That makes the Main Line school different from other recipients of Forte's Ponzi- fueled largesse, including the Archdiocese of Philadelphia. Those recipients reached agreements allowing more time for out-of-court negotiations with the court-appointed receiver gathering money for Forte's defrauded clients.

In a 23-page court filing last week, Malvern Prep argued that it was a victim of Forte. The school, known for its sports programs, went into debt constructing a strength-and-conditioning center at Forte's urging and after he pledged $1 million to pay for it.

But Forte only paid $500,000 of his pledge, according to the school, leaving Malvern Prep in debt for the rest. The school's June 30 filing asserted a counterclaim for $630,000, which includes $565,000 for a portion of a term loan needed to pay for the center plus $65,000 in fees and interest.

"We don't think it's a valid counterclaim," Lawrence T. Hoyle Jr., attorney for the receiver, said Tuesday.

Malvern Prep's attorney, Lawrence J. Kotler, of Duane Morris L.L.P. in Philadelphia, declined to be interviewed.

The $900,000 the receiver, Marion Hecht, is seeking from Malvern Prep, an independent Catholic school for boys in grades 6 through 12 that was founded in 1843, is a big chunk of more than $2 million in charitable donations from Forte that she is trying to recover.

As a result, it hurtles the clawback effort into complicated legal and moral territory involving law on fraudulent transfers and questions about how far the pain of a Ponzi scheme should be spread beyond investors to third parties.

John V. Donnelly III, an attorney with Cozen O'Connor in Philadelphia, said the theory is that the donations of stolen money are made to further Ponzi schemes by giving the donor status and access to powerful, wealthy people. If nothing of value was received in return for the donation, the money typically must be given back, he said.

But it gets trickier, Donnelly said, when time elapses and the nonprofit spends the money. "It's a very tough position to be in. That's probably why you see these charities pushing back a bit," he said.

According to its court filing, Malvern Prep's Forte saga began in September 2003, when Forte's son, Alex, enrolled as a freshman. Forte volunteered as strength coach, but was unhappy with the school's weight room.

For a year, Forte asked for improvements to the facility, but the school refused. In September 2004, he told a board member who was cochair of a campaign raising money for a performing arts center that he would pay $250,000 toward the weight-room renovation and give $75,000 worth of weightlifting equipment.

That got the board's attention, though it had previously determined not to spend more money on athletic facilities for a time because in 1999 it had opened the $7.2 million O'Neill Sports Center.

Forte then upped the ante, promising to supplement his $250,000 for the weight room with $300,000 for the performing arts campaign if the school renovated the weight room.

The school agreed, but ultimately decided it made more sense to build a 7,291 square-foot strength-and-conditioning center, rather than to renovate the old one. To cover the additional cost, Forte boosted his total cash pledge to $1 million from $550,000.

Between December 2004 and June 2007, Forte gave $500,000, the filing said.

In the meantime, the school borrowed $3.3 million to complete the construction of the training and performing arts centers. But no more money was coming from Forte for the portion of the loan used for training center, leaving the school with unexpected debt and what lawyer Amy Greer called an intriguing legal fight on its hands.

Greer, of Reed Smith L.L.P, said the biggest question is "whether pursuing these cases is actually in the best interest of the receivership estate, given the costs and potential for recovery."

Forte's fraud totaled $35 million. Forte's $2 million in charitable donations and about $8 million in false profits paid to investors are the biggest pools of money being pursued by the receiver.

Last week, the federal judge overseeing the case, Paul S. Diamond, approved a payment of $572,187 to the receiver and her attorney for more than a year's work.