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Hostile Takeover Attempt Threatens Hitchcock Foundation

by PATRICIA WOLFF

The battle for control of the Gilbert M. and Martha H. Hitchcock Foundation, now well into its second year, is raising serious questions about the way tax-exempt foundations in the United States are governed and regulated.

Will the Hitchcock Foundation survive this hostile takeover attempt? Why aren’t regulators such as the IRS doing more to enforce laws against self-dealing and conflicts of interest on foundation boards? What protection should whistleblowers expect when they come forward with reports of illegal activities?

The whistleblowers in this case are foundation President Denman Kountze, Jr. and his sons Edward Kountze of Boulder CO and Charles Kountze of Ann Arbor MI. President Kountze and sons are asking a Nebraska judge and the IRS to examine self-dealing and conflicts of interest by the foundation’s former lawyer and other foundation trustees.

Their opponents in this battle are powerful and privileged, at least in Nebraska circles. They include:

Thomas R. Burke, the foundation’s former attorney, secretary, and grants manager. Burke is a past president of the Omaha Bar Association and the Nebraska Bar Association. Burke’s law firm is known for representing Catholic causes and pedophile priests. Doubts were first raised about Burke’s questionable ethics back in the late 1980’s when he attempted to whitewash corruption by Nebraska Attorney General Paul Douglas. The former AG was accused of misconduct involving the failed Commonwealth Savings Co. of Lincoln. Burke served as the state bar’s hearing judge in the case against Douglas and issued findings that charges of Douglas’ impropriety were “without merit.” The state bar’s disciplinary counsel responded by filing 26 exceptions to Burke’s findings and blasted them as being either contrary to law or contrary to the evidence. The Nebraska Supreme Court ruled in 1987 against Burke and suspended Douglas’ law license for four years.

Neely Kountze and Mary Kountze, trustees of the Hitchcock Foundation. Mary sells diamonds at Borsheim’s jewelry store in Omaha and Neely, a cousin to Edward and Charles Kountze, has been involved in numerous business enterprises in Omaha and Texas. He is a general partner of the South Texas Land Limited Partnership, which has mineral and land holdings in the Texas Counties of Wharton, Matagorda, and Jackson. According to Edward Kountze, ExxonMobil Corp. is negotiating a business deal with the South Texas Land partnership that involves a new Liquified Natural Gas facility in southeast Texas.

Tyler B. Gaines, another Omaha attorney, also a Hitchcock Foundation trustee. Gaines was one of several prominent individuals subpoenaed in the late 1980’s to testify before grand juries looking into allegations surrounding the looting of the Franklin Community Credit Union and child-sex parties organized by Republican party activist Larry King. Gaines also represented the Miracle Hill Golf Course in 1986 when it was charged with illegally dumping more than 100 truckloads of concrete and dirt along Papio Creek, damaging a city bridge and polluting the water.

John Webster, well-to-do business tycoon and former President of the Nebraska Broadcasters Association. Webster is a close friend of Neely and Mary Kountze. Webster’s company was the owner of KEFM, Omaha’s last locally-owned FM radio station, until it was sold in 2003 to Clear Channel Worldwide for a reported $10 million. The parties are disputing whether Webster is a legally elected member of the foundation board.

“Throughout 2001 and 2002, Neely Kountze, Mary Kountze, Tyler Gaines and Thomas Burke systematically endeavored to undermine my authority and attempted to seize control of the foundation through unethical and improper means,” says Denman Kountze, Jr. The President contends his opponents wanted control of the Hitchcock Foundation and its millions of dollars for selfish reasons: to enhance their own images in the community, grease business deals and relationships, and ultimately to benefit themselves financially.

The Hitchcock Foundation controversy exploded in 2002 when the President and his sons raised concerns about Burke’s self-dealing and breaches of fiduciary duties. Their ousting of Burke as foundation attorney resulted in an attempted coup d’etat by Burke’s allies on the board and the filing of a retaliatory lawsuit. Omaha’s Judge James T. Gleason still has not ruled in that case, Hitchcock Foundation v. Kountze, even though the trial concluded in early December, 2003.

President Denman Kountze, Jr., Edward Kountze, and Charles Kountze have since sued Thomas R. Burke and his law firm, but that case, Hitchcock Foundation v. Burke, is also still pending before Judge James T. Gleason.

Both purported Hitchcock Foundation trustee John Webster and Judge James T. Gleason are trustees of the Omaha Home for Boys. Despite this potential conflict, the judge has chosen not to recuse himself from deciding the Hitchcock cases.

In an attempt to get the IRS to investigate the self-dealing problems, President Denman Kountze, Jr., and his sons have hired Marcus Owens of the Washington D.C. law firm of Caplin & Drysdale to write letters asking for agency intervention. Owens serves as a Director of the Better Business Bureau Wise Giving Alliance and is the former director of the Exempt Organizations Division of the IRS. Owens has written several letters to the IRS about this matter, but so far to no avail. Meanwhile, the Nebraska Attorney General’s office is looking the other way, ignoring alleged violations of the Nebraska Nonprofit Act, and the Nebraska Supreme Court’s Counsel for Discipline has declined to investigate a complaint that charges Burke with attorney misconduct.

The Omaha World-Herald newspaper has also turned a blind eye to the scandal, even though, or perhaps because it involves so many prominent and powerful individuals.
Twelve months after the first lawsuit was filed, the World-Herald produced one short, error-ridden article on the case, but only after it learned that the New York Times and Associated Press were working on stories. In an attempt to stifle media coverage, the Omaha faction’s attorney, Ed Hotz, threatened to sue both the New York Times and the Associated Press for their stories on the case.

Ironically, the foundation’s namesake, Gilbert Hitchcock, was the founder of the Omaha World-Herald. Hitchcock, a Wilsonian Democrat, was elected to the U.S. House of Representatives in 1902 and to the U.S. Senate in 1911. His wife Martha Hitchcock established the foundation in 1944 with the help of Omaha attorney Al Munger, father of Berkshire Hathaway’s Charlie Munger.

Martha’s nephew, Denman Kountze, Jr., was named foundation trustee in 1963 and elected President in 1984. Under his leadership, Denman Kountze Jr. turned the foundation into one of Nebraska’s largest philanthropic givers, awarding millions of dollars in grants to charitable organizations and universities. Its scholarship program for Columbia University journalism students is one of the school’s oldest. (See http://www.jrn.columbia.edu/.)

In September, 2002, the Neely Kountze faction staged a special board meeting during which they tried to illegally amend bylaws and elect John Webster to the board to tip the balance of power in their favor. By January 14, 2003 the board was so irreconcilably divided that each faction held its own annual meeting and each faction claimed its meeting was the legitimate one.

In a lawsuit filed a week later, the Neely Kountze faction asked the court to rule in favor of their annual meeting, by-law revisions, slate of officers, and the election of John Webster. They also asked for the removal of President Denman Kountze, Jr. Edward Kountze, and Charles Kountze from the board.

The defendants fired back with an answer and counterclaim, asking the court to prevent the plaintiffs from holding meetings in the name of the foundation, to invalidate the plaintiffs’ “special meeting,” and to void the election of John Webster. They also asked the court to declare that Neely Kountze, Mary Kountze, and Tyler B. Gaines were “no longer fit to serve as foundation trustees.”

According to the defendants’ counterclaim, trustees Neely Kountze, Mary Kountze, Tyler B. Gaines, and purported trustee John Webster “engaged in fraudulent or dishonest conduct, and engaged in a gross abuse of authority or discretion with respect to the foundation.” The charges against Neely Kountze include “voting in favor of a grant to the Omaha Children’s Museum despite the fact that the museum had or was in the process of purchasing property in which Neely Kountze, or any affiliated entity, held an interest.”

The Omaha Children’s Museum controversy reaches back to 1986, when Neely Kountze and his business partner, Richard P. Jeffries, the founder of Godfather’s Pizza, purchased the McFayden Ford dealership in Omaha for $500,000. They sold off the dealership and then announced in 1990 that they were “donating” the land and building to the Omaha Children’s Museum.

Court records would later reveal that the so-called donation included a transfer of the partnership’s $500,000 mortgage debt to the Children’s Museum. Then Neely Kountze turned around and voted for a $50,000 Hitchcock Foundation grant to the Children’s Museum. This constituted a blatant act of self-dealing, according to tax and legal expert Bruce R. Hopkins, in a report prepared for the court.

Another question is what benefit Neely Kountze received by voting for Hitchcock Foundation grants to Brownell-Talbot, a private school in Omaha. The foundation gave $2.7 million to the school between 1962 ­ 2002. Neely and his children graduated from Brownell-Talbot and for several years, unbeknownst to some other board members, Neely was a Brownell-Talbot board member.

The allegations against Thomas R. Burke are even more interesting. Court documents show that in 2000, while Burke was serving as foundation attorney, secretary, and grants manager, he solicited the Hitchcock Foundation for a contribution to The Stephen Center, an Omaha nonprofit that assists drug addicts with treatment and transitional housing. Burke knew at that time but failed to disclose to the board that his daughter and two grandchildren were living in housing owned, operated, and maintained by The Stephen Center. Nor did Burke disclose the fact that he was serving on The Stephen Center’s development committee and actively assisting the center with fundraising.

At its April 2001 annual board meeting, the Hitchcock Foundation approved a grant to The Stephen Center, with $25,000 to be contributed in 2001 and $25,000 in 2002. Burke then attempted to conceal the grant by failing to mention it in the minutes he prepared for the meeting. In a letter to President Denman Kountze dated December 27, 2001, Burke finally admitted that his daughter and her two boys were living in a Stephen Center house. That’s when the President realized he had to terminate Burke as secretary and attorney for the foundation.

The complaint against Burke and his law firm also alleges that they:

Refused to surrender foundation books and records to Secretary Edward Kountze, Burke’s replacement.

Performed unauthorized and unnecessary legal services and then billed the foundation for them.

Sought excessive legal fees from the foundation in billing statements that were not itemized.

Researched by-law changes that would undermine the powers of President Denman Kountze and attempted to implement them through illegal procedures.

Conspired with and allied themselves with a three-member faction of the board that sought to remove the President and his two sons from the Board of Trustees.

Misrepresented Burke’s role with the foundation to the public more than a year after Burke was fired.

Committed negligence and breached their fiduciary duties.

The Hitchcock Foundation case is just one of the several nonprofit organization scandals that have surfaced in the last few years. In response to the scandals, members of Congress and the Internal Revenue Service appear to be realizing that greater oversight is needed.

The Senate Finance Committee, led by Sen. Charles Grassley (R-Iowa) will be holding a hearing on charitable organization abuses on June 22 titled “Charity Oversight and Reform: Keeping Bad Things From Happening To Good Charities.” According to the Chronicle of Philanthropy, Senator Grassley said the committee wants to look at transactions “which may be inappropriately exploiting charities’ tax-exempt status and which may be unfairly enriching individuals and corporations.”

PATRICIA WOLFF is a writer and private investigator living in Colorado.

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