Civil suit alleging scam shadows CHOP benefactors, pediatric center named in their honor

An upcoming federal judge’s ruling on a racketeering case could put both a prominent local philanthropist and his largest beneficiary in a bind.

In June, 2013, the Children’s Hospital of Philadelphia, one of the nation’s most prestigious medical centers, announced the largest gift in its history. The Buerger family — Alan; his wife, Constance; their son, Reid and his wife Krista; and younger son Grant — pledged $50 million toward the construction of the Buerger Center for Advanced Pediatric Care.

Two years later, officials cut the ribbon on the new state-of-the-art outpatient facility.

“It truly is all about the children,” Alan Buerger told the crowd. “We are blessed to have been able to take advantage of this opportunity. It is an honor, and is humbling.”

But in between the announcement and the November grand opening of the facility, the Buerger family found itself the target of a massive civil lawsuit — a suit that threatens to tarnish the hospital’s newest facility and the reputation of the benefactors who helped make it happen.

“This is a racketeering scheme so audacious it would make the mob blush,” attorney Randy Mastro told a U.S. federal  court judge in August. Mastro represents Lavastone Capital, a subsidiary of corporate giant AIG. It is suing Coventry First, the company founded by Alan and Constance Buerger, for more than $1 billion in damages, alleging that the privately held company has engaged in fraud, overcharges and the laundering of “life settlements” to affiliated shell companies in order to cover up its business practices.

In addition to Coventry First, the lawsuit also names Alan, Constance and Reid Buerger, as well as Krista Lake as defendants.

In a 153-page legal filing, AIG calls the Buerger family “scam artists.”

The Buergers are not facing criminal charges in the matter, and could walk away from the financial dispute cleared of all racketeering-related claims. But the course of the litigation so far suggests the court takes the allegations seriously. U.S. District Judge Jed Rakoff dismissed Coventry’s countersuit against AIG, and the judge has already ruled that Coventry breached its contract with AIG.

Coventry is one of the largest players in the life settlements industry, and Buerger is considered by some the field’s leading figure. The Fort Washington, Pennsylvania-based company purchases life insurance policies from mainly wealthy individuals who, for a variety of reasons, are willing to sell their coverage for upfront cash. Coventry continues to pay the premiums on the policy, then collects the payout when the original owner dies.

While the dealings may sound a tad morbid, consumers often benefit from the secondary life insurance market; they receive far more from the life settlement company than they would if they simply surrendered the policy back to the insurance company.

The industry got its start in the 1980s during the height of the AIDS crisis, when dying men would sell their policies for cash.

Investing in life settlements is attractive to players looking for a predictable stream of income. A payout following the death of the original policyholder is inevitable, and doesn’t hinge on factors such as the price of oil or the strength of the housing market.

In 2006, AIG and Coventry entered into a deal in which Coventry would acquire life insurance policies on behalf of AIG, which would in return pay Coventry fees. In the suit, AIG claims that Coventry used a network of affiliates to artificially mark up the purchase price of several hundred policies before selling them to Lavastone, the AIG subsidiary, a scheme that plaintiffs say cost its corporate parent more than $150 million.

“The operations of [Coventry’s] sophisticated enterprise has involved a pattern of racketeering, including thousands of instances of wire fraud, mail fraud, money laundering, bank fraud, and obstruction of justice,” reads AIG’s complaint.

Lawyers for Coventry argue that AIG simply understood the contract differently, and that Coventry in no way defrauded AIG. Coventry says AIG was aware that it was earning a profit (beyond its fees) on policies, and many deals passed so long ago that the statute of limitations has run its course.

It calls AIG’s claims “overreaching at every turn.”

AIG notes in its lawsuit that Coventry has faced legal troubles for past business practices. In 2006, then New York Attorney General Eliot Spitzer accused the company of orchestrating a bid-rigging scheme. Coventry was not assessed any fines, but paid $12 million to settle the suit and agreed to reform some of its operations. The company has also found itself the subject of an investigation by the Florida Office of Insurance Regulation, which also resulted in a settlement.

Oral arguments in the current suit began in August and concluded on Oct. 26, less than two weeks before the ribbon cutting for the new Buerger Center. Now both sides await a decision, with possibly more than $1 billion of Buerger family money on the line.

Tainted gift?

Arrows along 34th Street in West Philadelphia guide visitors to CHOP’s Buerger Center. The family’s name also adorns the building at street level.

If a judge finds Coventry violated the federal racketeering statute, CHOP will have to decide what kind of relationship it wants to maintain with the Buergers.

“Basically, there are three different strategies that a not-for-profit can adopt,” said Paul Dunn, a professor of business ethics at Brock University in Ontario, where he researches so-called tainted gifts. “One, it can return the money and take the name off the building, or whatever honor was given to the donor. Or it can keep the money but remove the name.

“Or third, it can do nothing.”

Dunn says each option poses risks, and groups will often make a decision on a case-by-case basis. Nearly 20 years ago, another local institution found itself having to reconsider the source of an important gift.

John du Pont, an heir to the du Pont family fortune, pledged a reported $5 million gift to Villanova University in the mid-1980s, where he served as a wrestling coach. In exchange, Villanova named its on-campus basketball stadium the du Pont Pavilion.

Then in 1997, du Pont was found guilty of the murder of Olympic wrestler Dave Schultz, the events of which were recounted in last year’s Hollywood drama “Foxcatcher.” Villanova removed the du Pont name from the pavilion that year.

According to Dunn, each institution has to make a cost-benefit analysis.

“Is it more costly to keep the money and jeopardize future donations? Or is it better to return the money? And only the not-for-profit can make that internal assessment,” he said.

Both CHOP and Alan Buerger declined requests for an interview. Because the terms of the $50 million donation aren’t public, it isn’t clear under what circumstances, if any, CHOP could remove the naming rights to the building.

“We are aware of the suit between Coventry and AIG,” CHOP wrote in a statement. “We have no indication that its outcome will impact the gift from the Buerger family. We are grateful for the Buerger’s historic philanthropic support of CHOP and for their volunteer leadership in behalf of The Children’s Hospital of Philadelphia.”

Members of the Buerger family have made other sizable philanthropic contributions in the past to both local and national entities, though nothing approaching the pledge to CHOP. The family donated more than $1 million to Johns Hopkins University, as well as large gifts to the University of Pennsylvania School of Veterinary Medicine and the Robert F. Kennedy Center for Justice and Human Rights. (Disclosure: The Buergers made a financial contribution to WHYY in the early 2000s.)

“Typically, when donors are going to make a generous contribution, it is driven by their own personal passion and connection to the organization they are supporting,” said Jeanne Jachim, president of the Seattle-based Virginia Mason Foundation and a member of Association for Healthcare Philanthropy. “And they are giving the gift, especially gifts of that size and scope, because they want to make a significant impact on the organization.”

But she adds non-profits do need to think about the sources of their funding, and that prominent supporters are a reflection of the institution’s values.

“I think you always want to pay attention to who is supporting your organization and what kind of alliances you have with people…99 percent of the gifts that an organization receives come from a very good place, and very good people.”

Meanwhile, construction on some floors of CHOP’s Buerger Center for Advanced Pediatric Care is ongoing, as are fundraising efforts. To date, the hospital has received pledges totaling roughly $96 million, just shy of its $100 million goal.