Foundation Loses Hundreds of Millions Through Failed Investments, Trustees Won't Reveal Details

Two brothers await a South Dakota Supreme Court decision tomorrow on whether they can learn what happened to millions of dollars that disappeared from their late father's foundation.

Mark and Paul Schwan—sons of Marvin Schwan, who founded his namesake frozen-food business that owns brands, like Freschetta and Mrs. Smith's—are trying to figure out where more than $600 million went that the Marvin M. Schwan Charitable Foundation's trustees invested in offshore real estate developments.

Their father left the foundation all of his stock—worth about $1 billion—to continue to support seven Lutheran beneficiaries after he died in 1993 from a sudden heart attack, according to court documents. As part of the seven-member Trustee Succession Committee (TSC) for the foundation, two of his sons are responsible for selecting and removing trustees as well as providing oversight on their actions.

In May 2013, the trustees informed them that more than $600 million the foundation invested in offshore real estate ventures had been lost, but the brothers have been unable to learn much more about the investments and subsequent losses.

The trustees, three of whom are also members of the TSC, have refused to provide the four non-trustee members with that information, so the brothers urged TSC chair Dave Ewert, one of the non-trustee members, to join them in requesting more information about the failed investments, but he denied their request, saying via email, "We will not dwell with the happenings of the past but look forward to the future of the foundation and how we will function," according to court documents.

Without help from Ewert and Paul Tweit, the other non-trustee TSC member, the Schwans petitioned the 2nd Judicial Circuit Court, which denied their petition in July, saying they lacked standing to seek court supervision on behalf of the foundation since they were neither "beneficiaries" nor "fiduciaries," according to court documents. Now, they await the ruling on their appeal to the state's Supreme Court, which will hear their case Tuesday.

The offshore investments included three luxury resort and hotel development projects in the Bahamas, Costa Rica and the Cayman Islands, court documents reveal. In 2006, the foundation lost more than $135 million from the investment in the Four Seasons Resort at Emerald Bay in Great Exuma, Bahamas. In 2009, it lost almost $22 million more on that investment. The foundation wrote off $250 million related to investing in the Ritz-Carlton Hotel at Seven Mile Beach in Grand Cayman, Cayman Islands, and $205 million for the Four Seasons Resort at Peninsula Papagayo, Costa Rica in 2012.

Court records also show the trustees made at least three loans, totaling about $20 million, to three Costa Rican entities where Lawrence Burgdorf, foundation trustee, TSC member and former executive director; Keith Boheim, foundation executive director, trustee and TSC member; and Erik Burgdorf, foundation associate director, also were board members.

The poor investments have not been disputed, as the "current trustees have been working diligently with professional advisers to wind down these investments and minimize losses," according to the brothers' brief.

As a result, the foundation's assets dropped to about $449 million in 2013. Form 990 tax returns show charitable distributions also fell from about $43 million in 2006 to $14 million in 2013.

The foundation still has about $156 million in hotel and real estate investments in Central America and the Caribbean, according to its 2013 Form 990, the most recent year available.

The Grand Cayman property went into receivership in 2012, making those loans worthless, according to OffshoreAlert, a news site that covers offshore financial centers, wrote in 2014. The Bahamas location went into receivership in 2007 and shut down two years later. Those remaining foundation investments are in the Costa Rica property.

"The foundation's tax returns read more like those of a private sector global conglomerate, like Citigroup, than a domestic U.S. charity, showing an array of legal structures and accounts in offshore jurisdictions, like the British Virgin Islands, the Bahamas, Cayman Islands, Costa Rica, Ireland and Panama," OffshoreAlert.

The brothers claim that the foundation reached an agreement with the South Dakota attorney general, who oversees the state's nonprofits, without their knowledge during circuit court proceedings.

"In short, the trustees have provided thousands of pages of information and documents regarding their offshore investment activities to all parties involved in these proceedings except the four non-trustee members of the TSC, who together comprise a majority of the committee specifically charged under the trust instrument with reviewing the trustees' administration of the foundation, and the committee on which trustees Burgdorf, Boheim and [Kent] Raabe purport to serve," the Schwans' lawyers said in court documents.