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Financial Manager Accused of Looting Special Needs Trusts of $100 Million

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The Center for Special Needs Trust Administration located in Tampa, Florida, has filed for bankruptcy, accusing its founder, Leo J. Govoni, of having “borrowed” $100 million between 2009 and 2020 from more than 1,000 of the trusts it manages. Govoni denies the allegation.

Govoni created the Center, which is a non-profit, to manage both individual and pooled special needs trust. According to its bankruptcy filing, the Center now manages approximately $200 million for more than 2,000 trusts. The Center, in turn, contracted with Govoni’s private investment management firm, Boston Finance Group (BFG), to manage the investment of the trust assets.

The Center charges that “Govoni was able to cause the transfer of these funds [the $100 million] to BFG through the control he maintained over various aspects of The Center, its finances, as well as its information technology and human resources infrastructure.”

Similar to Bankman-Fried and Madoff Scandals

The claims, if they’re true, are similar to those for which crypto pioneer Sam Bankman-Fried and Ponzi schemer Bernard Madoff were convicted. Bankman-Fried’s hedge fund, Alameda Research, “borrowed” money from his crypto currency exchange, FTX. When the value of the crypto currency holdings of Alameda Research, which were highly leveraged, fell, large additional funds were siphoned out of the FTX exchange until the house of cards collapsed. Madoff controlled all information supplied to his investors, making it appear that they were reaping consistently high earnings when he was simply moving money around, paying older investors with receipts from newer ones.

Similarly, Govoni appears to have controlled the investment and accounting aspects of the Center holdings through his own private investment company with little or no outside auditing or oversight. In fact, he appears to have created and owned accounting firm the Center engaged to provide annual statements for beneficiaries as well as the company that provided its human resources and IT support. When the Center tried to disengage from the latter company, it denied it access to its records, resulting in an ongoing lawsuit.

But Worse

In many ways this case, if the allegations are true, is much worse than the FTX one. The victims of the FTX fraud and bankruptcy were largely investors, including large hedge funds such as Sequoia Capital. It’s mottos is “We help the daring build legendary companies,” not quite the same as what trustees should do when investing funds in special needs trusts.) Smaller investors in FTX knew they were taking a risk by investing in cryptocurrency in the first place. While Sam Bankman-Fried profited from his fraud, it’s not clear that theft was his motivation.

The victims of Govoni’s actions, on the other hand, are disabled individuals who have limited funds either left them by family members or received as lawsuit awards and settlements due to personal injuries that gave rise to their disabilities. They can neither afford to lose their nest eggs nor did they knowingly take on risk. Instead, they entrusted their money to an organization that purported to have their welfare at heart and which had a fiduciary duty to act in their best interest.

Could This Have Been Avoided?

The obvious question is: How could this tragedy have been avoided? And what steps can others take to avoid this happening to them?

The problem is that the system Govoni created appears on the surface to have had all the checks and balances that seemingly would protect trust beneficiaries. The Center is a separate non-profit organization from the other entities, though Govoni founded it and served on the board of directors until 2008 or 2009. It contracted with BFG for investment services, but used a separate accounting firm. It also contracted with a separate company for IT and human resources support.

But in this case, all these separate companies were also controlled by Govoni. Further, a key employee who appears to have facilitated the fund transfers worked for both the Center and another Govoni company from 2008 to 2020, at the same time she also served on the Center board and as accounting manager for the Center.

It’s not clear if the other directors of the Center were aware that these other Govoni organizations were not independent or how any of the Center’s clients could have been aware of the situation.

How to Avoid It Happening to You

So what can anyone seeking professional management of a special needs trust (or any trust for that matter) do to make sure this does not happen to them? Here are some possible answers:

  • Work with a bank, law firm or trust company that has legally-mandated oversight and checks and balances. The larger the entity, the more likely it will have “deep pockets” to replenish any accounts that are raided by an unscrupulous employee.
  • Or work with a trustee that keeps accounts in an investment firm such as Fidelity Investments or Charles Schwab where you or a person you designate has on-line access to the accounts.
  • If you are working with a pooled trust, ask them about their systems and checks and balances. (Of course, at least for a while after this scandal, the boards of directors of these trusts will be more careful to avoid situations such as what occurred to the Center.)

It will be interesting to see how the Center and Govoni situations play out. We should learn more how to avoid anything similar happening in the future.

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