Billionaire investor borrowed a total of $118.7 million from a public charity he founded and held on to the money for over a decade before paying it back with interest, the reports.
Icahn founded the in 1997 as a supporting organization — a type of public charity that confers better tax benefits for donors than a family foundation does — with a donation of $100 million worth of shares in American Railcar, a railroad-equipment company he owned. With no public market for the shares, the charity couldn't readily sell them to raise cash for its grantmaking. In late 2005, as the company prepared for an initial public offering, the charity agreed to sell the shares back to Icahn for the original value of $100 million or the IPO price, whichever was higher. Expecting a lower IPO price, Icahn gave the charity $10 million in cash and a promissory note agreeing to pay $90 million more after five years, and later promising to give it an additional $28.7 million after the post-IPO stock price rose more than 50 percent in the first month.
With monthly interest on the $118.7 million loan tied to the prime rate — which fell from 7.25 percent in January 2006 to 3.75 percent at the end of 2016, which is when Icahn finished repaying the loan — the charity received $53 million in interest, or about a 45 percent return, said Andrew Langham, general counsel of Icahn Enterprises. According to the Journal, however, the charity would have realized far greater returns had it been fully paid in cash and invested that money in an S&P 500 index fund (120 percent), a balanced index fund (103 percent), or the Bloomberg Barclays U.S. Treasury Index (52 percent).
Although many charities lend money to their officials — of the three hundred thousand nonprofits filing electronic returns whose underlying data the Internal Revenue Service released last year, about eighteen hundred public charities reported outstanding loans to officials in fiscal year 2014 — the amounts average less than $28,000. While no federal restriction on such loans applied to the Foundation for a Greater Opportunity at the time Icahn borrowed from it, New York State, where both his business and the charity operate, did not permit a charity to extend credit to a director. State courts and other officials nonetheless cleared his transactions, a move the state attorney general's office now says was a mistake.
"The loan was erroneously approved in 2006," Amy Spitalnick, a spokeswoman for the New York attorney general's office, told the Journal, adding that the office "has implemented changes to help prevent these sorts of issues."
Since 1997, the Foundation for a Greater Opportunity has awarded grants totaling more than $30 million, tax documents show, though little went to the educational charities it originally pledged to support. More than half the amount, some $19 million, went to a fund at the dedicated to eradicating polio; the charity also supports charter schools named after Icahn.
"It was a very good deal for the foundation. Although it was a debt, we never felt the debt," said president Seymour Fliegel, who serves on the charity's board. When told the charity could have earned more if it had received cash and invested it, he said, "We're not as smart as we thought we were."