Charities Are Asked to Return $1 Million Donated by J. David

Dozens of charitable and civic organizations that benefited from more than $1 million in contributions heaped upon them by fraud-ridden J. David & Co. will be asked to return those funds or face litigation, the trustee in charge of the J. David bankruptcy case said Friday.

Although the groups accepted the money in “good faith,” the contributions by J. David (Jerry) Dominelli were actually used to “protect his fraudulent scheme, and we must take some action to recoup the funds,” J. David bankruptcy trustee Louis Metzger said in a court hearing.

The trustee said he will send letters next week to dozens of nonprofit groups, which include some of San Diego’s largest cultural and civic organizations, asking them to waive any statute of limitation provisions and attempt to reach an out-of-court settlement.

Dominelli and associate Nancy Hoover contributed more than $1 million to various organizations.

The contributions were used to market the firm’s image and helped solidify J. David & Co.’s reputation as a successful investment firm, according to Metzger’s letter.

Included among the beneficiaries of J. David largess were the La Jolla Museum of Contemporary Art ($110,000), San Diego Symphony (a reported $180,000), San Diego Opera ($100,000), the UCSD Mandell Weiss Center ($162,500), KPBS TV ($58,000) and Easter Seals ($6,000).

Recipients of J. David’s fanciful donations were generally caught unaware of the trustee’s announcement Friday.

“Oh, brother,” said Hugh Davies, director of the La Jolla Museum of Contemporary Art, when told the museum might be asked to return a $110,000 contribution. “I’m not in a position to comment on it.”

The museum’s president, attorney Chris Caulkins, also would not comment on the trustee’s action.

Other organizations seemed understanding of Metzger’s position.

“I think that Metzger is obligated to go after any money he can recover, within reason,” said Bill Nelson, president of the San Diego Opera’s board of directors. But Nelson, who is an attorney and president of the Prospect Center Corp., said he didn’t think a request to return funds would be supported in court.

Det Merryman, president of the San Diego Symphony, would not comment.

Actually retrieving the funds in some cases may be difficult for Metzger. Quipped one official of an arts organization that received J. David funds: “We wouldn’t have it to give (back).”

J. David & Co. attracted about $200 million from about 1,500 investors with promises of annual returns of up to 40%. Dominelli has admitted he operated a typical Ponzi scheme, whereby new infusions of cash were used to pay off existing investors.

Actual losses totaled about $82 million.

Claims by former J. David investors and creditors have far exceeded those amounts, however, prompting U.S. District Judge J. Lawrence Irving on Friday to warn that those who filed exaggerated claims may find themselves under federal investigation for perjury.

Irving said he takes a “dim view” of the “cavalier attitude” investors have had when filing claims against the J. David & Co. bankruptcy estate.

To date, nearly 5,300 former investors and creditors have filed claims for $1.8 billion.

“I couldn’t be more serious--I will not tolerate this type of conduct,” Irving said.

Irving said he would carefully analyze the claims and “if I feel there have been (false claims filed), then I will suggest that the matter be turned over to the U.S. Attorney’s office or I’ll refer this directly to the grand jury.”

Metzger has also asked Irving to approve investor claims on a “hard-money-in, hard-money-out” basis, without taking into account the non-existent interest investors were supposedly receiving.

Attorneys representing dozens of former J. David investors on Friday objected to that request, arguing that Metzger’s request violates the investors’ due process rights.

In addition, many attorneys advised their clients to file numerous claims in the case because of the far-flung organizational structure of the J. David & Co. empire. The La Jolla investment firm consisted of several different corporate entities, and many investors filed the same claim against each entity.

Irving delayed ruling on Metzger’s request until March 5.

Irving did approve the trustee’s recommendation that the estate restrict its litigation action to those investors who have already been sued for receiving “preferential” payments of funds 90 days before the J. David bankruptcy, Feb. 13, 1984. Irving also approved Metzger’s request to send future bankruptcy updates only to those people who have already filed claims, which will likely cut in half the list of 3,900 interested parties who now receive the bulky but irregularly published updates.

Metzger said that he had whittled down the $1.8 billion in claims filed against the estate to $263.3 million, “which is still inflated,”

Under the formula for calculating eventual distribution of funds, Metzger’s accountants and attorneys seek to determine the “hard-dollar” investment, regardless of paper profits, less the funds withdrawn from the downfallen La Jolla investment firm.

That means that if an investor contributed $100,000 but withdrew $150,000, then he or she would owe the estate $50,000. That the investor believed he or she had earned an additional $50,000 in “profits”--which many investors have used as a legal argument against returning the funds--would not be taken into consideration, Metzger has requested.

Metzger said he still doesn’t know how much money will ultimately be returned to investors.

Assistant U.S. attorneys Gay Hugo and George Hardy, who are leading the ongoing federal grand jury investigation into J. David and several of its former participants, attended Friday’s court hearing.

To date, Dominelli has been the only J. David figure to be indicted or jailed for his role in the firm’s collapse. Dominelli was sentenced to 20 years in federal prison in June after he pleaded guilty to three counts of fraud and one count of income tax evasion.

San Diego Arts Writer Hilliard Harper contributed to this story.