O.C. ART / CATHY CURTIS : Donations of Ill-Gotten Gains: Keep? Or Return? : Hungry nonprofit organizations can mount any number of arguments for keeping criminals’ largess.

Of the many awkward “what-if” scenarios that might befall a museum--or an orchestra or a theater company or a performing arts hall--the prospect of unwittingly accepting a donation of illegally acquired money must rank high on the list.

At least you’d think so.

After all, we live in a complex, mobile culture that fosters instant friendships, quick-change identities, rampant social climbing, myriad get-rich-quick schemes and entire industries whose functions are mysterious to the uninitiated.

Orange County also has the dubious status of being the U.S. capital of low-overhead “boiler room” telemarketing scams used to push everything from bank cards to securities.

So you might imagine nonprofit organizations would scrupulously look gift horses in the mouth to be sure everything was on the up-and-up.

Well, think again.

For the most part, there are no questions asked. Nonprofit groups are hungry for cash (surprise!) and argue that they don’t have the resources to check out everyone who turns up with an open checkbook.

None of the arts organizations I contacted recently said they had any specific policies for dealing with potential “hot” donations. Moreover, there was widespread reluctance to talk about the issue--especially after Mission Viejo socialite couple Daniel and Susie Hernandez made headlines with their a philanthropic, shopaholic lifestyle, and for the illegal methods used to support that lifestyle.

You remember the Hernandezes: Daniel, a customer sales representative at a precious metals firm who pleaded guilty to money laundering and mail fraud last month, was accused of stealing $7.8 million from his company, PGP Industries in Santa Fe Springs. He in turn has accused the company of profiting from a money-skimming operation that involved doctored bookkeeping and siphoning off profits that belonged to customers from sales of precious metals .

With his wife, whose case in related crimes is pending, Daniel Hernandez made numerous lavish donations to Orange County charities, including $96,000 to Newport Harbor Art Museum, where Susie is a board member. (Newport Harbor officials say no action has been taken by the board regarding Susie Hernandez’s membership because she has not been convicted of any crime.)

The couple were unknown to museum officials before they spent $10,000 for a table at the museum’s 1990 Art of Dining auction fund-raiser. The year after, they agreed to help underwrite the event for a cool $50,000--a quick and effective means of gaining entree to one of Orange County’s preeminent social circles.

At the 1991 auction, the Hernandezes spread their largess even further, bidding $16,000 for lunch at the Paris apartment of couturiere Coco Chanel. The next year, they donated $20,000 to the museum’s Valentine’s Day benefit supper, and the board of trustees extended the ultimate accolade by making Susie a member.

Asked what will happen regarding the Hernandezes contributions, museum spokeswoman Maxine Gaiber would say only that the institution had taken the money “in good faith” and “spent it for purposes appropriate to the institution”--for exhibitions and education programs.

Daniel Hernandez has been a member of the board of trustees at Opera Pacific since 1991, and also is a member of the Impresario Circle, the top donor support group, which requires a minimum annual contribution of $5,000.

Opera spokesman Tim Dunn, who said he was unable to verify the total amount of Hernandez’s donations, says the company has no policy regarding “tainted” donations. But the Hernandez case will be on the agenda at the next board meeting, scheduled for Thursday.

“It’s difficult to say at this point what would happen,” Dunn says. “We have to wait for all the facts to come out. . . . Decisions can’t be made until the facts are all there.”

But the issue remains: Should money acquired illegally and donated to a nonprofit organization be returned to the person or business from whom it was taken?

In this case, the ethical argument is largely theoretical. U.S. Atty. Stephen Wolfe says, “There is no question in my mind that no effort will be made” to recoup Hernandez’s donations to nonprofit groups: “I don’t know if it’s in societal interest to do it, even if we could.”

According to the terms of Daniel Hernandez’s plea agreement, he is to repay the $7.8 million to the U.S. government rather than to PGP. Although Hernandez is said to have spent much of the stolen money, any goods he purchased with it could be seized by the government. (However, it is unlikely, according to Wolfe, that the government will attempt to recoup the money from the shops and dealerships where Hernandez made purchases.)

Although the “societal interest” Wolfe cites has a compelling ring to it, there is another side to the coin. An attorney who represents nonprofit organizations and who asked not to be identified said that such groups may be “held to a higher standard of behavior. . . . Their reputation is what they live on. They look to what the right thing is for them to do.”

On the other hand, the attorney said, “the board also has a duty to preserve the organization’s charitable assets.”

Patrick Whaley, a debtor-creditor specialist with the Los Angeles law firm Musick, Peeler & Garrett, says, “There’s nothing (in the law) that puts a nonprofit in any better or worse position than any other recipient that took (Hernandez’s) money in good faith.”

There seems to be no shortage of self-protective arguments for nonprofit organizations. Historical precedent isn’t necessarily on the side of the angels, either. One staff member at a museum asked me where we’d be without the generous donations to major American museums made by such 19th-Century industrialist “robber barons” as Andrew Carnegie, J.P. Morgan and Andrew Mellon.

Well, there surely are worse things you could do with tainted money than give it to arts institutions. Given the special position of these institutions--founded for the public benefit, not for private gain--the ethics of the situation still make for lively debate.

In a somewhat similar case in the mid-1980s, a bankruptcy judge ordered the Museum of Contemporary Art, San Diego to return only about one-fifth of approximately $15,000 donated to the museum by J. David Dominelli, a La Jolla commodities trader later convicted of masterminding an $80-million investment scam.

“The argument we made,” says museum director Hugh Davies, who was not at the institution during the years in question, “was that we had put the funds to good use for educational programs the community had benefited from.”

A painting by Agnes Martin--purchased with several donations, including one from Dominelli’s firm, J. David and Co.--was allowed to stay in the museum’s collection, although further negotiations would be necessary if the museum ever decided to sell it. That eventuality is remote, Davies says, because the work is “a major piece.”

Dominelli’s former lover and business partner, Nancy Hoover Hunter--who was subsequently convicted of tax evasion--was briefly a member of the museum’s board. Unlike Susie Hernandez, however, Hunter quietly resigned before the scandal broke.

And then there is Boyd Jefferies, a Laguna Beach resident convicted in 1987 of insider trading.

Two galleries on the first floor of the Laguna Art Museum still bear Jefferies’ name. A special “grand reopening” supplement of the museum’s newsletter--published in September, 1986, to celebrate the museum’s $1.6-million renovation--lists Jefferies and wife Sharon as building campaign donors in the top “benefactor” category ($50,000 and up). Elsewhere in the newsletter, a photograph of the smiling Jefferieses appears under the headline “The LAM Spirit.”

Former director William Otton, who shepherded the museum through the renovation, is now working in Texas, and did not return a phone call requesting comment.

Current director Charles Desmarais says, “Clearly, if the museum were legally advised or required to return some contribution because it was tainted in some way, of course it would do that.

“(But) why would a museum determine whether a specific gallery was paid for illegally? It’s a very complicated legal question. You’d want to have a big discussion with your board and decide what was appropriate for the situation.”

Fred Nicholas, president of the board of trustees at the Museum of Contemporary Art in Los Angeles, says his museum has never received illegally acquired money or art, as far as he knows.

But if the museum did unwittingly receive a tainted cash donation, he says, “I would think funds would probably be returned if they didn’t belong to the donor. It would be our obligation to do that. . . . If the funds had been spent, we would have to reimburse (the creditor) from funds raised after that.”

Interestingly, both the 1991 edition of the “Code of Ethics for Museums,” published by the American Assn. of Museums, and “Professional Practices in Art Museums,” a 1992 publication of the Assn. of Art Museum Directors, are silent on the issue of tainted donations of money (as opposed to illegally acquired art objects).

Seattle Art Museum director Jay Gates, who is chairman of the ethics and practices committee of the Assn. of Art Museum Directors, explains that the handbook “isn’t a statement of procedures; it’s a statement of principles. It doesn’t articulate what museums should do in every foreseeable circumstance.

“If somebody makes a financial gift that is tainted, my sense is you are into a legal issue rather than a matter of professional conduct. As protectors of the public trust, museums are encouraged to proceed in ways that are ethical and blameless. (But) it isn’t possible to know the source of every donation.”

Stressing that “very few museums have trafficked in questionable material,” Gates says a museum would have to return a stolen artwork to its rightful owner because conserving, storing and displaying works of art are “at the center of the museum’s public mission.”

But in his view, donations of stolen money (which might be spent for salaries or paper towels or many other purposes) fall into a decidedly less clear-cut category.

Told that Hernandez lived a lavish lifestyle that included the purchase of luxury automobiles, Gates asked whether I was going to call the car dealers and pose the same question.

“If not, why not?” Gates asked rhetorically. “Is money tainted if it only goes to some people?”