Posted on 1 Comment

Barry Zyskind’s High-Stakes Three-Card Monte Game

A tiny footnote buried in a pair of corporate filings suggests AmTrust Financial Services’ chief executive officer has a great deal of explaining to do about who owns almost 7 percent of the company’s shares.

Barry Zyskind, according to an early January Securities and Exchange Commission Form 4 filing, transferred 12,020,000 million shares of AmTrust — then worth more than $378.2 million — to a “charitable organization” called Gevurah from Teferes, a tax-exempt personal foundation he set up in 2006. (The number of shares reflects a Feb. 15 2-for-1 stock split.) According to the filing, he serves as a trustee and officer for the entity, with voting and investment authority. The company’s proxy, filed on March 29, also mentions this transfer.

Oddly, those two footnotes are the only mentions of Gevurah seemingly anywhere.

The Southern Investigative Reporting Foundation called American Stock Transfer & Trust, the transfer agent for AmTrust shareholders — the Karfunkel brothers founded it in 1971 and sold it in 2008 for about $1 billion — on May 12 to ask if Barry Zyskind had made a share transfer to Gevurah. A company representative told us there was no record for Gevurah in their computer system. (A transfer agent maintains shareholder records and balances for its corporate clients.)

There is no listing of a Zyskind-linked Gevurah foundation in the official record of tax-exempt organizations, the Internal Revenue Service’s Exempt Organization Business master file. Nor was there any success with the Canadian, United Kingdom or Israeli equivalents. (Zyskind, the son-in-law of the recently deceased AmTrust chairman and co-founder Michael Karfunkel, is a supporter of Haredi educational and religious institutions in Brooklyn; many of these institutions have links to Israel.)

Gevurah is similarly absent from the or the OpenCorporates databases; in contrast, Zyskind’s Teferes foundation, his former father-in-law Michael Karfunkel’s Hod Foundation and AmTrust’s other co-founder, Michael’s younger brother George’s Chesed Foundation for America, all show up in both. Foundation Source, a business that provides advisory and administrative services to private foundations, maintains a comprehensive database of public charities called GrantSafe but Gevurah isn’t in it.

To reiterate: Gevurah might exist in some form somewhere on earth but as of this writing, it’s not one with a charitable registration in the United States, at least with that name and connected to Barry Zyskind. The Southern Investigative Reporting Foundation even tried inputting various spellings of its name or searching for a filing made by Zyskind’s family, such as his wife Esther, in each of the named databases above. Finally, none of the Zyskind or Karfunkel private foundations have any alternate names, often referred to as “DBA’s,” that they are doing business under, attached to their registrations.

Regardless of whether it’s an “organization” or foundation, Gevurah needs to be registered somewhere to receive a grant from another public charity, as Teferes’ own registration stipulates.

Earning a fortune is assuredly hard but giving (some) of it away is not, at least if you choose to set up a personal foundation. Getting a nonprofit like Gevurah entered onto the New York state’s books (where Zyskind registered Teferes) is simply a matter of completing a Certificate of Incorporation form and filing some standard bylaws. After applying for and receiving an Employee Identification Number, the foundation can operate without restrictions for up to 27 months as the IRS considers its application for tax exemption. Assuming no mistakes, within about four weeks of filing most charitable organizations are registered.

All of the above costs about $530: $80 for the state and $450 for the IRS.

Possibly the only scenario in which Gevurah could have been granted the shares without potential legal headaches is if it’s considered a place of worship, but virtually all synagogues and churches register so donations to them can be tax deductible. From a practical perspective, a congregation launching with an endowment of this size would be unprecedented.

Zyskind’s Gevurah problems emerge as the SEC has put renewed emphasis on compliance with Section 16 of the Securities and Exchange Act of 1934, a series of rules that mandate company insiders disclose material changes in holdings in a timely and accurate manner. One large law firm called this the “broken windows” theory of securities enforcement. (Mary Jo White, SEC chairwoman, used the phrase in a 2013 speech.) Notably, in September 2014 the SEC’s enforcement unit filed suit against 28 corporate directors and officers, as well as six companies, for such violations.


The ongoing saga of the Karfunkel brothers, Barry Zyskind and their private foundations are a familiar topic to Southern Investigative Reporting Foundation readers.

Per our reporting, the Karfunkel-Zyskind foundations have so much AmTrust stock that they have run afoul of an IRS rule known as excess business holdings that addresses how much of a single company a private foundation can own.

Excess business holdings is the IRS’ framework of rules developed as a response to the practice of some 1960s-era donors who made tax-exempt donations of their shares to private foundations, albeit with a great deal of string attached. Instead of selling the stock and using the proceeds to make grants, these foundations held onto the stock, allowing the donors to maintain control of the company.

To prevent this, IRS rule permits private foundations to hold up to 2 percent of a company’s shares outstanding and levies sharp fines and penalties for non-compliance.

In order to meet the IRS’s rules, the Teferes, Gevurah and Chesed Foundation for America, which currently own 26.6 million shares between them, would be permitted to own 2 percent of the 175,356,577 shares outstanding, or a little more than 3.5 million shares. This means that they would potentially have to sell over 23.1 million shares, a prospective dilution of 13.1 percent. They could do this via direct sales or through unencumbered grants to unaffiliated charities like Habitat for Humanity or United Way, which would likely sell the stock quickly upon receipt.

Being forced to massively reduce their AmTrust holdings — and thus sharply diminishing their voting power — might not be the only migraine in store for George Karfunkel and Barry Zyskind: IRS Section 4943 levies a 10 percent excise tax based on the value of their “peak holdings” within a given tax year. In light of this, based on the Southern Investigative Reporting Foundation’s analysis of Gevurah, Teferes and Chesed Foundation for America’s excess business holdings of AmTrust shares, their prospective liability would appear to be $296.6 million.

Sources: 990-PF filings via and historical prices from Nasdaq
Sources: 990-PF filings via and historical prices from Nasdaq


For over a month, starting on April 13, the Southern Investigative Reporting Foundation repeatedly emailed and called Elizabeth Malone, AmTrust’s investor relations executive. She consistently stated that she “would check” with management about the Gevurah questions but never called back.

The emails to Malone went unanswered.

Calls to Stephen Ungar, AmTrust’s general counsel, and Harold Schlacter, the treasurer, were not returned.

Posted on 2 Comments

Michael Karfunkel’s Bridge to Nowhere

It’s not every day that someone makes a $373 million grant of shares in a company he co-founded. But on Nov. 12 that’s exactly what Michael Karfunkel did when his Hod Foundation donated 7.21 million AmTrust shares to the Teferes Foundation, whose founder and manager is Barry Zyskind, Karfunkel’s son-in-law.

But the grant disclosed on Friday afternoon, Nov. 20, after the close of trading, becomes a lot more interesting when one understands that Zyskind is the chief executive of AmTrust.

As Southern Investigative Reporting Foundation readers will recall from its August investigation, the 71-year-old Michael Karfunkel is one-half of a fraternal duo (his brother George is six years younger) that founded AmTrust, a high-flying insurance company. What the investigation uncovered was that the two brothers’ foundations—while certainly active grant-makers to synagogues and institutions connected to Brooklyn’s Haredi Jewish community — benefited mightily from using their foundations to maintain family control of AmTrust.

With that in mind, the Southern Investigative Reporting Foundation took a hard look at the deal and it appears that charity is the last reason this was done. Moreover, a close reading of the rules governing inter-private foundation transfers suggests Michael Karfunkel hasn’t done his son-in-law any favors.

In the Southern Investigative Reporting Foundation’s August story, an examination of several years’ worth of IRS Form 990s — the annual report for tax-exempt foundations — revealed the Karfunkel brothers had stuffed their foundations with so much AmTrust stock that they violated longstanding IRS rules governing something called “excess business holdings.”

You can be forgiven if the term doesn’t roll off your tongue, but for tax-exempt private foundations, it’s a very big deal. In short, the permitted holdings of a foundation and its disqualified persons — an IRS term for the network of foundation insiders that include its manager, their family members, the directors and key donors — boil down to a formula: 20% minus the amount held by disqualified persons. Given the Karfunkel insiders fail this test via their ownership of just over 59 percent of AmTrust’s shares, another IRS rule permits their private foundations to each hold as much as 2 percent of a company’s shares outstanding.

(Starting in the late 1960s the IRS began seeking to prevent private foundations from warehousing large holdings in closely held businesses.)

So did the Hod Foundation’s grant of all of its AmTrust shares to the Teferes Foundation put it in the clear?

Not hardly.

As before, there is a long-standing rule in place that somehow Michael Karfunkel or the people advising him missed. It’s called Internal Revenue Code Section 507(b)(2) and it deals with asset transfers between private foundations. The upshot of the rule is that when 25 percent or more of the fair market value of a foundation’s net assets are transferred, the recipient assumes the grantor’s tax liabilities (as well as the obligation to dispose of the excess business holdings.)

In the case of Hod Foundation, this liability is potentially mounting into the tens of millions of dollars. Filings with the Securities and Exchange Commission indicate that the Hod Foundation received a block of shares on Aug. 1, 2008, that pushed its ownership to just below 10 percent of the shares outstanding. Under Internal Revenue Code Section 4943, a private foundation has five years to liquidate the excess business holding; by August 2013, according to the timetable in its own SEC filings document, Hod was in violation of the IRS rules.

Ultimately the Hod-to-Teferes transaction is astoundingly strange: it solves no problems and only serves to highlight the very issue it was supposed to address, and raises additional ones, like charitable intent. The Karfunkels’ and Zyskind private foundations remain every bit in violation of the excess business holdings rule as they were before the move. And Zyskind’s Teferes Foundation has been afoul of the rules from the minute the deal closed, and as such, no holding period “clock” reset would be permitted.

Getting right with the IRS will mean that some painful arithmetic is in store for the Karfunkel family.

Using the figure of 74,886,335 shares outstanding as disclosed in last week’s 13-D filing, the 2 percent exemption means that Barry Zyskind’s Teferes Foundation and George Karfunkel’s Chesed Foundation for America would have to dispose of over 12 million AmTrust shares combined, either through direct sales or grants to public charities.  Breaking it down further, the maximum permissible holding for each foundation is 1,497,726 shares, implying that Teferes (which currently holds 7,347,555 shares) would have to sell 5,849,828 shares and Chesed (which currently holds 7,707,918 shares) would have to sell 6,210,192 shares.

What’s more, if they donate these shares to a public charity like the United Way or the Red Cross, the donations must be unencumbered, meaning there are no strings attached — so the charity would almost certainly sell them in the open market in short order.

Given the simple remedy to this expensive problem, and the Karfunkel family’s refusal to do so, it’s obvious that maintaining this status quo is vitally important to them.

The only question remaining is why.


A spokesman for the Karfunkel brothers, Kekst & Co.’s Robert Siegfried, was asked for comment about the transaction. In response to a question about excess business holdings, he said there was “no excessive business holdings” issue and noted that Teferes was a long time donor to Jewish organizations. The Southern Investigative Reporting Foundation sought clarifications in a follow-up email; Kekst’s Siegfried did not answer the questions and repeated his initial response.

Update: This article has been updated.

Posted on 17 Comments

The Mitzvah Factory

Illustration: Edel Rodriguez
Illustration: Edel Rodriguez

Michael and his younger brother George grew up poor Jewish kids in Hungary in the mid-1950s. Unlike so many, Michael managed to avoid a grim fate in the Holocaust — only to have his country swept up in a bitter revolt against the cruel occupation government of the Soviet Union.

The revolt failed, and like tens of thousands of their countrymen, the two brothers left their homeland and its bloodshed and managed to make their way to New York and a new future.

Nearly 60 years later, their lives are something even Horatio Alger would not have thought possible. Their quiet careers at the periphery of Wall Street investing and forays into the real estate and insurance industries (all while they averted publicity) have made both men billionaires, according to Forbes magazine.

Like so many rich people, the Karfunkels opened nonprofit foundations to share
their good fortune. Through the donation of large blocks of shares of AmTrust Financial Services — an insurance concern they built in the 1990s — their foundations have amassed considerable size as the share price has climbed: By the end of 2013 Michael Karfunkel’s Hod Foundation had assets of $286 million; his brother George’s Chesed Foundation of America had assets of $293 million.

(Their foundations give almost exclusively to yeshivas and synagogues connected to Haredi Judaism, many of which are affiliated with the Belz Hasidic sect.)

And this is where the story would normally end: Two miraculously successful brothers in their later years — Michael is now 71 and George is 65 — have the rare privilege of seeing their fortunes put to good use.

Except that, taking a hard look at how these foundations operate leaves a lot more questions than answers.

For three months the Southern Investigative Reporting Foundation analyzed the foundations’ publicly available documents, primarily though, an online repository of nonprofit foundation annual reports. What the Southern Investigative Reporting Foundation found was that all good intentions aside (Hod means “prayerful submission” in Hebrew and Chesed translates into “loving kindness”), regulatory filings indicate that the foundations, while generously supportive of the Belz Hasidic community, have become key instruments in furthering the Karfunkels’ business interests.

Unfortunately for the two brothers, based on the Southern Investigative Reporting Foundation’s analysis, it appears that their management of the foundations may expose them to regulatory scrutiny and possibly force them to sell a large amount of their foundation’s AmTrust shares, creating a material concern for company shareholders.

What follows below is how lax regulation and imprudent management turned the capstone of the American dream into what may be the first act of an American nightmare.


The Karfunkel brothers’ nonprofit foundations reflect their unusual tolerance for risk.

George and Michael Karfunkel’s first attempt at making their way on Wall Street is illustrative. The brothers were employees at a mutual fund boiler room called Economic Planning Corp.; their bid to diversify the firm by having it engage in the capital markets ended with them at the center of a wide-ranging pump and dump scam that collapsed in 1971. Never disclosed in their AmTrust filings, the Securities and Exchange Commission injunction and suspensions they received hardly set them back.

In response to a question about the lack of disclosure surrounding their SEC sanctions, the Karfunkels’ spokesman, Kekst and Co.’s Robert Siegfried, said the brothers have nothing to disclose, having sought and obtained a dissolution of the SEC injunction in January 2000. (The Karfunkels’ spokesman declined to provide the Southern Investigative Reporting Foundation the motions arguing for dismissal, stating that they are a matter of public record. A search of PACER the online legal database, however, did not yield any results.)

Their next venture, American Stock Transfer & Trust, a share registry that tracked changes in holders of record in the stock and options of publicly traded corporations, was a spectacular success and was sold to an Australian company for $1 billion in May 2008.

While managing American Stock Transfer, the brothers began cobbling together seemingly disparate insurance units in 1998, calling the collection AmTrust Financial Services. The company listed shares in 2006 with Barry Zyskind, Michael Karfunkel’s son-in-law, installed as chief executive.

Unlike other medium-sized commercial insurers like W.R. Berkeley who focus on standard retail and commercial policy business, AmTrust is a publicly traded portfolio of  insurance risks, like Italian medical malpractice, manufacturer warranties and California workers’ compensation.

From enough distance, there’s wisdom aplenty in seeking out niche markets as less competition in insurance can offer high returns, but those profits come with ample risk.

There is an established pattern of insurance companies that grow quickly misjudging the breadth of risk in their portfolio and facing cruel reckonings when claims begin to mount and reserves prove inadequate.

AmTrust, however, has had no reckoning despite a mounting chorus of critics who have voiced their concerns over the quality of its disclosures and accounting.  The company’s response to the skeptics was bolstered by the company’s strong recent earnings report.

The Hod and Chesed foundations employ risk in a fashion rarely seen in other private foundations. This is an interesting orientation for a foundation given that the IRS, the federal regulator for private foundations, has a blunt view of the role of risk in managing foundation’s operations and assets — namely, to avoid it.

But in case a foundation executive didn’t get the message, the IRS released guidelines designed to prevent “a lack of reasonable business care and prudence” in the foundation’s management.

Called “Jeopardizing Investments,” the IRS document promises additional scrutiny of a foundation if it starts to do things like use options, employ leverage or started making swing-for-the-fences trades, where the risk/reward ration was clearly skewed towards risk.

The Hod and Chesed filings reveal that the IRS memorandum didn’t make much of an impression on the Karfunkels because much of what the IRS warned about is how their foundations have regularly done business.

For instance, they used their foundations to make aggressive, directional market bets on controversial stocks. To that end, consider Michael Karfunkel’s waltz with Fannie Mae put options in mid-2008.

According to Hod Foundation filings from June 2008 to 2009, Michael Karfunkel began selling put options on Fannie Mae stock, a strategy that limited his profit to the option premium (or price) on the put options he sold.

But in mid-2008, Fannie Mae, the Grand Central Terminal of mortgage risk, was the proverbial house on fire, a once high-flying company en route to a collapse into  conservatorship.

The high-stakes wager on Fannie Mae’s survival cost the foundation a total of $10.5 million. The rationale for the trade aside, it is a fine example of the skewed risk/reward ratio the IRS warned about — Hod’s profits were capped at $2.6 million.

Chesed also paid dearly for George Karfunkel’s adventures with Citigroup options trading in 2008, when he sold nearly 500 put option contracts, making him effectively long the stock as the bank began to totter toward its mid-September bailout. Like his brothers bet on Fannie Mae, he was effectively betting that an institution laden with dubious mortgage-related securities would emerge essentially unscathed from the then raging crisis.

It was a spectacularly bad bet, with the trade costing Chesed more than $820,000 and potential profits capped at about $105,000. Similar bets on AIG (a loss of nearly $500,000) and Lehman Brothers (a loss of almost $250,000) also proved costly.

Another remarkable aspect of these trades is their timing, with the Lehman Brothers and AIG option positions being opened on Friday, Sept.12, with both once iconic companies promptly collapsing that weekend. The historical price action for both Lehman and AIG in the weeks leading up to that Friday is testament to the depth of investor panic. Shorting the puts of these companies wasn’t so much speculation as an attempt to catch a falling knife.

Contrary to the Karfunkel’s assertions below, losses from their option trading adventures — in combination with the collapse in the equity markets — had a disastrous effect on the fair market value of the foundations’ portfolios, with declines of 64 percent for Hod and 43 percent for Chesed.

Through their spokesman, the Karfunkels responded that the use of options — common among veteran market participants such as themselves — did not lead to a material decline in the size of the foundation portfolios, especially given the intensity of the 2008-2009 market collapse. A chart of both foundations that they provided the Southern Investigative Reporting Foundation portrayed their book value growth as favorable to a peer group of similarly sized family foundations. View the full Karfunkel reply.

The more one digs into how Hod and Chesed conduct their affairs, the idea of the foundations as complex economic vehicles begins to emerge.

Both foundations use money borrowed from a bank or broker — through what is known in finance as a margin account — to (presumably) amplify investment returns. The 2011 Chesed filing lists a $9.8 million margin account; Hod’s 2013 margin account filing shows just under $1.35 million of margin owed.

Moreover, both foundations regularly extend loans, like Hod’s unnamed $2.5 million receivable from 2013. This is a potential red flag: According to regulations, foundations are allowed to receive zero interest loans, but they are prohibited from making loans or extending credit, especially to what the IRS refers to as “disqualified persons“(meaning  the founder, a spouse and immediate family members, as well as substantial donors to the fund).

These issues come to the fore when the relationships between Hod and Chesed and a complex entity called the Michael Karfunkel 2005 Grantor Annuity Trust are explored. Known in financial planning circles as GRATs, these structures are a popular way for the ultra-wealthy to pass down part of their estate tax-free.

GRATs allow a grantor like Michael Karfunkel to transfer assets into a trust for a specified period; in return the trust pays the grantor an annuity over a set period of time. At the end of the term, what assets remain can be distributed tax-free among beneficiaries. Distilled to its essence, a GRAT is a bet that the assets in the trust will increase in value. (A Bloomberg News article argues that for the grantor, the bet often pays off spectacularly.)

Filings disclose that Hod was owed money by the Michael Karfunkel 2005 Grantor Annuity Trust $375,055 in 2010 and 2011, and Chesed started disclosing a receivable in 2010 with a $199,219 loan. After 2011, Hod’s filings no longer mention a receivable to the GRAT but Chesed does.

With the beneficiaries of the trust disclosed as Michael Karfunkel’s wife Leah and their children, including his daughter Esther (the wife of AmTrust CEO Barry Zyskind), the concept of the GRAT owing money is troubling, given the self-dealing prohibitions described above.

More than just being at the center of a series of eyebrow-raising transactions, however, the Michael Karfunkel 2005 GRAT is also the owner of ACP Re Holdings Ltd., a Bermuda-based reinsurer that is attempting to purchase troubled insurer Tower Group International Ltd.

One of the fundamental questions the Southern Investigative Reporting Foundation had about Michael Karfunkel’s GRAT was about a July 22, 2013, SEC filing disclosing that he had “gifted” 320,000 (worth over $10 million at the then share price) AmTrust shares to the GRAT. Two things are noteworthy about the filing: The first is that it was made four months late, with the transaction occurring on March 25. The second is that making a contribution of additional shares to a GRAT is flat-out forbidden.

In reply to Southern Investigative Reporting Foundation’s questions, the Karfunkels said that no loans were extended to or from the GRAT, but rather the receivable balance was due to the transfer agent getting behind on book entries which led to the GRAT receiving dividends otherwise owed to Hod, a problem soon discovered and corrected.

The issue of the additional contribution to the GRAT was, according to the spokesman, part of the transfer agent lag time issue referenced above. (View their full response.)

The Karfunkels’ response is, quite frankly, odd. Start with the fact that IRS and SEC filings have no record of, or reference to, any stock transfer whatsoever between Hod and the GRAT. (An elaboration on these points from the Karfunkels’ spokesman is linked at the bottom.)

Reconciling the balance of their reply with the documentary record didn’t get any easier.

For example, the GRAT, by definition, is prohibited from distributing assets — like their purported 2008 gift of AmTrust shares to Hod — to anyone (including beneficiaries) until the annuity with Michael Karfunkel, the grantor, is executed. Whatever the attributes or drawbacks to the GRAT as a financial instrument, it is designed as a simple contract: There is an annuitant (Karfunkel), the beneficiaries (his family) and the rest is math. Based on interviews with Wall Street operations department veterans, it appears unusual that a transfer agent would be unable to discern who the grantor was.

Nor would a “donation” from a GRAT — imagining that it was even legally feasible — be a rational exercise: If a donor wanted to make a donation to a charity, why would they take assets from the tax-advantaged GRAT structure and defeat the purpose of passing on tax-free gains to beneficiaries?

For an independent view, SIRF called Richard B. Covey, the 85-year-old Carter Ledyard & Milburn LLP partner who developed the GRAT in 1990 and without using their name, described the Karfunkel GRAT transactions, as laid out in the SEC and IRS filings transactions.

Contacted at his Spring Lake, New Jersey, home in early August, Covey was blunt in his response to the scenario posed by the Southern Investigative Reporting Foundation.

“That’s an absurd question. No one rational would seek to add assets after the annuity is struck, it would violate the agreement under most every understanding of [a GRAT],” said Covey. “They would be better off just [opening] a second GRAT.”

When asked to elaborate on this, Covey said the construct of a GRAT is cut and dry: Its fundamental component is the annuity, which, at bottom, is a contract that takes an asset and pays out a specified amount at some agreed upon date in the future.

Adding assets after the contract is struck changes the contract’s entire equation, Covey said. Nor, for the record, did he understand why a GRAT could make a donation.

Covey, when asked if there was some long-buried exception to these GRAT rules, said that without resorting to broad brush condemnations, he still wouldn’t want to be a lawyer pressing the argument in front of a [hypothetical] judge but perhaps, “there is a one in one thousand scenario where they could [convince a judge an exception was warranted].”


The Karfunkel brothers’ foundations grew to their current size after an earlier family charitable vehicle, the Karfunkel Family Foundation, distributed most of its assets to Hod and Chesed between 2000 and 2003 — almost $45 million, or 87 percent of its then $51 million was given to the foundations — and their asset base continued to grow sharply afterwards from large grants of AmTrust and other stocks.

That’s all standard enough. What’s really interesting is buried toward the back of the filings where the donations are disclosed, where some arithmetic reveals that the large blocks of stock donated were valued at prices sharply higher than the market price on the day of the grant.

There’s only one beneficiary from inflating an asset value and it’s the donor, who gets a receipt allowing them to claim an out sized — and inappropriate — deduction. For its part, a foundation is saddled with an overpriced asset that locks in a loss if they sell in the near term and which exaggerates their asset base.

The donation of overvalued shares was not a one-time event for the Karfunkel brothers, but was done at least six times between 2005 and 2012.

The Southern Investigative Reporting Foundation estimated that of the nearly $110 million in shares Chesed received from George Karfunkel, almost $31 million of this came from valuations above the then market prices.

For his part, Michael Karfunkel’s donation on Dec. 31, 2009, of Fannie Mae, Maiden Holdings and AmTrust stock that he valued at $60,974,615 to Hod appear to have been $8.65 million overvalued.

To prevent something like this from happening, the IRS introduced an accounting concept, fair market value, to be used when recording gifts of publicly listed securities. Whether its Berkshire Hathaway or a mercurial biotech startup, all stock gifts are put on the books at the average of the high and low trades on the day the donation is made.

So how could rich, sophisticated donors like the Karfunkels stumble over this methodology?

The Southern Investigative Reporting Foundation asked Ronnie McLure, a Dallas accountant and university professor whose practice has frequently provided accounting services to private foundations, if there is room for interpretation in the statutes.

“There isn’t really a way around using fair market value for public securities,” McLure said. “The federal regulations make that one easy and with liquid stocks the accountant can’t avoid it.”

Regardless, the Karfunkels seem to prefer a more freewheeling approach.

Consider the Nov. 1, 2005, donation of 187,500 shares of MRU Holdings to Chesed. Valued at $806,250 in the annual filing, this implies a price of $4.30 a share. The closing price on that date, however, was $1.03, making Chesed’s valuation — and George Karfunkel’s deduction — over $613,000 greater than if he had donated it at market price.

Other instances emerged.

On July 1, 2009, George Karfunkel gave Chesed 1 million shares of Plano, Texas-based energy concern Cubic Energy and 6.15 million shares of AmTrust, worth, the filing asserted, $78.33 million. Chesed’s claimed value was well above the market value of the securities. According to Yahoo! Finance, the average of the high and low prices for Cubic and AmTrust on July 1, 2009, were, respectively, $1.07 and $11.55 versus Chesed’s implied values of $4.50 and $12 per share.

(The Southern Investigative Reporting Foundation used Yahoo! Finance for historical prices and relied on the unadjusted stock price to reflect the price of the security on that date so that subsequent dividends and stock splits would not distort comparisons.)

Using the average of the high and low stock prices on Jul. 1, 2009, the gift should have been worth $72.1 million.

On July 1, 2010, Chesed received 380,853 shares of Citigroup from Karfunkel that it claimed were worth $17.98 million, or $47.21 per share.

Citigroup’s average share price on the date the donation was recorded was $3.74, making the value of the entire block of stock just over $1.42 million, a difference of $16.55 million.

And it gets weirder.

Recall that Chesed’s tax year is from July 1 to June 30 (the 2010 Form 990 has a filing date of June 30, 2011), so when Citigroup announced a 1-10 reverse split on May 9, 2011, the share prices were readjusted upwards by a factor of 10. What Chesed did is claim a value for the July 1, 2010, donation that was not in effect until more than 10 months later.

Incredibly, even after the reverse split, Chesed’s implied value of $47.21 (or $4.72) was still above the $3.74 average July 1, 2010 price.

In 2012, George Karfunkel made another two grants to Chesed: 200,000 shares of Organovo on Nov. 13 and 1.8 million shares of BioTime on July 1. Valued at $12.67 million, or $9.35 and $6 a share, respectively, the claimed values were again higher than Organovo’s then-average market prices of $2.34 and BioTime’s $4.38. (The market was closed July 1, 2012, so the Southern Investigative Reporting Foundation used prices from June 29, 2012.)

The fair value of the gift comes in just under $3.72 million — $8.95 million less than what Chesed stated.



Shares Granted

Value of Grant

Implied Px.



MRU Holdings






Cubic Energy





































How did a pair of billionaires end up donating more than $170 million dollars of stock at prices that were not fully reflective of the then market conditions? The answer isn’t clear but the Karfunkels, as the sole signatories and directors of their foundations, sure can’t claim ignorance.

In response to Southern Investigative Reporting Foundation questions, the Karfunkels replied that the issue was a time lag between the date of the donation and the foundation’s receipt of the shares. See their full response. With regard to the grant of Citigroup shares discussed above, the issue was apparently more complex:

“The lag time between date of the grant by George Karfunkel and date of receipt of the shares by Chesed spanned approximately 2 years,” according to Siegfried, the spokesman from Kekst & Co. “The reason for the long lag time was that the certificates for Citicorp shares donated by George Karfunkel bore a legend and could not be transferred physically at the time he made the donation.”

Like the reply to the Southern Investigative Reporting Foundation’s GRAT questions above, the Karfunkels’ answer frames an unusual scenario that is difficult to square with current market practices.

The concept of the physical delivery or transfer of shares between a buyer and seller — or a donor and foundation — is something that over the past 25 years has become increasingly rare in the U.S. capital markets. To be fair, there are hobbyists who collect stock certificates, and, rarer still, investors who insist on having their shares in physical form to prevent them from being lent out to short sellers, but beyond that, share transfers in the U.S. capital markets are entirely digital.

It bears recalling that the Karfunkel brothers founded and ran a successful, technologically advanced stock transfer operation and would, as a matter of daily business, understand fully what is necessary to transfer stock to another entity. As such, the central role repeated transfer agency mistakes play in their explanation for both the GRAT above and the valuation question is notable.

The concept of a legend posing a significant hurdle for the transfer of the shares is also difficult to wrap one’s arms around.

A legend is a restriction on the sale or transfer of stock, usually because the shares were purchased during a private placement of shares (a sale of stock to higher-net worth investors or institutions) that requires an agreed-upon holding period, or, alternately, legends are often attached to shares issued as payment in a transaction. To remove a legend requires two things that George Karfunkel had ample access to: a legal opinion stating that the conditions of the restriction had been fulfilled and a transfer agent to process the removal.

Poking around SEC filings, however, brought the explanation. In August 2000, Michael and George Karfunkel sold a unit of American Stock Transfer & Trust then called AST StockPlan Inc. to Citigroup for an undisclosed sum. An SEC filing (a registration statement called an S-3) notes that as of Dec. 20, 2001, each brother held 380,853 shares of the bank. A previous registration referenced a filing the Karfunkel brothers made on Sept. 26, 2000, and which was approved by the SEC on Oct. 5, 2000, granting registration (and transferability) for the majority of their Citigroup holdings.

Additionally, there is the quality of the foundations’ disclosures.

If, as the Karfunkels warrant, there was a substantial difference between the date of every stock donation the brothers made to Hod and Chesed and the receipt of the shares, then the IRS filings should reflect that the date the foundation received those shares is the formal date of donation. The IRS rules on the issue leave little to the imagination.

In late July, the Southern Investigative Reporting Foundation attempted to contact Henry Reinhold, the Brooklyn accountant who is paid around $40,000 annually to prepare the Karfunkel foundation annual filings (he also prepares the filings for Barry Zyskind’s Teferes foundation) and served as an officer of American Stock Transfer & Trust and an AmTrust subsidiary. Samuel Reinhold, Henry’s son, declined comment on his behalf.


Per Alexander Pope, if mighty contests really do rise from trivial things, then the Karfunkels may someday wish they had given a different answer to question 3a on page 5, part VIIB in the Hod and Chesed foundations’ annual filings.

The question, “Did the foundation hold more than a 2 percent direct or indirect interest in any business enterprise at any time during the year?” was checked off in the negative but each foundation’s filings say otherwise.

The Karfunkel brother’s foundations are chock-full of AmTrust shares; Hod and Chesed, respectively, hold 9.6 percent and 10.5 percent of the shares outstanding.

In case there is any doubt, according to the most recent proxy agreement, the Karfunkel family controls 59 percent, or 44.4 million of AmTrust’s 75.3 million shares outstanding. The Hod Foundation controls just over 7.2 million of these shares and Chesed has 7.9 million.

Keeping their economic good fortune closely wrapped in a series of family trusts and foundations was an understandable strategy by the Karfunkel brothers. AmTrust is literally a family business — apart from Barry Zyskind, several of Michael’s and George’s children hold important positions in its subsidiaries — and their massive stake in the company makes it immune to takeover or raids from activist investors. Moreover, Wall Street’s analysts and money managers often find attractive a company whose founders have maintained a large equity stake once they have publicly listed the stock.

So it is an irony of cosmic proportions that their moves to insure the effective Karfunkel family control of AmTrust may well lead to that iron grip being forcibly shattered.

The problem, in a nutshell, isn’t so much that the annual filings don’t reflect the truth so much as it is that the U.S. government has some unmistakable rules in place to prevent private foundations from holding that much stock in an enterprise.

A quick history lesson: In the 1960s, officials from the Department of the Treasury began to cast a skeptical eye on the use of private foundations to warehouse large corporate ownership positions company on the view that it was a distortion of both free market and nonprofit principles. The rule that emerged to combat this is Internal Revenue Code Section 4943, and it is primarily concerned with the idea of excess business holdings, or the amount of stock a private foundation can own when so-called disqualified persons (the founder, directors, their family members and key donors) have significant holdings too. (View a primer on key aspects of the rule.)

Traditionally the IRS mandates a bit of arithmetic to get to the foundations “permitted holdings” figure — the formula being 20 percent of the shares outstanding less the percentage of stock held by disqualified persons. In this case the Karfunkel family and its controlled entities own about 59 percent, making the point moot.

Under a provision of Section 4943 there is a second approach, known as the “de minimus rule,” with each foundation permitted to hold 2 percent of the shares outstanding, meaning that Hod and Chesed could hold slightly more than 1.5 million each.

It is difficult to interpret the IRS rules as meaning anything other than a lot of AmTrust stock needs to be sold or donated away — about 6.4 million shares for Chesed and 5.7 million shares for Hod, nearly 16 percent of the shares outstanding.

There is a catch, and as catches go, it is a significant one: The AmTrust stock that Hod and Chesed need to sell cannot be sold to those same disqualified persons, meaning that neither of the brothers (nor their families) can bid for any shares that the other’s foundation is forced to sell. (A second option is for the shares to be donated to an unaffiliated public charity, like the Red Cross, who would almost certainly begin selling the shares upon delivery.)

That’s news no AmTrust investor, even with the stock price on a tear, likely wants to hear.

For the Karfunkels and, seemingly, AmTrust investors, this headache has been a long time brewing.

Hod and Chesed began to build up their massive position in AmTrust stock at the end of 2007 when an otherwise unmemorable SEC filing disclosed a transfer of AmTrust shares on Dec. 31, 2007 from New Gulf Holdings, a holding company the brothers jointly owned, to Hod and Chesed. An additional transfer took place on Aug. 1, 2008. When the dust settled, the foundations owned more than 5.6 percent of the then nearly 60 million shares outstanding and had crossed the 2 percent de minimus threshold the IRS had laid down.



























Shares Outstanding









% Shares



















An outside observer, aware of the Karfunkels’ business successes, can be forgiven for struggling to understand how basic guardrails of nonprofit law like the IRS’ permitted holdings rule were blown through.

The brothers certainly had enough time to comply, since the IRS gives foundations a five-year window to dispose of gifted shares. So in Chesed’s case, after receiving 6.15 million AmTrust shares from George Karfunkel on July 1, 2009, the foundation had until this Jul. 1 to whittle down the stake to the requisite 2 percent of the shares outstanding. Hod, having received its AmTrust stock from Michael Karfunkel on Dec. 31, 2009, has until Dec. 31 to meet the requirements.

Being tax law, of course, no rule would be complete without footnotes and buried exceptions, and Internal Revenue Code Section 4943 is no different, providing foundations an additional five-year window to sell down excess business holdings but even this has a proviso to be hurdled: The foundations can only qualify if they demonstrate that “diligent efforts to dispose of such holdings have been made within the initial 5-year period.” This is going to be a tough sell since the past five years saw the brothers actively adding AmTrust shares into their foundations.

To put some teeth into the rules, the IRS taxes those foundations not in compliance 10 percent on the excess holdings of shares; lest that message not be received, the IRS levies an additional 200 percent tax penalty for any excess holdings not disposed of by the end of the foundation’s tax year.

In this case, that’s June 30, 2015, and the size of a prospective fine, even with a back of the envelope calculation, rapidly crosses into $100 million territory if the IRS isn’t satisfied.

In a reply to SIRFs request for comment regarding the foundation’s AmTrust holdings,  the Karfunkel’s spokesman wrote, “The Karfunkels are highly-sophisticated successful investors. They are the founders of AmTrust, its largest shareholders and extremely confident about the Company’s long-term potential. They are confident as well in the profile of their respective Foundations’ investment portfolios.”


The Southern Investigative Reporting Foundation approached the Karfunkels through their spokesman Robert Siegfried of Kekst on July 25 and, because of the brothers’ religious observances, subsequent vacation travel and related business obligations, was unable to begin a formal dialogue with a representative of theirs until an Aug. 5 phone call.

On that call and through a series of emails, the Southern Investigative Reporting Foundation provided the Karfunkels’ spokesman a set of questions, as well as source documents central to its investigation and any necessary context surrounding the questions. On Aug. 13 the Karfunkels replied. Seeking additional clarification, the Southern Investigative Reporting Foundation asked follow-up questions. View the Karfunkels’ response to those questions.

With respect to the amount of AmTrust stock held in Hod and Chesed, seemingly in the face of IRS regulations, the Southern Investigative Reporting Foundation found the Karfunkels’ response puzzling and asked their spokesmen in an Aug. 15 follow-up email if they stood by their statement. They did, with the added remark that they did not know what “IRS rules and regulations” the Southern Investigative Reporting Foundation was referencing. See their full reply.

Editor’s note: The Southern Investigative Reporting Foundation, in phone calls and email (including an hour-plus conversation with the Karfunkels’ longtime attorney) repeatedly mentioned “excess business holdings” and the foundations’ holdings of AmTrust stock as lines of inquiry.

Read a disclosure about the Southern Investigative Reporting Foundation and a donor during the preparation of this story.