05/06/2011 05:27 am ET | Updated Jul 06, 2011

Foundations, Insiders and IPOs: Back Door Influence and Abuse

Wealthy folks, hedge funds and other financial entities are increasingly creating nonprofit, tax-write-offs called foundations. These foundations will often give grants to research at medical schools, universities, entrepreneurship-related activities, often linked to tax payer subsidies. For example, when a big state university, say in the tech belt of North Carolina, or Seattle or a medical school in Houston, spins off, via technology transfers, private companies, who are some of the early investors? Often those linked to the same foundations which enjoyed tax write-offs when they sponsored the same research at a state-funded school, have access via their "giving" to inside information related to these new companies being set up.

If the start-up does well, it may go public and with the IPO will come a large profit, with very little taxes due (most of these start ups are the result of investments which are long-term and thus subject to the lowest tax rate). Which means that the wealthy folks, hedge funds, etc. have won twice: once when they received the tax write-off via their foundation giving, and again when the research related to that foundation giving allows them access to inside information so that they can become an early investor in what may be a future IPO.

Now some may argue that there is nothing wrong with this, as we need to encourage more investment, not less, in American companies, especially during this time of financial hardship. But what we also need to remember is that part of this research has often been subsidized early on via state universities, medical schools and entrepreneurship programs, by our tax money. Do we the taxpayers end up better off because of our "investments"? And does this vicious circle of giving, allowing for access to inside information and early investing allow for the wealthy to simply grow wealthier while also paying less tax?

The truth is that the abusive use of foundations, not simply for access to inside information, but also as a money tree to raise funds for political candidates and parties, has not been investigated enough. Monies can be passed through foundations and redistributed to all kinds of programs, groups and activities, resulting in disturbing trends of tax evasion mixed with political influencing.

Imagine if only hardcore right wing folks were given access via their foundation boards and grants, to the ability to invest early on in say a biotech company which is then granted huge military contracts during a war. Imagine something even more disturbing, that this biotech company, which needs to test its vaccines on humans for FDA approval, is granted special access to US troops used as guinea pigs. And then some years later the company goes public, making many many millions for its right wing early investors who then donate to conservative politicians and causes, soldiers who were used as guinea pigs become ill, and we helped pay for it all via state grants when the research first began at state schools. Something like this happened more than once during the last tech bubble. We may be on the way to it happening again as people "offshore" their gains into foundations which pay no tax.

The wasteful (a true nonprofit should limit its overhead to no more than 10%), immoral use of foundations as ways to funnel monies, evade taxes and influence politics not just at home but abroad, needs to be investigated. As the gap between rich and poor in the US becomes more horrifying and simply surreal, we need to remember that a lot of that wealth is being channeled and protected inside of private foundations.

The world of foundations and nonprofits is a parallel financial arena in which people buy influence, social, political and financial. People may think it is a benevolent world where only good is done, and yes a LOT of good is done. But do not be naïve, there is money to be made, and foundations need to be regulated just as tightly as Wall Street and the markets President Obama, Mr. Volcker and Ms. Warren. Please remember the back doors into our economy, which are often ignored but which can do a great deal of damage to our country.