Sons want accounting of how Schwan Foundation lost hundreds of millions

The South Dakota Supreme Court is scheduled to hear arguments next week on whether two sons of frozen-food magnate Marvin Schwan can learn details about how a charitable foundation established by their father lost hundreds of millions of dollars.

Mark and Paul Schwan are two of seven members on the trustee succession committee of the Marvin M. Schwan Charitable Foundation. The committee is supposed to meet at least once a year to review the administration of the foundation by its board of trustees. The committee can also appoint and remove trustees.

In 2013, the Schwans learned that the foundation had lost as much as $600 million in off-shore real estate ventures.

“These offshore investments consisted of hundreds of millions of dollars in loans and equity investments, made with foundation assets, to develop a Four Seasons Resort at Emerald Bay, Great Exuma, Bahamas; a Ritz Carlton Hotel at Seven Mile Beach, Grand Cayman, Cayman Islands; and a Four Seasons Resort at Peninsula Papagayo, Costa Rica,” according to their brief filed with the supreme court. “The trustees funded these offshore investments through an elaborate network of over 100 holding companies, subsidiaries, partnerships and other related organizations with legal domiciles in the British Virgin Islands, the Bahamas, Costa Rica, the Cayman Islands and Panama.”

The brief also alleges that the foundation made $20 million in loans to an entity where three trustees also sit on the board of directors.

“Speculative by their very nature, each of the trustees’ offshore investments failed in spectacular fashion, causing the foundation to suffer losses of hundreds of millions of dollars.”

In court filings, the foundation and its trustees acknowledge the losses, saying they are “working diligently with professional advisors to wind down these investments and minimize losses.”

The foundation also argues that it provided the trustee succession committee with detailed information about the losses, including audited financial statements.

Marvin Schwan created Schwan’s Sales Enterprises as a milk processing facility in Marshall, Minn. in 1948. The business manufactured ice cream and Marvin Schwan started selling ice cream on a delivery route. Schwan’s became a leading retail and food delivery business, and the food empire included frozen pizza brand names such as Tony’s and Red Barron.

Schwan, who lived in Sioux Falls, died unexpectedly in 1993 after suffering a heart attack at age 64. At the time of his death, Forbes magazine ranked him as America’s 70th richest man worth more than a billion dollars.

Much of that wealth went to the charitable foundation that he created the year before he died. The foundation was established to benefit seven Lutheran organizations.

As members of the foundation’s trustee succession committee, Mark and Paul Schwan argue they have a fiduciary responsibility to review detailed information about the losses sustained by the foundation. But three other members of the committee are also foundation trustees who were responsible for the financial decisions. They, along with the other two non-trustee members of the committee, have blocked efforts by the Schwan brothers. The seven beneficiaries also oppose releasing more details about the losses.

Lawyers in the case either declined comment because some aspects have been sealed or could not be reached. The foundation did not return a message Monday.

The Schwan brothers asked a circuit court to exercise supervision over the foundation, but the foundation argued that the brothers could not petition the court to take supervision because they lacked standing under state law.

The dispute also involves the attorney general’s office, which, under state law, has the authority to enforce the conditions of a charitable trust. It’s an issue that doesn’t come up often for the office, Attorney General Marty Jackley said.

Jackley declined to talk specifically about the Schwan case because aspects of it were sealed.

“It was important enough that we assigned two lawyers to it,” he said.

According to legal filings, Jackley’s lawyers negotiated a settlement with the foundation that includes a requirement that three trustees resign their positions if the Supreme Court rules in the foundation’s favor. The foundation would also amend its rules so that trustees can’t also serve on the trustee succession committee.