Crisis at Diana charity

The memorial fund set up in the name of Princess Diana is under threat today from a £16 million lawsuit.

The fund has been forced to freeze all its assets because of legal action brought by an American company that makes dolls of the princess.

Dr Andrew Purkis, chief executive of the fund, said it must find £4.5 million to meet its charitable obligations. He said 500 jobs in the charity and its beneficiaries were now under threat.

He appealed for a benefactor to come forward with a "Dunkirk-style rescue".

The fund was set up in 1997 two days after the princess's death when charities were swamped with phone calls from people asking how they could donate money to causes linked to Diana. More than 300 organisations have since benefited.

But the fund is embroiled in a massive lawsuit with giant US firm Franklin Mint. The company claims that an attempt by the fund to stop it making Diana dolls was "malicious" and is suing for £16 million.

It means that the fund's trustees, including Diana's sister Lady Sarah McCorquodale, could be held personally liable if Franklin Mint wins its case.

Dr Purkis admitted it was a mistake for the trustees to have taken the legal action. He added: "With hindsight, if they had known what was going to happen, the trustees would not have have done the same thing."

But he insisted that on the basis of the legal advice they were given at the time, it was the "right thing to do". He said: "They did what they did with the best of intentions. It went wrong, yes, but that does not mean they were not doing their very best at that time."

The fund is now entering into urgent negotiations with various grant-giving organisations to discuss different ways of providing for its beneficiaries.

"It is also exploring all possible avenues that could unblock the logjam in its own funds," the fund said in a statement.

Dr Purkis said that to blame Lady Sarah for the decision to take the legal action was "historically complete garbage". He added it would be "silly" to say he should be removed from his post.

He added: "If you really have to get into the blame game I think you will have to point the finger particularly at a big American corporation, which already had its victory and had all the dues paid to it in court, launching a quite unnecessary malicious prosecution suit against a charity which is doing fantastic work amongst the most vulnerable people in the world."

He said: "We will move heaven and earth to make sure, if we possibly can, that every one of those projects will find other sources of funding and the work of the Diana Memorial Fund will continue."

In a statement, the fund said it "is determined to find other ways of honouring existing grants commitments to over 120 organisations and has launched a rescue plan, trying urgently to restore the flow of money to beneficiaries. The rescue plan also aims to ensure that a freeze on new grant-giving would remain a temporary arrangement."

It added: "At the same time as launching this rescue initiative, the trustees are urgently in the process of notifying beneficiary organisations so that they can make whatever contingency arrangements they can to cope with such an unexpected and painful blow."

Dr Purkis said the fund has £46 million held in reserve, which means it will not go bankrupt.

The fund has pledged £50 million in grants with £40 million received by beneficiaries, since it was created. As well as charities in the UK, the fund supports HIV/Aids treatment centres and landmine clearance charities abroad.

Simon Gillespie of the Charity Commission said it will have devastating effect on organisations.

Landmine charity Children of the Andes said it has heard that £17,000 of money due next month might not be paid. The charity's spokesman Pilar Arrango-Ribeck said: "It is a huge blow, we need to continue this project."

Events leading to the current crisis date back to June 2000, when the fund lost a court battle in the US against the Franklin Mint in which they failed to stop the company making products bearing the Princess's image. The battle led to a £4 million legal bill for the fund.

In November last year, the Mint launched a £16 million counter suit in Los Angeles against the fund for malicious prosecution.

Dr Purkis said: "The first suit was finished. We lost it. We paid our dues in full to the court. Normally everybody would think that was the end of the matter.

"This is a brand new suit. This alleges that the motives of the trustees and executors were malicious. It is a groundless suit. It is in my view only a matter of time until we see it off."