This is what is known as a complete unmitigated disaster. The lawyers are gearing up for battle to find out who Madoff gave money to while he was on the verge of collapse, but that is hardly the real issue, although numerous New York law firms are putting together Madoff Working Groups to try and drum up some revenue by feeding on the carrion flesh.
The real issue is how the board of a charity, who are not only entrusted with other people’s money, they are entrusted with other people’s money for the benefit of other people, disregarded the duty of due care of obtaining some basic disclosure from Madoff.
If I was a contributor to the Jewish Community Foundation, I would demand an immediate production of exactly where the money is. The days of trusting another person with your money based on reputation is over. Actually, it was over with the advent of the internet. Any person holding another person’s money should be required to make available statements. If the government will not require it, private investors should, and if private investors do not, then at least those trusted with other persons’ money will have to in fear of the courts.
I think some lawyers are going to make a lot of money suing the investment funds, charities, etc. who were dumb enough to never get a scrap of real disclosure from Madoff. If you did get money from Madoff in the last months of his tenure, i have three words for you, give it back. Swiss bank accounts might work when you are dealing with the IRS or a state agency, but the FBI simply does not screw around. Unless you can buy gold and shove it under a mattress.
As for the charities that got screwed, I think the lessons for charities is that when someone donates $100 to you, you tell them that we are only going to invest it in bonds issued by the US gov’t or a state that does not have 10 million mexicans (see California), no more than 25% is going to be in stocks and mutual funds, and none of this hedge funds stuff. Charities should not be in the business of making money.
Steve Leimberg emails:
The impact on charities will also be wide-spread. Many charities are reporting substantial losses. Rumors abound as to the extent of damage to endowments at public charities. Supposedly a number of Jewish Federations, Yeshiva University and other endowments are taking substantial hits.
The impact of private foundations has also been reported. Sadly Elie Wiesel’s Foundation for Humanity appears to have been a victim of Madoff – perhaps losing its entire endowment. And a charitable foundation funded by Carl Shapiro and his family has allegedly lost nearly $150 million.
Foundations funded by Mort Zuckerman, Steven Spielberg, N.J. Senator Frank Lautenberg and many others are also reportedly victims. As reported in "Jewish Charities Shut Down Following Madoff ‘Ponzi Scheme" Wipeout" on Foxnews.com (12/15/08).
Two private foundation have already reportedly closed their doors, and we know that others are close behind. The Boston Globe reported that the Robert I. Lappin Charitable Foundation, a private foundation which financed trips for youth to Israel and supported educational and cultural services on the North Shore of Boston (where I grew up), closed its doors Friday. Apparently the foundation lost essentially 100% of its estimated $8 million endowment which was fully invested with Madoff. "Boston Donors Bilked Out of Millions" by Beth Healy and Steven Syre, Boston Globe (12/13/09).
Also, the Chais Family Foundation in California reportedly also closed its doors. The Chais foundation gave away about $12.5 million annually to charitable causes and supposedly had all of its assets invested with Madoff. Reported in "Jewish Charities Shut Down Following Madoff ‘Ponzi Scheme" Wipeout" on Foxnews.com (12/15/08).
In addition to those that invested with Madoff, the impact of the collapse will hurt other charities as well. Some received substantial portions of their funding from him.
For example, the Gift of Life Bone Marrow Foundation, which has saved hundreds of lives with its bone-marrow matching program, received much of its funding from Madoff and his Wall Street friends. The worthy services performed by it will need new backing. The Gift of Life Bone Marrow Foundation has already announced on its web site that it is seeking $1.8M of new funding. It is certainly not alone.
c. Hedge funds
Madoff’s firm’s collapse may also reverberate in the hedge fund world. Although it was not a hedge fund, per se, Madoff worked in a world of secrecy. While apparently offering transparency, no one knew how Madoff made money. His program was analogized to "working in a black box" – like many hedge funds. And nobody, it seems, really knew what was going on. The stories are replete (now) with advisors saying they never trusted Madoff’s performance and his flimsy auditing firm that supposedly was made up of only one or two accountants. "Now Accused of Fraud, Wall St. Wizard Had His Skeptics," by Alex Berenson and Diana B. Henriques, The New York Times (12/13/08).
But those who invested with Madoff had no such understanding. On top of that, many hedge fund investors are going to find out their investments were wiped out due to the hedge funds’ investments in Madoff.
Maxam Capital Management LLC reported a loss of $280 million on investor funds all held at Madoff and their founder says she will close the hedge fund’s doors. GMAC LLC Chairman J. Ezra Merkin, a money manager with Ascot Partners LLC, reportedly held substantially all of the funds $1.8 billion under management at Madoff. In a letter Merkin sent to clients (and as reported in the Wall Street Journal), Merkin said he himself was one of Ascot’s larges investors and he believed he personally had suffered major losses from this catastrophe. See "Fund Fraud Hits Big Names," by Robert Frank, Peter Lattman, Dionne Searcey and Aaron Lucchetti, The Wall Street Journal (12/13/08).
Other hedge funds (and particularly funds of funds) apparently held huge portions of their investments with Madoff. Fairfield Greenwich Group said in a statement Friday that it is assessing its losses, but as of Novermber 1 it has about $7.5 billion in investments connected to Madoff’s firm (supposedly about half its total assets). Id.
Further, what impact will this have on hedge funds that didn’t invest in Madoff? This scandal could lead to calls for more scrutiny of hedge fund managers. Perhaps even a cry for government regulation of an industry that is largely unregulated.
From Yeshiva University:
Dear Yeshiva University Community,
I would like to speak with you, members of the Yeshiva University Community, about recent events in the news. As a result of the last week’s revelations regarding Bernard Madoff, much concern and speculation has arisen regarding Yeshiva University. I write to you to make our situation clear.
Before going further let me reassure you:
- The University is financially strong.
- Be assured that our levels of scholarships and financial aid will not diminish.
- Yeshiva University staff pensions are not impacted by this revelation.
- Our leadership, faculty and students are engaged and advancing.
- We will learn all appropriate lessons from this experience.
- We have been engaged over the last two months in reviewing our budgets to seek ways to cut our operating costs due to global economic realities. We will continue to do so and remain committed to advancing our crucial mission of providing an education that ennobles and enables our students
Bernard Madoff is no longer associated with our institution in any way. The University had no investments directly with Madoff. Last Thursday night, we were informed by Ascot Partners, a vehicle in which we had invested a small part of our endowment funds for 15 years, that substantially all its assets are invested with Madoff. The Ascot fund was managed by J. Ezra Merkin who has served as a University trustee and chairman of the investment committee. Mr. Merkin has resigned from all University positions.
In the most recent statement from Ascot, Yeshiva’s investment was valued at about $110 million, which represents about 8% of our endowment. While these facts are disappointing, we need to remain focused on the larger picture. We are but one of many institutions and individuals that have been impacted.
Let me be clear regarding our financial position: the University’s endowment, taking into account the Ascot loss, is currently estimated to be approximately $1.2 billion, down from approximately $1.7 billion on January 1, 2008. That loss of 28%, calendar year-to-date, compares with an S&P loss of 38% and Dow Jones loss of 32%. While certainly this represents a painful decline, we are in the same or better position as many universities. Although this decreased endowment must factor into our long term fiscal plans, it will have minimal impact on day-to-day operations. Total income from endowment last year represented 13% of the University’s operating income. Much more critical to our future health is the continued level of financial support from the YU family, philanthropists, and friends. So, while we are in a healthy and strong position to move forward, we must use the moment to address all concerns that this situation has illuminated.
In light of recent developments, we have decided to examine our existing conflicts policies and procedures, and governance structures. To assist us in this process, we have engaged Sullivan & Cromwell and Cambridge Associates, internationally renowned and respected institutions with recognized expertise in corporate and institutional governance, to ensure that our policies, procedures and structure reflect not only best practices, but the gold standard — the standard to which we aspire for all our endeavors. We will be working closely with our advisors over the coming weeks and months and I’m confident that we’ll emerge stronger than ever.
I must add a more personal thought. We all should use these times to reflect on our blessings but also to reflect on our responsibilities. We should constantly be communally introspective and focus on advancing our ideals. The times are appropriate for us to focus on our core values, to practice and refine them and to share them with the world. We can and should always advance. Yeshiva University is committed to engaging in that conversation with other people of good will. I thank you for your interest, commitment and support.
Richard M. Joel
President, Yeshiva University