The amount of trading with the Wunderkinder’s money is unbelievable. It’s as though someone was day-trading with the Foundation’s nestegg. Wunderkinder’s operators were, at best, asleep at the wheel.
The trades go off like clockwork on certain days, like a Swiss watch.
They are engaged in puts and calls, the option strategy that Bernard Madoff was famous for.
The IRS code says charities can not do puts and calls. It’s one of the verboten classes of securities.
You are dealing with the smartest money in town — Breslauer, Rutman and Anderson — the gold standard for money management for the Hollywood set.
This charity was buying options and losing money on options, which is strictly forbidden for a charity.
The manager of the foundation is liable for penalties.
The rules come from section 4944 of the IRS code: "No category of investments shall be treated as a per se violation of section 4944. However, the following are examples of types or methods of investment which will be closely scrutinized to determine whether the foundation managers have met the requisite standard of care and prudence: Trading in securities on margin, trading in commodity futures, investments in working interests in oil and gas wells, the purchase of “puts,” “calls,” and “straddles,” the purchase of warrants, and selling short."
This mismanagement by the Wunderkinder Foundation makes Elie Wiesel’s Foundation’s mismanagement look like child’s play.
I guess they could argue they bought and sold options as part of a hedging strategy.
"puts and calls" aren’t an "option strategy". They are simply two types of options. There are options strategies, and they use calls and puts, simply because those are the building blocks.
And, options aren’t securities. They are meant, as their name suggests, to give people the option to buy or sell securities (at a certain price by a certain time). The problem is, that options expire (and most expire worthless), so you can lose everything you put in if things go against you.
It’d be interesting to know if charities can use options at all, e.g. buying puts to hedge against a potential stock loss or whether they are restricted only from things that are really risky, like selling naked calls.
Option strategies are discussed in the first and second articles and the third one discusses the risky tactic of selling naked calls:
Reading further, it looks like buying options is disallowed for charities (though not selling options?).
Steven Spielberg suffered some losses in the Bernard Madoff fraud scandal, though apparently nowhere near a rumored $300 million.
However, the famed filmmaker’s private Wunderkinder Foundation had some investments with Madoff, though Spielberg spokesman Marvin Levy said he was unable to detail the assets or losses of the foundation.
The Wunderkinder Foundation (translated as child prodigies) is a relative modest one compared to Spielberg’s much better-known Shoah Foundation and Righteous Persons Foundation.
According to the latest available public filing with the IRS, the Wunderkinder Foundation’s 2006 statement, covering the previous tax year, showed assets of $12,573,018 and grant distributions of $5,215,016. Spielberg gave $2 million to the foundation and is listed as the only donor.
According to press reports, Madoff managed 70 percent of the foundation’s dividend and interest income in 2006.
The lion’s share of the foundation’s grants, according to the IRS filing, went to the Cedars-Sinai Medical Center, which received $3,338,000 for medical research.
The Ross School in New York City received $500,000 and the local Vista Del Mar Child and Family Services got $100,000.
The NY Times has an article today about how Yeshiva University is trying to learn lessons from the Madoff Scandal (link). At the risk of pointing out the obvious, let me say what lesson should NOT be learned from this crime: That Yeshiva University graduates and/or Modern Orthodox Jews give priority to money over true religiosity.
That may or may not be true, but it is certainly not a lesson from this alleged crime. The reason is that the alleged perpetrator, Bernard Madoff, was neither a YU graduate nor a Modern Orthodox Jew. He was not religiously observant.
The direct lessons from this episode are regarding investment guidelines and due diligence. Everyone should be paying close attention to that.
All other lessons are indirect and are not specific to YU or the Modern Orthodox community. Did misplaced values hit close to home? Yes, because Madoff was on the board of YU. But he was never a role model of proper values to begin with so it is difficult to see how the revelations of his alleged crimes can change that.
Nevertheless, I applaud YU’s attempt to learn lessons from this because, as above, we should try to learn from everything. Items in the news, especially when they hit close to home, are excellent teaching materials. And when our study of ethics is reported in the news, that’s a Kiddush Hashem. So kudos to YU for finding a positive side to this unfortunate episode.