March 4, 2009

After Madoff: Charities Still Picking Up The Pieces

As the initial shock and awe subsides, the huge dollar figures swirling around Bernard Madoff’s alleged Ponzi scheme have become clearer, and while they might be a bit smaller than originally feared, they’re still big.

The Associated Press tallied some $30 billion in losses to the Madoff scheme. Meanwhile, Yeshiva University estimated its initial investment with Madoff was $14.5 million, according to Bloomberg News, after early indications of having $110 million with Madoff Securities by way of Ascot Partners.

Madoff, the founder of Bernard L. Madoff Investment Securities LLC, was arrested Dec. 11 after admitting that his $50 billion hedge fund was nothing more than a Ponzi scheme. He faces up to 20 years in prison and a maximum fine of $5 million if convicted.

Investigators say Madoff's crime originated in a separate and secretive investment-advising business that had a total of about $17.1 billion in assets under management. According to authorities, Madoff told investigators the scheme involved upward of $50 billion.

Foundations that were invested in Madoff have suffered huge losses, some even announcing that they have closed or plan to close. Some did not invest with Madoff but their funders -- now out of money -- did. The Palm Beach, Fla.-based Picower Foundation is the largest organization so far to announce it will cease operations. With almost $1 billion in assets, Picower was ranked as the 71st largest foundation in the nation by The Foundation Center, and the second largest in Florida. Most all of its assets were invested with Madoff.

The lawsuits also have begun to be filed. J. Ezra Merkin -- like Madoff, a Yeshiva trustee who resigned -- is being sued by New York University. Merkin’s Ascot Funds had invested virtually all of its holdings with Madoff, including Yeshiva’s investment. Connecticut Attorney General Richard Blumenthal is seeking the names of Connecticut-based victims, including nonprofits to find if trustees failed to perform due diligence.

In its most recent statement from Ascot, Yeshiva’s investment was valued at about $110 million, or approximately 8 percent of its $1.4-billion endowment, according to a Dec. 16 letter from Yeshiva President Richard Joel. But Bloomberg News reported on Dec. 30 that the university’s initial investment was $14.5 million, explaining that any gains above that, as well as losses below, were “fictitious.”

Madoff joined Yeshiva’s board in 1996, becoming treasurer in 2002, the same year that Merkin was elected to the board. University funds had been invested with Madoff for about 15 years.

The university hired Sullivan & Cromwell and Cambridge Associates “to ensure our policies and procedures and structure reflect not only best practices,” Joel said in his letter, “but the gold standard -- the standard to which we aspire all our endeavors.”

Yeshiva University referred Madoff-related inquiries to Rubinstein Associates, a New York City-based public relations firm. A spokesperson, in response to a request for the board’s conflict of interest policy, said the policy “as well as other internal policies are generally not made public. The university has conflict policies consistent with those of other major educational institutions. As indicated already, we have now engaged Sullivan & Cromwell and Cambridge Associates to review our policies and procedures and structure to ensure that they reflect not only best practices but are the gold standard.”

Investing organization dollars in board members’ firms would be “questionable at best,” said Linda Crompton president and chief executive officer at BoardSource, a Washington, D.C. nonprofit focused on policy and governance.

“Creating this kind of a relationship there’s a factor of due diligence that has to be done, and there needs to be transparency to the decision. If you go through that, and follow conflict of interest guidelines, and it still seems like a good opportunity for the organization, that’s a pretty complicated trail to walk,” Crompton said. “You might make the case that it makes sense, but that would be a pretty unusual case,” she said.

Most conflict of interest policies prohibit a board member from receiving an organization’s funds. “There might be certain circumstances, I don’t want to say no, never…but those are few and far between. In general, I wouldn’t have an organization investing with a board member,” Crompton said. Part of the roles and responsibilities of a board member, she added, are that they are not meant to be a beneficiary in any way personally.

The North Shore-Long Island Jewish Health System in Great Neck, N.Y. had $5.7 million invested with Madoff Securities, which stemmed from an individual donor who stipulated the funds be invested there. The sum represented less than 1 percent of the total investment portfolio and the donor has agreed to reimburse it for any financial loss. The hospital estimated that Madoff contributed $216,000 to North Shore-LIJ over the last 36 years, but stressed that he was not a founder of LIJ Medical Center nor had any personal relationship with executives.

Terry Lynam, vice president of public relations at North Shore-LIJ, said the board’s investment committee made an exception to its policies to invest with Madoff Securities. The donor, who Lynam declined to identify, felt very strongly that the money would grow much faster with Madoff. “What happened with Madoff, certainly there are lessons to be learned from it,” he said, adding that similar exceptions in the future likely will not be granted, with stricter adherence to policies.

While restricted gifts are not uncommon, Crompton said, for a donor to stipulate where their donation is to be invested is “extremely unusual,” but the recipient can still decide whether to accept it or not. “That would be part of the due diligence they’d have to follow. They need to know who these people are, if it’s invested in a certain way, who are principals involved. The board has to make sure it understands what’s going on,” she said.

The American Technion Society (ATS) had an endowment estimated at $274 million at the time the Madoff scandal broke, according to Kevin Hattori, media relations manager. Its initial investment with Madoff was $29 million, he said, with “unrealized gains’ of $43 million, for a total exposure of $72 million.

ATS had been working with Madoff since 1995, Hattori said, and followed established procedures and approvals by its investment committee. A former donor, now deceased, who knew Madoff personally and had money invested with him, suggested the investment to the ATS board chair, he said. That’s when the investment committee followed its procedures, vetted the firm and “found nothing,” Hattori said. “Without a doubt,” he said, revising its policies and procedures is a possibility.

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This article is from NPT Instant Fundraising, a publication of The NonProfit Times.

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