Yeshiva University has revised its loss to $14.5 million

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The Owner's Name is On the Door'- Alleged Ponzi Scheme Slams Investment, Charity Communities
Esther Baruh

UPDATE: Yeshiva University has revised its loss to $14.5 million as reported here: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3kDPcOCZ5gE. This has been comfirmed by an official source. This information was not available at time of publication.

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

The description of Bernard Madoff's brokerage firm from its now-defunct website rings bitterly ironic now, a few weeks after Madoff's alleged confession that he perpetrated one of the biggest investment frauds in history. A man who had made significant philanthropic contributions, Madoff was described by a Yeshiva University (YU) alumnus in the investment field as possessing a "good" reputation.

Madoff served on the YU board of trustees and acted as the chairman of the Sy Syms School of Business (SSSB). After his alleged admission of investment fraud to his sons, Madoff was arrested by the Securities and Exchange Commission and is currently under house arrest in his New York apartment.

The revelation of Madoff's alleged Ponzi scheme has grabbed headlines for weeks and has investors reeling. "For the Jewish community as a whole, it's a tragedy," a source close to YU said. "Everybody was already hurting after the economic downturn and now there are some very charitable individuals who have lost a lot of money, there are entire foundations which have shut down, and there are the endowment losses which we've all heard about."

University Hit Hard

Madoff resigned from all positions held at YU on the Friday following his arrest. No mention has been made yet of whom his replacement might be.

All mention of Madoff on the YU website was promptly removed after Madoff tendered his resignation, including his remarks at the 2008 SSSB dinner when he welcomed new SSSB dean Dr. Michael Ginsberg.

Ironically, Madoff's stunning revelation came just days before the annual university Hanukkah Convocation and Dinner held at the Waldorf=Astoria on December 14. Joel addressed the situation in his speech to the guests: "Yeshiva University remains the gold standard," he asserted. "The university is strong; its finances remain strong. We are dealing proactively with economic realities. Despite these seemingly dark times, we must focus on investing in the world through the majestic and timeless Jewish mission."

Joel mentioned that that Convocation was able to scale back its budget by over $125,000 and generated over $1 million more than the previous year. The Convocation's keynote speaker, New York governor David A Paterson, spoke positively of the university's future to an enthusiastic audience. "122 years later and only four presidents later, despite the obstacles of the past four days, this university is one that epitomizes the meaning of survival and will emerge unscathed," he declared roundly.

In a December 16 letter to the entire university community, Joel outlined the losses suffered by the university, but reassured his readers that the institution is financially stable, especially in light of overall market losses. He urged the YU community to use this opportunity to look inward.

An alumnus of YU with experience in the field called Joel's response "reasonable."

"President Joel responded to the Madoff scandal with dignity and clarity," praised RIETS Rosh Yeshiva Rabbi Moshe Tendler. "He did us proud."

Another person in the investment world who had been at YU years ago speculated that the Madoff scandal might make donors wary of making contributions. "If someone was on the margin thinking about giving the money or not, they may view this as a negative toward YU," he surmised.

An article in the daily news section of the Chronicle of Higher Education reported that Moody's Investors Service, a credit ratings and risk analysis provider, said that the company might downgrade the university's credit ratings due to its interactions with Madoff. According to a Reuters article reporting the same occurrence, Moody's currently rates YU at the "Aa2" level, two steps below the highest credit rating. Moody's promised to conduct their survey of the university's governance, investment management and debt over a period of three months.

Merkin Connection Raises Questions

J. Ezra Merkin's close handling of moneys invested with Madoff's company has raised eyebrows. "If he ran a fund supposedly under his management, and yet the entire fund was invested with Madoff, that is actually intentional fraud, if you will," said a YU alum in the field. "People were paying Ezra Merkin for Ezra Merkin to manage the money, not to outsource it to Madoff." Merkin's good reputation as a successful investor and risk manager may have led investors not to question where their money was going, the graduate speculated.

"Any time you're defrauded, you made a bad decision, but it's not like you could have, based on the information you had available, say 'this is absolutely wrong and there's an obvious thing going on,'" he pointed out. "That's why it's called fraud."

He guessed that "whatever anyone wants to say is going to come out in the form of law suits."

The lack of due diligence conducted vis-à-vis Madoff's company has investors scratching their heads. A graduate of YU in the investment field theorized that Madoff was able to keep his alleged scheme secret because of his positive reputation among investors and the Jewish community as a whole. "He had the trust of his peers, the university," the alum said. "It tells you people thought he was a good person. That's why Bernie Madoff was able to get the benefit of the doubt all these years - because he did have that reputation."

An alumnus of YU who attended the university years ago said he doubted whether Madoff began his investment advisory service intending to defraud his clients. "He probably started out with the intention of making money, and then lost money, paid them out of new money, and then it snowballed and became this enormous Ponzi scheme," he said.

A Loss of Epic Proportions

The data reporting the extent to which charities and individuals have been affected is beginning to come in, and the results are of epic proportions, shutting down many organizations and representing the loss of the entire net worth of some investors.

Joel asserted in his letter to the entire YU community that the university's endowment had lost $110 million with the collapse of Madoff's company. This portion of the endowment had been invested with Ascot Partners, a hedge fund managed by J. Ezra Merkin, a former member of the board of trustees at YU and chair of the investment committee. Merkin's firm invested a substantial amount of its assets with Madoff, resulting in the loss of millions of dollars for its clients.

The YU endowment, as of December 16, 2008, was valued at approximately $1.2 billion. This figure represents an approximate loss of $500 million since January 1, 2008, a dip that is largely due to poor returns in a volatile and sliding market. Joel assured his audience that this decline would "have minimal impact on day-to-day operations," and that continued donations would help sustain the university's financial health.

The university has hired Sullivan & Cromwell LLP, an international law firm with offices across the U.S., Europe, Australia and Asia, and Cambridge Associates, a privately held consulting firm, to assist the university in evaluating its conflicts policies and procedures along with its governance structures. The evaluation process is expected to take place over a number of months.

SAR, a Modern Orthodox yeshiva located in Riverdale, NY, also had substantial investments with Ascot Partners. In a letter to the SAR community, Jack Bendheim, president of SAR, claimed that SAR was unaware that Ascot had investments with Madoff. The portion of the SAR endowment invested with Ascot was worth approximately $1.3 million. "In light of the allegations, we are now valuing this investment at zero," Bendheim wrote.

Investors expressed their shock and pain at the disclosure of Madoff's alleged perfidy. "It's shocking to have someone revealed to be completely different from who you thought they were," said a source close to YU. "You go from having this person who was well-loved and trusted in so many circles, to all of a sudden finding out that he is a crook who has committed one of the biggest frauds in history. That deception causes a lot of pain and hurt on the personal level too."

YU is a double victim, asserted the source, both through the monetary loss via Ascot Partners and through Madoff's deliberate association with the university.

Jay Feinberg, executive director and founder of Gift of Life, a bone marrow registry, called the current data on Madoff's losses "the tip of the iceberg."

"I'm still trying to accept the reality of the situation, like many people out there," he said. "It's really something very hard to believe. All the charitable organizations out there that have been impacted by this need to try to find new people who are not affected by this who can help fill the gap."

Feinberg said that while Gift of Life had no direct investments with Madoff's company, many donors to the charity did, resulting in a major downsizing of the number of donations coming in. With donors unable to fulfill their charitable pledges, Gift of Life's ability to grow their registry is stunted. "The fundraising that we do directly impacts the tissue-typing in the registry," Feinberg explained. "In order for us to do drives, we're going to need to do fundraising in order to pay for laboratory testing."

Feinberg hopes that students who have been involved in the registry in the past will step in and initiate grassroots fundraising, or that possible donors who haven't been adversely affected will focus their charitable donations on Gift of Life so they can keep their mission going strong.

"We are all devastated by this, but we have to redouble our efforts and focus on the mission at hand," he said.

The wound of Madoff's alleged fraud is still too raw for investors and beneficiaries to formulate what they would like to say to Madoff. "I'm not sure, to be perfectly candid with you," Feinberg admitted. "You might want to ask me that question in a couple weeks. We're certainly all in shock right now, but we'll get through this."