Madoff Fraud Sparks Investigations, Policy Revisions

December 17, 2008       Mark Hrywna      

Days after learning that it may have lost more than $100 million in Bernard Madoff’s billion-dollar Ponzi scheme, Yeshiva University has promised to aspire to the “gold standard” of policies and procedures. This despite questions whether it followed the most basic policy and governance best practices for nonprofits.

The university will hire Sullivan & Cromwell, an international law firm based in New York City, and Cambridge Associates, a Boston-based investment consulting firm, to “ensure that our policies and procedures and structure reflect not only best practices, but the gold standard – the standard to which we aspire for all our endeavors,” said President Richard Joel in a letter released last night.

In the letter, Richard Joel said the Jewish school had “no direct investments” with Madoff but a portion of its endowment funds were invested with Ascot Partners, which had “substantially all its assets” invested with Madoff.

The Ascot Fund was managed by J. Ezra Merkin, who not only was a university trustee but also chairman of the board’s investment committee. Joel said the university was informed Thursday night (the day of Madoff’s arrest) that part of its endowment funds had been invested with Ascot for 15 years. It was unclear how long Merkin or Madoff had been among the university’s 40 trustees.

Investing organization dollars in board members’ firms is “questionable at best,” said Linda Crompton, president and chief executive officer at BoardSource, a Washington, D.C.-based nonprofit that publishes policy and governance guidelines. “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. You might make the case that it makes sense,” she said, but that would be a pretty unusual case.”

Most conflict of interest policies prohibit a firm connected to board members from receiving funds, Crompton said, adding that there may be certain circumstances in some cases, but those are few and far between.

“In general, I wouldn’t have an organization investing with a board member. As part of your roles and responsibilities, you’re not meant to be a beneficiary in any way personally,” Crompton said.

According to Joel, in the most recent statement from Ascot, Yeshiva’s investment was valued at about $110 million, or approximately 8 percent of its $1.4-billion endowment. Taking into account the Ascot loss, the university’s endowment is approximately $1.2 billion, down from about $1.7 billion as of Jan. 1, 2008, he said.

Jewish charities appear the hardest hit by the scandal, whether they invested with Madoff or received contributions from wealthy donors or foundations that have been affected. In the week since Madoff’s arrest, several foundations have shut down or plan to cease operations as a result of having all or most of their assets handled by Madoff Investment Securities LLC.

The 70-year-old Madoff, a former chairman of the NASDAQ exchange, faces a single count of securities fraud and was released on $10-million bail. Investigators say Madoff’s crime originated in a separate and secretive investment-advising business that served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. According to the FBI, Madoff told at least three senior employees that the business was a fraud and had been insolvent for years, losing at least $50 billion. The alleged fraud came to light in early December, according to authorities, when Madoff struggled to come up with $7 billion in client redemptions.

Madoff was arrested on Thursday and assets of the firm were frozen by federal courts on Friday. He appeared briefly in Manhattan federal court today with his wife, according to Bloomberg News. Madoff is subject to electronic monitoring and a 7 p.m. curfew. His wife agreed to give up homes in Montauk, N.Y., and Palm Beach, Fla., if her husband flees, Bloomberg reported.