DATELINE: December 17, 2008 , Chicago
One thing is for sure, Yeshiva University needs a new public relations department. It now has been reported by multiple media outlets that the university lost somewhere between $100 million and $110 million in the Madoff debacle, but the press office has been largely silent The Yeshiva Commentator, which bills itself as the official newspaper of Yeshiva College and the Sy Syms School of Business, is reporting that President Richard M. Joel acknowledged in a mass e-mail to students that the university suffered a $110 million loss from a Madoff-related investment. Noach Lerman and Rafi Blumenthal, YU Endowment Shaken By Madoff Storm, Losing $110 Million.
According to the Commentator, the Yeshiva investment was through Ascot Partners rather than directly with Madoff. Ascot Partners is described as a hedge fund run by J. Ezra Merkin, who until his resignation last week, was...
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a member of Yeshiva’s board of trustees and the chairman of its investment committee. Gary Rosenblatt, ‘Golden Boy’ Merkin Said to Have Misled Jewish Investors, Groups, New York Jewish Week (Dec. 17, 2008). Substantially all of the assets of Ascot Partners were invested with Madoff and that investment is now virtually worthless.
Let’s see if we have this right. Yeshiva University’s investment committee and presumably its board approved a major investment with a hedge fund run by the head of the investment committee. Well, we seem to have a conflict of interest here. The genius heading the investment committee and running Ascot Partners violated the most basic tenet of investing and fiduciary oversight—diversify, diversify, diversify.
Setting aside Merkin’s sheer stupidity, where was the exercise of fiduciary duty? Why did Merkin and Madoff, also a Yeshiva trustee until last week, let Yeshiva buy retail when it could have bought wholesale? Unless Merkin waived his management fee or whatever compensation he received as the manager of Ascot Partners, Yeshiva found itself paying both Merkin and Madoff fees for managing its investment. If Madoff, in his role as a fiduciary, believed that investing with his firm was proper, why wouldn’t he allow Yeshiva to make a direct investment rather one than through Merkin’s Ascot Partners? That would have saved Yeshiva one level of fees. Of course, one must suspend one's disbelief before thinking of Madoff as a fiduciary. In other words, did Madoff have a fiduciary duty to minimize the fees Yeshiva paid to have its money stolen by Madoff?
The Commentator has done some fine reporting. It reports that a number of people were dissatisfied with Merkin. According to Commentator sources, Merkin was secretive and overbearing. Another source pointed out that Merkin “eliminated all the checks and balances.” The Commentator notes that Merkin served on the investment committee of the UJA-Federation of New York, but that the UJA lost no money because its conflicts-of-interest policy prohibited investments through firms associated with committee members. That speaks volumes about the importance of a meaningful conflicts-of-interest policy.
Yeshiva University and its trustees face some interesting issues. Based on the facts revealed to date, Yeshiva’s trustees should be considering a lawsuit against Merkin for breach of fiduciary duties as a trustee. The New York Post reported today that the university is considering a suit. Bruce Golding, Yeshiva U.’s Painful $110 Million Fraud Lesson. Will the other trustees be in breach of their fiduciary duties if they refuse to countenance a lawsuit against Merkin? One can argue “Yes.” The potential claim against Merkin is a valuable asset. The trustees have a duty to maximize the value of that asset. Of course, the trustees also should be considering suing Madoff for breach of duty, but that is probably pointless given that he is (or will be) wiped out. It is worth noting that New York Law School filed a lawsuit in federal district court against Merkin and Ascot Partners. Ascot, Merkin, Auditor Sued Over Madoff Investments, Reuters (Dec. 16, 2008). The New York Law School Web site does not list Merkin as a trustee, nor does its 2006 Form 990, the one most recently available from GuideStar.
Bloomberg has provided us with a glimpse into the investment activities of some of the other Yeshiva trustees. Alex Nussbaum and Miles Weiss, Yeshiva Had Losses of $110 Million Linked to Madoff (Dec. 16, 2008). According to Bloomberg, at least seven members of Yeshiva’s board of trustees had foundations that invested in Madoff directly or through Ascot Partners. The trustees are David Gottesman (former chair of Yeshiva’s board) through the Gottesman Fund; Warren Eisenberg through a private foundation; Michael Jesselson through the Jesselson Foundation; Morry Weiss through the Sapirstein Stone Weiss Foundation; Emanuel Gruss through the Emanuel & Riane Gruss Charitable Foundation; Ludwig Bravmann through the L. Bravmann Foundation; and Robert Beren through the Robert M. Beren Foundation.
These investments by so many entities that are closely associated with Yeshiva trustees has a very clubby feel to it. Did any of these trustees do any due diligence on behalf of Yeshiva, or did they all just follow the leader? Business relationships among board members always raise the possibility that the trustees were scratching each others’ backs. For example, did the investments by the other trustees cause them to defer to Merkin’s and Madoff’s judgment? Did the other trustees not raise questions out of fear of offending Merkin or Madoff?
The investment by these other entities raises another interesting question, which one of our readers brought to our attention in an e-mail. Why didn’t some of the other trustees join the club? Surely they had the opportunity. Our reader sent us a copy of the 2006 Form 990-PF for the Sy Syms Foundation. Mr. Syms is a member of Yeshiva’s board of trustees. There is no evidence of a Madoff-related investment on the return. Does that mean there was disagreement among board members? Did some trustees perform due diligence? If they found evidence suggesting that an investment in Madoff was unwise, why would the other trustees ignore or discount the evidence?
We have absolutely no sympathy for Merkin, whose lawyer issued a statement claiming that Merkin and his family were among the largest victims of the Madoff scandal. The fact that Merkin apparently exercised little or no judgment in his personal affairs does not absolve him of his duty to exercise diligence when serving as a fiduciary in an oversight capacity. Despite that fact, Merkin’s lawyer said Merkin “intends to defend this lawsuit [New York University] vigorously, while seeking redress for himself and his investors from whoever perpetrated this fraud.”
One person we talked to suggested that Merkin had no exposure because his offering documents and legal agreements gave him the authority to invest as he liked. That may cut others off from successfully suing him, but in our view, Merkin's fiduciary duties to Yeshiva undercut that technical reading of contract language. We suspect New York law holds Merkin to a higher standard when dealing as a fiduciary. One question will be whether Merkin disclosed the concentration of Ascot funds with Madoff.
At the end of the day, the big loser is Yeshiva University’s development department. It presumably had been cultivating its trustees for years, looking forward to future contributions and bequests. Now that Yeshiva is embroiled in this mess, some of the trustees may be forced to resign. That will depend on what facts come out of the investigation. Moreover, the university may find itself suing Merkin and possibly other trustees. It is hard for us to imagine the defendants in a lawsuit turning around and making charitable contributions to the plaintiff. In short, development departments should be the ones demanding conflicts-of-interest policies. After all, it is their hard work that is destroyed when incestuous relations go bad.
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