DATELINE: December 16, 2008, Chicago
The Yeshiva University board of trustees and its investment committee have some explaining to do in light of the reports last night in the New York Times and other media outlets that the university apparently has lost somewhere around...
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$100 of its endowment to Bernie Madoff. Stephanie Strom, Giant Wall St. Fraud Leaves Charities Reeling, N.Y. Times (Dec. 15, 2008); and Jacob Berkman, Joel Keeps Mood Light, But Addresses Madoff Mess at Y.U. Dinner Sunday, Jewish Telegraphic Agency (Dec. 15, 2008). Depending on current values, that appears to be somewhere between 7% and 10% of the university’s total endowment. Strom wrote:
Yeshiva University lost $100 million to $110 million on investments in Madoff’s funds, having already seen its endowment drop to $1.4 billion, from $1.8 billion, after turmoil in the markets.
Berkman wrote:
Y.U. has yet to issue an official announcement about hard it was hit by the fraudulent hedge fund run by Madoff, who served as treasurer of the univeristy's board of trustees and chairman of its Sy Syms School of Business until he resigned last week amid news of the scandal. But the rumor swirling around the banquet was that the university’s endowment had lost $107 million, or about 10% of its total value.
For purposes of this post, we assume the media reports are correct, but we await additional details from Yeshiva.
Although the Yeshiva community is clearly a victim and Bernie Madoff allegedly is the perpetrator, there are questions that must be asked.
Madoff was a member of Yeshiva’s board of trustees and the board’s treasurer until he resigned both positions following last week's revelations. The school’s investment committee was headed by J. Ezra Merkin, the chairman of GMAC. Mr. Merkin also ran Ascot Partners LP, an investment fund that handled $1.8 billion in funds. Alison Leigh Cowan, Firm That Trusted a Disgraced Investor, N.Y. Times (Dec. 15, 2008). Merkin told his investors in a letter that substantially all of Ascot’s funds were invested with Madoff.
Yeshiva University still has not issued a press release. On Friday, a spokesperson for the university told the media that “Our lawyers and accountants are investigating all aspects of his relationship to Yeshiva University.” Peter Lattman, Merkin Gets Questions on Madoff, Wall St. J. (Dec. 16, 2008). The university should be conducting an internal investigation, but there needs to be an independent investigation. The FailedMessiah website has evidence that Yeshiva has already “sanitized” its Web site, raising questions as to whether its internal investigation will be a whitewash.
We are unclear whether the independent investigation should be conducted by the New York State Attorney General or the New York Board of Regents. It was the Regents who conducted the investigation of Adelphi University several years back, raising the question of which agency has jurisdiction over Yeshiva University. Certainly some government agency has jurisdiction. Yeshiva University's 2006 Form 990, the last one available at GuideStar, reports that of $580 million of total revenue, $160 million was attributable to government grants. In other words, over 25% of the university’s funding came from the government. By the way, Yesihiva can't wipe all evidence of its association with Madoff away. He shows up on the Form 990 as a trustee and the treasurer.
There will be those who protest that Yeshiva University was a victim. Many university stakeholders will turn out to be victims because the university has less resources to support important programs. But that does not necessarily mean that the university’s trustees are victims. They had a duty of care to make sure that the university’s money was wisely and prudently invested. Of all the investment managers in New York City and around the world, the board chose one of its own to manage a significant portion of the university’s endowment. Given the conflict of interest, the trustees who approved the decision to invest endowment with Madoff should be held accountable if they failed to perform adequate due diligence.
Investment committees of major institutions should not act like investment clubs. The decision process should not be, “I know a guy who is really smart and he has made me a lot of money.” Yet, that that may have been the prevailing attitude at Yeshiva. The independent investigators should ask the following questions:
A. Did the board of trustees issue RFPs for investment management services?
B. Did the board of trustees understand Madoff’s investment philosophy and methodology? Did it review offering documents? Did it regularly review quarterly reports?
C. Was Madoff present during the decision process? Did he recuse himself from the decision?
D. Did the board of trustees ever question Madoff’s stellar record? That record was so stellar that many shied away from investing with Madoff because they did not believe such returns were possible. An article in today's Wall Street Journal demonstrates that Madoff's claimed strategy would have been impossible to execute given the size of Madoff's fund. Tom Lauricella, Aaron Luchhetti, and Amir Efrati, Madoff Ran Vast Option Game: Firm to Shut, Wife's Role Questioned; Volume Made Strategy Impossible, Traders Say (Dec. 9, 2008). It points out that the paper record suggests that Madoff claimed to purchase more option contracts on a given day than were traded on the exchange.
On the surface, this was a straightforward example of the strategy. However, the problem is that if Mr. Madoff replicated the trade firmwide, as he was thought to be doing, the trading wasn't showing up in the options market. On Nov. 11, if it took 11 contracts to hedge a half-million dollars, it would have taken 22,000 contracts to protect $1 billion. Mr. Madoff claimed to be managing $17 billion.
But on Nov. 11, only 393 of the "call" contracts the firm sold actually changed hands, according to the Chicago Board Options Exchange. And trading totaled 183 in the "put" options he bought. The so-called open interest in both those contracts -- the measure of contracts outstanding -- was just 4,639.
E. In view of the board's relationship with Madoff, did the board have an independent third-party expert review the investment? Article after article has quoted skeptics, some who said they viewed Madoff as a crook long before last week's bombshell disclosures. Why didn't the board have its ear to ground or talk to someone who had his ear to the ground?
F. Did the board of trustees consider the implications of having an investment manager who also had custody of the assets under management? That is highly unusual.
G. Did the board of trustees ask to see the audit report from Madoff’s outside auditor? Did the board of trustees consider it odd that an investment firm with billions of dollars under management chose as its auditor what at best appears to have been a three-person firm.
H. Was Yeshiva's investment made directly through Madoff, or did Yeshiva invest through Ascot Partners? If the latter, was there an appropriate reduction in management fees, or was Yeshiva paying for the same investment services twice? Was the board aware of the relationship between Madoff and Merkin?
The bottom line: A trustee can invest his or her own money based on a gut feeling, trust, or a country-club relationship, but a trustee cannot invest institutional money on hearsay, gut, or feelings.
When Yeshiva finally decides to speak, at a minimum, it should release the portions of all minutes of all board and investment committee meetings that pertain to its decision to invest with Madoff. We suspect that these minutes will be telling.
Yeshiva University’s board is unlikely to be the last board with some explaining to do. The overall decline in the markets likely resulted in many colleges, universities, and other institutions with large endowments suffering losses that have yet to be reported. We strongly suspect that some of those losses will be attributable to hedge funds, other investment vehicles, and investment management services that were not fully vetted because the investment managers sat on the boards or because someone knew someone. The trustees of those institutions should be asked the same sorts of questions that we have posed to Yeshiva.
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