DATELINE: January 15, 2009, Chicago
Try to be pure at heart, they arrest you for robbery
Bob Dylan, Groom’s Still Standing at the Altar (unreleased)
Sexy Sadie oooh you'll get yours yet
We gave her everything we owned just to sit at her table
Just a smile would lighten everything
Sexy Sadie she's the latest and the greatest of them all
She made a fool of everyone
Sexy Sadie
Beatles, Sexy Sadie from the White Album
[Update: During an interview on CNBC today at noon CST, we thought we heard one person say that Yeshiva University had filed suit against Ezra Merkin. We have reviewed the electronic databases for the New York and federal court systems. We find no evidence of any lawsuit. No other references in the media to such a lawsuit are known to exist. If Yeshiva University has filed a lawsuit against Merkin, they can notify us and we will post that fact--please e-mail us the complaint. We suspect that the commentator misspoke.]
New York Attorney General Andrew Cuomo decided to enter the Madoff fray today. Cuomo issued subpoenas to J. Ezra Merkin, three of his funds, and 15 nonprofits. The focus of the investigation is on charities affected by the Madoff scandal. According to an article in the New York Daily News, the 15 nonprofits are not the target of the probe, just sources for information. That suggests that Merkin...
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and his funds are possible targets. Douglas Feiden and Greg B. Smith, Charities Claim Bernard Madoff Pal, Ezra Merkin, Invested Millions of Their Money Without Permission (Jan. 15, 2009). Scott Cohen of CNBC reported moments ago that Cuomo now has ten prosecutors working on the Madoff matter.
To date, we have heard little from Yeshiva University, one of the victims of the Madoff Ponzi scheme. We’ve seen even less in terms of action. We would have thought that the trustees or the university would have sued Merkin by now. Both New York University and New York Law School have sued Merkin and Merkin didn’t even sit on their boards.
The Daily News reports Yeshiva University, the Ramaz School and the United Jewish Appeal-Federation of New York all received subpoenas. Merkin apparently also served on the boards of Ramaz and the United Jewish Appeals.
Merkin and Madoff were both Yeshiva University board members. Yeshiva invested a portion of its endowment with Merkin’s Ascot Fund, which in turn is reported to have invested substantially all of its funds with Madoff. Setting aside Madoff’s alleged misdeeds, we find that to be a highly disturbing arrangement, Why should Yeshiva University pay fees to Merkin (assuming fees were not waived), a trustee, to hand over investment responsibility for those funds to another trustee, Madoff? If Madoff was an appropriate investment manger, why didn't Merkin suggest or insist that Yeshiva place its money directly with Madoff? If the facts are as they appear to be, Merkin is not as brilliant as his boosters suggest. In hindsight, this transaction looks to us like a breach of Merkin's duty of loyalty. Many will instinctively argue that hindsight is 20/20. That's true, but that doesn't mean that there wasn't a breach of the duty of loyalty. Boards repeatedly fail to understand that this is one of the fundamental problems with conflicts of interest. The transaction always looks great when the nonprofit enters into it. If nothing goes wrong, nobody notices. But in life, things don't always go as planned. That's why a banker sitting on a nonprofit board should not have his institution lend money to the nonprofit.
We are glad that a state attorney general is beginning a probe. If charity regulation is to have any credibility, state regulators must look into the role that directors and officers of charities had in authorizing the investments with Madoff and other funds that lost money in the Madoff scandal. The failure of Yeshiva University to sue Merkin demonstrates the reluctance of boards to take action against individual board members who may have breached their duties of loyalty and care. If boards won’t do it, the regulators must fill the resulting vacuum.
The open question is whether the IRS will begin an audit of Yeshiva University and Merkin, probing the arrangement to determine whether the IRS should invoke the intermediate sanctions under Section 4958 to force Merkin to disgorge any excess benefits.
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