Madoff and Merkin: Self-Dealing in Jewish Non-Profit World

I was a non profit fundraiser for eighteen years during which time I worked for two Jewish federations, a Temple and a number of other non-profits supported heavily by Jewish donors.  While the Madoff financial collapse has been a tragedy for Jewish philanthropy, it is one that in some cases could’ve have been avoided, as far as the non-profits are concerned, if they’d adhered to even rudimentary standards of ethical practice.  This is Marc Perelman in The Forward:

The UJA-Federation said that it did not invest with Madoff because its policy guidelines prevent board members from directing their endowment toward their own funds. Y.U., by contrast, did not have such guidelines. As a result, [board member] Merkin reportedly handled a sizable part of the university’s endowment and earned a management fee for effectively putting all the money into Madoff’s securities firm. The university reportedly lost an estimated $110 million, or 8% of its endowment.

What non-profit allows its own board members, supposedly serving in a volunteer capacity, not only to invest the non profit’s money but to earn a profit from doing so?  I’m no specialist in non-profit law, nor an accountant, but this stinks to high heaven of self-dealing.

Jewish Week is thinking along the same lines:

In hindsight, many in the community are now asking how a donor and/or trustee of a nonprofit could be in a position to manage money for the institution, as Merkin did.

“You have to know Ezra to really understand how this could have happened,” said one source who has sat on boards with him. “He is brilliant and incredibly well connected in the Jewish and financial community, with a long and incredible success rate in investments. Plus, he can be, at times, charming and considerate – as well as intimidating.”

Several people noted that when questioned or challenged about the wisdom of investing heavily in one fund rather than diversifying, “Ezra would ask, ‘Why would you reduce your concentration in your best performing fund?'”

If I were a member of the investment committee and I heard that response that would be a huge red flag for me.  Even the most brilliant investment manager who doesn’t understand the principle of diversification is waiting for a fall.

The Jewish Week story continues:

Still, there were grumblings. Some of board members at Yeshiva had raised issues of good governance at meetings…They felt Yeshiva was exposing itself to serious questions about potential conflicts of interest, regardless of who the personalities were. But veteran members resisted, insisting that Merkin was not only respected and trustworthy but “the Golden Boy controlling the Golden Goose,” as one person explained.

Ironically, the university was in the process of responding to calls for instituting stricter policies regarding conflict of interest when the news hit of the Madoff fiasco. Procedures that had been discussed for more than a year were scheduled to be put in place next year.

A day late and a dollar short, I’d say.  You have nearly a $2 billion endowment and it takes you TWO YEARS to put in place proper conflict of interest guidelines?

First, Ezra Merkin took Yeshiva University funds assigned to him to manage and gave them to Bernie Madoff to do so.  Did he tell YU officials he was doing so?  Second, he earned a fee for supposedly managing the money, but didn’t.  Third, he was rash, reckless and negligent in not supervising Madoff’s management of the funds.

If I were Andrew Cuomo, N.Y.’s attorney general, I’d be preparing a case against Madoff and Merkin not just for the collapse of Madoff’s fund, but for an outrageous case of self-dealing leading to the pauperization of much of the Jewish non-profit world.

Yeshiva University needs to clean house.  Any member of the investment committee or executive committee who hasn’t resigned by now should be forced to do so.  Y.U. needs to hire a non-profit law expert and come up with immediate conflict of interest guidelines for board members to ensure nothing like this ever happens again.  It also needs to consult with finance experts to ensure that its funds are supervised properly in future.

It may even need a new president given happy talk like this from someone who should be a lot more candid about what went wrong:

At Yeshiva University’s annual dinner on Sunday night at the Waldorf, President Richard Joel made a reference to “tragic mistakes” that had been made, but struck a decidedly optimistic tone, noting that the dinner raised more than $3 million, up from $2 million last year. He asserted that Yeshiva is in strong shape financially and otherwise. His most direct comment on the current scandal was to acknowledge “the 800-pound elephant in the room.”

That’s precisely the point.  A Jewish institution which has just seen 8% of its endowment go up in smoke because its officials were entirely negligent is not, by definition, “in strong shape financially and otherwise.”

I also think YU should be suing at least Merkin, if not Madoff.  Merkin did them dirty for the reasons I listed above and if there’s any possibility of recouping any of the losses from Merkin, they should attempt to do so (unless YU officials knew he was off-loading the investment onto Madoff, which appears not to be the case).

Every other Jewish non profit that has not been wounded by the Madoff collapse should profit by the suffering of others and examine their board and investment guidelines to ensure they are protected from this type of situation.  There is no guarantee that you can avoid such a disaster, but putting the right safeguards in place as the New York UJA federation appears to have done, will help you do so.

Because Merkin and Madoff were the kings of the world of Jewish finance entirely too many other wealthy Jews placed entirely too much confidence in them to do right by them.  Trust that is based on such social and religious ties, but which is not backed up by due diligence leads to disaster as we have seen.

The Jerusalem Post estimates that currently Jewish non-profits have lost at least $600-million from their endowments and that by the time the fallout is finished that amount might rise to $1.5 billion.  Experts consulted by the Post estimate that giving to all Jewish federations across the country could decline by 20% because the wealthiest donors have been hit the hardest by this event.

The greatest tragedy isn’t the losses, it’s the fact that many of them, for the non-profits involved, could’ve been avoided.