Non-Jewish charities are also heavily hit. And this comes at a time when…
…the economic crisis has already caused hundreds of thousands of Americans of all backgrounds to seek out help from nonprofits.
The Washington Post reports on the mother of all Wall Street frauds, committed by a man who sat on the boards of Yeshiva University, its school of business, and the American jewish Congress:
'All Just One Big Lie'
Bernard Madoff was a Wall Street whiz with a golden reputation. Investors, including Jewish charities, entrusted him with billions. It's gone.
By Binyamin Appelbaum, David S. Hilzenrath and Amit R. Paley
Washington Post Staff Writers
Saturday, December 13, 2008; D01
Deborah Coltin learned yesterday morning that the $8 million foundation she has led for a decade, which supported a wide range of Jewish programs on the north shore of Massachusetts, did not actually exist.
The foundation had invested its endowment with Bernard L. Madoff, a storied name on Wall Street. Every year, Madoff paid out several hundred thousand dollars to the foundation. But on Thursday, Madoff was charged with securities fraud after confessing to his sons that his business was a Ponzi scheme, according to a complaint filed by the Securities and Exchange Commission. The returns paid to investors came from money invested by other people. And there was almost nothing left.
It may be the largest fraud in the history of Wall Street, authorities said. Madoff is charged with stealing as much as $50 billion, in part to cover a pattern of massive losses, even as he cultivated a reputation as a financial mastermind and prominent philanthropist.
Coltin, executive director of the Robert I. Lappin Charitable Foundation, said she spent the day at her office as a woman in mourning, taking condolence calls and trying to understand what happened.
"I laid off five people today," she said.
"Our foundation was the lifeblood of this community," she said.
"It's just very, very sad."
Madoff's investors included a number of prominent hedge funds and the firm of Fred Wilpon, the owner of the New York Mets. Several may have sustained billions of dollars in losses.
But the damage appears to be deepest in the small world of Jewish philanthropy, where Madoff was a leading figure. The North Shore-Long Island Jewish Health System said it lost $5 million. The Julian J. Levitt Foundation, based in Texas and focused on Jewish causes, lost about $6 million. Yeshiva University, a New York institution where Madoff served on the board, said it was examining how much money it invested with his firm.
Madoff's own $19 million foundation, which gave to a range of New York and Jewish causes, also was wiped out.
Ira Lee Sorkin, an attorney for Madoff, said Madoff's firm "is cooperating fully with the government."
"We're disturbed about these unfortunate events that have led to this," Sorkin said. He declined to say whether Madoff, who has been released on bail, will fight the charges.
Madoff, 70, made his fortune as a middleman between buyers and sellers of stock. He helped pioneer electronic trading as an alternative to the New York Stock Exchange, where buyers and sellers meet in person, and he eventually became chairman of Nasdaq, the first electronic stock exchange.
Madoff built himself into a brand. He came to Wall Street with money saved as a Long Island lifeguard and built a family business employing many relatives, including his sons, and refused to sell the business or take it public. He advertised his integrity.
"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door," the company's Web site said. "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
By the late 1970s, and perhaps earlier, Madoff began managing money for investors, at least in part because he could require people to process trades through his firm. Madoff eventually attracted billions of dollars from investors. Some he knew personally. Others belonged to clubs he was a member of, including the Palm Beach Country Club in Florida and Glen Oaks Country Club in New York. Several large hedge funds invested with Madoff in part because he did not charge traditional fees, instead collecting money solely for processing trades.
The key attraction, however, was Madoff's remarkably successful track record. A hedge fund run by Madoff, which described its strategy as focused on shares in the Standard & Poor's 100-stock index, averaged a 10.5 percent annual return over the past 17 years.
This year, amid a general market collapse, the fund reported that it was up 5.6 percent through November, while the S&P 500-stock index fell 38 percent.
The SEC charged in its complaint that the returns were artificial. Madoff at some point started paying investors with money received from other investors, a Ponzi scheme, according to the SEC.
"Mr. Madoff lured investors to entrust him with substantial sums of money -- in some cases massive amounts of money -- with the false promise of great interest returns," said Mark S. Mulholland, a New York lawyer who filed a class-action lawsuit Thursday against Madoff. He said his firm has been approached by two dozen investors, who lost up to $90 million.
The SEC said it is not clear when Madoff started using new investments to create the appearance of profits. But the alleged ruse was finally exposed by the global financial crisis.
Madoff's investors had requested the return of about $7 billion by the end of the year, part of a broad trend in which investors are pulling massive sums from Wall Street. Madoff told one of his sons earlier this month that he was struggling to find the money. Then he told his other son that he was ready to pay annual bonuses to employees.
The sons confronted their father Wednesday, according to authorities, asking how the firm could pay bonuses if it couldn't pay investors.
Madoff asked them to come to his apartment, saying "he wasn't sure he would be able to hold it together" at the office, the SEC said. There he said he was "finished." The business was "a giant Ponzi scheme" -- "all just one big lie," the SEC documents said.
He estimated that his investors had lost $50 billion.
The sons reported Madoff to authorities. Yesterday, a federal judge placed the company in receivership at the SEC's request.
Outside analysts had raised concerns about Madoff's firm for years.
The company made its own trades and held the shares it bought, unusual practices that kept its activities hidden from view. Madoff also avoided filing disclosures of its holdings with the SEC; the firm said that at the end of every reporting period it sold its holdings and held only cash. Such a tactic is highly unusual because it exposes a fund to large losses by forcing it to sell assets without regard to price.
Madoff, though a pioneer of electronic trading, also refused to provide clients online access to their accounts.
"This was extremely secretive, even for the non-transparent world of hedge funds," said Jake Walthour Jr., head of advisory services for Aksia, a New York consulting firm that advised clients not to invest in Madoff's funds. "It was all done almost in fortress fashion to prevent anyone from knowing what was going on."
But a large number of investors apparently could not resist.
Robert Lappin started investing with Madoff in the early 1990s and eventually entrusted him with the entirety of his family foundation. The Lappin Foundation, created "to keep our children Jewish," gave about $1.5 million to Jewish groups in 2007, including a long-standing program that has paid for about 1,800 teenagers to visit Israel.
Coltin, the executive director, went to sleep Thursday night with an inkling of bad news and woke up at 6 a.m. yesterday, planning to call Lappin. Before she could, the phone rang.
"He said: 'I have to tell you this. Our funds are frozen,' " Coltin said
A little bit later, it became clear that the money had melted away.
The Wall Street Journal reports a litany of warning signs missed by both investors and regulators. First among the latter would be the Security and Exchange Commission chaired by Christopher Cox, the man many feel bears the most responsibility for our current worldwide financial crisis.
Under Cox, the Bush Administration's SEC did not do very much regulatory enforcement. (Kinda like the Bush Administration's USDA for those of you who closely followed Agriprocessors' earlier scandals.)
Here is the WSJ piece on the signs Cox and others missed:
Fees, Even Returns and Auditor All Raised Flags
By GREGORY ZUCKERMAN
Bernard L. Madoff is alleged to have pulled off one of the biggest frauds in Wall Street history. But there were multiple red flags along the way, including a series of accusations leveled against Mr. Madoff's operation. Now some are asking why regulators and investors didn't pick up on the alleged scheme long ago.
"There's no smoking gun, but if you added it all up you wonder why people either did not get it or chose to ignore the red flags," says Jim Vos, who runs Aksia LLC, a firm that advises investors and came away worried after examining Mr. Madoff's operation.
On Thursday, Mr. Madoff was arrested for what federal agents described as a massive Ponzi scheme, which could leave investors with billions in losses. A spokesman for Mr. Madoff said: "Bernie Madoff is a longstanding leader in the financial services industry and we are cooperating fully with the government and regulators investigations into this unfortunate set of events."
The first tip-off for some was the steady returns generated by the firm in every kind of market. Mr. Madoff would buy a basket of stocks resembling an S&P index while simultaneously selling options that pay off for the buyer if these stocks soar, while also buying options that pay off if the index tumbles. The supposed goal was to have smooth, steady returns.
Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff's stock-options strategy and was convinced the results likely weren't real.
"Madoff Securities is the world's largest Ponzi Scheme," Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.
Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.
In a statement late Friday, the SEC said "staff from the Division of Enforcement in New York completed an investigation in 2007, and did not refer the matter to the Commission for enforcement action." The SEC said it reopened the investigation Thursday. It's not clear what the focus of the 2007 investigation was, or why it was closed. A person familiar with the matter said it related to issues raised by Mr. Markopolos.
Also striking some as odd: Mr. Madoff operated as a broker dealer with an asset management division. Why not simply act as a hedge fund and pocket big gains, rather than profit from trading commissions as the firm seemed to be doing, they asked.
Joe Aaron, for long a hedge fund professional, found that structure suspicious and in 2003 warned a colleague to steer clear of the fund. "Why would a good businessman work his magic for pennies on the dollar?"
Conflicts of interest also proved a concern. "There was no independent custodian involved who could prove the existence of assets," says Chris Addy, founder of Montreal-based Castle Hall Alternatives, which vets hedge funds for clients seeking to invest money. "There's a clear and blatant conflict of interest with a manager using a related-party broker-dealer. Madoff is enormously unusual in that this is not a structure I've seen."
Some trading pros said Mr. Madoff's purported strategy couldn't be pulled off profitably while managing tens of billions of dollars.
"It seemed implausible that the S&P 100 options market that Madoff purported to trade could handle the size of the combined feeder funds' assets which we estimated to be $13 billion," Mr. Vos says.
Recent securities filings showed that the firm held less than $1 billion of shares, raising questions about where the rest of the money was. Some of Mr. Madoff's investors say they were told the firm put the bulk of its money in cash-equivalents at the end of each quarter, explaining why the public filings showed so few shares, but raising questions about where the proof was for all the cash.
Until at least November, 2006, the firm, which claimed to manage billions of dollars and be among the largest market makers in the stock market, used as its auditor Friehling & Horowitz, a small New City, New York firm.
Mr. Vos says his firm hired a private investigator and determined that the accounting firm had only three employees, one of whom was 78 and lived in Florida, and another was a secretary, and that it operated in a 13 foot by 18 foot office. His firm felt that was too small an operation to keep an eye on such a large firm operating a complicated trading strategy. A message left for the accounting firm was not returned.
Meanwhile, a series of media stories also raised questions about Madoff's operations, including a piece entitled "Madoff Tops Charts; Skeptics Ask How" in industry publication MAR/Hedge in May, 2001, and a subsequent story in Barron's. Mr. Madoff generally brushed off reporters' questions, citing the audited results and arguing that his business was too complicated for outsiders to understand.
—Kara Scannell and Jenny Strasburg contributed to this article
The images of the Aksia letter posted above can be clicked to enlarge.
As I exclusively reported Friday, YU sanitized its website in an unsuccessful move to remove all traces of a connection to Bernard L. Madoff.
YU did this without issuing any statement, without acknowledging the history, and without showing any responsibility for that history and the losses a connection to YU may have caused investors – and YU itself.
As I first reported, that led the NY Times to drop any mention of YU in its initial report on Madoff's fraud.
That Times error was (forcibly?) remedied Friday afternoon when, after being outed, YU gave the following statement to the Times. (The section in bold italics is the only actual quote from YU.)
Mr. Madoff has resigned from his positions at Yeshiva University, where he was treasurer for the university’s board and deeply involved in the business school.
“Our lawyers and accountants are investigating all aspects of his relationship to Yeshiva University,” said Hedy Shulman, a spokeswoman for the university.
The most recent tax filings for the university show that its endowment fund, a separate charity, was heavily invested in hedge funds and other nontraditional alternatives at the end of its fiscal year in 2006.
The school paper, the Yeshiva Commentator, recently reported that its endowment’s value had dropped to $1.4 billion from $1.8 billion — before the scandal broke.
Late Friday, the Times also published a piece that details Madoff's ties to various charities and the financial losses many of those charities seem to have taken:
Standing Accused: A Pillar of Finance and Charity
By ALAN FEUER and CHRISTINE HAUGHNEY
His company’s portfolio was ample: $17 billion. His address was appropriate: East 64th Street, a few blocks off the park. He golfed at the Atlantic in the Hamptons, at Old Oaks in Westchester County, at the sunny Boca Rio in Boca Raton. He was reported to have three homes and a yacht in the Bahamas.
For Bernard L. Madoff, there was also his multimillion-dollar private foundation that doled out money to hospitals and theaters. Indeed, through his charity work at places like the Gift of Life Bone Marrow Foundation or his public service at institutions like Yeshiva University, where he served on the board, Mr. Madoff seemed to have created a stainless persona of integrity and trust.
From the start, in fact, a motto of his business captured this image of simplicity and directness: “The owner’s name is on the door.”
But with his arrest on Thursday on federal charges of cheating investors of $50 billion in a fraud scheme, Mr. Madoff’s classic rise seemed to have had an equally spectacular fall.
“He was thought of as a great philanthropist, a pillar of the community, the chairman of Nasdaq — all of that stuff,” said one hedge fund executive who knew him.
“There was a joke around that Bernie was actually the Jewish T-bill,” the executive went on, referring to the ultrasecure investment of treasury bills. “He was that safe.”
Mr. Madoff had traveled far from his roots in eastern Queens, where as a young man he cobbled together a $5,000 grubstake from his earnings as a lifeguard and sprinkler installer to start the famed investment firm that eventually bore his name, Bernard L. Madoff Investment Securities.
He had come to move easily in the clubby Jewish world that iterates between New York City and its suburbs and southern satellites like Palm Beach.
Indeed, in the world of Jewish New York, where Mr. Madoff, 70, was raised and found success, he is largely still considered as a macher: a big-hearted big shot for whom philanthropy and family always intertwined with — and were equally as important as — finance.
Mr. Madoff, who attended but never finished law school, was already rich by his early 50s, largely due to his intuitive grasp of the centrality of computers to high finance, he once told Forbes magazine. In an era when many, if not most, transactions were conducted on the phone, he turned his company into a fully automated operation that could make trades in as little as four seconds flat.
And soon the Madoff name — if not quite the equal of the Tisch name, for example — carried a quiet power.
"The guy never flaunted anything,” said one longtime friend. “And that fit with his rate of return, which was never attention-grabbing, just solid 12-13 percent year in, year out."
The friend, a private investor who knows Mr. Madoff from the Palm Beach Country Club and from the Hamptons, said friends and investors had been calling nonstop since the arrest.
"The pain is just unbelievable,” the friend said. “He was part of the family for so many people. There was this quiet culture of people, slightly older-money, who maybe weren’t that interested in the market, who kept saying to each other, ‘Just give Bernie your money, you’ll be fine.’ "
That culture had perhaps its best expression at the half-dozen golf clubs he belonged to, ranging from the woody Old Oaks in Purchase, N.Y., to the Palm Beach Country Club in Florida.
“He and his wife were nice golfers,” said Denise Lefrak Calicchio, part of the Lefrak real estate family, who knew the Madoffs socially through several of their clubs. “He and his wife seemed lovely.”
With time, some wealthy investors even joined clubs in order to become part of Mr. Madoff’s investments, some who knew him said. It was considered a favor to be introduced to the man as a potential investor.
“There were people joining golf clubs just to get into his fund,” said one investor who declined to be named. “This guy was held in such high regard.”
A member of the Palm Beach club said the Madoffs did not socialize as much as other members did, nor did they fight as aggressively as others to keep up with the club’s more aerobic social climbers. They were well-liked, and did not appear to be part of the “blister pack,” as one club member put it, a term that refers to those who get blisters on their hands and feet from ascending social ladders.
“They seemed to stay apart from the herd,” the club member said. “They chose not to get into that social rat race.”
Mr. Madoff was, in fact, so popular with investors that he often turned away their money. After Barbara S. Fox, president of the Fox Residential Group in Manhattan, had sold his son, Andrew, an apartment, she pleaded with Mr. Madoff — unsuccessfully — to let her invest in the Madoff funds.
“I literally begged him,” she said. While Ms. Fox does not know why he turned her down, she called him “protective.”
Still, his refusal to take some investors added to his allure. Robert Ivanhoe, chairman of the real estate practice of the law firm Greenberg Traurig, said that he asked one of his clients who over two decades invested at least $50 million with Mr. Madoff to approach Mr. Madoff to see if he could invest with him. He knew Mr. Madoff as a major player in charitable groups.
Mr. Madoff declined. Mr. Ivanhoe said that the rejection made investing with Mr. Madoff even more appealing.
“He was turning people away all the time,” Mr. Ivanhoe said. “He didn’t need to be active in a charity to get more investors. People chased to invest in him.”
As Mr. Madoff’s success increased, so too did his interest in philanthropy, which was often handled, much like his business itself, as a family enterprise. He sits on the board of trustees for Yeshiva, whose officials issued a statement on Friday saying they were “shocked” at the news of Mr. Madoff’s arrest. And with his wife, Ruth, he runs the Madoff Family Foundation, a $19 million operation that last year gave money to Kav Lachayim, a volunteer group that works in Israeli schools and hospitals, and to the Public Theater in New York.
It is perhaps a testament to the family’s importance in Jewish philanthropic circles that when a nephew of Mr. Madoff’s, Roger Madoff, died of leukemia in April 2006, paid death notices appeared in newspapers from charitable organizations ranging from the Gurwin Jewish Geriatric Center to the Lauri Strauss Leukemia Foundation to the Lower East Side Tenement Museum.
Family, too, has always been of outsized importance to Mr. Madoff, evidenced by the number of relatives he has brought into his business. His brother, Peter, joined the firm as a senior managing director shortly after graduating from law school in the late 1960s, and both of Mr. Madoff’s sons, Mark and Andrew, joined the team after finishing their own educations. In 1978, Charles Weiner, a son of Mr. Madoff’s sister, joined the firm; 17 years later, Peter Madoff’s daughter, Shana, took a job with the company as a lawyer.
The family was so close that they even lived within blocks of each other on the Upper East Side.
“What makes it fun for all of us is to walk into the office in the morning and see the rest of your family sitting there,” Mark Madoff told Wall Street and Technology magazine in August 2000. “That’s a good feeling to have. To Bernie and Peter, that’s what it’s all about.”
And when Mr. Madoff finally told two senior executives of his problems, he chose to confide in his sons, who would notify the authorities and begin a quick countdown to his arrest.
Eric Konigsberg contributed reporting.
There are many wealthy people who are now insolvent, and there are foundations and nonprofits that have lost all or most of their endowments. And the news, I'm afraid, will only get worse.
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[Hat Tips: Jason, JAG and The Other DK.]