December 24, 2008 | Read Time: 3 minutes
Connecticut’s attorney general is examining whether board members of charities in the state shirked their fiduciary responsibility to protect charitable assets by placing investments with Bernard Madoff or other funds that invested with him.
Richard Blumenthal, Connecticut’s attorney general, has asked the court-appointed trustee responsible for liquidating the Madoff firm to provide a list of nonprofit organizations in Connecticut that had investments with Madoff.
In an interview, Mr. Blumenthal said he asked for the list for two reasons: He wants to help the charities recover as much as possible from the fraud, and he wants to determine whether some directors of the charities should be held accountable for failing to appropriately evaluate the Madoff firm before placing assets with it.
“We don’t have in mind any particular individuals or entities, but it’s my statutory responsibility to help safeguard the assets of charities and nonprofit organizations,” Mr. Blumenthal said. “The standard is that the director or fiduciary at any nonprofit has to exercise due diligence and the care and caution of any ordinary prudent investor.”
Nonprofit Losses
Dozens of foundations, charities, and universities lost money in the Ponzi scheme perpetrated by Mr. Madoff. At least four foundations announced they would close after losing virtually all of their funds in the fraud. (See The Chronicle’s list of nonprofit groups that have announced losses from Mr. Madoff.)
Trustees at Yeshiva University, based in New York, are already facing tough questions about whether they upheld their fiduciary duties. Yeshiva lost a $110-million investment it made in a hedge fund controlled by one its trustees, J. Ezra Merkin, who subsequently placed all of the fund’s money with Mr. Madoff. Both Mr. Merkin and Mr. Madoff were members of the university’s trustees, and Mr. Merkin headed the university’s investment committee. Each resigned after the fraud was exposed.
Jack Siegel, a Chicago lawyer who advises charities, argued recently in his blog, Charitygovernance.org, that Mr. Merkin failed to heed the basic tenet of diversification by placing all of the $110-million investment with Mr. Madoff. Mr. Siegel also maintained that if Mr. Merkin accepted fees from Yeshiva, he was essentially profiting from a “retail” price when Yeshiva presumably could have received the “wholesale” price by investing directly with Mr. Madoff.
Yeshiva is considering suing Mr. Merkin, according to the New York Post.
Andrew J. Levander, Mr. Merkin’s lawyer, could not be reached on Tuesday. Calls to the offices of Andrew M. Cuomo, New York’s attorney general, were not immediately returned.
In an interview, Mr. Siegel noted that a number of charities and foundations have revealed that they steered clear of Mr. Madoff’s firm after board members or consultants looked closely at the firm and had a difficult time understanding how Madoff earned such strong and consistent returns.
“Board members who chose to invest with Madoff aren’t necessarily at fault,” Mr. Siegel says. “If they did their diligence but came to a different conclusion about Madoff—you can’t fault them for that. It’s all about process. The question is, did they do what normally would be done in selecting investment managers?”
Abusing the Law
Richard Marker, a senior fellow at New York University’s George Heyman Jr. Center for Philanthropy and Fundraising, and a consultant who works with foundations and charities, says states will probably not waste their time prosecuting board members who simply made a mistake by investing in a fund that many others had deemed too good to be true. Instead, attorneys general may focus on charities or foundations that ignored their own investment policies, or conflict-of-interest policies, in an ill-conceived gamble on the Madoff firm.
“The law does not penalize stupidity — the law penalizes abuses,” Mr. Marker says. “The question is, Were they stupid, or was somebody essentially saying, willfully, ‘We can do better than the law requires?’ ”
Mr. Blumenthal, the Connecticut attorney general, said he doesn’t yet know how many Connecticut charities and foundations lost money in the Madoff fraud. He also said he didn’t expect to take any immediate action. “We’re very far from casting any blame, yet alone legal responsibility,” he said.
