Hedge Fund U

We previously posted about how the Bernie Madoff scandal shed light on problems in the governance and leadership of one major university (which includes a well-known medical school). Yeshiva University, which includes the Albert Einstein College of Medicine, reportedly lost more than $11o million of its investments with Madoff. Not only was Madoff on the university's board of trustees, but also the chairman of the board's investment committee was hedge fund leader Ezra Merkin. Merkin invested the university's money in his own hedge funds, which, in turn, turned over the money to Madoff.

This week, Merkin, who like Madoff has left the Yeshiva board, was charged with civil fraud. As reported by the Wall Street Journal,

J. Ezra Merkin, a money manager who funneled $2.4 billion from universities and nonprofit organizations into Bernard Madoff's firm, was charged Monday on allegations he "betrayed hundreds of investors" by repeatedly lying to them about how he invested their money.

Mr. Merkin, a New York philanthropic leader and the former chairman of finance company GMAC, raised billions of dollars for his three hedge funds, telling clients he was managing the money himself. But instead, according to a civil fraud complaint filed by New York state's attorney general, Andrew Cuomo, Mr. Merkin collected hundreds of millions of dollars in fees over more than a decade while weaving a 'panoply of lies' to conceal that he was channeling much of his clients' funds to Mr. Madoff.

'Merkin held himself out to investors as an investing guru...In reality, Merkin was but a master marketer,' Mr. Cuomo said in the complaint.

Mr. Merkin, who met Mr. Madoff in 'the very late 1980s, maybe 1990,' according to his testimony, has emerged as a prominent figure in the Madoff scandal because of his stature among charities, universities, funds and even sophisticated value investors. Many of his clients were entities he courted through his social ties among monied New Yorkers. Mr. Merkin sat on the boards of some charities whose money he managed.

The sales pitches for Mr. Merkin's three funds -- Ascot Partners LP, Gabriel Capital Corp. and Ariel Fund Ltd. -- included promises that he actively managed their funds, according to the complaint.

Mr. Cuomo said the Ascot fund was formed by Mr. Merkin in 1992 as a 'feeder' fund for Mr. Madoff. It grew to hold $1.8 billion from 300 investors by the end of December 2008. Mr. Madoff pleaded guilty last month to using the money in a Ponzi scheme, where funds from new investors were used to pay existing ones.

About 85% of investors in the Ascot fund didn't know their money was flowing largely to Mr. Madoff, Mr. Cuomo's complaint said. In two meetings with Ascot investors in his offices at 450 Park Ave. in Manhattan, it says, Mr. Merkin pointed through a glass partition to a trading area and said his staff 'right here' was doing the work of managing their money.

Mr. Merkin collected an annual fee from Ascot's investors amounting to 1% to 1.5% of the fund's total assets, which included the fictitious Madoff returns, Mr. Cuomo's complaint said. By 2008, Mr. Merkin was collecting about $25.5 million a year from managing Ascot -- generating management fees of about $169 million from Ascot from 1995 to 2007, the complaint says.

Mr. Merkin told investors that 60% of his Ascot fund was comprised of money that came from his personal family trusts, the complaint alleges. But all told, Mr. Merkin invested personally and through family trusts and foundations $7 million in Ascot through 1998, and less than $2 million over the following 10 years.

Seeing how readily Madoff's institutional investors, in particular, the leadership of Yeshiva University were bamboozled, I thought maybe it was time to see who that leadership actually was.

Yeshiva's current Board of Trustees is listed here on the University web-site, but without any detail about the people whose names appear there. A bit of Google searching revealed that the group included, besides Merkin and Madoff,

- Morry J Weiss (chairman), who is on the advisory board of Primus Venture Partners, a private equity firm
- Sy Syms (vice chairman), who is on the board of the Israel Discount Bank of New York
- Alan E Goldberg (treasurer), who is co-managing partner and co-founder of Lindsay Goldberg, a private equity firm
- Israel A Englander, who is co-founder if I A Englander & Co, a financial derivatives trading firm, and founder of Millennium Partners, a hedge fund (also note that Millennium Partners and Mr Englander personally settled lawsuits in 2005 that charged they used an elaborate scheme using market timing, as per this NY Times story)
- Ruth L Gottesman, the spouse of David Gottesman, the founder and senior managing director of First Manhattan Company, an investment adviser, (and also a former chairman of the Yeshiva University board)
- Lance L Hirt, another partner at Lindsay Goldberg, a private equity firm (see above)
- Michael Jesselson, the president of Jesselson Capital, an investment company
- Henry Kressel, a partner and senior managing director of Warburg Pincus, a venture capital company

So, before the resignation of Madoff and Merkin, nine of the 40 officers and trustees of Yeshiva University were in finance, all in leadership positions (and the board also included the spouse of another financial leader). Most were not in retail banking or retail stock brokerages, but in the more exotic areas of finance that are most associated with the global economic collapse, including derivative trading, hedge funds, private equity, etc.

On one hand, it would appear that a board so heavily stocked with finance leaders ought to have been sophisticated enough to do the due diligence their role required in evaluating the university's investments. On the other hand, perhaps the enrichment with finance people created a clubby atmosphere that discouraged questioning their fellow financiers too closely.

That almost 25% of Yeshiva University's board was composed of finance leaders is striking, given that the US Bureau of Labor Statistics estimates that less than 6% of employed people work in finance. But note that we previously found that 50% of the Harvard Fellows (the equivalent of their board of trustees' executive committee), and 69% of Dartmouth College's charter (self-appointed, as opposed to elected by alumni) trustees were leaders in the financial sector. This is somewhat anecdotal evidence, but it suggests that leaders of finance are much more prevalent among the top leadership of elite US institutions of higher education than would be explained by their prevalence in the population.

This raises the question of why financial leaders seem to have become so prevalent in academic leadership. This question is important, since this prevalence seems to have increased in a time when the culture of the leadership of the financial sector seemed to become more and more alien to the values that academic leaders ought to support, culminating in a global financial collapse that many blame on the sector leaders' arrogance, greed, and sometimes outright corruption.

At least it seems a reasonable hypothesis that some of the problems of academia, and particularly the problems of medical academia, may have been at least enabled by leadership more used to working in an increasingly amoral marketplace than to upholding the academic mission.

We hope that there will be more interest in who now leads academia, especially medical academia, how they got there, and what they have wrought.

A "Screamer" Who Got His Way: The Madoff Case Opens a Window On a University's Board of Trustees

We first discussed some health care aspects of the case of Bernard Madoff here. Since then, the case has generated tremendous media attention, and been dubbed the greatest financial scandal of the 21st century. With continuing reporting and investigation, the case has opened important windows into the mismanagement and misgovernance of many kinds of organizations, including health care organizations.

Consider what has been revealed about the governance of Yeshiva University, the parent of the Albert Einstein College of Medicine. As reported by the Yeshiva University Commentator, J Ezra Merkin, an apparent crony of Mr Madoff's, was a Yeshiva board member and Chair of its Investment Committee:

President Richard M. Joel acknowledged they invested approximately $110 million in Ascot Partners, a $1.8 billion hedge fund managed by J. Ezra Merkin, although they asserted that the exact figure was difficult to ascertain. Mr. Merkin, who recently resigned from his positions as a trustee on YU's board and chairman of YU's Investment Committee, sent a letter to investors Thursday, December 11th, stating he had invested 'substantially all' of the fund's capital with Bernard Madoff; the fund is now virtually worthless. Before President Joel's letter clarifying that the loss was $110 million, sources had located the losses between $100 and $140 million, while some unsubstantiated rumors around campus had ranged far higher.

The endowment once stood at $1.8 billion, according to pronouncements by President Joel; at January 1st, it held $1.7 billion, according to his email. Today, President Joel estimated the endowments' value at approximately $1.2 billion, and revealed a loss of 28% since earlier this year, compared to an S&P loss of 38% and Dow Jones loss of 32%.

Merkin's activities as Chairman of the Investment Committee seemed to include investing substantial amounts of the University's money in his own investment vehicles,

Merkin's tactic ... [was] directing substantial amounts of YU's endowment to a fund that he himself managed. Figures ranged for how much money was invested with Merkin, but it appears the best estimate is that roughly $200 million was invested in Merkin-managed funds.

Merkin apparently immediately made money by investing the funds of the institution for which he was supposed to provide stewardship in his own financial vehicles,

One source close to trustees alleged that Merkin took a full management fee and did not give YU any discount for the size of their investment, which is out of character for most investors in the hundreds of millions of dollars according to financial professionals.

By the way, although Merkin charged the university a management fee, all he apparently did to manage the money was to in turn give it to Madoff, as noted above.

One hedge fund manager familiar with the situation expressed outrage with Mr. Merkin's behavior. 'He didn't seem to diversify at all, and he obviously didn't do enough vetting of Madoff,' he said. 'If this fund was just a pass-through so less connected investors could get to Madoff, YU could have gone to Madoff directly - he was the treasurer of their board,' he emphasized. "For what exactly was Merkin earning his fee from YU here? And for what was YU paying him?"

Why did this self-dealing continue? Merkin had

a leadership style described by several as secretive and overbearing. A friend and supporter of Merkin acknowledged that "he has a hard edge to him."

There were board members with concerns about Merkin, but

YU board members who expressed such concerns were reportedly ignored or berated by Merkin. They often found it difficult to get information from him. 'He can be intimidating, and didn't feel the need to tell everyone what was going on,' one source related. 'He's a screamer.' Another source close to the situation revealed that administration officials found Merkin difficult to work with, and searched for tactics to deal with Merkin for months before Thursday's events.

And, of course, Merkin did not bother to tell his fellow board members that his money "management" consisted of simply handing the money over to Madoff,

Further, sources alleged that Merkin did not disclose to the board that the Ascot Fund was nearly exclusively invested with Madoff, which would fit with the description of several other investors.

Furthermore, according to a report by Bloomberg news, seven other Yeshiva board members had ties to Madoff and/or Merkin,

Madoff also managed money for private foundations affiliated with at least seven trustees at Yeshiva University, according to the most recent federal tax filings available. That includes three who reported having direct accounts with Madoff’s firm and four others who had invested in Merkin’s Ascot Partners.

Financier David Gottesman, who once served as chairman of Yeshiva’s board, reported in a tax filing for the fiscal year ended Aug. 31, 2007, that the Washington-based Gottesman Fund earned $2.1 million trading large-cap stocks through a $20.4 million securities account at Madoff’s company. Madoff also helped the Gottesman Fund earn $35,294 that year by trading options.

Gottesman didn’t return telephone calls to his home and office seeking comment.

Warren Eisenberg, the co-chairman of Bed, Bath & Beyond Inc. in Union, New Jersey, reported that his private foundation generated $106,193 in trading profits through a $5.1 million account with Madoff in the fiscal year ended June 30, 2007.

The New York-based Jesselson Foundation, run by Yeshiva trustee Michael Jesselson, earned about $1.5 million in profits through $234 million of trading in a Madoff account during the fiscal year ended April 30, 2007, according to its most recently available tax filing.

The Sapirstein-Stone-Weiss Foundation, run by the family of Morry Weiss, a Yeshiva trustee who is also chairman of Cleveland- based American Greetings Corp., listed a $2.4 million investment with Ascot and a $1.7 million stake in the 'Bernie Madoff Fund' in its tax return for the year ended May 31, 2007. Other Yeshiva trustees who reported that their foundations had invested in Ascot included Emanuel Gruss, Ludwig Bravmann and Robert Beren.

Beren, who formerly ran an independent oil and gas company in Kansas, said his foundation invested in Ascot because of Merkin, whom he described as 'one of the esteemed members of the investment community in New York.'

Weiss, Jesselson, Bravmann and Eisenberg didn’t return telephone calls seeking comment. Gruss, who said he is 87, declined to comment.

The duties of the board of trustees of a not-for-profit organization are to provide stewardship that maximizes the ability of the organization to carry out its mission. The mission of a university is to discover and disseminate the truth. The mission of a medical school is to do so in a medical context, while providing the best possible care to individual patients.

At this university, unfortunately, cronyism and self-dealing on the board got in the way of good stewardship. The board had no rules prohibiting and minimal concerns about conflicts of interest affecting its members. The board gave excess power to one of its members, a "screamer" distinguished by his ability to intimidate. This member used his power to manage the university's investments so as to minimize his own effort, while maximizing his personal profit. Board members who were worried about this state of affairs were too intimidated by him or his cronies on the board to restrain him.

The immediate result was financial loss and disorganization.

One wonders how governance like this affected the long-term leadership of the university. Perhaps more will come out about that in the future.

Some might be tempted to dismiss the case of the Yeshiva University's board as unique. Because of the intense scrutiny of the Madoff case, we have gotten unique insights into the governance and leadership of this one university. Given all that we have discussed about academic leadership and governance on this blog, it is likely that many other universities have similar problems affecting the membership and operation of their boards of trustees. Expect that the continuing global financial meltdown will expose some more of them.

But before they are exposed, it's time for all who care about academic medicine, and about academia at large, to look for ways to refocus academic leadership on their mission. Universities that focus on finding and disseminating the truth may lack for glitz and glamor. But in the long run, they will prosper, while those which concentrated on building fancy buildings, making daring investments, or increasing leaders' salaries will end up in history's dust-bin.