Bernard Madoff is not the only trustee of Yeshiva University who resigned in shame last week.
While international attention continues to focus on Madoff, who faces charges for his alleged $50 billion Ponzi scheme, some leaders in the Jewish community, particularly within Modern Orthodox institutions, are expressing shock and anger at the role played by J. Ezra Merkin, a prominent investment guru and philanthropist, who appears to have misled at least some investors.
Merkin stepped down Friday as a Yeshiva trustee who played a primary role in managing the university’s endowment funds.
According to several sources close to the institution, about $100 million was invested through Merkin, which ended up in Madoff’s fund – without the board’s knowledge – and is presumed gone.
Yeshiva’s endowment is now about $1.3 billion, down from 1.8 billion last year, due largely to the general collapse of the economy.
"About $100 million of that total is directly attributable to our investment with Ezra," according to one person close to the situation, who along with others interviewed for this article would only speak off the record.
No one is accusing Merkin, who did not respond to an interview request, of prior knowledge that Madoff was operating an alleged fraud. Indeed, Merkin informed investors in his $1.8 billion Ascot Partners fund last Thursday that he was among those who suffered substantial personal losses when it crashed, since all of its dollars were invested with Madoff.
But while he has portrayed himself as a victim, Merkin is being criticized as having misled institutional and personal investors, including those wary of Madoff’s secretive and suspiciously successful earnings streak. Several people said that while they were reluctant to invest with Madoff, they trusted Merkin completely, not knowing that he in turn was taking their investment in his Ascot Partners and putting it into Madoff’s fund.
"We thought we were investing in Ezra," said one official of a Jewish institution, "and now find out we were invested with Madoff. We feel duped and outraged."
One private investor said that several years ago he asked Merkin directly if his investment in Ascot was going into the Madoff fund and was told it was not.
Another individual investing funds for a local Jewish institution said he was also given misleading information by Merkin about where the funds were going.
The assumption, several sources said, was that Merkin was doing due diligence and diversifying the investments rather than putting them all in one fund, as he did with Ascot.
"This is, in general, an opaque business," said someone familiar with hedge funds, noting that it is not uncommon for monthly reports to investors to simply show performance information without listing the companies invested in.
Yeshiva University was not the only organization where Merkin played a key role, formally or informally, in managing funds, and it is believed Congregation Kehilath Jeshurun and the Ramaz School of Manhattan were among those that lost substantial funds through investments that ended up with Madoff.
SAR Academy in Riverdale, a Modern Orthodox school, was also affected.
In a letter to parents sent out Sunday night, SAR president Jack Bendheim reported on the school’s endowment fund, which had grown to approximately $3.7 million. "Years ago," he wrote, a portion of the endowment — $1.3 million — was "invested in Ascot, a manager which, unbeknownst to us, had substantially all of its assets invested with Madoff." Based on allegations, "we are now valuing this investment as zero."
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?’"
Still, there were grumblings. Some of board members at Yeshiva had raised issues of good governance at meetings, unaware of specific problems with Merkin or Madoff. 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.
Merkin has served for the last several years as chairman of the investment committee at UJA-Federation of New York. But in part because the federation has a policy prohibiting members of the committee from directing funds, there was no exposure of its funds to Ascot Partners or Madoff.
"There were some on the board who grumbled about us missing out on a solid investment but we weathered the criticism," one insider noted.
Merkin is expected to be off the UJA-Federation board by week’s end.
Some have pointed out that Merkin had benefited numerous individuals and nonprofit organizations for many years and deserves gratitude for boosting their levels of income and success. But most of those interviewed expressed more anger than appreciation, and wondered how deep and extensive the impact will be on the Jewish philanthropic community. Everyone said they expect a slew of civil lawsuits.
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."