YU Endowment Shaken By Madoff Storm, Loses $110 Million

Yeshiva University's endowment, already battered by the tough economic environment, took another major blow this past weekend, losing approximately $110 million, or 8% of their endowment's assets.

In a mass email to YU students, staff and many alumni, 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%.

Mr. Madoff, who resigned this past weekend from his positions of treasurer of the Yeshiva University Board of Trustees and chairman of the board of Sy Syms School of Business, was arrested on Thursday on charges that he had swindled $50 billion in a Ponzi scheme which shocked Wall Street (see related article, "Former YU Treasurer Bernie Madoff Runs $50 Billion Ponzi Scheme").

Mr. Merkin served with Mr. Madoff on Yeshiva's board, and was a member of several other prominent instiutions. For the last few years he has served as the chairman of the investment committee at the UJA-Federation of New York, as vice chairman for the Ramaz School of Manhattan, and as a member of the Columbia College's Board of Visitors.

Many Unhappy With Merkin Prior to Ascot's Demise

While Mr. Madoff's scandal reverberates across the front pages of the world's newspapers, more relevant to YU's future have been the revelations about Mr. Merkin's exposure to Mr. Madoff. After the collapse of Ascot Partners, Mr. Merkin resigned from his position on the board this past Friday, as first reported by the The Jewish Week.

However, Yeshiva's problems with Mr. Merkin allegedly began well before Ascot collapsed. One board member at Yeshiva related that several trustees and President Joel been looking into Merkin's management of the endowment prior to the events of this past Thursday. While some were discomfited by returns they found disappointing, others seemed to be rubbed the wrong way by 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."

Some sources were particularly troubled by Merkin's tactic of 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.

Kenneth Reed, director of research and policy analysis at the National Association of College and University Business Officers, called this tactic "a definite conflict of interest." Mr. Reed explained that endowment investment committees customarily provide guidelines to ensure a healthy degree of diversification, but do not set more specific details for where and how to invest.

Numerous professionals in the hedge fund and endowment world felt there was both an ethical and management problem with the setup at Yeshiva. One declared that it was "not only a major ethical problem" but also felt that it led to a situation where Mr. Merkin became only answerable to himself. "He eliminated all the checks and balances," he said, "that should have secured YU's money." While some felt that the investment committee's controls were adequate, one hedge fund professional deeply familiar with board procedures felt that the committee was hard-pressed to truly place Merkin in check. "He was more powerful than the normal chairman of an investment committee," this source related.

The UJA-Federation of New York, where Mr. Merkin had formerly served on the board's investment committee, did not lose money with Ascot Capital because a conflict-of-interest policy prevented Mr. Merkin from directing their endowment towards his own funds, according to their recent statement.

Several financial professionals further expressed surprised over Merkin's self-compensation for his work with Yeshiva's endowment funds. 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.

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.

Questions Over Merkin's Lack of Due Diligence Into Madoff

Although Mr. Madoff's fraudulent tactics escaped scrutiny from the SEC and much of the financial world, some felt that appropriate due diligence revealed that Mr. Madoff's reported earnings were at least suspect, and that investors with Mr. Madoff should have been more wary. A few articles over the past decade examined Madoff's investments and raised questions about his credibility, including in-depth pieces by Barron's in May 2001 and Mar/Hedge Newsletter in October 2001.