Trust was undoing for many charities

A wide swath of philanthropies entrusted significant portions of their portfolios to Bernard Madoff. (Shannon Stapleton/reuters)

Earlier this year, the American Jewish Committee got a feeler from Bernard L. Madoff: Would it care to invest some of its $90 million endowment with the storied New York investment manager?

The organization's investment committee took a pass, said spokesman Kenneth Bandler, because Madoff wouldn't provide enough information about how he achieved such steady, high returns.

"We dodged that bullet," Bandler said.

Not every such group can say the same. Along with statements of surprise, shock, and sympathy, another sentiment is quietly circulating in nonprofit circles: that social and cultural ties, as well as Madoff's exceptional reputation, trumped fiduciary caution among the charities, foundations, and hedge funds that lost money. Authorities said Madoff confessed this month to running a $50 billion Ponzi scheme, and by one estimate, the community that counted Madoff as one of its own lost as much as $1 billion.

"There was a blind trust, and that led to people having more faith than doing their own due diligence," said Steve Dimitriou, managing partner of Mayflower Advisors LLC, which helps corporations and nonprofit organizations decide how to allocate assets. Dimitriou did not do business with Madoff, whom he knew of through industry circles.

Brandeis University professor Jonathan Sarna, a specialist in American Jewish history, said he knows of several organizations that passed up the chance to park money with Madoff.

Madoff's purported strategy was to trade frequently in big-company stocks and use vehicles known as options contracts to protect against losses, then cash in all his investments and start fresh at the beginning of every quarter. "Certainly, there were institutions that had the opportunity to invest with Mr. Madoff, but through due diligence said, 'We don't understand his method, we don't understand his books,' " Sarna said.

Investment goals of charities vary. Concerned with preserving their money, some aim for conservative annual returns of no more than 5 percent. But specialists say others have made increasingly aggressive investments in recent years, partly inspired by big returns posted by university endowments and other large nonprofit institutions.

Nonprofits have a lot of leeway with investments, but there are generally recognized practices meant to manage risk and avoid devastating losses. Dimitriou and other specialists advise organizations to diversify their holdings and spread them among different money managers - and to closely monitor how they are handled.

Yet a wide swath of foundations and philanthropies entrusted significant portions of their portfolios to the secretive Madoff. Several were run by prominent Jewish families who were socially connected to Madoff and his children, often through common memberships in country clubs and boards.

On Friday, the unfolding scandal claimed the Picower Foundation of Palm Beach, Fla., one of the largest educational benefactors in the country. The $952 million foundation, which has ceased making grants, funded groundbreaking research at the Massachusetts Institute of Technology and Harvard Medical School.

In Salem, the Robert I. Lappin Charitable Foundation said it had to shut down because Madoff had lost all its money, potentially including funds from employees' 401(k) plans. In Boston, the family foundation of noted philanthropists Carl and Ruth Shapiro lost between 40 and 45 percent of its assets, or $145 million.

In Brookline, the Maimonides School says it stands to lose to $5 million, not because it was a Madoff client, but because the money was in the hands of managers who were.

Many prominent national figures were drawn in as well. One, the foundation of Holocaust survivor and activist Elie Wiesel, reported it lost $15.2 million, nearly all of its assets, with Madoff. In New York, Yeshiva University said it lost about $110 million, or nearly 10 percent of its endowment, through an investment with Ascot Partners, a fund that placed nearly all its assets with Madoff. Ascot's manager had also been chairman of the university's investment committee, and Yeshiva president Richard Joel said in a statement the school, where Madoff himself held positions, would examine its conflict-of-interest policies and governance structures.

The Wiesel and Lappin organizations didn't respond to questions. In a statement, the Shapiro foundation said, "The foundation's investments are quite carefully considered, and based on Mr. Madoff's consistent rate of return over the long term, we believed that the investments the foundation made with him were an important part of a larger strategy to achieve the foundation's goals."

Sarna estimated that the Jewish community lost between $600 million and $1 billion from the Madoff meltdown, but some of its significant institutions escaped unscathed. The largest Jewish philanthropic organization in Boston, the Combined Jewish Philanthropies, said its $437 million Jewish Community Endowment Pool had no exposure to Madoff's problems. On its website, the organization acknowledged that "many pillars of the Jewish philanthropic community locally and nationally were victims of this outrageous fraud."

But according to charity president Barry Shrage, the group would not have seriously considered hiring Madoff because his methods didn't fit their criteria, which emphasize that investments be transparent - that detailed information be available about exactly where the money is and how it is handled.

Harvey Lowell, executive director of pool member organization Jewish Big Brothers Big Sisters of Greater Boston, indicated even if it had done business with Madoff, the charity's losses would have been contained, because it restricts the amount of investments placed with any one manager to no more than 5 percent of the total portfolio. "They were lucky that no one saw Madoff as a good investment," he said. "This was so far out of the normal course of doing business."

Madoff held himself out as a specialist in trading options and reported to clients that he was steadily earning double-digit returns on their money in virtually all markets. Many grew vast fortunes with Madoff for years, at least on paper, and until this month, none reported having trouble withdrawing money upon request.

Just how much Madoff revealed to clients about his strategies, and what of that was true, is at the center of investigations by the Securities and Exchange Commission and the Justice Department. Acknowledging "apparent multiple failures," SEC chairman Christopher Cox promised a probe of the agency's actions after it received numerous tips about possible wrongdoing by Madoff over the past nine years.

Among Madoff's clients were hedge funds, which use sophisticated financial techniques to manage risk and earn profits. Hedge funds usually minimize their fiduciary obligations when they contract with clients, said Boston University financial law professor Tamar Frankel. That can make it hard for investors to sue for damages.

New York securities lawyer Scott Berman, citing conversations with investors in several hedge funds that lost money to Madoff, said he plans to explore whether the funds themselves breached their duties by failing to sufficiently review those holdings or diversify their assets so only a small portion of their money was with Madoff. "There could be not enough due diligence or over-concentration, or maybe some of both," he said.

Dall Forsythe, who teaches nonprofit financial management at New York University's Wagner School of Public Service, said it's hard to judge whether the nonprofits that hired Madoff neglected the conventional wisdom to diversify their investments, since he may have been telling them their money was being spread adequately.

But, Forsythe added, "I think the harder thing was believing in the stability of the returns" that Madoff reported over the years.

"To have some sort of investment that somehow managed to return such a remarkably stable portfolio is too good to be true," Forsythe said.

Ross Kerber can be reached at kerber@globe.com.