The Madoff Massacre
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|James Quinn||December 22nd 2008|
Cutting Edge Economic Crisis Analyst
The largest financial fraud in history continues to reverberate throughout the far flung Jewish communities of the United States and beyond. The perpetrator of this fraud and the overwhelming majority of the victims are Jewish. There are more questions than answers at this point in the investigation. Could one man acting alone possibly run a $50 billion multi-decade long Ponzi scheme? Where did the money go? Were there accomplices that either actively supported or were complicit in the scheme? The answers to these questions will be answered in the coming months, but the pain inflicted upon Jewish charities, Jewish communities on Long Island, New York, Los Angeles, and Palm Beach will last a lifetime. Attention has now turned to a second prominent Jewish financier, Jacob Ezra Merkin. Merkin appears to be deeply involved in Madoff’s mess. Who is Merkin?
Jacob Ezra Merkin is an American money manager, financier and philanthropist. To many, he is known best as the chairman of GMAC and the general partner of Gabriel Capital LP, a $5 billion family of hedge funds. Previously, the Harvard honors graduate was a general partner of the Ariel Fund and a managing partner of Gotham Capital.
Merkin still serves on the board of the UJA Federation of New York, an umbrella group for Jewish activities in New York, and is a trustee of Carnegie Hall and a member of the Columbia University Board of Visitors. He has donated to a spectrum of Republican figures, from Mitt Romney during his presidential bid, to Rick Lazio, to President George W. Bush. For sure, Merkin has been a key fundraiser in Jewish circles. On December 10, 2008, just a day before the Madoff scandal erupted, Merkin held a posh fundraiser in his multi-million dollar apartment for the Israel Museum. Indeed, Merkin has been a key philanthropist for other Israeli projects and enjoyed close personal relationships with former Israel Prime Minister Ariel Sharon as well as that country’s current Prime Minister, Ehud Olmert. A much-seen press picture of Merkin shows him handing an oversized ceremonial check to an enthusiastic Sharon with a smiling Olmert looking on.
Beyond his honors and philanthropy, Merkin also manages Ascot Partners LP, a hedge fund which was valued at $1.8 billion prior to the collapse of Bernard L. Madoff Investment Securities LLC. It was Merkin’s decision to funnel nearly all of Ascots’ holdings into Madoff’s operation. Any Ponzi scheme must have more money flowing in than flowing out. So too, Madoff’s investment firm was dependent on new flows of money coming into the firm. Merkin’s Ascot Partners LP was one of the key “feeder” funds for Madoff Investment Securities. A 60-page 2006 Ascot confidential memorandum obtained by The Cutting Edge News states on page 23, “All decisions with respect to the management of the capital of the Partnership are made exclusively by J. Ezra Merkin. Consequently, the Partnership's success depends to a great degree on the skill and experience of Mr. Merkin.”
Clearly, Merkin’s relationship with Bernie Madoff is multifaceted and deep. Madoff served as the Chairman of the Board of Directors of the Sy Syms School of Business at Yeshiva University, as well as Treasurer of its Board of Trustees. Merkin also served as a Trustee on the Board of Yeshiva University and served on its investment committee. Yeshiva University’s endowment fund has incurred losses of $110 million, or 8 percent of the university’s endowment, according to school sources.
In addition, Merkin is the president of the Fifth Avenue Synagogue in New York City. Members of this synagogue have lost an estimated $2 billion. His father, Hermann Merkin, was an icon of Jewish philanthropy who gave millions to help build Yeshiva University, the Fifth Avenue Synagogue and Merkin Concert Hall. This legacy was wiped out in a matter of a few days, according to outspoken criticism in the Jewish community. Among Synagogue members losing millions were: Ira Rennert - $200 million; Elie Wiesel—$37 million; Michael Jesselson—$1.3 million. The main reason so many Fifth Avenue Synagogue members invested with Madoff was the powerful recruiting effort put forth by Merkin.
It is unclear what benefit Merkin received from Madoff for his recruiting efforts, only that Merkin was a prolific source of funds for the scam. Interestingly enough, numerous professional investors at the synagogue refused to invest with Madoff. Joseph Sprung, a synagogue member and financial advisor, decided not to invest when a former client informed him that “it was not legit.”
Ironically, while the nation is littered with sharp financial eyes who guessed or concluded that Madoff was a scam, complaints to the highest levels of the SEC were ignored for a decade.
The most shocking revelation to investors, who were paying Mr. Merkin a 1.5 percent management fee plus 20 percent of the profits to manage their money in his Ascot Partners LP hedge fund, was that the entire fund was invested with Madoff. These investors were paying high fees to Mr. Merkin for his investment expertise. Little did they know that he was just feeding the funds through to Madoff Securities. One investor had asked him directly whether he had invested all the funds with Bernie Madoff. His answer was reportedly “no.” The auditors for Ascot Partners LP were BDO Seidman. If the entire fund was invested with Madoff Securities, it seems logical that an auditor would verify that the funds actually existed. Trusting the investment statements produced by Madoff without verification of the figures seems, on its face, to be negligent on the part of BDO Seidman.
Many feel the truth will be revealed in many courts of law, as lawsuits fly. New York Law School, which has lost $3 million investing in the Ascot fund, has already filed a lawsuit against Merkin and BDO Seidman. The class action lawsuit filed in U.S. District Court in Manhattan said the defendants "recklessly or with gross negligence caused and permitted $1.8 billion, virtually the entire investment capital of Ascot" to be handed over to Madoff, the suspected perpetrator of a $50 billion securities fraud. One plaintiff’s effort to freeze Merkin’s personal assets was withdrawn after a judge commented he was disinclined to grant it. But Merkin’s Gabriel Capital LP, a $1.5 billion hedge fund plans to liquidate.
Suspending withdrawals and selling remaining assets is the fund’s “only realistic option” Merkin told clients in a December 18 letter. Gabriel Capital lost 39 percent this year. Even still, liquidating Gabriel will be a years-long process because the assets are not liquid, Merkin stated.
For sure, Merkin has labeled himself a victim in this scandal. But as an investment professional, he broke the cardinal rule of investing by putting all his investors’ eggs in one basket. A diversified portfolio will shield against the type of total loss that Merkin’s investors have suffered. A genuinely skeptical investment professional would have questioned the month-after-month consistent returns produced by the Madoff fund. An impartial analysis would have revealed that it was statistically impossible to generate such returns through bull and bear markets.
Indeed, the veins of the Madoff scandal are still being exposed. The greater question for many is who helped him? And how many others like Madoff are yet to be discovered?
Cutting Edge Economic Crisis Analyst James Quinn is a senior director of strategic planning for a major university. This article reflects the personal views of James Quinn. It does not necessarily represent the views of his employer, and is not sponsored or endorsed by them.
Edwin Black contributed research to this article.