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.