The Tragic Fall of the Picower Foundation
Two years ago, a highly-regarded charitable foundation had to close its doors, apparently one of the biggest victims of the Bernard Madoff Ponzi scheme. Here is the Boston Globe version of the story:
The unfolding scandal surrounding the alleged Ponzi scheme run by Bernard L. Madoff yesterday claimed as a victim one of the largest foundations in the country, which has funded groundbreaking brain research at the Massachusetts Institute of Technology and diabetes research at Harvard Medical School.
The Picower Foundation of Palm Beach sent an e-mail to 'colleagues and friends' late yesterday saying that it was a victim of Madoff's alleged scheme and that it would soon shut down. With assets of more than a half-billion dollars, it is believed to be the largest charity to have been forced to close by the unfolding scandal.
'It is with great sadness that I write to inform you that the Picower Foundation has ceased all grant-making, effective immediately, and will close its doors in the coming months,' wrote Barbara Picower, the foundation's president, who added that its money was managed by Madoff.
Similarly, the New York Times reported without question:
One of the nation’s leading philanthropies, the Picower Foundation, announced on Friday that it was shutting down.
Listed previously at $1 billion, the foundation’s assets were managed by Bernard L. Madoff, Mrs. Picower said in a statement, and his 'act of fraud has had a devastating impact on tens of thousands of lives as well as numerous philanthropic foundations and nonprofit organizations.'
A Blow to Medical Research and Academic Medicine
This appeared to be a major blow to philanthropy, and to medical research and academic medicine. Per the Boston Globe:
[No charities that had suffered from the Madoff scheme] were near the size of the Picower Foundation. In its 2007 tax return, it said the market value of its investment portfolio was $955 million. The Foundation Center, a nonprofit that tracks philanthropy, ranks the Picower philanthropy as the 71st largest in the United States by assets. It finances medical research at many leading institutions, human rights and child advocacy programs, and arts and cultural operations.In particular,
A portrait of the Picowers hangs in the Picower Institute for Learning and Memory at MIT. They gave the center $50 million in 2002, which was, at the time, the largest grant from a single foundation the university had ever received. The foundation gave MIT another $4 million in May to launch a fund for faculty to conduct high-risk neuroscience research activities.In addition,
'I am deeply saddened by the terrible news,' Susumu Tonegawa, the Nobel laureate for medicine who founded the center in 1994, said in an e-mail.
It is unclear from the foundation's statement whether it lost all its money or just enough to force it to cease operations.
The Picower Foundation also gives MIT $200,000 a year to fund scholarships for graduate students, in the name of Norman Leventhal, the famed Boston developer and philanthropist. Leventhal was a director of Picower Foundation until this year.
The Picower Foundation also awarded $1.5 million for diabetes and metabolism research to Dr. Jeffrey Flier, dean of Harvard Medical School.
[Dean Flier's] research funded by the foundation 'is over,' he said, unless he finds another funder.So that was the story in 2008. By then, we all knew that the scope of Bernard Madoff's fraud was audacious, and that all sorts of people were victimized, but it seemed a particularly low blow that he could "undermine these wonderful philanthropic organizations that support excellent causes such as biomedical research." The narrative was one in which a prestigious, well-intentioned charity was laid low by an evil act perpetrated by a wily criminal.
Added his colleague, Dr. Barbara B. Kahn, chief of the division of endocrinology, diabetes, and metabolism at Beth Israel Deaconess Medical Center, 'I think it's tragic for the Picower Foundation and for the public that a single individual could undermine these wonderful philanthropic organizations that support excellent causes such as biomedical research.'
Should Madoff be Blamed?
Or not. Today the Wall Street Journal reported the latest update on this story, on that seems quite dissonant with the version above:
A federal judge signed off Thursday on a settlement in which the widow of a longtime investor with convicted Ponzi scheme operator Bernard Madoff will return $7.2 billion to the victims of Mr. Madoff's fraud.
The settlement by Barbara Picower, the widow of Jeffry Picower, brings to nearly $10 billion the amount that Irving Picard, the court-appointed trustee for Mr. Madoff's firm, has recovered for people cheated in the scheme.
Recall that Barbara Picower was the President of the Picower Foundation.
Anechoic Stories About the Conflicted Leadership of the Picower Foundation
In fact, the glowing description of that foundation in the Boston Globe did not square with stories that ought to have raised serious questions about this apparent bastion of health care philanthropy, but instead were quite anechoic.
In 2001, the St Petersburg Times had published an expose of the Picower Foundation which suggested that its Jeffrey Picower used it in a complex scheme involving self-dealing for the purposes of personal enrichment. The story is a bit complicated, but I provide details below to underscore its verisimilitude.
A Foundation that Appeared Virtuous
On one hand, it acknowledged how the foundation was set up to appear virtuous. One of the largest recipients of its apparent charity was the Picower Institute.
Picower's wife, Barbara, was active in determining the charities that received Picower Foundation grants. In 1999, the foundation gave $250,000 to the National Abortion and Reproductive Rights Action League, $700,000 to public television station WNET-Ch. 13 in New York, $120,000 to the Children's Aid Society and $107,000 to the Boys and Girls Clubs of Palm Beach County.The Institute's leader was a famous medical academic:
By far, though, its largest grant was to the Picower Institute. The foundation's $5.5-million donation was 41 percent of the $13.3-million in grants it made in 1999.
Dr. Anthony Cerami was at the peak of his career in 1991 when he dined with Picower to celebrate his new job as president of the Picower Institute for Medical Research.A Focus on Drug Development
A dean at New York's Rockefeller University, Cerami had just been elected to the elite National Academy of Sciences, about the highest honor for a scientist short of a Nobel Prize.
'Dr. Cerami is what we call a giant in the scientific community, and he's also very well liked personally,' said Michael Kent, a biotechnology investor.
But it appeared that the main purpose of the Institute was actually to develop drugs, through a vehicle called Cytokine Networks:
Cytokine Networks held the rights to certain discoveries of the Picower Institute. In an arrangement common for non-profit medical research charities, it was set up in 1993 to commercialize science discovered at the Picower Institute.
'To bring science more quickly to the bedside -- that was their avowed mission,' Massey said of the institute.
Cytokine Network's largest shareholders were the New York-based Picower Foundation and the Picower Institute, which had each invested $2.5-million in the venture and held a combined ownership stake of 62.5 percent.
[Jeffrey Picower] owned no shares of the company.
Cytokine Networks held the rights to a drug labelled CNI-1493:
CNI-1493 has shown great promise in reversing Crohn's disease, a devastating inflammation of the intestine that is treated, though not always effectively, by injections. A small molecule can be taken in pill form and is cheaper to manufacture.
However, Jeffrey Picower, the husband of Barbara Picower, seemed to indirectly control Cytokine Networks:
he ran the board meetings, which were held at the New York offices of the JMP Group, Picower's investment holding company, said [Dr Glenn] Rice, the former Cytokine Networks executive.Picower Foundation Sells Cytokine Networks to Picower (the Person)
'He was involved with every major decision,' Rice said. 'He'd get into minutia -- the capitalization of the company, screening potential new investors, personally reviewing the clinical trials. Virtually everything a chairman of the board would do, he did.'
And here comes the trick. Observe closely:
In 1999, [Cytokine Networks] ... merged with another private pharmaceutical company, PharmaSciences Inc., in which Picower was the majority shareholder.So
When the merger was completed in 1999, Picower's non-profit organizations' equity stakes were diminished from a combined 62.5 percent of the old company to 24.5 percent of the new company.
Picower owned nearly 47 percent -- making him the largest shareholder in the company that had obtained the rights to CNI-1493.
An evaluation by Merrill Lynch put the merged company's fair-market value at $15 to $25 a share, making Picower's stake worth an estimated $40- to $67-million.
This is a pretty good trick:
Rice contends that by wearing all the hats in the merger, Picower had a conflict of interest.
In any business negotiation, each side tries to get the best deal. Yet in this merger, the interests of Picower's non-profit organizations were pitted directly against Picower's personal interests.
On one side were shareholders of Cytokine Networks, mainly the Picower institute and foundation. On the other side were the shareholders of PharmaSciences, primarily Picower.
Picower called the shots at the institute and foundation. So, Rice said, the question is this: On whose behalf was Picower working? His own? Or his non-profit organizations?
'The valuation here would be crucial,' said George Cowperthwaite Jr., a certified public accountant who specializes in preparing private foundation returns and has no connection to Picower.
By that, Cowperthwaite means the relative values assigned to each company for purposes of the merger. The shareholders of Cytokine Networks would be expected to push for the highest value possible assigned to their company. A higher value would give them more ownership in the new, merged company.
Yet Rice, who also was a shareholder in Cytokine Networks, questioned whether Picower had any incentive to push for a higher valuation of Cytokine Networks because it would mean that he would end up owning less of the merged company.
Indeed, a 1997 valuation by Lehman Brothers concluded that Cytokine Networks shareholders should own 47 percent of the combined company. They ended up with 36 percent.
In 2009, ProPublica published a report on the Picower Foundation which summarized this transaction thus:
Picower used both his foundations and a private corporation called PharmaSciences, of which he was the majority shareholder, to gain control of a potentially lucrative medical discovery. In 1999, Picower merged PharmaSciences with a for-profit spinoff of his institute called Cytokine Networks, essentially negotiating with himself. The merged company called Cytokine PharmaSciences had the rights to develop a new drug that could help minimize such illnesses as arthritis and multiple sclerosis. The newspaper raised the question of whether Picower had shortchanged his nonprofit in the deal.So it appeared the Jeffrey Picower used the Picower Foundation, which was lead by his wife, and the Picower Institute, which was ostensibly an independent not-for-profit organization funded by the the Foundation, to set up a deal which could have markedly enriched Jeffrey Picower.
Picower's Previous Anechoic Financial Peccadilloes
In fact, it appeared that Jeffrey Picower had a long history of questionable business deals. In 2002, Forbes ran a profile of Jeffrey Picower that asserted:
has been battle-hardened from years of legal disputes over his dealings. In the 1980s he sold to clients of his old accounting firm Laventhol & Horwath shaky tax shelters involving computer leases. When the Internal Revenue Service realized the computers were virtually worthless, it challenged the deductions. That spelled trouble for longtime client Peter Davidson of Brooklyn, N.Y.'s Davidson Pipe, who had put at least $30 million in Picower's leases after an introduction by Laventhol accountant William W. Schneck, who happens to be a former boss of Picower. Davidson sued Laventhol and Picower for $90 million. He claimed that Picower had bribed Schneck to betray him. Picower denied that, and his lawyer says he testified that the $50,000 he'd given Schneck was a loan. After hearing the opening arguments, he and Laventhol paid Davidson to drop the case on condition that Davidson keep his mouth shut about the settlement. Davidson later settled with the IRS.So by 2002, there were plenty of reasons to worry about the integrity of any organization lead by Picower. Yet when the Picower Foundation went bankrupt in 2008, the public narrative was of a noble pillar or health care philanthropy done in by an evil confidence man.
Picower also had a run-in with the Securities & Exchange Commission. In 1983 the SEC rebuked him for being months late disclosing that he had exceeded a 5% position in Fidata, a financial services firm that he later merged into what is now Alaris, a medical device maker. Shades of the Cytokine Pharma merger: Picower was on both sides of the table.
Two years ago Picower had to put up $21 million from another one of his pet companies--Physician Computer Network in Morris Plains, N.J.--to appease other shareholders who'd lost everything when it went bankrupt after it came out that his executives had cooked the books. It is hard to imagine how a smart guy like Picower could have been oblivious to all of that while chairing the board and controlling 45% of the stock, but he was never charged with a thing.
There have been other trips to the courthouse. Fourteen years ago he refused to pay the final bill for renovations on his New York offices. When the interior design firm sued to collect, he sued them for $17 million, taking the stand at trial in an effort to convince the jury that sloppy work had left him in squalor. The judge made a surprise visit to the office with the jury in tow. The place turned out to be sumptuous, and the judge decided not to let it go to the jury at all, rendered a directed verdict and ordered Picower to fork over $178,000, including legal fees.
One year later, the story was very different
Picower as a Beneficiary of Madoff
So maybe it should have been no surprise when ProPublica chronicled how the Picower Foundation seemed to have made huge profits from the Madoff Ponzi scheme that had victimized so many others.
It now appears that the biggest winner in Madoff's scheme may not have been Madoff at all, but a secretive businessman named Jeffry Picower.Jeffrey Picower died in October, 2010. As noted above, just today, the settlement that would return $7.2 billion from Picower's operations to the Madoff trustee.
Between December 1995 and December 2008, Picower and his family withdrew from their various Madoff accounts $5.1 billion more than they invested with the self-confessed swindler, according to a lawsuit filed by the trustee who is trying to recover money for those Madoff defrauded.
The big question is why people can be so easily fooled?
Why were a Chief of Endocrinology, the Dean of one of the country's most prestigious medical schools, and a Nobel Prize winner not the least bit skeptical of a foundation whose leadership was accused of conflicts of interest and self-dealing, and had been involved in a series of questionable business deals over the previous 20 years? All this was public by six years before the collapse of the foundation. Why was the media so eager to spin a narrative that labelled the apparent perpetrators as victims? A simple Google search on "Picower" would have suggested other explanations.
Certain health care institutions seem to held in such high esteem that almost no one thinks to question what goes on behind their walls. This makes it possible for unscrupulous leaders to subvert the missions of such institutions for personal gain. It even makes it possible for scam artists to create institutions that appear as if they ought to be held in high esteem as vehicles for chicanery.
We have now seen so much ill-informed, incompetent, mission-hostile, conflicted, and criminal leadership of health care organizations that no one should accept the word of someone just because he or she is in the leadership of an institution with a fancy name.
Just because a health care organization has an impressive name, or even an impressive history does not mean that its current leaders should be immune to questions, inquiry, skepticism, or even investigation. In fact, in this day and age, the leaders of large health care organizations with historically good names should be scrutinized especially carefully.
If not, expect so see more collapses of "wonderful" organizations.