International Law

Trust no Substitute for Thought

Image by Getty Images via Daylife

Ross Kerber and Hinda Mandel, reporting in the Boston Globe, reporting on the effect of the Madoff Fraud on charities, write:

"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.

Other charities which lost their money are reported to be:

"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."

Ignoring the "advice" about being too good to be true, is there any special reason why charities are especially susceptible to fraud?

I am not sure that they are, not knowing the base rates for rejection or acceptance by institutions of the Madoff invite. But if they were, then it is probably because of something Sam Antar has recently mentioned on his blog:"

"My cousin Crazy Eddie Antar taught me that "people live on hope."

As white collar criminals, we preyed on your hopes and dreams by feeding you our spin and lies. Investors demand confident leadership and strong financial performance from company managements.

They want to hear management exuding confidence about their company's future business prospects. Eddie and I built an image of strong and confident leadership by promising investors a prosperous future backed up by our phony financial reports.

As criminals, we considered the humanity of investors as a weakness to be exploited in the cold-blooded execution of our crimes. We measured our effectiveness by the comfort level of our victims.

My cousin Eddie and I built walls of false integrity around us to gain the trust of our victims."

What Sam is pointing out here is that it easy to play to the hopes and dreams of some people some of the time - you simply listen to them, and feed them lies they want to hear.

And if you think that you can easily spot the red flags, then what would you make a hedge fund manager who operated as follows:

* was a young, brash, "immature" man who no one knew very well was dictating "ground rules" for entry into one of his investing partnerships.

* wanted absolute control over the money and would tell his partners nothing about how it was invested.  

They would get an annual summary of his performance, and they could put money in or withdraw it only on December 31."

The performance of those partnerships, as reported by * alone from his home office where he handled all the details himself, was consistently better than the stock market's returns.

See a lot of red flags in that scenario? Want no part of it? Congratulations, you just passed up an opportunity to invest with Warren Buffett.

Full post as published by Misleading Advertising Law on December 29, 2008 (boomark / email).