The Merkin angle

The late businessman and philanthropist Hermann Merkin loved Yeshiva University so much, he endowed a chair that was held for decades by Modern Orthodox spiritual leader Rabbi Joseph Soloveitchik. Now his son, J. Ezra Merkin, the chairman of GMAC Financial Service, has cost the school $100 million.

That’s the lead sentence in what might be the most compelling subplot in the Madoff scandal.

Merkin, the scion of a philanthropic family known for its support of Modern Orthodox causes (and brother of writer Daphne Merkin), has served on the board of many Jewish organizations and institutions, often playing a key role in overseeing how they invest their funds. As JTA’s Jacob Berkman reported yesterday, several leading Modern Orthodox institutions — including Y.U., and two Jewish day schools, Ramaz and SAR — placed their money in one of Merkin’s funds, Ascot Partners. Merkin in turn invested most of Ascot’s assets with Madoff.

Now other media outlets are starting to focus in on this slice of the Madoff story.

The Wall Street Journal (subscription required) and the New York Times both have articles looking at the plight and reaction of Merkin’s investors. Here’s a snippet from the NYT’s story:

“Certainly, a lot of his investors have good reason to be upset,” said Harry Susman, a lawyer in Texas who was flying to New York on Monday to help a group of investors who had retained him in the matter. …

The Ascot Partners fund is just one of what is likely to be many that were decimated in the collapse of Bernard L. Madoff Investment Securities.

Mr. Susman said the strategies promised in Mr. Merkin’s documents are a far cry from what he apparently did, placing all of the investors’ eggs in Mr. Madoff’s basket and charging a hefty fee for doing so.

He said his clients also recall conversations with Mr. Merkin when Mr. Madoff’s name came up, and Mr. Merkin was silent on the now apparent fact that Mr. Madoff was effectively the man managing their money.

Mr. Susman said his clients are particularly incensed because Mr. Merkin was charging them an annual fee of 1.5 percent of their investments in exchange for his services, which now appear to be little more than turning over the money to another investor altogether.

Mr. Merkin’s fund also had provisions that generally let investors make only annual withdrawals and then only with 45-days notice, a condition that not even Mr. Madoff imposed on those who hired him directly.

“People who went through Merkin, they had to pay for the privilege of being stolen from,” Mr. Susman said.

Over at the New York Jewish Week, Gary Rosenblatt looks at things from the perspective of insiders at Y.U. and other Jewish institutions (the site appears to be down, so we’ll link to it later). According to his report, some Y.U. board members were begining to raise questions about Merkin’s strategy for investing so much of the school’s money with Madoff, and new conflict-of-interest rules were being considered that would have forced a change:

While international attention continues to focus on Madoff, who faces charges for his alleged $50 billion Ponzi scheme, some leaders in the Jewish community, particularly within Modern Orthodox institutions, are expressing shock and anger at the role played by J. Ezra Merkin, a prominent investment guru and philanthropist, who appears to have misled at least some investors.

Merkin stepped down Friday as a Yeshiva trustee who played a primary role in managing the university’s endowment funds.

According to several sources close to the institution, about $100 million was invested through Merkin, which ended up in Madoff’s fund – without the board’s knowledge – and is presumed gone. …

o one is accusing Merkin, who did not respond to an interview request, of prior knowledge that Madoff was operating an alleged fraud. Indeed, Merkin informed investors in his $1.8 billion Ascot Partners fund last Thursday that he was among those who suffered substantial personal losses when it crashed, since all of its dollars were invested with Madoff.

But while he has portrayed himself as a victim, Merkin is being criticized as having misled institutional and personal investors, including those wary of Madoff’s secretive and suspiciously successful earnings streak. Several people said that while they were reluctant to invest with Madoff, they trusted Merkin completely, not knowing that he in turn was taking their investment in his Ascot Partners and putting it into Madoff’s fund. …

In hindsight, many in the community are now asking how a donor and/or trustee of a nonprofit could be in a position to manage money for the institution, as Merkin did.

"You have to know Ezra to really understand how this could have happened," said one source who has sat on boards with him. "He is brilliant and incredibly well connected in the Jewish and financial community, with a long and incredible success rate in investments. Plus, he can be, at times, charming and considerate – as well as intimidating."

Several people noted that when questioned or challenged about the wisdom of investing heavily in one fund rather than diversifying, "Ezra would ask, ‘Why would you reduce your concentration in your best performing fund?’"

Still, there were grumblings. Some of board members at Yeshiva had raised issues of good governance at meetings, unaware of specific problems with Merkin or Madoff. They felt Yeshiva was exposing itself to serious questions about potential conflicts of interest, regardless of who the personalities were. But veteran members resisted, insisting that Merkin was not only respected and trustworthy but "the Golden Boy controlling the Golden Goose," as one person explained.

Ironically, the university was in the process of responding to calls for instituting stricter policies regarding conflict of interest when the news hit of the Madoff fiasco. Procedures that had been discussed for more than a year were scheduled to be put in place next year.

Merkin has served for the last several years as chairman of the investment committee at UJA-Federation of New York. But in part because the federation has a policy prohibiting members of the committee from directing funds, there was no exposure of its funds to Ascot Partners or Madoff.

"There were some on the board who grumbled about us missing out on a solid investment but we weathered the criticism," one insider noted.

Merkin is expected to be off the UJA-Federation board by week’s end.

Some have pointed out that Merkin had benefited numerous individuals and nonprofit organizations for many years and deserves gratitude for boosting their levels of income and success. But most of those interviewed expressed more anger than appreciation, and wondered how deep and extensive the impact will be on the Jewish philanthropic community. Everyone said they expect a slew of civil lawsuits.