After $20 million loss in Madoff scandal, Tufts maintains it met investing standards

In the wake of Tufts' announcement on Friday that it had lost $20 million of its endowment in Wall Street mogul Bernard Madoff's alleged $50 billion Ponzi scheme, the university has maintained that its investment met due diligence standards.

When the Board of Trustees' Investment Committee approved an investment in Ascot Partners in 2005, the body was aware that the hedge fund was linked to Madoff, Director of Public Relations Kim Thurler told the Daily yesterday.

Thurler maintains that university officials followed appropriate guidelines, despite widespread outcry from the financial community in recent days that Madoff's methods had raised a number of red flags and that his returns were simply too good to be true.

"Before making this investment, the university followed all of its usual due diligence procedures, including a full legal review and full review of the fund's investment strategy, and an analysis of the risks and strengths of the investment, including audited returns," Thurler said in an e-mail. "In light of this analysis, this investment seemed to be a prudent one."

But after Madoff's arrest on Dec. 11 for securities fraud and his own admission of deceiving investors, University President Lawrence Bacow announced in an e-mail to the community that Tufts, too, had fallen victim to the former Nasdaq chairman's scheme.

The school has written off the total amount of the $20 million investment, which represented nearly 2 percent of Tufts' endowment, and its disappearance will not significantly impact operations, Bacow said. He added that the university will participate in investigations of the fraud and will attempt to recover its losses.

Meanwhile, Ascot Partners and its manager Jacob Ezra Merkin are the first in what is likely to be a series of firms and individuals to be sued by investors looking to recoup funds. Tufts is currently evaluating available legal avenues, according to Thurler.

"At this time, we can't predict if we will be able to recover any portion of the loss, but we are exploring all our options, including legal action," she said.

For Tufts and other misled investors, any results will likely take time to come to fruition. "This will go on for years," Economics Lecturer Christopher McHugh said. "Everybody will go after everybody else … I don't think there's any simple legal device."

The casualty list

While Madoff's alleged fraud may have pulled $50 billion out of the economy and left victims scattered across the globe, college endowments have emerged relatively unscathed.

James Hedges IV of LJH Global Investments, a firm that specializes in investing in hedge funds and private equity for wealthy families, told Fortune Magazine that the absence of universities from the casualty list likely stems from their adherence to a more traditional investment playbook.

"[With Madoff], when you get to page two of your 30-page due diligence questionnaire, you've already tripped eight alarms and said, ‘I'm out of here,'" he said.

Aside from Tufts, Yeshiva University and New York Law School have also reported losses. All three institutions shared a common thread: their connection to Merkin.

New York Law School has filed a lawsuit against Ascot Partners and a firm that audited the hedge fund to recover $3 million in investments. Yeshiva was hit harder, according to school officials, who say they lost $110 million.

Other schools have also suffered indirectly. The failure of the Picower Foundation, a Palm Beach-based charity that was active in the Boston area, is expected to leave a significant dent in research efforts at Harvard and the Massachusetts Institute of Technology, for example.

While most colleges appeared to have stayed away from Madoff, Thurler said that his investments seemed strategically appealing.

"The investment was to provide a stable, low-volatility return and represented a very small percentage of our endowment," she said.

So far, Tufts economists have hesitated to criticize the trustees' Investment Committee for the $20 million in losses, but they have pointed to lingering questions.

"I'm somewhat surprised, I must admit, that the whole $20 million was put into one place. I would normally expect that they would diversify to some extent," Economics Professor George Norman said.  "[But] I don't want to second-guess the Investment Committee of the university, because the Investment Committee has done a very good job over the years."

McHugh, who works at the Boston hedge fund New Generation Advisors, placed most of the blame with Ascot Partners. He said that the fund's managers should have pressed Madoff for more details on his investment strategies and insisted on seeing more documentation.

Investors who did actually grill Madoff, he said, generally avoided entrusting their money to him. "With Madoff … they weren't getting anything really except for some cursory statements," McHugh said. "I don't think that Ascot Partners [was] doing their job right."

Still, the university also could have been more cautious, McHugh added. "I do think that perhaps they weren't as suspicious as they should have been," he said.

Beating the market

According to most financial experts, what many saw as the most enticing attraction of investments with Madoff – the regular 10 to 17 percent returns – should also have been the biggest red flag.

While higher returns generally come with added risk, Madoff's strategy appeared to be entirely safe. Instead of questioning the logic of the system, McHugh said, most investors naively clung to the belief that Madoff was merely smarter than the market.