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

Published: Sunday, December 21, 2008

Updated: Monday, December 22, 2008 23:12

Should Tufts' losses in the Madoff scandal affect donations to the university?

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Related: Tufts has array of legal options in wake of Madoff losses

After $20 million in losses from an alleged Ponzi scheme, legal experts say it might be time for Tufts to dig in its claws. Full story

Related: Tufts loses $20 million in Madoff scandal

Tufts may have lost $20 million of its endowment in Bernard Madoff’s alleged $50 billion Wall Street fraud scheme, according to an e-mail sent by University President Lawrence Bacow to the Tufts community this afternoon. Full story

"In this business, a lot of people are cocky," he said. "We have a tendency to believe that the market is easy to beat."

According to McHugh, this philosophy flies in the face of the concept of the efficient market. He called Madoff's unfailingly high returns "absurd."

"Anybody who believes in the efficient market would pick that up," he said.

Norman, too, registered surprise that so many investors implicitly trusted Madoff. He cited the example of the European bank Société Générale, which internally blacklisted Madoff after noticing a surprising number of warning signs.

"They refused to put money into Madoff's accounts because when they went over and talked to him, they were suspicious," Norman said. "It's surprising that other financial bodies weren't equally suspicious."

The blind faith investors often put in Madoff represents a larger dependence in recent years on hedge funds that aim to significantly outperform the market, McHugh said.

"There are a lot of people out there who want to think that there are these market-beating investors who can pull it off," he said. "There was the perception that they would do better and that they would not have the downside risk – that they were nimble [and] could move around quickly."

Colleges have been particularly drawn to hedge funds in recent years, McHugh said. "For a while, it worked out great," he said. "Everybody loved hedge funds until this year."

A ‘sophisticated' crowd

Even if red flags truly did abound, the very ability of Madoff to draw the rich and powerful from around the world into his web of deceit is telling, sources said. Madoff, 70, formerly chaired the Nasdaq and was a pioneer in electronic trading.

"Let's be frank: Madoff managed to attract a lot of very, very sophisticated people," Norman said. "You're looking at major financial institutions, major banks, all of whom have done their due diligence and decided to invest in Madoff. So it's very difficult to work out where the blame should lie here."

Tufts does indeed join a star-studded crowd of victims, one that contains the likes of Britain's Royal Bank of Scotland; Spain's largest bank, Santander; the Elie Wiesel Foundation for Humanity; a U.S. senator; and a co-founder of the retail store Bed Bath & Beyond.

"We, along with many knowledgeable investors, were deceived by dishonest individuals," Thurler said. "Outright fraud can be difficult to detect through even the most sophisticated systems."

As a result, Tufts administrators and federal officials alike have promised to look into institutional reforms.

"[We] are reviewing our processes and procedures to see if there are any ways to strengthen them or other lessons to be learned," Thurler said, echoing comments made by Bacow in his Friday e-mail.

On the national level, the Securities and Exchange Commission (SEC) has been a popular target for criticism, with detractors saying that the body ignored the warning signs that emerged over the years. In fact, it recently came to light that a Massachusetts investor repeatedly warned the SEC over the past nine years about the possibility that Madoff was running a giant Ponzi scheme, but the commission did not take any substantial action.

"I think the SEC has got so much egg on its face that it's really got to go and revisit its [policies]," Norman said. "There's a sense that the SEC has been pro-deregulation; perhaps they're going to have to revise their stance on that."

But McHugh argued that additional regulation is not the answer. Instead, he encouraged increased responsibility among individual investors. "The more [we] regulate, the more people say it's not their problem," he said.

Expected impacts on the Hill

The Madoff scandal comes at a difficult time for the university on the financial front. In light of an increasingly dire economic outlook, the administration has projected a 25 percent decrease in the value of the school's endowment this year. In addition, it is planning for an expected $36 million in budget cuts for next year.

In his e-mail to the community, Bacow acknowledged the administration's financial stewardship obligations and pledged to seal any potential loopholes.

"We deeply appreciate the trust and confidence that each donor places in the university," he said. "We also have an obligation to our students and faculty to manage these resources wisely for their benefit."

Director of Advancement Communications and Donor Relations Christine Sanni said that while she expects contributors to share the university's outrage, she does not anticipate a decline in their willingness to give in the wake of the Madoff scandal.

"We don't think this news will affect our efforts to raise funds for our students and faculty," she said in an e-mail. "Tufts is fortunate in having many alumni and friends who remain as committed to Tufts as ever and a dedicated advancement team that is able to steward those relationships."

University officials have emphasized that they do not foresee any cuts in services stemming from the losses.

"The payout from our endowment for next year is determined by combining the value of all investments – not a single investment – and establishing a percentage payout for all programs," Thurler said.

The Madoff scandal, as well as the expected decline in the value of the university's endowment due to bleak economic conditions, comes in the midst of Beyond Boundaries, a capital campaign aiming to raise $1.2 billion by 2011.

While the campaign's public phase kicked off in late 2006, its quiet stage began in 2002 – three years before Tufts made its investment with Ascot Partners. Sanni was unable to say if any of the lost money came from donations made through the campaign.

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11 comments Log in to Comment

Your name
Thu Dec 25 2008 02:06
Nice job on this one Rob, thorough and well written
Your name
Wed Dec 24 2008 22:13
Stern's dealings need to be investigated with an eye toward criminal charges.
Patty Plenty
Tue Dec 23 2008 17:02
The Chairman of the Investment Committee himself manages a fund. I wonder if Tufts invested in that and what the actual returns were....
alumni456
Mon Dec 22 2008 22:49
It is thoroughly embarrassing that Tufts would be involved in such an irresponsible fiasco. It was well known that Mr. Madoff did not utilize a legitimate financial framework by any standard. However the University chooses to spin this story, citing the multitude of victims duped in this scandal is hardly an adequate response to the blatant misappropriation of finances at this first class institution. The kind of shadiness in this type of investment is certainly acceptable for individuals and small corporations in terms of risk assessment - but for a first class academic institution. I hope that the administration doesn't try to skirt the blame or the burden onto the Tufts faithful and at the very least manages to the handle this disaster with a measure of dignity.
Your name
Mon Dec 22 2008 22:13
Mr. Stern needs to resign immediately. He clearly had a conflict of interest when it came to investing university money in this particular fund. What was the university doing investing in a hedge fund anyway. It is disgraceful and embarassing to be associated with the other victims that thought they were special people immune to the natural vicissitudes of the market. Magical thinking? Why did't they give it to the wizard of oz or buy a share of the "emperor's new clothing" company.

Stern should reimburse the university himself!

'05 alum
Mon Dec 22 2008 21:42
It is clear that due diligence was not adequately performed and to say otherwise is clearly mistaken. Universities have no place investing in hedge funds like this. I think it would serve Tufts well to investigate Mr. Stern and his relationship with Mr. Merkin. I believe Mr. Stern should resign in the wake of this disaster.
Rob
Mon Dec 22 2008 20:38
"Tufts is an unfortunate victim, but to think the university should have foreseen these results is a fallacy." ~ '00alum

The whole point of the article is that many who did their due diligence on Madoff were aware that it was a con, and avoided him, despite the promised returns.
Of course the Board of Trustees Investment Committee should have foreseen that it was a con, that's their job. It's equally embarrassing that someone would actually claim to be a lawyer, and therefore: "I am aware of what is and is not wrong and/or unethical."

Well ok then, I guess it's settled. Move along. Tufts should be thankful that Mr. Stern has done such a fine job on their behalf.

Jenny
Mon Dec 22 2008 07:02
The Tufts community is so fortunate to have a group of motivated, dedicated individuals working for its newspaper. This article was very informative and well-written. Thanks for taking the time out of your Winter Break to write this, Rob Silverblatt!
'00 alum
Mon Dec 22 2008 00:01
Ms. Smith, JimStern is an extraordinary alum that Tufts should be proud to have as a member and head of our Investment Committee. He did not commit any ethical violation (trust me, as an attorney who has litigated ponzi schemes in the past, I am aware of what is and is not wrong and/or unethical). The Madoff story is a terrible tragedy that will spawn a ton of litigation. Tufts is an unfortunate victim, but to think the university should have foreseen these results is a fallacy.
Cathy Smith
Sun Dec 21 2008 21:48
Why isn't anyone questioning the role of Jim Stern in all of this? He's chair of the Investment Committee and the Principal of Ascot Partners, Jacob Ezra Merkin, made a large investment in Jim Stern's company, the Cypress Group, according to Saturday's front-page New York Times article entitled "Madoff Scheme Kept Rippling Outward, Across Borders". The Tufts Daily should be interviewing Jim Stern about this first and foremost. I, for one, as an alum who has contributed to Tufts in the past will no longer be contributing to Tufts for this reason. It's one thing to make a bad investment; it's another thing for the chairman of the Investment Committee to be using his appointed office at our Institution for the personal gains of his private company.
Selva Ozelli
Sun Dec 21 2008 19:48
Attached is an article I wrote regarding the US tax implications
of risk management transactions of hedge fund managers. Some of the
tax analysis could apply to Madoff and his foreign investors as well.

atter.

Selva Ozelli, Esq, CPA

http://www.hedgeweek.com/download/259124/Comment%20-%20Cracks%20in%20the%20facade%20-%20risk%20management%20transactions%20of%20hedge%20fund%20managers,%20by%20Selva%20Ozelli.pdf

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