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

"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.