Pending the results of an ongoing internal investigation, the university's top officials are withholding judgment on the process that led to a $20-million investment in Ascot Partners, a hedge fund connected to disgraced financier Bernard Madoff.
University President Lawrence Bacow and Trustee Chairman James Stern (E '72) told the Daily that they have confidence in Tufts' financial arm, but they would not definitively say whether investors followed due diligence or overlooked any red flags.
"I can't answer that yet," Stern said when asked if investors missed any visible warning signs. "I really prefer to answer a question like that when I've had a chance to review and study the material. It would be crass speculation on my part."
Both administrators urged patience and pledged a full review of the university's policies with an eye toward fixing any institutional problems that might exist. They also echoed Director of Public Relations Kim Thurler's response to a New York Times article financially linking Stern with Jacob Ezra Merkin of Ascot Partners, calling the reporting misleading.
Bacow said that he expects the internal review to indicate that the investment met due diligence standards. "I know it was handled routinely," he said. "My expectation is that it did [meet due diligence], but until we go back and take a look, we don't know for sure."
According to Stern, the Board of Trustees' Investment Committee will meet soon to discuss the $20-million loss. "We are doing a fairly elaborate review of this, as we should," he said. "We're going to have to come to some conclusion ... If there are errors of oversight and due diligence, that's something we have to contend with."
In the wake of the Madoff fallout, a number of financial experts have argued that the alleged Ponzi scheme should have been uncovered earlier. Madoff's consistent returns, they say, were too good to be true and impossible to replicate even using his self-professed strategy.
Stern, the chairman of the New York-based private equity firm The Cypress Group, cautioned against leaping to conclusions. "Eyesight always gets really good when looking in the rearview mirror," he said.
He also noted that illegal schemes are all too prevalent in the financial sector, making it impossible to nip them all in the bud. "In my 35 years on Wall Street, I have watched a variety of scandals," he said. "What I have learned is that if someone wants to commit fraud, they will commit fraud — and they will get away with it until they get caught. At some point, it will get detected."
Bacow, an economist by trade, noted that generally speaking, disagreements about the viability of numbers and strategies do not necessarily suggest fraud; in fact, he said, they drive the economy.
"If everybody looked at exactly the same information and always came to exactly the same conclusion, markets would not exist," he said. "The only reason that you have markets is that people look at the same information and draw different conclusions ... If everybody has the same filters through which they view the world, nothing trades."
Meanwhile, Bacow and Stern both reacted negatively to a section of an article that appeared on the front-page in the New York Times last month. The Dec. 20 story was about the extent of Madoff's reach and touched briefly on Tufts' investment in Ascot Partners.
"Mr. Merkin had been a major investor in a company whose board included James A. Stern," the article read.
The company in question is the Noel Group. A 1998 Securities and Exchange Commission (SEC) filing shows Stern and his family in control of 38,334 shares of Noel stock and Merkin having 1,492,536 shares. Merkin's portion represented 7.3 percent of total Noel stocks, according to the document.
Noel continued to appear on SEC reports of Merkin's holdings through 2005, the year Tufts put $20 million in Ascot, but Stern's involvement with Noel's board ended long before then. He said he received his last director's fee in 1999.
Immediately after the article was published, the university looked to distance itself entirely from the reporting, calling it factually inaccurate.
"The reference to Mr. Stern sitting on the board of a company in which Merkin had a major investment is not only factually untrue so far as we know but erroneously implies that Tufts made this investment decision because of Mr. Stern," Thurler told the Daily in an e-mail.
"I feel that the New York Times story was unfortunate and not accurate based on the information that I have right now," she said in a follow-up phone conversation.
After seeing documentation of the shared financial interest, though, Thurler no longer denied the veracity of the article. But she maintained that the piece suggested a misleading conclusion.
"That does not change the fact that readers of the article may erroneously and unfairly infer from the article that there was an inappropriate relationship between Mr. Stern and Mr. Merkin that led Tufts University to invest $20 million in Ascot Partners," she said in an e-mail. "That is not the case."
Stern said that while he met Merkin once, it was not in the context of his involvement in Noel's management. He also said that he was not aware until recently that Merkin had owned over one million shares in the company and repeated Thurler's statement that he had nothing to do with bringing Ascot Partners to the attention of the university.
"I had no idea that Mr. Merkin was an investor in the Noel Group. As an outside director, I would not have any reason to know that," he said.
And although the New York Times article indicated that Stern chairs the trustees' Investment Committee, he said that he has not held that position since 1995. Currently, he sits on the committee, but does not chair it.
"Needless to say, I wasn't very happy about the innuendo in the New York Times article," he said.
Bacow was also displeased. "I think it was grossly unfair," he said of the story.
While the $20-million loss adds to the university's current financial woes — the administration is bracing itself for $36 million in budget cuts for next year — both Stern and Bacow sought to put it in context.
"The people who serve on the Investment Committee are some of the most knowledgeable and sophisticated investors in the world. They are doing a terrific job on behalf of Tufts," Bacow said. "This was one specific investment where fraud was committed, and we're going to try to learn from this and do better. I don't think that one can indict an entire asset just because of one investment."
Stern pointed to the success of Tufts' endowment as compared to those at other universities. Still, he acknowledged that the financial situation is bleak.
"You've got a stock market that's off 35 to 40 percent. You have basically every aspect of the global markets off in huge numbers," he said. "Unfortunately, everybody's in the same boat. I think the real test is how we as an institution are going to deal with it. And I think we are going to fare really well."
Even if the university continues to outpace its peer institutions, though, the administration still expects net losses. "There's an old expression, ‘You can't eat relative performance,'" Stern said. "It's ugly and you still have to deal with it."
