December 16, 2008
Stunned local groups start to count losses as list of Madoff’s victims grows
It didn't take long for Bernard Madoff's arrest in New York for running an alleged $50 billion Ponzi scheme to send shockwaves through Los Angeles' Jewish community. |
The growing list of victims in Los Angeles from the meltdown at Bernard L. Madoff Investment Securities LLC reads like a who's who of L.A. Jewish communal life, including the Jewish Community Foundation, The Jewish Federation of Greater Los Angeles, Jewish Family Service, Jewish Free Loan Association and Beit T'Shuvah.
Private foundations like Steven Spielberg's Wunderkinder Foundation and individual investors like DreamWorks Animation CEO Jeffrey Katzenberg have also lost untold amounts of money.
Check the JewishJournal.com home page for frequent updates to the Madoff story and our ongoing all-Madoff blog, Swindler's List
For at least one Encino-based foundation, the Madoff mess has proven catastrophic. The Chais Family Foundation, which had donated $12.5 million annually to Jewish causes in Israel and the former Soviet Union, suffered such a substantial loss that it closed its doors Sunday.
"I don't think L.A. knows yet how bad they are going to be hit," said Ruthie Rotenberg, executive director of LimmudLA, a yearly volunteer-led Jewish conference that received a significant chunk of its $700,000 annual budget from Chais.
Like the reverberations from the downturn in the housing market that landed the United States in recession and helped place the auto industry at the brink, the extent of the effect on the Jewish community from what is being called the largest investment fraud in American history is still unknown. It's likely only to worsen as more victims come to light, since many of Madoff's investors were wealthy Jewish philanthropists - or their foundations and nonprofit beneficiaries - and major donors to Jewish causes.
"It is going to take months to unravel this," said Gary A. Tobin, president of the Institute for Jewish & Community Research. "But the fallout will last decades."
"It is just an unthinkable situation," said Dena Schechter, immediate past president of L.A.'s Jewish Family Service (JFS). "Clearly there are going to be agencies and foundations and families who are out of business. This guy worked a very specific community for a very long time. The fact that it is concentrated where it will have untold impact -- ultimately, who knows, there could be lots of people who will never be in a position to give again. We just don't know. I don't even want to speculate. It's too horrible."
For now, Jewish communal leaders are assessing the losses in their endowments.
The Jewish Community Foundation (JCF), which manages the endowments of some of the biggest Jewish social service agencies in town, had $18 million of its common-investment pool in Madoff's fund. The JCF pool, which was diversified across several investment advisors and at the end of October listed assets of $238.6 million, handled the endowments of The Federation, JFS, Jewish Free Loan and a handful of other local nonprofits. By October, the Madoff investment had grown to $25.5 million - the balance on that portion is now zero.
"The guy had a reputation in the community that was absolutely first-class. I don't think anybody had the faintest clue or hint that something like this was coming down the pipe," said Lorin Fife, who will become chair of JCF next month. "Unfortunately we are in the company of some very, very high-end and sophisticated investors with outstanding reputations in the investment community that have been victimized by this individual and whoever was involved with him in perpetrating this fraud."
The Federation appears to have been the hardest hit by the loss in that common-investment pool. It suffered a $6.4 million hit.
The news caught up to Stanley Gold, chairman of The Federation, in London late last week. He responded by copying his board on a letter to Marvin Schotland, JCF president and CEO, asking for an explanation of what had happened to The Federation's savings.
"Before I decide exactly what to do, I need to have the facts," Gold told The Journal in a phone interview this week. "There may be all kinds of opportunities to recover from institutions or insurance companies, but I don't want to get the cart before the horse. I need to know the facts. I have asked the questions, and I intend to get the answers in four to five days. And they [JCF] have told me they intend to be fully cooperative."
JCF issued an open letter Monday that stated that less than 5 percent of the assets it manages were invested with Madoff and that none of its donor-advised funds, which the foundation manages for about 1,200 individuals and families, were affected.
"The loss, while unprecedented in the foundation's 54-year history, does not threaten the foundation's stability, its existing commitments or its ability to maintain its leading role in the Los Angeles philanthropic community," the letter, distributed via BusinessWire and signed by Schotland and Chair Cathy Siegel Weiss, stated.
JCF has retained legal counsel and is "aggressively pursuing every possible recovery and remedy," the letter said. However, an article in the Wall Street Journal Monday suggested that investors are unlikely to get any money back, and that those who cashed out profits from Madoff's fund may have to give some back.
Questions to board members of JCF and a spokeswoman about which organizations were participants in the common-investment pool, as well as when and why the investment committee recommended using Madoff as a money manager, were referred to Schotland. He declined to speak with The Journal.
While some beneficiary agencies of The Federation, like JFS and Jewish Free Loan, participate in the common-investment pool, others - such as Jewish Vocational Service, Jewish Big Brothers Big Sisters and Bet Tzedek Legal Service - have their endowments managed elsewhere. It was unknown at press time where a number of the remaining agencies kept their investments.
Culver City-based Beit T'Shuvah, a drug and alcohol rehabilitation clinic for Jews, contributed $8 million to the common-investment pool. Founder and CEO Harriet Rossetto said Monday she wasn't sure exactly how much they had lost, but she was told the overall fund was down by 11 percent, which meant the organization may have lost almost $900,000. Those in need of help would feel any loss, she said.
"This is endowment money. It is our future," Rossetto said. "We work very hard for every penny we get. There is not an immediate crisis that the doors are going to close today, but my questions are just amazement at the number of supposedly savvy, sophisticated financial people - and I am not - who trusted a guy who should be a resident at Beit T'Shuvah, who managed to pull off an elaborate scam because he looked good."
The timing could not have been worse.
For the better half of 2008, Jewish nonprofits have been suffering under the weight of an economic recession. State and federal funding have fallen, and donors have pulled back somewhat, as well. At the same time that revenues have suffered, demand at social service organizations has skyrocketed. Fundraising holds a new set of challenges in this climate.
"We've had real good success here, because we are telling a story of real need," said Gold, who said Federation volunteers raised $1 million through phone banks during a 10-day period just prior to the Madoff scandal revelations. "To have it followed by this is demoralizing for both staff and lay people who raised that money and demoralizing for the people who give it."
Steven Windmueller, dean of the L.A. campus of Hebrew Union College-Jewish Institute of Religion, said nonprofits would likely find donors a bit "gun-shy" in the wake of this alleged fraud.
"They will want answers before they will be releasing funds," Windmueller said. "And levels of return have to be measured in the context of with whom are you investing, who is that money being invested [with] and what sort of security and protection is built in."
One of Madoff's chief victims may be the sense of trust he betrayed. With trust comes confidence and stability, and Jewish philanthropies can't operate without all three, Tobin said.
"This is like finding out that somebody who is very important in the family is a felon," Tobin said. "So it is going to shake confidence in people."
Still, the Jewish community generally excels during times of crisis, and many of the affected nonprofits said this week that the losses to their endowment would not lead to a reduction in their services.
"At this point we are not going to curtail services at all to the community," said Mark Meltzer, president and CEO of Jewish Free Loan, which has expected to dole out up to 50 percent more this fiscal year in emergency loans, bringing the total to more than $5 million. "We are going to maintain our loan activity. We'll go into our endowment if we have to."