December 24, 2008
Financial tsunami shakes Jewish Community Foundation
The JCF's common investment pool, which manages the endowments for some of Los Angeles Jewry's biggest social service agencies, was down for the year -- but only by about 19 percent. Its performance could be attributed, at least in part, to one of the investment pool's money managers. Polak didn't identify this apparent financial all-star, which in terrible economic times had managed this year to produce almost a double-digit return on investment.
But less than 10 days later, everyone knew the name: Bernard L. Madoff Investment Securities.
Last week, as the largest Ponzi scheme in history claimed hundreds of millions of dollars from Jewish organizations and institutions, the JCF reported it had lost an $18 million investment that had grown to $25.5 million on paper. Overnight, 9 percent of the money some L.A. Jewish nonprofits use to generate cash for their programs vanished.
"No one is happy, including us," said Marvin Schotland, JCF president and CEO. "But there has been an enormous amount of understanding about the unique set of circumstances that caused this to occur that could not have been foreseen or expected. It's a testament to the strength of the community, at least with respect to donors who have funds with us."
"They have not been engaged with blaming," he said. "They have not been happy, but they have understood this is an aberration."
Such a scandal -- any scandal -- had not touched the JCF before. But, then again, a Ponzi scheme on this scale had never occurred anywhere before.
The fraud has cut deep into not only Los Angeles' Jewish community but throughout the country and internationally. The list of victims has only grown since Madoff's arrest on Dec. 11.
The Jewish Community Centers Association of North America reported losses of as much as $7 million; American Technion Society no longer has $72 million. Hadassah is out $90 million and the Minneapolis Jewish community lost an estimated $100 million.
Revelations about Madoff's middlemen -- key money managers and machers across the country and the world who took a commission for directing investments to him -- have raised questions about how apprised individuals were of their investments and how knowledgeable these "fund feeders" were about Madoff's house of cards.
Stanley Chais, a Beverly Hills investment adviser, is clearly one victim. His family foundation, which annually gave $12.5 million to Jewish causes, suffered a fatal blow in the fallout. But now, Chais finds himself and his Brighton Co. the subject of a $250 million class-action lawsuit that accuses him of being not an innocent victim but a victimizer who mismanaged his clients' savings by investing with Madoff.
This is just one of many anticipated lawsuits that will likely drag on for years. Now, said Gary A. Tobin, president of the Institute for Jewish & Community Research, "comes the inevitable search for the guilty."
The head of the Securities and Exchange Commission has already chided his staff, charged with regulating the U.S. financial securities industry, over "apparent multiple failures" in addressing all the red flags Madoff raised during the past decade.
Locally, the JCF has created a special committee to pursue the recovery of funds and investigate what procedures led the organization to invest in Madoff and whether those should be reformed. The committee includes JCF Chair Cathy Siegel Weiss and Lorin Fife, who will assume the chairmanship next month, as well as Richard Sandler, vice chair of The Jewish Federation of Greater Los Angeles, which lost $6.4 million and has a nonvoting seat on the JCF board.
"When something goes wrong, everybody has a thousand theories as to who did what wrong," Sandler told The Journal last week. "I've been watching all these congressional hearings for the last few months. Too much of the focus of the hearings was about who to blame instead of what to do now. I think that is a mistake."
"Obviously," he continued, "we could blame this guy Madoff. But when you look at the investment list, it is really hard to pick out a person. I am a great believer of the statement, 'But for the grace of God, there goes I.'"
The JCF made its first investment with Madoff in 2004. At the time, Madoff's fund was akin to the financial world's holy of holies -- divinely sanctified and even more exclusive. Getting in required a good connection, often from another financial titan.
Polak, chairman emeritus of L.A.-based NWQ Investment Management Co., opened that door and brought the proposal to the investment committee. They decided to invest $12 million. Two years later, in 2006, another $6 million was directed there from the common investment pool.
"We've all been surprised. The whole world has been surprised," said Polak, who stepped down last week from the investment committee. "But I'm under instructions as a member of the board from Cathy Siegel and Marvin Schotland to refer all questions to Marvin."
Schotland said the committee, whose membership hovers between eight and 10, made the decision after an "extremely robust discussion." They employed, he said, the same caution they use for each of the JCF's investments.
It is unclear whether the JCF's outside investment advisers, Cambridge Associates, recommended using Madoff. The firm was not hired until a few months after the first investment was made.
Schotland declined to speak for Cambridge, whose officials did not return calls for comment. The previous advisers, Consulting Services Group, also could not be reached.
Meanwhile, nonprofits have been re-evaluating how they will spend their money next year.
Organizations like Jewish Family Service (JFS) had already been wracked by an economy in turmoil. The California Legislature this year cut $700,000 from JFS' funding, and more state cuts are expected. While JFS' losses in the Madoff affair were relatively modest, about $425,000, they will remove another $25,000 in interest-generated revenue from the agency's budget -- an expense JFS can't afford.
"It's a convergence of factors all at once: The government is unraveling, the economy is hurting our supporters and now you have not only the decline on Wall Street but also this fraud. It's a perfect storm," said Paul Castro, JFS executive director and CEO. "We are hopeful, but it is going to be a big challenge. We are focused in on raising the dollars we can just to keep existing operations going."
Like many of the local Jewish nonprofits ensnared in the Madoff mess, JFS is a participant in the JCF common investment pool. The pool's roster has not been released, but Schotland said communal organizations, from The Jewish Federation of Greater Los Angeles to Valley Beth Shalom, account for about 38 percent of the funds.
Family foundations exclusive from JCF's donor-advised funds, which account for about 70 percent of JCF's managed assets and were unaffected by the investor fraud, constitute another 6 percent. One percent of the pool comes from miscellaneous sources. And the bulk, 55 percent, belongs to the JCF and is used for grants.
In an e-mail, president Andrew Hyman of Valley Beth Shalom told the congregation that the synagogue had lost about 8 percent of its endowment, although he did not disclose the full value. The loss, he wrote, "will not have any significant negative impact on the endowment or its continuing support for the synagogue." But that doesn't mean the impact will not be significant and negative.
"It's tragic. And it has to be understood beyond one rotten apple," said Rabbi Harold M. Schulweis of the Encino synagogue. "You have to look at the barrel. We are living in a culture, and have been living in a culture of greed, of success at any price, and we have allowed that scene in the movie, 'Wall Street,' to become reality -- greed is good, and you know that as long as money comes in it is justified."
If there was any good news for Beit T'Shuvah, the Culver City-based Jewish drug and alcohol rehab center, it was that a little more than half of its $8 million endowment was withdrawn from the JCF's common investment pool earlier this year, when the agency was considering buying a halfway house, and that money hadn't been reinvested, limiting the organization's exposure to $3.6 million.
"But I think the damage is greater than the numbers -- the damage in people's trust and the damage in the whole philanthropic ideal and the fact that this hit on top of the economy are making people not want to part with their money," said Harriet Rossetto, the center's founder and CEO. "We haven't seen the extent of the damage here. It is going to keep being a domino effect -- things people haven't even thought of yet."
The next domino to fall may occur when supporters of Jewish social service agencies that lost money with Madoff realize that they no longer have the discretionary income to contribute to their regular charities.
"We have seen reported in the media the names of some people and charitable bodies who are based out here and been contributors to us. We feel bad about them and that their ability to support things we do may be reduced or eliminated," said John Fishel, Federation president. "We have not heard as of yet any impact on a larger group of donors. That is not the case in some communities on the East Coast and down in the Southeast."
Indeed, a few significant donors have already told the New York-based Jewish Foundation for the Righteous, of which Schulweis is the founding chairman, that they will no longer be contributing. Madoff himself had given in previous years.
While some donors were completely insulated from Madoff, others were acutely exposed. Everyone, though, is feeling the pinch of a tumbling economy. And this, nonprofit leaders and experts said, remains a much bigger concern than this onetime loss in funds.
"We have really had here a tsunami of economic crisis and distrust as a result of the crisis in the nonprofit sector and more specifically the Jewish communal system," said Steven Windmueller, dean of the L.A. campus of Hebrew Union College-Jewish Institute of Religion and an authority on the federation system.
Still, the Madoff scandal has shaken the very core of Jewish philanthropy, threatening a key component of giving -- a donor's ability to trust that the money will be put to good use. To restore that, Windmueller said, organizations should ask a lot of questions about who is making investment decisions, what safeguard to add to the process and whether stricter investment guidelines should be self-imposed or government regulated.
"All of this is about trust, all of this is about confidence -- but before you even go through these new initiatives we are going to have a period of handwringing, the ability to take apart what happened and who's responsible."