Bernard Madoff in 1993.

Philanthropic Organizations Vanish in Wake of Madoff Scandal

December 15, 2008 03:57 PM
by Anne Szustek
Several charities across the country have seen their funds obliterated as part of the fallout from the alleged Madoff Securities $50 billion Ponzi scheme.

Jewish Charities Go Broke Amid Madoff Revelations

In what is turning out to be possibly the largest-ever fraud on Wall Street, the assets of Madoff Investment Securities were frozen and put into receivership Friday after federal authorities received a tip-off that the $50 billion firm is allegedly a giant Ponzi scheme.

The number of investors hit by the deal continues to balloon. Among the victims are Sterling Equities Inc., the company that owns the New York Mets, as well as the firm’s owner, Fred Wilpon. Wilpon had invested millions of dollars into the investment firm and was a longtime friend of Madoff Securities founder Bernard L. Madoff. Other big-time investors who may have lost millions include GMAC Financial Services chair J. Ezra Merkin, former Philadelphia Eagles owner Norman Braman and the charitable foundation of Sen. Frank Lautenberg, D-N.J., one of the wealthiest members of Congress.

Charitable giving across the board is likely to see a drastic decline as investors across the country—many of whom, like Wilpon, had known Madoff for decades—have sustained huge losses.

But Jewish organizations and foundations stand to bear the brunt of the fallout from the Madoff scandal. Madoff, who was a well-known benefactor for Jewish causes, had several Jewish charities sign on to his investments. Now these organizations may be no more.

Deborah Coltin, the executive director of the Robert I. Lappin Charitable Foundation, a group that sent young Jews on trips to Israel, spent Friday “as a woman in mourning,” in the words of The Washington Post, after coming to the realization that the $8 million foundation had disappeared.

“I laid off five people today,” Coltin was quoted as saying by The Washington Post. “It’s just very, very sad.”

California-based charity Chais Family Foundation, which donated some $12.5 million a year to Jewish causes in Israel and Eastern Europe, also had to close its doors. According to Israeli paper Haaretz, all of its finances were put into Madoff Investment Securities.

The North Shore-Long Island Jewish Health System, though still in business, has announced it lost $5 million from the Madoff scandal. The Gift of Life Bone Marrow Foundation, a Jewish bone marrow registry in Boca Raton, Fla., to which Madoff donated heavily, announced that it needed an emergency $1.8 million in funding. Texas-based Julian J. Levitt Foundation, which sponsors Jewish causes, is out $6 million.

New York’s Yeshiva University, a Jewish institution, is still trying to measure the full extent of its losses. Sources told news organization Jewish Telegraphic Agency that YU has lost tens of millions of dollars from the scandal, although Yeshiva officials declined to confirm any amounts. The same JTA report wrote that Bernie Madoff had stepped down from his posts as university trustee and chairman of the school’s Sy Syms School of Business a week before his arrest. YU said in a statement quoted by Bloomberg that it was “shocked” over Madoff’s arrest and that the university’s legal team is “investigating all aspects of his relationship to Yeshiva University.”

Jewish institutions that have not directly been hit by the scandal, such as the UJA-Federation of New York, still stand to suffer as many longtime benefactors had money in Madoff Securities. John Ruskay, UJA’s CEO and executive vice president, told JTA, “We do not yet know the full extent of the losses that supporters of UJA-Federation and other Jewish institutions have had. But we have already heard that many major institutions had substantial funds invested, as did foundations … We don’t know yet the extent of the wreckage.”

Reference: Affinity fraud

Affinity fraud occurs when an alleged scammer targets a particular group, often an ethnic or religious group, in a bid to gain the members’ trust. Often the scammer is promoting an illegal investment plan such as a pyramid or Ponzi scheme.

People belonging to a given minority group often want to give back to their community and help those with similar backgrounds get ahead. Such a mindset can lull people into accepting recommendations from community leaders without doing their own personal due diligence.

Both the SEC and the North American Securities Administrators Association stress the importance of researching investments before jumping in, as well as to be particularly skeptical of any investment vehicle that purports to have no risk and guaranteed high returns. “The greater the potential return from an investment, the greater your risk of losing money. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud,” writes the SEC.

Related Topics: Other recent affinity frauds

The SEC has cracked down on several apparent affinity frauds as of late. In 2006, the SEC launched civil fraud charges against Renaissance Asset Fund, Inc., Ronald J. Nadel and Joseph M. Malone, who allegedly bilked $16 million from more than 190 investors, many of whom were Jehovah’s Witnesses.

The same year, a federal court in California ruled against Won Charlie Yi and C+ Capital Management for committing securities fraud in connection with soliciting $36 million from the Korean-American community in Southern California.

In 2005, Melkon Gharakhanian, also known as Michael Garian, was charged with eight counts of mail fraud by the U.S. attorney’s office in Los Angeles. Garian allegedly targeted members of Glendale, Calif.’s Armenian-American population—many of whom did not speak English as a first language and had little experience investing in the stock market. Garian raised more than $20 million from investors, allegedly claiming that he had access to “hot IPOs”; in actuality, the money was misappropriated for his own use.

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