Amid Madoff Wreckage, New Calls For Reform

Bernard Madoff, above, recruited investors in posh Palm Beach, Fla., below. Jewish losses from his alleged Ponzi scheme could total $1 billion. Getty Images

Bernard Madoff, above, recruited investors in posh Palm Beach, Fla., below. Jewish losses from his alleged Ponzi scheme could total $1 billion. Getty Images

by James D. Besser
Washington Correspondent

In the midst of the worst economic downturn since the Great Depression, the collapse of Bernard Madoff’s alleged $50 billion Ponzi scheme is cutting a trail of destruction through the Jewish world and forcing a re-evaluation of the Old Boys network that funds countless Jewish groups.

“This is the Titanic on top of a tsunami,” said Abraham Foxman, national director of the Anti-Defamation League. Foxman said ADL’s investments weren’t directly affected by the Madoff meltdown, but that many of the group’s donors have been “been badly hurt. It’s very hard for the community to respond to. We have no experience for dealing with something like this.”

Making it more difficult, Foxman said, is “an element of embarrassment and pain. And there are a lot

of questions that have to be answered about fiduciary responsibility.”

There were so many potential victims of the record-shattering fraud — including a disproportionate number of Jews apparently lulled by Madoff’s gold-plated connections in Jewish big-money circles — that this week the FBI set up a hotline for them.

It’s not just that Jewish organizations and donors lost uncounted millions and that their trust in a fellow Jew who happened to be a Wall Street icon was betrayed. It’s that the losses, still being totaled, came at precisely the moment the Jewish world was most vulnerable because of a raging recession that has cut into endowments, hurt big donors and sent the demand soaring for the services many Jewish philanthropies provide.

“It’s a perfect storm,” said Jewish historian Jonathan Sarna of Brandeis University, who stressed that nothing in the past — including financial scandals involving the likes of Ivan Boesky and Michael Milken, symbols of Wall Street excesses in the 1980s — prepared the Jewish community for a fraud of this scale that zeroed in on the community’s most important individuals and institutions.

“Never before have we seen this kind of impact on our fellow Jews, on Jewish philanthropies,” Sarna said. “The fact this wound has been inflicted by one of our own compounds the hurt.”

While the devastation wrought by Madoff’s $50 billion long-lived alleged Ponzi scheme is still being added up — and fingers are being pointed at the government agencies that failed to heed numerous warning signs — the early list of victims points to what numerous Jewish leaders are calling a communal catastrophe.

Numerous Jewish institutions, large and small, have been damaged, some fatally.

Two foundations that focus on Jewish concerns have already shut down — the California-based Chais Family Foundation, which has given more than $12 million to Jewish causes in Israel and Eastern Europe, and the Robert I. Lappin Charitable Foundation of Salem, Mass. The family foundation of Sen. Frank Lautenberg (D-N.J.) stands to lose a significant portion of its investments, according to press reports. (Lautenberg and Democratic New York Sen. Chuck Schumer, said this week they were returning campaign contributions from Madoff — who gave to Republicans and Democrats alike.)

It’ll be weeks, maybe months, before the damage to Jewish groups is fully known, analysts say.

But the direct hit to charitable foundations, Jewish federations and other organizations through their investments in Madoff funds is only part of the communal crisis.

Even more damaging may be the personal losses experienced by the cream of the Jewish philanthropic crop — the relatively small, insular group of big givers who gather in places like Florida’s Palm Beach Country Club, posh restaurants in New York and even remote locales like two country clubs in the Minneapolis-St. Paul metropolitan area, where Madoff losses are reported to be huge.

“In a narrow sense, this is more catastrophic than the economic downturn because it is both sudden and irreversible to those affected,” said Mark Charendoff, president of the Jewish Funders Network, a group that seeks to bring Jewish philanthropy into the 21st century. “As bad as the economic downturn is, we believe it will get better, even if it takes five years. But in this case, the money has just disappeared, in some cases in its entirety.”

While the focus in news reports has been on the individual donors and the organizations they support, “the real victims” are the clients of the services these philanthropies provide, he said.

And even Jewish groups that had nothing to do with Madoff and his financial manipulations are feeling the pinch, or soon will, as the foundations that give them money close or retrench, and their biggest donors add up their Madoff loses.

At the same time, the Madoff wreckage will thwart efforts by Jewish groups to cope with the worst recession in decades.

Many believed they could rely on their most generous donors, whose losses in the world wide meltdown were large but who still had enough left to keep giving at high levels, to get them through a deep and long downturn. For some, Madoff’s alleged fraud and the cascading losses effectively dashed those hopes, increasing their vulnerability and limiting their options as the economic slide continues.

Several Jewish leaders said the devastation wrought by the Madoff collapse points to the long overdue need for reform in how Jewish organizations get their operating funds.

Madoff’s alleged Ponzi scheme had such a devastating impact, they say, because so many organizations rely on informal networks of rich contributors who move in insular circles and operate on the basis of personal connections, not transparent fiscal procedures — the very qualities Madoff allegedly exploited to ensnare otherwise-savvy investors.

In recent years the donor bases of most major Jewish groups have shrunk as the focus shifts to small groups of big givers — a mode of fundraising that was seen, until now, at least — as more efficient and reliable than big networks of small givers.

All that may change as organizations assess the damage and struggle to recover.

“Short term, the impact will be terrible,” said Jennifer Laszlo Mizrahi, founder and president of The Israel Project, many of whose donors are still toting up big Madoff-related losses. “Some Jewish nonprofits will simply go away. They won’t be able to survive this. People will lose their jobs, and there are no jobs for them in this economy. Services that are critical to the Jewish community will be cut drastically.”

Long term, she said, many groups will have to change the way they do business — or close shop.

“We’re going to see a matter of survival of the fittest,” she said. “Darwin said it is not necessarily the smartest or the strongest who survive, but those best able to adapt.”

Some of that adaptation, she said, means a change in mindset. No longer will Jewish groups, at least those that hope to survive in a harsh new climate, be able to rely on small, highly informal groups of big givers who meet over drinks at posh country clubs.

“We have become very, very trusting of other members of the community.” Laszlo Mizrahi continued.

“We’ve learned that just because somebody seems to be kosher, they’re not necessarily kosher,” she said. “There’s going to have to be a lot more diligence about their investments, about how they get and handle their philanthropic funds.”

Historian Sarna agrees.

“A whole ritual of the organized Jewish community is going to end: going down to Palm Beach and Boca Raton every winter, putting on a good show for these people in the country clubs and coming back with the funds you need to run your organization,” he said. “I believe that is going to end, transforming Jewish philanthropy.”

Smaller family foundations, another mainstay of Jewish philanthropy, will have to become more professional in their approach to money, several analysts said — or disappear, as several did this week.

Charendoff of the Jewish Funders Network said Jewish groups will have to tighten procedures on “how their portfolios are allocated and whether directors of an organization can have any involvement with the portfolio allocation.”

Reportedly, Yeshiva University was hard hit in part because a trustee, Ezra Merkin, helped steer investments into Madoff-related funds, while the UJA-Federation of New York emerged relatively unscathed because of strict ethics requirements. (See accompanying story on Merkin, page 1)

“We have only two choices: We can, as a community, take on more responsibility to monitor and regulate ourselves, or Congress will do it for us,” Charendoff said. “And that is never a good option.”

Asked if the Madoff scandal has a silver lining because it will force more accountability and transparency in Jewish groups, Charendoff’s answer came quickly.

“If it was a wake-up call, it is an awfully painful one,” he said.

Westchester Jewish Conference

Westchester’s Jewish Community Relations Organization

Jerusalem Hotel

Dan Panorama Hotel in Jerusalem