"This shadow banking system of…hedge funds that has been largely unregulated—that is no longer going to be possible"
As if the housing crisis, liquidity freeze, deepening recession, and prospect of deflation weren't enough, now we have the Madoff Affair rocking Wall Street and investors everywhere. While no indictments have been handed down yet, prosecutors allege that Bernard Madoff, founder of Bernard L. Madoff Investment Securities, has orchestrated a long-running Ponzi scheme that duped investors—among them hedge funds, charities, and the rich and famous—out of billions. One big name allegedly taken to the cleaners was Mort Zuckerman, a principal of Boston Properties, proprietor of the New York Daily News and U.S. News & World Report, a political commentator, and a philanthropist who was on BusinessWeek's recent list of most generous givers. Zuckerman says he lost none of his personal wealth, but a chunk of the assets in a charity he controlled was invested with Ascot Partners, a hedge fund run by J. Ezra Merkin, managing partner of Gabriel Capital Group and chairman of GMAC Financial Services. Zuckerman said he got a letter from Ascot last week saying almost all its assets had been invested with Madoff and were presumed lost. At least one suit against Ascot has already been filed in federal court in Manhattan, according to news reports, and when I talked with Zuckerman on Dec.16, he said he, too, would be going after Ascot. In an e-mail, Merkin's lawyer, Andrew Levander of the Dechert law firm, said: "The offering Memorandum for Ascot expressly named Madoff Securities as a prime broker for the fund in several places and accurately described Ascot's trading strategy. Moreover, Mr. Merkin regularly consulted with Mr. Madoff about the trades he was supposedly executing for Ascot, and Mr. Merkin's management team contemporaneously reviewed the trading tickets provided by Madoff Securities. To our horror, it now appears that those discussions and those trade tickets were a sham."
What's the impact of the Madoff scandal on your charitable trust?
Well, about $30 million, or about 10%, was invested in the Ascot fund, which had somewhere around $1.8 billion [under management]. To my astonishment, the fund manager put the entire amount into Mr. Madoff's hands. I had no idea of this. I never knew Mr. Madoff, never heard of him, and then last Friday I get the notice that the entire fund has been lost because of Mr. Madoff's activities. So, obviously, it's going to affect the ability of this [charity] to do more things. Thirty million is a lot of money that I intended to spend for the welfare of others.
With that kind of money, you trusted somebody you knew, right? Was that someone Ezra Merkin?Yes.
What has been his response about giving the money to Madoff?Oh, he has not given anybody a satisfactory response. I had a conversation with him, and I don't want to go into it.
I understand. So…And nobody knew that he was doing it. I mean, there are dozens and dozens of people who…thought they were investing in a multiple and diverse group of funds. If you were going to invest all this money in another fund, it seems to me you should have told everybody that you were doing this so that they could decide whether or not that person was the person with whom they wanted to invest.
But you put your faith in Merkin.This is somebody whom I had known who had managed money, particularly for philanthropic funds. I wasn't looking for this charitable fund to make a lot of money. I wanted it to make some money, of course, but most of all, to preserve the principal. It wasn't to be a high-risk investment.
What is the nature of your charity, and who directed its good works? Was Merkin involved?No, no. He doesn't do the charity. He has nothing to do with the allocation of the funds from the charity. I am involved with it, but longtime friends of mine from Boston are the two principal trustees. And we invest in things that interest us—cancer care, education, archaeology, college debating.
You're a prominent businessman. You have deep ties to the Jewish community in New York, and Madoff was a legend in the city and in that community. How is it possible you didn't know Madoff?I'm not really involved in the financial world or fund management world. The whole thing is astounding to me, astonishing beyond words and very dismaying. In fact, I'd met with [Merkin] about 30 days ago. And when he talked about [my charity's investments]…you would never be able to infer from what he described to me that he had put the entire amount of funds in Madoff's hands.
You thought he was diversifying?Yes.
What can you do, sue him?Of course.
What else can you do to get back some money?I don't think there is anything other than using litigation. I mean, clearly, Madoff doesn't have any funds left or it would be pennies on the thousands of dollars.
A lot of people are worried that this is going to have big repercussions on Wall Street.Wall Street? I saw in the Financial Times that over $10 billion from major European banks [was invested with Madoff]. The repercussions on the people who manage funds is going to be enormous, in my judgment. And this shadow banking system of money-market funds, investment funds, private equity funds, and hedge funds that has been largely unregulated—that is no longer going to be possible.
Is there a pattern here? Why do you think so many successful people like you got burned? I mean we're talking about Steven Spielberg, Jeffrey Katzenberg…very successful people.I don't know that there's a pattern. I mean when you have a [successful] principal occupation, and my principal occupation is not the management of money…what you do is you try to find somebody who will manage the money for you. And I'm sure that was true of Spielberg, without question, and Katzenberg, and a lot of other prominent people. You do a certain amount of due diligence, you think you have the ability to rely on somebody based on his general community reputation, and you find out you can't.
Even someone with your access?It's not that I didn't check [Merkin] out, but look at all the people at philanthropic organizations that used him as the chairman of their investment committees, and they were all wrong.