Madoff middlemen key in scheme


For investors seeking access to Bernard Madoff’s house of cards, the front door was rarely an option.

Instead, reports increasingly indicate that the reclusive former Nasdaq chief fueled his alleged Ponzi scheme with an air of exclusivity and carried it out almost entirely through middlemen.

“The thing about Madoff is that people couldn’t get to him directly,” Economics Lecturer Chris McHugh said. “He was playing hard to get.”

It was this phenomenon, it appears, that led Tufts to entrust $20 million to the Ascot Partners hedge fund and pay the fund yearly fees, all in order to gain access to Madoff’s consistent 10 to 17 percent returns.

And until the foundations of Madoff’s carefully constructed ruse came crashing down, the results appeared encouraging. According to Director of Public Relations Kim Thurler, Tufts administrators were under the impression that the investment had accumulated returns in the neighborhood of $5.6 million since it was originally made in 2005.

But now, not only is the $20 million principal gone, but so too are the supposed profits. “As we now know, they proved to be wholly fictitious,” Thurler said in an e-mail.

Currently, Jacob Ezra Merkin, the general partner at Ascot Partners, and other similar investors are coming under public scrutiny, particularly for charging clients fees only to funnel all of their money to Madoff.

According to Sally Dungan, the university’s chief investment officer, Tufts was paying 1.5 percent each year on total assets invested with Ascot. Those fees were deducted from the fake returns, meaning that the university was not paying them out of pocket. The $5.6 million represented the theoretical returns after the deductions.

Laura Goldman, who runs the money management firm LSG Capital, called the university’s decision to invest through Ascot Partners and pay the associated fees irresponsible.

“They were fees way out of line for turning somebody over to somebody else,” she told the Daily. “[Tufts] should have said, ‘Listen, please introduce us to Madoff.'”

Dungan said that the university tried to skip the middleman, but like other potential investors, was turned away by Madoff.

“We … were told that Madoff was not taking any new separate accounts. Our only way to access this opportunity was through one of the various feeder funds,” she said in an e-mail.

But while the administration suggests that the front door was closed, Goldman said Tufts investors should have knocked harder. She argued that with a $20 million principal, the university could have found a way to avoid the middleman.

“Of course they could have called [Madoff],” she said. “When you’re the Tufts endowment, I think you can probably call Jesus Christ. That’s how the brokerage industry works.”

Goldman, a former Merrill Lynch employee who now operates out of Israel, met Madoff in the ’90s. She recently published an online account in which she describes the encounter, noting Madoff’s evasiveness and a plethora of red flags. After speaking with him, she recalls, she encouraged others to withdraw their investments from his accounts.

According to Goldman, Tufts too should have seen the warning signs. “Anyone who was at any time researching this knew something was wrong,” she said.

While Madoff’s exclusivity might have appeared to some to indicate the value of his investments, she said it was merely a way to discourage clients from pressing him on his strategy.

“The aura of exclusivity was so people wouldn’t ask questions,” she said. “If this guy was so great, why … wasn’t he on CNBC every day bragging about his returns? He wasn’t there because he wanted to be under the radar.”

Thurler and Dungan have maintained that the university performed due diligence checks on both Ascot Partners and on Madoff. Goldman said that in general, though, investors were afraid to probe too much into Madoff’s returns.

“They were all convinced it was something special,” she said. “They didn’t want to ask too many questions for fear they’d get kicked off of the gravy train.”

From conversations with some of Madoff’s clients, she also feels that a lot of them suspected that something was awry well before the Ponzi scheme came to light. “They didn’t care,” she said.

Still, Tufts administrators say that without the benefit of hindsight, the investment appeared sound and free of red flags.

And as middlemen take on increasing prominence in the Madoff scandal, the administrators say that Ascot Partners too seemed reputable. According to Thurler, the university could have withdrawn the $5.6 million in returns from Ascot, but “saw no reason to.”

“We were satisfied with the size of the position and the performance of the fund as reported,” she said.