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May 06, 2009

Council on Foundations
'Trust Deficit' Erupts After Madoff Investment Scandal

In a session billed as “CSI for foundations,” speakers at the Council on Foundations meeting in Atlanta dissected the Bernard Madoff investment scandal, which resulted in the deaths of 51 foundations and left 143 others “seriously injured,” according to Jeffrey R. Solomon, president of the Andrea and Charles Bronfman Philanthropies, in New York.

Speakers noted how many of the organizations that were hurt by the scandal missed signs of potential problems when investing with Mr. Madoff because officials relied on personal, religious, and social connections that they shared with him.

Melissa Berman, president of Rockefeller Philanthropy Advisors, said one lesson that has emerged in the scandal’s wake is that such relationships and a sense of trust are no longer enough.

The “acid test” for financial advisers, she said, must now be, “Can you fire these folks comfortably?”

The violation of personal relationships, she added, has fed into a broader “trust deficit” that is now a major issue for philanthropy.

“If we’re in a situation in which foundations can’t be trusted as appropriate stewards of private resources for public good, then the very sort of ‘license to operate’ that everybody in philanthropy enjoys is under threat,” she said.

Mr. Solomon said Bronfman Philanthropies considered investing with Mr. Madoff but did not after its chief financial officer investigated and discovered four factors he found troubling:

• The returns looked too good to be true.

• Mr. Madoff’s group did not welcome an office visit.

• The group would not disclose how the investments worked, and wouldn’t answer the chief financial officer’s questions.

• The auditors for the effort were “two guys at a strip mall,” Mr. Solomon said.

He added, “Having procedures in place and simply doing the kind of due diligence does result, in this case, in avoiding the problem.”

— Jennifer Moore

Wednesday May 6, 2009 | Permalink

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