The organizations of two prominent Dartmouth alumni are facing multi-million dollar losses as a result of their financial ties to Bernard Madoff, whose alleged $50 billion investment fraud shook the foundations of financial firms and non-profits worldwide upon its discovery in December.
Spring Mountain Capital, founded by John "Launny" Steffens '63, lost about $39 million in the scandal, while the Robert I. Lappin Charitable Foundation and the Robert I. Lappin 1992 Supporting Foundation, both founded by Robert Lappin '43, were forced to discontinue their programs for Jewish youth after losing a combined $8 million in assets.
Madoff, one of Wall Street's most prominent traders for more than four decades, was arrested by federal agents on Dec. 11, 2008. He stands accused of running what may be the world's largest Ponzi scheme, a fraudulent operation in which investors' returns are paid with money from other investors rather than from profits.
The financial losses that befell Lappin's charities have forced the organizations to dismiss their staffs and discontinue their programs.
"It is with a heavy heart that I make this announcement," Lappin, founder and trustee of the foundations, said in an online statement.
Deborah Coltin, executive director of Lappin's foundations, was unavailable for comment as of press time.
Lappin's foundations, which seek to help maintain Jewish teenagers' religious identity through trips to Israel and other educational programs, have initiated a grassroots effort to fund their 2009 Youth to Israel program, according to their web site.
Spring Mountain lost approximately $39 million through indirect investments with Madoff Securities, according to Gregory Ho, Spring Mountain's president and chief operating officer. The firm had about five percent of its $800 million hedge fund invested in Ascot Partners, a so-called "feeder fund" that invested, in turn, with Madoff's company, and in two smaller funds, Ho said.
Ascot, headed by J. Ezra Merkin, lost almost all of its $1.8 billion assets in the scandal, according to The New York Times.
Merkin was originally a limited partner in Spring Mountain, as well as a consultant, but resigned both positions upon news of the loss, Ho said. Spring Mountain is unsure how much of the smaller funds, Gabriel Capital and Aerial, were invested in Madoff Securities. Ho said the total loss is a small but significant, percentage of Spring Mountain's $2.2 billion in assets.
"There's disappointment," Ho said. "39 million dollars is a large amount, and we're unhappy about it, but we're looking at various avenues of recovery. We're going to have to wait to see what the government does in their investigation."
Steffens founded Spring Mountain with Ho and Merkin in 2001, after working for Merrill Lynch for 38 years, according to Forbes.com. He served as vice chairman of Merrill Lynch and chairman of its U.S. Private Client Group from 1997 to 2001, and was elected a member of the Board of Directors of Merrill Lynch in 1986.
Spring Mountain will use lessons learned from the scandal to improve its investment strategies, Ho said. The firm plans to use custodians chosen by the firm, rather than an investment manager, to actively manage accounts, he explained.
"We're going to use this as an opportunity to take the lead on what people should do in this area," Ho said. "Given [Steffens'] proactive view of the world, I think Spring Mountain Capital is going to take a very positive and affirmative step to change the model. There's a lot of rebuilding for us to do."
New York Law School, which invested with Ascot Partners, sued Merkin, Ascot Partners and its auditor, BDO Seidman, on Dec. 16, 2008 in a class-action lawsuit for failing to inform the school of the extent to which the fund was invested in Madoff Securities. The law school lost $3 million through Ascot Partners, according to the complaint.
Ho said Spring Mountain will not take a similar action because the firm was fully aware of Ascot's investment in Madoff Securities.
"I don't understand those assertions by other people because we asked and were given the information," Ho said.
