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Mar 15, 2009 (Vol. 29, No. 6)

Madoff Matters, But Larger Issues Loom

Ponzi Schemer Represents Just a Piece of an Extremely Sour Financial Funding Pie

  • In the months since financier Bernard Madoff was charged with promoting a Ponzi scheme, the financial repercussions continue to ripple. Charitable foundations lost millions of dollars, and the recipients of their endowments are feeling the pinch.

    The December collapse of the Picower Foundation, a leading benefactor for life science researchers was, perhaps, the most notable, but other funds were also hard hit. For example, the Auld Foundation, a major supporter of the Seattle Biomedical Research Center, had placed approximately 95% of its $1.75 million in assets with Madoff.

    Consequently, “a lot of endowment institutions are cutting back funds from riskier investments in an effort to balance their portfolios,” comments Paul DeRidder, Ph.D., venture partner, Crystal Cove Capital.

    The Council on Foundations reports that about three-quarters of foundations are maintaining their investment strategy, the remainder “generally are becoming more conservative in their investments,” and also are increasing their level of diversification.

    Academic medical and bio-related research is feeling the immediate effects of the Madoff meltdown and the general economic situation, according to Nilou Arden, Ph.D., director of biotechnology, NovoCatalysis. “My colleagues at Stanford have already had to tighten their belts,” adds Dr. Arden.

    Brandeis University is one of those directly affected by the Madoff scheme. As to the effect on the university, Irene Abrams, executive director of the office of technology services says, “It’s a little hard to say. A lot of our donors were hit.” She points out, however, “there’s so much government funding for basic research” that it takes several years before universities’ basic research is ready for technical transfer, so any effects upon the biotech industry may not be felt for several more years.

    Howard Hughes Medical Institute (HHMI) is looking resolutely forward. “That was long ago and far away,” vp for communications and public affairs Avice Meehan says of the Madoff scandal. “It will have no impact at all on our operations, although it has had consequences on the institutions where our researchers work. At HHMI, we’re assessing the result of the ongoing financial challenge on our endowments and operations. At this point, despite ongoing volatility, we expect to meet our commitment to our grantees, investigators, and Janelia Farm [Research Campus], and are proceeding with new initiatives with some degree of caution.”

    As Shannon Payne, Ph.D., senior scientist, Epigenomics, points out, “These cutting-edge research facilities are the lifeblood of biotechnology. They are the source of the innovative translational technologies upon which biotechnology companies are founded. When they suffer, we all suffer.”

    That said, she adds that Epigenomics is unaffected. That’s true of most biotech companies. They haven’t been directly affected, and any secondary effects are expected to be minor and far enough removed to make it difficult to separate them from the general economic climate.

    “The Madoff situation is a very localized phenomenon, given the way Madoff worked through a network of well-known people,” notes investment advisor Dushyant Pathak, Ph.D., president of VentureEdge. The ramification is that these investors, many of whom are experiencing notable declines in their net worth, are urging venture funds to slow down.

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