MIT Picower Institute Suffers From Madoff Losses

Since the Madoff scandal and the collapse of the Picower Foundation, the MIT Picower Institute for Learning and Memory has successfully continued its operations despite some sharp, unexpected loss of funding. Money for several high-risk, high-gain projects has vaporized.

At the cutting edge of brain research, the Picower Institute consists of eleven research labs in Building 46, all of which are headed by MIT Professors. The institute is endowed by MIT, but most of the endowment support is used to support administrative tasks. Most funding comes from outside grants. The largest grant-making organizations the labs received money from are the National Institutes of Health, the Howard Hughes Medical Institute, and the Picower Foundation.

The Picower Foundation, a philanthropic organization valued at $958 million on its 2007 tax forms, was one of Madoff’s largest victims, holding 24 accounts with Madoff’s firm. It has since closed.

In May 2002, the Picower Foundation gave $50 million to what is now the Picower Institute for the construction of a new facility, now known as Building 46. More recently, the Picower Foundation gave another gift of $4 million to the Picower Institute in May 2008 to start the Picower Institute Innovation Fund. Due to the collapse of the foundation, however, the institute only received $2 million, half of what was expected.

With the Picower Institute Innovation Fund, each of the eleven research labs would receive $150,000 of additional funding per year for two years. The primary goal of the fund was to promote high-risk, high-return research projects that normally could not be funded. However, the collapse of the Picower Foundation in December 2008 destroyed the fund, leaving several projects without the $2 million of additional funding.

Despite the loss of funding from the Picower Foundation, the institute’s outgoing director, Professor Mark Bear, is optimistic about the future of the institute.

“The sudden loss of funding by the Picower Foundation was difficult,” said Bear, who is also a Howard Hughes Medical Institute investigator. “The major negative impact is that we are forced to devote more time to fund raising, which is a distraction from doing science.”

On July 1, Professor Li-Huei Tsai was appointed as the new director of the Picower Institute, succeeding Bear. For now, Tsai plans to work closely with the Dean of Science and Office of Resource Development in order to get a better grasp of the institute’s current state.

All of the labs lost a significant source of funding which would have allowed them to conduct more projects. The financial state of the labs, however, is healthy enough to continue their operations.

Professor Susumu Tonegawa, who directed the Picower Institute in 2006, heads the Tonegawa Lab, which focuses on memory mechanisms with genetically engineered mice. “We are doing fine,” said Tonegawa, “although in a long run a major sponsor that would substitute the Picower Foundation … would be much desired.”

One of the challenges Tsai expects to face is acquiring resources for supporting research from government and private sectors. Government organizations like the National Institutes of Health give out national grants to institutes in order to support research. In the upcoming year, Tsai expects the amount of grants awarded from these institutions to grow as a result of President Obama’s stimulus plan.

Picower/Madoff Connection

On Dec. 11, Bernard L. Madoff shook the financial world and was arrested for conducting a $65 billion Ponzi scheme. Madoff lied to his investors about the remarkably high financial gains of his trading firm, Bernard L. Madoff Investment Securities L.L.C. In reality, Madoff paid investors with the same investments that he received from other investors, thereby gaining no returns from the market.

ProPublica, an investigative non-profit newsroom, reported that Madoff’s net worth amounted to a mere $825 million.

Even before Madoff’s arrest, Harry Markopolos, an independent financial fraud investigator, warned investors of the possibility that Madoff was conducting a giant Ponzi scheme, and unsuccessfully tried to get the U.S. Securities and Exchange Commission to investigate.

On March 12, Madoff pled guilty to eleven felony counts, and on June 29, he was given a maximum sentence of 150 years in prison. Investigations into the Madoff scandal are still ongoing, however, and investigators are now scrutinizing some of Madoff’s biggest investors, who benefited from the scandal. One of the largest investigations is targeting Barbara and Jeffry Picower of the Picower Foundation, who supposedly withdrew $5.1 billion since December 1995, according reported by ProPublica.

Attorney Irving H. Picard filed a complaint against the Picowers on May 12 of this year. In the complaint document, Picard accuses the Picowers of having full knowledge of Madoff’s Ponzi scheme. The document claims that Jeffry Picower demanded fictitious gains from Madoff, who would then purchase backdated securities to fake profits. In one example reference, Picard claims that Madoff opened new accounts in April 2008 that backdated to January 2008, resulting in a fictitious gain of $39 million in less than two weeks. In effect, Picower asked for money, and Madoff delivered.

Picard goes so far to state that the Picower Foundation was “dominated by and used merely as the instrument of [Jeffry] Picower to advance his personal interests rather than corporate ends.” As evidence, he points out several cases when the Picower Foundation benefited from annual return rates of more than 100 percent. Some rates were even as high as 950 percent per year.

William Zabel, the attorney representing the Picowers, denied Picard’s allegations. He told the New York Times, “Mr. and Mrs. Picower considered themselves friends of the Madoffs for over 35 years. They were totally shocked by his fraud and were in no way complicit in it.”