DATELINE: March 1, 2009, Chicago
The Pennsylvania Attorney General should open an immediate investigation into the investment practices of the University of Pittsburgh and Carnegie Mellon University. The Pittsburgh Post Gazettereported last week that combined, the two institutions had invested a $114 million through Westridge Capital Management. Jonathan D. Silver, Pitt, CMU Money Managers Arrested in Fraud: FBI Says They Misappropriated $500 Million for Lavish Lifestyles. The proprietors of that investment firm, Stephen Walsh and Peter Greenwood were charged in Manhattan federal court with securities fraud, wire fraud and conspiracy. The two were sued in civil court by the SEC and the Commodity Futures Trading Commission, on allegations that the two had misappropriated more than $535 million and fraudulently solicited $1.3 billion from investors since 1996. The University of Pittsburgh and Carnegie Mellon have brought a civil suit against the Westridge, Walsh, and Greenwood.
So what was the alleged scheme? Apparently it was another Ponzi scheme. It seems the two just...
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took the money and spent it on themselves. They are alleged to have used $160 million for personal expenses, allegedly buying rare books, stuffed teddy bears costing up to $80,000, a horse farm, a residence for an ex-wife, and blah, blah, blah.
The State University of New York at Buffalo may have been positioned to be another victim, but circumstances and a tough conflicts-of-interest policy protected it from loss. Walsh was a member of the University of Buffalo Foundation's board, but had not been active for at least two years. According to a press release issued by the University of Buffalo:
Mr. Walsh has been an inactive member of our foundation board since March 2004. Furthermore, we have a policy that prohibits investing funds with any member of our foundation board.
The University isn't completely out of the woods. Walsh was listed on the University's Web site as a Donor of Distinction. He gave $250,000 to the university's athletic department. As a consequence, the basketball office complex is named after him. UB Alum Charged in $500M Fraud, Buffalo Business First (Feb. 27, 2009). If Walsh is subsequently convicted, the university might want to remove his name, but did the gift agreement have a "bad boy" clause permitting removal?
You can begin any number of places. Where were the auditors? The FBI complaint alleges that an employee added up the transfers to Walsh and Greenwood each year and made them sign promissory notes. See Paragraphs 17 through 20 of the Complaint. See also David Voreacos, Patricia Hurtado and David Scheer WE’s Greenwood, Walsh Boosted Lavish Life, U.S. Says. The notes were executed for every year going back to 1996, except for 1997. Didn’t the auditors wonder why such large amounts were being borrowed by the apparent principals? Didn’t the auditors wonder why the notes apparently were never paid back? Didn’t the auditors wonder what these transactions were all about? Cash was coming in from investors, so the auditors presumably would have been looking for matching investments. With that much leakage represented by the promissory notes, didn’t the auditors wonder about the investment strategy and how the investors were getting the above-average return? Maybe there is an explanation, but it isn’t readily apparent to us.
Now we don’t know whether these investments were guided by an investment committee or a staff manager at the two universities, but the investment policies and level of due diligence at each univsity should be examined. These are large universities, with lawyers, accountants, and investment managers advising them. What were these folks doing?
The news reports suggest that the funds were held by separate custodians so it isn't clear how or why these custodians released funds to the principals.
Finally, we come to the rarefied world of those firms that offer advice on selecting investments and managers. According to the Pittsburgh Tribune-Review, the advisor to the University of Pittsburgh and Carnegie Mellon was Wilshire Associates of Santa Monica-it appears as if a Pittsburgh branch was involved. Debra Erdley and Thomas Olson, California Firm Let Pitt, CMU to Invest $114M(Mar. 1, 2009). It will be interesting to see whether Wilshire Associates is sued, and even more interesting to see what sort of due diligence Wilshire undertakes. Erdley and Olson contacted Wilshire and were told by a Wilshire spokesperson:
In this case, all clients received audited financial results purportedly from well-known, independent auditors and counter-parties. They also received custodial statements from trustee banks showing the trading activity of Westridge and (affiliate) WG Trading.
The question is whether Wilshire also received and reviewed those statements.
Concerns had been raised about the relationships between Wilshire and the University of Pittsburgh's investment committee. An assistant professor of business at the university, Jay Sukits, told Erdley and Olson that the investment committee meeting minutes were "completely scripted" and were "run" by the consultants. Sukits at one time worked for Salomon Brothers and Bear Stearns. He found "serious flaws" in the way the University Pittsburgh invested its endowment. He apparently believed that the university had too much hedge fund exposure. Skukit pointed out that the university was an investor in Long-Term Capital Management and lost its investment when that hedge fund collapsed.
Something is seriously wrong in how investments are being made and managed by large foundations, charities, and universities for this and the Madoff scams to have been viable--we include the overall disastrous investment performance of endowments in that assessment. We don’t need more laws and regulations. We already have countless prudent investor laws on the books. It is time to re-examine what prudence means and requires.
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