DATELINE: September 29, 2009, Chicago
A little under two weeks ago, New Jersey Attorney General Anne Milgram filed sued against the trustees of the Stevens Institute of Technology, Harold J. Raveche, Lawrence Babbio, and unnamed John and Jane Does in what, if the allegations prove true, could prove to be the story of the year in the nonprofit world. The 90-page complaint is sweeping in its allegations. Raveche is the CEO and Babbio is the chairman of the board and a member of the executive committee. While there have been incidents involving excess compensation, violations of the terms of restricted gifts, deception, failed investment management, and breach of the duty of care, we can't...
|
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives
Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour. |
recall seeing a complaint packed with so many and such a wide variety of alleged wrongdoings. The allegations, for example, go way beyond what we saw several years ago in the American University controversy over executive compensation.
AG Milgram obviously wants to throw the book at the defendants. She isn’t pulling any punches. She charges gross negligence, imprudence and ultra vires transactions in what appears to be an effort to preclude the defendants from taking advantage of any statutory shields from liability. We don't have the insurance policies or any indemnification agreements, but we would be willing to bet that if AG Milgram can prove that level of malfeasance, then the defendants will be denied coverage under D & O policies and will be precluded from obtaining payments under any indemnification agreements.
In anticipation of AG Milgram’s action, Stevens filed a pre-emptive lawsuit, requesting that AG Milgram pursue her remedies through closed-door arbitration. James Queally, Stevens Tech Makes Pre-Emptive Move as AG is Set to Slam Hoboken College, New Jersey.com (Sept. 17, 2009). The Stevens request was apparently rejected by the court. Katherine Santiago, N.J. Attorney General Accuses Stevens Institute Officials of Mishandling Endowment Funds, New Jersey.com (Sept. 17, 2009).
As Stevens pre-emptive suit suggests, AG Milgram’s own lawsuit was not a surprise. It followed a two-year investigation. In early September, AG Milgram met with the Stevens board of trustees, informing them that she planned legal action that would threaten the school’s accreditation. The board was given two weeks to agree to what were termed “non-negotiable” changes, according to New Jersey.com’s James Queally’s report. The board appears to have rejected AG Milgram’s offer, with a school spokesperson telling Queally, “The board's view is that the attorney general has wildly overstepped her authority by trying to substitute her judgment for that of a Board of Trustees that is composed of sophisticated men and women. If the allegations can be proved, we suspect that the board has made a gigantic mistake by deciding to contest the allegations."
AG Milgram apparently is not alone in her efforts. According to AG Milgram’s complaint, the IRS has been auditing Stevens. Paragraph 49 of the complaint indicates that Stevens has already paid $750,000 in penalties and unpaid taxes of subsidiaries. According to Paragraph 179 of the complaint, the IRS audit is expansive and includes issues pertaining to Raveche's compensation.
Here is a summary of the specific allegations:
1. CEO Harold J. Raveche’s compensation is excessive (Paragraphs 54-56). It is worth noting that Raveche also is president, serves as a voting trustee, and is an ex officio member of the executive, audit, and investment committees. For Fiscal Year 2007, Raveche’s salary and bonus exceeded $770,000. He also was the beneficiary of a below-market loan, a $54,000 housing allowance, a $24,000 tuition subsidy, a $14,110 automobile subsidy, and was reimbursed more than $100,000 for “expenses,” according to the complaint. As regular readers know, we aren’t big fans of challenges to compensation when payment of that compensation can be supported by comparables. In this case, AG Milgram appears prepared to challenge the comparables. In the complaint, for example, she points out that the president of MIT only received $635,294 in bonus and salary for fiscal year 2007. She notes that MIT’s annual operating expenses exceeded $2.3 billion while Stevens’ expenses were less than $158 million. Section VII of the complaint provides much more detail regarding Raveche's compensation. In one instance, the Compensation Committee apparently approved a $500,000 loan to Raveche which it planned to forgive. The committee allegedly failed to inform the full board of its intentions (Paragraph 338 through 342). Other statements in the complaint allege that the full board was not informed of increases in Raveche's compensation (Paragraphs 343 through 352).
2. The board of directors set an endowment spending rate, as required by New Jersey’s version of the Uniform Management of Institutional Funds Act (UMIFA). The rate was set at 5.4% from 2000 to 2006. The complaint indicates that the Raveche and the Stevens administration spent well in excess of the 5.4% rate. In 2000 and 2001, for example, the spending rates exceeded 9.5% (Paragraphs 61 through 72).
3. In addition to legal endowment, Stevens also had quasi-endowment that was established through board action. According to the complaint, quasi-endowment could not be spent without board approval. The compaint alleges, for example, that in 2005 the Stevens Administration spent somewhere around $5.5 million of quasi-endowment without board approval (Paragraphs 73 through 85).
4. One of the more interesting set of allegations involved borrowings under lines of credit (Paragraphs 73 through 85). AG Milgram asserts that the board did not properly authorize collaterizing certain assets as security for those lines of credit. Even more notable is the assertion that the collateralization with certain trust assets violated donor-imposed restrictions. It isn’t just AG Milgram who has questioned the collaterization. In December 2004, PriceWaterhouseCoopers concluded “security’s pledged may have been from endowments whose purpose are restricted to use and for which the corpus cannot be used to secure financing.” Many organizations have asked whether they can pledge restricted assets. There often is not a clear answer to that question, which makes the possibility of full blown litigation over the issue intriguing.
5. AG Milgram asserts that the Stevens Administration misstated operating results in Annual Reports from 1999 to 2005 (Paragraphs 132 through 137). For example, in 2002, the annual report showed a $3,702,095 in operating surplus while the annual financial statements reported only $1,025,411 in operating surplus. Even more shocking, is the report of a $464,123 surplus in the 2003 annual report while the audited financial statements reported an $8.5 million negative number. These numbers were taken from a table in the complaint (Paragraph 132).
6. AG Milgram cites at least two instances where endowed funds were mismanaged. One was the Alexander Crombie Humphreys Endowment (Paragraphs 193 through 208). The apparent problem with this endowment surfaced when a department head requested information about the endowment. According to the complaint, “Stevens pooled the ACH Endowment income into its general operating budget, and treated the ACH Chair as indistinguishable from any other professor at Stevens.” Apparently during certain periods none of the assets in this fund were used to fund the chair or department in question. In the case of the Clement M. Bonnell, Jr. Memorial Scholarship Fund (Paragraphs 209 through 229), the scholarship funds were misapplied because scholarships were awarded to candidates that did not qualify for the scholarships or were awarded as part of an overall scholarship package rather than "over and above any aid package to the student." In one case, one of the recipients didn’t even know the recipient had received the award. After discussions with a Bonnell family member, Stevens simply returned the fund’s corpus to the family.
7. Stevens is the beneficiary of a major gift referred to as the Taylor Trust. Based on the complaint, we don’t believe we have sufficient facts to describe the allegations in detail, but AG Milgram appears to be troubled by how Stevens dealt with this endowment (Paragraphs 230 through 275). At one point in the complaint, AG Milgram asserts that the Finance and Investment Committees took actions with respect to the fund that required full board approval without obtaining that approval. What it particularly troubling to AG Milgram is that Stevens apparently now maintains that the Taylor Trust provisions are none binding. AG Milgram also is concerned that the Taylor Trust assets are now being pooled with the remaining endowment.
8. AG Milgram asserts that Stevens and those charged with investing its endowment have failed to adequately diversify the investment portfolio (Paragraphs 276 through 322). The focus is on alternative investments in the investment portfolio, which jumped from 27.09% of the total portfolio in 2005 to 60.14% in 2008, according to the complaint. Under the asset allocation plan written into the investment policy and the investment committee’s charter, the investment committee is required to rebalance the portfolio whenever an asset class is below or above 15% of the neutral value of the asset allocation plan. AG Milgram assets that there was a failure to rebalance in accordance with the asset allocation plan.
In our next post, we will consider how outside professionals factored into the goings on, as well as the governance structure that may have led to and fostered the alleged behavior.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
Copyright 2009, Charity Governance Consulting LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "A Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good" and this web blog. For additional information call 773-325-2124
