STEVENS FALLOUT: WHO WILL BE RUNNING THE SHOW?

DATELINE: January 29, 2010, Chicago

The Stevens board of trustees may have hoped the settlement with the New Jersey Attorney General would make the recent unpleasantness disappear.   Give the press coverage and comments that we have received from a number of sources, we suspect that much to its distress, the board now...

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finds itself with what has quickly become a mess of its own making.  Settlement may have been expedient, but it left too many questions lingering.

Kathryn Masterson of the Chronicle of Higher Education raises the fundamental question in her article Terms of Stevens Institute President’s Departure Leave Some Wary of His Continued Influence (January 28, 2010).  Masterson writes:

Jack B. Siegel, a Chicago lawyer and expert in nonprofit governance, says the consulting arrangement raises several important questions that the settlement does not answer. How involved will the president be in future decisions about Stevens? Will his continued involvement affect the recruitment of the new president? And will the new president be making the decisions at Stevens, or will he or she be a figurehead, with the real decisions coming from the former president and the board?

 

"You can't tell from the settlement agreement," Mr. Siegel says. "It could go either way."

Those certainly are the questions.  Given the Chronicle’s wide circulation, you can be sure that some of the potential candidates to succeed current Stevens president Harold Raveche will recall reading Masterson’s article as they consider applying for the position or accepting an offer.  Those folks are not dumb.  You can bet they also will read the New Jersey Attorney General’s complaint and wonder whether the allegations are unfounded, as board chair Lawrence Babbio told the student newspaper, The Stute, during an interview or a meeting.  President Raveche to Resign As Stevens Settles Lawsuit (January 22, 2010).  Given the board’s continued support of Raveche, those candidates will undoubtedly wonder whether, in accepting the position, they will be playing Dmitri Medvedev's puppet to a Vladimir Putin's puppet master.  While that is an amusing analogy, candidates for the Stevens presidency may not be so amused.  We suspect that some qualified candidates will not bother to apply.  Why risk your career by walking into a mess that has not been resolved in the eyes of many stakeholders?  So the Stevens community already is paying the price for the board’s apparent wishful thinking in terms of hiring the best person to fulfill the presidency.

We are not the only ones who have raised concerns.  Masterson points to Raymond D. Cotton, a Washington lawyer who specializes in presidential contracts, who indicated that the board’s decision to maintain ties with Raveche could affect the school’s reputation and ability to raise money.

We should note that Babbio told the Stute that the new president's acclimation will be Raveche's main focus after June 2010.  Given the subjective nature of that assertion, it is any easy statement to make.  Only time will tell how things turn out.  We do note that the Stute reports that Raveche will "remain a non-voting member of the Board, but not at the same level of compensation as he received during his presidency."  We wonder whether the Stute is confusing the consulting arrangement with board membership. We are particularly puzzled by the notion of paid membership on a university board.

Let’s now turn to what the settlement means.  Finally, we have a student who is willing to speak on the subject.  More importantly, we have a student who exhibits some outrage.   Matt Neuteboom does go a bit over the top by referring to crimes and guilt in his op-ed piece that appears on the Stute’s website.  As James Walsh, the chair of the Finance & Investment Committee of the Board of Trustees points out in a January 26, 2010 message to the Stevens Community, the New Jersey Attorney General’s lawsuit was a civil rather than criminal one.  There were no allegations of criminality. 

Walsh castigates Neuteboom  by referring to the Stute op-ed piece, but not to Neuteboom by name, noting a “degree of ignorance of the structure of the legal system on the part of the writer.”  Walsh should be careful about pointing to the ignorance of a Stevens student.  If Walsh is correct, it is difficult for us to understand how a board of trustees can pay top dollar for the services of a college president who presides over a school that has produced such an “ignorant” student. 

Walsh probably didn’t intend to, but he has raised a fundamental question regarding the Stevens curriculum.  As recent problems at Toyota demonstrate, engineers and business people need to understand the legal system as they practice their chosen profession.  The world is not all numbers and formulas.  Those who rise in the corporate world often are the ones that are able to put their technical skills in the context of larger societal concerns and needs. 

We are more charitable than Walsh.  We chalk Neuteboom’s comments up to youthful exuberance.  But in the end, Neuteboom gets the central issue right when he notes that the settlement doesn’t prove anything regarding the facts—unfortunately his quote inappropriately uses the term “innocence,” but the larger point, that the settlement proves nothing, nevertheless comes through.

Walsh is technically correct in his criticisms of Neuteboom, but he might also want to direct similar criticism at Babbio, the board chair, who told the Stute, in explaining why the parties settled:

“[Attorney General Milgram] just could not prove anything…The original charges were simply unfounded…”

Babbio shows just as much ignorance of the legal system as Neuteboom.  Just as allegations in a lawsuit aren’t proof of the facts, a settlement does not prove that allegations are unfounded.  That is only Babbio's opinion.   

Walsh adds to the confusion with his memo, stating that:

All of the initial components of the complaint concerning the endowment and financial management were dropped by the NJAG.  Also of significant interest to some, there never have been "two sets of books" to track Stevens financial results and any continuing allegations by individuals to the contrary simply is false and misleading.  The NJAG completed the Settlement without finding any impropriety in Stevens financial bookkeeping.

We find this statement to be highly ambiguous in terms of what has transpired.  Is Walsh saying that the New Jersey Attorney General came in midway through the investigation/lawsuit and said, "We were mistaken, so we will continue to look at other issues, but we agree with you on the issues we are dropping?"  Or is Walsh just stating the obvious, that the New Jersey Attorney General dropped all allegations as a legal consequence of the decision to settle?  In other words, does the New Jersey Attorney General still believe her allegations, but decided to settle, or did the New Jersey Attorney General affirmatively conclude she was wrong.  If it was the latter, why didn't the settlement reflect that fact?

To best describe what this sort of settlement means, we offer the following analogy:  It is the bottom of the ninth in the last game of the regular season.  Two outs, two strikes, and three balls.  A non-steroided batter is up who has hit 61 home runs this year.  Roger Clemens winds up and throws the payoff pitch.  Will the batter break Roger Maris’ home-run record?  The crowd stands on its feet in anticipation.  The ball speeds forward.  And then five feet from the plate, the ball stops, suspended in mid-air.  Game over.

At the end of the day, all the questions raised by the allegations are still floating about in the ether even though the parties to the lawsuit decided to move on.  High school students considering a college career at Stevens, alums who are considering major donations, grantmakers who are considering research grants, and applicants for academic and administrative positions all must be wondering what the truth actually is.

There is a simple solution to the problem that Stevens now faces:  The board should retain a national law firm with no New Jersey connections to conduct an independent investigation of the allegations in the New Jersey Attorney General’s complaint.  In the engagement letter, the board should establish the independence of the law firm and all who will be involved in conducting the investigation.  It should agree to provide the law firm with access to all documents and permit the law firm to interview all relevant parties.  The engagement letter should be posted on the Stevens website.  When the report is complete, it should be posted on the Stevens website. 

When the New Jersey Attorney General’s lawsuit was pending, Stevens had every right to lawyer up, invoke attorney-client privilege, and refuse to release documents or respond to inquiries from the press, the student body, faculty, and the alumni.  But with the settlement in place and the attorney general barred from bringing a lawsuit over the issues raised in the attorney general’s complaint, Stevens has little to lose and much to gain from a full airing of the facts.  The Stute reports that Babbio told them an IRS audit is close to resolution, which, depending on the nature of the audit, might remove many concerns over subsequent IRS action.  

If the board refuses to initiate an investigation, the interested parties are not without recourse.  The school’s Form 990 is a publicly available document.  In the normal course of events, people turn to GuideStar’s online database to obtain Form 990s for tax-exempt organization.  The service is free and can be accessed at http://www.guidestar.org.  Unfortunately, there often is a delay before GuideStar posts the returns, particularly if the returns are electronic.   GuideStar currently provides the Stevens Form 990 for the fiscal year ending June 30, 2008.  It is interesting, but the return for the fiscal year ending June 30, 2009 will be far more interesting because the IRS redesigned the form to require far greater transparency.  That return was due November 15, 2009, but we would not be surprised if Stevens took advantage of the automatic three-month extension, which would put the due date at February 15. Stevens, however, could have applied for an additional three-month extension (not automatic), pushing the due date out to May 15, 2010.  In any event, there is nothing wrong with making periodic requests for this return.

Under Section 6104(d)(1)(B) of the Internal Revenue Code of 1986, as amended, Stevens must provide a copy of its Form 990 “upon a request of an individual made at such principal office or such a regional or district office.”  Stevens may not charge a fee for providing copy other than to cover reasonable copying charges.  There are monetary penalties for failure to timely comply with the request.

If a stakeholder decided to file a request for the return for the fiscal year ending June 30, 2009, they should pay close attention to the following sections of the return:

Core Form: Part VI:  Governance, Management, and Disclosure. The focus should be on questions 1b and 2, which focuses on director independence and relationships among insiders.  The Schedule O disclosure should be reviewed carefully.  The responses to questions 15 (determination of compensation) and 16 (joint ventures) could prove interesting.

Core Form: Part VII:  Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors.  This will provide basic information about amounts of compensation.  The focus should be on Column E of Section A, Compensation from Related Organizations, and on Section B, Independent Contractors.

Core Form: Part s VIII, IX, and X, which is where the financial information is disclosed.  Unfortunately, this data is not required to be GAAP compliant, but it should provide a pretty good preview of what will be in the audited financial statements if they have not already been released .

Schedule F:  Supplemental Financial Statements.  The focus should be on Part V, endowment funds.

Schedule J:  Compensation Information.  Based on newspaper accounts, we suspect that Stevens is required to file Schedule J, which includes more detailed information.  Of particular interest will be Part I, which looks at a number of executive perks, including housing allowances, first-class travel, discretionary spending accounts, and travel for companions.

Schedule L:  Transactions With Interested Transactions.  Of particular interest will be Part I, Excess Benefit Transactions, Part II, Loans with Interested Persons, and Part IV, Business Transactions Involving Interested Persons.

Schedule R:  Related Organizations and Unrelated Partnerships.  If there are related organizations listed, further investigation will be required to determine why activities are being conducted through those organizations rather than directly by Stevens.

And don't forget to read Schedule O in its entirety.

With the Form 990 in hand, stakeholders will be better equipped to develop their course of action, if any.

And to the editors of the Stute, instead of asking how students like the new KenKen (apparently a puzzle website) on the Stute's website, why not ask how they are reacting to the settlement?

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