Letter urges investigation of Board

By Diana Ming, The Dartmouth Staff

Published on Wednesday, May 30, 2012

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An anonymous group of College faculty and staff members are calling for an investigation of the Board of Trustees for alleged endowment mismanagement and conflicts of interest in the College’s investments, according to College General Counsel Bob Donin. Director of Media Relations for the College Justin Anderson said that the letter’s accusations are “inaccurate, misleading and irresponsible,” and the College recently defended its practices in a May 25 article published by FUNDFire, a newsletter of The Financial Times.

The group, known as “The Friends of Eleazar Wheelock,” sent a whistleblower letter to several government officials, including New Hampshire Attorney General Michael Delaney.

The New Hampshire State Attorney General’s Office received a copy of the letter in February and announced Tuesday that it is currently reviewing the allegations before deciding whether to pursue further investigation, according to Director of the Charitable Trusts Unit Anthony Blenkinsop.

The letter accuses the Board of several offenses, including directing the College’s endowment into hedge funds, venture capital and private equity funds with ties to Board members.

“For over a decade we have been witnessing the quiet takeover of this great College by a cabal of external, wealthy alumni/ae of the college,” the letter said.

The letter attempts to create a false impression that members of the Board have used their positions to influence the College to invest in their firms, according to Donin, who said he has no information regarding the identities of “The Friends of Eleazar Wheelock.”

“Dartmouth follows a very careful due-diligence process which assures that every investment decision is made independently based on recommendations by the professional staff of the investment office and on an arm’s-length basis,” Donin said.

The accusations suggest that the trustees have “furthered their own self-interest at the expense of the College and the Upper Valley” by receiving management fees through investments managed and owned by Board members. These actions are a violation of the non-profit status of Dartmouth based on state law, according to the letter, whose authors have advocated for the resignation of Board members on the College’s Investment Committee with such conflicts of interest.

High ratings from independent financial agencies indicate that the College meets its financial commitments and maintains obligations at low credit risk, Anderson said in an email to The Dartmouth.

“It’s worth noting that Dartmouth’s long-term debt carries the highest credit rating — AAA — from Fitch, which notes the College’s ‘strong balance sheet liquidity; healthy fundraising ability; and diverse revenues further support the rating and provide the college with a healthy financial cushion,’” Anderson said.

Dartmouth’s investment decisions are in compliance with state law, and financial transactions with companies that are affiliated with members of the Board require a two-thirds majority vote among the trustees, excluding the associated member, according to Donin.

“After it has been approved, the notice of the transaction is filed with the attorney general of the state of New Hampshire, including the amount of the investment and the name of the company involved and the trustee who is associated with that company,” Donin said. “In addition, that same notice is published in the newspaper.”

The state retains the right to contact the College in the case of concerns regarding an investment decision but has never exercised this right, according to Donin.

The letter distributed by “The Friends of Eleazar Wheelock” includes a list of 10 trustees, of the Board’s 25, with ties to the investment industry, as well as details regarding the portion of the College’s endowment invested in their respective funds.

“For years Dartmouth has been run by and has paid sky-high fees to a group of investment manager trustees, all Dartmouth graduates, who have then recycled some portion of the fees (for which they were taxed at a favorable 15 percent) back to the College as generous ‘donations,’” the letter said.

The list includes Vice Chairman of Morgan Stanley Bradford Evans ’64, private equity executive and founder of Apollo Management Leon Black ’73 and Chairman of the Board and founder of Lone Pine Capital Stephen Mandel ’78.

In each of these cases, the College began investing with the company before the affiliated individuals joined the Board of Trustees, according to Donin.

Although the letter implies that the College’s investments in alumnus or trustee-managed funds or companies is improper, this accusation is “categorically untrue,” Anderson said.

“These investments are explicitly legal and entirely proper, and Dartmouth meets or exceeds all provisions under the law governing such transactions,” he said.

The letter states that Mandel’s firm Lone Pine Capital manages over $130 million of the College’s endowment and that the College has paid Lone Pine an estimated $24 million in fees. Donin said that these management fees are not unusual and reflect “typical” fees paid in the industry.

The letter also states that investments in Board members’ firms have “average to poor” returns, failing to financially benefit the College, and cites a 2010 report from the Tellus Institute questioning the College’s investment strategy.

The College’s Investment Committee considers the recommendations of the professional staff of the Office of Investments, according to Donin. Employees of the office prepare memoranda documenting the performance of proposed investment companies and comparing the terms of the transaction to the terms of similar transactions with companies not affiliated with trustees.

While the membership of “The Friends of Eleazar Wheelock” has not been determined, faculty interviewed by The Dartmouth expressed the importance of examining the College’s management practices for ethical purposes.

History professor Russell Rickford said that while he was unaware of the whistleblower group before reading an article on Business Insider, Dartmouth students should consider the implications of higher education and Wall Street becoming more synonymous and intertwined. “Higher education is a center for the production of knowledge and the cultivation of independent thought, critical thought,” he said in an email to The Dartmouth. “Wall Street and the financial sector are the centers for the reproduction of privilege and the expansion of corporate hegemony. There are — or should be — profound conflicts between these two missions.”

A Tuck School of Business professor who wished to remain anonymous due to the controversial nature of and a lack of information about the subject said that the alleged practice of investing in firms managed by alumni seems both “unusual” and “disappointing.”

“My honest interpretation is that these guys believe that their funds are better than any other alternatives,” the professor said. “It’s more a sign of hubris rather than greed.”

The College’s investments in trustee-related funds and companies have allowed the College to succeed financially, according to Anderson.

“Had we chosen to exclude these funds as an option for our investment staff simply because of a connection to an alumnus or trustee, our endowment returns would have been lower,” he said. “Overall, Dartmouth’s endowment has performed in the top-quartile for the 10-year period ending June 30, 2011 within three applicable universes of higher education and/or non-profit institutions.”

A 2010 Chronicle of Higher Education study of 618 private colleges reported that 25 percent of these institutions have financial ties with trustee-affiliated companies.

The Chronicle found that the IRS requires colleges to disclose potential conflicts on their tax returns in an effort to promote transparency and discourage abuses.

“But how those conflict-of-interest polices are written varies widely, as does the level of disclosure in tax forms,” the article said. “Conflicts involving boards have caused hand-wringing in some higher-education circles for decades, particularly when a scandal flares. Where to draw the line remains murky.”

Similar conflict-of-interest accusations have been made at a number of Dartmouth’s peer institutions.

A report released by Tellus found that the Harvard Management Company, the private investment management corporation that manages Harvard University’s endowment, is “among the worst offenders in transparency,” citing its failure “to identify by name the board members involved in related party transactions.” The report also listed Williams College, Boston University and Tufts University as among the least transparent institutions in reporting related-party transactions involving members of the schools’ boards of trustees.

College Chief Investment Officer Pamela Peedin did not respond to requests for comment by press time.

Staff writer Sharla Grass contributed reporting to this article.