Payments To Trustees Not Detailed
Published in print on May 8, 2011
By Rick Jurgens, Special to the Valley News
Dartmouth College is regularly violating a key portion of a New Hampshire law governing conflicts of interest on the boards of nonprofits, according to a former legislator and a lawyer who helped draft the law.
As previously reported in the Valley News, Dartmouth trustees are positioned to collect millions of dollars in fees for managing money from the $3 billion endowment overseen by those same trustees. As required by a 1996 law, Dartmouth's reports to the New Hampshire Attorney General's Charitable Trusts Unit have regularly disclosed the sums invested in trustee-affiliated funds.
But the college's reports have failed to comply with another provision of that law -- the requirement that Dartmouth also disclose the fees or other financial benefits collected by individual trustees when the college invests in funds they manage.
"They are not complying with the law," former state Sen. Jim Rubens, one of the law's authors, said in an interview. "That's very clear."
Justin Anderson, a college spokesman, said the college had met its public disclosure obligations. "Dartmouth complies with New Hampshire's pecuniary benefit law by reporting all required transactions that occurred during each fiscal year in its annual report to the New Hampshire Attorney General Charitable Trust Unit," he said in a written statement.
New Hampshire's law requires that each nonprofit maintain "a list disclosing each and every pecuniary benefit transaction, including the names of those to whom the benefit accrued and the amount of the benefit." The nonprofit must submit that information annually to the Charitable Trust Unit, where it becomes available to the public.
Dartmouth's reports to that unit since 1998 reveal the size of investment commitments at trustees' firms but not the amounts of fees paid to those firms or any other financial benefit to the trustees, according to public records examined by the Valley News. Some disclosures specify the amounts invested, which can run into the millions of dollars. Others state only that the investment was more than $5,000, the threshold for reporting set by the law.
Dartmouth "did not appear to be complying with" the provision of the law that required the college to report the size of the financial benefits accruing to some of its trustees, said Terry Knowles, assistant director of the state's Charitable Trusts Unit, in response to questions from the Valley News.
She added: "This is something that we should be asking for."
Dartmouth's failure to comply with that provision of the law is a critical omission, according to Martin Gross, who was general counsel to the state association of nonprofit hospitals and who helped draft the 1996 legislation.
The 1996 law replaced a stricter one that prohibited nonprofit officers from receiving any personal financial benefit from their nonprofits' transactions or investments.
After hearing complaints that the previous law, passed in 1994, threatened nonprofits' ability to "recruit and retain good (board) members," Gross said, lawmakers passed a less stringent law, but included disclosure requirements in an attempt to prevent conflicts of interest.
"That's exactly what they should be disclosing -- either the amount or the method of calculating the compensation," said Gross.
Dartmouth and a handful of other New Hampshire nonprofits with endowments valued in the hundreds of millions or billions of dollars often invest a portion of that wealth in private investment funds. Those investments can generate millions of dollars in fees for the managers, industry experts say.
Todd Zywicki, who was nominated by petition, elected by alumni and served on the Dartmouth Board of Trustees from 2005 until 2009, said the college's failure to disclose the fees collected from Dartmouth by trustees who are also private fund managers "shows a lot about the arrogance and cavalier attitude that the college has about what the public has a right to know."
Alumni who give to the college have the right to know how their money is being used, Zywicki added, noting that the college's nondisclosure seemed "completely incomprehensible," especially in the wake of the Bernard Madoff scandal, in which investors' funds were stolen after many failed to ask basic questions about how their money was being managed.
"They disclose what's less important, and don't disclose what's most important," Zywicki said of Dartmouth's public notices about investments made in firms where trustees are owners or managers. "If they think that their fees are reasonable, then let them disclose (them)."
Although Dartmouth doesn't normally disclose the fees it pays to private investment managers, it provided a window into the process in documents given to the state stemming from a transaction done in 2000 with a firm co-founded by Russell Carson, who was, at the time, a Dartmouth trustee and investment committee member.
After it failed at the time to publicly disclose its $15 million commitment to the Welsh Carson Anderson & Stowe buyout fund, Dartmouth in 2004 followed up by providing an unusually detailed description of such transactions in a letter sent to state regulators.
Dartmouth paid an annual management fee equal to 1.5 percent of its capital commitment to the managers of each of five private investment funds -- including two affiliated with current or former trustees -- in which the college was a limited partner, according to documents attached to the 2004 letter. Those managers also collected "carries," or performance fees, equal to 20 percent of gains in fund value, according to those documents.
Those percentages are typical in such funds, which carry the potential for large gains and commensurate risk, industry experts say.
At the end of June 2009 -- the latest date for which the Valley News could obtain reliable information -- about 8 percent of Dartmouth's endowment, or $224 million, was invested in funds owned or managed by current or former members of the college's Board of Trustees or its investment committee, according to public records and nonpublic information reviewed by the newspaper.
College officials have defended such arrangements, saying that the trustee-run funds have, overall, outperformed the market and given Dartmouth a strong return on its investment.
Additionally, they have said, all trustees disclose potential conflicts and recuse themselves from votes that might benefit them personally.
However, the college's public filings do not detail the fees going to trustees and their firms.
"Surely, to comply with the statute, the organization has to report the amount of money paid to the firm in which the trustee is interested," said Gross. "The whole point of the disclosure is to show how much money was flowing from the organization for the benefit of the board member."
And what of oversight by state regulators? Knowles pointed out that recently, the struggles of smaller nonprofits trying to survive in the slow economy has absorbed much of the attention of her office, which has limited resources.
To monitor the state's nonprofits, the Charitable Trust Unit has a $630,000 annual budget raised by collecting a $75 annual fee from each nonprofit and licensing fees from telemarketers, she said.
The unit has five full-time employees, including one financial analyst who is a certified public accountant, and three part-time employees, including one attorney, and limited "computer capability." The unit now stores filings from nonprofits on five seven-foot tall shelves in the basement of the Attorney General's Office.
Gross said he was not impressed with the state's efforts to keep nonprofits in line: "It sounds to me like the enforcement of (the pecuniary benefits law) has been a little sleepy."
The current law gives the state attorney general the power to request from a nonprofit director who receives a pecuniary benefit "copies of all contracts, payment records, vouchers, other financial records or other financial documents."
Knowles said such requests came under the attorney general's "civil subpoena power."
Whether the attorney general uses that power depends upon "whether there is a compelling state interest in asking for the information," she added.