Asset management - Columbia Law School

I. Identifiying Violations of Law: Asset management
Michael DeLucia, Director of Charitable Trusts, New
Hampshire Attorney General's Office
Case Study #1: St. Paul's School
The Form 990 for St. Paul's School disclosed $400,000,000 in investments. Our Office
discovered: no effective Investment Committee; no effective Investment Policy; no effective
Board oversight. 62% of its investments were in "alternative investments" (e.g.,
limited partnerships, private equity). Questions for regulators: Is this prudent? Who
monitors the 52 limited partnership agreements? How do you determine the value of each
limited partnerships? What is the total amount that each limited partnership could "call" for
additional cash contributions? (Answer: $52,000,000) Attorney General's choices: remove the
board of trustees? craft a settlement? (Footnote #1: on October 6, 2009, Stanford University
announced it was selling off all of its “alternative investments.”) (Footnote #2: A second
inquiry into excessive compensation of its Headmaster followed. ($527,000 per year.) He was
the third highest paid headmaster in the nation, earning more than the President of Harvard.
Lesson here: poor governance practices in one area may indicate poor governance practices in
Case Study #2: Ashcroft-Simpson Trust and Von Weber Trust.
These trusts were managed by well-known lawyers.
(a) In the Ashcroft-Simpson Trust, the trustee failed to develop an Investment Policy; failed
to diversify the investments; failed to make distributions (scholarships) to beneficiaries; and
failed to file accountings with the Charitable Trust Unit. The AG’s Office filed a Petition to
Remove the Trustee/Appoint a Special Trustee to rebalance the portfolio and develop an
Investment Policy. The trustee must pay the expenses of the Special Trustee and a penalty to
the AG’s Office.
(b) In the Von Weber Trust, the trust documents required two trustees (not one); but the
trustee acted by himself, never named a co-trustee, and never named a successor-trustee. Upon
his death, there was no one to step into the trustee's shoes. The trustee had invested in a 1960's
style (a handful of large American corporations) and did not diversify. The AG's Office filed a
Petition to Appoint a Special Trustee to develop an investment policy, rebalance and diversify
the portfolio. Question for AGs: In 2009, what is a good investment policy? What is prudent
in a global economy?
Growing Significance of the Issues and the UTC. Charitable Trust regulators need to look
"under the hood" and "kick the tires" on the investment and financial aspect of our charitable
trusts, whether large or small. Many trustees are not aware of the provisions of the Uniform
Trust Code (UTC) that spell out the "duty to diversify" and that specifically address what is
prudent behavior. One major lesson of the Madoff scandals is the lack of prudence on the part
of large charitable institutions in selecting an investment advisor, in monitoring the
investments, or in simply performing "due diligence." The UTC is now the standard by which
we measure trust behavior.
More specifically, see the UTC sections 8-801 (Duty to Administer, Invest and Manage); 8-802
(Duty of Loyalty); 8-804 (Duty of Prudent Administration); 8-807 (Delegation by Trustee); 8809 (Duty to Protect Trust Property); 8-813 (Duty to Inform); and 9-903 (Diversification).
III. Using an Organization's Filings Against It
Articles, Bylaws, Trust Agreements, Form 990s and Audited Financial Statements
Case #1: Butnam Foundation. The Foundation's attorney called to inquire about termination
of the Foundation. Upon examination of the articles, bylaws and board minutes, it was
determined that the Foundation had sold voting shares to trustees for $1,000 per share.
Consequently, one trustee had 2 shares, another 3 shares, and the third had 412 shares (costing
$412,000). This issue (the sale of shares in a charity) is now in Probate Court in New
Hampshire and also the subject of legislation. In the Butnam case, the bylaws were violated
(required to have a minimum of 5 trustees, not three) and the charitable mission was not
honored in full (all distributions were made to one charity in Maine) and their is some question
of self-dealing. Lesson for charitable trusts: do not put the articles and bylaws in the bottom
draw; they are critical to your fulfilling your fiduciary duties - and avoiding litigation.
Case #2: Spartan Marching Band. Here, a 50-year old award-winning charity assumed too
much debt and had a board that was dysfunctional. The two sons of the founding father
brought division and conflicting personalities to the board. The board failed to file the required
audited financial statements for two years; the AG's Office brought a Petition to Remove the
Board for Breach, after discovering in the board minutes that the board intentionally failed to
file the statements. Overwhelmed with debt, the board planned to file for bankruptcy.
However, our examination of the board minutes, the financial statements, the invoices and
contracts led us to believe there were basic breaches of fiduciary duties. The board was
imprudent in assuming so much debt.
Case #3: The Sargent Museum. In 1995, the Sargent Museum was established to develop a
home for some 900 boxes of Native American artifacts discovered in Manchester. The City of
Manchester sold an historic building to the board of directors for $1.00 to develop a Museum;
the State of NH gave a grant to develop the Museum; and donors contributed funds. In 2005,
the building was in disrepair, nothing had been developed, the homeless lived in the building,
and the board lacked the necessary 5 minimum trustees. The AG's Office examined the
articles, bylaws, contracts, and grants and filed a Petition to Remove the Board and Appoint a
Special Trustee.