How Not to Run a Foundation: The Ongoing Saga of U of L

April 25, 2018; US News & World Report

The newest chapter in the story of the University of Louisville Foundation, which is quickly becoming a case study for how not to run a philanthropic foundation, is all about a lawsuit.

The university and its affiliated foundation have filed suit in Jefferson Circuit Court, charging six defendants in the civil action with disguised transactions that depleted the endowment, breach of fiduciary duty, and diverting funds for personal gain.

Keeping in mind the staffing of many foundations and the opportunities to go off track, this is quite a list of defendants. It starts with the former president of U of L, James Ramsey; his chief of staff and assistant secretary to the foundation, Kathleen Smith; and the legal firm of Stites and Harbison, which served both the university and the foundation at the time of the questionable transactions. Also named in the lawsuit is Burt Deutsch, board member of the U of L Foundation, a member of the executive committee, and a paid consultant to the foundation. Michael Curtin and Jason Tomlinson, also named, were assistant treasurers for the foundation. The suit leaves the door open for any others found to be involved.

Ramsey was the U of L president for 14 years, and he was also the president of the foundation. He resigned in 2016 and took a buyout of almost $700,000. Last year, NPQ wrote of the audit that revealed the malfeasance and the overspending of the endowment on risky, speculative ventures; the pushback from the former CFO; and the donors’ perspective.

The forensic audit cost $2 million, and $1.5 million has already been spent in ongoing legal fees. Including the loss of over $42 million and counting from the endowment, it is an expensive lesson for the foundation. Lawsuits can be costly.

“When you keep on peeling the onion back and you see what some of the actions that were taken, it boils down to it’s the right thing to do,” U of L Foundation chair Earl Reed said.

“When certain activities occur that are so egregious and wrong for the future of the university and the foundation and our donors, you just can’t sit back and let it go,” he added.

They voted to proceed with the lawsuit, Reed said, “not only to restore confidence in the university, but also to recover funds that were intended to support the educational mission of the university.”

In answer to the inclusion of the law firm in the suit, Andrew Campbell, an attorney for the university and foundation, said, “We believe the evidence will show that that firm stepped over the line from simply being legal consultants and providing legal advice to a much more active role.”

Kentucky’s attorney general, Andy Beshear, worked previously as an attorney for Stites & Harbison. U of L trustees Chairman David Grissom said Wednesday that Beshear had “no involvement or culpability whatsoever” in actions alleged in the lawsuit.

The chairman of Stites & Harbison, Bob Connolly, stated he had not seen the lawsuit but he has confidence in their attorneys’ work for the U of L Foundation.

The U of L Foundation has developed policies and put changes in place to address the gaps in governance. The board, with all new members, must approve in writing any investments in real estate or companies. Deferred compensation is forbidden and the university president is prohibited from leading the foundation. The foundation must also have a line-item budget. (It is surprising that a university-affiliated foundation that is almost 50 years old, has assets of over $750 million, and has to answer to donors, did not have a line-item budget.)

Philanthropic foundations would do well to pay attention to the cautionary saga of U of L Foundation, from the start of its small governance missteps up to the apparent misuse of dollars for personal gain. An engaged board with written policies in place that’s educated in its role in the fiscal oversight of the organization is a major barrier to practices that could lead them to be a defendant in a lawsuit, like former board member Deutsch. The dollar award, if the plaintiffs win, could rise above the Directors and Officers insurance policy coverage.—Marian Conway

  • David Patt

    We have to be careful not to overreact to management screw ups and ethical transgressions by thrusting Board members and other volunteers into those management roles.

    It’s important to have controls – for both staff and Board – that prevent misuse of funds and that flag financial problems, if they emerge, so they can be corrected quickly. The goal is to have everybody do their jobs – volunteer and paid – as they should, to benefit the organization, to wipe out conflicts of interest, and to comply with Board and other regulatory directives.