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College Stonewalls on Investment Fees Paid to Trustees; NH AG Caves

Kudos to the Valley News for its extended reporting on the College’s investment of endowment funds with Trustees’ investment vehicles. The series, entitled “Dartmouth’s Conflicted Guardians?,” noted on August 3, 2011 that the NH AG had ordered the College to disclose the various fees paid to Trustees as part of their management of the endowment’s funds. However, Rick Jurgens’ extended piece on Sunday in the VN reports that Anthony Blenkinsop, director of the New Hampshire Attorney General’s Charitable Trusts Unit, has accepted Dartmouth’s assertion that these fees “cannot be quantified,” and he has withdrawn the demand.

Jurgens details the clear requirements of NH law on investments by interested parties in non-profits:

New Hampshire law prohibits nonprofit organizations from engaging in transactions in which a director or officer has a direct or indirect financial interest, except under specified conditions:

* To be permissible, two-thirds of a nonprofit organization’s governors not involved in that transaction must determine that it is in the organization’s best interest and fairly priced.

* Transactions of more than $5,000 must be publicly disclosed in advance.

* In addition, the law requires that the organization keep a list of all transactions, the amount of the transaction, the interested party and the fees paid to him or her, and submit that list to the state along with its annual report, which is available for public review. That list must also be made available to all trustees and to an organization’s contributors.[Emphasis added]

In an example of fine investigative journalism, Jurgens notes that while Dartmouth supposedly can’t quantify these fees, former Trustee Leon Black’s Apollo Investment Fund VII, in which the College has an investment, is somehow able to disclose its fees in precise detail to the California Public Employees Retirement System:

Other investors routinely compute and disclose fees paid to managers of investment funds. For example, the California Public Employees Retirement System regularly discloses the fees it pays to Apollo Investment Fund VII, a fund in which Dartmouth also has a stake.

According to its public filings, the California system valued its Apollo VII stake at $489 million at the end of fiscal 2011, and paid the fund’s managers $10.7 million in management fees during calendar 2011 and $9 million in 2010.

Dartmouth revealed its stake in Apollo VII because Leon Black, the founder and CEO of Apollo Global Management, which manages the Apollo VII fund, was a Dartmouth trustee in 2007 when the college committed to invest $25 million in Apollo VII. However, Dartmouth has not publicly disclosed its fee formula or payments to Black’s firm.

The College’s position on this matter is ridiculous on its face. How can a financial transaction be non-quantifiable? Perhaps when an investment of the endowment’s money is initially made, one cannot know what a hedge or private equity fund’s total fees will ultimately be — as, for instance, in a “2 and 20” transaction, where a 2% annual management fee and 20% of the annual profits go to a fund’s managers — but over the life of the investment, on a year-to-year basis, everyone involved knows what the fees are down to the last penny. The law says nothing (see the bolded text above) about only reporting fees in advance at the time of the investment; the text clearly allows the interpretation that fees must be disclosed as and when they are paid. That is why the law says that the organization shall “keep a list” and “submit that list to the state along with its annual report,” i.e. each year.

As another example, if the College were to enter into an agreement with a Trustee’s law firm or accounting firm for ongoing services, the total fees to be paid would not be quantifiable at the start of the relationship. But obviously the law foresees the importance of the College disclosing these fees each year, so that members of the Dartmouth community may understand the extent of the College-Trustee relationship and the self-evident conflict of interest that it engenders.

Dartmouth’s College Counsel Bob Donin must be chuckling to himself that he got out of this pickle so easily. However, the deeper question remains as to why the Trustee money managers are loath to reveal information about fees. My surmise: there are a good number of funds that were wiped out in 2008, and perhaps in other years, and nobody wants that fact known.

What to say about this situation? Dartmouth is a big time school in a small state. The good old boys of the Trustee cabal have survived yet another test.

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