Experts: U of L officials improperly invested own money in foundation-backed companies
Andrew Wolfson
Updated 12:36 p.m. ET Jul. 6, 2017
They met in President James Ramsey’s conference room, with no notice to the public.
They were called the “Entrepreneurial Group,” a select panel of University of Louisville Foundation board members, officers and outside consultants who recommended investments in new ventures to the foundation and to Ramsey.
Former U of L Chief of Staff Kathleen Smith and former President James Ramsey
Courier-Journal
So far, their picks have miserably underperformed, as noted in the recent scathing audit by Alverez & Marsal. The 11 biotech startups recommended by the group received $9.9 million and are now worth only $1.7 million.
But that's not all. The audit says some group members, foundation directors and university trustees piggybacked on the deals, personally investing in some companies after the foundation did so – without disclosing it to the foundation board.
Related: What will U of L Foundation board do to address freewheeling spending?
More: U of L could claim $20M in insurance to recover money depleted by foundation
In a 2013 email cited in the audit, foundation officer Kathleen Smith, Ramsey’s chief of staff, said trustees were “significant investors” in one of the companies, Advanced Cancer Therapeutics – ACT – into which the foundation had invested $3.2 million.
C. Kerry Fields, a University of Southern California Marshall School of Business professor and ethics expert, said it is unethical for an investment adviser or foundation director to make such investments.
Fields said that is a conflict because an adviser or director might urge the board to stick with or increase the investment to protect their own money even if it might be in the foundation’s best interest to sell.
“You can’t give prudent advice if you are invested in the company,” he said.
Other ethicists contacted by the Courier-Journal, including David Vogel of the University of California at Berkeley and Christopher MacDonald of Toronto’s Ryerson University, said at minimum the personal investments should have been disclosed to the foundation board.
In that memo to foundation chief financial officer Jason Tomlinson, Smith said she was concerned the university’s compliance officers – she called them the “compliance gestapo” in another email – were poised to accuse the ACT investors of a conflict of interest.
More: How much money would U of L have to pay back to the NCAA?
Background: Audit rips into U of L Foundation for bad investments, compensation, hiding payments
The audit report, released June 8, determined the personal investments were “not transparent" and were not disclosed on conflict of interest forms. Numerous foundation directors also said they were unaware of them.
The audit report doesn’t identify which Entrepreneurial Group members, directors or trustees made their own investments, and the foundation hasn’t responded to an open records request for that information. Smith’s lawyer, Ann Oldfather, said the company would be the best source on who invested but Randall Riggs, ACT president and CEO, did not respond to phone calls.
Entrepreneurial Group members Ed Glasscock and Frank Weisberg confirmed they each made a single investment in one of the companies.
Weisberg said he invested in ACT after the foundation put in about $3.2 million.
“I invested in ACT and I didn’t think there was anything wrong with it,” he said, noting it was open to public investment at the time.
Glasscock said he put $50,000 of his own money into TNG Pharmaceuticals, which developed a vaccine to keep flies off cattle, after the foundation invested $250,000. He said he contacted Smith, who was also the Entrepreneurial Group’s chair and assistant secretary of the foundation, for approval.
In a memo cited in the audit, he said he was asking her permission because “of my conflict due to my involvement with the foundation.”
Smith on Dec. 18, 2013, directed Glasscock to invest through an outside venture capital fund “so that any investment by you would be protected from ORR” – an open records request that would make the investment known to the public.
Glasscock now says there is nothing wrong with investment advisers investing in companies they recommend because they are, in effect, putting their money where their mouth is.
Oldfather told the Courier-Journal that Smith said “she was merely passing along information that Ed may want to consider” and that “it was of no matter to her one way or the other” if Glasscock invested because the foundation already had.
However, the same email says the foundation agreed to a further investment of $250,000, if the company needed it.
Glassock said in an interview that he made his investment directly, without using a venture capitalist, and that he has no idea why Smith thought he would want to avoid public disclosure.
“There was no reason for me to be concerned about it,” he said. "I didn't want to hide anything."
The Entrepreneurial Group, which was created by the foundation, had at least six members, according to the audit. In addition to Smith, Weisberg and Glasscock, it included Mike Curtin, the foundation's assistant treasurer, Burt Deutsch, a director and later consultant, and Tomlinson, chief financial officer.
Weisberg declined to comment on the quality of the Entrepreneurial Group's advice, or whether the foundation got its money’s worth.
The value of the foundation investments, which were made from endowment funds, has declined 83 percent, and several of the companies are closed or bankrupt, auditors found. They also said the foundation is likely to lose another $3.2 million in loans and other benefits it gave to the companies.
The foundation's nearly $3.2 million investment in ACT in 2010 is now valued at zero, according to the audit. Only three of the investments gained in value – one by just $192.
Glasscock called himself “one of the most knowledgeable merger-and-acquisition lawyers” in the region, and said he was worth what he was paid.
The report says that Glasscock was paid an $8,000 monthly retainer through his firm, Frost Brown Todd.
Deutsch was paid $10,000 per month starting in 2014, the year after he left the board, for a total of $263,000. He told the Courier-Journal that he made no personal investments in the companies. He said he hadn't read the audit and wouldn't comment on it.
Glasscock said he disputes the current valuations put on the startups in the audit report and said many of them could still be profitable in the future.
He said one of the companies, Edumedics, which offers care management for people with diabetes and other chronic conditions, recently received new funding based on a market capitalization that would increase the value of the foundation's share of the company from about $555,000 to $1.2 million. That's still less than the $1.5 million the foundation invested in 2011. Edeumedics COO Mark Crane said he couldn't comment.
Glasscock also said the audit doesn’t mention other profitable projects recommended by the group, including the development of the Shelbyhurst campus, which he said is producing lease revenue and has multiplied in value. The audit says ground lease payments the foundation received from 2014 to 2016 were insufficient to repay a loan from the foundation’s endowment.
The audit questions why the foundation invested endowment money in startup companies, noting that an outside lawyer in a 2009 memo warned that “bio-technology investments are generally considered to be among the riskier investments.”
The memo explained that it takes a long time. typically 10 years or more – for early-stage bio-technology companies to become commercially viable and that fewer than 1 percent of them ever make it to market.
Glasscock said “everyone recognized” the investments were high risk and that they were part of a pilot program designed to commercialize university research and support students and faculty involved in the startups.
Deutsch told the Courier-Journal that the investments recommended by the group were designed to provide “programmatic benefits to the university” in addition to “any monetary return” to the foundation.
Auditors said the foundation, which is under new management, no longer uses the Entrepreneurial Group.
Reporter Andrew Wolfson can be reached at 502-582-7189 or awolfson@courier-journal.com.
Startup company Net investment Gain/Loss
ACT $3,187,184 -3,187,184
RhinoCyte 2,053,401 -2,053,401
Edumedics 1,506,665 -950,701
Apovax (Apolmmune) 1,025,000 -1,025,000
PGxL 909,745 -909,745
Intrepid 325,000 78,489
TNG 250,654 0
Antisoma 250,000 -204,070
Gnuras 150,000 102,600
Indigo Olive 100,000 0
InScope 100,000 192
9,857,649 -8,148,821
Source: University of Louisville Foundation Audit, Alvarez & Marsal
Notes: Although Foundation Financial Affairs team reported market values of $460,000 for ACT and $532,000 for PGXL as of June 30, 2016, the current financial position of these companies indicate a value of $0.
Originally Published 11:50 a.m. ET July 6, 2017
Updated 12:36 p.m. ET Jul. 6, 2017
Andrew Wolfson
Updated 12:36 p.m. ET Jul. 6, 2017
They met in President James Ramsey’s conference room, with no notice to the public.
They were called the “Entrepreneurial Group,” a select panel of University of Louisville Foundation board members, officers and outside consultants who recommended investments in new ventures to the foundation and to Ramsey.
Former U of L Chief of Staff Kathleen Smith and former President James Ramsey
Courier-Journal
So far, their picks have miserably underperformed, as noted in the recent scathing audit by Alverez & Marsal. The 11 biotech startups recommended by the group received $9.9 million and are now worth only $1.7 million.
But that's not all. The audit says some group members, foundation directors and university trustees piggybacked on the deals, personally investing in some companies after the foundation did so – without disclosing it to the foundation board.
Related: What will U of L Foundation board do to address freewheeling spending?
More: U of L could claim $20M in insurance to recover money depleted by foundation
In a 2013 email cited in the audit, foundation officer Kathleen Smith, Ramsey’s chief of staff, said trustees were “significant investors” in one of the companies, Advanced Cancer Therapeutics – ACT – into which the foundation had invested $3.2 million.
C. Kerry Fields, a University of Southern California Marshall School of Business professor and ethics expert, said it is unethical for an investment adviser or foundation director to make such investments.
Fields said that is a conflict because an adviser or director might urge the board to stick with or increase the investment to protect their own money even if it might be in the foundation’s best interest to sell.
“You can’t give prudent advice if you are invested in the company,” he said.
Other ethicists contacted by the Courier-Journal, including David Vogel of the University of California at Berkeley and Christopher MacDonald of Toronto’s Ryerson University, said at minimum the personal investments should have been disclosed to the foundation board.
In that memo to foundation chief financial officer Jason Tomlinson, Smith said she was concerned the university’s compliance officers – she called them the “compliance gestapo” in another email – were poised to accuse the ACT investors of a conflict of interest.
More: How much money would U of L have to pay back to the NCAA?
Background: Audit rips into U of L Foundation for bad investments, compensation, hiding payments
The audit report, released June 8, determined the personal investments were “not transparent" and were not disclosed on conflict of interest forms. Numerous foundation directors also said they were unaware of them.
The audit report doesn’t identify which Entrepreneurial Group members, directors or trustees made their own investments, and the foundation hasn’t responded to an open records request for that information. Smith’s lawyer, Ann Oldfather, said the company would be the best source on who invested but Randall Riggs, ACT president and CEO, did not respond to phone calls.
Entrepreneurial Group members Ed Glasscock and Frank Weisberg confirmed they each made a single investment in one of the companies.
Weisberg said he invested in ACT after the foundation put in about $3.2 million.
“I invested in ACT and I didn’t think there was anything wrong with it,” he said, noting it was open to public investment at the time.
Glasscock said he put $50,000 of his own money into TNG Pharmaceuticals, which developed a vaccine to keep flies off cattle, after the foundation invested $250,000. He said he contacted Smith, who was also the Entrepreneurial Group’s chair and assistant secretary of the foundation, for approval.
In a memo cited in the audit, he said he was asking her permission because “of my conflict due to my involvement with the foundation.”
Smith on Dec. 18, 2013, directed Glasscock to invest through an outside venture capital fund “so that any investment by you would be protected from ORR” – an open records request that would make the investment known to the public.
Glasscock now says there is nothing wrong with investment advisers investing in companies they recommend because they are, in effect, putting their money where their mouth is.
Oldfather told the Courier-Journal that Smith said “she was merely passing along information that Ed may want to consider” and that “it was of no matter to her one way or the other” if Glasscock invested because the foundation already had.
However, the same email says the foundation agreed to a further investment of $250,000, if the company needed it.
Glassock said in an interview that he made his investment directly, without using a venture capitalist, and that he has no idea why Smith thought he would want to avoid public disclosure.
“There was no reason for me to be concerned about it,” he said. "I didn't want to hide anything."
The Entrepreneurial Group, which was created by the foundation, had at least six members, according to the audit. In addition to Smith, Weisberg and Glasscock, it included Mike Curtin, the foundation's assistant treasurer, Burt Deutsch, a director and later consultant, and Tomlinson, chief financial officer.
Weisberg declined to comment on the quality of the Entrepreneurial Group's advice, or whether the foundation got its money’s worth.
The value of the foundation investments, which were made from endowment funds, has declined 83 percent, and several of the companies are closed or bankrupt, auditors found. They also said the foundation is likely to lose another $3.2 million in loans and other benefits it gave to the companies.
The foundation's nearly $3.2 million investment in ACT in 2010 is now valued at zero, according to the audit. Only three of the investments gained in value – one by just $192.
Glasscock called himself “one of the most knowledgeable merger-and-acquisition lawyers” in the region, and said he was worth what he was paid.
The report says that Glasscock was paid an $8,000 monthly retainer through his firm, Frost Brown Todd.
Deutsch was paid $10,000 per month starting in 2014, the year after he left the board, for a total of $263,000. He told the Courier-Journal that he made no personal investments in the companies. He said he hadn't read the audit and wouldn't comment on it.
Glasscock said he disputes the current valuations put on the startups in the audit report and said many of them could still be profitable in the future.
He said one of the companies, Edumedics, which offers care management for people with diabetes and other chronic conditions, recently received new funding based on a market capitalization that would increase the value of the foundation's share of the company from about $555,000 to $1.2 million. That's still less than the $1.5 million the foundation invested in 2011. Edeumedics COO Mark Crane said he couldn't comment.
Glasscock also said the audit doesn’t mention other profitable projects recommended by the group, including the development of the Shelbyhurst campus, which he said is producing lease revenue and has multiplied in value. The audit says ground lease payments the foundation received from 2014 to 2016 were insufficient to repay a loan from the foundation’s endowment.
The audit questions why the foundation invested endowment money in startup companies, noting that an outside lawyer in a 2009 memo warned that “bio-technology investments are generally considered to be among the riskier investments.”
The memo explained that it takes a long time. typically 10 years or more – for early-stage bio-technology companies to become commercially viable and that fewer than 1 percent of them ever make it to market.
Glasscock said “everyone recognized” the investments were high risk and that they were part of a pilot program designed to commercialize university research and support students and faculty involved in the startups.
Deutsch told the Courier-Journal that the investments recommended by the group were designed to provide “programmatic benefits to the university” in addition to “any monetary return” to the foundation.
Auditors said the foundation, which is under new management, no longer uses the Entrepreneurial Group.
Reporter Andrew Wolfson can be reached at 502-582-7189 or awolfson@courier-journal.com.
Startup company Net investment Gain/Loss
ACT $3,187,184 -3,187,184
RhinoCyte 2,053,401 -2,053,401
Edumedics 1,506,665 -950,701
Apovax (Apolmmune) 1,025,000 -1,025,000
PGxL 909,745 -909,745
Intrepid 325,000 78,489
TNG 250,654 0
Antisoma 250,000 -204,070
Gnuras 150,000 102,600
Indigo Olive 100,000 0
InScope 100,000 192
9,857,649 -8,148,821
Source: University of Louisville Foundation Audit, Alvarez & Marsal
Notes: Although Foundation Financial Affairs team reported market values of $460,000 for ACT and $532,000 for PGXL as of June 30, 2016, the current financial position of these companies indicate a value of $0.
Originally Published 11:50 a.m. ET July 6, 2017
Updated 12:36 p.m. ET Jul. 6, 2017
