How UofL Foundation’s high-risk investments fizzled

In the end, the University of Louisville Foundation’s push to invest $10 million in “new ventures” was undone by high-risk startups, a lack of transparency and a complex web of organizations, some members of which engaged in questionable practices.

Risky investments in biomedical startups cost the foundation millions of dollars, according to a recent forensic audit.

In at least one case, the foundation’s investment came with a quid-pro-quo arrangement that required a fledgling company to rent office space from a ULF subsidiary, an expensive real estate deal that undermined the startup’s financial stability — and the foundation’s investment, the auditors wrote.

The audit, from Alvarez & Marsal Disputes and Investigations, also indicates that the foundation invested in the same companies in which members of the boards of the foundation and the University of Louisville had invested without disclosing that information in conflict of interest forms. At least one UofL officer directed another investor on how to support the ventures without facing public scrutiny.

However, one of the principals involved with the foundation told Insider that the auditors overstated the frequency with which foundation-related personnel also invested their personal funds in the ventures.

The audit was released a week ago. The foundation’s board on Wednesday created an ad hoc committee to investigate the information revealed in the audit and its chairwoman, Diane Medley, confirmed that the foundation’s chief financial officer was taking a “a mutually agreed upon” leave.

Risky investments

The audit report indicates that between August 2005 and June 30, 2016, University Holdings Inc., on behalf of the foundation’s board, invested $9.9 million in startups, which are now worth about $1.7 million. Interviews and documents indicate that the group that analyzed and recommended the investments knew that biotech investments were inherently risky.

Recommendations to the president about where to invest the funds came from The Entrepreneurial Group, which the foundation had created. The group consisted of three foundation officers, two foundation board members and Ed Glasscock, chairman emeritus of Louisville law firm Frost Brown Todd.

Auditors said it was “not clear” whether the foundation board intended to invest its endowment funds into as high-risk ventures as biotech startups. The board in 2008 had authorized the investment of $10 million in “new ventures.”

Auditors also said that the foundation exceeded that $10 million threshold “by guaranteeing loans and providing other benefits, likely costing ULF more than $3.2 million in additional losses:” The foundation in May 2014 guaranteed up to $3.5 million of startup PGxL’s line of credit with Stock Yards Bank & Trust, but the company defaulted on the loan in September of last year.

The audit reveals other convoluted arrangements: Before guaranteeing the PGxL line of credit, the foundation agreed to provide the startup with $300,000 to match its renovation costs. Emails indicate that UofL then-President James Ramsey authorized the payment but that it “was not recorded as an equity investment or an agreement that required PGxL to repay the funds. According to the FFA (Foundation Financial Affairs Office), ULF recorded the transfer as receivable related to tenant improvements which ULF wrote-off in FY2016 when ULF transferred Nucleus to ULREF (University of Louisville Real Estate Foundation).” (Nucleus describes itself as “the innovation center and economic development arm of the University of Louisville Foundation.”)

For biotech startup Advanced Cancer Therapeutics, records indicate that the company’s intention to become a tenant in the Nucleus building was contingent upon the foundation’s commitment to invest in the startup. A foundation officer wrote a Nucleus leader that the foundation was “eager to give (ACT President Randy Riggs) our money, but he needs to be as equally eager to get his lease signed up for your building.”

Among its recommendations, auditors wrote that the foundation “should not require the startup companies it invests in (or other entities it directly invests) to rent office space in ULF-owned real estate.

“Startup companies in particular have limited revenue and funding, thus unnecessary rent puts the startup company in a worse financial position, negatively impacting the overall investment,” auditors wrote.

However, an expert on foundations told Insider that foundations can make investments in a lot of ways, including no-interest or low-interest loans, by obtaining an ownership stake in the company in which they’re investing or by entering joint ventures.

“It’s not completely unusual to have an obligation coming back to the foundation in some form or another,” said Suzanne Friday, senior counsel and vice president of legal affairs for the Arlington, Va.-based Council on Foundations.

Also, she said, it’s up to the entrepreneur to determine whether the funder’s requirements, such as a lease of a certain property, is affordable and makes good business sense.

Friday also said that while the Internal Revenue Service has rules and guidance that suggest that foundations make prudent investment decisions, the organizations have significant latitude if high-risk investments are related to their charitable mission. That means a medical foundation, for example, can easily invest in high-risk medical startups if those fledgling companies’ goals align with the foundation’s mission.

Friday said that such so-called impact investment or mission-related investing is gaining popularity.

Just this April, the Ford Foundation announced that in the next decade it would commit $1 billion of its $12 billion endowment “to the nascent investment field known as mission-related investing.”

Lack of transparency

Auditors also wrote that ULF officers failed to update the foundation’s board on the losses that the investment were producing and that, in general, the investments “were not transparent.”

A diagram in the audit explains how the foundation invested in startup Advanced Cancer Therapeutics (ACT). TNRP = The Nucleus Real Properties. ULRF = University of Louisville Research Foundation. ULF = University of Louisville Foundation.

In addition, interviews, emails and other documents show that some foundation board members, university board members and members of the group that had been designated to analyze the investments also invested in the same companies supported by the borrowed foundation funds without disclosing that information in conflict of interest forms.

Kathleen Smith, chief of staff for the president and assistant secretary, also directed Glasscock, who planned to invest in one of the startups, “that he should do so … through the Yearling Fund (a venture capital fund) so that any investment by (him) would be protected from ORR (open records requests.)”

“Numerous ULF board of directors interviewees were unaware” that members of group responsible for making foundation investment decisions “were also individually invested in the startup companies,” the auditors wrote.

Ed Glasscock

Glasscock told Insider that he invested only on one occasion in a startup in which the foundation also invested, and he did so after obtaining the foundation’s approval and without any intention of hiding the investment from the public.

He said the foundation had invested $250,000 in TNG Pharmaceuticals, a startup launched by two UofL students focused on developing a vaccine that controlled the horn fly and improved cattle milk production. The Entrepreneurial Group deemed the investment to be sound, as the students had received awards and grants for their entrepreneurial activities, he said.

When a local venture capitalist approached him to invest his personal dollars into TNG to help the company clear some Food and Drug Administration hurdles, Glasscock said he approached Smith to make sure that he could invest into the venture without raising any issues with the foundation.

Smith brought up open records concerns and investing through the Yearling Fund, Glasscock said.

“I was not concerned about open records,” Glasscock told Insider. “I was very open with her. I was very open with anyone.”

Glasscock said that after Smith told him that supporting the venture with his personal money would be OK, he invested $50,000 through Glasscock Financial Services.

The attorney said that he thought the former students had a good business model and he wanted to make sure that the venture could move forward.

“Was happy to do it,” he said.

Glasscock also told Insider that he was one of the people who were interviewed by the auditor, whose report, Glasscock said, made it look as though members of the foundation board or The Entrepreneurial Group invested all the time in companies in which the foundation invested, too.

So far as he knows, Glasscock said, no members of those entities invested in any of the other companies supported by the foundation.

His investment in TNG, he said, was “a unique situation.”

What’s more, he said, the last he heard, TNG still was pursuing FDA approval.

Auditors recommended that those involved in the foundation’s investment decision making process “should disclose personal investment in companies in which ULF is also directly invested … to avoid the appearance of a conflict. This rule should apply even if individuals invest through a fund such as the Yearling Group.”

Smith, who was paid nearly $4 million over the past five fiscal years, mostly from the controversial deferred compensation plan of the foundation, was placed on paid leave last fall. Her contract with the foundation, signed by Ramsey just before he resigned, runs out at the end of July.

Smith could not be reached for comment, but her lawyer, Ann Oldfather, told WFPL that the audit was a “one-sided smear campaign” and ignored Smith’s 46 years of positive contributions to the foundation, adding that there was “not even a whiff” of wrongdoing.

The foundation declined to answer questions raised by the audit and told Insider via email that it “is continuing to digest the audit and does not have any comments at this time.”

ACT, the biotech company, could not be reached. It was expected to receive notification this month about its chances for obtaining a $3 million federal grant.

Disclosure: Ed Glasscock and Advanced Cancer Therapeutics board chairman and co-founder, Dale Boden, are investors in Insider Louisville.