The University of Louisville and the University of Louisville Foundation have filed a lawsuit against former university President James Ramsey, accusing him and four others of depleting the school’s endowment through intentionally complicated and unauthorized transactions.
The lawsuit also named as defendants Ramsey’s former chief of staff, Kathleen Smith, former vice chairman of the foundation Burt Deutsch, former university CFO Michael Curtin, and former foundation CFO Jason Tomlinson, as well as law firm Stites & Harbison, which served as legal counsel for the foundation during the alleged acts.
According to the lawsuit, the defendants knowingly caused the foundation to spend endowment funds at “an excessive and unsustainable rate,” and took endowment money “that should have been invested and diverted it to speculative ventures, loans, and gifts that had little realistic chance of repayment.”
The suit goes on to accuse Ramsey and Smith of paying themselves and others “excessive compensation” out of the foundation. It also said they disguised the transactions to avoid scrutiny and circumvent the foundation’s spending limit and annual budget.
“The defendants’ bad faith actions and other wrongful conduct caused the endowment to lose millions of dollars,” said the suit. “The defendants worked individually and collectively to commit the bad acts.”
According to the endowment’s investment policy, the foundation is prohibited from spending more than it makes, a rule intended to enable the endowment to grow, and fund the university’s mission in perpetuity. The lawsuit cited a stern warning from the foundation’s investment advisor Cambridge Associates over the endowment’s high spend rate.
“It is incumbent on us as your investment advisors to lay bare in the plainest terms that the current level of net draws (i.e., spending minus endowment gifts) is likely unsustainable,” said Cambridge Associates, according to court documents. “We strongly advise adjusting the spending policy.”
Cambridge recommended that the foundation reduce its spending rate from 7.48% to 5.5%, which Cambridge said, “was still at the high end of what endowments generally spend,” and that the foundation “no longer adjust the three-year rolling average by dropping the lowest year.” It also said that the foundation should “no longer include the unspent portion of spending policy from years past in the current spending policy calculation.”
The suit alleges that the finance committee didn’t reevaluate the foundation’s spending rate until eight months after it received the warning from Cambridge, and even then didn’t acknowledge the recommendation to reduce the spending rate, only accepting the advisor’s recommendation to exclude the unspent portion of the spending allocation, which it allegedly failed to implement.
“Despite officially adopting the recommendation, the defendants caused the Foundation to continue including the unspent carryover in future budgets,” claimed the lawsuit. “Thus, the defendants—without authority—caused the Foundation to spend millions more than it should have.”
The suit also claims that the actual spending rate by the foundation was even higher than the 7.48% that Cambridge called excessive, accusing the defendants of “using accounting tricks to inflate the endowment pool’s value on which the 7.48% was assessed … these techniques artificially inflated the endowment pool’s value by approximately $70 million in some years, thus inflating the spending allocation by millions.”