When Colleges Defraud Donors

Piggybanks Eating Money Shows Financial Crisis Or Monetary Fraud

September 30, 2019

Colleges rarely sue one another, so when little Hillsdale College in Michigan sued the much larger University of Missouri a couple of years ago, it raised some eyebrows. Hillsdale alleges that Mizzou blatantly violated the terms of Wall Street financier Sherlock Hibbs’ will, who left $5 million to his alma mater upon his death to create multiple chairs to be held by “disciples” of the Austrian school of economics. Hibbs, who died in 2002, was a strong adherent of that approach to economics, led in the 20^th century by Ludwig von Mises and Friedrich Hayek, asserting, among many other things, that market-based solutions to problems are generally superior to those imposed by governments. Austrian economists are generally libertarians or at least market-oriented conservatives.

Last week’s Wall Street Journal’s account of the current brouhaha by Hillsdale alum Nicole Ault revealed the published vitae of about two dozen members of the Department of Economics (the logical home of Austrian economists) at Mizzou. None had a remotely Austrian orientation. I then learned the names of the alleged Austrian disciples holding Hibbs financed positions, all teaching management or marketing courses unrelated, as far as I could tell from published vitae and course offerings, in any important way to Austrian economics. To be fair, Mizzou once did have a genuine (and good) Austrian economist, Peter Klein —but he left in 2015 to go to Baylor, and I do not believe he was funded with Hibbs money.

If the facts are precisely as newspaper accounts state, there is little doubt in my mind that Mizzou owes Hillsdale, very conservatively, the nine million dollars reportedly now in the Hibbs endowment. Violating the wishes of a donor is akin to fraud, in my opinion, and I have seen it too often in academia. I think there should be serious consequences to violators of donors’ intent –why give to support your favorite cause if your wishes can easily be ignored? The professors who in 2018 signed statements that they are true disciples of Austrian economics should be fired, both for not being Austrian economists (and thus ineligible for Hibbs funding) and for being liars. The dean and other administrators who masterminded this fraud should lose their jobs and perhaps worse –face felony charges for misappropriating funds. When universities start paying huge fines (how about punitive damages?) and top officials are fired and perhaps even go to jail, violations of donor intent will sharply decline.

[Before You Donate to Your Alma Mater]

The Mizzou misappropriation of funds allegation would never have arisen except for an extremely eccentric but highly perceptive precaution taken by Sherlock Hibbs –he appointed Hillsdale College as an overseer of the funds, giving them the power to assess, every four years, whether donor intent is being met –and, if it is not, to become the recipient of those funds. Hillsdale is known for its strong adherence to conservative or libertarian principles combined with a strong Christian tradition–it is opening a new spectacular $30 million chapel at a ceremony with Justice Clarence Thomas speaking in a few days. Hibbs felt that if there were hanky-panky in the use of funds at Mizzou, Hillsdale would protest. He was right.

In some respects, this allegation of violation of donor intent is small compared with some others I have heard. Most famous is the 2008 settlement where Princeton, facing a lawsuit that many felt it would lose, agreed to pay to descendants of Marie and Charles Robertson $90 million (out of an endowment that had grown to $900 million). Princeton was supposed to use the money to support students for federal international service, but large sums clearly were used for other purposes.

I have personally seen funds diverted from the intent of the donor in several instances. Another example: the misuse of the Shelby Cullom Davis Endowment funds to Trinity College to support a professorship in free enterprise and related activities would have gone unabated if it were not for the courageous actions a few years ago of the chair holder, Gerald Gunderson, and state legal authorities. Universities will say almost anything to get the money, and then start to chip away at donor intent. The ultimate problem is that university administrations are too often not very accountable to anyone. There are no shareholders, and the true “ownership” of most colleges and universities is somewhat nebulous. A governing board has ultimate authority (the Board of Curators at Mizzou), but it is often a rubber stamp for the administration and ignorant of much that happens on campus. Powerful groups –senior administrators, superstar faculty –can persuade presidents and CFOs to allocate funds in a way inconsistent with agreements made.

[Are Alumni Pulling the Strings in Academia?]

A similar example played out recently in a dispute between the University of Wisconsin and Washington University in St. Louis. The two schools jointly were to share in the royalties from a patent arising from research performed by researchers at the two schools, with Wisconsin administering the money. Washington U. said Wisconsin was violating the legal agreement by underpaying it, and a federal court agreed, ordering Wisconsin to pay Washington U $31.6 million.

The moral of the story? Donors beware. Candidly, I would not buy a used car from some university administrators –their adherence to integrity and honesty is imperfect, putting it conservatively. Have outsiders review the use of funds. Put in the donor gift agreement strong provisions for periodic review of fund usage by individuals whose interests are aligned with that of the donor. Make fraudulent use of funds a crime subject to meaningful penalties, both financial and penal.

Discussion

Jim Davies

October 16, 2019

Thanks for this enlightening article.

Diversion of funds from the donor’s intended purpose seems to me to be even wider than the college examples related. The problem is that the donor has to trust others, such as his executor; he’s not around any more to supervise personally.

This gets especially hairy when government intervenes, as it did recently in a matter that involves myself. It writes a new law, that can have the effect of negating retroactively the wishes of the deceased donor. If the executor is a company it will probably not fight, for that would imperil its license to exist.

My own story is told at TinyURL.com/DistrustZedra . Any suggestions?

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George Leef

October 2, 2019

On the law, this case should be an easy win for Hillsdale. The trouble is that Missouri will try to confuse the home-town jury with all kinds of red herrings. That approach might succeed.

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Old Law Prof

October 1, 2019

I have no intention of giving any of my sizeable estate to any of my three alma maters.
But, if I do, the gift will be CONDITIONAL. I wasn’t a tenured faculty member for 40 years to learn nothing.

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Robert King

October 1, 2019

OMG is Vedder right! I was dean of a college at a “university of the first rank,” as administrators are fond of saying, from the mid seventies until the nineties. I raised millions of dollars for endowed chairs and professorships. While I was dean I made sure “donor intent” was honored.
But administration is mind-deadening, and after almost twenty years of doing it I had had enough. Went back to teaching and writing.
And watched as my successors, who hadn’t known the donors personally as I had, used the income from those endowments for pretty much whatever they found needful, donor intent be damned.
The descendants of the donors, when there were any, were not usually interested enough to complain.
Donors beware! Follow to the T what Professor Vedder says. Be very specific in what you want your money to be used for. Put it in writing. And put some enforceability in there. Having one university (Hillsdale) oversee what another university (University of Missouri) is doing is a brilliant defense against the misuse of endowments.

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1. Ed Cutting, EdD
  
  October 3, 2019
  
  The flip side of this is the dispute at Stanford which led both to the AAUP and the concept of academic freedom. The Stanfords had donated much of their fortune ($1.1 Billion in today’s money) to create the university and Jane Stanford wasn’t happy that a Stanford economics professor was saying that her late husband Leland had exploited Chinese laborers in building his railroad (which he had).
  
  It raises interesting questions….
  
  Reply
Keith Glass

October 1, 2019

Nowhere near as serious, but common. When I graduated from Lehigh in 1983, tradition was that your cap and gown deposit ( they were rented) would go to the Class Gift, to be presented at the 5 year anniversary of graduation.

The class had voted for the funds to go to the creation of an on-campus pub. Instead, the University used the money to fund a locker room for the women’s Field Hockey team.

Needless to say, they haven’t gotten a dollar from me, since. . .

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John Radzilowski

October 1, 2019

I have seen this first hand at four different universities, three major, one minor. The universities take the money for say an endowed chair and then claim academic freedom permits them to hire faculty whose views are directly contrary to the express wishes of the donor or use the money for something else entirely. In many cases the donor is dead and the heirs don’t care or are easily bamboozled by the university and its lawyers. In a couple cases I know of donors who were just ordinary middle class folks who managed to save up a million or two through wise investing and frugality and were passionate about the leaving the money for a cause dear to them.

The only real solution is for donors to create a private non-profit foundation stocked with like-minded friends and family which would manage the money and dole it out to the university on an annual basis after certifying that university is living up to its end of the bargain.

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Ed Cutting, Ed. D.

September 30, 2019

“The ultimate problem is that university administrations are too often not very accountable to anyone.”

The larger problem, I believe, is the transitory nature of university administrators. The average tenure of a college president is now only 6.5 years and the days of an administrator coming out of the faculty and holding a variety of increasingly senior posts at the same institution/b> are long gone.

Instead it’s a few years here, a few years there and a few years somewhere else — they’re very much like professional athletes in the era of free agency, with search firms managing their careers as they jump hither and yon. And the search firms are very much like realtors, showing their own stable of candidates instead of actually searching for one meeting the unique needs of the institution.

Hence, I argue, there is a cadre of administrators who have no particular loyalty to their current institution as they’re already looking to their next post somewhere else. In such an environment they can promise damn near anything as they won’t be around when the promise is broken — and their replacement can nonchalantly dismiss the promise as one they would never have given. Instead, their loyalty is to the cadre…

Even when someone is fired, as Evan Dobelle was at the University of Hawaii, it neither precludes the so-called “golden parachute” nor from being hired elsewhere — after three years with the NE Board of Higher Ed, Dobelle was hired to head Westfield State. And again fired over allegations he had misused hundreds of thousands of dollars in taxpayer and donor money.

And instead of going to jail, he retired to Churchill College of England’s Cambridge University. While professional athletes at least answer to the league, college presidents really only answer to themselves, and that is a problem….

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