excellently reported article.

Bastard.

The Belstar hedge fund has two offices – NYC and the Cayman Islands… Are his tax filings complete and correct given all we’re hearing?

I’m curious as to how the university assembled this case, although I never did like or trust the bastard. Please do keep us posted.

Sounds like Wesleyan agreed to pay a hedge fund for the services of QAC in 2007. Am I reading this right?

Slow down, you guys. None of this is proven. Kannam deserves a fair shake.

1. the cayman islands question — thats totally standard practice for hedge funds, means nothing

2. met the guy a few times. totalllllllllll sleaze bag.

would a university advertize its own misfeasance in approving incorrect expense reports that it should not have approved by going after the guy in court that has already been fired?

A few facts:

1.Kannam has been a top decile performer for the school. Even last year, down 25, he was better than Harvard and in line with most like Yale.
2. It is entirely normal for university employees (profs, money managers, etc.) to have outside interests. My guess is his contract didn’t preclude it.
3. The University obviously cherry picked from a decade of emails. Take 10 years of emails from anyone and you can tell any story you like.

My take is this: Roth was hired as prez basically to be a fundraiser. Hasn’t worked out so well. On top of this, the endowment takes a 25% bath. Ergo, Kannam is an easy scapegoat. Also, the University naming so many defendants is suspicious. It frankly doesn’t make sense since this is really a contract dispute between Kannam and the Univ. Smacks of frivolity.

Let’s all remember that you can sue anyone for anything, so how about a little benefit of the doubt for someone who until only a few weeks ago was held in high regard by the community?

Oh, and I’ve seen the “Taj.” It’s just a little house. Obviously, Kannam was being tongue and cheek. Another example of how you can tell any story you want with emails.

Kannam and Gill worked at Wood Gundy together

Forgot to mention, the financials show that the school was tapping the endowment for around 7% a year for operating expenses – this is the highest I have ever heard of, and that was BEFORE the 25% decline. Between that and the school’s inability to raise serious money, Roth must have been feeling enormous pressure. How convenient to have a scapegoat.

Also, if Kannam really had wanted to enrich himself, he would have directed school money to some of these companies he was involved with. I don’t see anywhere that it’s even alleged that he did that.

Lastly, it seems really bizarre that Wesleyan sued Kannam’s wife and father. Smacks of bullying. As I read the details, this boils down to a fairly plain vanilla employment contract dispute over expenses and spare time. On the expenses, if there was abuse, by all means, get the money back (but how much could that be? 10,000? 20,000?).

The list of 20 defendants, including family members, suggests to me that Wesleyan is playing the role of legal bully here. As an alum, I hope there’s not an enormous counter suit.

Great piece, Argus. And now it’s hit Business Week and Inside Higher Ed. Yay, Ezra and Rob!

Found this story on Bloomberg this morning. Excellently done by the Argus- provides much more detail than the ‘berg article. Also, the Wes investment office has reeked of secrecy. My current employment has me calling endowments/foundations, etc. to research current investment plans- it took me 5 months, even leveraging the fact that I am an alum, to get in touch with somebody. Of course, kannam was never there, and other peoples’ voicemail boxes were full (those people have since been fired, also)… Hopefully they can get back on track!

Thanks Argus for the great article!!

alum2:

On destroying other people’s reputations, you may be on to something about the carelessness of the current wes administration. See this Argus story:

http://wesleyanargus.com/2009/12/11/dr-stephen-l-morgan-sues-univ-over-false-accusations-of-murder/

If it is all true about Kannum, why in the world did it take so long to fire him? I find it hard to believe that Roth knew none of this until October 2009. He probably stuck with Kannum in spite of this, and then when the endowment fell, they decided to move against him to conveniently explain away their financial troubles.

How pathetic wes has become.

blargwatcher:

You may be right, but cut out the dismissive tone. As if I am the first person to engage in anonymous speculation in a comment section of a blog?

All I am saying is that Roth had this guy working for him for 2 years, and the prior administration for 9 more. Kannam will probably fight hard to show that Wesleyan was aware of his activities and implicitly sanctioned them as long as he made them buckets of money. Then, they decided to fire him when the endowment bottomed out in spring 2009. It takes them until the fall to dig up the dirt on him, hire the lawyer, etc., because they are busy dealing with the Justin-Jinich murder and whatever else. (And, who knows, maybe they decide not to fire him while he is actually doing a good job helping the endowment recover.)

This course of events seems plausible and does not lack internal logic. Sure, it is speculation. I’ll give you that.

No matter what, it will be interesting to watch this and the other cases unfold. Who would have predicted so much litigation involving Wesleyan? Pretty strange. I’ll bet Roth will be gone in a couple of years for getting Wesleyan so much bad press. Wesleyan deserves better, and he doesn’t seem to make very good decisions on this important stuff.

Yes, true, I suppose he can take some credit for that. Not sure how much.

What would usually happen in that situation?

The error discovered and the person given a chance to explain why it was or was not an innocent mistake, and in either case correct the error.

Why all the blood, is this overkill? What good will come out of it?

to APPROVE an expense report for Super Bowl tickets and then mention that in a lawsuit.

WM:

The suit doesn’t seem to allege any harm to the endowment at all, which makes sense since it is known that the the returns were really good. I also remember the glowing piece in the alumni mag recently. It would be one thing if Kannam had channeled dough to vehicles he profited from, but that’s not alleged at all. Not sure where there’s justification for damages…

Something is very weird about all this. Wes has gone nuclear on what really seems like just minor employment contract dispute. Suing 20 parties? That’s the kind of thing sleazy class action lawyers do. Was there really no other way to work this out? I sure hope this doesn’t totally backfire, because Wes is putting its reputation on the line for a measly $3 million. At a minimum, we are looking foolish in the public eye because if this guy was really so bad, why the heck did we say how wonderful he was for 11 years? I don’t think Roth thought this through at all.

IF he was cherry picking stocks from hedge funds for his other funds to invest in without doing his own research he was not upholding his fiduciary duty in whatever other roles he may have had. Not a long leap to say that he may not have done the proper amount of work on Wesleyan’s investments.

That is aside from the fact that cherry picking Wesleyan’s portfolio for personal financial benefit is unethical and a violation of fiduciary duty.

Whether he loses the suit or not, he’s traded his integrity for financial gain. Good luck to him in the future because he’s ruined his career.

It was even a double billing error, there are just overblowing some expense reports descrepencies that they should have caught themselves.

Isn’t it strange that Cross Border Capital is not listed as a defendant in the lawsuit.

In fact, a search of state records shows that there is no Cross Border Capital registered in Connecticut as required by law.

So where were the proceeds from the hedge fund tips and referrals going?

This thing is far deeper than what appears on the surface as depicted in the lawsuit.

alum2,

I’m not really in a position to remark on the rest of your comments, but w.r.t the 7% endowment draw:

Wesleyan draws from its endowment at a rate of 5.5% of the 12-quarter moving average. Thus, after the endowment lost value, we’ll be drawing at a higher rate and in good times we’ll be drawing at a lower rate than 5.5% of its then present value.

As of last may, the university hadn’t deviated from the 5.5% rule, nor have I seen any indication that they would do so in the future.

The 5.5% draw is generally in line with other schools, which generally draw at a rate between 4.5% and 6%.

I would appreciate the opportunity to comment on Wesleyan’s risible lawsuit against Thomas Kannam, which has smeared many innocent and honorable parties. I would point out that almost no reporters have sought my comments on this matter before printing the numerous articles that have dragged my name through the mud, with the sole exception of the Dartmouth College student paper – truly vox clamantis in deserto – which I unfortunately learned about too late to comment after the article had already ran.

I believe Wesleyan’s litigation is entirely frivolous and constitutes an abuse of the legal process. In addition, for reasons described more fully herein, I believe Wesleyan president Michael Roth and general counsel David Winakor may have engaged in such serious misconduct as to potentially incur severe civil and criminal liabilities, and in the case of Winakor, professional disciplinary sanctions, including disbarment. I am sending this email to convey my position, more fully and accurately for the record and would hope to draw your attention to the following points:

1. The sheer scope and ferocity of Wesleyan’s complaint – over trivialities concerning Mr. Kannam’s expense reports (it should be noted that the university makes does not allege that any endowment funds were improperly invested in any ventures that Mr. Kannam may have been involved with) – is so unusual, that it is not unreasonable to question whether any ulterior motives, personal animosities and/or other pressures on the university and/or persons may lurk behind it. In this latter regard, I would direct your attention to Moody’s rating agency report from 2005 which accompanied Moody’s decision to downgrade Wesleyan’s credit rating from Aa2 to Aa3, which I believe remains downgraded at Aa3, “reflecting weak operating performance and debt service coverage as a result of above average endowment spending for strategic initiatives and recent stagnation of tuition revenue…as well as the University’s need blind admissions policy and significant financial aid.” Lacking the stature, prestige and financial resources of Ivy League universities, or the other “Little Ivies” – Amherst and Williams – it would seem that Wesleyan has to in effect “bribe” students to attend with money it doesn’t have. This is not financially sustainable, and one can speculate whether creating a phony crisis involving the endowment might give persons responsible for fundraising – which Moody’s report says Wesleyan must do at higher levels than its peers – a preemptive excuse for any less than stellar results at bringing in the levels of donations that Moody’s says Wesleyan needs. One might add that these financial pressures have only been heightened by the recent financial crisis. Wesleyan’s financial bind not only produces red ink, but also threatens its ability to attract students and selectivity rankings going forward, placing even greater pressure on persons responsible for fundraising, who may well be tempted to give themselves a “get out of jail free” card by blaming poor fundraising on the “scandal” surrounding Mr. Kannam as they anticipate tough times ahead. Interestingly, and further undermining Wesleyan’s position with respect to its complaint in the matter at hand, Moody’s report further states: “Wesleyan’s endowment investments are well diversified among hedge funds (21%), international equity (9%), fixed income (16%), domestic equity (35%) and private equity (17%), as of March 2005. The University achieved an endowment return of 16.6% in FY 2004 and management estimates a return of 13% return for FY 2005. The University does not outsource its investment management function but, rather manages the portfolio internally. The investment function of the University appears to be well-managed with good investment oversight.”

2. With respect to Cross Border Capital Advisors – which never ever had any investors, any assets, any employees, any revenues, any payroll or any budget, nor was it even incorporated — Mr. Kannam’s affiliation with it did not take “meaningful time away” from his Wesleyan work. In this regard, during the periods alleged in Wesleyan’s complaint, Mr. Kannam met with me no more than a handful of times each year, either over lunch in Middletown or occasionally while he was in New York, almost always for other engagements. Contrary to the allegations in the Wesleyan suit, he and I did not set up a hedge fund, and he did not undertake any material travel, nor incur any direct or indirect expenses at my request, nor receive any financial or other benefit of any kind, directly or indirectly from me or any entity that I may have been involved with, directly or indirectly, at any time whatsoever.

3. Furthermore, Mr. Kannam never directed the funds of any institution, whether Wesleyan or any other, to any investment in which I had even the remotest direct or indirect financial interest.

4. Had any potential “entrepreneurial ventures” between me and Mr. Kannam ever materialized – and none ever did — he consistently told me that his arrangement with Wesleyan would have allowed him to be involved in an advisory capacity.

5. Wesleyan’s lawsuit accuses me of causing Mr. Kannam to charge expenses to Wesleyan on my behalf; this is completely false.

6. Wesleyan’s lawsuit further accuses Mr. Kannam of providing me with proprietary trading ideas that he received in his capacity as CIO. During the entire period covered by the complaint, I have never traded a single share of stock, directly or indirectly, nor have I caused anyone else to trade a single share of stock, for any reason, directly or indirectly. Nor did Mr. Kannam and I ever set up a hedge fund.

7. Wesleyan’s ridiculous complaint asks sane and reasonable people to believe that Tom jeopardized his job as CIO – by Wesleyan’s own statement, one of the highest paid in the university — by not only spending most of his time for years working on “entrepreneurial ventures” that generated no revenues and gathered no assets, but also hiring others to do the same – all in exchange for no compensation of any kind, direct or indirect, whatsoever. This defies common sense, is patently absurd, and borders on the deranged.

8. Wesleyan’s claims include the salaries of other Wesleyan employees – none of whom I have even met or spoken with; none of whom were hired at my request or with my knowledge or consent, and none of whom have any ever produced any work product for me at my request or with knowledge or consent.

9. Wesleyan’s complaint is based on the sworn affidavit of its general counsel, David Winakor, who has alleged under oath and penalty of perjury that I am somehow affiliated with Belstar, and vice versa; this is utterly false.

10. The allegations in the suit are based on excerpts from a few emails, devoid of context, taken from more than 140,000 emails in Mr. Kannam’s Wesleyan email file going back to 1998. Wesleyan has not yet given any of the defendants (including Mr. Kannam) complete access to these files, despite having failed to comply with court imposed deadlines to produce these files in full, and until we have such complete access, it is impossible at this time to provide a more complete response to what I believe are Wesleyan’s frivolous charges.

Based on conversations that I have had with other parties harmed by Wesleyan’s complaint, the current estimates of quantifiable damages measured by loss of investor commitments, business impairment and reputational damages range anywhere between $30mm and $200 million. Given the large number of businesses and reputations smeared in this matter, and the national top business news coverage it has been receiving, the final tally could be even larger, i.e. potentially approximating the size of Wesleyan’s entire endowment. If the proximate cause of such losses is the negligence and reckless actions of certain individuals owing fiduciary duties to the university, and a duty of care in exercising their responsibilities, the university would be entitled to recover such damages from those individuals, either directly or in a derivative action filed on behalf of the university.

Moody’s report suggested that Wesleyan would need to return to the bond market in 2010. Bond investors, rating agencies (which have been notoriously deficient and conflicted in warning investors of potential financial problems in advance), prospective applicants, alumni and university trustees should carefully weigh the possibly huge impacts of such large contingent liabilities on the university’s solvency and ability to carry out its mission. Possible long-term or even permanent impairment of the university’s capital markets access could follow from its obligation to disclose material pending litigation which may arise in connection with the recovery of such losses. Not only could such events cripple Wesleyan’s ability to raise new debt, further rating downgrades on its existing debt could cause interest coverage charges to explode, leading to defaults under the university’s existing debt covenants.

Since all of these potentially very real and very catastrophic consequences arise from $10,000 to $20,000 of disputed expenses — which Mr. Kannam had offered to settle prior to the filing of this absurd lawsuit – members of the Wesleyan community may wish to question the basic competence and judgment of the current university president and general counsel, who would seem to be playing with matches in a house filled with gasoline. In my opinion, it is fair to question whether Michael Roth’s credentials as a film scholar and aesthete are the best qualifications to run university plagued with human resources issues, complex financial problems and lacking the resources adequate to the task of attracting the very best students against formidable competition.

I have recently become aware of certain alleged facts, which if true, are potentially stunning. It has been alleged that Michael Roth was caught off guard by a 360 degree job performance review by his direct reports during the summer of 2009, only two years into his term as Wesleyan’s new president. It has also been alleged that Michael Roth was very disturbed by the prospect of such an evaluation, and made statements to the effect that had he known that he would be the subject of such a review so early in his term he would not have accepted the job. It is also alleged that when a Wesleyan trustee asked Tom Kannam for his evaluation of Michael Roth as part the foregoing review, Kannam stated that Michael Roth was not performing well on the “real job” he was hired to do, since Roth had apparently proven to be an ineffectual fundraiser. It is further alleged that Roth was very angered by this review. In these circumstances, it is reasonable to ask if this may have provided the motive for Roth to pursue a personal vendetta against Kannam, thereby giving rise to this entire sordid affair. I have not had the opportunity to independently verify these facts, but they obviously merit serious independent investigation and are certainly capable of judicial verification under oath.

Wesleyan alumni and trustees would be well-advised to press for full public disclosure and accounting for the entirely discretionary, unnecessary and frivolous legal expenses incurred to date at the possible behest of Michael Roth and/or David Winakor in this matter. These sums may already be in the hundreds of thousands of dollars, huge amounts for a cash-strapped nonprofit that relies on the goodwill of alumni contributions based on the trust that such funds will be used wisely in support of the university’s mission. If it turns out that these sums were spent in pursuit of a personal vendetta against Mr. Kannam, this may constitute fraud, waste and abuse of charitable funds and a serious abuse of discretion. This could also provide grounds for criminal charges against the university administrators involved, their personal financial liability for the recovery of such funds, and – of course – their immediate dismissal. Furthermore, the university’s administration and trustees owe full disclosure to current Wesleyan bondholders with respect to the potentially huge contingent liabilities that may accrue to the university as a result of the very real damages inflicted on innocent parties by this frivolous litigation, under full penalties of Sarbanes Oxley for material misstatements or omissions.

No one would or should invest in a movie studio or broadcast network run by the actors themselves – a situation akin to having inmates running an asylum – yet in my opinion, this is analogous to what is happening at Wesleyan. I can imagine a good film about the shame, embarrassment, disrepute and financial meltdown of a once proud university resulting from an artiste’s fit of pique, but I don’t know whether it’s more of a comedy or tragedy.

Thank you for your attention.

Defendant Ralph Gill makes a lot of unsupported accusations in his rambling missive. Seems oddly similar in structure and tone to the New Haven Register Letter to the Editor mentioned in a prior post.

His financial analysis is wholly defective. 2004 data? No time series data? No comparative benchmarks? What’s the point?

If there is any veracity to Defendant Gill’s accusations, where’s the cross complaint? Where’s the request to the judge to throw out the Wesleyan complaint? Where’s the complaint to the Connecticut Bar Association? Where’s the letter to the Wesleyan Board, signed by all defendants?