Scott Romney's Conflict of Interest
Former trustee voted to invest university funds in Bain Capital
The MSU Board of Trustees voted to invest more than $42 million in Bain Capital stocks and private equity in 2007 and 2008 during the same time Mitt Romney’s brother, Scott, served as a trustee — which some experts said could be a conflict of interest.
Experts questioned whether Scott Romney inappropriately backed the university investments in Bain, a company co-founded by Mitt Romney, near the end of his term.
Some MSU officials say if Mitt Romney wins the nation’s highest office in less than a week, Scott Romney could serve as an unprecedented voice for MSU’s interests in the White House, using relationships he forged with university leaders during his time here.
The board’s vote does not necessarily violate any financial policies or disclosure laws, and Scott Romney was not the deciding voice on the board in whether to invest MSU’s money.
Still, the strong connection between the Romneys and Bain Capital raised questions among experts about the trustees’ decision to invest in the firm — particularly regarding the board’s own conflict of interest policy, which the action likely breached.
The MSU Board of Trustees voted on three different occasions to invest money into Bain Capital stocks and private equity after receiving recommendations from its finance committee and Cambridge Associates, an external investment consultant. Representatives from Cambridge Associates met with MSU financial staff, who recommended investing in Bain Capital stocks to the board's finance committee. The committee then recommended the investment to the full board of trustees, where it was approved. In deciding where to invest, trustees said the board's committees looked at a firm's track record in financial expertise and returns in addition to diversifying the university's investment portfolio through oil and gas capital, cash and cash equivalents like private equity, among other methods.
Cooley Law School legal ethics professor Nancy Wonch said the language in the policy, which identifies actions that create personal benefits or appear to compromise a trustee’s judgment, could implicate Scott Romney if his brother still was profiting from Bain Capital at the time of the vote — which Mitt Romney’s campaign denies, but various sources dispute.
“He should have disclosed in his position,” Wonch said. “Other trustees should have said, ‘We don’t think that’s a conflict of interest.’ The safest thing to do when you have a gray area is err on the side of caution.”
Current and former MSU trustees were divided on whether or not Scott Romney disclosed his relationship with Bain to the board, although most remembered him abstaining on one of the votes because of what meeting minutes denote as “his investments in certain Bain funds.”
The abstention is reflected in minutes from the MSU Board of Trustees meetings.
Mitt and Scott Romney could profit from the investment returns when they are cashed in, financial experts said.
But since the disclosure of private investments is not required by law, it is impossible to tell for certain whether or not the family has benefited or will benefit financially from the investment.
The board’s public meetings records show Scott Romney was absent from the first board vote on Bain in September 2007 and abstained from the second in January 2008, but voted along with the board the third time in December 2008 — less than a month before his term was set to expire after he lost re-election in November.
MSU Director of Investments and Financial Management Glen Klein said MSU invested in Bain in 2008 because of the company’s success and experience in investments, and the process of investing in Bain was the same as other routine investments.
Klein also noted Scott Romney was not on the committees in charge of deciding in which firm to invest.
Scott Romney, who has been deeply involved in his brother’s presidential election bid, potentially could provide an MSU voice to a Mitt Romney administration through his connections to current trustees.
And on Oct. 26, the trustees appointed him to another term to the MSU College of Law Board of Trustees, after initially being appointed in 2003.
MSU Trustee Melanie Foster, a Republican, said in a previous State News story that a Mitt Romney presidency could further the university’s research funding for the Facility for Rare Isotope Beams, which was cut under President Barack Obama’s budget, among other university ventures.
“We, Michigan State University, (would) have an ear to the White House,” she said at an Ingham County Republican Party event in February where Mitt Romney spoke. “That’s never happened in our history … Don’t discredit that.”
When asked to comment on the investments, Scott Romney sent an email response agreeing to a phone interview with The State News.
But in a phone call Monday, Mitt Romney’s campaign officials rescinded the offer, saying Scott Romney could only comment through their spokespeople.
The Mitt Romney campaign issued a statement Tuesday on behalf of Scott Romney, asserting any of his abstentions from board votes were done for appropriate reasons.
“I’m confident that I never cast a vote that would have been deemed improper,” the statement read.
Tracking the votes
Of the three votes the board took to approve the investment in 2007-08, Scott Romney was absent for the first, abstained for the second and partook in the third — the only investment to take place after losing his 2008 re-election bid but before he left office, according to meeting minutes.
Chris Tobe, a former portfolio manager for JPMorgan Chase and former investments instructor at the University of Louisville, said a possible conflict of interest surrounding the board’s December 2008 vote is a gray area.
“It’s definitely something that should be disclosed,” said Tobe, a self-proclaimed whistleblower who has testified in congressional hearings and been quoted in The Wall Street Journal and Bloomberg News.
He has studied Bain’s investments with public retirement funds and multiple universities, including MSU.
Tobe said the uncertainty of whether Mitt Romney still received benefits from Bain should have been a warning sign about the relationship between MSU and any proposed investments in the firm.
“That’s pretty obvious on the face,” Tobe said. “(If it’s) your brother’s firm, to give it your money. … It doesn’t matter if it’s with Bain or anyone else.”
Where things get problematic lies with the investment fees, he said.
The university profits by negotiating an investment in a private equity firm, but the firm also gets a kickback, which is harder to trace back to who benefits.
The Romney family could see returns from the MSU Board of Trustees’ investments in several years, but personal financial data does not require disclosure, he said.
At press time, The State News was deferred on a Freedom of Information Act, or FOIA, request for MSU Board of Trustee records specifying investment information from the Bain votes.
The MSU FOIA Office requested a deposit for labor before fulfilling the request.
Wonch compared the board’s disclosure procedure to a judicial case where a judge has a history with the parties in the courtroom.
In such a case, there might not be a documented conflict of interest, but the public might doubt the judge’s ability, she said.
“In public officials, they have to go the extra step,” Wonch said. “Not only don’t they have a conflict of interest by their own policy, they have to avoid the appearance of a conflict of interest.”
Inside the boardroom
In 2006, the full Board of Trustees, including Scott Romney, voted to enact a conflict of interest policy to prevent trustees from having financial interests that “reasonably appear to compromise” their judgment, which legal experts said was interpretive language.
Former MSU Trustee David Porteous, who served from 1998 to 2006, said the policy was not enacted as a reaction to any particular issue but something the board wanted to enact to remain “ahead of the curve” in corporate governance.
“One of the things you’re endeavoring to do is you recognize there will be conflicts or perceived conflicts from time to time at any large institutions,” said Porteous, a Republican.
The board’s adoption of the policy had nothing to do with potential financial conflicts from any trustees, Foster said.
Trustees can abstain from votes for a variety of reasons, but there is little to no outside enforcement of the policy.
It ultimately depends on if the trustee feels there is a potential conflict of interest, said former Republican trustee Donald Nugent, who was a trustee from 1995-2010.
“To my knowledge, Scott had no personal gain in the Bain investments, (and it was) up to him personally,” he said.
Members of the finance committee in 2008 said Scott Romney disclosed his family’s relationship to Bain, but some trustees did not remember any such announcement.
Former Democratic Trustee Colleen McNamara, who served on the board from 1995-2010, said she was unaware the Romney family was involved in Bain.
“I had no idea that was the case,” she said. “Bain meant nothing to me.”
The board’s investment advisory subcommittee regularly meets with Cambridge Associates, a Boston-based investment consultant, to be advised on where the university should invest; it then will recommend Cambridge’s suggestions to the finance committee and the full board.
But Frank Lentini, a spokesman for Cambridge Associates, could not verify the criteria used prior to making the investments because Cambridge does not discuss individual clients without their approval.
There is no specific policy to determine where money should be invested, and it is up to the committees to determine the best route, Republican Trustee Brian Breslin said.
McNamara said investments were a routine agenda item. The finance committee advised the board that Bain was a good place to invest before taking a vote on several investment managers all at the same time, she said.
“Everybody knows there’s some conflict, but how serious it is is what everyone’s fighting over,” Tobe said.
Klein added Scott Romney was on neither the finance committee nor the investment advisory subcommittee when the investments took place.
University spokesman Kent Cassella echoed Klein, saying the university does not believe Scott Romney would derive any personal benefit from the investments and understood his abstention was an “extra degree of caution” in a political environment.
Wonch said the line between a real conflict and a perceived one can be difficult to determine, and the board’s third vote to invest in Bain could have raised the possibility.
Porteous said no policy is perfect, and the board’s conflict of interest policy always would be subject to individual situations that arise in which the policy doesn’t work.
“It is virtually impossible, in my opinion, to be able to put in a policy that works perfectly in every case, because you have a lot of different individuals with different relationships,” he said. “As thoughtful as you are, there’s undoubtedly going to be some circumstances you didn’t anticipate.”
Following the money
Bain, a Boston-based venture capital investment firm Mitt Romney co-founded in 1984, has undergone scrutiny in its financial disclosures and for how involved Mitt Romney was in its decisions during the 2012 election.
It is widely acknowledged that Mitt Romney took a leave of absence in 1999 to become the chairman of the 2002 Salt Lake City Olympic Games Organizing Committee.
But what remains in question is how long he was receiving benefits from Bain.
Romney family financial statements and investment documents, obtained by Gawker.com in August and verified by The New York Times, show Mitt Romney’s retirement agreement with Bain allowed him to continue receiving profits on some investments made through February 2009.
A Romney campaign spokesman said Mitt Romney placed his investments in a blind trust after he was elected governor of Massachusetts in 2003 and is unaware of investment specifics, as the trust is handled by another manager.
But Romney’s longtime blind trust manager, R. Bradford Malt, also has represented Bain Capital, according to The Boston Globe.
Ken Gross, a political law attorney in Washington, D.C., said blind trusts usually are a function of wealth in a number of holdings, a rarity used mostly by people who have large amounts of money in many different investments.
Gross said the investor cannot know what activity takes place after investments have been entrusted, but there are no restrictions on who a blind trust manager can be and what funds the investor has going in.
“You can’t get amnesia about what went into the trust,” Gross said. “You can’t (exempt) yourself of conflicts by just putting stuff in a trust.”
MSU had wanted to invest with Bain for several years but the endowment wasn’t large enough for Bain’s minimum investment amount, which was about $10-15 million, Nugent said.
When the opportunity for investment arose in 2007, it had been three or four years since MSU first suggested Bain as an investment manager, said Nugent, a Republican.
MSU invested $20 million in Bain Capital Fund X in September 2007 and $7.3 million in Bain Capital Europe Fund III in January 2008, according to documents from the MSU Office of the Vice President for Finance and Operations, or VPFO.
The other $15 million was invested in stocks through Brookside Cayman, Limited, a global fund Bain offers, in December 2008, the VPFO documents show.
Board of Trustees Chairman Joel Ferguson, a Democrat, said Scott and Mitt Romney’s finances are completely separate and there is no connection between their business or investments.
Experts said because personal investments are private, their details are not subject to disclosure laws.
“When you deal with private businesses, there isn’t the kind of openness with respect to financial dealings,” Wonch said. “They have a right to confidentiality, (and) as a result to that, everyone is left guessing.”
Nicholas Jelfs, a senior analyst and press officer at Preqin, a London-based private equity research and consulting firm, said only so much investment information is available to the public.
Most disclosure information the organization receives comes primarily from public sources, regulatory filings and Freedom of Information Act requests — but Preqin’s 75-person team also keeps in contact with firms, investors and fund managers to keep data updated, Jelfs said.
Many institutions regularly update this information with Preqin, but some information regarding clients or returns does not have to be made public, Jelfs said.
“If a firm is unable to provide any data to us, then unfortunately, we are only able to offer information gathered from the public sources,” he said.
MSU INVESTMENT POLICY
AS STATE AID DECLINES, MSU SEEKS ALTERNATIVES
During the past decade, MSU has ramped up its alternative investments to compensate for declining state aid, and investing in private equity firms, such as Bain Capital, has become more common, MSU Frederick S. Addy Distinguished Chair in Finance Geoffrey Booth said.
MSU and the 14 other public universities in the state receive their funding from three major places: state appropriations levied from taxpayers, student fees and investments.
In the 2001-02 academic year, state appropriations accounted for a majority — 50.1 percent — of MSU’s funding, according to the MSU Office of Planning and Budgets.
But every subsequent year saw a drop in state aid. In 2011-12, state appropriations accounted for only 22.9 percent of MSU’s funding.
When donors give money to the university, it is pooled into an endowment fund with other gifts to the university, said Stephen Dimmock, a former MSU assistant finance professor who researches university endowments.
The firm uses the money to invest in starter businesses that will provide profits back to both the firm and the investor — compensating for the long-term commitment.
According to Preqin, a London-based private equity research firm, MSU’s current financial allocation to private equity funds is $121 million, or 8.7 percent of its portfolio.
MSU’s goal is to fall between 7 and 20 percent of private investments in its portfolio, MSU Director of Investments and Financial Management Glen Klein said.
Because private equity historically has high returns, it can ensure that the university can fund scholarships, said Dimmock, now an assistant professor at Nanyang Technological University in Singapore.
But no one can predict what the returns will be, he added.
Klein and other MSU financial staff members are in constant contact with their investment consultants. If the financial staff is favorable to the consultant’s recommendation, it will then be reviewed by the trustees and their committees.