LOUISVILLE, Ky. (WDRB) -- The University of Louisville sued its former president, James Ramsey, and a handful of other former top administrators on Wednesday for allegedly depleting the university’s endowment to fund excessive spending, including lavish compensation for themselves, while using “creative accounting” to conceal the activity.
The lawsuit filed in Jefferson County Circuit Court centers on Ramsey’s management of the nonprofit U of L Foundation, of which he was also president until he resigned both jobs under pressure in 2016.
“Millions of dollars of donations originally intended for the benefit of the University and its students instead were used to pay excessive compensation,” U of L Board of Trustees Chairman David Grissom said in a prepared statement. “Other funds were directed toward risky and inappropriate investments, and spending regularly exceeded the foundation’s own policy.”
The lawsuit, filed jointly by the university and the foundation, follows reporting by WDRB News in 2016 on the foundation’s unconventional borrowing from the endowment, a $730 million pool of donations that is supposed to support the university forever. That reporting was confirmed in a $2.2 million forensic investigation released June 8, 2017.
Since the forensic report’s release last summer, the university and foundation boards have held countless closed-door discussions about whether to pursue a legal case against Ramsey and his former aides, or whether to move on without action.
The boards have weighed how much they might recover – including from the foundation’s $25 million in insurance policies – against the risk of keeping negative news about the university in the press and the expenses of a complex legal battle.
“When you keep on peeling the onion back and you see some of the actions that were taken, it boils down to: (filing the lawsuit) was the right thing to do,” Earl Reed, chairman of the foundation board of directors, told reporters on Wednesday. "When certain activities occur that were so egregious and wrong for the future of the university and the foundation and our donors, you just can't sit back and let it go."
The lawsuit is the only action so far resulting from the nearly year-old forensic investigation performed by Chicago consulting firm Alvarez & Marsal.
The Kentucky Attorney General's office opened a criminal investigation into foundation management issues in July 2017, and the office "continues to analyze information provided by the University of Louisville pursuant to our earlier inquiry," Attorney General spokesman Terry Sebastian said Wednesday.
Grissom told reporters Wednesday that university and foundation officials continue to have "conversations" with "law enforcement agencies" about the situation, but he declined to be more specific.
Lawsuit names four others, law firm
The lawsuit also names Ramsey’s former chief of staff Kathleen Smith; Jason Tomlinson, the foundation’s former chief financial officer; Burt Deutsch, the longtime former chairman of the foundation’s finance committee and a former paid foundation consultant; Michael Curtin, U of L’s former chief financial officer; and Stites & Harbison PLLC, the Louisville law firm that advised the foundation.
In comments to the press on Wednesday and resolutions they voted to approve, university and foundation board members indicated that Ramsey and Smith are the primary targets of the lawsuit.
“What we believe the evidence clearly establishes is a pattern of mismanagement, inappropriate expenditures and unauthorized acts by the individuals mainly through the direction and planning of Dr. Ramsey and Ms. Smith,” said Birmingham, Alabama lawyer Andy Campbell, the university’s lead attorney on the case.
Steve Pence, Ramsey’s attorney, said Wednesday that Ramsey has done nothing wrong.
“It’s unfortunate the university is spending time trying to tear down what was built rather than building something themselves,” he said.
As the lawsuit proceeds in court, Pence said, Ramsey "will take full advantage of placing people under oath and clearing his name."
Smith’s attorney Ann Oldfather said: “Other than the harm (the lawsuit) is going to do to the community, which will be significant, I welcome and Kathleen welcomes the opportunity to tell our side of the story of this person who was integral to the success the university has enjoyed for the last 15 years which this board of trustees has done its best in the last two years to trash.”
Don Cox, the attorney who represented Tomlinson in his wrongful termination lawsuit against the foundation, noted that Tomlinson and the foundation settled the lawsuit and that the foundation issued a statement saying Tomlinson performed his duties "as requested" and thanked him for his service.
Deutsch did not immediately return a call for comment, while Curtin could not be immediately reached.
Bob Connolly, the chairman of Stites & Harbison, said he hadn't yet seen the lawsuit but is "confident in the work" the firm performed for the foundation.
$22 million in “egregious” deferred compensation
The lawsuit takes aim at the foundation’s “unreasonably excessive” deferred compensation program in which Ramsey, Smith and other top administrators were paid a total of $22 million from 2005 to 2016, including $8.75 million for Ramsey and $2.6 million for Smith.
Ramsey and Smith insisted that the foundation not budget money to satisfy the deferred compensation payouts, depleting the endowment to fund them instead, according to the lawsuit.
“Ramsey and Smith’s compensation is particularly egregious given their wrongful conduct, which they suppressed from the Foundation and University board members,” according to the lawsuit. “In other words, Ramsey and Smith were being excessively compensated from the Foundation while they were simultaneously improperly and secretly depleting the Foundation’s assets.”
The university and foundation allege that “at least some” of the deferred compensation was not approved by foundation’s board, including a $1 million “retention” payment that Ramsey began collecting in 2012.
“This bonus is not even discussed, let alone approved, during any Foundation or University minutes from this time period,” according to the lawsuit.
An email shows Smith was “fearful,” according to the lawsuit, when she learned that foundation staff were looking for board minutes in which the $1 million was approved, at the request of auditing firm Crowe Horwath.
“Please do not send these minutes to anyone without my knowing why,” Smith wrote, according to the lawsuit.
‘Fraudulent’ endowment spending at issue
Much of the lawsuit focuses on how, under Ramsey, the foundation created a company called University Holdings to borrow through a “line of credit” from the endowment while classifying the loans as investments instead of spending.
That accounting was “a scheme” directed by Ramsey to spend more of the endowment than the foundation’s means would otherwise allow, according to the lawsuit filed Wednesday.
“Ramsey knew he could not spend endowment money on certain projects—the Foundation budget lacked available funds to do so. Thus, to avoid detection or scrutiny, the Defendants caused the Foundation to fraudulently record the UHI line of credit as an investment generating fictitious returns—while knowing it was truly an expenditure,” according to the lawsuit.
As WDRB first reported in 2016, University Holdings racked up a $72 million debt, including interest, the endowment. The money funded foundation activities such as Nucleus, its downtown life sciences organization; MetaCyte, a defunct business incubator; the suburban office buildings built on U of L’s Shelby campus and the purchase of the former Kentucky Trailer property where U of L once planned an engineering research park.
University Holdings also paid $1.7 million in extra compensation or car allowances to Tomlinson, Smith and a handful of employees in the university president’s office, according to WDRB’s 2016 reporting and the forensic investigation released last June.
The lawsuit says Smith “schemed” with Stites & Harbison, the foundation’s former law firm, to “obfuscate” the compensation from University Holdings.
The lawsuit includes a 2013 email, first unearthed in the forensic investigation, in which Smith wrote: “I would like to make the paper trail to our holdings as obscure as possible . . . please think about how we can move our LLCs into something more obscure that would be difficult to find through ORRs (open records requests).”
The lawsuit is below: