Sunday, December 18, 2011
Houston foundation hit by Ponzi scheme
DALLAS -- A foundation that endows athletic scholarships at the University of Houston may have lost more than 40 percent of its listed assets because of investments in an alleged Ponzi scheme orchestrated by a financial adviser for college basketball coaches who committed suicide last summer.
The losses incurred by the Houston Athletics Foundation could have financial implications for the university, which has traditionally struggled to raise funds for its sports programs. The investments have also raised ethical issues for the group's board, many of whom had long-standing ties to the scheme's mastermind, David Salinas.
More than $2.2 million of the nearly $5.1 million in assets listed by the foundation in its most recent filing with the Internal Revenue Service were invested in bonds that the Securities and Exchange Commission claims never existed. The foundation's losses are among the most notable in a scheme that allegedly defrauded more than 100 investors of $39 million, including millions of dollars from several high-profile college coaches.
"We were tricked like everybody else," said Matthew Houston, the foundation's current treasurer.
Salinas, 60, shot himself to death in his suburban Houston home last July, just weeks before the SEC filed a lawsuit accusing him and an associate, Brian Bjork, of selling bogus corporate bonds with purported yields of up to 9 percent. The matter remains under criminal investigation by the U.S. Secret Service.
Houston said the foundation has decided to collect dues from board members to ensure the university receives the roughly $250,000 the group usually sends annually to fund athletic scholarships.
Houston athletic director Mack Rhoades said he still anticipates a reduction of some sort, but the money is a relatively small percentage of the $3 million the school raises annually for that purpose.
"It's not a huge impact, but it does have an impact," he said.
Athletic funding has been a challenge through the years for the university, where sports programs are overshadowed by the city's professional teams. The problem was accentuated when the university was among those left out when the Big Eight merged with the Texas schools of the Southwest Conference to form the Big 12 in 1996. The shift forced Houston into the less lucrative Conference USA.
But the school has created a buzz with a run of successful football seasons, and two weeks ago it gained admission to the Big East, a BCS conference. The move could mean an annual revenue increase of $7 million, according to Rhoades.
The university's athletic department initially relied on the foundation as its fund-raising arm, but it lost that role in 2002 when then-athletic director Dave Maggard replaced it with a group directly under the department's control, Cougar Pride.
Maggard, who retired in 2009, would not comment on the foundation or Salinas, saying only that he made the change to be "more efficient and cost-effective."
Salinas was a money manager for numerous college basketball coaches, including Billy Gillispie of Texas Tech and Scott Drew of Baylor. Former Arizona basketball coach Lute Olson also invested with Salinas, as did Baylor football coach Art Briles, who previously coached at Houston.
In addition, Salinas operated a well-known AAU basketball program for high school players, many of whom were recruited by the coaches whose money he managed.
Court and other records examined by The Associated Press show that Salinas was just as closely aligned with the foundation, an organization that annually gives the university a grant equal to 5 percent of its assets to help cover the cost of athletic scholarships.
Salinas was among the foundation's board members when the group was started in 1995, and he remained on the board until his death, records show. Bjork also was on the board and was its treasurer until the SEC filed its lawsuit.
Bjork has agreed not to contest the SEC's civil claims and has informed authorities he will cooperate, but is not admitting guilt, said his attorney, Matt Hennessy. The attorney said neither he nor his client could comment further.
In addition, documents filed in the SEC case show that an investment company started by Salinas and Bjork, Select Asset Management, made a $1.58 million loan to one of the foundation's board members.
Experts who regularly scrutinize charitable organizations said the loan represents a major conflict of interest that could have compromised board decisions. At the very least, the foundation's board members had an obligation to look closely at the bonds because they comprised such a large percentage of the group's investment portfolio, they said.
"There are all sorts of best practices that it seems to me were not followed in this case," said Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy, a watchdog group for nonprofits based in Washington, D.C.
Dorfman said the circumstances surrounding the Salinas case are similar to what his organization saw in analyzing the nearly 150 foundations that invested with Bernard Madoff, whose $65 billion Ponzi scheme is the largest financial fraud in U.S. history.
"Unfortunately, personal relationships often supplant good due diligence, and people just go along with a charismatic personality, which was certainly the case with Bernie Madoff," he said.
Houston, the foundation's treasurer, said the group has reorganized its board and revised its bylaws to prohibit investing with board insiders. It also is considering a lawsuit against its auditors for failing to realize the bonds didn't exist, he said.
Rhoades supports the foundation's policy changes, but he doesn't believe the group should be singled out for criticism because of what it lost.
"The Houston Athletics Foundation is like every other victim out there that invested money with David Salinas, and it's sad," he said.