A former chairman of the University of Colorado Foundation who has donated millions has sued the organization, alleging what he sees as an underwhelming investment strategy is costing students.
Clarence Herbst, who was chairman from 1992 to 1994 and also has served the organization in other roles, filed the lawsuit on July 15 in Denver District Court, alleging breach of fiduciary duty and violation of state law.
In addition to the foundation, the lawsuit also names as defendants foundation CEO Jack Finlaw, UC President Mark Kennedy and others. Three recent graduates of the system’s Boulder and Colorado Springs campus are also plaintiffs.
Finlaw, who assumed the CEO role in 2004, said he wasn’t surprised by the lawsuit — “He’s been threatening to sue us on this for longer than I’ve been here” — and disputed the notion the foundation’s recent returns have been underwhelming.
“Our performance is in the top quartile,” compared to other university endowments, Finlaw said.
In the lawsuit, Herbst — who said he has donated about $5 million to the foundation or CU itself — alleges that the foundation’s recent strategy of active investing is producing less returns, and costing more in fees, than if the organization had just dumped all its funds into an index fund.
He said the foundation has underperformed the S&P 500 Fund by approximately 5.49 percent annually from 2010 to 2019.
Herbst’s lawsuit then notes that the cost of attending CU is rising, and suggests underperforming investments are part of the reason, along with cuts in state funding. The lawsuit seeks class-action status on behalf of all students who have attended the CU system since 2009.
“No ordinarily prudent person would have wasted tens of millions of dollars per year on investment advisory fees with PWP and dozens of other active management and hedge fund advisors when the CU Foundation could have invested in low cost index funds and saved CU tens of millions of dollars,” the lawsuit reads.
Herbst claims that the foundation did invest most of its assets in index funds until about 2003. In 2004, however, it named Chris Bittman its chief investment officer, “and at that point, the CU Foundation began its downfall by active investing,” the lawsuit reads.
Bittman left the role in 2009 to become a partner at Perella Weinberg Partners, and the foundation then contracted the firm to manage its investments.
“Following the initial contract with PWP, the CU Foundation did not negotiate the percentage fees and costs it would pay PWP and other active manager firms engaged by PWP to ‘manage’ the CU Foundation’s assets, and it has not done so in the last ten years,” the lawsuit states. “The CU Foundation did an insider transaction with Mr. Bittman and PWP.”
Bittman and PWP are not named as defendants in the lawsuit.
Finlaw said that as of June 30, 2019 — results for the fiscal year that just ended haven’t been tabulated yet — the foundation had an annualized return of 9.2 percent in the last 10 years.
Average return for all university endowments over that same time was 8.4 percent, Finlaw said. Restrict that to endowments, like CU’s, that are greater than $1 billion and the average return was 9 percent annually.
Finlaw said the foundation has a “very diversified portfolio,” that includes private equity and real estate investments, along with publicly traded stocks and some index funds. He said the foundation believes such diversification is required by state law.
Of the impressive returns for S&P 500 funds in recent years, “my view is hindsight is 2020,” Finlaw said, adding that returns wouldn’t have been so impressive in the 2000s.
“It might work for people like you and me who have much smaller portfolios,” he said.
Finlaw also said the foundation regularly reviews the performance of Perella Weinberg Partners and has had outside consultants do so as well.
“We believe their fees are very reasonable,” he said.
Herbst is the retired chairman and CEO of Resinoid Engineering, which has facilities in Ohio and Illinois, and was founded by Herbst’s father. According to its website, the company makes products for the automotive industry, among others.
Herbst graduated from CU and currently lives in Colorado, according to the lawsuit. He has received numerous awards from the school system. The Herbst Academic Center at CU Boulder and McCord-Herbst Student Veterans Center at UCCS are named after him.
Herbst has been disappointed in his alma mater’s actions before. Crain’s Chicago Business reported in 2015 that Herbst, disappointed by the school’s decision to pour tens of millions into athletics, had “dropped his stadium seats, took the school out of his will and pulled three paintings he had lent the Boulder school from his private collection of Western art.”
Attorneys Matthew Johnson and Kimberly Berve of Dowd Bennett are representing Herbst in the lawsuit.