THE UNIVERSITY OF LOUISVILLE & THE UNIVERSITY OF ...

1 1 CIVIL ACTION NO. _____JEFFERSONCIRCUIT COURTDIVISION NO. _____JUDGE _____Filed ElectronicallyTHE UNIVERSITY OF LOUISVILLE &THE UNIVERSITY OF LOUISVILLE FOUNDATION, R. RAMSEY, KATHLEEN SMITH, BURT DEUTSCH,MICHAEL CURTIN, JASON TOMLINSON, ANDSTITES & HARBISON, PLLC,DEFENDANTSS erve:James R. Ramsey8902 Adrienne , KY 40245 Kathleen Smith3604 Hillcreek , KY 40220 Burt Deutsch2017 Lowell , KY 40205 Michael Curtin600 NW 104th TerraceKansas City, MO 64154 Jason Tomlinson908 Willow Pointe , KY 40208 Stites & Harbison, PLLCc/o S&H LOUISVILLE , LLC400 W. Market St., Ste. 1800 LOUISVILLE , KY 40202-3352* * * * * * *F01DF6CD-8A21-4CB9-80A1-9F7 FFD3B7354:000001of0000352 COMPLAINT WITH JURY TRIAL DEMANDP laintiffs the UNIVERSITY of LOUISVILLE (the UNIVERSITY ) and the UNIVERSITY of LouisvilleFoundation, Inc. (the Foundation, and collectively, Plaintiffs ) respectfully bring thefollowing Complaint against Defendants James R.

2 Ramsey ( Ramsey ), Kathleen Smith( Smith ), BurtDeutsch ( Deutsch ), Michael Curtin( Curtin ), Jason Tomlinson( Tomlinson ), and Stites & Harbison, PLLC ( Stites ). In support of this Complaint, Plaintiffsstate as follows:THE the UNIVERSITY is a public UNIVERSITY inJefferson County, Kentucky. It isa member of the Kentucky state UNIVERSITY the Foundation is a non-profit corporation organized under the laws ofKentucky with its principal place of business in Jefferson County, Kentucky. The Foundationworks exclusively for the charitable and educational purposes of the UNIVERSITY . The Foundation,holds, invests, and designates the UNIVERSITY s endowment (the Endowment ). information and belief, Defendant Ramsey is anadult resident of JeffersonCounty, Kentucky. During times relevant to this Complaint, Ramsey was, among other things,the president of both the UNIVERSITY and the information and belief, Defendant Smith is anadult resident of JeffersonCounty, Kentucky.

3 During times relevant to this Complaint, Smith was, among other things,Ramsey s chief of staff and the assistant secretaryfor both the UNIVERSITY and the information and belief, Defendant Deutsch is an adult resident of JeffersonCounty, Kentucky. During times relevant to this Complaint, Deutsch was, among other things, aF01DF6CD-8A21-4CB9-80A1-9F7 FFD3B7354:000002of0000353member of the Foundation s board of directors and executive committee. Deutsch was also aconsultant paid by the information and belief, Defendant Curtin is anadult individual andMissouri citizen. During times relevant to this Complaint, Curtin was, among other things, theFoundation s assistant information and belief, Defendant Tomlinson isan adult resident ofJefferson County, Kentucky. During times relevantto this Complaint, Tomlinson was, amongother things, the Foundation s assistant treasurer(he succeeded Curtin in that position).

4 Stites is a limited liability company organized under the laws ofKentucky with its principal place of business in Jefferson County, Kentucky. Stites served as theUniversity and Foundation s law firm regarding manyof the transactions complained of AND Court has jurisdiction over the subject matterof this action pursuant to KRS (1). is proper as to all Defendants because many of the acts and omissionscomplained of herein occurred in Jefferson County, Defendants knowingly caused the Foundation to spend Endowment funds atan excessive and unsustainable Defendants took Endowment money that should have been invested anddiverted it to speculative ventures, loans, and gifts that had little realistic chance of Defendants depleted the Endowment through intentionally complicated andoften unauthorized engaged in this disloyal conduct, Ramsey andSmith paid themselves (andothers)

5 Excessive compensation out of the Defendants disguised these transactions to avoid scrutiny and circumvent theFoundation s approved spending limit and annual Defendants bad faith actions and other wrongful conduct caused theEndowment to lose millions of Defendants worked individually and collectivelyto commit the bad actsdescribed reserve the right toamend this complaint if additional co-conspirators are later Spending the UNIVERSITY of LOUISVILLE Endowment Fund Statement of InvestmentObjectives and Guidelines (the Investment Policy ), the Foundation must not spend more than itmakes. As the Foundation s investment advisor Cambridge Associates, LLC ( Cambridge ) putit, you [the Foundation] have to earn what you spend whether it be from investment returns,from gifts, or a combination thereof. rule enables the Endowment corpus to grow eachyear so that it may fund theUniversity s mission in perpetuity.

6 While the Foundation serves the UNIVERSITY and should spendmoney to aid and promote the UNIVERSITY , it must doso while saving and investing enough tosustain the the Foundation s case, the spending policy allocation was calculated as apercentage of certain assets comprising the Endowment Pool. This percentage was assessedF01DF6CD-8A21-4CB9-80A1-9F7 FFD3B7354:000004of0000355against the Endowment Pool s rolling market , the Foundation calculated thisrolling value by averaging the Pool s value for each of the three preceding years. In or around2011, in an attempt to increase spending, the Foundation modified this formula by averaging thetwo highest of the last three years 2008, the Foundation increased its total spending policy to of theEndowment Pool, apportioned as follows: (1) toUniversity departments; and (2) tobusiness operations and administrative 2012, Cambridge provided Deutsch (who was then the Vice Chair of theFoundation s Board and the Chair of its Finance Committee) an analysis and recommendation(the Cambridge Memo ) regarding the Foundation s spending policy, which was among the highest in the nation.

7 To put this in context, the average UNIVERSITY spending rate atthe time was around s conclusion was clear and strongly-worded:[W]e believe it is incumbent on us as your investment advisors to lay bare in theplainest termsthat the current level of net draws ( , spendingminusendowment gifts) is likely unsustainable..we strongly advise adjusting thespending , Cambridge recommended that the Foundation (1) reduce itsspending rate from to (which Cambridge noted was still at the high end of whatendowments generally spend ); (2) that the Foundation no longer adjust the three year rollingaverage by dropping the lowest year ; and (3) thatthe Foundation no longer include the unspentportion of spending policy from years past in the current spending policy calculation. to the minutes, the Finance Committee didnot reevaluate theFoundation s spending rate in light of the Cambridge Memo until July 2013 approximatelyeight months that meeting (which was presided over by Deutschas the Chair), the FinanceCommittee only accepted Cambridge s third recommendation ( , to exclude the unspentportion of the spending allocation).

8 Despite officially adopting the recommendation, theDefendants caused the Foundation to continue including the unspent carryover in future , the Defendants without authority caused the Foundation to spend millions more than itshould Finance Committee rejected Cambridge s second recommendation ofecommendation ofreturning to a three-year rolling average, insteadexpressly resolving to continue dropping thelowest importantly, the minutes contain no record ofthe Finance Committee orDeutsch discussing Cambridge s first and strongestrecommendation to reduce the rate to It appears Deutsch, as Chairof Finance Committee, failed to evenconsider this recommendation or present it to the Finance Committee for a minimum, Deutsch did not recommend reducing the spending rate. TheFoundation s spending remained until knew, however, that the Foundation was required to spend less than itearned.

9 The Investment Policy mandates that the corpus of the Fund must keep pace withinflation in order to provide future generationswith the same relative level of support currentlyenjoyed by the Fund s beneficiaries. also knew the Foundation was violating thiscentral tenant. TheCambridge Memo described the spending rate as unsustainable. Documentation from that timeperiod corroborates Cambridge s critique and provesthe Foundation was spending more than other Defendants were also aware of this unsustainable spending. Forexample, in March 2013, Curtin admitted that cash outflows had greatly exceeded cash inflowsto the Endowment over the previous five make matters worse, the Foundation actually spent more than the already-excessive, authorized spending rate. The Defendants did this by using accounting tricksto inflate the Endowment Pool s value (on which was assessed).

10 The Defendants (inparticular, the former assistant treasurers, Curtinand Tomlinson) caused the Foundation (1) torecategorize expenditures as valuable Endowment Pool investments; and (2) to record fictitiousreturns on certain alleged investments. Tomlinson later admitted that the purpose of this schemewas to generate a higher spending policy was instrumental in re-categorizing certainexpenditures as , he did critique the second scheme of recording nonexistent this critique, Deutsch did little to stop this tactic and the Foundationcontinued to record fictitious returns for years techniques artificially inflated the Endowment Pool s value byapproximately $70 million in some years (thus inflating the spending allocation by millions).The UHI Line of , with the assistance of the other Defendants, caused the Foundation totransfer at least $ million to UNIVERSITY Holdings, Inc.