March 23, 2009
As we continue to meet the more general challenges of the recession, reports that Pitt may have been among the victims of an investment fraud have been deeply troubling to everyone who cares about the University. As those familiar with our recent history know, we have worked very hard to build financial strength at Pitt. Among other things, we take the responsibility to protect University assets very seriously, and our team of capable and experienced financial professionals has an enviable record of high performance in that regard.
I provided a general overview of this matter at this month's public meeting of our Senate Council—believing that it was appropriate to share what information I could with the assembled representatives of our faculty, staff, and students. The following day brought published reports of the remarks that I made in that session, which some of you may have seen. However, knowing that the broader University community has an understandably strong interest in this matter, I also wanted to take the further step of reaching out more directly through this update.
In doing so, I must begin, as I did in addressing the Senate Council, by expressly noting that there are limits to what I can say. Most basically, of course, there are things that we simply do not yet know, a circumstance that may be tied to the basic nature of fraud. We do anticipate, though, that additional information will be developed and shared as the federal investigations now under way move forward. We also must take care, then, not to say anything that could complicate either those investigations or the pending legal proceedings through which we expect to achieve some measure of recovery.
The investments in question were made with Westridge Capital Management, Inc., a firm brought to our attention as a potential fund manager in early 2000 in connection with a broader search undertaken by one of the University's principal investment advisors. This advisor is one of the country's largest and most-respected investment consulting firms and has served as a consultant for Pitt for more than 25 years. Our first investment with Westridge was made in late 2002, more than two years after that initial recommendation and following an extended period of due diligence activities.
That initial investment and all of our subsequent Westridge investments were with a federally regulated entity that also was regularly audited by a Big Four accounting firm. Despite some published reports to the contrary, the investment strategy employed was conservative—utilizing an enhanced index approach tied to the S&P 500 and designed to deliver modest returns with little risk. Due diligence reviews with respect to the fund manager and its performance were conducted on a regular and ongoing basis.
As has been widely reported, Westridge also attracted investments from other large institutional investors—principally corporate and governmental pension funds, as well as other universities. Additional investors apparently were poised to invest with Westridge at the time concerns about its operations were made public. One highly publicized example from close to home involved the Pennsylvania School Employees Retirement System, which had authorized a $1 billion investment with Westridge. That investment reportedly was not made only because the necessary legal documents still were being drafted when public concerns emerged.
Our own concerns were triggered when we learned last month that two Westridge principals had failed to cooperate in an inquiry initiated by the National Futures Association. At that point, we first demanded a return of our funds. When those efforts proved unsuccessful, we immediately joined forces with Carnegie Mellon University, also a Westridge investor, to bring suit in the United States District Court for the Western District of Pennsylvania. That court quickly issued the temporary restraining order that we had requested, an order designed to freeze the assets of Westridge and its principals while the court considered our other claims for relief, all of which were focused on securing the return of our assets.
Shortly after the entry of that federal court order here in Pittsburgh, prosecutors initiated criminal proceedings against two Westridge principals in federal court in New York City, and the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) filed civil actions, also in New York City, for fraud and securities law violations. In the cases brought by the SEC and the CFTC, a receiver was appointed late last month to operate Westridge and preserve its assets. That receiver is under an obligation to provide periodic reports to the court, which also will be available to potential claimants.
These actions initiated by the federal government bring the significant resources and authority of the SEC, the CFTC, and the United States Attorney's office to bear on this matter. As a result, Pitt and CMU voluntarily asked the federal judge here in Pittsburgh to temporarily stay our own action so that the efforts of federal officials would not be impeded in any way by that suit. We are actively monitoring the progress of the New York proceedings and cooperating with the federal authorities who are pressing forward with those proceedings, expecting that they will provide answers to some of our key questions—including the nature of any fraud that may have occurred; the period of time over which it was perpetrated; and the extent of the assets that may be available to satisfy our claims.
In the meantime, after reporting all that we now know to the full Board of Trustees and after discussions with its Investment Committee, we have initiated a review that will begin, not surprisingly, with a careful look at the history of our dealings with Westridge but that will extend more generally to our investment manager selection and due diligence practices. The ultimate shape of that effort clearly will be affected by what we learn from the ongoing federal investigations as that work unfolds. However, we did not want to wait until those investigations had been concluded before taking our own first steps.
To be clear, from what we now know, we believe that our selection and due diligence processes have been thorough and would fare favorably if measured against either the processes employed by our peers or a best-practices standard. Further, it may be impossible, as often is said, to construct any system that provides complete protection against criminal behavior, including cleverly conceived fraud—and, though not yet proven, acts of fraud have been charged here. However, one of our key goals is to determine whether there are any ways that we might improve our processes to ensure that we have achieved the highest practicable levels of asset protection.
As already has been reported, we do not anticipate that these problems will have any short-term impact on distributions from our endowment. It is difficult to predict any possible longer-term effects until we can better gauge our potential losses. Of course, we remain committed to securing the largest possible recovery, and the overall financial strength that we have built in the last dozen years does provide a measure of protection against this possible loss, just as the financial strength we have built has better positioned us to deal with the broader challenges of the troubled economy.
Obviously, I wish that my communications to you could be limited to an unending and uninterrupted stream of positive news, and even in these difficult times, a great deal of very good news is being generated by the people and programs of Pitt. However, our shared institutional lives do involve challenges and disappointments, as well as opportunities and successes, and I know that one of my responsibilities is to report to you about bad news as well as good news. In that regard, I hope that this overview is helpful, and I will share additional information about this matter when I am able to do so.