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The Investors’ Club: How the University of California Regents Spin Public Money into Private Profit

By Peter Byrne
Tuesday September 21, 2010 - 09:00:00 AM

[EDITOR'S NOTE: This is the introductory section of an eight-part series sponsored by the Berkeley Daily Planet in cooperation with several other publications, organized by the non-profit organization. The whole series can be found here on the site.]

“As universities become glorified vocational schools for corporations they adopt values and operating techniques of the corporations they serve.” – Chris Hedges (Empire of Illusion, 2009)

Part One: Overview of the investigation

Experts identify multiple conflicts of interest among an elite group that oversees investments for the University of California.

Last fall, amid an unprecedented state budget crisis, the University of California Board of Regents took extraordinary measures to cut costs and generate revenue. Lecturers were furloughed, classes eliminated. The board reduced admissions for in-state students, while increasing the admission of out-of-state students, who pay higher fees than state residents. And to the consternation of tens of thousands of students, undergraduate tuition was raised by 32 percent, with more hikes to come.

It now costs about $30,000 per year to attend the University of California (UC) as an undergraduate, including tuition and expenses. Even with student aid, it’s a sum beyond the means of many students and their families.

While education took a beating, the regents authorized $3 million in bonuses to a handful of top administrators, and reduced the salaries of janitorial staff. The regents approved new construction projects, including a sports stadium. They assured Wall Street bond underwriters that periodic tuition increases would help pay off hundreds of millions of dollars in new construction loans.

Objecting to the tuition increases, UC students, employees, and professors staged demonstrations at regents’ meetings and on campuses across the state. Some protestors accused the regents of “privatizing” the university to benefit industrial corporations and Wall Street investors. While it is true that the university’s ties to corporate and banking interests are many and legion, there is a special kind of privatization taking place behind closed doors.

Our eight-month investigation reveals that some members of the regents’ investment committee, who are also Wall Street heavy-hitters, have modified long-standing investment policies in a way that benefited their own financial holdings. The fallout: multiple conflicts of interest. 

The changes can be traced to 2003, when regents Gerald Parsky, Richard C. Blum, and Paul Wachter—all financiers by trade—took control of UC’s investment strategy. Sitting on the board’s investment committee, the three men steered away from investing in more traditional instruments, such as blue-chip stocks and bonds, toward largely unregulated “alternative” investments, such as private equity and private real estate deals. According to UC internal reports, the dramatic investment change has led to an “overweighting” of investments in private equity. One concerned regent has likened the change to “gambling in Las Vegas.”  

The changes did not stop there. 

By-passing the university treasurer’s in-house investment specialists, the regents investment committee hired private managers to handle many of these new kinds of less-regulated transactions. This action theoretically placed some distance between the personal financial holdings of regents and the investments made on behalf of the UC endowment and retirement funds. But it also served to increase management costs, and to limit the transparency around UCs investments, since these “external” managers are not subject to the same public disclosure laws that apply to university operations. 

Unfortunately, many of these deals, while potentially lucrative, have lost significant amounts of money for UC’s retirement and endowment funds, which were worth $63 billion at the end of 2009. (These losses ultimately reduce the amount spent on education, since the endowment supports teaching activities.) And the non-transparency of these private deals enabled multiple conflicts of interest to arise without challenge. 

Specifically, our investigation shows that, under the new regime on the investment committee, UC placed $2 billion into a series of private deals and publicly held enterprises with significant ties to the business activities of four regents: Wachter, Blum, Sherry Lansing, and Gov. Arnold Schwarzenegger. 


State Senator Leland Yee (D-San Francisco) was asked to review the findings of this investigation prior to publication. “These are amazing conflicts of interest,” he concluded. “They happened after the UC Regents’ investment committee drastically changed policy away from investing in fixed income securities and into risky private equity buyout funds—thus enriching several regents with ties to those funds.” 

Yee added, “And contracting out the management of corporate investments to firms who make their money by generating management fees was just a terrible idea.” 


Summary of findings on Mr. Blum 

After Mr. Blum was appointed to the Board of UC Regents in 2002, UC invested $748 million in seven private equity deals in which he or his firm, Blum Capital Partners, was a major investor. (Mr. Wachter was involved in one of these deals as an investor). Many of these deals were operated in partnership with TPG Capital, where Mr. Blum is an investor and an executive, according to the economic disclosure statements of his spouse, Sen. Dianne Feinstein (D-California), and other public records. 

The Blum-related private equity deals in which UC has invested are: Washington Mutual and First American Corporation (2008); Harrah’s Entertainment (2008); Univision (2007); Freescale Semiconductor (2007); Sungard Data Systems (2005); Kinetic Concepts (2003); Commonfund (2002). 

UC has also invested $84 million in real estate and private equity deals, as well as the stock of a public corporation, in which Mr. Blum held significant interests: 

• A UC investment of $42 million, beginning in 2006, enabled the buyout of a real estate company, Glenborough Realty Trust, in which Mr. Blum was a member of the board of directors and a stockholder. UC’s investment in the fund that purchased Glenbourough has declined in value by $38.5 million. 

• In 2007, UC invested $16.6 million in Colony Capital, a private equity firm to which Mr. Blum has numerous business ties. 

• As of late 2007, Mr. Blum’s San Francisco-based firm, Blum Capital Partners, had benefited from a $26 million investment in Janus Capital Group made by UC, as well as from related investments in Janus made by UC’s external managers. 

• Starting in 2004, Blum Capital Partners bought substantial ownership stakes in two for-profit vocational schools in which UC concurrently invested $53 million. These same educational corporations are seeing increases to their enrollment and profit due to class cut-backs at state-funded universities and colleges such as UC. And in 2007, Sen. Feinstein initiated federal legislation that benefited these two companies and other for-profit educational corporations. 

• At the end of 2009, UC held investments totaling $304 million in all 18 of the public companies in which Blum Capital Partners held a substantial or controlling stake. 

Summary of other findings 

• Since 2003, the regents have invested $411 million in Dimensional Fund Advisors, a company partly owned by Gov. Schwarzenegger and Mr. Wachter. UC also put $75 million into Apollo Management private equity funds in which Mr. Wachter and Gov. Schwarzenegger are invested. 


• Since September 2006, Regent Lansing (who is not on the investment committee) has been a member of the board of directors of Qualcomm Inc., for which she receives an annual director’s fee of $135,000, plus stock options. According to her economic disclosure statement, Ms. Lansing owns “more than $1 million” in Qualcomm stock options (no upper limit is specified). In 2009, Qualcomm paid her $485,252. Documents released by the UC Treasurer show that, after Ms. Lansing joined the Qualcomm board, UC quadrupled its investment in Qualcomm to $397 million. Ms. Lansing told us that she did not instruct the treasurer or members of the investment committee to buy Qualcomm stock. 


• We also discovered that since 2004 the California Public Employees Retirement System (CalPERS) has invested billions of dollars in deals that served the financial interests of Mr. Blum, Mr. Wachter, and Gov. Schwarzenegger, often in tandem with UC’s investments in the same deals. During this period, Blum Capital Partners, was an investment advisor to CalPERS. 


Ken Boehm, the chairman of the conservative watchdog group National Legal and Policy Center in Fairfax, Virginia, reviewed the findings of this investigation. “It is hard to imagine more clear-cut examples of conflicts of interest than UC investing in companies and private equity funds in which regents have financial stakes,” Boehm said. “Plus, many of these investments are risky, and the regents have a fiduciary duty to invest more safely. This flat-out looks like wholesale conflicts of interest, of people taking care of their buddies.” 


Ethics experts on the other side of the political spectrum agreed. Robert Weissman, president of Public Citizen, the liberal good-government advocacy group based in Washington D.C., was also appraised of the findings of this investigation prior to publication. “A third grader can see that what the regents on the investment committee are doing is unethical,” he said. “It goes far beyond the ‘appearance’ of a conflict of interest. These are core conflicts of interest.” 

Neither Mr. Blum nor Gov. Schwarzenegger responded to repeated written requests for comment. UC Treasurer Marie Berggren and UC President Yudof also declined to comment. In an emailed statement, Berggren’s spokesperson, Lynn Tierney, said, “It’s misguided to assume that there’s a conflict of interest simply because there’s an overlap between personal investments by University of California Regents and investments made by the UC Treasurer’s Office. The real issue is whether Regents communicate with the Treasurer’s Office about specific investments.” 

Tierney added that the treasurer does not track the regent’s personal investments. 





Ahead: Part Two:The Smell Test: How to tell the difference between a conflict of interest and a coincidence.