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Tuesday, September 18, 2018

Moritz Family Fights Ohio State Over Undisclosed 1% Annual Development Fee Charged Against Naming Gift To Law School, As Endowment Has Shrunk From $30m To $22m In 17 Years

Ohio State LogoColumbus Dispatch, Moritz Family Fights Ohio State For Using Endowment to Pay For Fundraising:

A young Michael Moritz had promise and aspirations, but little money to realize them.

When Ohio State University surprisingly awarded Moritz a full-ride scholarship to law school in 1958, it transformed his life.

Over the decades, Moritz became a partner in a major law firm, a corporate-law expert in demand across the nation for mergers and acquisitions. As he built clients and respect, he also built a fortune.

In retirement, and out of gratitude, he gave back — big time — to his alma mater. In 2001, he donated $30.3 million to Ohio State to endow four faculty chairs and give 30 annual scholarships to needy law students. In recognition of the largest-ever gift to one of its academic units, Ohio State renamed its law college in honor of Moritz.

Tragically, eight months later, the 68-year-old Moritz was killed by a hit-and-run driver in Naples, Florida, with his endowment surviving as what his family believed was eternal testament to his name and generosity.

However, his widow and son now have battled Ohio State for more than two years. They contend the university is diminishing the Moritz legacy by illegally draining millions of dollars in “development fees” they fear threaten the survival and terms of his perpetual donation.

They also wonder whether other donors to many of the 5,500 endowment funds totaling about $4 billion held by Ohio State are aware of the $16.3 million in cumulative annual fees their gifts are charged to pay the salaries of university fundraising employees and the cost of pursuing and entertaining would-be donors.

University officials say the withdrawal of development fees is legal. The Moritz family disagrees — strongly.

“We want the money to go to scholarships, to do great things at the university — not to be spent flying around the country talking to wealthy donors” and hosting social events to court them, said Jeff Moritz, Michael’s son, who earned a master’s degree in business administration at OSU. ...

Jeff Moritz was shocked when he visited his mother’s Grandview Heights home in early 2016. An Ohio State report showed his father’s original 2001 gift of $30.3 million — consisting of subsequently sold 409,478 shares in Cardinal Health, where his father was a director — had shrunk by $8.4 million over the years to $21.9 million, a decline of 28 percent. ...

The endowment also was being tapped for only 12 to 16 full-ride scholarships each year instead of the 30 grants mandated in the gift agreement. “My dad’s legacy and what he wanted to do for the law school is evaporating. I find it sickening,” Moritz said.

He and his mother then began a series of discussions with Ohio State development officials in which Moritz said they attributed the decline to the recession’s negative impact on investments. “They did not mention the deduction of fees,” he said.

More back and forth and the receipt of a report on the endowment’s financial history finally led to an admission by Ohio State officials that an annual development fee, cumulatively totaling about $3 million, had been taken from the endowment since its inception, Moritz said.

The fees also led to the loss of nearly $3 million in investment earnings the endowment otherwise would have earned, he contends. (The fee stood at 1.33 percent in 2004, but it was phased down to 1 percent by 2007 and since has remained the same.)

“My father’s agreement does not call for a development fee; it’s restricted ... nowhere is there any mention of a development fee,” Moritz said. ...

Cleveland Plain Dealer, Moritz Family Challenges Ohio State University For Using Percentage Of Endowments to Woo More Gifts:

Since 1994, Ohio State University has pulled millions of dollars out of endowments — up to 1.3 percent of all gifts — to woo more donors, for more money.

The 1.3-percent fee is now detailed on contracts donors sign before creating endowments, pools of invested money which generate more money for the university through interest. The university began putting language about the fee on contracts in 2008, more than 10 years after the fee began.

The family of Michael Moritz, the namesake of Ohio State's Moritz College of Law, claims the school didn't tell them about the fee.

And they say because they weren't notified, most likely many other donors don't know about the fee.

Michael's son, Jeffrey, found out about the fee in 2016, 14 years after Michael donated more than $30 million in stocks. The family learned the endowment had lost nearly 28 percent of its original value, according to court documents. Instead of funding 30 annual law scholarships, the university was giving out only 12 to 16.

The Moritzes want the money put back into the endowment, which was intended to fund faculty chairs and scholarships.

The university refused, and now Jeffrey Moritz, an OSU alumnus like his dad, is trying to reopen his father's estate to get more bargaining power to get the money back.

"Our first thought is that (the fund) is going down to zero ... the legacy of my father and all his work would be gone," Jeffrey Moritz said.

Officials argue the development fee is lawful, as well as a common university practice. Gift contracts didn't need to cite the fee, because the documents are designed to address the purpose of the money, OSU spokesman Chris Davey said in a written statement.

http://taxprof.typepad.com/taxprof_blog/2018/09/moritz-family-fights-ohio-state-over-undisclosed-1-annual-development-fee-charged-against-naming-gif.html

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Comments

This is disgusting, there's no angle that doesn't make OSU and its administrators look like bastards. How could they impose a fee like that without disclosure? (prior to 2008)

I think university administrators rank below ambulance-chasing trial lawyers and used car salesmen for the worst human beings.

Posted by: Todd | Sep 18, 2018 7:19:01 AM

Just because it didn't happen in a dark alley or a convenience store, let's call this what it is: Theft.

Posted by: tuphat | Sep 18, 2018 7:50:58 AM

Apparently these officials consulted with Urban Meyer on how best to respond to the Moritz family.

Posted by: willis | Sep 18, 2018 9:13:10 AM

Universities acting like telemarketing/scammers and bunko artists. What a surprise.

Posted by: ruralcounsel | Sep 18, 2018 9:43:15 AM

Enough with the charitable deductions first of all.
Why should the rich, remember Gordon Gee?, benefit from the tax code?
It's crazy. Trump bill was a huge first step in going after these excessive endowments. Would love to see more.

Posted by: Josh Scandlen | Sep 18, 2018 9:53:04 AM

https://www.bizjournals.com/columbus/news/2018/08/30/a-healthy-2018-ohio-state-brought-in-7b-spent-5-9b.html Perhaps they could use some of this billion dollar surplus instead of taxing endowments?

Posted by: Stephen | Sep 18, 2018 10:32:23 AM

Is there anyone who law schools' don't lie to and rip off?

Posted by: sca721 | Sep 18, 2018 10:48:58 AM

I had the exact same experience with a much smaller bequest to a college from my parents' estate. A scholarship fund was set up, with 5% of the principal to be withdrawn each year for said scholarships. To my surprise, my annual statement from the college showed that 1% went to the development office, while the remaining 4% went to the intended purpose, effectively a fee of 20% for overhead.

If I were to make a major donation again, I'd negotiate this point. If a school was insistent on that 1%, I'd set up the withdrawal rate at something like 10%, so that even though the scholarship fund would expire, the effective overhead rate would be halved.

I do think that there should be regulations that require universities to state their policies on this to be clearly stated up front.

Posted by: PaulB | Sep 18, 2018 1:35:13 PM

I asked myself why businessmen are so naive and let themselves be defrauded when they give money to universities. Then I realized the answer--- they're used to the higher ethical standards of business, where people keep their promises.

Posted by: Eric Rasmusen | Sep 18, 2018 7:56:41 PM

Mr. Rasumsen's comment is quite correct. The manners and morals of the marketplace denigrated by Cardozo have been improving since Meinhard v. Salmon in 1928 while the fiduciary standards in play in this and other instances have been in decline.

Posted by: Joseph W. Mooney III | Sep 19, 2018 5:31:13 AM

As I understand the facts, the university development office “charged a fee” of 1.3% of principal. Fees are normally paid for services. What services was the university development office rendering to this legacy? Endowments are normally treated as throwing off income equal to 5% of principal. 1.3% is more than 25% of 5%. This means that the university development office was taking more than 25% of the income from the endowment. As to which my question remains: For what services rendered?

Obviously, if Mr. Moritz agreed to this in advance, then it’s fine. But the allegation is that this so-called “fee” was undisclosed. If so, I can’t say much for the university’s chances in court, were Mr. Moritz’s family treated as having standing to complain. If I were the university’s President, however, I’d worry about the next big donor. He or she should be asking: what undisclosed fees will the university charge my legacy after I’m gone?

Posted by: Theodore Seto | Sep 19, 2018 2:40:46 PM