Former Wesleyan University CIO Sued by CT Attorney General

Connecticut's attorney general alleges that Thomas Kannam's “golf outing of the century” in California, a Super Bowl outing, and a trip to the United Kingdom with his entire family to interview for a job at Cambridge University were flagrant abuses of both his power and of the university's endowment assets.

(August 23, 2010) — Attorney General Richard Blumenthal is suing Wesleyan University’s former Chief Investment Officer Thomas Kannam, who was once one of Wesleyan University‘s most highly paid employees, and three private companies for allegedly mishandling university endowment assets for personal trips and other expenses.

According to a release filed Monday by Attorney General Blumenthal, the lawsuit, which has been served but not yet filed in court, claims that Kannam failed to disclose his ties to multiple investment groups, including Belstar Group, LLC, Vietnam Capital Partners, LLC and Advanced Device Technology, Inc., while serving as Wesleyan’s chief investment officer.

“Wesleyan staff and assets were allegedly treated as personal fiefdom — abused and misused for private gain,” Blumenthal said in a statement. “Our lawsuit seeks to recover every dollar diverted from Wesleyan University’s charitable assets by its former investment chief. This misuse of Wesleyan’s endowment resources deprived all Wesleyan students and staff of potential resources.” The attorney general added that Wesleyan’s endowment strictly promotes education and charity as opposed to any private profit and personal trips. “So-called golf outings of the century and new job-seeking trips abroad illegally drained school resources,” he asserted. “My office will fight to recover charitable resources and restore public trust.”

Kannam, who served as Wesleyan’s director of investments from December 1998 through 2005, when he was promoted to serve as chief investment officer, allegedly used Wesleyan employees and university resources to offer research and other services to private firms, which are also named as defendants in the suit. As a condition of employment, Kannam was prohibited from serving in any other positions or on boards, compensatory or otherwise, without permission from the university president, yet Kannam failed to seek consent or disclose his affiliations and lucrative outside ventures that persisted throughout his work at Wesleyan.

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Blumenthal’s office estimates that Kannam — who was terminated in October 2009 — misused, at a minimum, tens of thousands of dollars in university assets.

The suit against Kannam by Blumenthal follows a suit by Wesleyan on November 24, 2009, in Connecticut Superior Court. The university claimed Kannam “defrauded the university of thousands of dollars” and “engaged in outside employment in breach of his duty of loyalty, his employment agreement and the university’s conflict of interest policy.” Blumenthal will support Wesleyan’s suit against Kannam. The Middletown, Connecticut-based university fired him Kannam in October.

In June, Wesleyan filled Kannam’s position, naming Anne Martin of Yale University’s fund as its new chief investment officer to oversee Wesleyan’s fund, which was valued at $532 million as of March 31.

Read ai5000’s cover story on Thomas Kannam in the March / April issue.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(August 23, 2010) — Pension schemes should push hedge funds to explain and justify their fee structures, research house Lipper has urged.

The firm is demanding that funds follow the leads of the California Public Employees Retirement System (CalPERS) and Utah Retirement Systems, which push hedge fund managers to explain their fee structures. “CalPERS announced in March 2009 its intent to work with hedge fund managers to restructure fees and relationships,” CalPERS spokesman Davis Wayne told ai5000. “We’ve cut about $56 million in fees with hedge fund managers this year – the bulk of fees cut this year — about $99 million — have been with hedge funds,” he said.

Meanwhile, Utah’s pension fund has urged its managers for ‘claw-back’ arrangements that permit investors to reclaim charges paid to funds that subsequently underperformed.

“Hedge funds have installed strong standards around transparency generally, and maybe that should be extended more fully to fees, as well,” said Ed Moisson, head of consulting at Lipper SMI, according to Global Pensions.

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Hedge Fund Research revealed that the 2% management and 20% performance fees charged by hedge funds globally have been a steady source of debate since the funds posted a record 19% net loss in 2008, after having made fees on approximately10% gains in 2007. “Hedge funds commonly charge a management and incentive fee, but in contrast to the perception that these levels are standard across the industry at 2% and 20%, respectively, average management fees for single strategy funds were actually 1.58% as of the end of the first quarter of 2010; while average incentive fees were 19.12%,” Ken Heinz, president of Chicago-based Hedge Fund Research, Inc., told ai5000.“In some cases, newer funds are charging lower levels, while in others established managers are changing their fee structures.”

Lipper outlined 10 issues trustees should ask managers, which include:

1. What is the performance fee rate, and does this apply to total returns, or just net returns above a benchmark?

2. Is there a fixed hurdle rate or other benchmark, above which performance fees can be collected?

3. Is there a high water mark and what is its duration?

4. Is there a ‘claw-back’ mechanism?

5. Is there an equalization system?

6. How often is the performance fee crystallised for payment?

7. Is there a cap on fees?

8. Is there a penalty for underperformance?

9. Is there a quid pro quo for lock-up arrangements, such as lower fees?

10. Is there a redemption penalty, and what is the redemption notice period?

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742