Board puts money in funds run by associates, friends of appointees; staff defends methods

R. G. RATCLIFFE
Houston Chronicle Austin Bureau
March 21, 1999, Sunday

Correction Appended

AUSTIN - A little-known, quasi-state agency headed by political appointees has been meeting behind closed doors to invest $1.7 billion of public university money in the form of investments in private companies.

Almost a third of that money has been given to funds run by the appointees' friends and business associates. And because of rulings by the Texas Attorney General's Office, the public cannot find out whether any of these investments made or lost money for the state.

As chairman of the 3-year-old University of Texas Investment Management Company, Tom Hicks has committed $1.7 billion in public university money to private investment banking funds that promise potentially high returns from high-risk investments.

Hicks is a Dallas investment banker with a growing sports and broadcasting empire. He is perhaps best known as owner and chairman of the board of the Texas Rangers baseball team. His good works for the university include a donation of more than $1 million to expand the UT football stadium and the gift of the Alamo diary to UT-Austin.

Almost a third of the $1.7 billion directed by UTIMCO, $252 million, has been committed to funds run by Hicks' business associates or friends. Another $205 million has gone to five funds run by major Republican political donors.

In one case, Hicks insisted that UTIMCO increase by $10 million an investment commitment to a company in which he had an indirect financial interest. The staff halted full funding of the investment when it discovered the conflict.

Hicks did not respond to several requests made early last week for an interview with the Houston Chronicle about UTIMCO's investment practices. But late Friday, he issued a statement through his spokeswoman saying questions raised by the Chronicle created a false impression.

UTIMCO's investments were made in closed-door, off-campus meetings - including one in Hicks' boardroom at the Ballpark in Arlington. Such meetings have caused state auditors to question the secrecy and potential for conflicts of interest.

Hicks founded the Dallas investment banking firm Hicks, Muse, Tate & Furst, Inc. He was appointed to the UT Board of Regents in January 1994 by Gov. Ann Richards, who took $17,500 in campaign contributions from Hicks before her defeat.

Hicks did not seek reappointment to the Board of Regents when his term expired in February, but has asked to keep his chairmanship of UTIMCO as an outside director.

All of these UTIMCO commitments are part of an investment plan launched by the UT regents in 1995 and taken over by UTIMCO in 1996 to place some of the state's trust and endowment investment portfolio in privately run funds. This $1.7 billion investment drive is five times larger than the $282 million that was placed in such private deals between 1987 and 1992, before UTIMCO was born.

Concerns about conflicts of interest

Before 1990, public pension and trust funds rarely invested much in private investments. That was the realm of corporate pension funds and wealthy individuals.

But investing public money privately has become a popular and legal way of handling pension and trust funds nationally.

During this decade, public institutional investors have begun increasingly to play the market of venture capital and leveraged buyouts. The potential for conflicts of interest has alerted federal law enforcement agencies and the U.S. Securities and Exchange Commission has acknowledged problems in a dozen states.

The California Public Employees Retirement System was rocked by scandal last year over elected officials who serve on the CALPERS board receiving campaign contributions from people, including Hicks, who wanted investment contracts.

The FBI conducted an inconclusive investigation of Hicks after his investment banking firm won a $100 million investment from the CALPERS board over the objections of its staff. The recommendation to invest with Hicks came from an outside consultant who nine months later sold a yacht to Hicks for a $45,000 profit.

In New York, Democratic Comptroller H. Carl McCall took campaign contributions from private managers of the state employee pension fund he controls. In one instance, McCall took $16,000 from executives of Freeman Spogli & Co. three days before awarding the firm an $85 million investment.

In January, SEC enforcement chief Robert E. Plaze sharply criticized what he called "pay for play" - campaign contributions that are made with the express or implicit expectation of receiving investments from municipal or state governments.

"Pay-to-play creates the impression that contracts for professional services are awarded on the basis of political influence rather than professional competence," Plaze said. "It brings discredit on the businesses and professionals who participate in the practice."

The SEC plans to ban public investment funds from giving contracts to regulated money managers who make political donations to officials who serve on or appoint persons who serve on public investment boards.

The Texas State Board of Education last year passed a rule requiring people seeking money management contracts with the state's $16 million Permanent School Fund to disclose any campaign contributions they have made to board members.

The board has the legal authority to set up a nonprofit corporation such as UTIMCO to manage the school fund, but has not done so. A bill is pending before the state Senate - SB1791 - that would enhance the board's ability to set up such a corporation.

The move to invest public university money in private funds began after Hicks joined the UT Board of Regents in 1994.

The investments had been made through the regents boards, which are required to conduct business in public.

UT Chancellor William Cunningham told the Legislature that the university needed greater secrecy in its investments so that it could place money with competitive high-return investment funds.

UTIMCO President Tom Ricks said in an interview last week, "If we were required to disclose these investment strategies, we would be locked out of the market."

Ricks, the top UTIMCO staff member, said the public's interest in UTIMCO's investments are protected by internal, private and state auditors. He said the UTIMCO board also has a legal responsibility to make sure the funds are invested wisely to make money.

In the 1995 session, the Legislature authorized creation of UTIMCO, a nonprofit corporation. Since 1996, UTIMCO has handled more than $11 billion in the investments of the UT endowment funds as well as the state's higher education trust, known as the Permanent University Fund. Of that amount, $1.7 billion has been directed to private investment management companies.

When it began operations in 1996, Hicks became chairman of the nine-member UTIMCO board of directors, which has included key fund-raisers for the Republican National Committee. Hicks and his brother, Steven, have donated $ 146,000 to Gov. George W. Bush's campaigns.

In the past three years, state auditors have criticized the secretive nature of UTIMCO's investment decisions and have complained about the potential for conflicts of interest for board members.

"Because private investments often involve complex business structures and may create subtle relationships among the parties involved, strong controls are needed to ensure that potential conflicts of interest are adequately identified, resolved and disclosed," state auditors said in a November 1996 report.

Investment results don't have to be disclosed

In response to the Houston Chronicle's open records requests for information about UTIMCO investments, then-Attorney General Dan Morales, a Democrat, and his Republican successor, John Cornyn, ruled that UTIMCO does not have to disclose whether individual private investments make or lose money, citing the competitive marketplace exception of the Public Information Act. Morales also ruled that the names of private fund managers and co-investors do not have to be made public.

Using what public records were available, the Chronicle was able to find only sketchy information on most of UTIMCO's investments.

Suzy Woodford, executive director of Common Cause of Texas, said UTIMCO's closed-door investment practices keep the public from knowing whether there are conflicts of interests, whether board members are profiting from investments and even whether the investments are wisely made.

"There really is no oversight over what they are investing public money in," she said.

Woodford said much of the private investing is done with limited partnerships that by law do not have to reveal the names of the limited partners.

Such a deal "could be a real easy way to have cozy relationships without the public knowing about it," she said.

Larry Makinson, executive director of the Center for Responsive Politics in Washington, D.C., said financiers have always been some of the biggest campaign contributors nationally.

"These people understand the value of a political investment, and they don't spend money lightly," Makinson said.

"It really bears extremely close scrutiny, whether it be the union pension fund or the money your university has got," he said.

In Texas, the law creating UTIMCO said conflicts of interest exist only when a manager has a direct personal financial interest. Hicks has removed himself six times from voting on investments that had direct ties to his companies.

Austin Long, director of private markets for UTIMCO, said the agency's staff works hard to avoid conflicts between its investments and Hicks. Long said the UTIMCO staff halted one investment after discovering such a conflict.

The UTIMCO staff recommended in June 1996 that the board commit $15 million to The Beacon Group III-Focus Value Fund, L.P. But Hicks insisted the amount be raised to $25 million, according to board minutes.

Beacon received $15.6 million from UTIMCO before the staff discovered a "back-door" conflict of interest that violated state law and halted further investments with Beacon. Long refused to say what the conflict was.

According to SEC records obtained by the Chronicle, Hicks sat on the board of directors of Stratford Capital Partners, which along with The Beacon Group in 1996 was buying a chain of movie theaters. Stratford is an affiliate of Hicks, Muse.

"When we do a deal, we put out a lot of feelers to make sure we don't run into Tom (Hicks)," Long said. "We're trying as hard as we can not to run into (one) another."

Hicks in January 1998 signed a conflict-of-interest statement saying he had no "personal or private interest" in the Beacon investment. At the time Hicks signed that document, Stratford and Beacon owned $52 million of the theater chain stock.

Friday's statement to the Chronicle reads: "It appears the Houston Chronicle has constructed an elaborate and false scheme to explain a series of completely separate transactions. The facts are all of these transactions were conducted with the highest standards of integrity required in due diligence. It is far-fetched and frankly goofy to make false comparisons and then draw conclusions in an imaginary connect-the-dot exercise."

UTIMCO money touches Hicks' firm

UTIMCO has made $120 million in commitments with three funds that have done business with Hicks, Muse.

American Securities Partners, a New York leverage buyout firm, received $30 million in investment commitments from UTIMCO in May. Ten months earlier, American Securities Partners had sold its ownership interests in Community Pacific Broadcasting L.P. to Hicks, Muse and Capstar Broadcasting partners, which is run by Hicks' brother Steven.

When the UTIMCO investment was made, Hicks signed a conflict-of-interest statement saying, "I do not have a personal or private interest" in American Securities Partners.

Long said he was unaware of the deal between American Securities Partners and Hicks, Muse until told about it by the Houston Chronicle.

Evercore Capital Partners, a New York investment banking firm, received a $40 million investment commitment from UTIMCO in January 1997. Less than nine months later, Evercore served as the financial adviser to NBC as the network entered a $1.7 billion joint venture with Hicks' firm to purchase LIN Television Corp.

The Kohlberg Kravis Roberts & Co. 1996 Fund received a $50 million commitment from UTIMCO in August 1996. Sixteen months later, KKR announced a joint venture deal with Hicks' investment firm to buy Regal Cinemas for $1.1 billion. The money KKR used for the joint venture with Hicks came from The KKR 1996 Fund, according to SEC filings.

Ricks said the UTIMCO staff worried that this deal might violate the state conflict-of-interest law. But UTIMCO lawyers approved it because the joint venture was done after Hicks voted on the investment.

UTIMCO invested another $107 million of public university money with two of Hicks' former University of Texas classmates, Bruce Schnitzer and William McComb Dunwoody.

Schnitzer helped raise money in 1990 for the Hicks Muse Equity Fund I and subsequently made several investments with Hicks' firm.

While Hicks recused himself from voting on $67 million in investments in Schnitzer's Wand Partners, UTIMCO minutes indicate Hicks did participate in the decision to invest $10 million toward the purchase of Acordia Inc., an insurance brokerage with ties to Wand Partners.

Internal UTIMCO memos obtained by the Chronicle indicate the staff was concerned about crossing Hicks on the original UTIMCO investments in Schnitzer's Wand Partners.

In June 1995, an outside investor told UTIMCO staff that something might be wrong with one of Schnitzer's investments. Long wrote a memo to another staff member to check out the rumor.

"Needless to say, such an inquiry must be conducted with an exquisitely delicate touch, given the prior relationship between Schnitzer and Hicks," Long's memo said.

Ricks said the memo reflected the nervousness of the UTIMCO staff because Hicks had introduced them to Schnitzer. But Ricks said Hicks has never interfered with staff decisions on whether to recommend an investment to the full board of directors.

"As far as I'm concerned, Tom Hicks is one of the best things that has ever happened to the University of Texas in terms of investment acumen," Ricks said.

Political donors have done well

While insider business deals using public money have concerned auditors and others, political donors also have done well in receiving investments of state university money.

In addition to the investments with Hicks' associates, $205 million of the UTIMCO private investments has gone to five funds that are run by or have major co-investors who are major Republican donors, including contributors to George W. Bush's gubernatorial campaigns.

The largest such investment has been $96 million to the 5-year-old Maverick Capital Fund of Dallas, a hedge fund run by investors Sam and Charles Wyly and begun primarily with Wyly family money.

Under its standard fees, the Maverick fund would receive about $960,000 a year for managing the money plus 20 percent of the profits it makes for UTIMCO.

The Wylys and their fund manager, Lee Ainslie, have given more than $685,000 to state and national Republican committees and candidates since January 1995. That includes $76,000 the Wylys gave to Bush's re-election campaign.

The Maverick fund received its investment during a UTIMCO directors meeting in the boardroom of the Ballpark at Arlington in July 1998, a month after Hicks bought the Texas Rangers baseball team from an investor group that included Bush.

UT Regent Tom Loeffler, a Washington lobbyist who is national co-chairman of Team 100, a group of high-dollar GOP donors created by President Bush, was among the UTIMCO directors who voted on giving the Maverick fund its investment.

Loeffler and his law firm also are registered congressional lobbyists for Hicks, Muse, earning about $280,000 a year on that contract.

Loeffler said there is no connection between his business and political interests and what he does as a UT regent and UTIMCO director. He said he only votes on investments recommended by the staff.

"I have a responsibility to the University of Texas System, and I honor it impeccably," Loeffler said.

Other UTIMCO board members who have been major donors to Republican causes are Texas A&M Regent Robert H. Allen and businessman Homer Luther, both of Houston, and Luther King of Fort Worth.

UT Chairman Don Evans served on the UTIMCO board from 1996 to 1997 and retains fiscal oversight. Evans heads Bush's presidential exploratory committee and has been a key fund-raiser for Bush's gubernatorial campaigns.

Ricks said the UTIMCO staff never looks at the political background of investors. He said the university receives endowments from both Democrats and Republicans and the investment fund cannot afford to be partisan.

Ricks said the ultimate question for any potential investment fund manager is whether they can make money for UTIMCO.

"At the end of the day, you have to have cash flow, and it doesn't matter who you are connected to," Hicks said.

CORRECTION-DATE: March 23, 1999 Tuesday

CORRECTION:
A paragraph in a story on Page A1 in Sunday's Chronicle was misleading in reporting that almost a third of the $1.7 billion directed by the University of Texas Investment Management Co. has been committed to funds run by business associates or friends of UTIMCO chairman Tom Hicks. Almost a third of the money went to funds run by Hicks' business associates and friends or funds run by major Republican political donors.