University Endowments Skewered; Lawsuits Against Fund Managers Possible

(MoneyWatch)  Universities are seeing their endowments broadsided by the financial meltdown and some are considering suing their fund managers because they can't withdraw cash or because their funds have tanked so much.

According to bond ratings agency Moody's Investors Service, university endowments will decline 30 percent this year. Among those hardest hit are big Ivy Leagues schools, such as Harvard whose $34 billion endowment has been so hammered by market drops that President Drew Gilpin Faust has written an emergency, cost-cutting appeal to the school's community. Cornell and Brown have announced hiring freezes.

At Howard University in Washington, D.C., CFO Sidney Evans, told me, "Our endowment peaked at $550 million in September 2007," he says. As of Nov. 7, it had fallen to $426 million. "That's about 20 percent in a little over 14 months," he says. And at Carelton College in Minnesota, the school's endowment stood at $648 million in late June and now has fallen to $540 million.
Some of the problems stem from the fact that some schools, especially the wealthier ones, have invested up to 40 percent of their endowment funds into dervative-driven instruments overseen by hedge funds. Those funds have taken a huge hit this year and some prdict that about one third of the 10,000 or so registered in the U.S. may be out of business.

A few schools are taking a hard-line appoach. New York lawyer Jacob H. Zamansky, a litigator involved in one of the lawsuits against failed investment bank Bear Stearns, says that he's been contacted by five endowments for colleges or other charitable organizations that suffered big losses or were unable to access their money in recent months.
Those at risk of becoming lawsuit targets are fund managers who have gone outside of their asset management mandates, says Thomas E. Burkhardst, vice president for finance and admininistrative services at the University of Dayton.
If so, it won't be the first time universities have sued, partcularly after getting involved with hedge funds. In 2005, Depauw University in Greencastle, Ind., sued Hennessee Group LLC, which had recommended that the school invest in hedge funds operated by a Stamford, Conn.-based firm, Bayou Fund LLC. After investing $3.25 million, the school discovered that Bayou, partly operated by Samuel Israel III, had gone out of business. Israel was later arrested, escaped in a faked suicide on Bear Mountain Bridge in New York this summer, and the turned himself again in to authorities., riding a motor scooter.