90 Pages of Scandal

New Jersey attorney general sues Stevens Institute of Technology, seeking to oust president and board chair who are accused of breaking rule after rule.
September 18, 2009
 

Seeking the ouster of both the president and board chair at Stevens Institute of Technology, New Jersey’s attorney general filed a lawsuit Thursday that describes the institute’s top two leaders as clandestine partners bolstering the president’s pay without authorization, concealing damning reports from trustees and violating the wishes of donors.

The 90-page lawsuit draws on a three-year investigation, which zeroed in on the business and management practices of Harold J. Raveché, the institute’s president, and Lawrence T. Babbio, chair of the board. The result of the probe is a 16-count civil complaint, which enumerates allegations of financial mismanagement, including clandestine efforts to compensate Raveché without the full knowledge of the board.

In seeking to oust a president and trustee from a Stevens, Attorney General Anne Milgram used a rarely exercised power. There have been instances, however infrequent, where state authorities have taken actions against private non-profits, including the 1997 occasion when the New York State Board of Regents ousted the trustees of Adelphi University.

Milgram says she is authorized to take legal action under the New Jersey Nonprofit Corporation Act and the Uniform Management of Institutional Funds Act. Commonly abbreviated as UMIFA, the act exists in numerous states that restrict endowment spending practices.

Milgram sought a settlement with the board earlier this month, seeking the ouster of Raveché and Babbio. In response, the board pursued its own remedy in Superior Court, “attempting to block any potential action by the attorney general or, in the alternative, to cover up the investigation by requiring that any proceeding against the school proceed only in secret,” according to a news release from Milgram’s office.

Pete McDonough, a spokesman for the institute’s board of trustees, said Thursday that Milgram has overstepped her authority.

“The board’s view is that it would be inappropriate for them to allow the attorney general to substitute her managerial experience for the business judgment of the members of the board,” McDonough said.

Financial Report Concealed

Among the numerous allegations outlined in the suit are repeated assertions that most of the 21 board members were kept in the dark while Raveché and Babbio helped conceal the institute’s deteriorating financial position. In one such instance, the two named defendants and other members of the audit committee failed to disclose to the full board that the institute’s independent auditor had “fired” Stevens as a client, the suit alleges.

PricewaterhouseCoopers dropped the university because it was a “high-risk client,” but the full board was given a more palatable explanation, the suit states. The board was told the company was “unable to continue as external auditors to Stevens, due to costs inefficiency of not having dedicated work force for non-profit organizations."

The board was also not provided with the PricewaterhouseCoopers July 29, 2005 internal control letter that raised questions about the institute’s readiness to embark on a major growth plan.

“Stevens Institute of Technology is undergoing a phase of extremely rapid growth in its research activities that is unique in the 140+ years of its existence,” the report stated. “The existing finance and research administration infrastructures, and related policies and procedures, have proven inadequate to the demands posed by this unprecedented growth.”

Three years after the internal control letter was issued, Stevens was forced to pay the Internal Revenue Service $750,000 in penalties and unpaid taxes, the suit states.

Compensation Secretly Bolstered

The tendency of board committees to withhold information from their counterparts continued in matters of compensation, according to the suit. The institute’s compensation committee repeatedly approved bonuses and forgivable loans without authorization of the full board, the suit asserts. From 1999 to 2008, Raveché’s salary and bonuses rose from $362,458 to $1.1 million. The suit questions the approval process that bolstered the president’s pay, and provides evidence that Raveché and Babbio, the board’s chair, concealed a consultant’s report that declared the president’s compensation excessive.

In 1999, Babbio “announced the existence” of a compensation committee, which included him and three other trustees. The board didn’t even vote to appoint members of the committee until 2003, and it wasn’t until 2005 that the board approved the charter of a Human Resources Committee to address compensation matters. The compensation committee, as it existed and functioned prior to the charter, “was not created in accordance with Stevens' bylaws or New Jersey law,” and its actions before 2005 are “voidable,” according to the suit.

It wasn’t until 2005 that the Compensation Committee sought the advice of an independent consultant to determine if Raveché and other executives’ compensation was on par with peer institutions. But when Towers Perrin HR Services began its work, “Babbio and certain Stevens officers attempted to influence” the consultant’s work, the suit says. In a 2005 e-mail exchange, the institute’s then-chief financial officer urged Towers Perrin to include Carnegie Mellon University, the Massachusetts Institute of Technology and the California Institute of Technology in the compensation peer group.

The consultants resisted, and “Towers Perrin’s internal e-mails show that the consultants suspected that Stevens' officers were attempting to manipulate the analyses to protect their compensation,” according to the suit.

Towers Perrin ultimately reported that “cash compensation levels (base salary and bonus) for virtually all the executives fall above the 90th percentile.” The report, however, never saw the full light of day, according to the suit. It was dismissed by the compensation committee, and the full board never even knew Towers Perrin had been retained, the suit charges.

Board members were not only left in the dark about Raveché’s compensation as compared to the institute’s peers, they didn’t even know what his compensation was, according to an unidentified trustee quoted in the suit. One trustee, identified as Trustee A in the suit, asserts that he was unaware of the levels of cash compensation Raveché had been given until he read about it in a 2004 Chronicle of Higher Education story.

“The key figure in all this is Larry Babbio who... is the one who organizes the compensation committee and OKs these salaries and perks,” the trustee wrote in an e-mail. “The Board never saw the details of any of the deals during my time. If you asked you got some but not all the details. It is a complicated web and needs to be audited in detail.”

Form 990s also falsely reported Raveché’s compensation levels, according to the suit.

In addition to salary and bonuses, Raveché has received approximately $1.8 million in loans below market rates since he became president in 1988, the attorney general reports. About half of the loans -- $928,319 – were agreed to be forgiven, according to his 2007 employment agreement.

The loans extended to Raveché were impermissible under the New Jersey Nonprofit Act, the suit alleges. The board cannot loan funds to a person who is both an officer and a trustee – a description that fits Raveché – because the institute’s bylaws don’t expressly authorize it, the suit charges. Even if the bylaws allowed such loans, a two-thirds approval of the entire 21-member board would be required – and that never happened, the suit says.

Beyond compensation issues, the suit makes a series of allegations about fiscal mismanagement. Among the assertions are that restricted funds, provided by donors to the university’s endowment, were not used for intended purposes or not expended in accordance with stated restrictions. The suit further alleges that the financially struggling institution increased endowment spending rates above levels approved by the board.

Rather than respond to the litany of allegations of the suit, McDonough, the board’s spokesman, said “we’re just hoping this is resolved.” McDonough did, however, issue a statement, noting that the board had formed a new committee and retained a retired judge as “an impartial fact-finder” to suggest possible improvements.

"Nothing in the suit is new; the issues raised have been, or are in the process of being, addressed,” the statement reads. “With the assistance of former NJ Supreme Court Chief Justice Zazzali, we are confident that if there are any remaining issues, they can be clarified and resolved.”

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