Conrad Colbrandt gave Saint Mary's College of California a financial permission slip to dream big — a $112-million pledge to support new construction and endowments.
From the time that Mr. Colbrandt made his pledge in 1997 until 2004, talk of new athletics facilities and classroom buildings became real architectural plans, approved by the Board of Trustees. The college went so far as to construct a new $26-million science center, and paid for it by selling $17-million in bonds to repay a $15-million loan taken out to build it, expecting reimbursement from Mr. Colbrandt's pledge payments.
All of those plans, however, were quickly dashed one day in 2004 when it was discovered that Mr. Colbrandt was deeply involved in a real-estate-investment scam that was orchestrated by his associate, John S. Banker, another Saint Mary's donor.
Duped investors had been told that PepsiCo wanted to sell some of its land to an investment group, which would lease the land back to the corporation. Some 30 to 40 people were taken in by the scam — reportedly Mr. Colbrandt among them. Mr. Banker, 84, who was named as a suspect, disappeared, and is suspected of fleeing to Mexico.
Millions of dollars were lost, including the money promised to Saint Mary's. The college's president, Brother Craig J. Franz, resigned, saying that the institution needed new leadership to rebuild the confidence of potential donors and alumni.
One of the worst fears of higher-education fund raisers was being played out.
It is the era of the mega-gift, after all. Of the 23 promised donations of $150-million or more made to colleges, 17 have been pledged within the last five years. That generosity has made colleges more dependent on single, extraordinary gifts. It has also increased the importance of due diligence, background checks, and donor agreements that protect the institutions' and the benefactors' interests.
It is now commonplace for accountants and lawyers to sit on both sides of the table when donation deals are being drafted, as major gifts to institutions like the University of Colorado, New York University, and Princeton University have either been revoked or have come under legal fire.
But such safeguards need to be balanced with good, trusting relationships with would-be benefactors.
"There are perfectly ethical ways to check somebody's background," says Peter Buchanan, a senior associate at Washburn & McGoldrick Inc., a fund-raising consulting firm in Latham, N.Y. "You really want to pay attention when you are dealing with a donor with no history or connection with the institution."
Even donors with the best intentions can face unexpected financial hardship. At the height of the technology boom of the 1990s, for example, Silicon Valley donations were flowing freely to higher education. But, after the bust, many institutions faced the unfortunate reality that gifts of stock would often be worth much less than the amount pledged, and other pledges made based on unrealized profits would not be forthcoming.
Situations such as the one at Saint Mary's have higher-education leaders thinking twice, especially if a donation may sound too good to be true. But regardless of the circumstances, when a donor breaks a promise, the consequences for an institution can be devastating. Many college officials are realizing that they need to build in as much protection as possible when accepting major gifts.
John P. Butler III, president of Barnes & Roche, a fund-raising consulting firm in Rosemont, Pa., says that making sure donor agreements are clear to all parties is the best way to ward off problems.
"It's a highly individualized thing," he says. "Two parties are usually acting in what they think is good faith, but the problems occur from a lack of candor, thoughtfulness, and detail in discussion about the deal."
Criminal Background
At Saint Mary's, Mr. Colbrandt had no known connection to the institution before being introduced to the then-vice president for advancement and planning in 1997 by a college trustee, according to a 78-page report by an independent committee about the circumstances surrounding the pledge. Over the course of the following six years, he made a series of donations and pledges, missing payments along the way. Nevertheless, Mr. Colbrandt was named a member of the college's Board of Regents, an advisory committee to the trustees.
In the report, a college employee said she had had limited resources to do much background research on the donor, but used the Internet and DataQuick (a real-estate search tool) to hunt for titles, stock ownership, and political contributions.
She was never instructed to examine the real-estate transactions from which Mr. Colbrandt was hoping to generate the donation money, though officials recalled discussing the framework of the business deal with him, as well as with the architect of the deal, Mr. Banker. Both men agreed to give anonymous gifts to the college, but it is unclear how much money Mr. Banker pledged himself.
A criminal-background check on Mr. Banker would have revealed that he had been convicted and sentenced to 64 months in state prison in 1980 for grand theft and forgery for attempting to sell restaurant properties he didn't own. He was accused of taking $2-million from investors.
Officials who conducted the investigation believe that Mr. Colbrandt and Mr. Banker were protected by their request for anonymity. Most of the college's trustees and staff members did not know their identity, their donor files were kept in a vault, and no contact records were retained for either man. Had members of the Board of Trustees known at least Mr. Banker's identity, "someone may have recognized that Banker had been convicted of real estate fraud," according to the committee's report. Mr. Colbrandt's lawyer did not return telephone calls seeking comment.
"I think we learned a lot about due diligence," says Brother Stan Sobczyk, the college's new vice president for advancement.
New Safeguards
Other institutions have also seen promised pledges disappear. In 2005, the noted philanthropist and New York money manager Alberto W. Vilar was charged with stealing client funds to help pay for his donations to charities, including a pledge of $18-million to his alma mater, Washington and Jefferson College. He had also pledged $23-million to New York University and $10-million to Columbia University.
At NYU, the gift was supposed to go toward the Alberto Vilar Global Fellows Program, which was to provide tuition, housing, and travel funds for 20 performing artists each year. The program was discontinued after one group completed its fellowships in 2005. Mr. Vilar did not make any payments on the pledge.
NYU also never saw a $21-million pledge made in 2004 by the Yalincak Family Foundation for a new general-studies building, classroom renovations, and an endowment for a professorship and lecture series in Ottoman history. As it turned out, the money that was donated was not the family's to give, and Hakan Yalincak, a student at NYU at the time, pleaded guilty to bank fraud and wire fraud in June.
Over the course of the last three years, fund-raising leaders at NYU have started using some new strategies to ensure that pledges are paid. Debra LaMorte, senior vice president for development and alumni relations, says practices such as consistent pledge payment reminders to donors were starting to be put in place before the donations fell through.
Even following the best fund-raising practices in securing the pledges from Mr. Vilar and the Yalincak Family Foundation would not have protected the university, says Ms. LaMorte.
"If somebody is not approaching you in a direct way, there's not much you can do about it," she says.
Hurt Feelings
Mr. Buchanan, the consultant, says the best donor agreements are the result of long-term, personal connections. Taking adequate time to get to know a potential donor is one of the most productive background checks, he says.
"The idea that a college can have great difficulty with a donor or donor agreement is the exception and not the rule," he says. "You can get more information by cultivating a relationship and asking them questions than any other method."
But other methods can include checking the donor's history of philanthropy to other charities, and searching for documents such as Securities and Exchange Commission forms, property and stock holdings, court documents, and tax records.
The Association of Professional Researchers for Advancement also recommends that to avoid straining a relationship with a donor, staff members should be open and honest about the information being collected. They should emphasize how the donor's privacy will be preserved through methods such as concealing phone numbers and other identifying information of anonymous donors, and restricting access to donor files to a small number of employees, all of whom must sign confidentiality agreements.
A Change of Heart
Often when a gift is revoked, the benefactor has run into financial problems or has had a disagreement with the institution's leadership.
At Florida International University, for example, a member of the Board of Trustees was to give a one-time gift of $20-million to a new college of medicine, which in turn would bear his name. But this fall after the donor, Herbert Wertheim, learned from his accountant that if he gave the lump sum to the university, he would lose $6-million in tax deductions, he requested that his agreement be altered to allow payments over the next three years.
Modesto A. Maidique, president of the university, who refused to comment for this article, denied Mr. Wertheim's request. According to a letter Mr. Maidique wrote to Mr. Wertheim, the university would lose a $20-million matching grant if the donation were not paid in full, upfront.
"It is now our understanding that you do not wish to comply with the terms of the agreement," Mr. Maidique wrote.
Mr. Wertheim says he was insulted because Mr. Maidique also indicated to him that he was being given the naming rights to the medical college "on the cheap," and that the university had another donor who would pay $100-million for the honor.
"It was the straw that broke the camel's back," Mr. Wertheim says.
But when asked whether he believed his donor agreement bound him to pay his donation as stipulated, Mr. Wertheim simply said, "I don't know."
Taking Risks
So why don't more institutions take donors to court when major gifts — like the one to Florida International — evaporate? College officials say it is usually not worth the effort. It generates unwanted publicity, and most of the time it does not result in any money being paid.
Take the case of Gasper Lazzara. The Florida dentist made multimillion-dollar pledges to be paid over 30 or more years to the University of Colorado at Denver and Health Sciences Center, the University of Nevada at Las Vegas, and Jacksonville University in 2003 and 2004. All three contracts for the scholarship programs were terminated last summer, because, Lazzara says, the orthodontics business that would help pay for them was not producing enough profit.
The University of Colorado simply ended the contract in October, without liability to either party. Dr. Lazzara had fulfilled his $3-million donation for a new dental facility there, but had ceased payments of $1.25-million per year to the scholarship program.
M. Roy Wilson, chancellor of the Denver campus and Health Sciences Center, says officials understand that "there is always the possibility that the business plan associated with a public/private partnership will not work out."
"We understood those risks at the time we entered into this relationship, and the university knows Dr. Lazzara made every effort to make this relationship work over the long term," Dr. Wilson said in a written statement.
At the University of Nevada, where Dr. Lazzara had a similar arrangement, officials also terminated the agreement. Dr. Lazzara not only could not continue the scholarship program, but he also did not make the second half of his payment on his $3.5-million commitment to help pay for a new dental facility.
The university did not pursue legal action against Dr. Lazzara because Dr. Lazzara's orthodontics company had no assets.
"We do not believe there would be a reasonable expectation that UNLV would receive anything by going to litigation over breach of contract," Richard C. Linstrom, the institution's general counsel, said to the Board of Regents at a meeting.
Gerry J. Bomotti, vice president for finance and business, says that some regents had concerns about the agreement, but that the fund raisers were asked before the contract was signed to confirm that Dr. Lazzara was a high-net-worth individual and that his company had enough assets to stay in business.
Three years ago, his story checked out. "At the time, he was a successful business person who was forthcoming with us," Mr. Bomotti says.
At Jacksonville, officials say that Dr. Lazzara paid his $3.5-million donation in full, and that the contract for the scholarships allowed him to cease payments if he no longer needed to hire graduates of the orthodontics program.
New Rules
Since its ordeal, Saint Mary's College has reconsidered how it sets up its donor agreements to ensure that money is in place before new projects are started. College officials tell the trustees what the percentage of a proposed project's financing is in hand versus how much of a pledge is unrealized. The development office also provides an annual update to the trustees about the status of unrealized pledges.
Brother Sobczyk and Brother Ronald J. Gallagher, Saint Mary's new president, spent time visiting donors, foundations, and alumni in the aftermath of the pledge debacle. With two large foundation grants and a couple of other major donors stepping up to give to the construction projects over the past two years, the college has been able to move forward with its plans, breaking ground on a new academic building last May.
"And now, when we talk with any donor who is making a pledge commitment over time, we ask to have half the donation within the first two years and complete the payments within five years," Brother Sobczyk says.
The Board of Trustees has also stipulated that no construction will begin until at least 50 percent of a donation has been paid, says Brother Gallagher.
"We realize that we have to do our research and know our donors well," he says. "Most have been associated with Saint Mary's for a long time. One person slipped in with fraud, which is not to say that we're looking at everybody in that light. But we are looking closely."
