The D.C. auditor, as part of a wide-ranging probe of financial management at the University of the District of Columbia, is investigating the transfer of UDC's $10 million endowment from American Security Bank to the National Bank of Washington earlier this year, which was apparently done without competitive bidding.
University and city officials said the publicly financed university's endowment was switched to ensure better returns on UDC investments.
The UDC endowment portfolio, divided into two accounts, had been managed for nearly 15 years by American Security Bank, and in fiscal 1984 yielded more than $1 million in interest.
On March 1, the portfolio was switched to NBW.
"The money had been in one bank for [nearly] 15 years, and that's too long," said Ronald H. Brown, chairman of the UDC Board of Trustees. "It was my decision to transfer it. I was, frankly, taken aback by the auditor's letter. This whole thing baffles me. It's not like we took the endowment accounts down to Tom, Dick and Harry's drugstore."
Brown said he began informal discussions about the accounts with NBW officials more than two years ago. He did not seek bids from other banks, he said.
"Frankly," Brown said, "I feel like I can invest it anywhere I want, as long as it's a reputable institution."
D.C. Auditor Otis H. Troupe, in a letter last month to bank, city and university officials, asked for explanations about the transfer, including whether any banks offered bids for the funds and whether any UDC funds are being used to help finance other NBW transactions.
On Brown's advice, the university's Investment Advisory Committee, which includes Brown, Deputy Mayor Alphonse G. Hill and UDC trustee Daniel I. Fivel, decided officially last December to transfer the endowment funds to NBW. The committee can make investment decisions without the approval of the full board and is not required to request bids.
Luther Hodges, chairman of the board of NBW, said that in recent years his bank has begun to compete more aggressively with its main rival, American Security, for city accounts.
Yesterday, Troupe questioned the committee's decision to switch the university's endowment without competitive bidding.
"When you've got $10 million to invest, you don't just drive up to a teller's window and dump it in," Troupe said. "It is prudent to evaluate the possible return from all reasonable money management sources. If you have only one source received, it raises questions about the quality of thinking that went into that decision."
Troupe began looking into the transfer after hearing reports, which turned out to be incorrect, that the endowment was not accruing interest at NBW.
A letter from NBW President C. James Nelson, dated yesterday and sent to Troupe, said the UDC funds are invested in marketable securities, such as government bonds, certificates of deposit and other fixed-income obligations.
Last December, the UDC trustees gave the investment committee more latitude for handling the endowment. The funds are divided into two accounts, with $7.2 million kept in the Principal Trust Account, which is invested in lower-risk, long-term government securities and bonds. Close to $3 million is placed in the Revenue Trust Account and invested in higher-risk common stocks and mutual equity funds that bear larger returns.
Hill said he notified NBW on Feb. 21 that the investment committee had selected it to manage the endowment funds beginning March 1.
Under the terms of the agreement, Hill said, NBW will be paid an annual fee of 0.10 percent of the funds contained in the larger Principal Trust Account. It will receive 0.60 percent of the first $5 million in the Revenue Trust Account and 0.50 percent of anything beyond $5 million.
Hill said NBW would receive more in fees than American Security received under a similar arrangement, but only because NBW would be making more transactions than American Security, which he said was more conservative in its investment policies.
Troupe's ongoing audit of the university's finances includes an examination of "the appropriateness of certain expenditures" by top university officials, according to informed sources.
Earlier this week, a group of about 25 faculty members asked for a meeting with UDC President Robert L. Green to get his response to a wave of rumors about financial mismanagement that have saturated the campus in recent weeks. According to informed sources, Green offered assurances during the meeting that his administration was not involved in any financial wrongdoing.