Cronyism and Conflicts of Interest, Addendum 1

This past week I posted about the impression of serious conflicts of interest in the personal relationships and financial dealings of Ohio Governor John Kasich, Ohio State President Emeritus Gordon Gee, and former JobsOhio director and venture capitalist Mark Kvame, as well as others in their circle. At the center of the current controversy is a $50 million investment by Ohio State in Kvame’s start-up Drive Capital.

To recount, Ohio State’s Board of Trustees voted to allow several university executives to make up to $100 million investments without the prior approval of the Board. Shortly afterwards and shortly before he resigned as President, Gee promised the $50 million investment in Kvame’s start-up. But the investment was not finalized until Gee assumed the position of President Emeritus, which had been created for him, and Joseph A. Alutto had been named Interim President.

The Columbus Dispatch submitted a public-information request for documents and written communications related to the investment. The results are summarized in the article “Records: OSU Officials Had Reservations about Kvame Investment,” by Encarnacion Pyle and Doug Caruso. The full text of the article is available at: http://www.dispatch.com/content/stories/local/2013/11/01/Gee_Kvamme_Ohio_State_investment_documents_released.html.

Another article in the Miami Herald makes uses of similar public-information requests made by the Associated Press. Written by Julie Carr Smyth, “OSU’s $50 Million Fund Investment Followed Warnings” is even more blunt in its assessment of the obvious cronyism and apparent conflicts of interest involved in the investment. The full text of that article is available at: http://www.miamiherald.com/2013/11/01/3726062/osus-50-fund-investment-followed.html

Here are the major revelations reported in the two articles:

First, OSU officials, including Chief Investment Officer Joseph Hook and Interim President Alutto were not enthused about the investment because Drive Capital is a start-up without any track record. The Dispatch quotes the following memo from Hook: “Kvame’s proposal ‘is still very much unproven at this stage. The fund hasn’t demonstrated proof-of-concept, doesn’t offer (redacted) the historical track record, and carries a variety of other risks and unknowns. In summary, it does not meet our traditional underwriting standards and risk/return criteria.’”

Second, even allowing for those reservations, Hook and Alutto both felt that the investment was two to three times as large as what the university would conventionally make in an established venture-capital firm.

Third, the public-service explanation for the investment seems clearly to have been conceived more as a necessary justification of the decision than it was a driving factor in making it. Again, as reported in the Dispatch, Hook followed his observations about the dubiousness of the investment with this observation: “This offering would have to be considered under the premise of supporting larger societal objectives, such as economic development.”

Fourth, as the Herald reports more fully than the Dispatch, Gee’s enthusiasm for the investment intensified after a dinner with Kvame and his wife: “Kvamme and his wife Megan dined with Gee to discuss the venture . . . ‘Your thoughtful questions, insightful comments, and sense of humor always give us food for thought accompanied by the delicious meal,’ Kvamme wrote Gee on May 15. ‘We also always come away from our dinners with more ideas on how we can make Ohio the center of innovation and creativity.’”

Fifth, Kvame apparently recruited Gee to solicit similar investments from other major Midwestern universities: “Gee replied that he would work with Vice President for Finance Geoff Chatas to ‘see how we can best get other institutions to join with us.’ Among other universities Kvamme asked Gee to approach were the universities of Michigan, Minnesota, Wisconsin, Illinois and Indiana, Purdue University, and Penn State.”

Finally, again from the Dispatch, “in September, records show, Gee got permission from OSU’s fundraising office to approach Kvamme for a $1.5 million donation for a higher-education center that Gee is creating at the Glenn School of Public Affairs. Kvamme has not donated money for the center, OSU spokeswoman Gayle Saunders said last night.” A $1.5 million donation would be substantial, if not framed in the size of the investment that Ohio State has already made in Drive Capital.

Frequent Kasich critic Brian Rothenberg, the director of ProgressOhio, has succinctly summed up the implications of all of this: “’This is just another example of how there is a cozy country club atmosphere that is playing with public money. You don’t do $50 million deals with the public’s money because of a dinner reservation. That’s pretty expensive steak or halibut.’”

3 thoughts on “Cronyism and Conflicts of Interest, Addendum 1

  1. Pingback: Former JobsOhio Chief Could Make Millions on OSU Deal | As Ohio Goes, So Goes the Nation

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