Monday, October 22, 2007

Claremont, Williams Mega-Gifts Finance Fight Against Ivy League

Claremont, Williams Mega-Gifts Finance Fight Against Ivy League
Bloomberg, Oct-22-07
By Matthew Keenan

Liberal arts colleges in the U.S. are attracting alumni gifts of $10 million or more at a record pace to finance their competition with Ivy League universities for the nation's premier students.

Williams College in Williamstown, Massachusetts surpassed its $400 million capital campaign goal in June. Vermont's Middlebury College is almost halfway to its $500 million target, the most ambitious yet for any liberal arts institution. Claremont McKenna College in California received a record $200 million last month from investor Robert Day.

Schools have grown savvy in reaching out to alumni for ``mega-gifts,'' Michael Schoenfeld, Middlebury's vice president for college advancement, said in an interview. ``There is a need, there is the competition and there is the capacity of donors who are able to make a gift like that.''

For colleges with less than 3,000 students to compete with larger Ivy League universities for talented high-schoolers, alumni must help fund scholarships, attract professors and improve campuses, officials at the schools said. Universities are also seeking record sums, with Stanford, near Palo Alto, California, aiming to raise $4.3 billion. Cornell University, in Ithaca, New York; and Columbia University, in New York City, each set $4 billion goals.

Middlebury has drawn $50 million from an anonymous donor and $23.5 million from Shelby M.C. Davis, founder of New York money manager Davis Advisors. The school, in the midst of a five-year campaign, assigns eight of 65 development employees to donors capable of giving $100,000 to $5 million each.

Just three officials, including President Ronald Liebowitz, solicit gifts above that amount. Volunteers such as Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc. in New York, also help the school tap affluent donors. Founded in 1800, Middlebury has about 2,350 undergraduates, compared with 6,700 at Harvard University in Cambridge, Massachusetts.

Wellesley's Example

Wellesley College, the Massachusetts women's college founded in 1870 whose alumnae include U.S. Senator Hillary Clinton, set a standard for liberal arts fundraising by gathering $472.3 million in a campaign that ended in 2005.

U.S. colleges and universities gathered an all-time high of $28 billion in contributions in 2006.

When Williams President Morton Schapiro took office in 2000, he drew up a strategic plan that resulted in a 15 percent increase in faculty, a new student center and greater financial aid, said Steve Birrell, vice president for alumni relations and development.

``We had needs coming out of the strategic plan that were of a different magnitude than we could support with so-called normal fundraising,'' which doesn't involve specially solicited mega-gifts, Birrell, 65, said in an interview from the school's campus in Williamstown.

Signature Gift

Williams, founded in 1793 with funds bequeathed by Colonel Ephraim Williams, publicly opened its campaign in the fall of 2003, after two years of preparation. The 2,000-student school's drive reached $413.3 million last week, and will continue through next year.

The signature gift was $20 million for a theater and dance center by Herbert Allen Jr., chairman of investment firm Allen & Co. in New York. The 1962 Williams graduate has a fortune valued at $2 billion by Forbes magazine.

Unlike universities more than twice their size, liberal arts colleges don't have medical schools or other research facilities that draw corporate and foundation grants, said John Lippincott, 58, president of the Council for the Advancement and Support of Education. Smaller schools rely instead on a cadre of deep-pocketed alumni.

Williams Donors

``You certainly are not going to achieve that goal in a period of five, six or seven years by accumulating small gifts,'' said Lippincott, whose Washington-based group represents marketing, communications and fundraising officials from 3,300 schools.

About 85 percent of the Williams money came from 2 percent of donors, including seven contributions of $10 million to $20 million each, Birrell said. At Middlebury, officials say a ``rule of 76'' calls for 76 gifts that together cover 76 percent of funds raised.

Claremont McKenna, with about 1,150 students, started soliciting gifts in March 2006 and plans to go public with the campaign next year.

Day's Donation

The school, founded in 1946, received $200 million in September from Day, an economics major who started TCW Group Inc., a Los Angeles-based investment firm that manages $70 billion. The gift will support students specializing in finance, accounting and leadership psychology.

His donation followed a $20 million gift by the Seattle- based Bill and Melinda Gates Foundation to fund science scholarships.

George Roberts, co-CEO of Kohlberg Kravis Roberts & Co., gave $20 million in October 2006. Roberts, a 1966 graduate, is seeking $40 million in matching gifts from other donors to create endowed faculty chairs. His initiative is more than halfway to its goal, showing that a culture of philanthropy has taken hold among alumni, said Claremont McKenna President Pamela Gann.

`Big Partner'

``People feel that they can have a high impact at a liberal arts college,'' the 58-year-old Gann said. ``A $20 million gift goes a lot further here than at a research university today. I think that matters. People feel like, `Oh, I'm a big partner.' And you are.''

Colgate University, in Hamilton, New York, launched a $400 million drive in March, and plans to reach that goal in three years, after taking in $234.4 million already.

``Our alumni are prepared to make those kinds of commitments,'' said Murray Decock, 48, vice president for institutional advancement.

Colgate got $27 million from Robert Hung Ngai Ho, a 1956 graduate, and dedicated its 121,000-square-foot science center to him last month. The school, founded in 1819, now has about 2,700 students.

Daniel Benton, the chief executive officer of hedge fund firm Andor Capital Management, in New York, gave $25 million. The 1980 graduate issued Colgate a challenge, making his gift contingent on the school's finding contributors for at least $25 million more in chunks of $1 million or greater. In March, 19 donors stepped forward with $27.9 million.

Saturday, October 06, 2007

How 2 Guys' Iowa Connection Took Big Telecoms for a Ride Calls

How 2 Guys' Iowa Connection Took Big Telecoms for a Ride Calls
Sent to Their Area Piled Up Access Fees Until FCC Interceded
WSJ, 4-Oct-2007
By DIONNE SEARCEY

Two-and-a-half years ago Ron Laudner was the anxious owner of a rural phone company serving this tiny town, where Main Street was emptying out as restaurants and other businesses disconnected their phones and moved to busier commercial districts.

More than 1,800 miles away, David Erickson was running a Web-based conference-calling business in Long Beach, Calif., shopping around for phone companies to be his partners.

In mid-summer 2005 this unlikely duo struck a deal. They routed millions of minutes of Mr. Erickson's conference calls through the switches of Mr. Laudner's Farmers Telephone of Riceville. To do it, they used outdated federal regulations to charge telecom companies such as AT&T Inc. and Verizon Communications Inc. steep rates and collected huge profits at their expense. Together, the two made hundreds of thousands of dollars. Soon, Mr. Laudner cut other deals to generate even more traffic. At the peak, his little telephone company was facilitating conversations among everybody from Mary Kay Cosmetics employees to customers of Male Box, an "all male all gay" chat line.

"I'm not going to argue I didn't think it was amazing," Mr. Laudner says.

But the big phone companies had another term for it. "Verizon is not going to stand by while irresponsible companies use this traffic-pumping scheme to overcharge our company," says Tom Tauke, vice president of public affairs, policy and communications for Verizon.

The deal between Messrs. Laudner and Erickson illustrates how tumult in the telecom industry has given rise to opportunities -- and headaches -- as entrepreneurs exploit outdated regulation. Their arrangement, and deals like it, spawned lawsuits, blocked phone calls and triggered an investigation by the U.S. Federal Communications Commission into the high fees some rural carriers charged to the Bells. Late Tuesday, the FCC proposed rules that, if approved, are likely to prevent such deals in the future.

"We got smacked and smacked hard," Mr. Laudner says.

The partnerships benefited from the confluence of hot demand for conference calling and a proliferation of cheap long-distance plans. But the key was federal rules drafted during the 1983 break-up of Ma Bell, which required big telecom companies to pay hefty fees to small carriers to compensate for the high cost of providing service across miles of sparse farmland. Today, because of new technology, hundreds of callers can be linked at very little cost, no matter their location.

The Iowa plan worked like this: Mr. Erickson's freeconferencecall.com assigned a local Iowa telephone number to a group offering a conference call. When customers dialed the number, they went through their own carriers -- say, AT&T -- to be routed to Farmers Telephone in Iowa. Farmers Telephone then linked the callers to each other. Farmers charged the Bells steep rates to transmit their customers' calls and split the proceeds with freeconferencecall.com.



Mr. Erickson is a 42-year-old high-school graduate from Long Beach who gave up a childhood dream of becoming an architect to instead run construction companies that built machines for designing curbs and gutters. He dabbled in running insurance companies briefly before getting interested in telecom by going to a trade show with a friend and being wowed by a device that allows videoconferencing between PCs.

Mr. Erickson formed freeconferencecall.com in October 2001 working with a Boston phone company. He handled the marketing to attract customers to the service while the phone company provided the phone numbers and transmitted the calls. Mr. Erickson's business plan was to give away free conference calling and sell businesses other things, like a service that would allow users in multiple locations to work on spreadsheets simultaneously.

Other startups were doing the same thing, many of them depending on customers looking for sex chats. These customers have flocked to the free conference-call startups rather than pay costly fees associated with the 900-number sex industry, which has shrunk dramatically with the advent of inexpensive Internet-calling options and Internet-based pornography.

Mr. Erickson says he doesn't market to sex chat groups, but concedes he can't control who uses his free calling service.

Mr. Erickson realized early on there was money to be made from sharing the revenue that his phone-company partners were able to collect from the major carriers. Back in 2001, he started researching the fees and not long after recognized that rural phone companies, which could charge the Bells significantly higher fees than those in urban areas, presented an opportunity.

Mr. Laudner, a robust 49-year-old who has spiky gray hair, a goatee and an earring, was born in an apartment over a phone office his father managed in nearby Rudd, Iowa. One of his first jobs was driving through the cornfield-lined countryside in 1974 for a local phone company replacing customers' rotary-dial phones with more modern touch-tone phones. In 1995 he took over Farmers Telephone and two other rural phone companies all created in the early 1900s when isolated farmers strung wires along fences to get phone service.

In recent years, Mr. Laudner has been eager to find ways to compensate for his shrinking core business, land-line phones. He created a slogan, "Let's talk," and participated in a dozen parades through neighboring towns, decorating his company's float to resemble an iPod to reflect new consumer technologies. He dreamed of rallying his Iowa phone company friends to help build a wireless business in rural Iraq but decided the country became too violent to safely set up shop.

In the spring of 2005, Mr. Laudner bought gear to help him market new Internet-based phone services such as Internet calling, video services, conference calling and other services to businesses outside Riceville's shrinking Main Street. A consultant, Darin Rohead, who helped sell him the equipment, put Mr. Erickson and Mr. Laudner in touch. Over a phone call they soon struck a deal, with Mr. Erickson mailing him gear to install that would enable the calls.

"I'll make you as successful as you want to be," Mr. Laudner remembers Mr. Erickson telling him.

Mr. Laudner offered the firm phone numbers with the local 641 area code to use to market free conference calls and other services. Callers who dialed the 641 number would pay the long-distance charge, which is now close to free in many plans. They would then be linked to one another through telecom gear in Mr. Laudner's phone-switching center. Mr. Laudner agreed to give freeconferencecall.com a "marketing fee" based on phone traffic, which amounted to splitting the per-minute access fees roughly 50-50 for each call.

In the summer of 2005 Mr. Laudner filed standard paperwork with regulators to justify his 5.3-cents-a-minute rate by presenting evidence of his past history of handling very little phone traffic. At the time, it was unclear how dramatically the traffic would jump. The FCC as well as AT&T reviewed his filing and didn't protest.

"We were taking the rules the way the rules were intended," says Mr. Laudner. "I didn't know how much traffic I was going to get."

Several weeks later after a few technical hiccups Mr. Laudner got the system up and running at full speed. Calls to his exchanges were slowly escalating as word spread online about the services.

The big phone companies didn't initially notice the impact of Mr. Laudner and Mr. Erickson's deal.

Mr. Erickson traveled to a barbecue in Iowa to meet Mr. Laudner face to face and to try to pick up more recruits. The two men ate ribs and played a round of golf.

During this period, Mr. Laudner struck partnerships with three other conference-calling firms. Suddenly, Farmers Telephone of Riceville was processing millions of minutes of phone calls a month, earning Mr. Laudner -- and the free-calling-service companies -- hundreds of thousands of dollars in new revenue. In November 2006, Mr. Laudner's company handled 27.4 million minutes of calls, more than double the number he had processed in an entire year before he partnered with the Internet companies. AT&T traffic alone on Farmers' network spiked to 15 million minutes in December 2006 from 121,000 minutes in January of the previous year.

The same thing was happening at nearly a dozen other small Iowa phone companies that were partnering with freeconferencecall.com and other companies, processing calls for everything from an Amish conference-calling service to "Free Phone Chat," a place where callers could "meet new friends and lovers."

About the same time in Denver, at the corporate headquarters of Qwest Communications International Inc., the company's analysts began to notice a spike in the bills owed to Iowa companies. Qwest's Lisa Hensley Eckert, who reviews traffic between phone carriers, received call records from the Iowa phone companies so she could examine the jump in volume. She started plugging popular Iowa phone numbers into a search engine tracking several to Web sites such as hotlivesexchat.com, allfreecalls.net, freecalls2theworld.com.

"They all used the same three Iowa area codes," says Ms. Hensley Eckert. "To see millions of dollars going out the door -- it was much larger than anything we'd seen before."

AT&T, Verizon, Sprint Nextel Corp. and other phone companies were also taking note. In late 2006, Qwest and AT&T disputed their unusually high monthly bills and stopped paying Mr. Laudner. On Jan. 29, AT&T sued Farmers and three other Iowa companies in U.S. District Court there; Qwest and Sprint soon followed with similar lawsuits and filings to the FCC. In one filing, AT&T complained that the Iowa companies "make a mockery" of the system designed to compensate carriers for providing phone service in rural areas.

The charges to Iowa companies, including Farmers Telephone, affected Qwest's 2006 fourth-quarter earnings, and cost the company roughly $10 million to $15 million out of total profits for that quarter of $194 million.

According to phone-company records, Riceville handled nearly 2.1 million minutes in January alone of calls to Male Box as well as five million from the Chicago Blade and Chicago Alibi, which offer adult chat and a "live personals" service where callers record and select personal ads.

Mr. Laudner says sex calls made up a sliver of his business. Most of the traffic Farmers Telephone handled came from sports chat clubs, businesses and charities including a domestic-violence prevention group, he says.

Still, word got around about the sex-related traffic. It didn't go over well in Riceville, population 900, which touts its "safe environment for children" on its Web site. A resident stopped one of Mr. Laudner's workers early this year to ask whether his company was involved in the sex-call business.

In March, Mr. Laudner received a call from freeconferencecall.com saying customers' calls weren't going through.

Freeconferencecall.com initially blamed Mr. Laudner for the problems, and he checked his equipment, which he found to be working properly. Quickly Mr. Erickson learned the problem was more widespread than Farmers Telephone. Qwest had suddenly stopped routing some Iowa traffic through its network. And AT&T started blocking calls to numbers it tied to "unscrupulous carriers," the company says. The tactics in some cases affected regular phone traffic to Iowa, the Iowa carriers say.

Angry freeconferencecall.com customers who couldn't dial into their conference calls complained to Mr. Erickson, and some of them never returned to the site, he said.

"It was like stepping on somebody's oxygen hose," says Mr. Erickson who thinks the blocking was "criminal."

Mr. Laudner and other Iowa carriers were outraged. In April, he and Mr. Erickson and other Iowa phone executives, traveled to Washington, D.C., to complain about the blocking to officials at the FCC, which has in the past levied fines for similar acts.

The FCC didn't fine the phone companies but staffers phoned AT&T, Qwest, Sprint Nextel, Verizon and Embarq Corp., formerly the local phone division of Sprint Nextel, to warn them that blocking was unacceptable, according to FCC and phone company officials. In June, the agency formally barred the big phone companies from blocking the calls.

For now, despite the FCC's proposed rules, which say some of the carriers are "engaging in an unreasonable practice," the calls continue to flow to Iowa. But AT&T, Verizon and Sprint aren't paying the fees to Mr. Laudner for the disputed calls. Mr. Laudner says he is owed at least $20 million by various carriers.

Mr. Laudner couldn't pay the free-calling-service companies their share. Farmers Telephone and freeconferencecall.com ended their relationship in late June when the companies' two-year contract expired. "Ron had been a good guy," Mr. Erickson said. "He wasn't going to go further with it and I wasn't going to try." He says he's since found other companies in nearby states to handle the calls, noting: "I don't need Iowa to do this."

Write to Dionne Searcey at dionne.searcey@wsj.com1

Ruing CDOs Down Under Australian Beach Suburb Discovers Its Exposure To U.S. Subprime Woes

Ruing CDOs Down Under Australian Beach Suburb Discovers Its Exposure To U.S. Subprime Woes
WSJ, 4-Oct-2007
By JACKIE RANGE

At a recent meeting of the Manly Council, which governs a beachfront Sydney suburb, topics included Meals on Wheels, an antismoking policy for outdoor areas and U.S. subprime mortgages.

Earlier this year, the council handed 5.5 million Australian dollars (US$4.9 million) to Grange Securities, a small Australian investment bank. Council staffers were taken with the idea of slightly higher returns that Grange representatives proffered. They also were put at ease by Grange's client list, which includes dozens of Australian councils.

Grange was "quite firm and quite positive about the fact that they thought they could do a bit better than what we were doing ourselves," says Jenny Nascimento, manager of finance operations at Manly Council.

Now, Manly is ruing its investment decision, as are many councils across Australia. Manly officials say A$3 million of the money the council gave Grange was invested in collateralized debt obligations -- bonds underpinned by large pools of debt, including, in one case, U.S. subprime mortgages. As of Aug. 31, Manly was facing a paper loss of A$588,767 on the money it gave to Grange, funds that were collected from residential and business taxes, and charges for sporting facilities and parking, among other things.

"All of the client base are recognized as sophisticated investors who are responsible for their own due diligence relating to their investment decisions," a Grange spokesman said. "However, we do spend a great deal of time explaining the investments to our clients and ensuring all risks, etc., are clearly outlined in the documentation."

Initially, CDOs and other mortgage-backed securities were almost solely in the purview of investment banks and hedge funds. As these sophisticated buyers became saturated and the U.S. housing boom of the past several years kept delivering vast quantities of mortgages, the banks that created CDOs and other mortgage securities looked further afield for potential buyers to sop up the supply. Last year, banks issued $388 billion of all types of CDOs world-wide, up from $52 billion in 1999, according to Dealogic, a data-research firm.

They found a willing audience among town councils, small governments, charities, conservative state-run banks and risk-averse individual investors. Most of them were outside the U.S. and many had just a few million dollars, at most, to invest.

CDOs were appealing to many of these average investors because they promised to add a dash of juice to their investment portfolios. Although CDOs often are portrayed as complex and risky derivatives that offer huge returns, in many cases they offer an interest rate just a smidgen above government securities or a savings account, but supposedly with no more risk.

SachsenLB, a conservative state-run bank in Germany, was so enamored with mortgage securities that it set up an operation to trade mortgage securities and handle other investments from an office in Dublin. Bank of China Ltd., a big state lender, said its exposure to U.S. subprime mortgages stood at $9.65 billion. In the U.S., by comparison, the take-up among conservative investors looks relatively small.

The CDOs that washed up on Manly's tree-lined beaches were selected by Grange, which has since been bought by Wall Street brokerage Lehman Brothers Holdings Inc. The firm distributed its first CDO in 2002. Grange negotiated with investment banks such as Lehman or Barclays PLC of the United Kingdom to tailor products for its conservative client base, people close to Lehman said. "We saw an opportunity and, indeed, a need from an investor base to get advisory services and have access to the broader fixed-income market," said Glenn Willis, Grange's country head.

By August 2005, there were A$5.7 billion of publicly offered Australian CDOs outstanding, according to an Australian central-bank report. Since 2002, roughly 65% of Australian CDOs were bought by such investors as local governments or charity endowments.

Manly is part upscale Sydney suburb and part beach town. Many of its residents enjoy one of the world's most stunning commutes, riding ferries across Sydney Harbor, past the famous Sydney Opera House, to get to work.

The town, which invested a sum equivalent to roughly 10% of its annual operating budget with Grange, now is counting its losses. Manly saw the value of its investment in one CDO called Federation plummet to A$172,310 as of Aug. 31, from its original investment value of A$500,000.

Many other Australian councils face the same predicament and must decide whether to suffer the losses now or hang onto securities that face an uncertain future. "We're good at local government, but we're not necessarily good at investment," said Ross Fleming, Manly's chief financial officer.

Three councils say Grange put them into CDOs that were outside their criteria for investments or contained other irregularities, according to people familiar with the matter. For instance, the CDO called Federation is due to mature in 2047, exceeding the 10-year limit for the Woollahra Council, another Sydney suburb, to hold any security.

Grange has paid at least several million dollars in reimbursements to councils, council officials say. They declined to comment on why the money had been paid, citing confidentiality agreements with Grange. Woollahra Council, for instance, demanded the Federation security be bought back, and Grange complied, said Tony Lewis, managing director of Lewis Securities Ltd., who acted as an independent adviser to the council.

Grange declined to comment on individual clients. A spokesman said that the firm has "canceled trades" in a limited number of instances and that it "engaged in appropriate selling practices in the distribution of its products to clients." People close to Lehman note that more than 90% of Grange's CDOs have performed well so far.

Another gripe was that some of its CDOs, which contained U.S. and European assets, had Australian names, such as Kalgoorlie (a western Australian mining town famous for gold, nickel and brothels).

These labels disguised the true nature of the investments, some say. "I will make the conclusion that they were trying to mislead us, by giving Australian names to U.S. assets; you can draw your own conclusion," said Councillor Andrew Petrie in Woollahra, which owned Kalgoorlie. "If they'd been called 'Detroit,' you'd have said, 'What's this?' "

The Grange spokesman said the securities were denominated in Australian dollars and had other Australian characteristics. Market participants said it wasn't unusual for such securities to have Australian names.