Robin Hood Nest Egg Draws Scrutiny From Congress (Update1)

By Ryan J. Donmoyer and Alison Fitzgerald

July 16 (Bloomberg) -- The Robin Hood Foundation is a behemoth of New York philanthropy, where hedge-fund luminaries like Paul Tudor Jones II throw glittering parties featuring performances by the Who, the Rolling Stones and Beyonce to raise hundreds of millions of dollars to fight poverty in the city.

Now one of the charity's projects -- a rainy-day fund that has grown to $144.5 million from $20 million in less than a decade -- is drawing scrutiny from lawmakers in Washington. Their main concern: About half the money is invested in hedge funds run by Robin Hood donors or board members, who have been paid the industry standard fee of 2 percent of assets and 20 percent of profit for managing the donations.

``I don't remember Robin Hood keeping two and 20 as his cut,'' says Senator Charles Grassley of Iowa, the top Republican on the tax-writing finance committee, which also oversees charities.

While there's nothing illegal about the arrangement, it may create an appearance of conflict in the highly charged atmosphere for hedge funds and private-equity firms in Washington, as lawmakers in both the House and Senate consider legislation that would tighten regulation and raise taxes on the industry.

``They are taking this money and making some fabulous returns, but they are making a few bucks on it, too,'' says Tom Reis, a program director at the W.K. Kellogg Foundation in Battle Creek, Michigan, which has about $8 billion in assets. ``It flirts with self-dealing. I can see where Grassley is coming from.''

Best in the Business

David Saltzman, Robin Hood's executive director, says he sees no problem with the arrangement because the managers are among the best in the business, with proven track records of returns that far outstrip other investments. ``We hope that Robin Hood would be proud of our efforts to save lives,'' says Saltzman, 45.

Since its inception in 1988, Robin Hood has raised more than $500 million for programs ranging from charter schools to the Children's Defense Fund to the Harlem Children's Zone. This year's annual gala, held in May, drew 4,000 guests, included a performance by Aerosmith and raised $71 million, the largest- ever take for a charity on a single night. Robin Hood says 100 percent of donations are distributed.

The controversy concerns a separate emergency fund, built on contributions from Robin Hood's 31-member board. Members include such business and financial heavyweights as Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein; Lehman Brothers Holdings Inc. Chairman Richard Fuld; General Electric Co. Chairman Jeffrey Immelt; and Robert Pittman, chairman of hedge fund Pilot Group LLC.

Other Members

Other members include television anchors Diane Sawyer and Tom Brokaw; movie producer Harvey Weinstein; and actress Gwyneth Paltrow. The board also picks up the tab for about $18.5 million a year in administrative, program support and fund-raising costs.

According to Robin Hood's 2005 tax filing, the most recent available, these long-term assets were entirely invested in 19 hedge funds, seven of which were managed either by a member of the board of directors or the leadership council, a group of major donors. Saltzman says the decision on where to invest is made by an investment committee of the board that isn't allowed to invest in committee members' own funds. The charity paid about $14 million in fees in 2005, or about 10 percent of the rainy-day assets, according to Saltzman.

Incentive Fees

The organization wouldn't break out the share of fees paid to people directly connected to it. The 2005 tax filing says it paid at least $1.08 million in management and incentive fees to funds operated by board members including Jones, 52, the charity's founder, whose Tudor Investment Corp. manages $17.7 billion.

Saltzman says the charity's funds returned an annual average of 17.05 percent after fees between 1990 and 2006, compared with 10.99 percent for the Standard & Poor's 500 Index.

Robin Hood's 2005 tax filing gives some clues as to how it achieved those returns. A stake in Tudor BVI Global Fund Ltd. grew to $10.07 million at the end of 2005 from $8.78 million a year earlier; an investment in the Tudor Futures Fund grew to $5.76 million from $5.03 million.

The charity also reported that a stake in SAC Capital International Ltd., managed by board member Steven Cohen, grew to $23.9 million at the end of 2005 from an initial investment of $15 million in 2004. The tax form said SAC Capital doesn't disclose its fees, but reported that the charity paid ``management and incentive fees'' that are standard for the industry.

Equal Treatment

Saltzman says Jones and Cohen were compensated for managing the charity's money because their funds don't allow for charging some investors and not others. Steve Bruce, Jones's spokesman, declined to comment. Cohen, 51, also declined to comment through a spokesman, Jonathan Gasthalter.

Saltzman says the rainy-day fund isn't an endowment and is being created in compliance with Better Business Bureau standards to help the charity honor its commitments if there's a downturn in the financial markets that limits fund raising, or if donors flock to other causes. Melissa Popper, director of the Better Business Bureau's New York Philanthropy Advisory Service, says her organization reviewed Robin Hood and determined it met ``our standards for charity accountability.''

Still, Art Taylor, president of the Wise Giving Alliance, the charity watchdog at the Better Business Bureau in Arlington, Virginia, says he is concerned at how Robin Hood is handling the fund.

`You Start to Wonder'

``We would prefer that there were more people involved on the board that were independent of these hedge funds,'' Taylor says. ``You start to wonder what happens in the year that the hedge fund doesn't do well. Does the board have the power to fire the hedge-fund manager?''

Bruce Hopkins, a former chairman of the American Bar Association Tax Section's Committee on Exempt Organizations and author of more than 17 books on non-profit tax law, says that while current law doesn't prohibit self-dealing, ``it's obviously a conflict of interest because they're on both sides of the transaction.''

Grassley, 73, and the Finance Committee's Democratic chairman, Max Baucus of Montana, have been looking at charities' accumulation of undistributed assets and use of offshore havens such as the Cayman Islands to avoid paying penalties on debt- financed investing, such as hedge funds. In Robin Hood's case, Grassley says, he is concerned that those who make donations to the fund are receiving charitable deductions for money that isn't distributed to the needy.

Doing Well, Doing Good

``I'm worried that I am seeing more and more that suggests that some hedge-fund and private-equity managers view charitable donations as a chance to do well for themselves and forget it is about doing good for others,'' he says.

Saltzman says the charity has occasionally dipped into the fund, including at least $5 million after the Sept. 11, 2001, terror attacks when relief organizations were attracting most donations. More recently, the charity has taken $20 million from the fund to help build public high schools in impoverished areas of Brooklyn and the Bronx, it says.

Kellogg's Reis says it's important to remember that ``we are talking about a charity that would not exist without hedge funds and people making gobs of money.'' Robin Hood, he says, is ``a public good. There may be a few qualms, but they are benefiting society.''

Representative Richard Neal, a Massachusetts Democrat on the tax-writing House Ways and Means Committee, has a different perspective. ``Charities are afforded a substantial tax benefit as well as public trust, and because of that, they must abide by very strict rules to remain above board,'' he says. When questions are raised, ``it should be looked at, no matter who the organization is.''

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net

Last Updated: July 15, 2007 19:57 EDT

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