Whistleblowers who raised the red flags about Harvard Management

The IRS is examining questionable practices at college endowment funds across the country.
By: twitter.com/DrIrisMack
Aug. 8, 2009 - PRLog -- BEFORE THERE WAS THE IRS, THERE WAS STEVE ROSE. Once the tax chief at Harvard Management Co., Rose was criticizing tax practices at the investment firm long before the IRS audited it in 2004 or launched the current review of college endowments across the country.

Rose has all the earmarks of an effective whistleblower. He is bold, angry, blunt and dogged. "I thought the place rotted," he says of his experience at Harvard Management in 2000 and 2001.

This year, he revived his campaign -- spurred by the example of a kindred spirit, Iris Mack. A former quantitative analyst for Harvard Management, Mack became so alarmed by the losses piling up at the endowment fund this year that she went public with charges she had previously aired internally about excessive risk-taking.

Mack,  blasted the management company in March, telling the Harvard Crimson, the student newspaper, of a "frightening" use of derivatives and statistical-modeling techniques during her brief tenure in 2002.

Harvard played down the charges when speaking with the Crimson. But Rose, who previously did not know Mack, viewed the Crimson article as nothing less than a call to arms.

"I came forward because Iris came forward," says the Walpole, Mass.-based CPA. "It's hard feeling like you're doing this alone, and Iris was doing this alone."

Iris Mack, top, a former quantitative analyst at Harvard Management has raised questions about risk-management at the firm. Steve Rose has hammered away on tax issues.
He, too, talked to the Crimson, becoming, with Mack, a thorn in the side of Harvard just as it was trying to explain to students, professors and alumni exactly why the huge endowment was plunging 30%. In the ensuing months, Mack and Rose have compared notes on the phone and become friends.

Many of the concerns that the two have raised are hard to corroborate after the passage of time, and the top management of the investment unit has turned over three times since the days when Rose and Mack worked there. But the stories of the two whistleblowers are nonetheless intriguing.

IRIS MACK, A SOFT-SPOKEN SOUTHERNER, arrived at Harvard Management with impressive credentials. She had earned a doctoral degree in applied mathematics at Harvard -- only the second African-American woman to do so -- and she had put in a stint as an executive in the derivatives group of BNP Paribas in London. Right before Harvard, she worked at Enron, the doomed energy concern.

"I thought it would be different at Harvard," she says. But almost as soon as she arrived, she says, she perceived a limited understanding of derivatives models and inadequate risk management across the portfolio. "I didn't feel comfortable endorsing the trading strategies," she says.

Mack raised her concerns privately in a letter to then-Harvard President Lawrence Summers. She assumed the correspondence with his office would be kept confidential, but little more than a month into the discussions, she says, she was confronted by the management company's CEO, Jack Meyer, with copies of her communications. She was fired several days later; her attorney has cited a letter from Meyer faulting her for spreading "baseless allegations."

Meyer and Harvard have declined to comment on Mack's departure, though Harvard says a thorough investigation found her criticisms of investment practices to be "without merit."
Mack, who received a settlement of an unknown sum from Harvard in 2003, was interviewed several times by investigators from the U.S. Attorney's office in Massachusetts. That office declines to comment.

Mack has since returned to academia, teaching graduate-level math and finance at Embry-Riddle Aeronautical University in Daytona Beach, Fla.
"I never felt good about settling with HMC" rather than fighting, she says. "It seemed immoral." But Mack, who came from a humble background and couldn't afford to take on Harvard, decided to move on with her life.

STEVE ROSE TOOK UP THE POST as corporate tax director at Harvard Management in 2000 after a stint at Coopers & Lybrand and five years in the U.S. Air Force. With a master's degree in taxation, he had also been a lecturer in taxation at Boston's Northeastern University.

"You come from someplace else and you realize the place is not normal," Rose says of Harvard Management. He contends he was routinely stonewalled and excluded from important planning meetings after he began questioning its tax practices. As with Mack, Harvard says its investigations found Rose's charges to be "without merit."

Rose quit in disgust in 2001 -- but he didn't stop railing against the huge endowment manager. He corresponded with the U.S. Attorney's office in Massachusetts and the Internal Revenue Service, as well as the Senate Finance Committee. That helped spark hearings by the panel about certain tax practices of endowment funds.

"I felt I had a duty," he says, and the government had "an opportunity." Now in business with his own tax practice, he is thrilled that the IRS is surveying 400 college endowments about tax-related issues.

ASIDE FROM INSPIRING ROSE to resume his fight, it's unclear exactly what will come from Mack's speaking out. But make no mistake: Mack is not finished. She is working with professors, administrators and fellow alums, including Ralph Nader, to try to rejuvenate Harvard Watch, a student and alumni group that closely monitored university business practices earlier in this decade. Harvard, watch out.

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(1) If you don't have an online Barron's subscription: http://www.tickerforum.org/cgi-ticker/akcs-www?post=105095

(2) If you have an online Barron's subscription: http://online.barrons.com/article/SB124908669502998405.html
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