The University of Louisville has filed a hybrid derivative and fraud-styled civil complaint in state court, seeking to recover substantial sums from former officers and directors of the University of Louisville Foundation.
This complaint is the latest development in the long running scandal involving the University and the Foundation, its fundraising support organization. The scandal is grounded in multiple allegations that Foundation executives took a series of loan and investment actions without board approval, paid themselves excessive compensation and improperly applied endowment funds, among other claims. A number of the allegations appear largely based on information that was uncovered from a prior forensic audit conducted by an outside audit firm; the Foundation’s board was alleged to have failed to oversee foundation spending, to correct known issues, and to monitor management, among other claims. The suit now seeks to hold certain former officers and directors personally accountable for their actions in violation of their duties to the Foundation.
The defendants in the civil litigation include the former University President (who also served as Foundation President), several other executives, and the Foundation’s law firm. The central allegation in the complaint is that the defendants fraudulently appropriated and diverted Foundation assets for personal use and conspired to conceal their actions, violating their fiduciary duties as officers and directors of a nonprofit organization under Kentucky law.
The University of Louisville Foundation scandal is perhaps the most significant nonprofit controversy in recent years, at least with respect to the kinds of governance and financial matters that arise in many sophisticated nonprofit organizations. This is particularly to the extent that the scandal implicates issues relating to effective board oversight of management; fulsome management reporting to the board; prudent investments, proper application of endowment assets, and intra-corporation conflicts of interest.
It is noteworthy that the University elected to seek this form of relief. An open question is whether the University’s complaint will be a reference point for other strained relationships between nonprofit organizations and supporting organizations.