UCSF's Mad Money

The Stanford-UCSF merger's tab -- including a "pro bono" review that cost $191,490 -- is running into the millions

The tab is rising as Stanford University and the University of California at San Francisco proceed with the megamerger of their medical centers. But some curious accounting lapses by University of California officials make it difficult -- if not impossible -- to figure correctly.

While the debate has centered around issues such as the disposition of UCSF's more than $350 million in public assets, the $8.25 million that Stanford and UCSF have each handed over to capitalize the deal, and the arrangement's fundamental legality, a notable element has gone uninvestigated: the cost of actually doing the transaction.

And University of California officials are unable to explain exactly how the university system is spending hundreds of thousands of dollars of public money, explanations they are required to provide under state law.

Documents obtained by SF Weekly indicate that as of March, UCSF alone had spent more than $1.87 million on accountants, consultants, and attorneys doing the deal.

Included in those expenses is $191,490 paid for a Third Party Review directed by millionaire investment guru F. Warren Hellman -- the one that supposedly wasn't going to cost the university a dime.

The review was instrumental in persuading the University of California Board of Regents to approve the merger. Under normal circumstances, this wouldn't raise an eyebrow -- people did work, produced a report, and they got paid. Except that a great deal of attention was drawn to the fact that this report was, essentially, a favor to the university. Hellman was subsequently named to the board of the new entity created by the merger. And university officials repeatedly thanked him for his great generosity in giving this deal the once-over.

A San Francisco Chronicle story on March 19 reported that Hellman's investment firm, Hellman & Friedman, counts Stanford University as one of its clients, which raised questions of conflict of interest. In that story, Hellman is quoted as saying:

"I have had a love affair with the University of California for as long as I can remember. I did a study [the Third Party Review] out of the goodness of my heart ... to do a service for the UC Regents."

Equally important, however, is what wasn't said.
Hellman hired a Boston consulting company, Bain & Company Inc. to do work on the Third Party Review and paid their bills himself. He then submitted a bill to the university, which reimbursed him with a $174,637 check. Neither Hellman nor university officials could explain why the university hadn't merely paid Bain & Company directly (something they did in a later transaction).

UCSF also paid $4,083 directly to John McArthur, former dean of the Harvard University Graduate School of Business, for his travel expenses while working on the study. Hellman does not appear to have been paid anything personally for his hours of work.

In fact, Hellman seems to be the only one who has a handle on who was paid for what and how much it cost. He, at least, was able to produce checks documenting the transactions with Bain. Despite repeated requests, neither the University of California, nor UCSF officials have been able to come up with any records to justify the expenditures. Until Hellman produced the checks, the university couldn't even say if the checks had been written, much less to whom.

Over the course of three days last week, university officials offered a series of incomplete explanations.

Their first response was that the Third Party Review was done pro bono. Things didn't get much clearer from there: Hellman wasn't paid for the report, they said (before he produced the check made out to him); consultants were paid for the report directly from the university (again before Hellman was asked); checks were made out to the consultants, but delivered to Hellman because he hired them (now we're getting warmer); Hellman received payment to reimburse him for some of the consultants' costs, and the consultants were paid directly for others (which seems about right); Hellman had a contract for the review; oops, not exactly; there may or may not have been a contract for the review; University of California President Richard Atkinson asked Hellman to do the review as a personal favor; the review was done at the request of the UC Board of Regents.

It wasn't until Hellman himself spelled out exactly what happened that the university came up with an official answer.

Financial documents provided by Hellman show that he paid Bain & Company Inc. for work related to the review a total of $174,637 from August through October 1996. In December, Hellman received a check for the same amount from UCSF. Later that month, an invoice for $12,770 from Bain & Company -- also for work on the review, presumably -- was forwarded to UCSF from Hellman's office.

Following that disclosure, UCSF issued an official statement on Friday, after days of obfuscation, that they had paid what Hellman said they had paid -- the above amounts to Hellman and Bain & Company, along with the $4,083 paid directly to McArthur.

Hellman says he never had a contract with the university, which raises questions about how such a hefty sum could be paid out without such authorization. He also says he offered to pick up the entire tab, and count the Bain & Company and McArthur expenses as donations to the university, but officials rejected that option. He's not sure why. Hellman also says he has contributed mightily to the university, as much as five times the amount that the review cost. And that, frankly, he has had quite enough of being run through the wringer with this public accountability business.

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