Why did two Bay Area newsrooms dismiss Peter Byrne's story about conflicts of interest in UC investment deals?
Project Censored highlight stories that didn't make the national mainstream news media. And in this issue, we've got a story that shows something about how news judgments are made in two of San Francisco's largest newsrooms.
Journalist Peter Byrne (who once worked at SF Weekly and wrote some critical stories about us) shares the tale of what happened to a story that the San Francisco Chronicle assigned him — but never published. The people at the Chron and the Bay Citizen (a nonprofit whose work runs in the New York Times) have different perspectives on what happened in this case — and whether powerful people like Richard Blum influence whether critical stories end up in print. Readers can decide for themselves how to see this situation.
But what was striking to us at the Guardian — and why we chose to print both Byrne's account and the final story that the Chronicle chose not to print below — was that the suppressed story was actually quite tame and well-balanced after Chronicle writers, editors, and lawyers spent months working on it (Bay Citizen also invested weeks of work and never published anything relating to the story).
It simply raised the issue of whether the University of California should be doing private equity investment deals that are overseen by wealthy, politically connected people like Blum, whose own funds were also involved. It ultimately wasn't a screaming indictment or accusation of illegal activity, but just a modest peek behind the curtain of an important institution whose focus has strayed from its core mission of serving college students.
We reviewed email exchanges that confirm the basic outline of Byrne's story, conducted some interviews that guided our editing of this story, and included responses from the Chronicle and Bay Citizen at the end of the story. Ultimately, whether this is a case of censorship or something else, we thought it deserved to find its way into print. (Steven T. Jones)
Why two Bay Area newsrooms dismissed my story about conflicts of interest in UC investment deals
In September 2010, the journalism website Spot.us published my investigative series, "The Investors Club: How University of California Regents Spin Public Money into Private Profit." It detailed how members of the UC Board of Regent's investment committee oversaw the investment of nearly $1.5 billion of UC's money into business deals in which they themselves held significant stakes.
One of the conflicted regents was Richard Blum, the financier husband of U.S. Sen., Dianne Feinstein (D-CA); another was Paul Wachter, a business partner of then-Gov. Arnold Schwarzenegger (who is also a regent).
The story caused a stir, particularly at a time when student groups were protesting draconian cuts and tuition hikes. Several newsweeklies published the series. The Los Angeles Times ran a story about my findings. And the investigation was honored with journalism awards by several local, state, and national organizations. So I was not surprised when Nanette Asimov, the higher education beat reporter for the San Francisco Chronicle, called me last October.
"I know it's a Herculean task, but is it possible to charbroil your opus down to 800 words?" she asked. The paper offered to pay me $350 for the story.
Intrigued, I squeezed the investigation that Spot.us had paid $7,000 to produce into a few paragraphs. Little did I know that Asimov and I would be expanding and cutting and tweaking this story for the next eight months, as publication was delayed again and again by foot-dragging editors.
But I was patient. Even after Metro Editor Audrey Cooper told me that Blum had "threatened" Chronicle editors if they ran the tale, I waited several more months before going public. It is my belief that journalists must as accountable for what we do not print as for what we do print.
When Elizabeth Lesly Stevens, a staff writer at the Bay Citizen, inquired about the delay in publishing the story, I told her what I knew and gave her dozens of emails between myself and Chronicle staff. Ironically, the Bay Citizen never ran the story about the story.
It quickly became obvious that the complex financial story would not easily squeeze into a few paragraphs. But since the Hearst Corporation had cut the Chronicle's reportorial throat several years ago by laying off its investigative enterprise staff, there appeared to be no one left capable of editing it. Asimov had to constantly badger editors to work on the story.
Shortly before Thanksgiving 2010, Chronicle business reporter Tom Abate got involved. He sent me an outline indicating places where I should insert a "FIRE BREATHING QUOTE" and then a "QUOTE OF OUTRAGE." The idea of daily news writing, he told me, was "make the readers spit up their coffee." Okay! I dreamed that the streets of San Francisco would soon flow with rivers of regurgitated java.
By early January 2011, Asimov and I had worked up a coherent version, focusing on Blum and Wachter's conflicts of interest. On January 31, Assistant City Editor Terry Robertson emailed, "I'm aiming to get it in the paper by the end of the week." A few days later, he backtracked, "Well, I just found out that the story needs to be lawyered. That throws a bit of a wrench into the works. Sorry."
By mid-February, Robertson had evidently lost interest. Determined to see it in print, Asimov recruited a veteran Chronicle reporter, John Wildermuth, to edit it. He whipped it into shape at 1,600 words. Now it was time for Asimov to call Blum for comment, since he refuses to talk to me.
According to Asimov, Blum was "spitting nails." He called the allegations of conflicts of interest made by an array of ethics experts "obscene." He said, "Nobody has ever told me that we had to ask UC for an OK before we invested in something. I wouldn't be on the Board of Regents if I have to ask for permission to go to the bathroom." And I was told he threatened the Chronicle with legal action if the story was published.
In late March, the copy was again sent to Cooper. On April 11, she decided it needed yet more attention from the lawyers.
On April 14, the Daily Nexus, which is the student newspaper at UC Santa Barbara, reported on a group of students who had gathered hundreds of signatures on a petition to the state Attorney General asking for an investigation based upon the conflicts of interest identified in the Spot.us investigation. In the article, UC scholar Gray Brechin opined that the Chronicle was failing to print my story due "to the political influence of Blum and Feinstein."
Shortly after the story was posted online, Cooper called Daily Nexus Editor Elliot Rosenfeld. She complained that Brechin's comment about the Chronicle was "libelous." The student editor removed the quote from the newspaper's website.
When I asked Cooper about this, she emailed, "As for the Nexus, I think it's a learning experience for them. As I told the paper's editor and Dr. Brechin, I have never been intimidated into publishing anything—nor to refrain from publishing an article. And it won't happen in the future, regardless of whether the pressure comes from a scientist, another journalist, or a senator."
Then Cooper stopped responding to my emails.
On May 6, I received an email from the Bay Citizen's Stevens. She had been at a dinner party with Brechin. She asked me why the Chronicle story was languishing. She said the Bay Citizen might publish it. I told her I was not ready to go public.
On May 18, I emailed Asimov about the status of the story. She said the lawyer had it.
I called Cooper. She told me, "I would like to get [the story] in for Memorial Day because we need the copy. ... I am not responding to emails because I don't want any of this shit in print. ... Dick Blum can go fuck himself! Excuse my language. I don't know the guy. I am not afraid of him. If he is doing something shady I want to publish that ... [but] I am not going to be bullied into not printing it by Dick Blum and I'm not going to be bullied into printing it. ... The fact that he's called the editor and has an attorney in waiting makes us want to do it more. ... I absolutely want to run it. I would like to run it next weekend."
I asked if Blum was threatening the newspaper.
Cooper replied, "Yeah. The only people who know that are me and the executive editor and the managing editor. I don't think Nanette knows that. So you are now like the fourth person that knows that besides Dick Blum. ... People threaten to sue us all the time. But if we are going to mess with, you know, a billionaire, we are going to be a little cautious."
A few weeks later, on June 2, I asked Asimov if she knew about Blum's threat. She replied, "Of course, I knew. Heck, Blum told me as well. The presence of Blum's lawyers won't influence whether we run the piece, however. But this is getting increasingly ridiculous, and I've asked someone to find out the status for us."
On June 27, Asimov told me that the "final version" of the story would "run over the weekend" and that it had been cut to 1,200 words. It did not run.
On July 6, I asked Asimov what was going on. She replied, "What happened is that the lawyer looked at it, and made some tweaks. Most were minor, but a small number of them struck me as simply wrong—like he didn't understand the point. So I told Audrey, and its been the big chill ever since. So I don't currently know what's happening."
That same day, July 6, the Chronicle ran a profile of Feinstein praising her as "the most effective politician in California." Her well-documented conflicts of interest with her husband's various businesses were not mentioned.
A week later, July 12, the Chronicle printed an op-ed by Blum in which he said online education is the future. He did not mention that Blum Capital has a multi-billion-dollar stake in two of the nation's largest for-profit education corporations, each with a growing online component. Nor did the oped note that UC had invested $53 million in these companies after Blum joined the investment committee in 2004.
On July 19, Asimov told me, "The story was re-sent to the attorneys last night with the latest edits." She said that nothing was likely to happened for at least two weeks since people were going on vacation. She said she would "leave [Cooper] a note saying that if the lawyer approves it, you must approve the final version." And that was the last time I heard from anyone at the Hearst Corporation.
A few days later, Stevens contacted me again. She wanted to write about my story for the Bay Citizen's section in The Sunday New York Times. Not being gifted with second sight, I did not know if the Chronicle would ever run the story, but they damn sure had let it get rigor mortis. So, I gave Stevens the email trail. I warned her that she might run into a similar problem at the Bay Citizen, which was founded by Wall Street financier Warren Hellman. It turns out that Hellman sits on the Board of Directors of the Berkeley Endowment Management Company, which controls half a billion dollars in UC Berkeley Foundation investments. Public records show that Hellman's investment bank is partnered with the same two private equity funds that count both UC and Blum Capital as limited partners. And one of the Founding Patrons of Bay Citizen is the Blum Family Foundation. And one of the board members of the nonprofit Bay Citizen is Jeffery Ubben, a former managing partner of Blum Capital. But I digress.
[Editor's Note: The Bay Citizen's newsroom is run independently of its board members, and journalists there say none of the funders have influenced the selection or editing of news stories.]
A week later, Stevens informed me that the story was being pushed to the following week. And then she went on a month-long vacation and the story died. Go figure.
But Stevens did alert the Chronicle staff to my complaints, and the fact that I had provided her with emails and documentation to back up my claim that the Chronicle had bowed to Blum's threat.
On August 8, Asimov emailed a UC instructor, Kathryn Klar, who had inquired about the status of my story. Asimov recounted, "I worked for nearly a year to get Peter Byrne's—frankly awful—story in good enough shape to run in the Chronicle. It was poorly written and confusing. He will tell you how hard I worked to get that thing ready for publication. ... By the end of July, the story was in great shape and the lawyers were taking a final look.
"And then Peter did the unthinkable. He forwarded a year's worth of my private correspondence to another journalistic organization—not a newspaper—who then contacted me and others at the paper threatening to write a story about how the Chronicle had suppressed Peter's story. ... They behaved like blackmailers. Of course they had no story to write, and they didn't. Needless to say, Peter's story will not run in the Chronicle now. But it was his actions, not ours, that led to its death. We, my editors included, liked the story and were pleased that it was finally in great shape. Even the lawyers agreed.
"Its such a shame."
Editors note: We asked Chronicle Managing Editor Steve Proctor for his response. He told us:
"The decision not to publish the story was made by the paper's two top editors, me and Ward Bushee. After reviewing Mr. Byrne's previously published articles and his interactions with the Chronicle, we decided that we were not comfortable publishing his work.
"The story was brought to the Chronicle after having been previously published on a journalism web site. The editors here who worked with Mr. Byrne decided that his reporting would need to be double-checked if the piece were to appear in some form in the Chronicle. This was done intermittently, over a period of time, as there was no urgency to publish given that a version of the story had already appeared.
"We want to be clear on one point. The Chronicle is never intimidated by threats made prior to the publication of a newspaper story — and they are hardly infrequent. We make all of our decisions about publishing stories based on the high standards for journalism that we seek to uphold in the newspaper every day." Bay Citizen reporter Elizabeth Lesly Stevens told us: "After much reporting we ultimately decided that Peter's story was a lot less interesting than he thought it was, and wouldn't make for a very worthwhile column in the NY Times."
Editors note: This is the final version of the story that was supposed to run in the Chron:
The University of California has invested hundreds of millions of dollars in business deals in which two regents who have helped oversee UC's investment portfolio also had financial interests, records show.
Since 2003, UC has invested in five private equity deals in which Regent Richard Blum also had investment interests, according to federal, state and university documents. Regent Paul Wachter had a substantial financial interest in one of those deals.
In such cases, Blum and Wachter were in a position to benefit — or lose — from university investments they oversaw. Blum served on the investment committee from 2004 to February 2010. Wachter joined in 2004 and is its current chairman.
Both regents deny any wrongdoing. The university's chief attorney has examined the investment overlap and concluded they were likely coincidental.
Yet some ethics experts say the overlapping investments create an appearance of conflicted interests. Critics say the deals may violate state and UC ethics guidelines.
Blum, an investment banker and financier who was appointed to the regents in 2002 by then-Gov. Gray Davis, is the husband of Sen. Dianne Feinstein. Wachter is CEO of Main Street Advisors,?a financial management company. He was named to the board by Gov. Arnold Schwarzenegger in 2004.
The regents' 10-member investment committee sets policy for and oversees the management of UC's $70.8 billion as of March 2011 portfolio of investments, which includes the retirement, endowment and campus foundation funds. UC's chief investment officer, Marie Berggren, regularly reports to the committee, explaining where the money is being invested and how well the investments are doing.
The investment committee's conflict-of-interest policy prohibits committee members from telling the investment officer what specific funds to invest in. But they can, and do, direct her to invest greater or lesser amounts in certain categories of funds.
Committee members must also adhere to conflict-of-interest guidelines established by the state and UC, both of which prohibit officials from influencing or voting on matters in which there is even an appearance of a personal conflict of interest. In particular, UC's policy says a conflict exists "if it is reasonably foreseeable that the decision will have a material financial effect on one or more of your economic interests." A material interest is defined as being worth more than $2,000.
Blum had investments of more than $1 million in a number of the business partnerships that UC put money into, while Wachter had up to $1 million invested in one of the deals.
UC's general counsel, Charles Robinson, examined these investments in 2010. Robinson concluded that the investment overlap was probably coincidental, and that neither Blum nor Wachter improperly steered public funds.
"Any overlap is substantially more likely to be the result of independent decisions by like-minded investors than the result of coordination," Robinson reported.
Blum called the idea that he would coordinate investments and profit from UC's financial dealings "ridiculous" and even "obscene."
"Nobody has ever told me that we had to ask the UC for an OK before we invested in something," Blum told The Chronicle. "I wouldn't be on the Board of Regents if I have to ask for permission to go to the bathroom."
Wachter also dismissed the idea that the overlapping investments represent a conflict. "It just doesn't make sense at all," Wachter said, adding that he's surprised that he and Blum had so few overlapping investments over the years, given the extent of their holdings. "The key thing is that you're not telling each other what to do."
But ethics experts say conflict of interest laws and regulations do not allow for such overlaps. "The regents' overlapping investments pose clear conflicts of interest," said Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University. "It is really striking that members of the investment committee stood to gain so significantly from co-investing with UC."
Robert Weissman, president of the government watchdog group Public Citizen, was more direct: "A third-grader can see that what the regents on the investment committee were doing is unethical."
Minutes from committee meetings show Blum and Wachter consistently voted to instruct the investment officer to increase the amount of money invested in private equity funds, a sector in which the two regents have substantial financial interests.
More importantly, some of those investments were tied to private equity deals in which Blum and Wachter held financial stakes.
In one example, Blum, Wachter, and UC all invested in private equity funds that partnered to buy the Las Vegas casino corporation Harrah's Entertainment in 2008.
It worked this way: The regents' investment committee oversaw an investment of $199 million in four private equity funds that helped finance the $30 billion Harrah's deal, according to documents filed with the U.S. Securities and Exchange Commission and UC financial records.
Blum held "more than $1 million" in one these funds, called TPG Capital V, according to Feinstein's economic disclosure statement. Wachter owned "up to $1 million" in two of the funds that financed the Harrah's buyout, according to his financial disclosure statements.
Blum denied any conflict. He said the money resulted from a 2006 merger between Blum's Newbridge Capital and TPG Capital. Newbridge became TPG Asia, with Blum as its co-chairman.
As a result of the merger, "I wound up having some extremely minor — less than 1 percent — interest in some of (TPG Capital's) funds," Blum said, referring to his $1 million-plus asset.
Blum said he did not engineer the arrangement, and is never consulted on matters concerning TPG Capital, which did the deal with Harrah's.
"You couldn't pay me to invest in a casino," he said. Wachter agreed that the Harrah's case presents no conflict. "With investors, there will always be overlap. The point is, if one of the regents told the UC to invest in a particular fund, manager or company, that would be a different conversation. But that's what our policy prohibits."
During his six years on the investment committee, Blum had a financial interest in four other deals in which UC was involved, according to SEC filings and UC records.
They involved Univision and Freescale Semiconductor in 2007, Sungard Data Systems in 2005, and Kinetic Concepts in 2004.
Blum said he had no control over any of the deals involving TPG Capital, but said his firm, Blum Capital Investments, was very involved with Kinetic Concepts.
He scoffed at the idea that he engineered any UC investment to enrich himself. "This is how ridiculous it is," Blum said. "So someone's going to whine because of $1 million? And somehow I'm taking advantage of the UC? I probably give away a bigger percentage of my net worth" than many people.
Private equity, in any case, has not been a cash cow for the university. In February, investment officer Berggren reported that the 10-year rate of return on the private equity portion of the UC retirement fund was averaging less than 1 percent annually, far less than the 6.5 percent return of UC's fixed-income portfolio during the same period. Nanette Asimov contributed to this report.