From the Declarations of UC Treasurer
David Russ during the recent lawsuit
Selections by Charles Schwartz, February 2004
A Declaration starts out with the statement,
"I have personal knowledge of the matters set forth
in this Declaration and would be competent to testify to them if called
as a witness."
and concludes with,
"I declare under penalty of perjury that the foregoing
is true and correct."
-- Date, Place and Signature
From Russ' Declaration dated May 6, 2003, paragraph
10, relating to recent performance of the UCRP investments.
... Petitioners note that the net value of the fund
has declined from $41.9 billion to $34 billion (18%) from 2000-2002. The
total return change for this time period was a negative 7.39% (annualized
geometric return) from July 1, 2000 to June 30, 2002, or two fiscal years.
The holding period return was a negative 14.23%. It is important to recognize
that corresponding holding period returns of market indices such as the
Standard & Poor's 500 Index (S&P 500 Index), Russell 3000 Index
and the NASDAQ index dropped over 30 percent, 31 percent and 69 percent,
respectively. The diversified strategy employed by the Regents since March
2000 enabled UCRP to avoid catastrophic losses that would have been incurred
in an equity only portfolio. ...
It is outrageous that Russ compares the recent performance
of the whole UCRP portfolio (consisting of stocks and bonds) with market
indices that look only at stocks. He then goes on to imply that UC's investment
strategy prior to March 2000 involved "an equity only portfolio." How absurd!
In fact you can look in the Wilshire report (3/16/00, their Exhibit 1)
and see that the old asset allocation - 65% Equity and 35% Fixed Income
- was exactly the same as the new policy.
From Russ' Declaration dated May 6, 2003; paragraph
39, relating to the closed meetings of the regents in January and March
2000 and in October and November of 2002.
The adoption of asset allocation policies would
necessarily involve the purchase and sale of investments by the University.
Under these plans, the University would be required to sell off positions
in which it held more investments than the asset allocation policy permitted
and purchase securities in sectors in which its holdings were lower than
required under the policy. Furthermore, the meetings involved discussion
of proposals to place a portion of the University's public equity investments,
which had previously been managed entirely by the internal staff of the
Treasurer's office, into externally-managed index funds. This required
the University to sell overweight positions from the internally-managed
portfolio just as was required (on a larger scale) in late 2002. The same
considerations that required keeping the 2002 transactions confidential
would have applied in 2000.
Those considerations were stated in his paragraph
36 as follows.
We were extremely concerned that the actual dates
of the trading activity would be revealed to market participants who could
then put in place "short" positions in our overweight portfolio positions
(relative to the index weights) in the anticipation of selling activity
in those positions. This practice is commonly referred to as "front-running"
large transactions. ...
We were able to prove that this explanation for
the closed regents' meetings in early 2000 is pure invention. Available
documents show that within a few weeks after the new asset allocation policy
was adopted by the regents, they publicized the details of the planned
changes in the investment portfolio, and this was months before those transactions
were carried out.
What is even more striking, is the fact that
Russ told the regents exactly the opposite story during the October 29,
2002 meeting (quoting from page 19 of the transcript, which was produced
following the court order):
TREASURER RUSS: Now, I've already worked very confidentially
with State Street and their group on this [transferring the internal portfolio
to the index fund]. And they anticipate, with our current portfolio, I
believe the number was 4% open market transactions ... So the costs will
be very low ... one basis point essentially is what the cost would be. ...
REGENT PREUSS: I mean you're not disturbing the market
TREASURER RUSS: Oh, no. Nobody will even know. Nobody
will even know.
From Russ' Declaration dated August 1, 2003
(and filed August 4 in support of UC's Motion for Reconsideration), paragraph
5, relating to the court's ruling on release of information on private
I believe that negative consequences of this Court's
decision to the University's ability to invest have already been felt.
Prior to the issuance of the decision, my office was in negotiation with
Three Arch Partners, a private equity firm with which the University had
not previously invested, to invest in a new fund that Three Arch was forming.
It was our belief, based on these discussions, that we would be able to
participate in the fund. On Saturday, July 26, 2003, the San Jose Mercury
News reported on this Court's July 24 decision. The following day,
Sunday, July 27, 2003, my office was notified by Three Arch that the University
would not be invited to invest in the partnership.
There were newspaper stories following Russ' revelation
that gave a different slant on the Three Arch situation. From the San
Francisco Chronicle, August 8, 2003, page B3 (article by Hui-yong Yu,
Three Arch, a venture capital firm in Portola Valley
that specializes in medical startups, confirmed it told the UC system on
July 27 that it can't invest in its new fund. The decision wasn't related
to the court's opinion, said Wilfred Jaeger, a founding partner. "We didn't
have room" for more investors, he said.
Three Arch has received more interest in a new fund
than it can accommodate, Jaeger said. He said the firm doesn't object to
the publication of internal rates of return for individual funds.
Even Judge Richman commented on this contradiction
during the hearing on August 28, 2003 (transcript page 13), addressing
himself to UC's lawyer, Jerome Falk:
THE COURT: I have to ask you one thing and I'll
hear from Mr. Olson, that is, what is your reading of Three Arch? Is Three
Arch not telling the truth to the press or is Mr. Russ, in essence, not
telling the whole story to the Court? Maybe that's an unfair question because
he's your client. I've got two totally different stories. When I read what
Three Arch tells the "Recorder" -- you people -- everybody puts in, I'm
not saying this is a newspaper case, but people seem comfortable giving
me newspaper articles. So I read them and there's no evidentiary -- he
did object, but anyway.
MR. FALK: I object. We didn't ask you to rely on
newspaper articles for their truth and I don't think you should, and if
anything slips through my fingers on that score, I disclaim it. It's not
right. You should not get the truth out of hearsay newspaper articles.
Mr. -- I am not a percipient to this, Mr. Russ is a highly credible person
as far as I'm concerned and I accept his account and I don't care what
the newspapers say.