Loss of Trust

Donors, foundations say banks mishandle charitable accounts

Many charities and foundations believe they are losing millions of dollars a year to the very institutions they

pay to safeguard their assets. At least seven class-action lawsuits are pending in federal and state courts across the country in which charitable trusts, foundations, and scores of individuals accuse the banks that oversee their assets of a range of improper activities, including mismanagement of funds and conflicts over what charities can benefit from a trust.

Hundreds of aggrieved charitable trusts have already won legal settlements from banks. In five recent class-action settlements involving more than 450 charitable trusts and thousands of other trust beneficiaries, banks have paid out more than $207-million.

In most of the legal cases, the banks have denied any legal wrongdoing. Nonetheless, even bank officials acknowledge that some trusts have not been treated well, largely because of the fast pace of consolidation in the banking industry.

Some donors are so angry they have stopped setting up trusts using banks, and many nonprofit officials, lawyers, and scholars say they are growing concerned that actions taken by banks could mean that charities might not get as much money as they once thought they would from charitable trusts.

“Many large banks regard these charitable accounts as the bank’s own piggy bank to reach into as needed,” says Richard D. Greenfield, a lawyer in Easton, Md., who represents several trusts and foundations in disputes against banks. “Bank officials don’t think anyone is going to raise a big fuss if excessive fees are taken, and they have learned from experience that members of foundation and charity boards tend not to rock the boat.”

Increased Fees

As banks have merged in recent years, they have often come under greater financial pressure -- and that has led to increases in fees that institutions charge to oversee trust accounts. Many of the lawsuits by charitable trusts say that at the same time, banks have been reducing the services they provide. In some cases, banks that believe they are not making enough money for handling trusts resign from their fiduciary role -- or they sue to get paid more.

Higher fees and reduced services are not the only problems trusts face when banks change hands, charity regulators and legal experts say. Records get lost. Longtime trust officers get laid off, breaking down communication between trust officials and financial institutions. And account statements become increasingly incomprehensible, sometimes covering up financial improprieties.

Many charities rely on the money they expect to get from foundations and charitable remainder trusts and other types of trusts. Charitable remainder trusts are a popular way for donors to leave part of their estate to charity. To set one up, a donor contributes cash, stock, or some other asset to the trust, which makes regular payments to the donor or to his or her beneficiaries. When the donor and beneficiaries die, any remaining trust assets go to charity.

Officials at Shriners Hospitals for Children, in Tampa, Fla., which is a beneficiary of more than $450-million in charitable trusts, say the organization is monitoring trusts more closely than ever as a result of problems it has seen, says Bill Fawcett, the group’s corporate controller.

“Each time we were looking at these trusts, we were getting surprised,” Mr. Fawcett says. “Certainly mergers have created some pressures on the quality of service and fees, but even some banks that have been there forever, we’ve caught them doing bad things, too.”

While many charities and trust beneficiaries describe increasing tensions between charitable trusts and banks, some bank lawyers say relations have improved following mergers or acquisitions, as some banks have become more centrally managed and have established more effective and consistent methods for resolving disputes.

Several bank officials acknowledge that banks have made mistakes after acquiring new trust accounts, including losing account information or failing to make sure that computer systems between the banks work together. Bank officials, however, deny that their institutions have broken the law.

Control Over Funds

One of the most common conflicts between banks and charitable trusts arises over a difference of opinion about what the trust’s assets should be used for, says David G. Coffaro, managing director of trust and estate services at Wells Fargo & Company, in San Francisco, which holds more than $400-billion in assets and operates in 23 states.

“By the time grant-making decisions get to the grandkids, they may hold a different view of the world than grandpa,” Mr. Coffaro says. “They get frustrated because the trust document was set up a certain way and can’t be changed.”

Trust beneficiaries and foundation officials say that decisions about where to distribute the money held by trusts and foundations are hardly the biggest conflict they encounter with banks. They complain that as the banking industry has changed in recent years, many banks have started to put their own interests above those of the families whose relatives set up the foundations or trusts and the charities expecting to receive payments someday.

William T. Hopwood is a co-trustee in Camden, Me., whose grandfather set up a charitable trust about 50 years ago to support medical and environmental causes in western Pennsylvania. The John M. Hopwood Charitable Trust has about $25-million in assets and gives away about $1.2-million a year.

Mr. Hopwood, who as a co-trustee helps make investments and distribute the trust’s money, says he has been trying for 15 years to persuade the banks that have overseen the trust’s assets to allow more than one family member to formally participate in the activity of the organization. He also wants members of his family to have the right to discharge the bank as co-trustee and the authority to cease the group’s operations and pay whatever is left in the trust to charity, if the family so wishes.

Those changes could adversely affect the bank, and because the changes are not part of the original trust document, the bank is not obligated to make them. But Mr. Hopwood says the moves are in the best interests of his family and it frustrates him that he has not been able to persuade any of the banks to put in place his family’s suggestions. “For the bank to tell me what’s best for my family is not appropriate,” he says.

Over the years, Mr. Hopwood says he has come close to getting several banks to make some of the changes he has sought. But every time he has gotten close, the bank merged, was acquired, or changed its trust officials, forcing him to start his negotiations over. He is currently negotiating with PNC Bank, in Pittsburgh, which oversees the trust, to make the changes. PNC Bank officials would not comment on their negotiations with Mr. Hopwood, saying they did not want to compromise their relations with him. Mr. Hopwood says he is close to getting what he wants -- but that all the conflict has taken a toll.

“It’s definitely taken the fun away from the grant making,” Mr. Hopwood says. “I can see where it would also have an impact on the effectiveness of the grant making.”

‘Easy to Sue’

Generations ago, organizations like the Hopwood Trust were set up over a handshake between friends, as many donors knew and were friends with local bankers.

But as banks have gotten bigger and consolidated in places like New York, San Francisco, and Charlotte, N.C., many people feel their banks have grown increasingly impersonal, says Scott McCue, a Chicago trust lawyer who represents about 50 charities. Impersonal treatment has helped spur a new wave of litigation, he says: “It’s just really easy to sue a bank if your relationship is through a call center.”

It is also easy for trust beneficiaries and foundation officials to justify a lawsuit when they think they see a conflict of interest. A common complaint from trust beneficiaries is that banks have improperly converted trust assets into the bank’s proprietary mutual funds or into the stock of the bank. Some lawyers are starting to argue that banks should not be permitted to put trust assets into their proprietary funds or their own stock because doing so prevents banks from serving their fiduciary obligations to the trusts.

Foundations have found such arguments difficult to win in court. The McCune Foundation, in Pittsburgh, which has about $600-million in assets, lost a legal battle in 1995 against its trustee, National City Bank, in Cleveland, which has about $140-billion in assets and operates in seven states in the Midwest. The McCune Foundation accused the bank of failing to properly oversee the foundation’s assets and refusing to appoint a McCune family member to serve as a trustee of the organization to let family members have a say in how the assets of the foundation are invested. The family was particularly concerned that many of the foundation’s assets were invested in the bank’s own stock. A judge dismissed the lawsuit, but the foundation continued to speak out against the bank.

To quiet the controversy, the bank appointed James M. Edwards, the chairman of the distribution committee at the McCune Foundation and a great-nephew of Charles L. McCune, the banking magnate who set up the foundation in 1979, as a special adviser overseeing the trust’s investment in the bank’s stock. Mr. Edwards has the authority to sell the foundation’s interest in the bank whenever he chooses. The bank’s stock has dipped about 15 percent in the past six months, and Mr. Edwards is considering selling all or part of the foundation’s interest in it.

“My advice is to never let a bank be trustee over a corpus where their own stock is in it,” Mr. Edwards says. “They want to act like they don’t have a conflict of interest, but any fool can see they do.”

Investment Decisions

What rankles trust beneficiaries the most is not so much that bank mutual funds or bank stocks perform poorly -- it is that banks often do not appear to consider each trust’s needs when they require trusts to invest solely in bank-managed funds.

That is part of the argument Mr. Greenfield makes in five pending lawsuits representing estates and trusts in California, Florida, Maryland, and Missouri. Each of those claims alleges that Bank of America -- which operates in 29 states and the District of Columbia and holds $1.1-trillion in assets -- improperly coerced thousands of trusts into putting their assets into the proprietary mutual funds of the bank.

In a statement provided to The Chronicle, Bank of America said that it fully complied with all federal and state laws and diligently carried out its fiduciary duties in the best interest of its clients. In court documents it has filed, Bank of America calls the charges “outrageous” and describes the legal maneuverings of Mr. Greenfield to make repeated changes to some of the lawsuits as “bizarre” and “cavalier.”

The law is on the side of banks, some lawyers say. Many states have passed laws allowing banks to generate fees by investing trusts’ assets that the banks already are paid to oversee into the bank’s proprietary mutual funds.

Allegations that banks have overcharged trusts have led to some of the biggest legal settlements between charities and banks.

Last month, Northern Trust Bank of California agreed to pay more than $21-million to settle a class-action lawsuit filed in Los Angeles County Superior Court. The lawsuit alleged that for more than two decades, Northern Trust Bank of California and a bank it acquired in 1992, Trust Services of America, charged excessive fees to 1,300 people, charities, and others with trust accounts. Northern Trust denied the allegations, saying it settled to avoid costly litigation.

Lawyers say that banks often get away with taking extra fees without much notice because the account statements they produce are so confusing. That helped Security Pacific National Bank, now owned by Bank of America, to conceal that it had overbilled trust customers $18-million over 20 years, beginning in 1975, court records show. Bank of America, following the acquisition, agreed to pay back some of the money taken from charitable trusts and other bank customers after a former bank employee went public with the allegations. Not content with the reimbursements Bank of America planned to pay, a trust beneficiary sued the bank on behalf of thousands of others.

Last year, the U.S. Court of Appeals in San Francisco ordered Bank of America to pay $111.5-million in punitive and other damages to more than 2,500 trust beneficiaries. More than 450 charitable trusts won money as part of the court’s decision, says Robert W. Mills, a San Francisco class-action lawyer who helped represent the trusts.

One of the biggest beneficiaries of that Bank of America settlement was Childrens Hospital Los Angeles, which was paid $545,000, according to David D. Watts, the hospital’s assistant vice president of planned giving.

Large settlements like the Bank of America case have persuaded some banks to try to protect themselves by requiring donors to sign a form that gives away their rights or their beneficiaries’ rights to ever file a class-action lawsuit against the financial institution.

“If you sign the form, it basically means that banks can steal from you and you have no remedy,” Mr. Mills says. He cautions trust beneficiaries and foundation officials to read the fine print in legal documents before they allow banks to oversee their assets.

State Regulation

Charity regulators in some states say they do not see widespread malfeasance on the part of big banks -- and they say there is no reason donors should not continue to use banks as trustees. But some regulators are pushing banks to become more accountable to the people and organizations whose assets they oversee.

The New York State Charities Bureau is trying to persuade the state’s banking industry to adopt new rules requiring financial institutions to perform regular financial accountings of all the charitable organizations they oversee, says Gerald Rosenberg, the assistant attorney general in charge of the Charities Bureau.

“The failure of banks to do frequent accountings has created problems, especially where estates have gone for decades without a financial accounting and where problems are being swept under the rug,” Mr. Rosenberg says. “Mergers give us occasion to take a hard look at what’s been going on and to condition our approval of bank mergers.”

In a court ruling last year, Bankers Trust Company of New York admitted that, following its 1999 merger with Deutsche Bank, it lost the records of two trusts set up in the 1920s by John D. Rockefeller Jr. to benefit Baptist churches in New York. The court penalized Deutsche Bank, which had absorbed Bankers Trust, by requiring it to repay the trusts part of its commissions for the 28 years in which the bank could not find the trusts’ records. Deutsche Bank has since resigned its fiduciary responsibility for the trusts.

What is ironic, regulators say, is that the bank itself sued the churches in an attempt to raise its fees.

SETTLEMENTS OVER TRUSTS: A SAMPLING OF THE BIGGEST ONES