When the cold call came from Ameriquest Mortgage Co., a top lender, Jeff and Cheryl Busby were intrigued.
They had been wanting to renovate the garage of their small bungalow, a stone's throw from picturesque Green Lake. The agent, they said, promised that refinancing would give them $20,000 in cash, yet lower the monthly payments.
The agent was a smooth talker, and the Busbys were not concerned that he didn't offer them a chance to study the documents.
They later found that their interest rate was 11% -- far too high. Assuming an honest mistake, the couple returned to Ameriquest. The agent said he would get them a better loan. Things moved so fast, they said, that they had no opportunity to read the dozens of pages of fine print.
The new terms were worse. The payments nearly equaled their entire income.
Ultimately, they sued, saying Ameriquest had invented a car sales business for Cheryl to improve her financial status, complete with a phony business card. Cheryl was 63 and had never sold a car in her life. Their lawsuit also said the agent had fabricated a higher income to "flip" the Busbys into a bigger loan, larded with illegal charges.
The Busbys couldn't make the payments and were forced to sell. The bungalow had been in Cheryl's family since 1935. It was where she had grown up and where her parents had died. It was 100% of the Busbys' retirement nest egg.
Now it was gone.
"It was a traumatic experience," Jeff Busby said, sitting with his wife in the small rented house where they ended up, awaiting the outcome of their lawsuit. Both talked at once, pouring their story out.
"Jeff went into the hospital for a month -- a depression," Cheryl said, her eyes brimming. It was his first relapse of bipolar disorder in many years.
White-haired at 65, Jeff Busby still had the barrel chest of a former athlete who once played scratch golf, but he moved and talked nervously. Losing their home had taken a toll.
"I kind of went berserk," he said.
The Busbys found a lawyer through Cheryl's employer, Solid Ground, a Seattle nonprofit that counsels victims of predatory lenders. Since 1998, the Bill & Melinda Gates Foundation has awarded the nonprofit grants totaling $1.2 million. Yet at the end of last year, the Gates Foundation had more than $2 million invested in securities from Ameriquest.
The conflict is one of many that a Times investigation has found between the foundation's investments and its good works. The Gates Foundation reaps vast profits every year from companies whose actions contradict its mission of improving society in the United States and around the world, particularly the lot of people afflicted by poverty and disease.
The Times has found that the Gates Foundation had major investments in:
* Mortgage companies that were accused in lawsuits or by government officials of making it easier for thousands of people to lose their homes.
* A healthcare firm that has agreed to pay more than $1.5 billion to settle lawsuits accusing it of medical lapses and fraud going back a decade.
* Chocolate companies said by the U.S. government to be profiting from the slave labor of children.
Critics fault the Gates Foundation most for failing to use the power of its immense wealth to improve the behavior of the companies in which it invests. At the end of 2005, the foundation's endowment stood at $35 billion. In June 2006, Warren E. Buffett, the world's second-richest man after Bill Gates, pledged to add about $31 billion.
That $66 billion will give the Gates Foundation more than 10% of the assets of all of the charitable foundations in the United States and provide it with unmatched muscle and potential moral authority. Though it does a vast amount of good with its grants, the foundation declines to use its influence in efforts to reform companies whose business practices flout its goals.
The Gates Foundation did not respond to written questions about specific investments and whether it planned to change its investment policies. It maintains a strict firewall between those who invest its endowment and those who make its grants.
No lack of guidance
Guidance is available for investors who want to avoid companies that behave irresponsibly.
For-profit services such as Calvert Group Ltd. and KLD Research & Analytics Inc. analyze corporate conduct for mutual funds, pension managers and other foundations, but the Gates Foundation does not use information from these services either to avoid investing in or to try to improve companies that engage in socially irresponsible behavior -- even behavior that conflicts with the foundation's mission.
Neither do some other leading philanthropies. The William and Flora Hewlett Foundation, for instance, and the Pew Charitable Trusts invest to maximize funds for grants and vote proxies solely to increase a company's financial performance.
If the Hewlett Foundation created a large staff to monitor the social impact of its investments, said Eric Brown, the foundation's communications director, "The L.A. Times might call us and ask why we have so much overhead."
But the assets of the nation's charitable foundations have risen to a dizzying $511 billion. With such wealth will come closer scrutiny, said Douglas Bauer, senior vice president of the Rockefeller Philanthropy Advisors, a nonprofit group that counsels foundations. "People are demanding a higher level of accountability."
The Gates Foundation has at least $224 million invested in companies dedicated to gambling, such as the Las Vegas Sands Corp., MGM Mirage Inc. and Penn National Gaming Inc.; or dedicated to alcoholic beverages, including the Tsingtao Brewery Co. in China, Kirin Brewery Co. in Japan, and the United Kingdom's Diageo, maker of Smirnoff vodka, Guinness beer and Johnnie Walker whiskey.
The foundation says it does use one investment screen -- to avoid holdings in tobacco. Nonetheless, as of December 2005, it held at least $43 million worth of investments in companies tied directly to tobacco profits. They included Alcan Inc., one of the largest producers of cigarette packaging; and President Chain Store Corp., the Pantry Inc. and Seven & I Holdings Co., which earn a substantial part of their revenues from the sales of tobacco products.
The foundation did not respond to written questions about its investments in companies that profit from alcohol, gambling or tobacco.
The Ford Foundation also screens out tobacco companies, but no others. In part, said Linda Strumpf, its chief investment officer, that is because judging other far-flung, complex corporations that often mix beneficial activities with harmful ones can be a "slippery slope."
Unlike the Gates Foundation, however, Ford scrutinizes corporate behavior, then quietly pressures companies to change harmful polices. Strumpf said Ford voted on more than 600 shareholder proxies annually, including initiatives on climate change, AIDS, human rights and equal opportunity.
Monica Harrington, a senior policy officer for the Gates Foundation, said its investment managers voted proxies, but she did not respond to written questions about specifics. In May, she told the Chronicle of Philanthropy that the Gates Foundation did not get involved in proxy issues.
In addition, Ford has invested $375 million of its endowment in ways that directly support its charitable mission. "You can have more influence as an owner," Strumpf said.
One example of such influence was the effort in the 1980s and '90s to force the ruling regime in South Africa to end racial oppression. Hundreds of municipal and state governments, universities and other institutional investors divested from companies with South African operations that refused to adopt the Sullivan Principles, a code of conduct meant to end workforce discrimination and segregation. The stand the investors took was a key factor in ending apartheid.
A more contemporary example is the Carbon Disclosure Project. Investors controlling assets of $31.5 trillion have collectively pressured 940 large companies to provide detailed data on greenhouse-gas emissions. The project uses the responses to spur improvement on climate change.
Most advocates of these approaches are less provocateurs than hard-nosed investors.
"Although we have ethical and moral principles, we argue the business case," said Lance Lindblom, president of the Nathan Cummings Foundation. In the long run, he said, beneficial practices accrue to the bottom line. "The approach that we take is really about our long-term, sustainable profit interests."
As more information on investment practices comes to light, said Paul Hawken, who runs the Natural Capital Institute, an investment research group, it will be hard for large foundations to ignore the effects of their investments. "A foundation in this way is like any other business. It will be held accountable. [Simply] getting the highest return is what got us into this mess."
Its size gives the Gates Foundation an unmatched ability to steer the debate on foundation investments. Starting in 2009, when outlays of Buffett's donations begin, it will give away $3.5 billion each year -- nearly equal to the total assets of the legendary Rockefeller Foundation.
Bauer said he had this message for the Gates Foundation and others that invest with a blind eye to the consequences: Good returns from bad companies can cancel out the beneficial effects of grants.
"In the extreme example, it would be a wash," he said. "Trustees should say to themselves: 'As we think about the work that we are trying to do with this foundation, which ultimately should contribute to the public good, we should be making sure that everything we do is aligned to the mission, including the investments we make.' "
'Fraud follows money'
Long before the Gates Foundation's investment in Ameriquest, the mortgage lender had become known for high-pressure sales tactics, forged documents, hidden costs, stiff prepayment rules and rushed closings, such as the ones that Jeff and Cheryl Busby said cost them their home.
In January 2006, ACC Capital Holdings Corp., which owns Ameriquest, settled a class-action suit with 49 states and the District of Colombia. Without admitting wrongdoing, the firm agreed to pay $295 million to customers who had borrowed money between 1999 and 2005.
"Doing the right thing for the people we serve has always been one of our core values," said Aseem Mital, the company's chief executive. "We regret those occasions when our associates have not met this ideal."
Ameriquest declined to comment on the Busby lawsuit.
Cheryl Busby's employer, Solid Ground, is one of many groups that have gotten money from the Gates Foundation to fight housing instability and homelessness. Since its inception, the foundation has awarded at least $48 million in such grants.
Indeed, it has made housing a top priority in its Pacific Northwest giving. The foundation has funded so many shelters and services that if a map of Seattle were a dartboard, almost any toss could hit a Gates-supported program.
Similarly, Ameriquest is only one of many lenders in which the Gates Foundation has invested that have contributed to housing instability. Like Ameriquest, these lenders offer so-called sub-prime loans, designed for borrowers who have credit problems that disqualify them from conventional prime loans.
Sub-prime loans can be a way for less creditworthy Americans to become homeowners, and sometimes sub-prime lenders provide a valuable service.
But they often give higher-interest sub-prime loans to borrowers who could qualify for standard loans. During the recent housing bubble, sub-prime lending grew until it accounted for more than a fifth of all residential loans, according to National Mortgage News, an industry publication.
"Fraud follows money. It always has," said Chuck Cross, who until recently directed consumer services for the Washington State Department of Financial Institutions.
Numerous studies have shown that it is not uncommon for unscrupulous sub-prime lenders to target minority borrowers -- or seniors, such as the Busbys.
Growth in the sub-prime industry has been fueled by the practice of bundling loans and selling them like bonds. Investment banks have bought billions of dollars' worth of sub-prime loans, freeing predators to bilk new victims.
Fannie Mae and Freddie Mac, federally chartered corporations, are the biggest investors in sub-prime loans, according to Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. Together, Cecala said, they buy about one-third of all sub-prime securities issued by major lenders, including Ameriquest.
Several experts call Fannie and Freddie key enablers of sub-prime excesses. "What are they doing," Cross asked rhetorically, "buying loans from a company that just suffered the second-biggest predatory-lending settlement in history?"
Fannie Mae has said it never supports predatory lending. Freddie Mac has said it refuses "to do business with financial institutions that engage in predatory lending."
Federal investigators, however, have found that Fannie Mae and Freddie Mac have failed to meet industry standards of ethics. In 2003, the investigators said, "Freddie Mac cast aside accounting rules, internal controls, disclosure standards, and the public trust in the pursuit of steady earnings growth."
In 2004, the investigators nabbed Fannie Mae in one of the biggest accounting scandals ever: It recently reduced its previously announced earnings by $6.3 billion.
"We consider the whole industry suspect," said Kevin Stein of the California Reinvestment Coalition, a group of more than 240 nonprofits and public agencies that studies financial agencies.
Nonetheless, as of December 2005, the Gates Foundation had at least $367 million invested in the stocks, bonds or securities of 20 of the top 25 sub-prime lenders and other large sub-prime companies. These included companies involved in the four largest class-action settlements for sub-prime abuses.
The foundation also holds nearly $1.9 billion worth of stocks and securities issued by Fannie Mae or Freddie Mac. Overall, Gates Foundation investments in the sub-prime companies or their securities totaled more than $2.2 billion in 2005.
The Gates Foundation did not respond to written questions about its investments in Ameriquest and in the sub-prime lending industry or about that industry's effects on housing instability.
Few Gates Foundation investments more sharply contradict its emphasis on human welfare than its holdings in a hospital firm accused of unneeded surgeries for profit or its holdings in companies accused of buying supplies produced by the slave labor of children.
The hospital firm, Tenet Healthcare Corp., has a history of scandals, lawsuits, federal raids for fraud, kickbacks and patient-care lapses going back more than a decade. Although in most cases the company denied wrongdoing, since 2003, Tenet has agreed to pay more than $1.5 billion in settlements.
The Gates Foundation held $58 million in Tenet bonds in 2002, the year Tenet paid $56 million on charges of Medicare fraud. The same year, Tenet faced a major scandal at its Redding, Calif., hospital, which was accused of hundreds of unneeded heart surgeries to boost profits.
It settled federal charges in that case for $54 million.
Bonds from a troubled company can offer high returns despite scandals, as long as the company stays in business. In 2003, the Gates Foundation increased its Tenet bond holdings to $89 million.
In addition, the foundation bought Tenet stock worth about $80 million.
In 2004, Tenet settled lawsuits brought by patients and their loved ones in the Redding scandal. It agreed to pay $395 million.
"This settlement is the fair and honorable way to conclude this very sad chapter," said Trevor Fetter, Tenet's chief executive. "We are building a new Tenet on a solid foundation of quality, transparency, compliance and integrity."
Eighteen months later, Tenet settled new federal charges of Medicare fraud for $900 million. It was the second-largest such settlement ever.
"Some of this company's past actions did not measure up to the high standards that we have imposed on ourselves since these issues first arose," Fetter says now. "But these challenges galvanized us to make necessary changes."
Tenet shares slid in 2004, and the Gates Foundation sold its stock. As of the end of 2005, however, it still held $10 million in Tenet bonds.
The Gates Foundation did not respond to written questions about its investments in Tenet or about the accusations of fraud and lapses in care.
Forced child labor
The Gates Foundation, which awards much of its money to help children, has benefited from a $2.1-billion stake in companies cited by the services that analyze corporate conduct because the companies have been accused of violating human rights, including the rights of children.
Since 2005, for example, the Gates Foundation held investments totaling $189 million in four large chocolate makers: $146 million in Archer Daniels Midland Co.; $26 million in Nestle; $12 million in Cadbury Schweppes, the world's largest confectionary maker; and $5 million in Kraft Foods Inc.
All four companies publicly support sustainable cocoa farming, responsible pesticide use and nonabusive labor practices. All participate in the International Cocoa Initiative to keep production environmentally safe and free of child labor.
Nonetheless, all four firms buy much of their cocoa from West Africa, where 70% of the world's cocoa is grown. A 2002 report by the International Institute for Tropical Agriculture, a group supported by the U.S. Agency for International Development, said 284,000 children in West Africa, many younger than 14, worked in the cocoa industry under hazardous conditions.
They included 200,000 children in Ivory Coast, the world's top cocoa producer. "Countless numbers of children have been trafficked to slave on Cote d'Ivoire's many cocoa plantations," a U.S. State Department report said this year.
The U.S. Labor Department said: "Children working as forced labor on these farms describe being deceived, coerced and threatened by adult intermediaries and employers; working between 10-20 hours per day with few or no breaks under hazardous conditions; and being confined to locked rooms at night."
In addition to the children trafficked as slaves, many were working under hazardous conditions on their own parents' small farms. The four chocolate companies said they were committed to eliminating all abusive child labor.
U.S. lawmakers, however, threatened trade sanctions unless the industry set standards to check and certify cocoa farms by July 1, 2005, and label chocolate so buyers could be assured that farms producing cocoa were being monitored against child labor. All four firms support the program.
The deadline passed, though, and no certification program had been implemented. A new deadline to establish a certification system and apply it to half of the cocoa farms in Ivory Coast and Ghana was set for July 2008.
In 2005, the International Labor Rights Fund sued Nestle, Archer Daniels Midland and another chocolate producer in U.S. District Court in Los Angeles on behalf of three children from Mali who said they were taken from their homes and brought to Ivory Coast as slaves. The lawsuit, filed for "thousands" of children who allegedly suffered the same fate, said the companies failed to use their power to control suppliers.
The companies denied any liability. Nestle spokeswoman Barb Skoog told the Reuters news agency: "Obviously, we strongly believe it is important to make sure that cocoa is grown responsibly without abusive labor practices."
The lawsuit is pending.
The Gates Foundation did not respond to written questions about its investments in the chocolate makers or about concerns that their products had been produced using child slaves.
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