US: Money clashes with mission

When the telemarketing call came from Ameriquest Mortgage, Jeff and Cheryl Busby were intrigued.

They had been wanting to renovate the garage of their bungalow, a stone's throw from Seattle's Green Lake. The agent, they said, promised that refinancing would give them $20,000 in cash yet lower 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 percent � 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, the Busbys said, 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.

Now it was gone.

"It was a traumatic experience," Jeff Busby, 65, said, sitting with his wife in the small rented house where they ended up, awaiting the outcome of their lawsuit.

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 2006, the foundation had more than $2 million invested in securities from Ameriquest.

The conflict is one of many that a Los Angeles Times investigation has found between the Gates Foundation's investments and its good works. The 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 people afflicted by poverty and disease.

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 health-care 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. Warren Buffett, the world's second-richest man after Bill Gates, pledged in June to add about $31 billion.

That $66 billion will give the Gates Foundation more than 10 percent of the assets of all of the charitable foundations in the United States and provide it with unmatched muscle and potential moral authority. Although it does good with its grants, the foundation declines to use its influence to reform companies whose business practices flout its goals.

The 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.

A history of problems

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, which owns Ameriquest, settled a class-action lawsuit with 49 states and the District of Columbia. 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.

It has made housing a top priority in its Pacific Northwest giving. The foundation has given money to 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. Like Ameriquest, these lenders offer "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 one-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 older Americans.

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.

Other holdings

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, 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, Tenet has agreed to pay more than $1.5 billion in settlements since 2003.

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.

Human-rights issues

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 foundation held investments totaling $189 million in four large chocolate makers: $146 million in Archer Daniels Midland; $26 million in Nestle; $12 million in Cadbury Schweppes, the world's largest confectionary maker; and $5 million in Kraft Foods.

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 percent of the world's cocoa is grown. A 2002 report by the International Institute for Tropical Agriculture at the U.S. Agency for International Development said 284,000 children in West Africa, many younger than 14 years old, 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," according to a U.S. State Department report.

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 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. The lawsuit is pending.

About this series

January 6, 2007

This series is based on more than 90 interviews and hundreds of documents, including thousands of pages of Gates Foundation grant descriptions and policies, evaluation reports, tax forms, filings to the U.S. Securities and Exchange Commission through September 2006, and lists of endowment holdings from 2002 through 2005.

Information was used from four leading services that provide guidance for investors regarding corporate performance: Calvert Group Ltd., Innovest Strategic Value Advisors, KLD Research & Analytics Inc. and Oekom Research. None of the companies was directly involved in The Times' assessment of the Gates Foundation portfolio; they have taken no position on The Times' conclusions.

The research groups consider companies in context and weigh their efforts to improve. For example, oil and gas companies are big polluters by nature, but some vigorously pursue pollution reduction or alternative-energy development. The researchers give more-favorable ratings to companies that make strong efforts to improve than to those that don't.

The Times' tally of Gates investments in companies that contradict its goals included only those firms that were ranked among the worst by the investment rating services, which considered their performance in one or more broad categories, including governance, environmental practices and social practices, or on one or more specific issues, such as product safety or human rights. The four services evaluate unique but overlapping sets of companies:

Calvert: The 1,000 largest U.S. companies measured by market capitalization.

Innovest: 1,255 U.S. and foreign companies.

KLD: The Russell 3,000 companies, plus many other U.S. and foreign companies.

Oekom: 108 U.S. and foreign companies in the oil and gas, banking and pharmaceutical industries.

Calvert rates companies based on several governance, social and environmental measures. Companies rejected for the Calvert social investment index, because of poor performance in one or more categories, were included in The Times' total of Gates Foundation investments in firms that counter its charitable goals or socially concerned philosophy.

Innovest rates companies on seven levels for two overall categories: environmental and social. The Times' total of Gates Foundation investments in firms that counter its goals or socially concerned philosophy included companies that received the lowest possible rating in either of those overall categories.

KLD provides relative scores in several governance, social and environmental categories. The Times included in its total of Gates Foundation investments that counter its goals or philosophy any holdings in companies that scored at least one standard deviation below the norm for all firms in each category. Depending on the category, this represented 1% to 15% of evaluated companies.

Oekom uses a minimum passing score within an industry group for overall corporate responsibility. Companies that failed to achieve a passing score were included in The Times' total of Gates Foundation investments that conflict with its goals or philosophy.

The Times also included companies screened by Calvert, KLD or Innovest for significant problems involving diversity, human rights, product safety or other product-related concerns, and tobacco-product manufacturing and sales.

The four rating companies look at similar factors, and often reach the same conclusions. However, each service uses unique weightings and analysis, naturally resulting in some conflicting conclusions.

These evaluations were supplemented with Times reporting.

Companies among the 100 highest-polluting in the United States were derived from rankings by the University of Massachusetts Political Economy Research Institute. These rankings consider total air pollution released, toxicity of pollutants and the number of people at risk of exposure. The top 50 polluters in Canada were rated by the trade publication Corporate Knights, based largely on the University of Massachusetts approach.

The Times used several studies that reviewed or evaluated actions of the pharmaceutical industry regarding intellectual property rights, patents and drug pricing in developing nations. A preliminary list of relevant companies was drawn up using studies or evaluations conducted by Innovest, KLD, Oekom, the nonprofit medical group Doctors Without Borders and the Interfaith Center on Corporate Responsibility, a coalition of 275 faith-based institutional investors that includes religious groups, pension funds, endowments, hospital corporations and colleges.

The list was refined and validated in interviews with experts and through a review of more than 40 technical papers and analyses, including studies by the World Bank and the World Health Organization. Those sources were supplemented with reports and announcements from the pharmaceutical companies and the Pharmaceutical Research and Manufacturers of America, a leading trade group.

Companies in the sub-prime industry were compiled from National Mortgage News and Inside Mortgage Finance, leading trade publications. Times reporting validated and refined the list.

Information about proxies was gathered from the EthVest database, sponsored by the Interfaith Center on Corporate Responsibility. The data were supplemented by interviews with officials from various foundations.

The overall figures in this series may significantly understate the volume of Gates Foundation investments that tend to conflict with its charitable goals. There are several reasons:

1. The Gates Foundation did not provide details for approximately $4.3 billion worth of investments it characterizes as loans.

2. Among thousands of entries on the foundation's investment lists, spelling errors or other irregularities in original source materials occasionally made definitive identification impossible; such erroneous listings were excluded from The Times' total.

3. Subsidiaries were considered part of the parent companies if the parent owned more than 50% of the subsidiary. Though attempts were made to discover all such corporate linkages, those efforts were not exhaustive.

4. Many companies in the Gates portfolio were not evaluated for social or environmental impacts in materials provided by the ratings services used by The Times.

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