A Massachusetts developer has sued Yale and a financial lender backed by the University, accusing the lender of proffering a high-interest loan in violation of a Massachusetts law aimed at mobsters and other racketeers who force high rates on borrowers with the threat of violence.
Five other universities and two foundations were also named in the lawsuit, which is pending in Massachusetts state court. According to the lawsuit, Yale and the other institutions invested their endowments in Realty Financial Partners, the lender accused of charging 42 percent interest on a loan, more than twice the legal limit.
A University spokesman declined to comment Monday, and University General Counsel Dorothy Robinson did not return a phone message.
But Yale’s endowment increased 28 percent last year, the highest return of any university in the nation, fueled by investments in non-traditional vehicles like its stake in Realty Financial Partners, a private equity fund in which Yale is a limited partner. Realty Financial Partners loans money and buys equity stakes in real estate companies and developers.
Yale and other universities have made millions in recent years by investing heavily in hedge funds, real estate, energy and natural resources. Such investments account for 39 percent of all investments held by university endowments, up from 35 percent last year, according to data from the Commonfund Institute in Wilton, Conn.
The developer, Fred Fahey, borrowed more than $10 million for a 186-home community and golf course he built north of Boston. But he said Realty Financial Partners applied a 42 percent interest on some of the money he borrowed.
That interest destroyed his company and forced him to lay off all 22 of his employees, Fahey said in a telephone interview Monday.
“It’s basically knocked us out of business,” Fahey said. “We devoted all our time, money and attention to this project,” which was “devastated” by the high interest rate, Fahey said.
In a statement Monday, Realty Financial Partners said the lawsuit was without merit. Fahey defaulted on his loan obligations four times in four years, and the final interest rate payoff was less than 20 percent, not the 42 percent the lawsuit claims, the company said.
Lenders are not allowed to charge interest of over 20 percent unless they file a notice with the Massachusetts attorney general every two years. The suit accuses Realty Financial Partners of not filing those notices at the proper times.
The company said it played by the rules.
“The lending partnership files all of the required paperwork with the state’s attorney general’s office to ensure that no loan — ever — can be considered illegally usurious,” Reality Financial’s statement said.
Nowhere in the lawsuit is the company accused of being a loan shark, the company added.
The lawsuit, filed in June, was first reported last week in an article by Bloomberg News, which raised questions about the propriety of the investments that may be behind the massive jumps in endowments of Yale and other colleges in recent years.
“You have to ask if there’s an inconsistency between the public purpose [of universities] and this type of financial transaction,” Peter Kinder, the president of Boston-based KLD Research & Analytics Inc., which consults with nonprofits regarding their endowments, told Bloomberg. “It’s a hell of a burden to put on someone,” he said.
Other defendants named in the suit include Harvard, Princeton, the University of Notre Dame, Oberlin College, Spelman College, the Carnegie Corporation and the John D. and Catherine T. MacArthur Foundation. All are limited partners in Realty Financial Partners.
A lawyer for the defendants, David Rich, did not return a phone message Monday.
Fahey is seeking more than $20 million in damages, said his lawyer, Richard Briansky. The parties are likely to next be due in court in January, Briansky said.