MN Attorney General takes Otto Bremer Trust to court Monday

Sep. 23—Following an eight-month investigation and a year of legal motions, the Minnesota Attorney General's office will take the three trustees of the Otto Bremer Trust to court on Monday in an effort to replace them with new stewards of one of the state's oldest philanthropies.

The civil trial, which opens before Ramsey County District Court Judge Robert Awsumb, centers on both the day-to-day operations of the St. Paul-based charity, and the trustees' longstanding efforts to oust the board of the philanthropy's largest asset, Bremer Bank, the first step toward a possible bank sale.

The trustees have said that selling shares in the St. Paul-based Bremer Financial Corporation would increase assets for their philanthropy, which in turn would benefit nonprofits and charitable causes.

Since its founding in 1944, the trust has distributed through grants and charitable investments more than $700 million across Minnesota, Montana, North Dakota and Wisconsin. However, the prospect of selling off a major Minnesota farm lender to east coast hedge funds or competing institutions has alarmed bank officials and raised concern with Minnesota Attorney General Keith Ellison's office, which regulates charities.

"The record here is clear: there has been no breach of fiduciary duty by the trustees, let alone a serious breach," wrote attorneys for the trustees, in a joint legal statement last month summarizing the scope of the case. "In the absence of a serious breach there is no legal basis for removing the trustees. ... The trustees have faithfully and successfully served the Trust. They have a combined 60 years of experience managing (Otto Bremer Trust), one of Minnesota's oldest and most prominent philanthropic organizations."

Among the accusations against them, however, is that trustees S. Brian Lipschultz and Daniel Reardon ignored conflicts of interest and used the philanthropy's sizable assets for self-dealing — namely, to reward friends, influence political outcomes, run unrelated businesses, inflate their own salaries, administer their personal affairs and punish those who crossed them. Employees have alleged a hostile work environment that allows no oversight of financial decisions.

The "trustees' continued appointment will result in future disputes, waste of (state) and charitable resources, and the court's time," wrote attorneys for Ellison's office, in the joint statement. The "trustees have lost the trust of the community they are supposed to serve."

$500,000 FOR POLICE UNION; PUNISHMENT FOR A FORMER MAYOR?

The attorney general's office maintains, for instance, that the trustees awarded a $500,000 grant to the St. Paul Police Federation for the purpose of influencing which candidate the union would back for police chief. In another instance, former St. Paul Mayor Chris Coleman and his homebuilding nonprofit are presented as victims of the trustees' financial maneuvering.

When Coleman learned that out-of-state-investors wanted to buy controlling interests in Bremer, a $15.7 billion St. Paul-based bank with deep community ties, he winced. "Anytime decisions are being made about your community from far away, they tend to be different," said Coleman, the chief executive officer of Twin Cities Habitat for Humanity, in a November 2019 article in the Pioneer Press.

Coleman's concerns were enough to allegedly cost his St. Paul-based nonprofit a grant of at least $200,000 related to affordable housing, at least temporarily. The trustees of Otto Bremer Trust — which has served as parent company to Bremer Bank since 1944 — had long sought to court hedge funds that would force a merger or bank sale.

Court filings last year by attorneys for the Minnesota Attorney General's office paint Lipschultz and Reardon as being unforgiving of the negative media attention, especially in light of a lawsuit filed against them by bank leaders intent on stopping a sale.

In January 2020, Lipschultz told Habitat for Humanity that Otto Bremer Trust would not fund its grant proposal due to the "significant financial commitment already provided" to the nonprofit "by our subsidiary, Bremer Bank," according to a legal memorandum filed in August 2020 by the attorney general's office. In a legal deposition, Lipschultz testified that Coleman's perceived loyalty to the Bremer Financial Corporation had come up as a concern.

Lipschultz and Reardon questioned the former mayor's "motivation for providing support in the press" to Bremer Financial, according to the legal memo, and they noted "something awry" because the bank's marketing director, Erin Dady, had worked for Coleman at City Hall. The amount of the scuttled grant was not described in the court documents.

Lipschultz, in a Nov. 22, 2019 email to two communications firms, had previously expressed surprise that a reporter would be working on an article about how Coleman, former Habitat for Humanity CEO Sue Haigh and other community leaders felt a possible bank sale could impact the region.

"I'm perplexed about even the reference to 'community leaders' who have 'done work with Bremer'? Huh?" he wrote, referencing the media inquiry. "With the exception of HfH (Habitat for Humanity), where Bremer Bank has entered into an insane mortgage purchase commitment so that Jeanne (Crain, chief executive officer) could get her profile raised, why would community leaders have any value-added commentary about doing work with Bremer. Bremer is just a bank. That's it."

Nevertheless, Habitat for Humanity was able to secure a $200,000 grant from the philanthropy this year.

ADDITIONAL ACCUSATIONS RAISED

That's one of many accusations from an eight-month investigation by the attorney general's office that began in early 2020. In a 15-page joint statement summarizing the scope of the trial, a witness list runs upwards of two dozen potential witnesses on each side.

A judicial determination over whether to unseat the three trustees could play into a number of related lawsuits that have been put on hold pending a decision in the attorney general's case. Among them, bank leaders sued the trustees in Ramsey County District Court in November 2019, and the trustees counter-sued not long after. Hedge funds then got involved, with the Financial Hybrid Opportunity Fund suing the Bremer Financial Corporation in December 2019, and the Malta Hedge Fund suing the bank corporation in March 2020. Employees of Bremer Bank, which is partially employee-owned, sued the trustees in January 2020.

Additional accusations raised by Ellison's office in civil filings include:

— In October 2019, the trustees sold shares of Bremer Financial Corporation to 19 hedge funds, in a "rushed and reckless" manner that failed to secure the best price and had not received court approval, according to the civil complaint.

— Over the course of eight years, Lipschultz and Reardon increased their annual compensation from roughly $120,000 to more than $540,000, largely by firing their executive director and hiring the trustees — themselves — to do the job.

— Through fees for asset management, a bank sale could elevate each man's compensation past $1.8 million, the complaint alleges.

— When the attorney general's office began investigating, Lipschultz allegedly erased threads of text messages from his cellular phone and then dropped the phone into a lake.

In legal filings, the trustees contend they've been transparent in their financial dealings and successfully run an established foundation. Otto Bremer Trust's expense ratio has consistently remained lower than those of other Minnesota foundations.

The trustees allegedly used trust assets to make private and potentially high-risk investments, in violation of the federal Volcker rule, which is intended to limit bank relationships with hedge funds and private equity firms. From late 2019 through May 2020 alone, they transferred $143 million, or the majority of the trust's $228 million in non-Bremer Financial Corporation assets. They have since had to divest from those funds and pay divestment penalties and legal fees, according to Ellison's office. Mike Ciresi, the trustees' attorney, has denied that's true.

"These investments are very prudent," said Ciresi on Thursday. "They're invested in by philanthropic organizations across the country, indeed the world, and the state of Minnesota. There was no financial penalty at all."

Expenses are approved annually by the district court, according to the the trustees' filings, without objection by the attorney general's office, and any potential conflicts of interest related to grantmaking are fully disclosed. Their investment strategy, they wrote, was "transparent to the Federal Reserve and has substantially outperformed traditional benchmarks and other non-profits."

On Sept. 16, Awsumb, the Ramsey County District Court judge, ordered that it was too soon to tell whether communications between the U.S. Federal Reserve, which enforces the Volcker rule, and the trustees would be admissible at trial. The attorney general's office has called those communications — which could lend some credence to the trustees' claims — hearsay. Awsumb was unconvinced, though he acknowledged "witness unavailability creates a unique situation. ... The Federal Reserve has reportedly indicated that they will not appear to testify."

To replace the three trustees, Ellison's office has recommended Marcia Avner, a senior fellow with the Minnesota Council of Nonprofits, Carlene Rhodes, former president and chief executive officer of the St. Paul Foundation and Minnesota Community Foundation, and retired Hennepin County Judge Pamela Alexander.