Bad Faith, Addendum 2: Unintended Costs of the Railroading of PSU

When the BOT inner circle reached its "bad faith agreement" with the NCAA on the Consent Decree, it is likely that they thought the University would incur very little in the way of future expenses.  They were wrong, mostly because they believed their own hype.

By
Ray Blehar

According to PSU's progress web-site, as of June 30, 2014, the University incurred $79.7 million in expenses not including settlement of claims related to the Sandusky crimes.  Adding the settlements of $59.7 million, the current tab for the scandal is $139.4 million.  However, that does not include the additional $36 million in payments/donations owed from the lNCAA/Corman settlement.  

Adding those brings the total cost to $175.4 million... and counting.  But that figure is an illusion.  The cost to PSU is far lower -- but still a lot more than the BOT inner circle ever expected.

The BOT Inner Circle Misjudged Costs of Scandal

Based on the earliest accounting available, it is reasonable to estimate the scandal's expenses were in the $15 million dollar range when Erickson signed his name on the dotted line on July 23rd, 2012.  

It is also very likely that he and the cabal of Board members didn't believe that the scandal expenses would move much farther beyond that.  They believed they convinced everyone that there was a PSU cover up and that all future litigation in the matter was closed. 

To review, the BOT inner circle:

• Created a narrative that the PSU "culture" was to blame for enabling Sandusky's crimes;
• Hired Louis Freeh to conduct a phony investigation and create a report to justify their actions of firing Paterno and Spanier -- and to further indict the PSU culture.
• Got the NCAA to repeat the "culture" narrative and to praise them for their actions that (allegedly) "saved" PSU football; and, 
• Attempted to cut off future challenges to the consent decree by giving up PSU's rights to appeal to the NCAA or take other legal actions. 

The BOT inner circle, apparently believing the stuff they were shoveling, likely thought the only things left to happen after the consent decree was signed was that the "moving forward" train would leave the station and that everyone would jump on board.   

As Karen Peetz mistakenly stated, "by the time someone gets here in 2014, it will just be a distant memory." 

Their mistaken beliefs would cost PSU millions.

OOPS!  The Scandal Won't Cost PSU Anything

Unfortunately, the "smartest people in the room" were not only foolish to believe their own hype about the PSU culture being responsible for Sandusky,  but they were also foolish enough to believe their faulty assumptions about the costs of the scandal.  

According to a media source, PSU spokesperson David LaTorre stated that the scandal wouldn't cost PSU anything.  The University stated the situation a bit more eloquently.

"The University maintains General Liability and Directors & Officers insurance policies which are expected to cover the defense of claims brought against the University and its officers, employees and trustees. Legal and other expenses not covered by insurance are expected to be funded from interest revenues related to loans made by the University to its self-supporting units. As a common business practice, the central University -- which has the ability to finance bonds backed by its credit rating --is able to loan its self-supporting units money for special projects. These units do not have their own borrowing authority, but they are all part of the University's credit profile. As an example, in the case of the most recent $100 million Beaver Stadium expansion, the University bore the risk to finance a bond at a variable rate during a favorable financial period. The University then loaned funds at a fixed interest rate to Intercollegiate Athletics, which then repaid the loan with interest from its ticket sales, club seats leases, sponsorships and other income generated. The interest from this loan is then placed into a fund that can be used for more projects in the future or in emergency situations. Therefore, uninsured expenses can be covered by this interest and will not be funded by student tuition, taxpayer funds or donations. Compensation paid to all such attorneys, consultants and firms will be regularly updated and all expenses are audited."

The interest expected from the series of loans to PSU athletics is estimated at $43 million over the terms of the loans.  As the accounting shows, however, the university did not issue bonds and instead used funds from the institutional support budget.  That decision was likely driven by the fact that there were too many eyes watching the Board's every move.

Regardless of how the costs were funded, they total at around $32 million -- which is a lot more than zero.  

Sandusky Injury Claims ($59.7 Million and Counting)

Lubert's sub-committee blew it.

The legal and compliance sub-committee of the PSU BOT culminated research it began in February 2012 and in October 2012 the Board approved a resolution which stated the University was liable for injuries suffered as a result of the crimes of Gerald Sandusky.  Among the many reasons why this was a bad decision, the foremost was that the decision was made under the premise that  PSU's insurer would reimburse the University for the claims (up to the specified coverage limits).  The insurer, the Pennsylvania Manufacturer's Association (PMA) Insurance Company, denied the claims.  PSU sued and the case is scheduled to go to trial in March 2015. 

The "plain language" of PSU's policy indicates that the University will lose.  Molestation and sex abuse aren't  covered.  

Also, there are three pending cases against PSU regarding the Sandusky case -- all which rely heavily on the Freeh Report as evidence that the University was at fault for Sandusky.  These are civil cases and the burden of proof is on the victims to show a preponderance of evidence supporting their respective cases (that PSU was a "third party" who contributed to or facilitated the crimes).   Obviously, the attorneys will also point to the language of the BOT's resolution that states the University is liable.   

PSU isn't looking good in these cases and they know it.  According to PSU's 2013 financial statements (p. 36), the University believes "a loss is reasonably possible in future periods which could have a material adverse effect on our current and future financial position, results of operations and cash flows."   

NCAA/PSU Unexpected Litigation Expenses ($8 million)

Given that the consent decree contained derogatory/defamatory statements about Paterno and other PSU leaders, it provided grounds for those individuals to sue for damages.  The Board's inner circle and the NCAA's belief a single sentence in the consent decree could stop damaged parties from litigating was rather foolish to say the least.  

The group of litigants claiming damages because of the University's, Freeh's, and NCAA's statements and actions include: Mike McQueary, Bill Kenney and Jay Paterno, the Paterno Family (et al), and Graham Spanier.   

As mentioned earlier, the BOT inner circle also erred in concluding that insurance would pay for Sandusky claims.  As a result, it hired Jenner & Block, LLP and Lee, Green & Reiter Inc. to litigate the PMA lawsuit.  

The legal tab incurred by PSU since the outset of the scandal is approximately $17 million. About half of those costs were unexpected.

Externally Initiated Investigations ($4.5 million)

The costs for externally initiated investigations has exploded since July 2013, when they were just $842 thousand.  Those costs were inclusive of the services provided by Margolis and Healy for consulting on Clery Act compliance.  The Department of Education issued its initial Clery Act compliance report in July 2013.  In addition, those costs included the services of Gene Marsh, who was brought in allegedly negotiate with the NCAA.

In August 2013, PSU released another statement revealing externally initiated investigations cost PSU about $1.1 million.   However, as of June 30, 2014, the cost of those investigations reached a whopping $5.6 million.  

Based on the firms listed, the monies are being paid to Buchanan Ingersoll, a governance consulting firm (but not Holly Gregory's)  and the law firm of Saul Ewing.  Saul Ewing holds the documents and related information related to the Freeh Report and has been supporting civil litigation efforts since the early days of the scandal.  The costs related to civil litigation and hiding the truth about the Freeh Report have escalated as the litigation efforts continue.  Given that some of  these cases are tied to Sandusky's criminal acts and some may be eventually be tied to criminal acts, it is unlikely that D & O insurance will cover the costs.

Indemnified Persons' Legal Defense ($4.1 million)

According to documents uncovered in the investigation, prosecutor Frank Fina advised PSU officials that he expected "C + S to flip" on Spanier.   Had that happened, the costs for the legal defense of the indemnified persons would have been much lower.  The Curley, Schultz, and Spanier cases would have been resolved by now, Spanier would have a criminal record, and the University would been done paying legal fees for indemnified individuals.  

Of course, none of that happened.

Much to the chagrin of Frank Fina and the BOT,
PSU officials have maintained their innocence. 

The three former PSU administrators have maintained their innocence and continue to fight in the courts.  

As of December 31, 2012 -- about two months after the OAG issued the Conspiracy of Silence grand jury presentment, the cost of indemnified persons defense was $5.8 million.  At the last accounting the cost was $9.9 million and counting as more Penn State officers file lawsuits.

Public Relations (Unexpected Direct Costs, $3M) 

Freeh, like Mitchell, was hired for PR purposes.

Considering that the hiring of Freeh and George Mitchell were nothing more than public relations ploys, the cost of PR for the scandal has reached $20.7 million.  Not so ironically, in the earliest accounting for the scandal, the Freeh investigation and public relations costs were combined in the same category.  

In February 2012, that total was $5.75 million.   However, the costs of Freeh and Mitchell ($11.6 million) were expected at the time of the consent decree.

As noted above, the OAG and PSU expected one or more of the PSU officials to roll and bring an end to the scandal and its related costs.  The cost of PR calculated at the end of 2012 was $6.2 million.  PR costs have now unexpectedly reached $9.2 million

Firms providing early PR support were:  Reed Smith LLP, Ketchum, Kekst and Company Inc. and Domus Incorporated.   Firms added in April 2012  at a cost of $2.5 million for a 12 month period were: Daniel J. Edelman, Incorporated and La Torre Communications.

It is notable that Edelman's advice to PSU is likely to cost more than 40 times what the firm was  paid.  Here are his remarks from August 2012 about PSU's consistent messaging.

"Look, the school has lived through three major news cycles in the 

last two months, the Sandusky trial and verdict, the Freeh report, and then the NCAA

sanctions. In all three of these situations we've been responding to events not in control of

the events, but in each situation we've been able to provide consistent messages.

"And those are as follows: First, we take responsibility to insure this sort of thing

never happens again, and that we are going to fix the shortcomings so we're a stronger

institution in the future. 

"Second, we're committed to developing and supporting specific programs to protect children on and off campus.

Edelman: Learned nothing from Duke

"Third, we have a plan to improve the school's governance which will be informed in part by the Freeh Report's recommendations and will make this great University even greater in the future. This University has received praise in many corners in the past two months, despite these three big events in the sense that you have been willing to hold nothing back in the investigation and to take very strong actions, such as the removal of the statue in front of the football stadium prior to the NCAA sanctions.

In summary, Edelman's consistent message was to confirm that Penn State and Paterno was responsible for Sandusky's actions.   It should be noted that Edelman also advised the Duke administration's public relations efforts after the rape allegations lodged against its lacrosse team.  In that case, he relied on the media and the court of public opinion to form his beliefs and suggested that it might be right for Duke to do the same.  

It seems some people never learn from the past.

Conclusions

At this point in time, the unexpected costs for the scandal are $75.2 million -- well over the $44 million in interest that the University expected to cover everything.  Of course, those costs will continue to rise as the litigation continues and more potential lawsuits are filed over a variety of issues related to the Board's continued poor decision making.

Clearly, the BOT inner circle's analyses were flawed when they underestimated the direct costs (and indirect costs) of the scandal.  The only thing they may have underestimated worse was the resolve and intelligence of the University's alumni.

Next: Underestimating the alumni.

Joyner: Names On Jerseys To Be Removed

Dave Joyner, in what he called a "business decision," ordered the names removed from PSU jerseys for the 2013 season.

By

Ray Blehar

UNIVERSITY PARK, PA: Penn State Athletic Director, Dr. David Joyner announced today that the names that adorned the backs of the jerseys of the 2012 Nittany Lions will be removed for 2013.

Joyner, who was reached by phone from the house he rents from Ira Lubert, stated that it was a "business decision" for the removal and that it had absolutely nothing to do with restoring the tradition of a former coach - who shall remain nameless.

"It was strictly a business decision," stated Joyner, whose athletic department teeters on the edge of revolt under his direction.  

"First, there's the cost of the letters and the threads.  Not only do we have to purchase white letters for the blue jerseys, but blue letters for the white jerseys - oh, and the blue and white thread too.  Luckily, I had some coupons for JoAnn Fabrics last year and we got off pretty cheap, but the coupons were not available this year."

Joyner went on too say there was also a revenue issue involved with the names on the jerseys.  "As you know, Penn State fans are notoriously cheap.  So, what we didn't realize, when Ira and Rod made the decision to put the names on last year, was that the fans would stop buying programs.  That was quite a hit to our revenue."

"You know, Ira kind of chuckled about it, as I was washing his car, and said how the previous coach didn't put the names back there so he could sell more programs.  I never thought about it that way when I played for the former coach, but he was a pretty shrewd business guy after all."

Joyner believes removing the names will solve the revenue woes of the department.  "We really did not realize how much revenue there was from program sales. You know, when you're rolling in dough, you don't pay attention to the little things."

After consulting with Erickson about the possibility of putting names on the helmets, Joyner stated that while the move would cut the costs of lettering in half, since the players only get one helmet, there wouldn't be enough room for a name like Obeng-Agyapong.

When asked about season ticket sales, NLC renewals, club and suite renewals, and revenue projections for 2013, Joyner referred us to PSU public relations official David La Torre.  

La Torre said the University could not comment at this time. 

Preliminary Hearing: Lisa Powers Confirmed Surma's Role in Public Relations Disaster

Powers' testimony confirms that Surma directed the "shut down" that led to the PSU PR disaster

By
Ray Blehar

Penn State's response to the Sandusky scandal was rated one of the top public relations disasters for not only 2011 but also 2012.   Now, based on Lisa Powers' preliminary hearing testimony, we know that John Surma directed the disaster that ensued after the release of the grand jury presentment.


A PR blog in Denver summed it up this way...

PENN STATE

Penn State represents one of the greatest PR disasters of all time, certainly of the last decade. In fact, it has been such a debacle that the university managed to make the list both last year and this year. Last year, the university went from one of the nation’s most revered institutions to one of the most reviled in a matter of weeks due to its lack of a response to a horrible child sex abuse scandal that saw two administrators indicted, a former assistant coach arrested and football coaching legend Joe Paterno fired. This year, additional details emerged about an institutional culture that valued football success over protecting innocent children that were disturbing enough that the NCAA nearly gave the school’s football program the so-called “Death Penalty.” The result was another year of brutal headlines that will have almost everyone older than 10 associating Penn State with child rape for the rest of their lives.

Here's the summary from Business Insider, who rated it as 2012's top disaster:
1. Penn State covers up the Sandusky scandal.

Penn State assistant football coach Jerry Sandusky was charged and later convicted of repeated counts of child molestation while at Penn State.

Although the scandal was unveiled in 2011, the university felt the full fallout in 2012 when the Freeh report stated that Joe Paterno and the administration covered up Sandusky's abuses, Major companies pulled sponsorships of the program.

Part of the PR disaster was due to Penn State's initial difficulty addressing the problem. Pulitzer-winning stories in The Patriot-News of Harrisburg initially uncovered the scandal in March 2011. But Penn State remained tightlipped. PR firm Ketchum was hired in November of 2011, and the school hired Edelman and La Torre for crisis management in April 2012. The school pledged to spend $208,000 a month for 12 months on PR support, but the damage was done.

March 2011 Grand Jury Article

According to Powers' testimony (page 20), she had reached out to then-PSU General Counsel, Cynthia Baldwin for advice on how to respond the 31 March 2011 Patriot News article regarding PSU officials who had testified at the Sandusky grand jury.

Baldwin told Powers it was the third or fourth grand jury (actually, it was the second due to the first grand jury's term expiring) that had looked into the Sandusky allegations and there was nothing there.  It was a fishing expedition.  Baldwin said that PSU had nothing to say and Powers followed the advice of counsel.

This appeared to be a major tactical error and poor PR decision on PSU's part, however, Caroline Roberto, the attorney representing former Athletic Director, Timothy Curley, revealed that Judge Fuedale issued a non-disclosure order to PSU (page 58) in February 2011.

PSU was forbidden from being transparent about its role in the Sandusky probe.

However, the March article, in reality, didn't have much of an impact with the public or the PSU BOT.  

Many people, myself included, believed that the investigation may have resulted from a Second Mile participant who had an ax to grind with Sandusky.   The situation was similarly characterized by Spanier and Baldwin when they briefed the PSU BOT in May of 2011.

November 2011:  Right Move

Looking back at how the Penn State PR disaster unfolded, Graham Spanier did exactly the right thing when he issued the statement making it clear that there were allegations  (not crimes) against Sandusky and defending the actions of  Tim Curley and Gary Schultz.  Spanier's November 5th statement follows (my emphasis added):

"The allegations about a former coach are troubling, and it is appropriate that they be investigated thoroughly. Protecting children requires the utmost vigilance.

With regard to the other presentments, I wish to say that Tim Curley and Gary Schultz have my unconditional support. I have known and worked daily with Tim and Gary for more than 16 years. I have complete confidence in how they have handled the allegations about a former University employee.

Tim Curley and Gary Schultz operate at the highest levels of honesty, integrity and compassion. I am confident the record will show that these charges are groundless and that they conducted themselves professionally and appropriately."

According to Powers' testimony at the preliminary hearing, on October 28th, Spanier had gathered together a small group of PSU leaders, including Garban, Baldwin, and PR chief Bill Mahon to discuss the pending charges against Curley and Schultz.   Spanier expressed that he was sure that the men had handled the situation appropriately and was giving them his full support.  When Powers asked Spanier why he would choose to support Curley and Schultz, Spanier responded essentially by asking Powers to put herself in the position of the accused men and if she would expect the support of her supervisor.

In short, Spanier was doing what a good leader would do - defend the actions of Curley and Schultz, and more importantly, Penn State University.   A poor leader would have thrown the men and PSU under the bus (to protect himself) -- and that was the option exercised by the PSU BOT about one week later.

November 2011 - Wrong Moves

After Spanier issued his statement, Powers got word the next day that the PSU BOT was angry that Spanier had "changed" the statement.  Spanier responded that he did not make substantive changes to the statement and Powers testified that the only changes made were to add the line about protecting children and Spanier's unconditional support of Curley and Schultz.

The BOT was never specific about what changes to the statement were the "crimes of the century," however, I suspect that it really didn't matter what Spanier wrote -- the BOT was going to find fault with it and use it as a reason to relieve him of his duties as President.

This is where it gets interesting.

While the BOT was allegedly upset with Spanier's statement, they did not issue a new statement to replace it.  Instead, all anyone heard from November 5th to November 9th was silence -- and a few leaked rumors of the intended removal of Joe Paterno as head coach.

On Monday, November 7th, Linda Kelly held the press conference to announce the Sandusky charges.  Many who viewed the press conference found it unusual that Pennsylvania State Police Commissioner Frank Noonan took the the microphone and made the fateful statement that Paterno failed in his moral obligation to protect children.  However, this should not have come as any surprise, as Noonan was also prominently mentioned and quoted in the OAG's press release about the Sandusky charges.  In other words, Noonan was involved in the crafting of the message, likely because the presentment and press conference had to provide cover for his disastrous three year investigation (where police and investigators failed to surface a victim).

Surma Takes Over
John Surma and Steve Garban met for breakfast on Tuesday, November 8th and, in a pre-planned move, Garban stepped aside and Surma took over.

According to the New York Times, Corbett (who earlier vowed to fire Spanier) had been working the phones with Surma and other BOT members once the indictment became public.   Garban told Spanier that the BOT had lost confidence in his ability to lead.

PSU's only chance to right the sinking ship in this disaster would have been Paterno's Tuesday morning press conference, however, Surma (who was now in control of PSU) cancelled it.

According to Powers, all communications emanating from PSU after the original statement from Spanier had to be approved by Surma.  And Surma, whose family had a major ax to grind with Paterno,  was more than happy to let the media dictate the false narrative of that Sandusky's crimes were covered up by Paterno and others to protect the football program.

PSU remained silent until the night of November 9th, 2011 - when Surma himself declared Spanier and Paterno should be removed in the "best interests, long term interests" of Penn State University.

Approximately one hour earlier, Surma had moved that Paterno be removed in his conference call with trustees.  The motion was met by silence - except for the voice of Tom Corbett, who stated, "remember that little old boy in the shower."

When asked to explain the reasoning behind the decisions to remove Paterno and Spanier, Surma was woefully short on answers.

Ketchum, who was hired in November 2011, obviously did nothing to help PSU and the hiring of LaTorre and Edelman to assist PSU's public relations efforts can be summed up in two words:

NO COMMENT.