Lured by promises of quick returns, a midlevel administrator at Ball State University gambled on a series of risky investments. Unchecked and undetected by others, the decisions made by the former director of cash and investments resulted in the loss of $13.1-million of the university’s money.
How was Gale Prizevoits, the former director, who was earning $84,000 a year shortly before she was fired, able to sign off on questionable high-dollar contracts with no authorization from higher-level administrators? Why didn’t Ball State officials, as well as state and internal university auditors, catch the deals, which enabled a swindler to buy luxury cars and real estate with public funds?
The incidents at Ball State serve as a cautionary tale about what can happen if a university fails to enforce effective safeguards to ensure prudent investing of its money.
Ms. Prizevoits, who was fired by the university in 2011, five years after she began working there, may have been motivated in part by a desire to demonstrate to Ball State officials that they should pursue a more aggressive investment strategy, according to emails provided by the university. In one, she wrote that she had made at least one of the investments with the hope of earning quick returns, to “prove” to the Board of Trustees that a change in the university’s investment policy was warranted.
University officials describe their general financial approach as conservative, built around low-risk investments like certificates of deposit and money-market accounts.
Facing dwindling budgets and intensifying revenue pressures, colleges across the country have become more creative over the past decade or so in how they invest, said Antony Page, an Indiana University law professor who teaches courses on contracts and international securities regulation.
These “alternate investments” include foreign markets, commodities, certain kinds of real estate, and what Ms. Prizevoits believed she was buying in at least one of the deals that went wrong—collateralized-mortgage obligations, a type of mortgage-backed security.
Eventually, however, Ball State’s problem was not the soundness of Ms. Prizevoits’s investment strategy but her dealing with people who, the courts have found, committed fraud. Ball State, a 21,000-student institution in Muncie, Ind., also lacked the right kinds of safeguards to detect problematic investments.
“It just seems like there wasn’t anybody at Ball State checking,” Mr. Page said. “You must make sure there are controls so that one misguided employee can’t blow so much money.”
‘Lack of Due Diligence’
Over a series of three contracts, Ms. Prizevoits signed over more than $8-million of the 96-year-old university’s money in 2008 to a Florida-based company called Betts and Gambles Global Equities LLC, to invest in collateralized-mortgage obligations. The founder of the company, federal-court documents state, instead spent part of the money on a Ferrari, a Maserati, and real estate.
By 2010, Ms. Prizevoits had become suspicious of the investments she had made with Betts and Gambles, documents state. Even so, she made another questionable investment on behalf of Ball State, sending $5-million to a California company, Blackhawk Wealth Solutions Inc., to invest in fixed-income securities called Treasury Strips. Much of that money flowed to another company, and was then used to buy a series of real-estate properties in the Bronx, N.Y.
Seth Beoku Betts, founder of Betts and Gambles, was sentenced in June to 51 months in federal prison for securities fraud. A Brooklyn man, George C. Montolio, was sentenced to 36 months in federal prison for wire fraud in March 2013 in connection with the $5-million investment.
Ms. Prizevoits was fired a month after the U.S. Attorney’s Office alerted the university to the California investment. Ball State officials didn’t publicly reveal the fraud incidents until this June, administrators say, because law-enforcement officials asked them not to disclose the cases as investigations were continuing.
Ms. Prizevoits had the qualifications for the university investment job, according to information about her credentials and work experience that Ball State released in June. Only a bachelor’s degree was required for the position, which controls about $270-million to $350-million of the university’s unrestricted net assets, although an M.B.A. was preferred. Ms. Prizevoits earned an M.B.A. at Indiana University in 1985.
She owns a home in Palm Coast, Fla., with Lawrence Cistrelli, Ball State’s director of risk management, according to records from the Flagler County property appraiser’s office.
University officials say that Mr. Cistrelli and Ms. Prizevoits reported to different supervisors, and that their duties did not overlap.
Randall Howard, Ball State’s treasurer and vice president for business affairs, said that the university had checks in place, but that Ms. Prizevoits worked around them.
“It was a combination of deceit, concealment, mischaracterization, and, to be fair, probably some lack of due diligence on other folks’ part,” he said.
Ms. Prizevoits mischaracterized the type of security that was being purchased, concealed information from auditors, and did not show the contracts she had signed to any other university official, Mr. Howard said.
She did not respond to an email from The Chronicle requesting comment for this article.
New Safeguards
Ball State officials learned of the existence of the deals when an investigator from the U.S. Attorney’s Office for the Southern District of New York contacted them in September 2011 about the California investment, Mr. Howard said.
That prompted the university to review all of its holdings, a step that revealed the Betts and Gambles fraud, he said.
University officials say they have seen no evidence that Ms. Prizevoits personally benefited from the transactions. A federal investigator’s report from the Betts case portrays her as a victim of fraud, and the emails show her as becoming increasingly worried as returns—along with the principal investment, which she eventually requested back—did not materialize.
However, when the U.S. Attorney’s Office is done with the case, Ball State officials plan to sit down with a local prosecutor and present information that university investigators have uncovered.
“We will let that person determine whether any state crimes have been committed,” Mr. Howard said. “The evidence we have uncovered makes it appear that somebody went to great lengths to conceal information and mischaracterize investments from the very beginning.”
Mr. Howard described the new safeguards that Ball State has adopted, which he said would probably have prevented this situation. Investments now can be purchased only through brokers on an approved list, and only Mr. Howard can put brokers on that list. All investments must also flow through a single prime broker, who cross-checks all purchases, he said.
Ultimately, he said, no risk-management strategy is foolproof.
“The several controls we’ve added would prevent this particular fraud from happening again,” he said. “Unfortunately, if you combine at least one person wanting to commit a crime with somebody else who is either helping to conceal the crime or not being diligent in the controls, you can’t have enough controls to protect for everything.”
Mr. Page, the Indiana University professor, said this type of fraud is uncommon at universities because they have typically done a good job of creating safeguards. He called it “the upside of bureaucracy.”
“But there’s a trade-off: The more safeguards you put in place, the more costly it is,” he said. “Was Ball State in the right place? Probably not. But on the other hand, I’m sure there’s a hundred other small colleges that were doing the same as Ball State was doing, and they weren’t victimized.”
The fraud incidents also pose a public-perception problem at a university that, like many public institutions across the country, has faced state budget cuts in recent years.
The fraud has had no impact on Ball State’s day-to-day operating budget, Mr. Howard said. The millions of dollars that were invested and lost are “unrestricted net assets,” which are typically set aside for long-term obligations, he explained. This money comes from a variety of sources, including tuition, the previous year’s interest earnings, and revenues from housing and dining, parking, and student-services fees. All budget reductions that the university has had to make in recent years can be tied directly to cuts in state appropriations, he said.
The university’s explanation is not sitting well with some alumni and others.
“It drives me nuts,” said Bobby Ellis, a photographer in Nebraska who graduated from Ball State in 2013. “If you’re supposed to get approval from higher-ups, you shouldn’t be able to invest the funds until you get it. It’s kind of like giving someone a check. You have to sign off on the check for it to be cashed in your name. Why wasn’t the university doing that?”
Mr. Howard said the university’s priorities have been to make sure this kind of fraud doesn’t occur again, catch the guilty parties, and recover as many assets as possible. Federal investigators have seized assets purchased by both of the men who were convicted of using Ball State’s money illegally, and the full value won’t be known until the government sells those assets. Mr. Howard said his understanding is that most, if not all, of the proceeds from the sale of the assets will go to Ball State.
“Right now,” he said, “that includes five properties, several automobiles, and some sports memorabilia.”
Investments Gone Wrong: At Ball State, a Loss of Millions
The investment deals under investigation by federal officials began two years after Gale Prizevoits began to work for Ball State University. Here are some key events:
March 2006: Gale Prizevoits begins working at Ball State as manager of cash and investments.
July 2008: Ms. Prizevoits signs two agreements—one for $2.5-million and the other for more than $3.1 million—with Betts and Gambles Global Equities LLC. The company’s founder, Seth Beoku Betts, says he will invest the money in a type of security called a collateralized-mortgage obligation.
December 2008: Ms. Prizevoits signs a third agreement with Mr. Betts, for $2.5-million. A federal investigator would later write that Betts, that same day, transferred $325,000 of the un1iversity’s money to a car dealership to buy a Ferrari and a Maserati.
April 2010: Ms. Prizevoits signs a $5-million agreement with a California-based company, Blackhawk Wealth Solutions Inc., to invest in fixed-income securities called Treasury Strips.
September 2011: Investigators from the U.S. Attorney’s Office for the Southern District of New York alert Ball State officials that the institution may have been defrauded as part of the California investment. That leads administrators to examine all of Ball State’s investment holdings, and the university discovers the three contracts with Betts.
October 2011: Ms. Prizevoits is fired.
March 2013: A Brooklyn man, George C. Montolio, is sentenced to 36 months in federal prison after pleading guilty to one count of wire fraud in connection with the unauthorized $5-million investment made by Ms. Prizevoits.
June 2014: Mr. Betts is sentenced to 51 months in prison in connection with the $8.1-million in Ball State investments after pleading guilty in February to one count of securities fraud.
