Gates Foundation invests in firms accused of abuses

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.

The Busbys couldn't make the payments and were forced to sell. The bungalow had been in Cheryl's family since 1935. It was where she had grown up and where her parents had died. It was 100 percent of the Busbys' retirement nest egg.

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.