Warren Buffett sees 'betrayal' as hospital drains big endowment

Warren Buffett
Lacy O'Toole | CNBC
Warren Buffett

Donald and Mildred Othmer made a lot of money investing with Warren Buffett. When they died, they wanted their Buffett profits to be given back to the community. They probably never imagined what would happen next.

In what it calls a "cautionary tale for wealthy investors who hope their gifts will make a long-term impact," The Wall Street Journal reports on the destruction of a $135 million hospital endowment created less than 20 years ago by the Othmers.

Buffett tells the Journal that if the donors were alive, "I would think...they would feel betrayed."

The Othmers were Omaha natives who were married in New York in 1950 and lived "modestly" in Brooklyn for decades the Journalreports in "A Buffett Fortune Fades in Brooklyn."

In 1961, they each put $25,000 into a partnership run by Buffett. Eight years later, the partnership was dissolved and the Othmers received about 14,500 shares of Berkshire Hathaway, At $42 per share, the stake was originally worth $609,000 (almost $3.9 million in 2013 dollars.)

When they died in the mid-90s, the stock was worth $780 million. (Today, with Berkshire at an all-time high of $178,275 per share, the stock would have a market value of almost $2.6 billion.)

(Read more: Warren Buffett's generosity grows with Berkshire's stock price)

With no children and a desire to give back to society, the bulk of their money went to several charitable institutions, including nearby Long Island College Hospital. It received a $135 million endowment that the Othmers' wills specified should be "held in perpetuity" by only spending its income, not the principal itself.

Instead, as the Journal recounts:

In a series of court-approved transactions, hospital administrators repeatedly tapped the fund to serve as collateral for loans and to cover malpractice and other costs, according to court records. The transfers were permissible to keep the hospital going, the court ruled, saying that is what the Othmers would have wanted.

Now, amid protests by workers and residents, the money-losing hospital's owners have been given permission to close it down and almost all of the Othmers' gift is gone.

(Read more: Warren Buffett's online lessons for giving away billions)

Alerted by a Brooklyn resident, Buffett tells the Journal, "This came as a huge surprise to me." He wishes he had known sooner.

The Othmers "did not spend huge sums on themselves but instead wanted the money to go back to society. And at least one institution couldn't wait to change the terms under which it received the money."

You can read the entire story by Anupreeta Das here. It is not behind the Journal's paywall, so you don't need a subscription to see it.

Update: While the article wasn't behind the paywall when it was first posted, it is now (July 24, 2013), so a subscription is required.