Management Firm’s Land Deal Probed : Company Accused of Shortchanging Educators

A Newport Beach company that invests money for an estimated 40,000 California educators is under investigation by the state Department of Corporations, which is looking into allegations that investors were shortchanged in real estate deals.

In a recent prospectus, Teachers Management & Investment Corp. disclosed that the state agency is investigating its real estate fees, travel expenses, advertising and a series of property transactions involving a single unidentified piece of land.

“It’s a situation we have under investigation and that investigation is continuing,” said Commissioner Franklin Tom of the corporations department, which regulates investment offerings in California. He said the probe would “probably take some time to complete because of the complexity of it” and because of “the voluminousness of the materials reviewed by us to date.”

New Partnerships

Tom said the department ordered the disclosure of the investigation for the benefit of prospective investors in two new TMI partnerships.

Many of the allegations under scrutiny are contained in an elaborate, 350-page complaint filed with the department last May by a group that includes former TMI employees and sales agents. A copy of the complaint was obtained by The Times.

One allegation being investigated involves Centennial Savings and Loan Assn. of Santa Rosa, which owns 75.5% of TMI. Centennial and a second company, whose owners included an associate of TMI’s chairman, reaped millions in profits from land deals in Santa Rosa--profits that the complaint alleges should have gone instead to TMI investors. The TMI investors did make some money on the land.

Centennial was seized by the Federal Home Loan Bank Board on Aug. 20 and declared insolvent. Its directors were dismissed, its president was ousted and Centennial was reconstituted as a federally chartered, depositor-owned thrift.

Accused of Under-Reporting

The complaint also alleges that TMI under-reported sales prices of properties to its investors to mask more than $3.5 million in excessive real estate brokerage commissions and that some of these fees were paid to companies whose principals had ties to either TMI or its chairman, Robert Fitzpatrick.

Sixty-one-year-old Fitzpatrick, who has been TMI’s guiding light since 1968, refused to be interviewed. But Allan B. Goldman, a TMI lawyer, said in a letter that there “appears to be a vendetta” against the company.

TMI was founded 18 years ago by a group of educators and realty specialists, and since then thousands of California teachers and professors have entrusted part of their savings to the privately held company through a series of real estate partnerships largely restricted to educators.

TMI’s symbol is a shiny apple, and as a general partner it boasts partnership assets of $271 million. Its directors include Kenneth L. Peters, a state Board of Education member and former Beverly Hills school superintendent.

Comprehensive data on TMI’s returns to investors could not be obtained, but investors in its Santa Rosa property clearly made profits. Robert and Betty Pierce, a pair of retired schoolteachers from Riverside, said that since early 1979 they have invested $47,500 in TMI’s Fountaingrove partnership, which bought the Santa Rosa land, and that their total pay-out so far is $62,875.

But the Pierces, who have invested $188,000 with TMI since 1978 and have seen little return beyond Fountaingrove, say they are unhappy with the deal because the partnership hasn’t yet distributed all the proceeds from the land sale.

Series of Transactions

They even complained in a letter to the Department of Corporations, said Riverside attorney William Thomas, their lawyer. The department declined to comment.

Robert Pierce said he is also worried that Fountaingrove investors were deprived of additional profits because of a complex series of land deals that may have benefited others.

In fact, public records, interviews and TMI documents reveal that the land changed hands in a series of transactions apparently benefiting two companies with ties to TMI or its chairman.

One was Centennial. The other was the West Point Development Co., a major shareholder of which was Sacramento real estate broker Daniel P. Lahey, according to the company’s president at the time, Raymond Gatejen.

Lahey, who did not respond to requests for an interview, is alleged by the complaint to have acted as broker on TMI land transactions. According to several former TMI employees, he and Fitzpatrick have a longstanding relationship. For example, the two men own a Standardbred racehorse together, according to the U.S. Trotting Assn. in Columbus, Ohio.

Public records, interviews and TMI documents show that the Santa Rosa transactions unfolded this way:

In March of 1979, using $6.5 million raised from about 2,800 investors, TMI’s Fountaingrove partnership bought 1,257 acres of the Fountaingrove Ranch, a picturesque tract of rolling meadow on the outskirts of Santa Rosa, about 50 miles north of San Francisco. It paid $15.4 million, financing most of the price.

Three years later, on June 30, 1982, the partnership sold a 144-acre parcel zoned for commercial and industrial uses to West Point for $9.4 million. West Point put down $2.4 million in cash, most of it from the immediate resale of 14 acres, and Fountaingrove accepted a one-year, $7-million note at 10% for the bulk of the purchase price.

When the note came due on June 30, 1983, West Point couldn’t pay. So Fitzpatrick wrote a memo urging investors to grant a one-year extension. He predicted in the same memo that West Point’s commitment to spend $2 million for a road and underground utilities on the land would improve security on the note by raising the property’s value to $17 million a year later.

The complaint argues that granting the extension, rather than foreclosing, enabled West Point rather than Fountaingrove to profit from the higher price, but investors approved the extension anyway. The complaint also says Fitzpatrick subsequently told investors he had meant to say the property would be worth $17 million only if sold in smaller, 10-acre to 20-acre parcels.

Another 45 Acres Sold

But on June 28, 1984, just a week after Centennial completed its acquisition of TMI, West Point sold 120 acres of the land to Centennial’s real estate subsidiary, Sonoma Financial Corp., for $13.6 million, according to Erwin Hansen, Centennial’s president at the time. That purchase price was $4.2 million more than West Point paid for the entire 144 acres.

On the same day, Sonoma sold 45 acres to a company called LRN Inc., whose vice president was Lahey, for $6.9 million, and within six months had sold the rest for another $12.3 million, Hansen said. The $19.2 million that Sonoma grossed was $5.6 million more than it paid.

When Centennial acquired 75.5% of TMI for $5.8 million, it left Fitzpatrick in control of the company and its board on a five-year employment contract, according to Hansen.

Investors profited too. According to the Pierces and a former TMI employee, investments were sold in $1,000 units, with each unit requiring subsequent capital contributions that came to an additional $900. Each $1,900 investment brought a pay-out of $2,515, plus an additional $1,231 per unit that Fountaingrove retained to build a golf course on the remaining partnership land. The amount retained by Fountaingrove totaled $8 million.

If the state investigation uncovers wrongdoing, the Department of Corporations has several options, a department lawyer said, including barring the sale of TMI investments. It can also go to court to obtain refunds for investors, seek penalties and even force the company into receivership. If evidence of criminal wrongdoing is uncovered, the department can refer the case to a criminal prosecuting agency, such as the Los Angeles County district attorney.