Big Real Estate Syndicator Sees Empire Collapse : Richard Traweek’s Tangled Legal Problems Threaten Thousands of Investors

Richard W. Traweek, a Los Angeles real estate syndicator, was surfing along the very crest of success. He was still under 40 years old and had already raised more than $120 million from investors in 38 real estate limited partnerships. He had reaped millions of dollars from the multiple fees that characterize such enterprises.

He was a major political player as well, donating big money and hosting fund-raisers for prominent politicians of both parties, state and national. He counts as beneficiaries of his past efforts such Republicans as U.S. Sen. Bob Dole of Kansas and U.S. Sen. Pete Wilson of California and such Democrats as Assembly Speaker Willie Brown and state Controller Gray Davis.

At times, Traweek gave the impression that he nourished hopes of becoming governor of California some day. (“Only a joke,” he now says.)

Traweek lived the good life with all the trimmings--the $2.5-million Bel-Air house and the fine wine cellar, the country club memberships and the Colorado condominium.

But a radical change in Traweek’s Arcadian life began about four years ago, and since then, it has gone only in one direction: downhill. It all started with two jury verdicts in civil fraud cases awarding a total of $3.35 million against him.

The ensuing financial and legal tangles might be a study in reverse alchemy: how to turn gold into base metal.

Traweek, now 43, was forced to file for Chapter 11 bankruptcy protection, then saw a judge take away control over his assets, including his Bel-Air house. It is up for sale, although he and his wife and 3-year-old daughter, Tory, still live there. His Colorado condo also is on the block.

The Internal Revenue Service slapped a $180,112 lien against him last year for unpaid 1985 taxes still owed and seized a bank account in February.

But of far more serious import for the public than Traweek’s personal hardship are the perils facing his thousands of investors.

Foreclosure proceedings are pending on the properties owned by half a dozen Traweek-controlled partnerships. And at the request of mortgage holders, several courts have appointed receivers over the properties.

Former Lawyers Blamed

Other partnerships recently disclosed that their operating funds are too small to cover administrative expenses and still make debt installment payments. Still other partnerships are in danger of defaulting on promissory notes held by investors, which could halt their operations, according to filings with the Securities and Exchange Commission.

Traweek said in a recent interview that some mortgage lenders have indicated that they are “willing to work with us” to avoid looming foreclosure sales, “but the Chapter 11 (and other) problems don’t help the situation at all.”

Ironically, the main hopes for Traweek creditors (including those who won a $2-million-plus fraud damage award against him) seem to be riding on the dubious future of a $100-million legal malpractice lawsuit.

Traweek is waging that action against his former lawyers--the Beverly Hills office of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey--which Traweek blames for his downfall. The giant law firm has declined to comment on any aspect of the case, but it recently won a major round in the court battle.

Meanwhile, disclosure of Traweek’s problems has been unusually slow to ooze out. Two months after filing bankruptcy proceedings, a Traweek letter to investors dated Oct. 7 gave many investors their first rundown on his multiplying troubles.

Collapse Began in 1984

But the letter did not mention some significant aspects. It was not until Nov. 16 that a flock of his partnerships disclosed the foreclosure proceedings in filings with the SEC. These, in turn, disclosed that still other SEC filings are long overdue.

In the recent interview, Traweek sought to explain the tardiness: It had been “very difficult to get our arms around (the situation) to be able to say, here’s what’s happening, because by the time you get one (report) written, it’s already outdated.”

The collapse of Traweek’s fortunes began in early 1984 with two heavy blows. Within just a three-week period, juries returned two huge damage awards against him, one for $1.25 million and another for $2.1 million. They were returned in favor of real estate salespeople who alleged that Traweek had defrauded them of their commissions on properties he bought for his partnerships.

While Traweek was appealing the multimillion-dollar fraud awards, he did not yet feel the full weight of his troubles. But after the first verdict was upheld on appeal in February, 1986, some of his bank accounts were seized. Last March, Security Pacific National Bank brought a fraud suit against him for a $1-million debt going back to 1984.

But the bad times were far from over.

sh Severs Umbilical Cord

In July, 1986, one of Traweek’s limited partnerships filed for Chapter 11 bankruptcy protection, which forestalled a foreclosure sale of the partnership’s office-retail building in Marina del Rey. Last March, however, the firm holding a second mortgage on the building finally took possession in a foreclosure and evicted its chief tenant, Traweek Investment Corp.

Perhaps the most crushing setback came early this year. After losing his appeals of the $2.1-million verdict, Traweek says he was advised by his securities counsel to suspend syndication of new partnerships. He took that action, cutting the umbilical cord to fresh investor money.

Circumstances of the Traweek empire’s collapse put it well outside the run of business reverses. Especially unusual are his lawsuit’s allegations that his own lawyers caused the debacle. The highlights of Traweek’s contentions in that case to date include:

- That Finley Kumble botched the chance, which Traweek had actually won from the trial judge, for a new trial on the $2.1-million award. However, a San Diego Superior Court judge ruled in Finley Kumble’s favor Oct. 20 on a demurrer, which threw out the claim. Traweek’s attorneys, Alioto & Alioto of San Francisco, are appealing the ruling.

- That Finley Kumble caused his business to be ruined through failure to disclose the $2.1-million fraud award to new investors. This laid him open to investor demands to rescind $25 million of investments and demand their money back. This effectively kept him from resuming the syndication of new partnerships and forced him into bankruptcy court, Traweek claims.

Traweek and his 100%-owned Traweek Investment fled into Chapter 11 bankruptcy proceedings Aug. 10 to escape creditors. Traweek says this was done to forestall the threatened seizure of his assets to pay the $2.1-million damage award, which had grown to about $2.8 million because of interest earned since the jury made the award.

Career ‘Toyed With’

During the interview, Traweek returned repeatedly to his bitter reflections on the failure of Finley Kumble to come forth with an offer to settle their dispute. Traweek says that during a meeting at the law firm’s Beverly Hills office earlier this year, Richard D. Williams of the firm twice conceded that he decided on his own the wording of the allegedly inadequate disclosures on the $2.1-million jury verdict.

But Finley Kumble managing partner Robert H. London halted questions about the drafting of the disclosures, Traweek says. London also said at the meeting that his law firm had a $1-million deductible provision in its malpractice insurance and that he preferred to pay the money to fight the case rather than to settle it, according to Traweek’s account.

Traweek now says he believes that the law firm has concluded that “the worse off I am, the less money they will have to part with to end this thing.”

It is an injustice, he said, to have “a pretty bright career just being toyed with by these lawyers.”

And it was a bright career. In 1975, when he was 33, Traweek had started his business of syndicating real estate: buying income-producing properties--apartments and condominiums--for those who invested as limited partners. He organized the deals as the general partner, individually and through one of his firms.

According to his official biography, he began his company with only 29 investors and about $3 million, buying a small apartment complex in the South Bay area of Southern California.

Sought Legislative Help

As he began to enjoy growing success in his business, Traweek became a director of banks and charitable institutions as well as a lecturer in real estate classes and at management seminars put on by the big aerospace companies. He proudly lists himself as a member of the hall of fame at “my alma mater,” El Segundo High School.

Although he particularly courted the legislative powers in Sacramento, Traweek was active in the housing industry lobby in Washington as well.

Sometimes politicians did things for him. A Democrat, state Sen. John Mello of Watsonville, sponsored a bill in 1983 that sought to let Traweek skirt San Francisco law and convert some of the 720-unit John Muir apartments to condominiums. Also, Traweek hired a close friend, state Assembly Speaker Willie Brown, to help get the conversion OKd. But all efforts, including a later lawsuit against San Francisco, failed in Traweek’s biggest test of his political clout as the bill was voted down.

Traweek also encountered failure in one of his major partnership ventures. That was the one that owned an office-retail building in Marina del Rey, much of whose office space was occupied by Traweek Investment’s headquarters.

Asked in the recent interview what caused the partnership, Traweek Investment Fund No. 14, to go sour, Traweek answered: “Vacancies.” He added that it failed despite $2.3 million in loans that he and his father, S. V. (Tex) Traweek, poured into it.

Allegations of Fraud

Alluding to that experience while discussing the two juries’ findings in the real estate commission fraud suits, Traweek said:

“A general partner doesn’t put $2.3 million of his own money into a fund to try and keep it alive, then go bankrupt and lose all his money in the process, if he’s the type of person that goes around committing fraud.”

But allegations of fraud keep haunting him.

He has denied Security Pacific’s court allegations that he and his father concealed from the bank that they collected $900,000 in fees before July, 1986, when they were scheduled to receive the money and pay it to the bank. The suit alleges that the defendants “compounded said suppression of information” through statements by Traweek executive James Gillette, who allegedly withheld the fact that “the payment had been received and the money already spent.” The defendants filed an answer denying all wrongdoing.

Then there is the fact that two juries have accepted the testimony of the salespeople who testified that Traweek cut them out of commissions by fraud.

One plaintiff, Gerard Morrow, a Sherman Oaks realtor, waged a four-year legal battle and spent $50,000 of his own money to get his case to a jury. He contended that he was cut out of a $500,000 commission for his work. But, he alleged, Traweek employees with whom he had negotiated the sale of the controversial John Muir apartments in San Francisco later told him that Traweek was not interested in buying, although Traweek bought the apartments a few months later for Traweek Investment Fund No. 10. Traweek for his part contended that he never heard of Morrow until the suit was filed and that he learned of the property from another broker.

Morrow said afterward that “I felt an injustice was done to me; my rights were trampled on.” Even after the jury award, it took two more years to go through the appeal process and get his money. Unlike the later $2.1-million award against him, Traweek paid the $1.25-million Morrow judgment.

‘Drastic Remedy’

In the second civil trial, concerning the purchase of the Sunset Terrace Apartments in Brentwood, real estate brokers Annette Ann Ballou and Becky Codron claimed that Traweek lied when he said the partnership could pay no more than $50,000--half the commission they expected on the sale--and that no other brokerage commission was being paid. But court documents show that Traweek Investment was paid nearly $500,000 in commissions for buying and later selling the property.

Traweek said in the interview: “I’m not a fraud. I don’t care what the jury came in with; it’s not a fact. I mean, it (the verdict) might be what I have to live with, but it’s not true.”

But the question of Traweek’s business practices was again apparently a factor when a trustee was placed in charge of Traweek’s affairs in September, a move that was called a “drastic remedy” by some creditors supporting Traweek.

The trustee was successfully sought by Ballou and Codron’s attorney, Sol Reiss, who included some harsh commentary about Traweek in his argument to the court.

He told the court that “the past business practices of the debtor (Traweek), as well as the conduct of the debtor in these proceedings, indicate that the debtor is unworthy” to remain in control of his Chapter 11 proceedings.

If he remained in control, Reiss told the court in a written declaration, he “will not accurately report and marshal the assets and liabilities . . . but will so conduct the affairs . . . as to deprive the creditors of the amounts to which they are entitled and to favor certain creditors at the expense of others.”

Reiss added that a trustee was required “to assure that the assets of the estate are not transferred to other operating entities without fair consideration.”

Two of the largest Traweek creditors listed by Traweek in his bankruptcy case “defy belief,” the Reiss declaration said. He said they were $2.2 million in loans from pension funds covering Richard Traweek and his father.

The declaration said these “alleged obligations are in fact obligations of Traweek Investment Fund No. 14.” That was the fund that owned the Marina del Rey property and went into Chapter 11 last year. Further, Reiss told the court, an SEC filing on his last partnership told investors that the pension fund loans would not be collected from Fund No. 14.

‘Scorched Earth Policy’

“The court can see the standard of integrity which will be applied by this debtor as respects his current creditors,” Reiss continued.

The lawyer cited the last Traweek partnership fund, No. 23, as an example of Traweek diverting funds to affiliates that otherwise would go to creditors. The acquisition fee due to Traweek on that fund, Reiss noted, went to Traweek’s successor as general partner, MPG Financial Inc., a company run by Traweek business associates C. Michael Maher and Michael C. Palmer.

Security Pacific as a major secured creditor joined Reiss in asking the court for a trustee. However, the committee of unsecured Traweek creditors opposed the motion, saying:

“Unsworn statements of counsel (which for the most part are speculative and argumentative) do not constitute a sufficient basis for the drastic remedy which is sought. Advocating a policy of scorched earth by seeking the appointment of a trustee at this early stage . . . will not benefit the unsecured creditor body.”

Traweek displays letters from some investors that show he still has a loyal following, even with the setbacks.

In response to his Oct. 7 letter, a La Canada couple wrote to express confidence that “your skill will prevail in the long run” and that “you personally have been in our prayers.”

Another complimented Traweek on his courage and on his strength in explaining “your bizarre situation” at an Oct. 29 meeting with a group of investors. “You are still a master!” the writer said. “Dick,” the letter went on, “you have several thousand people out here who believe in you and trust you. . . . You are in our prayers.”

Others expressed concern about their investments and asked for more information.

And one woman, who said her husband died last March, wrote: “I’m disappointed, as I carefully screened the Traweek investments for over two years before I made my decision to invest monies received from the sale of my paid-for home. It took 25 years to pay for my home, and to be in a position of such risk is frightening to me.”

Several of the Traweek limited partners signed a letter to Finley Kumble, saying their partnerships paid the law firm fees to keep them “out of legal trouble--not to jeopardize our investments,” adding:

“We are certain that you must have malpractice insurance, paid for in part by fees earned on our investment dollars, to cover what in our opinion was inadequate performance. We insist that you immediately resolve this situation so that our general partner is not diverted or impeded from performing the partnership business.”

The situation seems to weigh heavily on Traweek.

“Hopefully,” he says, “I will be able to vindicate myself somehow.”