O.C. Educators’ Fund May Be Insolvent, Suit Alleges : Courts: Civil action filed by investors claims that up to $100 million has been lost. Officials from TMI were unavailable for comment.

A lawsuit filed Tuesday alleges that a real estate investment fund that raised as much as $1 billion from 60,000 California educators has lost up to $100 million of the investors’ money.

Teachers Management & Investment Inc. of Newport Beach, a 26-year-old fund marketed by teachers for teachers across the state--may be insolvent, according to the suit, which was filed in Orange County Superior Court.

The suit seeks immediate appointment of a receiver to run the company, which invests educators’ retirement funds in dozens of real estate limited partnerships.

“We think TMI has degenerated into a Ponzi scheme,” said Ron Rus, attorney for the four investors who filed the suit. “Some of the partnerships have property that has become worthless, and they are now using money from the good ones to keep the bad ones going.”

TMI officials could not be reached for comment on the allegations. An employee at the company’s headquarters said the firm’s general partners, James R. Martin and Maurice Shuman, were traveling.

Shuman’s wife, reached late Tuesday at the couple’s Newport Beach home, said that her husband was traveling and that she did not have a number where he could be reached.

In a 1988 interview with The Times, Shuman noted with pride, “In its 20 years, TMI has never had an investor lose money.”

The lawsuit alleges that TMI officials lost millions of dollars of investors’ money in a “systematic and increasingly sophisticated pattern of prohibited activity.”

According to the suit, the firm erected an elaborate maze of bankruptcy filings for its 40 or more limited partnerships and commingled funds in what amounted “to a Ponzi scheme undermining the security of possibly as much as $1 billion in retirement funds.”

The civil lawsuit also accuses TMI of fraud, breach of contract, misrepresentation and racketeering.

“They didn’t put the money we paid where it was supposed to go,” said Jean M. Sweeney of Fullerton, one of the investors who filed the suit. She and her husband, Jack, a professor at Fullerton Community College, invested $530,000 of their retirement funds in about two dozen TMI partnerships, she said. Jean Sweeney said it is unclear what her nest egg is now worth.

Rus said the allegations in the suit have been sent to the state Department of Corporations, which regulates firms that sell limited partnership investments.

In 1985, the department investigated complaints by former TMI employees and sales agents alleging that the firm--then under different ownership--underreported sale prices of properties to its investors to mask more than $3.5 million in excessive real estate brokerage commissions. After a two-year inquiry, the department found no violations of securities laws.

TMI has nothing to do with the State Teachers Retirement System, the state pension fund for California educators.

Privately owned TMI, formed in 1968 by a group of educators and real estate specialists, has been a vehicle for teachers and school administrators to sweeten their retirement funds. The money, invested through self-directed individual retirement accounts, has gone mainly into real estate partnerships, though the company also offers other investments such as mutual funds, stocks and bonds. The firm’s motto is “Teachers Helping Teachers,” and its symbol is a shiny red apple.

The company has supplemented its staff by hiring educators who moonlight as sales agents. In recent years, investors other than educators have been invited to participate.

While the state’s real estate market was booming during the 1970s and ‘80s, TMI investors saw annual returns that went as high as 30%. But when the market collapsed in the late 1980s, those handsome returns ended, according to Kay Seibert of Anaheim Hills, a retired college business professor who has $50,000 of her retirement funds in TMI properties and is one of the four investors suing the company.

The lawsuit alleges that TMI’s real estate pools own land that cost far more than it is worth today and that, in some cases, loans have been refinanced several times so that the property is now highly leveraged. Martin and Shuman, both accountants, have owned the firm since 1987.

Even after putting some of its partnerships into bankruptcy, the suit states, TMI has continued to ask investors to put more money into the failed ventures, saying that may help them recoup their lost funds.

The suit also alleges that TMI’s general partners set up private management companies to which the firm paid large sums for services--allegedly paying themselves millions of dollars a year more than the management fees stipulated in various partnership agreements and prospectuses.

How TMI Works

* Property pools: When high interest rates and rising prices during the 1980s made it difficult for developers to buy and hold large chunks of property, syndicates were formed to raise money from investors and use the funds to buy land, improve it and then sell it at a profit to developers.

* Eye on educators: As a syndicator, Teachers Management & Investment Corp. of Newport Beach targeted teachers as potential investors and eventually enlisted more than 60,000 educators in its ranks.

* Getting in on the action: When TMI began, investors paid $500 a share for stakes in real estate holdings such as raw land or commercial establishments such as hotels or business centers. Eventually shares went to $1,000 each.

* Reaping returns: Investors also made additional regular contributions to the pool to pay for improvements on the properties. When the real estate was sold or developed, the teachers shared the proceeds after a load, or sales charge, was deducted.

* Hitting a snag: TMI’s holdings declined dramatically in value during the real estate downturn, a group of investors says in a lawsuit. The group accuses the syndicate’s managers of using income from some holdings to cover losses on others. TMI’s general partners could not be reached for comment on the lawsuit, filed Tuesday in Orange County Superior Court in Santa Ana.

Researched by DEBORA VRANA / Los Angeles Times