TMI Operators Deny Investment Fund Is Insolvent : Suit: Owners challenge allegation that O.C.-based firm lost $100 million, blame depressed real estate market for setbacks.
Operators of Teachers Management & Investment Inc., which raised as much as $1 billion from 60,000 California educators and others, said Wednesday they “absolutely deny” allegations that the fund is insolvent and may have lost at least $100 million of investors’ money.
A lawsuit filed by four investors Tuesday in Orange County Superior Court seeks immediate appointment of a receiver to take over TMI. In their statement, company owners James R. Martin and Maurice Shuman described the plaintiffs as “dissident investors” and vowed to “vigorously defend” TMI and each of its dozens of real estate partnerships.
“The real problem that our investors have faced is the substantially changed and depressed California real estate market,” the statement said. “Although we have made headway in overcoming a great number of market-occasioned problems, we still have a large job to complete.”
The lawsuit alleges that TMI officials lost millions of dollars of investors’ money in a “systematic and increasingly sophisticated pattern of prohibited activity” to cover losses in its real estate partnerships. That activity, the suit states, included “commingling of funds and payments made out of trust amounting in the end to a Ponzi scheme undermining the security of possibly as much as $1 billion in retirement funds.”
Ron Rus, the plaintiffs’ lawyer, filed a request Wednesday for a temporary restraining order that would prohibit TMI’s officers from altering or destroying documents. A hearing on the request is set for 1:30 p.m. today.
Teachers and other investors who put thousands of dollars of their retirement funds into TMI hailed the news that legal action was being taken against TMI.
“For the last two years we thought we’d just have to kiss that money goodby,” said Betty Gorelick, a former Los Angeles elementary school teacher who invested about $15,000--all of her retirement funds--in two TMI partnerships that later filed for bankruptcy. “But with the suit, maybe there is a glimmer of hope yet,” the Northridge resident said. “I’m glad something is getting started.”
John Weber, a dentist in Hemet, said he lost $60,000 of his five employees’ retirement money after he invested their pension fund in several TMI limited partnerships that later went bankrupt. He made the investment, he said, on the advice of his mother-in-law, who was a high school teacher.
“For the first few years, we got excellent returns,” he said. “But then I lost all my employees’ money. I had to make up the money for them, and there wasn’t even a tax write-off.”
Bob Rawson, 64, a retired high school teacher from Cuyama in Santa Barbara County who has $30,000 invested with TMI, said he is hopeful about the lawsuit.
“It would be nice if we could get something back, but I’d be satisfied if we could just hang those suckers,” he said of TMI’s officers. “I think the real estate market caused TMI some problems, but I also think we were ripped off by the management.”
Formed in 1968 by a group of educators and real estate specialists, privately owned TMI has been a vehicle for teachers and school administrators to sweeten their retirement funds.
Over the years, TMI has owned through its limited partnerships a number of commercial properties, including hotels in Northern California; office complexes; the Parducci Winery lands in Mendocino County; as well as thousands of acres of undeveloped property.
While the state’s real estate market was booming during the 1970s and ‘80s, TMI investors saw handsome profits, but when the market collapsed in the late 1980s, that ended.
“TMI did not escape unscathed” from the real estate downturn, according to a 1993 report from the company.
“In our income property and hotel partnership, TMI found itself in the unenviable position of trying to restructure limited partnerships whose assets had fallen in value and whose lenders were under enormous regulatory pressure to resolve under-collateralized and other non-performing loans.”
In fact, the report said, some hotels owned by the company lost more than 50% of their value, and many went into foreclosure. Though the company sold more than $136 million of property in the preceding six years, the report stated, by 1993 land sales “have virtually stopped.”
The lawsuit filed this week also alleges that TMI’s owners set up private management companies to which they paid large sums for services to the TMI limited partnerships--effectively paying themselves millions of dollars a year more than the management fees stipulated in the partnership agreements and prospectuses.
The suit alleges that at least $3.5 million went to those affiliated companies.
“They were paying money to themselves to pay for development of the land,” investor Rawson said. “You do that one time, but you don’t go asking the investors to pay for that every cotton-picking year.”
The lawsuit includes a long list of TMI endeavors that went sour. One of those was Otay Mesa III Ltd. TMI sold investors 2,000 shares in the partnership in 1983, raising $7.73 million to buy land in an unincorporated area of San Diego.
According to a report from the company’s auditor, KPMG Peat Marwick, early this year, however, the partnership had recurring losses, and the note on the property was in default. That raised “substantial doubt about the entity’s ability to continue as a going concern,” the auditor reported.
Among TMI’s other investments were a number of hotels, the lawsuit states. One of those was the Sheraton Sunrise Hotel in Rancho Cordova near Sacramento, which the company bought in the mid-1980s.
In 1988, the partnership that owned the hotel filed for bankruptcy protection, the suit states. Under the reorganization plan, TMI was to raise $3.7 million from investors, its reserves and a joint venture partner to pay off its debts. Instead, the suit states, TMI fell further behind in its payments on the hotel and eventually defaulted on a $14.5-million loan from Eureka Bank in Foster City. After going into foreclosure in 1992, the hotel was sold to a group of Hong Kong investors.
The TMI Story
A history of Teachers Management & Investment Inc.
* The beginning: Robert Fitzpatrick, a former real estate broker, forms TMI with a group of teachers and administrators. They agree that only educators will be able to invest. The shares cost $500 apiece.
* Expansion: Its symbol a shiny red apple and its motto “Teachers Helping Teachers,” TMI begins employing educators to moonlight as sales agents. Through the ‘70s, the company pools millions of dollars of investors’ funds and uses most of the money to buy undeveloped land through limited partnerships. Investors receive an average annual return of more than 30% from 1967 to 1987.
* Complaint filed: In May, a group that includes former TMI employees and sales agents files a 350-page complaint against TMI with the Department of Corporations alleging that company operators pocketed millions of dollars from land deals and brokerage commissions that should have gone to TMI investors. After a two-year investigation, the department finds no violations.
* Bank seized: In August, Centennial Savings & Loan in Santa Rosa, which owns 75% of TMI’s stock, is declared insolvent and closed by federal regulators. TMI falls under control of the Federal Savings and Loan Insurance Corp.
* Stock purchase: In February, two Orange County accountants, Maurice Shuman and James R. Martin, agree to buy 75.5% of the outstanding TMI stock owned by Centennial Federal Savings and Loan Assn. for $4.1 million in cash. The two hope to buy 60,000 more shares to push ownership to 81.5%. Martin, who had retired from Peat Marwick, had been account manager and tax partner for TMI since 1968. Shuman, who has his own accounting practice in Newport Beach, had worked with Martin on various transactions.
* New management: In May, the purchasers oust TMI founder Fitzpatrick and announce aggressive expansion plans to add 200 account managers to its current sales staff of 320. A new office is opened in Seattle, and plans are announced for another in Hawaii.
* Suit filed: A group of TMI investors files suit alleging that the company is insolvent. The investors seek the appointment of a receiver to take over management of TMI. Company officials cannot be reached Tuesday for comment on the allegations.
Researched by DEBORA VRANA / Los Angeles Times