2 Owners of TMI Fund Dispute Suit’s Allegations : Investing: They respond in detail to fraud accusations, calling them untrue.
The owners of Teachers Management & Investment Corp., the Newport Beach investment company accused in a civil lawsuit of fraudulently losing as much as $100 million it had raised from California teachers, said Sunday that they inherited most of their troubled company’s problems and are doing their best to steer the real estate syndicate out of one of California’s worst recessions.
In an interview with The Times, the two men responded in detail to the suit filed Aug. 22 against them and their company. James R. Martin, 55, and Maurice Shuman, 56, both of Newport Beach said the suit’s allegations that they lost $100 million of clients’ retirement money through fraud and racketeering are simply untrue.
TMI, a 26-year-old fund marketed by teachers for teachers across the state, is insolvent, according to the suit filed in Orange County Superior Court by four investors. The suit seeks immediate appointment of a receiver to take over management of the company and whatever assets are left.
But Martin and Shuman insisted that their company is not insolvent. Rather, they said, TMI is profitable, though it is struggling to overcome not only the real estate downturn but also what the two men characterized as poor investment decisions made by the company’s former owners.
Although company officials admit TMI’s partnerships may have lost $100 million of value, they claim it is not because of any fraud but rather because of the real estate downturn. They also say the real estate partnerships only raised about $500 million, rather than the $1 billion claimed in the suit.
Privately owned TMI was formed in 1968 by a group of educators and real estate specialists as a vehicle for teachers and school administrators to sweeten their retirement pots. Over the years, TMI has, through its limited partnerships, owned a number of commercial properties, including hotels in Northern California, office developments and the Parducci Winery lands in Mendicino County, and thousands of acres of undeveloped land.
When the California real estate market was booming during the 1970s and ‘80s, TMI investors often saw annual returns of more than 30%. When the market skidded in the late 1980s, those handsome returns ended.
In an interview at TMI’s Newport Beach headquarters, Martin maintained that TMI’s “heart is with the teachers.” He and Shuman also answered specific questions about the company’s history and current status.
Question: Is $100 million of investors’ funds missing?
Answer: (Martin) Absolutely not. I think those kinds of statements are completely irresponsible.
Q: Is TMI about to file for bankruptcy?
A: (Martin) We are profitable. I cannot release the numbers. But we have absolutely no plans to file bankruptcy.
Q: The suit alleges that there was fraud at your company--an “undisclosed pattern of self-dealing"--that the management was siphoning off millions of dollars of investors’ funds to affiliated companies that you controlled. How do you respond?
A: (Martin) I want you to remember one thing: All these partnerships were audited by (KPMG) Peat Marwick. It’s pretty simple to follow the dollars here. This is not a maze. Every dollar we get is specifically set out in footnotes in the partnership reports, so every partner knows where the dollars went--whether it’s to TMI or an affiliate. There are no secrets. There is no hiding anything. It’s just a ludicrous statement that anyone is hiding anything. Now, you could argue over whether it was proper or not.
Q: Was it proper?
A: (Martin) Obviously, these people (the investors) believe that nothing should be spent on entitlements. And that’s absurd.
Q: You mentioned the Peat Marwick reports. Why did Peat Marwick say in its latest statements that it couldn’t issue an opinion, saying no current appraisal on your property values was available?
A: (Martin) I can’t answer for them. But I think anyone is concerned in this real estate market. Everyone is scared and cautious in this market. We certainly are.
Q: How did you decide to buy TMI in 1987?
A: (Martin) It was very exciting. TMI had the capability of doing a lot of positive things. They had an excellent rapport with the educator world. They had made a tremendous track record with investments with very high-yielding returns. They made a lot of people’s lives better. So that was the appeal. They had the portfolio and the track record in the past, and the marketplace still looked very. . . . It was a different picture then.
Q: You mentioned one of the things that attracted you to the company was its sales force: teachers. Wasn’t this the classic example of an affinity group that is marketed to people from their peers, or people they trust?
A: (Martin) I think that there is a personality to TMI. It was formed by educators who wanted to invest in real estate like the bigwigs. And they were pretty well prevented from doing that because of the net worth they had. So some forward-looking teachers formed this. And TMI has survived real estate cycles for 27 years with a community of teachers who were really the basic investors, and a community of school-teacher friends who generally also bought the product and sold it to their friends.
Q: Do you think the teachers truly understood the risks in investing in real estate partnerships?
A: (Martin) I think a lot of them didn’t. I think a lot were naive. There had been this pattern of incredible returns. . . . They are very good people, and I think they are very deserving. I wish we could deliver all victories for them. Unfortunately, we are not in control of the economics of the state of California.
Q: Why did TMI target teachers’ retirement funds?
A: (Martin) We don’t take anyone’s pension funds. We don’t specifically offer retirement investments. We don’t use the word retirements. These were just investments like somebody might have bought a share of stock, a mutual fund. They were limited partnerships, a pretty common investment vehicle in the 1960s, ‘70s and ‘80s. But they were not retirement funds. We don’t have any pension funds purchasing raw land. . . . . Now, people might have intended these investments to be used to retire with, and many of our limited partners did that and made substantial returns, so it did help them to retire. But we weren’t selling retirement funds.
Q: Why not try to sell this company? I heard you were in discussions with Koll Real Estate Group.
A: (Shuman) We have had discussions with several people, and, yes, some were with Koll. But people are concerned about the liability.
Q: The state Department of Real Estate is investigating.
A: (Martin) I think that will be very positive for us. We’ve been totally cooperative, and we think they will find a clean bill of health. We are not aware of any SEC investigation.