TMI Investors’ Suit Stands Against Peat Marwick, Newport Law Firm
Investors statewide who lost $100 million in Teachers Management & Investment Corp. won important courtroom battles this week when a judge refused to throw out allegations against KPMG Peat Marwick accountants and an Orange County law firm.
Orange County Superior Court Judge Francisco F. Firmat refused to dismiss allegations of fraud, conspiracy, negligence and other wrongdoing against Peat Marwick, which annually audited real estate partnerships for the investors.
Firmat also kept the Newport Beach law firm of Bruck & Perry in the case by refusing to dismiss claims of conspiracy, misrepresentation and negligence.
The judge issued his rulings in one case Friday that was brought by a court-appointed receiver and in a class action Thursday that was filed by some 20,000 investors, mainly teachers.
“This is a major motion that demonstrates that this case is going to go forward,” said William B. Hirsch, attorney for receiver Dennis B. Schmucker. “We believe that Peat Marwick’s exposure is considerable in this case. On the conspiracy claim, it’s now on the hook for all of TMI’s fraudulent acts.”
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The allegations against the Big 6 accounting firm involve “a direct diversion of assets over a period of time that simply should have been apparent to a public watchdog that was appropriately undertaking its duties,” said Ronald Rus, attorney for the investors.
A Peat Marwick spokesman would not comment, directing attention instead to legal papers that denied any wrongdoing and asserted that the firm revealed all material information about the money-losing real estate partnerships.
The papers contend that neither the receiver nor the investors could adequately state legal claims against the firm for the allegations made.
No one at Bruck & Perry could be reached for comment.
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TMI, based in Newport Beach, was set up to help teachers throughout the state save for retirement by investing in real estate partnerships. Investors accused TMI’s managers, Maurice B. Shuman and James Martin, of siphoning quarterly payments and profits for other ventures.
Schmucker asserts in his lawsuit that Peat Marwick “assisted, participated in and aided and abetted the fraudulent scheme” with its audits. He alleges that the accounting firm “knew, recklessly disregarded or should have known that the market value of California real estate had dropped precipitously,” yet continued to reflect the properties at a higher value in their audits.
Shuman and Martin have maintained that California’s plummeting real estate values, not fraud, hurt TMI’s portfolio. In September, they reached a tentative settlement, without admitting liability, to turn over $4 million in cash and rights to assets that could give investors $6 million more. The settlement is still pending.
In reports to the court, Schmucker has criticized TMI’s managers and the professionals who helped them. He noted that investors put $194.5 million into 30 partnerships, yet he could find barely $33.3 million in equity left.
“Although it will be years before the actual amount of losses to these nearly 20,000 California teachers is known, it is clear that only a small portion of the investors’ cash will be returned,” he said.
