TMI Investors Asked to End Cooperation

Teachers Management & Investment Corp., which is under criminal investigation over the loss of more than $100 million in teachers’ retirement funds, is trying to prevent investors from cooperating with authorities.

As part of the company’s effort to settle a civil fraud lawsuit, TMI has proposed that the 20,000 teacher-investors statewide stop voluntarily cooperating with state and federal authorities in the criminal investigation.

The Newport Beach company also wants teachers to “withdraw any and all complaints” made to authorities, according to a Feb. 20 letter from TMI’s lawyer, David C. Grant of Newport Beach.

The teachers’ attorney, Ronald Rus of Irvine, has rejected the proposal, accusing TMI of suggesting that his clients “commit obstruction of justice.” Both sides now say the tentative $4-million settlement disclosed in court in September is in jeopardy of unraveling.

The proposal is part of the legal maneuvering in a case against TMI and its two principals, Maurice B. Shuman and James R. Martin. The teachers accuse TMI, Shuman and Martin of diverting investor funds to their own use. Shuman and Martin contend that plummeting real estate values caused the losses.

The teachers are also suing KPMG Peat Marwick, TMI’s accounting firm, to recover more of their losses.

Grant said in an interview that he sought the noncooperation provision partly because the teachers and their lawyers have been “hounding” authorities to take action in an effort to gain leverage in the settlement.

“Of course, if they’re subpoenaed by authorities, they would have to comply,” he said.

The provision also seeks copies of all correspondence that the teachers and their lawyers had filed with the state attorney general’s office, the Securities and Exchange Commission and other state and federal authorities.

Several defense attorneys in securities lawsuits said they have never heard of such a bold attempt to thwart a criminal probe.

Ethically, securities law defense attorneys said, lawyers can’t even refer to possible criminal prosecutions in settlement talks.

“The most problematic area in this case is [TMI’s] request to withdraw the complaints,” said one white-collar fraud defense attorney. “That sounds the closest to obstruction.”

A state prosecutor said plaintiffs could become accessories to a crime should they agree to such a provision.

“My gut reaction is that it would be contrary to public policy,” said Ronald D. Smetana, a deputy state attorney general. “If a case were settled on that basis, it would stop us. We depend, in part, on referrals from victims.”

Though Smetana would not confirm any investigation, the Orange County district attorney’s office assured teachers in letters last month that the state agency was pursuing a criminal investigation.

News of the investigation broke Feb. 13. A week later, Grant included his proposal as part of a series of changes to the pending settlement.

With the negotiations at a standstill, Grant last week filed another unusual motion, this time asking an Orange County Superior Court judge to compel the teachers to accept the original terms laid out in court last fall.

Rus said he will oppose the motion as long as Grant insists that the noncooperation provision and other terms be part of the settlement.

Rus said the original agreement announced in court in September was simply a “bare-bones outline,” the details of which both sides have been trying to work out.

Judge Francisco F. Firmat scheduled a hearing on the motion for March 21.