TMI Tries to Keep Investors From Aiding Fraud Probe

An Orange County company under criminal investigation in the loss of more than $100 million in teachers’ retirement funds is trying to prevent investors from cooperating with authorities.

As part of its effort to settle a civil fraud lawsuit, Teachers Management & Investment Corp. 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 last 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.

Privately owned TMI, formed in 1968 by a group of educators and real estate specialists, promoted itself as a vehicle for teachers and school administrators to sweeten their retirement funds. Educators invested more than $230 million, mainly in real estate, and saw returns of up to 30% in the best of times. Some even helped to sell investments to fellow teachers.

But their returns evaporated in the recent recession and many lost their life savings.

Grant disagreed that he was asking teachers to engage in any wrongdoing. He 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 say they have never heard of such a bold attempt to thwart a criminal probe.

Ethically, securities law defense attorneys say, 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 last 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.

Grant and Shuman warned that further litigation will erode the amount of money available to the teachers under the tentative settlement. That’s because a $5-million pool of insurance money being used to pay the settlement also is paying legal defense fees and costs.

The more legal fees TMI incurs, the less money will be available to teachers, Grant said.

Rus and Dennis B. Schmucker, the court-appointed receiver for 30 TMI real estate partnerships, said that Grant’s law firm has taken in more than $1 million in fees and costs since the case was filed. Grant, though, said his fees have been no more than about $700,000.

Both the receiver and the teachers also are suing KPMG Peat Marwick, TMI’s accounting firm, and others who helped TMI.

In a regular quarterly report to the court, filed Monday, Schmucker said that the partnerships were much worse off than first believed.

Of the 30 partnerships, seven are no longer active and the remaining 23 show losses of more than $150 million. Schmucker’s report said that teachers put $185.7 million in those deals that are still active but that he could find only $26.2 million in equity.

“Although it will be years before the actual amount of losses to these nearly 20,000 California teachers is known,” he wrote, “it is clear that only a small portion of the investors’ cash will be returned.”