O.C. Firm That Invested Teacher Funds Will Pay to Settle Lawsuit

After years of legal wrangling and failed attempts to reach a settlement, the financially troubled Teachers Management & Investment Corp. on Wednesday agreed to pay investors $4.3 million to settle accusations that the company mishandled their retirement funds and caused losses of more than $200 million.

The settlement stems from a 1994 class-action lawsuit filed against the Newport Beach real estate investment firm on behalf of 20,000 California teachers, some of whom lost their life savings. The educators accused the firm and its operators, Maurice B. Shuman and James Martin, of illegally diverting money and shuffling funds to conceal deep losses in the company’s real estate holdings.

In settling the case, Shuman and Martin admit no liability. The executives have long maintained that California’s depressed real estate values--not fraud or mismanagement--sank the value of TMI’s real estate portfolio.

Louise Carmichael of Orange, a retired schoolteacher and plaintiff in the case, expressed relief that a settlement had finally been reached, though the amount doesn’t begin to cover what investors lost in TMI.

“This doesn’t right the wrongs done to [investors] but it’s a step in the right direction,” she said.

The tentative agreement reached late Wednesday guarantees that TMI will pay a minimum of $4.3 million to investors, according to Irvine attorney Ron Rus, who is representing the teachers. Rus said investors could reap a few million more from the sales of TMI real estate, most of which is now under the control of a court-appointed receiver, Dennis B. Schmucker.

The agreement must still be approved by Orange County Superior Court Judge John C. Woolley. A hearing is set for Monday.

Schmucker said it is unclear how much of the proceeds of the settlement will eventually be distributed to investors or how the split will be calculated. He said legal fees must first be deducted from the final payout, a sum that will be determined by the judge.

While Wednesday’s agreement will likely end the teachers’ civil action against TMI and its operators, the company still faces possible criminal charges. The California attorney general’s office is investigating the activities of TMI and its operators, Shuman and Martin.

Additionally, the teachers are still pursuing a civil case against TMI’s accountants, attorneys and bankers, who Rus contends had full knowledge of financial improprieties at TMI. That suit seeks to reclaim the $200 million in losses sustained by investors in TMI.

Although Wednesday’s settlement will return to investors only a fraction of what they claim to have lost, Schmucker said it could strengthen their negotiating posture with TMI’s professional advisors.

“People are not in the habit of giving away $4.3 million if there was not some responsibility,” Schmucker said. “The accountants and lawyers have significant exposure.”

David Grant, attorney for TMI, said the agreement vindicates Shuman and Martin and makes it clear that they did nothing wrong.

“Now they can get on with their lives,” Grant said.

Formed in 1968 by a group of educators and real estate specialists, privately owned TMI offered a way for teachers and school administrators to feather their retirement nests with investments in California’s then-thriving real estate market. The company pooled those retirement funds to form a variety of real estate partnerships with stakes in hotels, office buildings, wineries and undeveloped land.

Investors saw annual returns as high as 30% in the 1970s and ‘80s when the state’s real estate market was booming. Word of the company’s success spread among the state’s teachers, several hundred of whom moonlighted as licensed sales agents for the firm.

But the company hit some turbulence in the mid-1980s when the state launched a two-year investigation into allegations that TMI shortchanged investors on some real estate transactions.

That probe turned up no wrongdoing. But TMI was further hamstrung when Centennial Savings, a Santa Ana thrift that owned 75% of the company, was declared insolvent and taken over by federal regulators in 1985.

The government sold its stake in TMI in 1987 to a company controlled by Shuman and Martin. The new owners put additional cash into TMI and embarked on an aggressive expansion program that eventually saw the company managing more than $1 billion of investors’ funds.

But the real estate downturn of the late ‘80s and early ‘90s hit TMI hard. Officials of the company, who as late as 1988 had boasted that its clients had never lost a dime, watched the value of its holdings plunge and placed several of its partnerships in bankruptcy.

Shuman and Martin blamed the market for their reversal of fortune, but some clients suspected mismanagement. Investors filed a class-action suit in Orange County Superior Court in 1994 accusing company officials of fraud, beach of contract, misrepresentation and racketeering.