In the first bit of good news to surface for the Dallas Police and Fire Pension (DPFP) in quite some time, the Dallas News is reporting the pension board has "won" a $2 million settlement against their former real estate fund advisor, CDK Realty Advisors. Of course, the settlement falls slightly short of the $320mm in losses allegedly caused by CDK, but a win's a win, right?
Meanwhile, city officials who complain they had little control over the fund’s activities but are now being forced to find a way to bail it out, had mixed reactions to the settlement.
“We need every dime possible coming into the fund, especially from those that played a role in its downfall,” Mayor Mike Rawlings said in a statement. “This settlement appears to be a small step in the right direction, though I still hope to see more transparency and details about the scope of the alleged wrongdoing by CDK.”
Lee Kleinman, a City Council member and former member of the fund’s board, said he was “shocked CDK got off the hook for a mere $2 million considering the amount of fees they bilked out of the system over the past decade.”
But others highlighted the importance of getting CDK’s cooperation. “We could have hammered these guys a lot harder perhaps” by taking the matter to trial, said Philip Kingston, another city councilman who serves on the fund’s board. “But getting their cooperation to chase down other potential sources of recovery I think was really important.”
For those who missed it, here is some background on how CDK Realty same to find themselves to be the target of an FBI raid in April 2016 related to their management of real estate investments on behalf of the DPFP...turns out they may have had some issues marking their real estate portfolio to market (see "Dallas Cops' Pension Fund Nears Insolvency In Wake Of Shady Real Estate Deals, FBI Raid").
To provide a little background, per the Dallas Morning News, Richard Tettamant served as the DPFP's administrator for a couple of decades right up until he was forced out in June 2014. Starting in 2005, Tettamant oversaw a plan to "diversify" the pension into "hard assets" and away from the "risky" stock market...because there's no risk if you don't have to mark your book every day. By the time the "diversification" was complete, Tettamant had invested half of the DPFP's assets in, effectively, the housing bubble. Investments included a $200mm luxury apartment building in Dallas, luxury Hawaiian homes, a tract of undeveloped land in the Arizona desert, Uruguayan timber, the American Idol production company and a resort in Napa.
Despite huge exposure to bubbly 2005/2006 vintage real estate investments, DPFP assets "performed" remarkably well throughout the "great recession." But as it turns out, Tettamant's "performance" was only as good as the illiquidity of his investments. We guess returns are easier to come by when you invest your whole book in illiquid, private assets and have "discretion" over how they're valued.
In 2015, after Tettamant's ouster, $600mm of DPFP real estate assets were transferred to new managers away from the fund's prior real estate manager, CDK Realty Advisors. Turns out the new managers were not "comfortable" with CDK's asset valuations and the mark downs started. According to the Dallas Morning News, one such questionable real estate investment involved a piece of undeveloped land in the Arizona desert near Tucson which was purchased for $27mm in 2006 and subsequently sold in 2014 for $7.5mm. Per the DPFP 2015 Annual Report:
In August 2014, the Board initiated a real estate portfolio reallocation process with goals of more broadly diversifying the investment manager base and adding third party fiduciary management of separate account and direct investment real estate assets where an investment manager was previously not in place. The reallocation process resulted in the transfer of approximately $600 million in DPFP real estate investments to four new investment managers during 2015. The newly appointed managers conducted detailed asset-level reviews of their takeover portfolios and reported their findings and strategic recommendations to the Board over the course of 2015 and into 2016. A significant portion of the real estate losses in 2015 were a direct result of the new managers’ evaluations of the assets.
Then the plot thickened when, in April 2016, according the Dallas Morning News, FBI raided the offices of the pension's former investment manager, CDK Realty Advisors. There has been little disclosure on the reason for the FBI raid but one could speculate that it might have something to do with all the markdowns the pension was forced to take in 2015 on its real estate book. At it's peak, CDK managed $750mm if assets for the DPFP.
And for those curious what an actual FBI raid looks like...here you go...though it's slightly less exciting than you might think.
Of course, as you might expect, CDK has denied any wrong doing...
A lawyer for CDK stressed Monday that the settlement is not an “admission of any wrongdoing or liability for any claims.”
“CDK Realty Advisors was one of several commercial real estate managers hired by the Pension System,” Steven A. Schneider said in a statement. “CDK was not involved in or responsible for the design and construction” of the controversial Museum Tower in the city’s Arts District. He said the firm was also not involved in the fund’s high-profile investments in luxury homes in Hawaii and a resort and vineyard in Napa County, Calif.
The firm has contended in a court filing that the real-estate investments it recommended were profitable for the fund.
...and it's previous managers were able to quickly launch a new firm called "Harvest Interests" which is actively pitching the Lubbock Fire Pension Fund for new capital.
CDK’s principals started a new firm last year called Harvest Interests. Cooley spoke to the Lubbock Fire Pension Fund in November about moving forward with real estate investments, according to meeting minutes.
Cooley said “they had settled with Dallas Police and Fire, but the paperwork was still being worked through,” according to the minutes. Cooley told the Lubbock fund that CDK will become defunct at some point in the future after investments it manages are sold, the minutes say.
What more is there to say really?