Updated with correction Aug. 20, 2014.
An SEC administrative law judge is scheduled to rule this week on whether institutional timber manager Timbervest LLC's violated securities laws and order firm officials to pay more than $15 million in disgorgement payments and interest.
The Securities and Exchange Commission named the firm's four principals — CEO Joel Shapiro, Chief Investment Officer William Boden, Chief Operating Officer David Zell Jr. and President Gordon Jones — in the case.
“The evidence clearly shows that respondents ( Timbervest top officials) present a continuing risk to their current clients and to the investing public,” SEC lawyers said in a March 31 brief filed after a hearing earlier this year before an SEC administrative law judge in Atlanta.
The SEC, in its legal filings, claims Timbervest officials violated the Investment Advisers Act of 1940, collecting more than $1.15 million in “unauthorized, bogus brokerage fees” through shell companies after selling land in the separate account they managed for the BellSouth Corp. pension fund. That fund became part of the AT&T Inc. pension plan after the companies merged in 2006.
The transactions included an alleged cross-trade of land from the pension plan's account into a Timbervest commingled fund. The SEC in the March 31 brief said the transaction was prohibited under the Employee Retirement Income Security Act.
The March 31 brief states Timbervest officials' “reckless attitude” toward their fiduciary duties was evidenced in their management of another piece of land in the BellSouth/AT&T separate account. The agency brief says Timbervest officials terminated BellSouth's/AT&T's hunting lease on a parcel of timberland it managed for the company in Georgia and then, without consulting pension plan officials, constructed a hunting lodge on the property for use by friends and associates of Timbervest executives.
Timbervest officials deny any wrongdoing.
“We are going to fight this to the bitter end,” said Mr. Shapiro, Timbervest CEO, in a phone interview.
Mr. Shapiro said the firm has $1.2 billion in assets under management in six funds, 90% of which is from institutions. He said company officials plan to begin fundraising for a new timber fund shortly.
One investment consultant, who asked not to be identified, said “the chances of Timbervest raising a new fund are zero,” given the SEC charges
The consultant said even without the SEC charges it is a particularly difficult time to raise capital for domestic timber funds, such as the ones run by Timbervest, given the low level of new housing starts in the U.S.
And some institutions have terminated Timbervest or reduced allocations to the firm.
The $810 million Ohio State Highway Patrol Retirement System, Columbus, terminated a $29 million separate account with the firm in 2012. At the time, an official at the pension fund cited “general concerns” with the firm.
The $7.9 billion Arizona Public Safety Personnel Retirement System, Phoenix, reduced funding to a Timbervest commingled fund to $30 million from $50 million in 2012, said PSPRS spokesman Christian Palmer.
“The decision was made in part over concern that the SEC prosecution of Timbervest's principals might jeopardize Timbervest' returns,” Mr. Palmer said in an e-mailed response to questions.
Mr. Shapiro called the SEC charges, “a shakedown.”
He said the investment firm returned the $1.15 million in brokerage fees to AT&T in late 2011 or 2012, but he insisted company officials had done nothing wrong.
The SEC is seeking more than $15 million in payments and interest based on profits the company made when managing the pension fund's separate account between 2006 and 2012, when AT&T terminated the account.
By all indications, the case won't be settled immediately, even with the expected ruling this week.
Mr. Shapiro said Timbervest executives would appeal any negative decision to the five-member SEC, a required step in the appeal process, and then to federal court if necessary.
The SEC, in its filings, alleges Timbervest"s wrongful activity goes back to April 2005 when BellSouth added an amendment to its separate account agreement with the firm calling for a reduction of the portfolio to $250 million from the initial $470 million allocation.
The SEC says Timbervest officials, in an August 2006 disposition report sent to Steve Gruber, then a consultant for BellSouth at ORG Portfolio Management LLC, Cleveland, that a portfolio holding in Alabama was being sold as the result of an unsolicited favorable offer the month before.
But the SEC claims that Timbervest officials sold the 13,000 acres as part of a prearranged agreement to park the land. The land was sold for $13.5 million in October 2006 to Charles Lee Wooddall, an owner of several timber companies.
According to the SEC brief, Mr. Wooddall testified at the administrative law hearing in January and February this year that Mr. Boden, Timbervest's CIO, proposed Mr. Wooddall buy the property, hold it for a short time and then sell it to a Timbervest commingled fund.
That second transaction happened about six weeks after the initial sale in 2006, when Timbervest officials bought back the land from Mr. Wooddall for a commingled fund called Timbervest Partners, the SEC says. The purchase price was $14.5 million.
Mr. Shapiro contended the transactions for the Alabama land were two separate, independent sales and were not planned.
After the sale of the land, a $470,000 brokerage fee was paid from the pension fund's separate account to Fairfax Realty Advisors, which the SEC claims is a shell company with a post office box in a UPS Store in Atlanta. A close friend of Mr. Boden, Ralph Harrison, an attorney in Atlanta, had set up Fairfax, the SEC claims
It also claims AT&T never was told of the brokerage fee, which was deducted from the separate account.
The SEC says Mr. Harrison received $47,075 in fees from the $470,000 and then gave the rest to Mr. Boden, who shared it with other top officials at Timbervest.
(Mr. Boden had worked as a consultant for Timbervest before joining the firm. He had scouted land purchases and dispositions for the separate account from the fall of 2002 through April 2004. The $1.15 million in commissions were fees owed Mr. Boden for that work, Mr. Shapiro said.)
Another shell company, Westfield Realty Advisors, was set up by Mr. Harrison so Timbervest officials could receive more brokerage fees for another sale from the separate account, the SEC claims.
On Dec. 15, 2006, Timbervest sold a $25,135,000 piece of land in Kentucky from the separate account to an undisclosed buyer, the SEC says. After the deal closed in April 2007, Mr. Harrison received a $68,549 fee through Westfield Realty Partners, the SEC claims.
Messrs. Boden, Shapiro, Zell and Jones each received $154,230, the SEC says.
The SEC says those fees also were prohibited by ERISA because they were not disclosed and were part of a prohibited transaction.
Mr. Shapiro in the interview insisted the transactions were not subject to ERISA regulations. He said the separate account was set up as a real estate operating company, which would have been exempt from the ERISA rules regarding prohibited cross-trade transactions.
Mr. Shapiro also said the construction of the hunting lodge on the BellSouth property in Georgia was part of improvements to the property and only increased the value of the land. He said the SEC has it wrong: BellSouth never had a lease on the property, which was a third-party hunting club.
In its filings in the case, Timbervest officials contend the brokerage fees were fully disclosed to BellSouth's consultant, ORG and to BellSouth.
The official at BellSouth whom Timbervest officials contend was told of the fees was David Zell Jr., then director of BellSouth's natural resources portfolio, the Timbervest filings state.
Mr. Zell is now Timbervest's chief operating officer and one of the four Timbervest officials the SEC wants to bar from the securities industry.
Mr. Zell did not respond to a phone call or an e-mail seeking comment
Consultant ORG's top official, meanwhile, had no recollection of ever being told of the brokerage fees.
In its March 31 brief, the SEC states that in hearing testimony in early 2014 ORG CEO Edward Schwartz testified “categorically” that neither Mr. Shapiro nor anyone else ever informed him Timbervest wanted to pay — or that it had paid — advisory fees or brokerage commissions from the pension fund's account.
Mr. Schwartz did not return phone calls seeking comment.
This article originally appeared in the August 18, 2014 print issue as, "SEC ruling expected in Timbervest case".