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.