By Ray Stern
By Ray Stern
By New Times
By Amy Silverman
By Stephen Lemons
By Stephen Lemons
By Monica Alonzo
By Chris Parker
A partnership headed by J. Fife Symington III made an apparently illegal payment to a pension fund investment manager who agreed to make a $10 million loan to a troubled Symington development, public records obtained by New Times reveal.
The $10,000 kickback was paid in connection with a loan that several union pension funds made to finance the Mercado, a downtown retail center developed by Symington's partnership. It was the pension funds' attempts to collect on the long-overdue loan that pushed Symington into personal bankruptcy last month.
The pension funds have alleged in civil court that the $10,000 payment--made to an investment manager convicted and imprisoned for taking similar fees--violated federal law.
It is a felony under the federal Employee Retirement Insurance Security Act for a pension fund manager to personally receive payment from anyone conducting a financial transaction with the pension fund. It is also a crime for anyone to make and receive unlawful payments to influence the pension fund manager.
Loan documents and federal court records show that the Mercado Developers Limited Partnership, headed by Symington, paid William Earle Miller $10,000 when Miller agreed to make the $10 million loan in October 1987.
The Mercado loan came at a crucial time for Symington. The details of securing that loan--which figured so prominently in the governor's recent bankruptcy--almost certainly will be crucial to his future.
It was mid-1987, and a highflying Phoenix real estate developer named J. Fife Symington III needed money.
Symington's plan to build the Mercado retail development in downtown Phoenix was stalled by nervous bankers, who didn't want to put up a $10 million long-term loan for the risky project in the midst of a deteriorating real estate market.
If Symington didn't quickly find a permanent lender, his deal with the City of Phoenix--which included such sweetheart inducements as free land, more than $1 million in tax breaks and a $2.7 million low-interest loan--might fall through.
About the same time, a Scottsdale investment manager named William Earle Miller was busy investing more than $200 million of union pension fund assets in about 80 shaky Arizona real estate projects.
By 1987, many of the loans were in default; some borrowers never even paid interest on the loans. But Miller hid the losses from the pension fund trustees.
Actually, Miller did more than hide losses. Miller accepted unlawful payments for loans he arranged. In fact, federal authorities later alleged he had taken more than $600,000 in kickbacks from a Tucson real estate broker for a series of real estate deals between 1981 and 1985.
Symington's and Miller's paths were about to cross. At the Mercado.
Their relationship--which began about 20 months before Miller's illicit activities first were listed in an obscure federal civil suit--was facilitated by the leader of the Phoenix firefighters union, Pat Cantelme.
In 1987, Cantelme was president of the Central Arizona Labor Council. One of his goals was to assist construction projects that used union labor. He frequently helped arrange union pension fund financing for construction projects, if developers promised to use union labor.
"I would be involved as a catalyst to get things together, and that was the case with Symington," Cantelme says.
Cantelme thought Miller might be interested in using union pension funds for the long-term Mercado loan Symington desperately needed.
"I actually introduced Miller and brought them together," Cantelme says.
In October 1987, Miller and Symington hammered out an agreement. The union pension funds would provide up to $11.1 million after the Mercado was built to pay off a $10 million construction loan made by First Interstate Bank.
"The unions stepped up to the plate," Symington declared after the deal was struck.
The agreement cleared the way for Symington and his development partner, a nonprofit community group called Chicanos Por La Causa, to build the Mercado, which was expected to provide subsidized leases to minority owners of small businesses.
But the pension fund loan came at a high price.
Its terms included a $10,000 payment to Miller. It was called a "loan processing fee." But federal prosecutors have called similar fees illegal.
Miller learned this lesson in pension law the hard way and now has plenty of time to reflect.
The former U.S. marine and Stanford University graduate is serving 37 months in a Las Vegas-area federal prison. In 1993, he was convicted of receiving $600,000 in illegal payments from Tucson real estate broker Keith Dolgaard in exchange for funding loans sought by Dolgaard.
Dolgaard also was convicted of violating federal pension fund laws. He is serving 37 months in a west Texas federal prison.
But prison wasn't on the minds of Symington and Miller in October 1987. They had just agreed on a $10 million loan that benefited them both. (Neither man agreed to be interviewed for this article.)
Greed, deception and ambition, however, would soon trigger a brutal, high-stakes struggle among the union pension funds, their money managers and Symington. That struggle would put Miller in prison. Arizona would be left with a bankrupt governor.
Miller committed to lend up to $11.1 million from six pension funds controlled by three unions--the Arizona State Carpenters Union, Arizona Operating Engineers Local No. 428 and the Arizona Laborers, Teamsters and Cement Masons Local No. 395. Even with the new money, delays continued to plague the Mercado development.
Construction was stalled until June 1988 by First Interstate Bank. The bank refused to issue a $10 million construction loan until the U.S. Department of Housing and Urban Development approved a $2.7 million loan from the City of Phoenix to Symington's Mercado Developers Limited Partnership, public records show. The city loan needed federal approval because the money came from a HUD grant.
By the time construction began in the summer of 1988, the Arizona real estate market was eroding. Office vacancies were soaring, and the impact of the 1986 Tax Reform Act, which changed fundamental rules for real estate investors, was beginning to be felt. By year's end, Phoenix banks and thrifts were posting huge losses.
The collapsing market soon exposed Miller's poor investment choices. An internal audit by the union pension funds discovered massive problems, and Miller was forced out as investment manager in November 1988. Miller's departure would prove disastrous for Symington.
Miller's duties were taken over by McMorgan & Company, a San Francisco money-management firm that specializes in handling pension fund assets.
The more McMorgan investigators looked into Miller's handling of nearly $1 billion in pension fund assets, the more problems they found. The biggest crisis involved nearly $250 million of pension fund assets Miller had invested, or had committed to be invested, in poorly performing Arizona real estate.
In April 1989, the pension funds filed a federal lawsuit against Miller in U.S. District Court in Phoenix, alleging he had engaged in racketeering, violated securities laws and received illegal compensation when he invested union pension fund assets in Arizona real estate projects.
Among other things, the pension funds alleged that Miller violated federal law by accepting payments for arranging loans. The Employee Retirement Income Security Act of 1975 prohibits investment managers from receiving or conspiring to receive any consideration from any party in connection with a transaction involving the assets of a pension plan.
Miller's receipt of a $10,000 loan-processing fee from Symington's Mercado Developers Limited Partnership wasn't included in the pension funds' initial lawsuit against Miller. But an allegation that the $10,000 fee violated federal law was included when the pension fund amended its legal complaint in June 1991.
The civil suit was the beginning of a dreadful series of events for Miller. The civil allegations soon attracted the attention of the U.S. Attorney, who began an investigation that led to a federal grand jury indictment on November 17, 1992.
The indictment alleged that Dolgaard received more than $6 million in fees for bringing scores of real estate projects to Miller, who would then approve pension fund loans. In return, the indictment alleged, Dolgaard paid Miller more than $600,000.
Trial testimony revealed that Miller also had taken $107,000 from a joint savings account he had with an elderly client. In a desperate attempt to repay the money to the client after it was discovered missing, Miller obtained $115,000 from a company controlled by Dolgaard.
The government alleged the October 15, 1985, payment from Dolgaard to Miller was made with "the intent to influence Miller"--and the union pension fund assets Miller controlled.
A jury convicted Dolgaard and Miller of three counts each of violating federal pension fund laws. Two of the counts were related to unlawful payments to influence the operations of a pension fund. Dolgaard and Miller were sentenced to 37 months in federal prison on March 28, 1994.
Assistant U.S. Attorney Joelyn D. Marlowe says the government did not review the $10,000 payment from Symington's partnership to Miller because the government's case was narrowly focused on the Miller-Dolgaard relationship.
In addition, the payments between Miller and Dolgaard were kept secret, Marlowe says, while the payment between Symington's partnership and Miller was recorded in loan commitment papers. The Symington partnership's payment to Miller was relegated to obscurity before New Times began investigation of the Symington bankruptcy.
The pension funds continued their case in civil court against Dolgaard, Miller and Miller's employer, Mitchell Hutchins Institutional Investors Inc. The suit ballooned into a massive case, involving numerous counterclaims, that was finally settled in November 1994.
The union pension fund was the big winner in the settlement, collecting $93.3 million from a series of defendants, including Chemical Bank and Paine Webber Group Inc., which were the past and current owners of Mitchell Hutchins. The two companies paid a total of $80 million.
Other losers were the union pension fund trustees, who agreed to pay $9 million to settle claims, brought by the U.S. Department of Labor, that they failed to properly monitor Miller's investments.
Miller's downfall directly affected another prominent figure--Phoenix developer Fife Symington.
Miller did not require Symington to sign a personal guarantee to repay the $11.1 million pension fund loan commitment when the two men struck their deal in October 1987. But by June 1990, when it was time for the pension funds to actually issue the loan, Miller was long gone.
The new pension fund money manager, McMorgan & Company, refused to issue the loan unless Symington signed a personal guarantee, McMorgan officials say.
By the summer of 1990, the Phoenix real estate market was a shambles. Building the Mercado had cost more than anticipated; the pension fund loan would not be enough to pay off First Interstate Bank's interim construction loan. There was a $1 million shortfall.
Symington was forced to renegotiate the shortfall with First Interstate. The bank granted a one-year extension on repayment; the full amount was due in June 1991. First Interstate Bank also got Symington to personally guarantee repayment of the loan.
McMorgan wanted the same sort of guarantee.
"We had one of those eyeball-to-eyeball meetings," says Paul Morton, a McMorgan vice president. "We needed to collateralize this loan because of the changing market."
Normally, McMorgan would have had very little leeway in changing the loan commitment signed by Miller and Symington in October 1987. But McMorgan had been dealt a powerful negotiating card.
Symington was no longer just another private developer. He was in a five-way primary race for the Republican gubernatorial nomination. Any delays in the Mercado project might have publicly exposed Symington's financial weaknesses prior to the election.
So Symington signed a personal guarantee pledging his assets to repay the pension fund loan. Symington's wife, Ann, also signed the guarantee, pledging any assets she and her husband held as their community estate.
As part of the guarantee, Symington submitted a financial statement that, the couple promised, was "true and correct."
The December 31, 1989, financial statement--signed only by Fife Symington--said their community property was worth $12 million, McMorgan officials say.
With the guarantee and financial statements signed and delivered, McMorgan funded the $10 million permanent loan on June 29, 1990.
The ink was barely dry on the pension fund loan when the Mercado suffered its first major public blow. In early July 1990, an anchor tenant, C. Steele & Company, closed its doors, just seven months after Mercado's grand opening.
The restaurant and catering business, one of the largest retail tenants in the Mercado, never paid rent before shutting down. Symington Company officials tried to put the best spin on failure. Company president Randy Todd contended "there are a lot of good things happening" at the Mercado.
Symington survived the fallout politically, winning the September 1990 Republican gubernatorial primary. But Democratic candidate Terry Goddard, who strongly backed city support of Mercado while Phoenix mayor, sensed an opening.
As the general election approached, Goddard focused increasingly on apparent weaknesses in Symington's development company. The week before the election, Goddard ran television ads stating Symington's development projects were $200 million in debt. Symington was livid, claiming Goddard was attacking below the belt.
But Symington survived, defeating Goddard in a February 1991 run-off election.
Once in office, Symington wasted little time attempting to shore up the Mercado's poor leasing. He had little time to turn the project around; if more space were not leased, loan reserves set aside to make mortgage payments would be exhausted. Then Symington's company would be responsible for the shortfalls.
In May 1991, McMorgan officials held a series of discussions with Symington concerning repayment of the loan. The governor warned McMorgan that the only way the loan would be repaid was for the pension funds to work with Symington, McMorgan officials say.
The governor, McMorgan officials say, indicated that only he had the power to make the project work.
McMorgan was not impressed with Symington's political muscle-flexing, or his demand for a "workout" of the loan's terms.
"What we need from you is dollars," a McMorgan official says was the reply to Symington's renegotiation demand.
On May 31, 1991, Symington responded to McMorgan's request for payment with a stunning document. The governor--who 11 months earlier submitted a financial statement claiming he and his wife had a net worth of $12 million--voluntarily sent a new financial statement to McMorgan.
According to Superior Court documents, this statement was prepared by Symington's personal accountants--Coopers & Lybrand.
As related by McMorgan officials, both Coopers and Symington contended the governor wasn't the wealthy developer he claimed to be only months earlier. Instead, the new financial statement said Symington was $23 million in the red, McMorgan officials say.
Somehow, Symington had seen his net worth plummet by $35 million in 11 months.
Two days after Symington declared his massive indebtedness to McMorgan, the governor defaulted on the $1 million loan to First Interstate Bank that he had renegotiated and personally guaranteed.
First Interstate Bank couldn't do much about Symington's refusal to pay; a foreclosure action would leave the bank in "second position," behind the pension funds that would have primary claim on the Mercado property.
Once it became clear Symington wasn't going to make payments to either the bank or the pension funds, McMorgan notified the governor it planned to foreclose on the Mercado.
McMorgan sent a notice of trustee sale to Symington on October 10, 1991. Symington's response to the notice was terse. According to McMorgan officials, the governor said the pension funds will be unsuccessful in forcing him to make good on his personal guarantee to repay the $10 million loan because he was broke. Symington said he and his wife had no community assets--despite the financial statement a year earlier showing joint assets of $12 million.
Symington also warned McMorgan that if the pension funds insisted on calling in the personal guarantee, the governor would simply file for bankruptcy.
Nearly four years after Symington first told McMorgan officials that he would file bankruptcy rather than pay his debt to the pension funds, the governor acted. On September 20, he sought Chapter 7 protection in U.S. Bankruptcy Court.
The filing is Symington's attempt to liquidate his debts rather than reorganize them and set up a payment schedule, as he could have done under other portions of the bankruptcy code. Symington's bankruptcy filing was delayed for years, largely because the governor was able to vigorously defend against lawsuits that the pension funds had filed against him. That protracted defense was carried out by lawyers from the state's largest law firm, Snell & Wilmer.
It is unknown how much Symington has paid or owes Snell & Wilmer. The governor stated in his bankruptcy filing that his debts to his lawyers and his accountants are "unknown."
These "unknown" debts raise questions about whether Symington has used political power to benefit some of his creditors.
For example, three Snell & Wilmer attorneys have landed key positions in state government since Symington took office. The appointments include: Mary Leader, executive assistant for health and human services; Rita Pearson, head of the Department of Water Resources; and former head of the Department of Environmental Quality Ed Fox.
The governor's accountants, Coopers & Lybrand, were awarded more than $4.5 million from two state contracts related to Project SLIM. Coopers & Lybrand was forced to repay $725,000 from the first contract to end an attorney general's investigation into possible bid-rigging. The second contract has also raised questions; state records appear to document Symington's involvement in steering work to Coopers ("How Fife's Friends Got Fat on Project SLIM," March 16).
Lawyer and accountant fees are not the only mysteries of Symington's bankruptcy filing. Officials with union pension funds say they want these key questions answered during the bankruptcy proceeding: ù Are Ann Symington's extensive assets--reportedly in the millions of dollars--available to creditors? After all, the governor listed community assets of more than $12 million on at least two financial statements.
ù What is the value of Symington's four trust funds? The governor claims they are worth less than $1 million. The pension funds want to see proof, and they also want to explore tapping the trusts to pay off creditor claims.
ù What is the explanation for Symington's sudden change in net worth? How could he suffer a $35 million swing in 11 months, from a positive $12 million to $23 million in the hole?
ù Did the governor transfer assets to his wife before filing bankruptcy?
ù How did the governor pay off $1.2 million in loans his wife and mother made to his campaign in 1990? During that time period, the governor told pension fund officials he was broke.
ù How closely do Symington's financial disclosure statements, filed annually with the secretary of state, correspond with personal financial statements submitted to pension fund officials and other creditors? (The 1991 financial statement Symington submitted to the state shows a positive equity in his real estate projects; in May 1991, Symington told pension fund advisers he was $23 million in the red.)
ù What happened to a $300,000 commission Symington received in 1994 from the sale of the Esplanade, another failed Symington real estate project? The bankruptcy filing suggests it is already gone. But gone where?
If the pension funds or other creditors can show Symington fraudulently or illegally obtained loans, there is a possibility the debts could be excluded from Symington's bankruptcy. Such debts would continue to follow the governor indefinitely.
"We don't see this as over," says pension fund attorney Keith Overholt. "There are still a lot of things we can do."
Creditors aren't the only ones interested in the fine print contained in Symington's bankruptcy filing.
A federal grand jury is continuing a criminal probe of Symington's finances that began more than two years ago. Sources familiar with the investigation say the grand jury is piecing together answers to many of the questions creditors have been asking about Symington's finances, and about possible shifts of assets to his wife.
Much is still unclear about the grand jury probe. It has not been disclosed whether that panel is examining the roots of the Mercado loan, or the legality of the $10,000 "loan processing fee" paid by Symington's partnership to Miller.
In a civil suit against Miller, pension fund lawyers alleged the payment violated federal law. Miller's acceptance of similar payments from real estate broker Keith Dolgaard helped land both men in federal prison.
But are prosecutors examining loan commitment documents signed on October 15, 1987, by William Earle Miller, now an imprisoned felon, and J. Fife Symington III, now a bankrupt governor?
At this point, anyone outside of federal law enforcement can give only one truthful answer to that question: unknown.