Kickback Story Irks Symington

Governor Fife Symington threatened to sue New Times last week over a story stating that he had paid a kickback in connection with a $10 million pension fund loan for his failed Mercado minimall in downtown Phoenix.In a written response to the New Times story ("Paying the Piper," October 5), Symington acknowledged that a partnership he headed paid a $10,000 "loan processing fee" in connection with the loan, made by a conglomeration of union pension funds. But the governor claimed the $10,000 payment was made to Mitchell Hutchins Institutional Investors Inc. because the firm was acting as a broker, rather than as an investment manager, in connection with the loan. Symington claimed New Times' story on the payment had defamed him.

"Mitchell Hutchins Investment Corp. was not a pension fund manager," Symington said in the statement.Symington did not respond last week to NewTimes' request for an interview.But the governor's assertions that Mitchell Hutchins was acting as a broker when it received the $10,000 payment are contradicted by numerous public documents--including loan papers signed by Symington--and by oral statements from several sources familiar with the Mercado loan.The distinction between a pension fund manager, which would have a financial duty to serve only the pension fund's interests, and a broker without such fiduciary ties is important.

Federal pension fund laws generally prohibit investment managers from receiving payments from anyone conducting a financial transaction with a pension fund. Brokers, however, can receive compensation for their services from recipients of pension fund financing.

The New Times story said Symington paid a $10,000 kickback to William Earle Miller, who was vice president and general manager of Mitchell Hutchins Institutional Investors Inc. Miller, whose firm had been hired as investment adviser for a group of union pension funds, negotiated the $10 million pension fund loan commitment with Symington.

The governor last week released a copy of a check showing the $10,000 payment from his Mercado partnership was made out to Mitchell Hutchins Investors, whose Phoenix address is the same as Miller's business address.

In an unusual move, state Democratic party chairman Sam Coppersmith rushed to Symington's defense on the legality of the $10,000 payment.Coppersmith, a former congressman, sided with the Republican Symington, telling a Valley daily newspaper that the payment was not a kickback and that New Times was "barking up the wrong tree."In backing the governor's position, however, Coppersmith did not publicly elaborate on his involvement in the Mercado loan. Coppersmith was an attorney representing Miller during the negotiations with Symington. Assuch, Coppersmith approved the loan commitment documents that included the apparently illegal $10,000 payment.Coppersmith acknowledges that he was paid for his services on the transaction by Symington's Mercado Developers Limited Partnership."I don't think it is a problem for Symington to pay a loan processing fee," Coppersmith says.

Other knowledgeable observers certainly do.The parent company of Mitchell Hutchins, PaineWebber Group Inc., determined in late 1988 that the loan processing fee paid to Mitchell Hutchins by Symington--along with similar fees paid by other borrowers of union pension fund money--violated federal pension fund law, Phoenix attorney Terry Davis says. Davis was involved in litigation concerning the pension funds' real estate lending, including the Mercado loan.

Davis says that once PaineWebber realized the "loan processing fees"--including the Mercado fee approved by Coppersmith--violated the Employee Retirement Insurance Security Act, PaineWebber repaid them to the union pension funds."All of that money was paid back as soon as they found out it was illegal," Davis says.Davis later represented Miller in a federal civil lawsuit that was filed by the union pension funds. The funds filed suit after discovering that Miller had invested $250 million of pension fund money in failing or poorly performing Arizona real estate projects, including the Mercado.

The pension funds alleged in the suit that Miller and Mitchell Hutchins violated numerous federal laws--including the law that prohibits payment and receipt of kickbacks such as the $10,000 Mercado payment. In fact, the suit was amended so that it specifically included the Mercado payment as an alleged violation of law.

The suit, which dragged on for five years, was settled in late 1994. PaineWebber and Chemical Bank, an earlier owner of Mitchell Hutchins, agreed to pay $80 million of a $93.3million settlement won by the union pension funds.

Union pension fund officials also say that Symington is simply wrong to claim that Mitchell Hutchins was a broker for the Mercado deal, and that the payment to the firm was therefore legal.

"He's got everybody up here scratching their heads wondering what he's talking about," says Paul Morton, a spokesman for San Francisco-based McMorgan & Company, the current investment manager for the union pension funds.

Pete Garcia, president of Chicanos Por LaCausa, which was a partner with Symington on the Mercado project, also says Mitchell Hutchins was not the broker on the deal. Garcia identifies the broker as Robert Zambo of Scottsdale.

Federal court records show McMorgan & Company replaced Mitchell Hutchins as the union pension fund investment manager in November 1988 after the funds terminated Mitchell Hutchins' contract.

William Earle Miller subsequently was indicted and convicted in federal court on charges of accepting illegal payments while acting as the investment adviser for the union pension funds. The illegal payments that led to his conviction were not connected to the Mercado transaction.Miller is serving a 37-month prison sentence in a Las Vegas-area federal prison.Responding to the governor's threat to sue, New Times editor John Mecklin says, "I take all threats of litigation seriously. But our story was accurate and thoroughly documented, and Mr. Symington and Mr. Coppersmith are just plain wrong on the facts.

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John Dougherty
Contact: John Dougherty