A Hard Investment Lesson : TMI Story Shows Even Teachers Need Reminding About Risks

The teachers lounge at Commonwealth Elementary School in Fullerton seemed an unlikely place for financial wheeling and dealing. Visitors would most likely find teachers Louise Carmichael and Norma Elgas swapping stories about wayward students as they shared their brown-bag lunches.

But Carmichael was all ears one afternoon in 1972 when Elgas, a popular sixth-grade teacher, mentioned a Newport Beach investment company with the motto “Teachers Helping Teachers.” Elgas talked enthusiastically about Teachers Management & Investment Corp., a small company that was giving hundreds of Southern California educators access to the booming California real estate market for investments of as little as $1,000.

As many as 300 school teachers across California were moonlighting as part-timers for TMI, using low-key but effective sales pitches. Though Elgas was not an official salesperson, she did not hesitate to talk about her success investing with the company.

“She just told me about TMI like you would tell someone: ‘Oh, Mervyn’s has some real pretty T-shirts,’ ” Carmichael said.

Carmichael, now 62, and her husband, Elmer, eventually invested $195,000 of their retirement money through real estate partnerships marketed by TMI. And, as California’s real estate market thrived in the ‘70s and ‘80s, the investments paid solid dividends.

But as real estate prices went sour in recent years, the returns have dwindled--or disappeared altogether.

Even Elgas, 67, now a retiree living in the San Luis Obispo County community of Arroyo Grande, said she has no hope of recovering $10,000 of her funds, as several of her TMI investments in raw land sit stagnant with no ready buyers for the properties.

Carmichael, also now retired, says she wonders whether the company’s motto should have been “Teachers Using Teachers.” In August, Carmichael and three other investors filed a civil lawsuit against TMI, alleging that the company is insolvent and has lost $100 million through fraud by its original and current owners.

The suit, filed in Orange County Superior Court, has prompted an investigation by the state Department of Real Estate. TMI’s owners deny any wrongdoing, blaming the troubled real estate market.

As many as 60,000 teachers invested their money in TMI properties since the company was founded 27 years ago, though the company says that it has only 16,000 current investors.

This week, a judge may decide whether to remove control of TMI from its current owners and appoint a receiver who would act to preserve any remaining TMI assets.

Carmichael says she regrets her own role in steering peers toward TMI. “Teachers are so tired of making decisions for kids all day,” she says, “so sometimes we want to leave other decisions up to someone else, someone we trust. I feel badly because I recommended TMI to a lot of teachers. I wish I’d kept my mouth shut.”

Regardless of the outcome of the investors’ lawsuit against the company, the story of TMI offers lessons for those who might covet seemingly stunning returns enjoyed by friends or professional colleagues and who are prone to want to get in on the action themselves. It also offers yet another reminder that real estate is often riskier than it seems and that jumping unthinkingly on today’s hot investment bandwagon can put investors on a road to ruin.

For years, teachers had excellent reasons to talk up the company, which grew from an informal investing group led by Woodland Hills resident Donald J. Shroyer, now 73, who spent 31 years as a teacher and principal in San Fernando Valley elementary schools.

TMI incorporated in 1967 with $250,000 invested by nearly 200 teachers. The fund took a conservative approach, buying tracts of land that could easily be resold and shying away from riskier properties.

For nearly two decades, it surpassed its investors’ expectations.

During the go-go 1980s when real estate was king in California, TMI had no trouble assembling groups of profit-seeking teachers in hotel ballrooms, where the company would show slides, videos and charts promoting its various real estate opportunities.

To join TMI, a teacher would pay $1,000 for each unit stake in a partnership that would in turn pool investors’ funds to buy a real estate project--either a hotel, raw land, a shopping center or agricultural parcels--on the hope that the values would rise, even skyrocket.

Investors could pick which of many partnerships they wanted to join. To keep the property maintained, investors would pay an additional fee of about $75 every three months. When the land was sold, investors were to get their principal back plus hoped-for double-digit returns.

TMI hired expert accountants, lawyers and administrators to run the business, including real estate broker Robert W. Fitzpatrick, who became president in 1968. It hired hundreds of teachers to sell its partnerships. About 200 still sell annuities and other types of retirement investments for TMI Lifeplans, a company affiliate.

Although the moonlighting teachers rang up a $60 commission on every $1,000 partnership unit they sold, Shroyer was confident that the sales force wouldn’t oversell: “I thought that, if you’re going to be having coffee with the teachers the next day, you’d better not be putting them into anything bad.”

That connection--a company founded by teachers that employed teachers to sell exclusively to teachers--was the key to the young company’s growth.

Such a familial approach, though, sometimes lulls investors into a false sense of security, said Sanford R. Goodkin, a San Diego-based real estate consultant.

“Teachers, God bless them, are here to educate the brains of our children and doctors are wonderful in healing, but they are both lousy investors,” Goodkin said.

One of the early investors who profited was Jim McDonaldof Laguna Beach, a professor at Saddleback Community College in Mission Viejo, who still has $100,000 invested with TMI. McDonald, now 60, said he reaped returns of 300% on two of the more than 20 partnerships he joined.

He and others say that the only fair way to gauge TMI’s performance is to track how all of its various investments have performed over the years, rather than focus on the recent troubles of some of its partnerships. That the company had a successful record, in fact, was the main reason its part-time sales force was able to recruit so many other investors.

By the mid-1980s, cracks began to appear in TMI’s foundation and its management.

After receiving a 350-page complaint from former TMI employees and sales agents, the Department of Corporations in 1984 began a two-year investigation into TMI’s real estate fees and travel expenses, and into accusations that TMI’s former management made profits on land sales that should have gone instead to TMI investors. Officials concluded the investigation by ruling that there was no evidence of wrongdoing.

In the present case, the department has turned down requests by angry investors to investigate the current owners of TMI, though the current allegations are different from those of 1984.

About the same time as the earlier investigation, two TMI directors decided that they wanted to sell their 75% stake. TMI President Fitzpatrick arranged for Centennial Savings & Loan in Santa Rosa to buy it.

Within a year, though, the thrift was in financial trouble, and federal regulators took it over, along with its stake in TMI. Fitzpatrick, again scrambling for a buyer, turned to James R. Martin, a longtime Peat Marwick accountant who had been auditing TMI’s books, and entrepreneur Maurice B. Shuman.

The two businessmen combined a $4-million bank loan and $3 million in cash from Brentwood Associates, a Los Angeles venture capital group, to buy TMI in 1987.

Shuman and Martin said in a recent interview that because they did not think Fitzpatrick was in touch with the rapidly changing real estate market or familiar with new tax laws, they asked him to leave the company after the sale.

Fitzpatrick declined to be interviewed for this story.

Shuman and Martin are both accountants-turned-investment bankers who met in Seattle during the 1960s. The two longtime associates are experienced investors, having held stakes in everything from oil and gas partnerships to a gold mine, fishing boats, cattle and a wine importing business.

Shuman once made headlines in Washington state after officials forced him to pay $200,000 in restitution when a funeral home company he owned was charged in one of the state’s largest consumer fraud protection suits. Washington officials said Shuman had failed to abide by a state law requiring that his company set aside money in a trust fund for people who had prearranged purchases of cemetery plots.

Shuman and Martin, despite their long history of investing, said that neither they, Brentwood nor the investors realized when they took over TMI that the California real estate market was on the brink of a precipitous decline.

Some investors say that more than the real estate downturn is behind the company’s financial woes. The four who filed suit in Orange County blame Shuman and Martin for their losses, saying that the owners illegally used money from profitable properties to prop up losers. The investors allege in their lawsuit that the men commingled funds and siphoned off millions of dollars of investors’ money.

Maury DeWald, who is a partner with Irvine investment firm Verity Financial and served as volunteer chairman of the Los Angles County United Way campaign from 1991 to 1993, has nothing put praise for Martin and Shuman.

“Jim has always had a reputation as a resourceful, bright and knowledgeable guy,” DeWald said of Martin. “He’s advised any number of businesses in terms of operating and tax strategies.”

DeWald, who has known Martin since the 1970s when both men worked for accounting giant Peat Marwick, said the lawsuit “strikes me as disgruntled investors, and you have to question how many of them there really are.”

When Martin and Shuman bought TMI, DeWald said, “they went into it knowing that it was a long, tough road. . . . I think they simply wound up fighting fires they didn’t know existed.”

But Ron Rus, the attorney representing TMI investors in their lawsuit, thinks otherwise.

The owners “inherited these properties seven years ago, and they have had many opportunities to get out of the hot spots, which they declined,” he said. “But they continued TMI in order to collect quarterly assessments from the teachers and bleed the partnerships to perpetuate the scheme.”

Times librarian Sheila A. Kern contributed research for this report.

Troubled TMI’s Investments

Teachers Management & Investment Corp., founded to guide real estate investments by California educators, is the target of a lawsuit alleging fraud and conspiracy. A look at the company and some of its current investments.

* TMI AT A GLANCE

Founded: 1967

Headquarters: Newport Beach

Owners: James R. Martin and Maurice B. Shuman

Business: Real estate investment syndicate formed to help teachers supplement their retirement incomes

Lawsuit: A group of investors has filed suit alleging the company is insolvent. They seek the appointment of a receiver to take over management of TMI. Owners say the company is a victim of the real estate downturn. * TOP TEN INVESTMENTS

TMI’s largest current investments (in millions):

Development Location* Amount invested Marlboro Square Folsom $26.3 Park Mt. Vernon Colton 18.0 Valentine Concourse Fresno 14.9 Stockton Airport Industrial Stockton 12.6 Dublintown Dublin 12.5 Prado de las Posas Camarillo 12.4 Monarch Industrial Park Livermore 12.0 TMI Business Centre San Jose 9.9 Loma Rica Ranch Grass Valley 9.0 TMI Growth Properties ‘80** ** 8.9

* All in California ** Lincoln Building in San Diego and Newtown Shopping Center in Los Gatos Sources: Times reports, Teachers Management & Investment; Researched by JANICE L. JONES / Los Angeles Times