Legal bill to defend ex-pension staffers nears $500,000
The state’s legal tab is nearing a halfmillion dollars to defend four former high-level Public Safety Personnel Retirement System employees who alleged wrongdoing over real estate investments and then were sued by Scottsdalebased Desert Troon, which managed those properties.
The cost to taxpayers is expected to rise, as the 3-year-old case has no trial date set and Troon has declined to negotiate on settlement offers from the state’s risk-management division, according to an attorney representing one of the exemployees.
The risk-management division is the agency responsible for paying the PSPRS legal bills from state funds.
“We have no idea what the endgame is. The ball is in Desert Troon’s court. We don’t know what they want,” said Scott Zerlaut, who is defending former PSPRS investment manager Paul Corens.
Troon sued Corens in May 2014 in Maricopa County Superior Court, along with ex-investment managers Anton Orlich and Mark Selfridge and former PSPRS in-house counsel Andrew Carriker. While employed at PSPRS, they all raised questions about
the valuation of real-estate assets managed by Troon.
All quit between June and September 2013.
Their concerns triggered a federal criminal investigation into whether trust managers improperly used inflated values for poorly performing real-estate investments in order to trigger PSPRS staff bonuses. The U.S. Attorney’s Office later cleared PSPRS of any wrongdoing and no charges ever were brought against Troon. The trust, however, altered its bonus program.
Troon’s suit accuses the four former PSPRS workers of engaging in a conspiracy to defame and falsely disparage senior management at Troon and the pension system. The four have denied the allegations.
The state risk-management division’s cost to hire private lawyers to defend the four ex-employees and to engage in settlement negotiations was $464,275 as of Aug. 1, according to documents The Arizona Republic obtained under the Arizona Public Records Law.
Megan Rose, a spokeswoman for the Arizona Department of Administration, said the state is required by law to provide legal coverage “for employees acting within the course, scope and authorization of their employment.”
Mike Parrish, a private attorney hired by the state to work on settlement negotiations with Troon, declined comment.
Bill Richards, an attorney for Troon, also declined comment. But he issued a statement saying, “Desert Troon looks forward to seeing itself fully vindicated of the false and defamatory statements made about it, and having its good work for PSPRS and its beneficiaries affirmed.”
PSPRS had previously sued Orlich — one of the men the state is defending against Troon’s lawsuit — in a related matter in Maricopa County Superior Court. The trust accused Orlich of stealing sensitive internal documents when he left PSPRS.
Orlich argued that he had permission to take the documents and that he took them out of concern that they would be destroyed. Orlich was never charged with a crime, but was forced to return the records.
That civil case was dismissed in late 2015, after PSPRS unsuccessfully sought monetary and punitive damages from Orlich. The trust spent about $575,000 in legal fees, but Orlich did not pay any money to the trust.
The pension system for police officers, firefighters, politicians and correctional officers has had a business relationship with Troon since the mid-1990s, when the retirement plan began investing in local real-estate ventures.
Troon manages two companies in connection with PSPRS. One is a joint venture, while the other is a wholly owned subsidiary of PSPRS that was formed to assemble and sell distressed real-estate assets, according to PSPRS records.
The investments have been primarily in Arizona, with smaller investments in Utah, Colorado and Texas. They include golf courses, strip malls, lifestyle residential properties and retail centers.
Trust annual reports show those investments have lost value since fiscal 2009, when the real-estate market crashed locally and around the country.
In November 2011, PSPRS invested an additional $29 million in Troon-managed properties to pay recourse debt because those properties had lost so much value and were in danger of default.
By fiscal 2016, the most recent records available, PSPRS had made investments totaling $356 million in Troonmanaged properties. Records show they were worth nearly $196 million, for an “unrealized loss” of $160 million to the trust.
An unrealized loss occurs from holding onto an asset after it has decreased in price, rather than selling it and realizing an actual loss. PSPRS officials have said the strategy is, at some point, to sell the properties to preserve the trust’s equity interests.
While PSPRS has reported in its annual reports that Troon-managed real-estate investments have lost tens of millions of dollars in value, it has paid at least $10.9 million to Troon in management fees since April 2014, records show.
Christian Palmer, a PSPRS spokesman, said real-estate management fees are used to improve properties and maintain or enhance operations. He said they are not necessarily tied to the appraised value of properties, although properties would dramatically lose value if maintenance was discontinued.
The pension system declined to disclose its management contract with Troon, citing a state law defining such contracts as confidential, proprietary and not subject to disclosure under the Public Records Law.
Though the trust lost value in its Troon-related investments, its overall performance significantly improved this past fiscal year.
The roughly $9.3 billion trust is expected to make a 12.5 percent net rate of return on its investments.
But PSPRS still has less than half the money it needs to pay all liabilities. This has caused government employers to make larger contributions to the system.