A pension fund mystery

MARK NICHOLS July 14 1986

A pension fund mystery

MARK NICHOLS July 14 1986

A pension fund mystery



For decades Canadian pension funds— currently with total assets of nearly $110 billion—have built an impressive record of cautious but profitable performance. In recent years demographic and economic changes have begun to alter some time-honored pension plan practices. As funds have become bloated with cash from a maturing workforce, fund managers in search of promising investments have increasingly turned to afield once largely shunned by pension plans— real estate. But the Canadian real estate market is also a powerful magnet for offshore investors seeking a long-term haven for their money—as well as for high-rolling speculators in search of quick profits. Ás a result, pension fund managers have become players in a highly competitive and sometimes risky marketplace.

In a dramatic example of the potential hazards of real estate investing, Montreal-based Bell Canada Enterprises Inc.(BCE) has become embroiled in lawsuits and a wide-ranging internal investigationfollowing the collapse of a multimillion-dollar real estate deal between BCE pension funds and a Toronto development firm earlier this year. Intriguingly, several of the people contacted by

Maclean’s reporters during a threemonth investigation said they feared for their safety as a result of recent events in the real estate business.

The Maclean’s investigation uncovered details of a series of property deals that provide a fascinating insight into the arcane world of real estate speculation—and the BCE telephone and telecommunications conglomerate's unusual involvement in it. The property transactions were handled by way of numbered companies, which is a customary practice. In one case, questions remain about the ultimate disposal of a $9.1million profit that apparently was realized in that transaction.

Neatly trimmed lawns, a backdrop of trees and nearby parkland provide a sylvan setting for the austere concrete and glass office blocks at 220 and 240 Duncan Mill Road. But the location, in an isolated commercial corridor that runs through the Toronto sat-

ellite city of North York, is unpopular with many who work there. Rush-hour traffic is extremely heavy on the highways that crisscross the area, and there are few shops or restaurants. When the two buildings were sold last September for a total of $23.1 million, that price seemed reasonable in an area that some real estate experts consider to have an uncertain future. But the speculators who bought the buildings were convinced that they could make money on the deal—and they did. Three months later they sold the properties for $32.2 million. The purchaser: Bimcor Inc., a BCE subsidiary that manages the roughly $6 billion worth of investments for the pension funds of BCE and its subsidiaries.

As a venture into the world of speculative real estate, the Duncan Mill Road investment appeared to be at odds with the meticulously cautious approach to investment followed by most pension funds. But that was only one of the puz-

zling elements in the deal. At the heart of the mystery was the profit ostensibly earned by the owners who flipped the properties—a group that included Toronto stock trader Andrew Sarlos and two others. On paper, they appeared to have cleared a $9.1-million profit. But some participants in the deal told Maclean's that Bimcor apparently transferred as much as $7 million of the purchase price into a reserve account to provide income to the pension fund if the buildings failed to attract tenants. But another participant in one of the transactions,

Peter Anker, then president of the development firm Markborough Properties Ltd., said,

“There has to be something to justify that higher price.” Still another participant in the deal told Maclean's: “I know what you are thinking. I hope you are not right.”

According to one investor in the deal, the idea of buying and reselling the Duncan Mill Road properties originated with a North York real estate entrepreneur, Lou Charles. Convinced that the Duncan Mill buildings could be bought cheaply and resold for a profit, Charles approached Sarlos, a brilliant Toronto arbitrageur—a high-risk, high-profit stock speculator.

With his partner in Sarlos & Zukerman Ltd., Barry Zukerman, Sarlos makes investments on behalf of the Reichmann family and other wealthy Canadians. Intrigued by Charles’s proposal, Sarlos approached a Toronto real estate investor and consultant, Ronald Graham, who reportedly agreed that the two Duncan Mill properties were a sound investment. Sarlos decided to help finance the deal, and it went ahead.

The owner of the building at 220 Duncan Mill Road was Markborough Properties. In a recent interview Anker, Markborough’s president at the time of the sale, told Maclean's that he was mystified by some aspects of the deal with Sarlos’s group. Anker said that during negotiations, he gained the impression that Bimcor was to be the final purchaser of the Duncan Mill properties. When he asked why the transaction was going through middlemen, he said Charles told him, “This is the way Bell does it.” According to another participant, the Sarlos group agreed during negotiations with Bimcor to take a profit of between $2 million and $3 million, while $6 million to $7 million would be set aside by Bell as a contingency fund for the properties. But real estate experts consulted by

Maclean's said that such an arrangement would be unusual, if it meant that Bimcor was assuming the risk of buying an expensive property without an assurance of future tenants. If, indeed, the deal provided for such a contingency fund, Bimcor may have paid as much as $80,000 in Ontario land transfer taxes that it otherwise could have avoided. For their part, officials at BCE repeatedly refused to discuss the transaction with Maclean's.

At the Montreal headquarters of Bimcor, BCE’s accountants, Touche Ross & Co., have been carrying out a sweeping audit following the collapse last January of a deal involving a former Simpsons Ltd. warehouse property located in North York. But insiders also told Maclean's that Bimcor directors had already asked the Toronto accounting firm of Peat Marwick Linquist Holmes to send in investigators to examine the management of pension funds at Bimcor and other BCE subsidiaries, including the pension fund for BCE’s manufacturing arm, Northern Telecom Canada Ltd. The BCE lawyers intervened at the last moment to prevent Bimcor from spending $63 million for the former Simpsons warehouse property. The lawyers were concerned that Bimcor had agreed to acquire the

20-acre property from a development firm, Maron Land Development Inc., on the same day that the developers were scheduled to buy it for $35.5 million—a transaction known in real estate circles as a “flip,” which in this case would have netted Maron a quick profit of $27.5 million. BCE then suspended and subsequently fired “with cause” Bimcor’s $425,000-a-year president, Selim Anter, and its vice-president in charge of real estate, Christopher Morgan. Last month BCE appointed a new president of Bimcor—John Hilliker, former chief executive officer of Genstar Financial Corp., a subsidiary of San Francisco-based Genstar Corp., a financial, real estate and building conglomerate.

BCE is clearly alarmed by the possibility of serious irregularities in its pension funds. David Orr, an assistant vice-president for corporate relations at BCE, told Maclean's that the company gave the auditors an “open commission.” He added, “We told them, ‘Go ahead and look at everything and anything until you feel you are satisfied on the details of all transactions within the activities of Bimcor,’ which extend across a number of areas.” Orr also insisted that “in no sense is there any suggestion of the security of people’s pensions being imperilled—absolutely none at all.” He declined to say whether investigators had found evidence of mismanagement or fraud. Said Orr: “I’m not even sure we’ve come to any conclusions on that yet.”

Maclean's has learned that g concerns about pension fund £ management—particularly in the Northern Telecom fund— had hardened over the past 18 months within the Bell organization. At the same time, bitter internal feuding broke out last year over a decision to let Bimcor take over management of the Northern Telecom fund. Last summer Bruce Craig, who since 1979 had spearheaded Northern Telecom’s aggressive real estate activities as assistant vicepresident, pension funds, left over policy differences. Craig now works as a real estate consultant for the Ghermezian brothers’ Edmonton-based Triple Five Corp. Ltd., a development company that built, among other things, the West Edmonton Mall. He was replaced by Morgan, who moved to Bimcor after it officially took over management of the Northern fund at the beginning of this year.

According to former executives of Bimcor and Northern, one senior North-

ern executive who resented losing control of the $1.1-billion pension fund to Bimcor vowed to “get” Anter. As well, they said that Anter had an abrasive personality and a penchant for lavish living which offended other executives. But according to Anter, Bell officials simply did not understand the real estate business. “Bell is in the simple business of running a telephone company,” Anter told Maclean's. “When you get into a fierce real estate battle, it’s another world.”

The first outward signs of BCE’s problems surfaced in March, soon after Maron had filed a damage claim for $30 million in the Supreme Court of Ontario over the aborted Simpsons property sale. A spokesman for Maron told reporters in March that the firm was entitled to make an extraordinary profit in the sale to Bimcor because it had arranged for the Simpsons site to be developed as a shopping centre. The centre was to be built around the first Ontario outlet of Super Carnaval Food Stores Ltd., a chain of high-volume supermarkets operated in Quebec by Joseph Burnett, a billionaire Toronto land developer and food wholesaler.

Burnett, 50, is currently on trial in the Ontario Supreme Court in Newmarket, Ont., on charges that he and a company allegedly controlled by him evaded more than $2 million in income taxes between 1971 and 1974. The Crown has alleged that Burnett concealed income in bank accounts and bookkeeping entries in the name of John Pullman. The Crown has also introduced evidence in the Newmarket trial to show that Pullman, who died last year, has been linked with the notorious U.S. crime figure Meyer Lansky. Burnett has denied that he had any links with Maron. However, Maron’s president, Henry Federer, was once vice-president of a firm headed by Joseph Burnett’s brother Jack. As well, Super Carnaval Food Stores had lent Maron $8.5 million to help make the original purchase of the Simpsons warehouse site.

Despite Maron’s claims, some real estate experts say they are skeptical that its development plans were enough to justify a $27.5-million price increase. According to the president of a Toronto real estate investment firm, the original price of $35.5 million that Maron paid for the property was fair, if “a little aggressive.” But the value added before the aborted sale to Bimcor—the shopping centre arrangements—should have justified only a “marginal increase, say to $40 million” rather than the $63 million Bimcor was ready to pay. Last week, five months after that deal collapsed, the property was still for sale.

Investigators examining the deal have, in any case, lost one valuable source of information. In March, Garry

Smith, 47, a corporate lawyer with the prestigious Toronto firm of Weir and Foulds, was found dead at the bottom of an empty swimming pool in his partly converted downtown Toronto home. At the time Smith, who in the past has

represented Burnett, had been acting for Maron. His body was discovered a day after he was quoted in Toronto newspapers concerning the lawsuit. Toronto police immediately launched an

investigation, but last week they told Maclean's that they had not yet decided whether Smith, known to be a heavy drinker, died accidentally or was a victim of foul play.

BCE, in a statement of defence filed

before the Supreme Court of Ontario in April, described Maron’s proposed deal with Bimcor as “unconscionable.” It declared that company senior executives would not have approved the deal if they had known of the involvement of “the

Burnett family, its associates or related corporations as vendors.” That statement puzzled some observers, because BCE’s subsidiary Northern Telecom is a part-owner of Burnett-operated shopping plazas in Quebec and the Maritimes.

For his part, the 42year-old Anter, in a separate action filed last month, claimed that his dismissal by BCE was “arbitrary, malicious and totally without just cause.” He is demanding almost $6 million in compensation for wrongful dismissal as well as damages and costs. A Turkish-born money manager who joined Bell Canada as a financial analyst in - 1969, Anter became man| ager of Bell’s pension % fund in 1978 and in 1982 g was named the first preso ident of Bimcor, the newí ly created firm set up to ü manage investments for 5 the pension funds of Bell and other subsidiaries. — As head of Bimcor, Anter engineered BCE’s takeover last year of the cash-starved Vancouver property development firm Daon Development Corp. (now BCE Development Corp.).

In his statement of claim, Anter said that when he arrived at his Montreal

office on Feb. 3, he was summoned to the BCE boardroom and told that he was being suspended with pay during an investigation “of certain real estate transactions involving alleged substantial profits for vendors”—suggesting that there was more than one problem deal. Anter’s statement also noted that in addition to his base salary in 1985 of $160,000, he earned $105,000 in bonuses and another $160,000 in benefits.

But before the aborted Simpsons warehouse deal triggered stern action by BCE senior management, senior BCE executives had begun to register their concern. According to industry sources, BCE chairman Jean de Grandpré was annoyed when a Bimcor property deal in downtown Montreal led to a public embarrassment for the corporation. A proposal to build a $200-million head office on land assembled at the prestigious corner of Sherbrooke and Crescent Streets ran into strong opposition from antidevelopment groups and was shelved last January. In the meantime, senior Bell executives began taking a closer look at other real estate investments.

“There was a long list of properties we were worried about,” a BCE director told Maclean ’s. “There was a string of real estate transactions that were bought by the same individuals and companies and sold a few months later.

We had to do something.”

By then, said an executive who had worked under Craig and Morgan at Northern Telecom but who has since left, the mood of suspicion in the company had created “a definite air of paranoia.”

In its investigations,

Maclean's learned of a number of real estate investments by the two funds that appeared to reflect a higher element of risk than is customary for pension funds:

• In late 1983 the Northern Telecom pension fund paid $25.5 million for a one-third interest in a small city block in downtown Calgary, while the recession was causing property values in Western Canada to plummet. The property was purchased from Family Life Assurance Co. (now Sovereign Life Assurance Co. of Canada) which, in an internal transaction with a subsidiary a year earlier, put a price of only $10 million on the whole block. Northern later increased its interest in the property, which comprises three buildings

and a parkade, to 50 per cent. “The present prospects for that land,” said Dennis Swan, manager for Knowlton Realty Ltd. in Calgary, “do not in my opinion justify the price paid in 1983.” • In May, 1985, Bimcor and Northern were major participants in the $16.3million purchase of a Burnett-operated shopping market at Thornhill, Ont., north of Toronto. Real estate experts, including former Northern Telecom employees, told Maclean’s that the two funds took a majority interest in the property, which was losing money at the time. A Toronto real estate analyst said the business community “just went nuts over this deal,” adding, “It was a very high price to pay for a shopping centre with a history of problems.”

• In 1984, Northern —operating through a subsidiary now called Norpen Realty Corp. Ltd.—bought shopping malls, or interest in malls, in Kamloops, New Westminster, Chilliwack, Smithers and 100 Mile House, B.C. A firm owned by Thaddeus (Ted) Charne, a Winnipeg property developer with extensive interests in British Columbia, manages all the malls. As well, Charne’s company was a partner in developing Chilliwack Centre Mall, which subsequently went bankrupt and was sold by the receivers to Norpen. Real estate experts believe that, with British Columbia’s forestry and mining industries depressed, the five malls are likely to yield incomes in the range of between six and eight per cent over the next five years—

below normal pension fund expectations of roughly 12 to 15 per cent.

Charne has been involved in six of Northern’s B.C. real estate deals. Norman Tam, a director and part owner of Arix Realty Corp. of Vancouver, has also figured in at least five of the deals. Real estate executives told Maclean's that the Bell and Northern funds relied on certain middlemen to an unusual extent—a practice pension funds traditionally do not follow. “It is unnatural,” noted a Toronto real estate expert. “No institutional investor should have that close a relationship with a single agent. Northern had its own expertise.”

The outside auditors examining the records of Bimcor and the Northern Telecom fund may ultimately decide that the funds’ affairs are in order. In the real estate marketplace, as in any other, a property is worth as much as a buyer will pay—and estimates of worth can vary widely on the basis of differing calculations of what the future may hold. If the auditors do determine that Bell pension fund money was spent inadvisedly, it would not be employees and pensioners who would be hurt; rather, it would be the 345,000 shareholders in BCE, the most widely held publicly traded company in Canada. The reason: the company’s pensions are defined benefits plans which require an employer to make up for any shortfall.

Meanwhile, the Bell fund has been performing impressively, with an average annual growth of 25 per cent to the end of 1985, compared to an industrywide average of 20 per cent. Performance figures for Northern’s fund are closely guarded by the company. David Kendall, a vice-president and treasurer at Northern, would only tell Maclean’s: “There is nothing wrong with the way the pension plan is performing. It has met all of our objectives.”

Still, in the aftershock of the events at BCE, some pension funds have begun to take a second look at their real estate portfolios. The firings at Bimcor, said Philip O’Brien, president of Montreal’s Devencore Inc., have “put a damper on what was a growing market of pension funds becoming involved in real estate. Other pension fund managers have become very cautious about real estate. They know their own futures are at stake.” But even if fund managers are feeling nervous, pension experts say they doubt that other major funds are encountering problems like BCE’s. Said Donald Coxe, research director with Toronto-based Gordon Capital Corp.: “This is not the tip of the iceberg.”