What Ropes & Gray law firm’s real estate funds partner Matt Posthuma labeled “a one-off for the industry” lawsuit that Dallas Police and Fire Pension System (DPFP) filed against its former real estate consultant the Townsend Group (Townsend) is worth our attention from an investor relations perspective.
Meghan Morris of Private Funds Management, one of the world’s trusted news sources in private equity, indicated it is widely believed terminating a contract with the real estate consultant is a bitter pill to swallow. For “the fairly close-knit” nature of the real estate management world as Posthuma said, investors hesitate to risk their reputation in the long run. Moreover, it’s challenging to provide proof of fiduciary duty breach in court. Nonetheless, this is not the case here.
Background
On Aug 31, 2017, the public pension fund and a political subdivision of Texas, DPFP, filed a lawsuit in the District Court of Dallas County, Texas, alleging Townsend, its two principles – Richard Brown and Martin Rosenberg, and former external general counsel Gary B. Lawson of FisherBroyles LLP – four primary breaches: “failure to advise DPFP to diversify its investments to minimize risk of large losses, failure to assess the ‘value added’ by each IM in its pursuit of investment strategies, failure to disclose material information to the DPFP Board, and failure to advise DPFP regarding overallocation of real estate investments,” according to the lawsuit.
The lawsuit states that Townsend expressly consented to diligently undertake its fiduciary duty to DPFP and earned over $2.5 million from October 2001 through February 2016. However, Townsend’s negligence and withholding of essential information caused DPFP’s loss of $580 million.
On Sep 11, 2017, real estate investment trust Colony NorthStar and current owner of Townsend, announced that the global consulting firm in risk, retirement and health, Aon Group, would acquire Townsend for $475 million, Morris wrote on Sep 12, 2017.
On Jan 2, 2018, Townsend announced Aon’s complete acquisition on its website.
Jess Krochtengel of Law360.com, a LexisNexis company, noted in October 2017 Townsend disputed DPFP’s claims and sought to divide the case. The real estate consultant accused the pension fund of ‘transparent gamesmanship,’ according to Krochtengel’s note. It also blamed that DPFP tactically litigated Townsend and former attorney Lawson together, which would jeopardize Townsend’s ability to move the case to federal court. On May 16, 2017, the Fifth Court of Appeals of Texas denied Townsend’s severance request, Krochtengel reported on May 22, 2018.
Later in May 2018, Townsend escalated its dispute to the Texas Supreme Court, seeking to separate the claims. Once again, in late July 2018, the Supreme Court denied Townsend’s request “[t]hat leaves intact a lower appellate court ruling,” according to Michelle Casady of Law360.com on July 27, 2018.
A closer look
Dallas Hub Editor Tristan Hallman noted in September 2017 that following the unsatisfactory $2 million settlement offered by CDK Realty Advisors, an investment manager selected by Townsend and under its purview, DPFP filed the lawsuit. As DPFP lawsuit indicates, Townsend, its principles and Lawson failed to fulfill their duties as a prudent consultant and legal counsel in monitoring, supervising, and advising DPFP in investment strategies, specifically in diversification and risk mitigation in a timely manner. Consequently, DPFP suffered severe losses of $580 million due to overallocation in various risky and incomplete projects in Idaho, Hawaii, Texas, Arizona and California, to name a few.
Obviously, a series of breaches by Townsend, its principles and Lawson boil down to a lack of communication and upholding a code of ethics.
The pension fund pointed out in its lawsuit that had Townsend conducted an independent and extensive due diligence study and communicated the findings of the study to DPFP, millions of dollars would have been saved “for the loyal and hardworking police officers, firefighters, and their families.” By not conducting due diligence on investments, it’s not unfair to say that Townsend misled the pension fund with inaccurate and unreliable data. The lawsuit states, “Townsend bragged to the Trustees about the terrific above market returns of the DPFP real estate portfolio, advising them that the real estate portfolio was ‘well diversified geographically’ despite 28% of the entire real estate portfolio being invested in undeveloped dirt (most of it outside of Boise) – at a time when DPFP was over-allocated in undeveloped land by 13%.”
Clearly, misleading and withholding material information for investors to make informed decisions is extremely unethical, especially when it leads to huge financial losses to investors. The lawsuit indicates, “For years, Townsend allowed investment managers under its oversight to run amok, plowing DPFP funds into wildly inappropriate investments, disclaiming their statutorily mandated fiduciary duties and over-allocating funds toward investments in real estate.”
This shows that Townsend’s management didn’t embrace public relations principles and maxims. Based on the definition of public relations accepted by professionals and academics – a strategic management function using two-way communication to maintain mutually beneficial relationships – it appears that the relationship between Townsend and DPFP was one-sided. Townsend prioritized its profit over the pension fund’s interests. Ironically, the real estate consultant feared to lose the lucrative relationship with DPFP by not communicating with the investor when it should.
Analysis
First and foremost, what happened during Townsend’s 15-year tenure as a consultant to DPFP reflects that Townsend didn’t utilize the RACE model – Research, Analysis, Communication and Evaluation – in its practice. Neither did the consulting firm conduct thorough research and due diligence where necessary to anticipate and define specific problems in ‘value-added’ investments, nor did it analyze and plan appropriate investment strategies for the pension fund. As DPFP pointed out, Townsend failed to communicate, monitor, supervise and advise the investor in a timely manner. Finally, Townsend didn’t conduct an evaluation to determine whether to change investment strategies to minimize risks for DPFP.
Let’s have a look at Townsend’s leadership on its website. It appears that Townsend doesn’t value communications to nurture investor relationships. There is not a leader dedicated to communicating and building relationships with investors. Those partners who are involved in client relations, namely Micolyn Magee, Jennifer Young Stevens and Jeff Barone, seem to juggle their schedules among other responsibilities such as (i) portfolio analysis, (ii) strategic planning, (iii) investment planning, (iv) manager/fund due diligence, (v) performance measurement,
(vi) office management and oversight, (vii) acquisition, disposition and financing recommendations, and so forth. This probably explains why Townsend didn’t practice two-way communication with its investors, particularly DPFP.
Clearly, Townsend didn’t utilize a number of great truths of public relations (PR) that Center et al. (2014) highlighted in their book Public Relations Practices: Managerial Case Studies and Problems (Eighth Edition), specifically:
Truth #1 – The long-term security of the organization or product is far more important than short-term expediency.
>> Townsend didn’t factor in the risks when the consultant used unreliable data to advise DPFP to fund a series of real estate investments throughout its 15-year contract.Truth #4 – Planning and preparation are invaluable. When disaster strikes, it’s too late to prepare a crisis plan or build a legacy of trust.
>> Townsend’s practice reflects a lack of planning and preparation.Truth #5 – The value of research is inestimable.
>> $580 million loss during 15-year tenure doesn’t seem to be a result of research being taken into practice.Truth #7 – Communication must always follow performance. Act before you talk.
>> Despite its written consent in the contract with DPFP, Townsend failed to comply.Truth #8 – PR frequently turns on timing. Knowing when to act is as important as knowing what to do.
>> Townsend failed to communicate with DPFP on numerous occasions that could have reduced DPFP’s losses.Truth #9 – If your client, product, or organization is challenged: (a) Don’t ignore the challenge, (b) If the challenge is unfair, fight back as hard as you can, (c) If the challenge has merit, fight for corrective action.
>> It wouldn’t have been too late if Townsend hadn’t feared to lose the lucrative relationship with DPFP by not communicating with the pension fund earlier.Truth #12 – PR has to be involved from the beginning to have maximum impact.
>> Townsend didn’t seem to value the relationship with DPFP by practicing two-way communication in an ethical manner.Truth #13 – Full and complete disclosure and communication is the best way to keep from getting greedy when entrusted with the public’s money.
>> Townsend did exactly the opposite by staying silent and withholding material information.Truth #14 – Doing the right thing is more important than doing the “thing” right. There is no such thing as “corporate” ethics. People are either ethical or they aren’t, and these people determine the ethics of an organization.
>> Despite the code of ethics described in Exhibit B of the Investment Consultant Agreement signed by Townsend and DPFP on Oct 1, 2004 (pp. 65-71 of the lawsuit), Townsend didn’t comply.Truth #15 – If you have to say something, the truth is always best.
>> While several projects remained undeveloped for years, Townsend failed to advise DPFP to change investment strategies by cutting losses and moving on.
Additionally, Townsend’s reaction to the lawsuit represents the consultant’s reactive approach instead of proactive. Townsend disputed the lawsuit and accused its investor. The news media are the only communication channel for the community to stay informed. Townsend took no further action to acknowledge its mistakes and what corrective actions it would take to regain trust from investors, the real estate industry and the community.
Until Townsend embraces the value of mutually beneficial relationships between the firm and its investors through two-way communication, it will most likely continue to cost the real estate consultant its reputation and additional financial loss.
Questions for discussion:
Do you think public relations principles and maxims are useful for IR professionals, particularly in real estate? Why and why not?
If you were an IR professional of Townsend, what are your next steps to help Townsend recover and grow stronger given that Aon Group completed the acquisition of Townsend in January 2018?
Any helpful input should be added to this case study?
I’m learning as much as you are, so please feel free to contribute under the comment section below.