Sean Werdlow called questions about his relationship with Suzanne Shank and his City Hall exit a 'low blow and cheap shot.' (Christine M.J. Hathaway)
City lawyers trying to terminate a $1.4 billion pension deal blamed for plunging Detroit into bankruptcy want to question the deal’s architect, a former Kwame Kilpatrick appointee, about his relationship with a banker whose firm profited from the deal.
The lawyers want to know why Kilpatrick’s finance chief, Sean Werdlow, resigned in November 2005 and joined SBS Financial Products Co., which according to a lawsuit filed by the city was one of the municipal investment banks that engineered the pension deal. The firm was created by an investment bank headed by Suzanne Shank, who recently bought a 6,000-square-foot, multimillion-dollar home with Werdlow.
A lawsuit, bankruptcy documents, divorce files and interviews shed light on the deal and two powerful people whose relationship has drawn attention on the sidelines of the biggest municipal bankruptcy in U.S. history.
The deal dates to 2005 and injected $1.44 billion into the Detroit pension funds. Soon after it closed, Werdlow resigned from City Hall in November 2005 and joined Shank’s bank.
“The timing of Mr. Werdlow’s move ... raises questions,” said Bill Nowling, a spokesman for Detroit Emergency Manager Kevyn Orr. “This is not a suggestion of any wrongdoing.”
A source told The Detroit News that the relationship between Werdlow and Shank, who have been photographed arm-in-arm in the society pages of Hour Detroit magazine, is of interest to the city in connection with Detroit’s lawsuit filed last week to terminate the pension deal.
Werdlow called questions about his relationship with Shank — and his departure from City Hall — a “low blow and cheap shot” and said the public is looking for a scapegoat in light of the failed pension deal.
He defended the deal, saying it was vetted by City Council, the city’s pension funds and lawyers. SBS was one of 12 banks involved in the deal, he said.
He also told The News he has been dating Shank for a year and they have been open about their relationship.
“Going back to 2005: She was married at the time and so was I,” Werdlow said late Thursday. “It was nothing but a professional relationship. It’s not like we’ve been carrying around some scandalous secret here.”
Shank could not be reached for comment Thursday.
Werdlow, 46, was Kilpatrick’s handpicked finance director, hired away from his job as vice president and treasurer of the Detroit Medical Center in 2002.
George Orzech, a longtime trustee on the city’s Police & Fire pension board, said Werdlow initially had a good relationship with board members, but that soured once he started discussing the pension deal.
“The shenanigans started. He wanted to control the pension system,” Orzech said. “Our business relationship ended. They were heavily motivating us to do this (deal) — Sean was.”
A complex deal
In 2005, under Werdlow’s leadership, Detroit borrowed $1.44 billion from investors through a financial note called “certificates of participation,” or COPs. The deal was designed to pour money into the city’s two pension funds.
“Werdlow was one of the people pressuring us to vote for this,” former City Councilwoman Sharon McPhail told The News.
The pension debt deal was made more complex by an interest rate swaps deal layered on top of $800 million of the debt. The city traded a variable interest rate for a fixed rate in a swap involving Shank’s firm, SBS Financial. The swaps initially gave Detroit lower borrowing costs.
But when prevailing interest rates plummeted in 2008-09, Detroit’s annual payment ballooned from an estimated $5 million a year to $50 million.
McPhail fought the pension debt financing deal, holding it up for weeks in early 2005 until the Kilpatrick administration secured enough votes. She called the deal a “manufactured emergency.”
“It looked to me that it was going to be a problem and people weren’t telling us the truth … about the risk that was involved,” McPhail said of the pension debt deal.
Orr’s legal team now contends the trust funds and service corporations used to funnel the money into the pension funds were a “sham” and “conduits” designed to bypass the city’s statutory debt limits.
Orr has asked U.S. Bankruptcy Judge Steven Rhodes to invalidate the entire deal, contending the service corporations’ contracts with the city were illegal and can be torn up in the city’s reorganization. That could leave the investors and insurers of the debt on the hook for $1.4 billion that’s already been invested by the retirement systems, which could end up becoming the beneficiaries of an illegal transaction.
“The 2005 financial transaction plaintiffs attorneys are referring to as a sham in their lawsuit was not only fiscally necessary, but was reviewed and vetted on numerous levels including rating agencies Moody's and Standard and Poor's, but also well respected law firms upon which the city, underwriters and swap counterpart(ies) all relied,” said Tom Butler, a spokesman for Shank’s company, in a written statement.
Orr’s spokesman said the city’s legal team would explore the motives of all the players and companies involved in the transaction, should the lawsuit proceed to the evidence-gathering discovery phase.
“We’re going to vigorously pursue the city’s rights and we think that was bad debt and the city didn’t have the right to do that,” Nowling said.
Michael Greenberger, an expert on derivatives at the University of Maryland’s law school, said the apparent revolving door Werdlow took from City Hall to SBS Financial smacks of “an inside deal for somebody representing the citizens of Detroit who belied his fiduciary responsibilities ... to further his own personal gain.”
Werdlow worked in finance and banking before City Hall and was involved with deals with almost every bank on Wall Street, he said. He added he always planned on serving one term under Kilpatrick and returning to the finance and banking industry.
It would have been impossible to leave City Hall and find a job at a bank that didn’t do business with Detroit, Werdlow said.
“There is no place I could have gone to get a job,” he said.
Shank’s firm allowed him to stay in Detroit and return to investment banking. After his move, he had a two-year “cooling off” period in which he was not involved in any Detroit deals, he said.
His firm made less than $2 million on the Detroit pension deal, he said.
Werdlow’s fortunes have improved dramatically in the nine years since he pushed the city to approve the pension deal.
He rose from being a $140,000-a-year appointee at City Hall to a financial executive who collects almost $700,000 a year in compensation and amassed a collection of four luxury cars and expensive watches, according to public records.
After the deal was approved in 2005, Werdlow resigned that November and, according to court records, joined SBS Financial Products Co. The firm was created by Shank’s company to handle complex interest-rate transactions for municipalities.
Today, Werdlow is senior managing director and chief operating officer of Siebert Brandford Shank & Co., which provides municipal underwriting and financial advice to state and local governments across the U.S. The firm is headed by Shank and has headquarters in New York City and Oakland, Calif.
Shank, 52, also is a director of the Detroit Institute of Arts. In March 2011, she divorced Darrell Burks, an accountant who was appointed in 2012 to an advisory board overseeing the city’s finances.
Werdlow’s finances were detailed in a contentious divorce fight. Werdlow filed for divorce in July 2012 after being married to wife Pamela for 14 years. She could not be reached for comment.
“(Werdlow) is in total control of the couple’s wealth, which includes investments, retirement accounts, bank accounts, real estate, a collection of expensive watches and four fully-paid vehicles,” her lawyer wrote.
Werdlow owned a 2006 Range Rover, a 2002 Corvette, a 1997 Mercedes-Benz sedan and a 2010 Porsche Panamera, according to his divorce file.
In September, seven months after his divorce, Werdlow and Shank bought a 6,250-square-foot European-style home in Bloomfield Hills.
The luxury home has five bedrooms, seven baths, a designer kitchen “with premium everything,” wine cellar and pool, according to the real estate listing.
The home was listed for $2.45 million in May and sold to Werdlow and Shank for an undisclosed amount.
Public records show Werdlow and Shank took out a $1.6 million mortgage on Sept. 6.