August 26, 2014 at 3:07 pm

Attorney: Alleged pension fund misdeeds should play no role in Detroit bankruptcy trial

Downtown Detroit (David Coates / The Detroit News)

Detroit — Alleged corruption and Detroit pension fund mismanagement that cost more than $1 billion is irrelevant and shouldn’t factor into the city’s bankruptcy trial next week, a lawyer argued Tuesday.

An attorney for the city’s two pension funds doesn’t want U.S. Bankruptcy Judge Steven Rhodes to consider the alleged misdeeds before deciding whether Detroit’s plan to shed about $7 billion in debts is feasible and fair. The lawyer asked Rhodes to block evidence about alleged mismanagement and misconduct from being admitted during a trial starting Tuesday in bankruptcy court.

Pension fund lawyer Robert Gordon on Tuesday said bond insurer Syncora Guarantee Inc., one of the city’s holdout creditors, is expected to argue during the trial that mismanagement and corruption weakened the city’s pension funds. Syncora has said the pension funds are being bailed out by Detroit’s debt-cutting plan at the expense of financial creditors.

Syncora is trying to blame retirees for the alleged prior mismanagement by some of their elected pension officials, Gordon wrote.

“This theory is desperate and absurd, as there is simply no factual or legal basis for it,” Gordon wrote.

Syncora has consistently criticized the “grand bargain” plan to pump $816 million into Detroit's pension funds. The money is a mix of private and public money.

Syncora has called the plan a “fraudulent” way to rescue city pensioners and preserve city-owned art at the expense of other creditors.

Before the grand bargain, pensioners faced steeper cuts to make up for shortfalls caused by bad investments and the great recession.

Emergency Manager Kevyn Orr has said mismanagement worsened the problem. Last fall, he cited several failed pension fund investments as a reason he was considering taking over the pension funds.

Despite the problems, Orr does not believe retirees should be punished.

“We also have to consider that, for the average pensioner, they have no culpability in those practices,” Orr told Syncora during a July 22 deposition.

Four former pension officials and businessmen indicted in a corruption scandal will stand trial in federal court Oct. 7.

The lead defendant is former Mayor Kwame Kilpatrick’s fraternity brother and city Treasurer Jeffrey Beasley. Beasley, former pension fund lawyer Ronald Zajac and two others are accused of scheming to defraud current and retired city workers.

The case, a spinoff of the corruption case that led to Kilpatrick being sentenced to 28 years in federal prison, includes allegations that pension officials loaned people more than $200 million after receiving free trips, bribes and kickbacks — including casino chips and a Christmas basket stuffed with cash.

The alleged corruption and bad investments cost the pension funds more than $84 million, federal prosecutors allege. The pension funds have taken about a $1 billion hit from distributing excess earnings to retirees and workers.

“It is premature to conclude guilt of any kind, and for the same reason, it would be purely speculative to attempt to quantify whether that any alleged bribe contributed at all or in any material way to any underfunding problems at the (pension funds), as the facts underlying those charges have not yet been adjudicated,” Gordon wrote.

Syncora’s allegations are a “sideshow distraction,” Gordon added.

“Syncora is slinging mud at the retirement systems with inflammatory and unfounded accusations in an attempt to prejudice the court against a party whom Syncora deems to have gotten a better deal,” he wrote.

rsnell@detroitnews.com
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