particularly where as here money from one entity is used to support the other. Mr. BLILEY. Going back to the debentures for a minute, to what other claims were these debentures subordinated? Mr. HYNES. All claims. They are basically guaranteed by the holding company in general. There is no property associated with it or anything else. Mr. BLILEY. Just the faith and credit of the holding company? Mr. BLILEY. I understand that the SEC as you have testified, is responsible only for insuring that there is adequate disclosure in a real estate limited partnership rollup prospectus. It does not judge the merits of the deal; is this correct? Mr. CHAFIN. That's correct. Mr. BLILEY. Who is responsible for judging the merits of the deal then in a limited partnership of this type? Mr. CHAFIN. In this type, literally the only regulatory Agency responsible for judging the merits was the Federal Home Loan Bank Board or the Office of Thrift Supervision, but they were judging it from the merits of the bank. They want to make sure that the bank is not fleeced or left hanging out there because they are trying to protect the taxpayers behind these banks. Investors are protecting themselves. Mr. BLILEY. That's right. It is strictly caveat emptor. Mr. CHAFIN. Exactly. Mr. BLILEY. What kind of fees did they collect? You mentioned something about fees for doing this. I assume that they charged a fee for offering this so-called window of opportunity. Mr. CHAFIN. The fees we were talking about were from the genesis of the partnerships, handling the administrative fees, the general partner's fees, et cetera, et cetera. Our calculation indicates of all 11 partnerships we are talking somewhere in the neighborhood of $60 million. On the one set of partnerships that were rolled-up, our analysis indicates that we are talking $15 million. On the four that are currently being proposed, that the investors had put in $113 million, the fees are somewhere between $25 and $30 million, a quarter of the investment. Mr. BLILEY. While the real estate or the investment of the limited partners was going from $62 million down to $6 million; while the bank was going from a healthy bank to a marginal bankMr. CHAFIN. Actually, the bank has gone from unhealthy to a little better, but unhealthy. Mr. BLILEY. OK. It lost money, right? Mr. CHAFIN. Right. Mr. BLILEY. In the last 2 years. Mr. CHAFIN. It has earned a profit this first quarter. Mr. BLILEY. What kind of salary did Mr. Levan draw from the bank and the holding company for this less than sterling performance? Mr. CHAFIN. Mr. Levan was drawing a salary from the bank of approximately $375,000, drawing a salary from the holding company upwards of $600,000-we are getting pretty close to $1 million and for several years his wife was also drawing a six-figure salary that made the family income Mr. BLILEY. What was her duties? Mr. CHAFIN. Rich, her title? Mr. HYNES. I think she was Executive Vice President. Mr. CHAFIN. The family income pierced $1 million annually. Mr. ROWLAND. Thank you, Mr. Bliley. You testified that some of the limited partners called the debentures junk bonds. Yet, the debentures issued in 1989 pay only 10 percent interest currently. It's my understanding that junk bonds pay a very high rate of interest. Do these debentures really qualify as junk bonds? Mr. CHAFIN. I would call them half-junk. Junk bonds, in my opinion, are high yield/high risk. These are high risk but not high yield. Once the debentures hit the market though, they are currently-we have a figure in here and the SEC has a figure that the total of $30 million face is worth somewhere around $6 million. You will hear testimony today that as of July 3 of this year they may be worth only $3 million. When you factor in the 8 percent interest and that it has been discounted by 80 percent, it's actually paying 40 percent a year. Now discounted, they are paying a nice high rate. Mr. ROWLAND. So, the debentures issued in 1989 are worth significantly less than the real estate and other assets the limited partners gave up? Mr. CHAFIN. Right. The holding company has netted $17 million out of the sale of nine of the 17 properties. Meanwhile, the debentures out there are not very liquid, ranging in value from $3 to $7 million. Mr. ROWLAND. What other assets did BankAtlantic get in the 1989 rollup? Mr. CHAFIN. In addition to the real estate, the 17 properties, there is approximately $3 million in cash. Mr. ROWLAND. That answers the next question that I was going to ask you. Was there some cash involved in that 1991 rollup? Mr. CHAFIN. The 1991 is the current proposed. Mr. ROWLAND. The 1989. Mr. CHAFIN. That one has approximately $6 million in cash associated with it-the 1991 rollup. Mr. ROWLAND. Mr. Bliley had been over this somewhat, but let me ask you these questions again. How can Mr. Levan as a fiduciary to the bank, the holding company and the limited partners fell full responsibility of all three as a related party transaction? Mr. CHAFIN. We think it's very difficult. In fact, we asked Mr. Levan that question and said when you were moving forward with this plan how did you take into consideration your fiduciary responsibility to the limited partners, the investors in the real estate. His answer back was he has many fiduciary responsibilities. He has fiduciary responsibilities to the investors in the holding company, he has fiduciary responsibilities to the investors in the bank. I think it's interesting to note that certainly in the 1981 partnerships he wasn't CEO of the holding company and the bank, and he didn't have those other fiduciary responsibilities. I, as an investor, wouldn't appreciate signing up with you, Mr. Chairman to go out and manage my money and then find out you have gone out managing other people's moneys and their considerations now have to be added into my considerations, but that's what happened. Mr. ROWLAND. It appears that Mr. Levan's holding company and the bank got the better end of this deal. Has Mr. Levan frauded his limited partners in these rollups? Mr. CHAFIN. Fraud is a legal term, and I am not sure we necessarily want to get into that. There is an SEC inquiry into the matter, and we are not at liberty to discuss what they have talked to us about. I can say though, from the standpoint of-one potential problem would be that at the time you are telling the investors that the properties are ill-liquid and that you don't have a market for them, if you know for a fact that you already have buyers lined up and that you have a pretty good plan on exactly what you are going to be able to do here, that could create a potential problem. Short of that, we see nothing that would be in a fraud type category and haven't been looking at it from that angle to be perfectly honest. Mr. ROWLAND. It appears that the holding company needed money badly and the bank also needed capital. How could Mr. Levan not favor his companies over the interest of the limited partners? Mr. CHAFIN. That is the competing fiduciary problem that he had. I think you could look at it. If he had taken a middle stepassume for the sake of argument that the debentures aren't worth their $30 million face, they are worth $6 million in the real market. He could have converted his limited partners out of the real estate, sold the real estate, taken the $17 million in cash, and if it was in the best interest and if it's such a great investment for these investors to get into the bank holding company, with $17 million I could have bought three times the number of debentures that are selling on the market for $6 million than I could by going the transaction he did. So, even in that case we would argue that the limited partners could at least have three times the debentures, had we gone through the middle conversion, gotten the cash and then gone out on the market; if somebody wanted to sell me debentures. Mr. ROWLAND. I believe you said that Mr. Levan's company sold its first public limited partnership in 1981? Mr. CHAFIN. That's correct. Mr. ROWLAND. How much of his own money did Mr. Levan put up to start the company? Mr. CHAFIN. We haven't been able to verify it and find out precisely. From what we can tell to date it is none. Mr. ROWLAND. Getting back to the limited partners who got more than $30 million in debentures, during the course of the limited partnership's operations they received regular cash distributions as well as tax losses for a few years, didn't they? Mr. CHAFIN. Yes. Mr. ROWLAND. Overall, how did they come out? Mr. CHAFIN. If you consider they got distributions of I believe it was $18 million and tax benefits of $12 million-there's $30 million-if they could have gotten the $3 million in cash and the $17 million from the real estate and still had eight properties left, just a quick total and you are over $50 million. They could have come out-they certainly wouldn't have made money, especially when you consider the time value of the investment. You invest something in 1981 and 10 years later just in terms of the present value of it you probably have about one-half of your investment. They clearly would have been better off than they would be in terms of having a market value of $6 million right now in these debentures. Mr. ROWLAND. Can you tell me, what is a subordinated debenture? What is it subordinated to? Mr. CHAFIN. All of the other liabilities but not common stock or preferred stock that the corporation has put forward in raising capital. Mr. ROWLAND. Thank you very much for your testimony here. I call to the witness stand now panel two, Mr. Roy M. Henry who is President of First Financial Planners, Incorporated. You have on the table there in front of you, a copy of the rules of the Energy and Commerce Committee and the House of Representatives. Do you desire to be represented by counsel here? Mr. HENRY. No. Mr. ROWLAND. It is customary to swear in all witnesses. Do you object to being sworn in? Mr. HENRY. No. Mr. ROWLAND. Would you please rise and raise your right hand. [Witness sworn.] Mr. ROWLAND. You now may consider yourself as being sworn, and proceed as you so desire. TESTIMONY OF ROY M. HENRY, PRESIDENT, FIRST FINANCIAL PLANNERS, INC. Mr. HENRY. I appreciate the chairman's giving me the opportunity to talk to you about the situation with I.R.E., BankAtlantic, and Alan Levan as it concerns rolling up the limited partnerships. I am the President of First Financial Planners, a registered financial planner, and have been active in the financial planning industry for over 15 years. I recommended some of Mr. Levan's I.R.E. partnerships to some of my clients, and I personally invested in two of the three limited partnerships in the first 1989 rollup. The purpose of my testimony is not a vendetta or an argument with Alan Levan, I.R.E., or BankAtlantic. In my opinion they are simply the worst symbols of what is wrong with our system. I think they are probably a classic example of what is wrong with the system. I will go through some of the areas that I think the committee will be interested in. Let's talk about Alan Levan and I.R.E. first, because that is what was in effect when our investors invested in I.R.E. Series 21, 23 and 24. Number one, Alan Levan personally and I.R.E. as a corporation, acted as a general partner. I will quote to you I.R.E. and Alan Levan's definition of a general partner's duties and their incentive. These are quotes. "What is the incentive for the general partner to provide maximum profits and optimum benefits through the limited partnership. Keep in mind that the profits to the general partner are based on how well they perform for you and other limited partners." That is on page seven of the cover of the prospectus given to the limited partners in 1981 on I.R.E. Series 21. Second, Alan Levan and I.R.E. acted as fiduciaries when they took over the responsibility as general partners. On page 17 of the same prospectus, and I quote, using their words. "The general partners are accountable to the partnership as fiduciaries, and consequently must exercise good faith and integrity in handling the partnership's affairs." Number three, the investment philosophy as stated by I.R.E. on two different areas, in other words, what was the primary objective of this investment. I am using their words again. The first quote is on page 11 of the cover of the prospectus, Series 21. "Safekeeping and preservation of the limited partner's invested capital is the general partner's overriding concern." On the front page of the prospectus of Series 21 the first priority stated on that front cover-that was one of the reasons why the limited partners invested-"Preserve and protect the partnership's original capital." The facts of the rollup, and these are the facts. I did quite a bit of homework on this because this has been a 21⁄2 year quest on my own personal part, because I took my responsibility as a fiduciary to my clients seriously and put those above my own company. Fact one, $61 million was invested in Series 21, 23 and 24. The appraised value based on Mr. Levan and BankAtlantic's appraisers as of 1-2589 was a little over $46 million. That represents approximately 75 percent of the original capital invested. Thirty million dollars face amount of what I call junior junk bonds and what I will explain—a junior junk bond is that it offers the high risk and does not offer the high yield, and they do not have to in any way pay interest current. They simply can accrue the interest later. It's the highest bond that I am aware of that— the highest risk bond that I am aware of that could be offered. As an interesting side note on July 3, 1991, we called all of the market makers involved in the BankAtlantic bonds that were issued as a result of the 1989 rollup, and we were told that there is currently not a market for these bonds. No one is buying the bonds. The last trade made would represent a market value of $3.6 million if the $30 million of bonds were sold. That was the last trade that was actually done. That represents 6 percent of the limited partners initial investment. BankAtlantic has sold properties to date and already in previous testimony has netted them $17 million. That doesn't take a rocket scientist to divide $3.6 million into $17 million-already sold property netting them this cash. This is five times plus better to BankAtlantic and Alan Levan than it was to the limited partners. The next item, BankAtlantic's net worth as they published-this is the book that everybody has been talking about. It might be the phone book of Fargo, North Dakota. It may not be a large city, but that's the book that mom and pop America was supposed to be able to read within a 3 week period of time and make an informed judgment. This was the book that was cleared by the Securities and Exchange Commission. |