CAUSE NO. DC-16-01566

CDK REALTY ADVISORS, LP,
Plaintiff,
v.
DALLAS POLICE & FIRE
PENSION SYSTEM,
Defendant, Counter-Plaintiff,
and Third Party Plaintiff,

v.
CDK ADVISORS, LLC, BRENT W.
KROENER, KENNETH COOLEY
JON DONAHUE, and MARSHALL
EDWARDS,

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IN THE DISTRICT COURT

of DALLAS COUNTY, TEXAS

192nd JUDICIAL DISTRICT

Third Party Defendants.

DEFENDANT AND COUNTER-PLAINTIFF DALLAS POLICE &
FIRE PENSION SYSTEM’S ORIGINAL COUNTERCLAIM
Pursuant to Texas Rules of Civil Procedure 97, Defendant, now acting as Counter-Plaintiff,
Dallas Police & Fire Pension System (“DPFPS”) files this Original Counterclaim against CDK and
respectfully shows the Court the following:
A. DISCOVERY CONTROL PLAN
1.

DPFPS intends to conduct discovery under Level 2 of Texas Rule of Civil

Procedure 190.3.

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 B. NATURE OF ACTION
2.

This is an action for damages based on CDK’s multiple breaches of fiduciary

duties owed to DPFPS, and on CDK’s negligence in providing real estate investment advice and
management services to DPFPS. In summary, CDK advised DPFPS to enter into a variety of real
estate investments that were high risk, speculative, and not typically of the type pursued by pension
systems. These high-risk investments have resulted in write-downs and losses of more than $320
million - losses on assets managed by CDK that represent funds that should have been safeguarded
for the benefit of Dallas’s loyal and hardworking police officers and firefighters.
3.

Not only did CDK recommend real estate investments that other professional

advisors would not have recommended under the circumstances, CDK compounded the problem
by routinely failing to properly supervise and monitor such investments or properly report on the
risks and results associated with them. CDK also failed to obtain periodic appraisals on the
properties in question which would have disclosed decreased values – even though CDK’s own
compensation contractually was supposed to be tied to the fair value of certain properties.
Moreover, CDK comingled DPFPS funds in its own accounts, further breaching its fiduciary duties
while creating additional risk for DPFPS. In other words, CDK:


advised DPFPS to invest in excessively risky real estate deals;



failed to conduct proper due diligence on such investments;



charged fees for “actively supervising” or “managing” investments when it often
did neither;



failed to have the subject real estate regularly appraised to determine its fair value,
thereby concealing its fair value from DPFPS;



failed to properly report the true status of such investments to DPFPS’s Board of
Trustees;

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 

failed to ensure that its advice would keep DPFPS’s portfolio properly diversified
and in accordance with approved investment guidelines;



collected fees justified, at least in part, by inflated property values; and



otherwise engaged in self-interested transactions that were unfair to DPFPS.

By this suit, DPFPS seeks to recover losses caused by CDK’s negligence and breaches of fiduciary
duty, as well as disgorgement of more than $25 million in fees CDK received for providing its
reckless and improper advice. DPFPS’s related Third Party Petition also seeks to recover damages
from parties responsible for, and related to, CDK for their roles in CDK’s conduct and for their own
actions as alleged below.
4.

In its declaratory judgment count, CDK alleges that its relationship with DPFPS

from 2002 to 2014 resulted in $80 million in gains, so it wants this Court to declare that it had
nothing to do with a list of non-CDK-related investments that it claims led to DPFPS losses. For
the avoidance of doubt, DPFPS is not suing CDK or the Third-Party Defendants for any losses
relating to projects they did not manage or for which they did not serve as an investment
advisor. That includes investments when managed by DPFPS itself, or projects managed by others
in the Napa Valley, Hawaii or Timbuktu for that matter. DPFPS also is not suing CDK for the lack
of diversity in this year’s Oscars, global warming, or the outcome of the presidential election, all of
which are equally irrelevant to this case. The only projects at issue are the ones specifically
mentioned in this action or that otherwise relate to properties and investments falling under CDK’s
Investment Management Agreement with DPFPS. But as CDK has placed its entire relationship
with DPFPS at issue, so too will this Counterclaim and DPFPS’s related Third-Party Petition.
C. PARTIES
5.

Counter-Plaintiff DPFPS is a public pension fund performing a governmental

function – enjoined on it by law and given to it by the State as part of the State’s sovereignty, to be
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 exercised in the interest of the general public – namely, of providing a pension plan to police
officers and firefighters of the City of Dallas. DPFPS is governed by Article 6243a-1 of the Texas
Revised Civil Statutes, and subject to certain provisions of the Texas Government Code, including
Chapters 552 and 802. It is headquartered in Dallas County, Texas.
6.

Counter-Defendant CDK Realty Advisors LP (“CDK”) (formerly known as CDK

Associates, LP) is a Texas Limited Partnership doing business in Dallas County, Texas. CDK
already has appeared for all purposes in this action.
7.

Third Party Defendant CDK Advisors, LLC (“CDKA”) is a Texas Limited

Liability Company doing business in Dallas County, Texas. Its principal place of business is 4100
Harry Hines Blvd., Suite 400, Dallas, TX 75219. CDKA is CDK’s general partner.
8.

Third Party Defendant Kenneth Cooley is an individual who is a limited partner of

CDK and a principal of CDKA. He resides at 6721 Candlecreek Lane, Plano, Texas 75024-5511.
Cooley is the “C” in CDK.
9.

Third Party Defendant Jon Donahue is an individual who is a limited partner of

CDK and a principal of CDKA. He resides at 116 Morning Dove Ct., Argyle, Texas 76226-5132.
Donahue is the “D” in CDK.
10.

Third Party Defendant Brent Kroener is an individual, a limited partner of CDKA

and the Manager of CDKA. He resides at 4240 Prescott Avenue, Apt. 8C, Dallas, Texas 752192378. Kroener is the “K” in CDK.
11.

On information and belief, Third Party Defendant Marshall Edwards is an

individual who is a limited partner of CDKA and a principal of CDKA. He resides at 16827
Village Ln., Dallas, TX 75248-6026.

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 12.

Collectively, Defendants Cooley, Donahue, Kroener, and Edwards will be referred

to as the “Individual Defendants.” CDKA and the Individual Defendants are named parties in
DPFPS’s related Third Party Petition, which was filed contemporaneously with this Counterclaim.
D. JURISDICTION AND VENUE
13.

In this Counterclaim and Third-Party Petition, DPFPS seeks monetary relief of

more than $1 million. The damages sought herein are within the jurisdictional limits of this court.
14.

This Court has personal jurisdiction over CDK because it is a resident of the State

of Texas and because it is “doing business” in Texas.
15.

Venue is proper in Dallas County, Texas, pursuant to Section 15.002 (a)(1) of the

Texas Civil Practice and Remedies Code, because a substantial part of the events giving rise to
DPFPS’s claims occurred here.

Furthermore, pursuant to the parties’ written Investment

Management Agreement, CDK has agreed to exclusive venue in the City of Dallas, Dallas County,
Texas.
E. FACTUAL BACKGROUND
16.

In its Original Petition, CDK alleges that it enjoyed a professional relationship that

was profitable to DPFPS for many years. According to CDK, the fair value of DPFPS’s
investments increased by $80 million during that time.
17.

In reality, CDK could not possibly know the fair value of DPFPS’s real estate

portfolio during that time period, because CDK, CDKA and the Individual Defendants routinely
failed to obtain appraisals for the properties in which it advised DPFPS to invest. In fact, the real
estate projects recommended and managed by CDK, CDKA and the Individual Defendants have
required more than $320 million in write-downs and losses to date. Much of the raw land cannot be

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 developed economically in the manner represented to DPFPS – a fact CDK, CDKA and the
Individual Defendants never disclosed to DPFPS.
18.

DPFPS began its ill-fated relationship with CDK when the parties entered an

Investment Management Agreement. Pursuant to this agreement, CDK contractually agreed to
serve as a fiduciary and investment manager for DPFPS, and to act solely in the interest of DPFPS.
CDK performed its fiduciary and investment management services for DPFPS primarily through
one or more of the Individual Defendants. CDK’s actions complained of below were taken or
supervised by one or more of the Individual Defendants, all of whom were principals of CDK and
served as its agents for performing CDK’s services and fulfilling its fiduciary duties to DPFPS. As
CDK’s general partner, CDKA also is responsible for CDK’s actions.
19.

With respect to the DPFPS account it managed, CDK contractually promised to

advise DPFPS on all aspects of its investments in, and the operation of any investment held in, that
account. CDK expressly agreed to “monitor, recommend, and actively supervise all acts being
taken or which should or may be taken” with respect to DPFPS investments.
20.

With respect to real estate investments, CDK specifically agreed to perform

reasonable and prudent due diligence, monitor any potential causes for disposition or property,
obtain property appraisals, and physically inspect such property.
21.

CDK’s asset management fee varied between investments, but in many cases, it

was paid an annual fee equal to a percentage of the amount DPFPS had invested in the property,
even though contractually, CDK was supposed to be paid according to the market value of the
property per year.

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 22.

Although CDK regularly charged such management fees, it never confirmed the

fair value of the property with independent appraisals until write-downs and losses were substantial
and the investments had been carried at inflated values for many years.
23.

By contract, CDK was required to promptly prepare and furnish DPFPS with

written quarterly and annual reports concerning market values, the status of DPFPS’s investments
(including a statement of assets and liabilities), and other relevant information. Both Cooley and
Kroener signed CDK’s Investment Management Agreement with DPFPS on CDK’s behalf as
principal and manager, respectively.
24.

In addition to the fiduciary duties it voluntarily assumed under the Investment

Management Agreement, CDK also assumed statutory fiduciary duties under Tex. Govt. Code
§802.203. Pursuant to Texas law, CDK was required to manage DPFPS’s investments with the
care, skill, prudence and diligence that a prudent person acting as an investment manager would
use. That includes a duty to defray the reasonable expenses of administering those investments and
to diversify DPFPS’s investments to minimize risk of large losses. CDK failed in all regards.
25.

CDK’s fiduciary duty breaches typically fell into four categories: failure to

properly conduct due diligence, failure to actively manage the investment, failure to keep DPFPS
fully informed (including in written reports) regarding the value, risks and prospects of the
investment (including whether the investment was contrary to DPFPS investment guidelines), and
improper self-dealing. While the instances of each of these failures are numerous, the Eagle and
Sandstone investments provide instructive examples. Those two investments alone resulted in
write-downs of over $150 million.

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 Eagle Investment
26.

“Eagle” is an investment in undeveloped raw land in Idaho. CDK served as the

investment manager for the property through March 2015.
27.

As initially presented by CDK, the Eagle investment required a purchase of 4,950

acres of raw land in Ada County, Idaho (near the city of Boise) for $25 million. A few months
later, CDK recommended the purchase of an additional 2,400 acres of raw land in the same area for
another $17.5 million. CDK explained that the investment strategy was to hold the property for five
to seven years while developing it, at which time the property could be sold for a projected return of
25-35%.

In providing its recommendation to DPFPS, CDK failed to perform adequate due

diligence on the Eagle property. Based on CDK’s advice, the DPFPS Board unanimously
approved the Eagle investment.
28.

Several months later, CDK advised DPFPS to purchase an additional 9,500 acres

in the area for $21.5 million. This brought the total capital outlay for Eagle to $64 million, which
was payable over a period of two years. According to CDK, once all of the property was acquired,
and the last purchased parcels were swapped with Idaho’s Bureau of Land Management for other,
more strategically advantageous property, DPFPS’s investment would have an expected rate of
return of 28 to 29%.
29.

By the time DPFPS had fully funded its $64 million commitment, CDK reported

to DPFPS that the net asset value of the investment had increased to $111.4 million. Although part
of the development plan proposed by M3 Builders (the property developer) and recommended by
CDK contemplated securing a loan for up to $42 million to fund a large portion of the costs of
development, the loan never materialized.

After DPFPS had fully funded its $64 million

commitment and more than a year and a half after CDK presented the investment to DPFPS, no

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 development had occurred, so CDK recommended that DPFPS make an unsecured loan of $15
million to M3 Eagle, LLC, the company formed to hold the Eagle property. Thereafter, CDK
reported that the net asset value of the investment had increased to $126.6 million. However, CDK
did not reveal to DPFPS the basis for this supposed increase, which was due in part, on information
and belief, to improper capitalization of expenses, including management fees.
30.

Following this rosy (but misleading) report on Eagle’s increasing value, CDK

began reporting on the investment using the term “Developed Value” instead of net asset value.
According to CDK, the Developed Value of Eagle was $200 million by 2010. By that point,
however, no actual construction had begun. Nor had the planned swap of land with Idaho’s Bureau
of Land Management occurred after five years of efforts.

Nevertheless, on CDK’s

recommendation, DPFPS held the investment.
31.

In fact, the Eagle property was never worth $200 million, or anything approaching

that figure. Both CDK and M3 Builders had dramatically underestimated the actual costs of land
development – primarily because they had conducted little, if any, due diligence related to the Eagle
property specifically. After DPFPS fired CDK in early 2015 from managing DPFPS’s investment
in Eagle, it subsequently learned that the entire Eagle investment was worth only a small fraction of
the value invested. Although it managed the property for years and routinely reported dramatically
inflated values to DPFPS, CDK did not actually have the property appraised on its watch until
DPFPS specifically asked for and required an appraisal in 2014.
32.

After CDK’s dismissal, DPFPS learned that M3 Builders’ and CDK’s intended

master planned community, as presented to DPFPS, was not feasible.
33.

All of these issues could have been discovered had proper due diligence been

conducted at any of several points in time before DPFPS invested its money. Although such due

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 diligence was CDK’s responsibility as investment manager, it completely failed to discover and
report these issues to DPFPS. Because the issues were never reported, not only did DPFPS lose the
bulk of its investment in the project, it also paid CDK and Eagle’s developer millions of dollars in
fees that otherwise would not have been owed.
Sandstone
34.

Another of CDK’s investment recommendations to DPFPS is known as

Sandstone. After the Sandstone investment was approved, CDK served as the investment manager
for the property through March 2015.
35.

Sandstone was a 2,147 acre working ranch in Colorado. According to CDK, the

investment involved developing the raw land, holding the property for three to four years, and then
reaping a projected return of at least 30%. The investment required DPFPS to contribute capital of
$26.5 million.
36.

M3 Builders, the developer for the Eagle investment, also served as the developer

and property manager for the Sandstone property.
37.

CDK reported that a pre-construction loan for $1,015,000 at 12% interest had been

obtained for the Sandstone property. What CDK failed to disclose to DPFPS was that this loan had
been obtained from a company related to M3 Builders, and that, on information and belief, the
secured loan was actually for $2 million more than CDK reported.
38.

Part of the development plan proposed by M3 Builders and recommended by

CDK contemplated securing a loan for up to $15 million from an unspecified source to fund a large
portion of the costs of development. This loan never materialized. Based on advice from CDK,
DPFPS made an unsecured loan of $20 million related to the Sandstone property. Following this
loan, CDK reported that the value of the Sandstone investment had increased by 75%. As with the

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 Eagle property, CDK did not reveal to DPFPS the basis for this supposed increase, which was due
in part, on information and belief, to improper capitalization expenses including management fees.
DPFPS guaranteed other property-related loans as well, based on CDK’s advice.
39.

The proceeds from the unsecured DPFPS loan were used to repay the secured M3

Builders related-party pre-construction loan. Although the M3 Builders-related loan was paid in
full thanks to DPFPS’s loan, the Sandstone property never generated sufficient funds to repay the
DPFPS loan. After DPFPS had made investments over a significant period and contributed at least
$46.5 million to Sandstone (plus an additional $648,000 in fees paid to CDK on the investment),
CDK reported that the property would be listed for sale, due to “the demise of the luxury home
market.” Despite this report, CDK never recommended that the value of the property should be
written down, and never obtained an appraisal on its watch to ascertain the property’s actual fair
value until 2014.
40.

Ultimately, the Sandstone and Eagle properties were combined under a company

called Project Holdings LLC. The combination of the properties under one corporate umbrella
facilitated loans being made from Sandstone to help prop up the Eagle property, unbeknownst to
DPFPS. CDK knew or should have known that the plan for Eagle’s development that had been
given to and proposed by CDK was not economically feasible. Had CDK advised DPFPS of these
facts, such loans could have been stopped and the value of Sandstone would not have depleted even
further.
41.

Following the combination of Eagle and Sandstone under Project Holdings, CDK

reported that additional capital was required to fund the projects. Based on CDK’s advice, DPFPS
continued to contribute to the projects and guarantee $15 million in loans.

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 42.

Before and after DPFPS loaned money to Sandstone and Eagle under Project

Holdings based upon CDK’s recommendation, CDK allowed several M3 Builders-related parties
to make loans to Eagle, Sandstone, and Project Holdings with higher priority and, in most cases, at
higher interest rates. Although Eagle, Sandstone, and Project Holdings stopped paying interest to
DPFPS, they used the DPFPS loan proceeds to repay the M3 Builders-related loans in full with
interest, giving M3 Builders-related parties preferential treatment while subordinating DPFPS’s
interests. Currently, Eagle and Sandstone still owe more than $47.2 million in principal and interest
to DPFPS. While those loans were pending, Eagle, Sandstone, and Project Holdings paid out at
least $14.5 million in principal and interest to M3 Builder-related parties on CDK’s watch.
43.

All of the additional loans and capital infusions were for naught. Although CDK

reported a net asset value of $181.2 million for DPFPS’s combined investments under Project
Holdings as of the third quarter of 2013, by December 31, 2015 that value had plummeted to a
fraction of that amount. By that point, over $110 million of the cash DPFPS had invested in the
projects under CDK’s watch was no longer reflected in the value of the property. The vast
majority, and perhaps all, of such losses could have been avoided had CDK performed appropriate
due diligence and oversight, advised DPFPS of the true risks, and accurately reported the fair value
of such investments on a timely basis.
44.

Although both the Eagle and Sandstone transactions involved the purchase and

development of raw land (as opposed to existing rent-producing property), CDK never advised
DPFPS of the additional risks associated with the purchase of such property, that it had failed to
obtain periodic appraisals during the due diligence process, or that its representations of fair value to
DPFPS in its regular reports were not properly supported as required by industry standards, of
which CDK was aware. Nor did CDK advise DPFPS at any point during its “management” of the

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 Eagle and Sandstone investments of a fact it later admitted to a DPFPS Board member in 2014 –
that CDK wasn’t the best manager for land development. Under the circumstances, neither
investment was appropriate for a pension system.
45.

Had DPFPS been advised of such facts from the beginning, it could have avoided

the investments in the first place. Had DPFPS been advised at any point in time later, it could have
cut its losses and avoided additional fees and expenses. Because CDK failed to advise DPFPS of
such facts, however, DPFPS unknowingly continued to sustain substantial losses while paying
CDK (and M3 Builders and indirectly, M3 affiliates) fees for the privilege.
46.

The Eagle and Sandstone investments described above are only two examples of

CDK’s many failures of disclosure, negligent oversight and management, breaches of contract and
breaches of fiduciary duty. Similar failures and breaches occurred in connection with many other
investments CDK managed for DPFPS, including but not limited to investments involving
Southern Cross, Riverview, and Creative Attractions, which together involved tens of millions of
dollars in additional write-downs and losses.
Southern Cross, Riverview, and Creative Attractions
47.

The Southern Cross investment was a construction company venture between

DPFPS and an Australian company. According to CDK, the construction company would require
a $10 million investment by DPFPS and result in a return of at least $16 million within four years.
48.

When the Australian company folded, CDK took over management of the

construction company, although it had limited construction experience.

Under CDK’s

mismanagement, Southern Cross dramatically ran up costs on the Riverview project (and others)
and allowed Southern Cross employees to (1) be reimbursed for personal expenses (including a

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 mortgage for a condo at The Beat, another DPFPS investment) and (2) cause overpayments for
subcontractors who employed their family members.
49.

Less than two years after taking over Southern Cross, CDK wound down the

company. The investment in Southern Cross resulted in a loss to DPFPS of over $1.3 million.
50.

The Riverview investment was presented by CDK as a venture with an Australian

developer to build high-end condominiums on Town Lake in downtown Austin, Texas. According
to CDK, DPFPS would earn a 25% to 30% return on the project.
51.

On CDK’s watch, Southern Cross (which acted as the general contractor on the

construction) requested construction draws that construction lender Amegy Bank refused to pay.
CDK also caused Riverview to borrow over $31 million from DPFPS for construction costs under
an unsecured loan – even while simultaneously drawing down on another construction loan from
Bank of America. DPFPS made such loans to Riverview on CDK’s recommendation.
52.

Ultimately, DPFPS lost over $15 million on the Riverview investment, excluding

the fees it paid to CDK for “managing” Southern Cross and Riverview.
53.

As presented by CDK, Creative Attractions was a private equity investment

through an entity formed to acquire, own, develop, operate, and otherwise deal in niche restaurant
and entertainment concepts.
54.

Based on CDK’s recommendations, DPFPS entered into a revolving line of credit

with Creative Attractions under which DPFPS was responsible for providing $17.55 million to
Creative Attractions, accruing at a rate of 9% but with no interest payable until the loan matured six
years later. On its face, the terms of the loan manifested a doomed investment under basic financial
tools such as net present value calculations. In assessing the net present value of the loan, a very
high discount rate would be necessary, because (1) the niche restaurant concept business is a high

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 risk industry, and (2) Creative Attractions did not have a demonstrated track record or history of
positive cash flow. Given the risks involved, no commercially reasonable lender in the marketplace
would have provided Creative Attractions with financing at such a grossly inadequate rate in
exchange for a six-year balloon payment term without any interest payable until maturity. With an
appropriate discount rate, the net present value of the investment was significantly negative. CDK
failed to adequately disclose such risks to DPFPS, leading DPFPS to enter into a transaction with
negative net present value.
55.

CDK continued to recommend that DPFPS advance funds to Creative Attractions

under the line of credit even after receiving Creative Attractions’ compiled financial statements,
which stated that “[m]anagement has elected to omit substantially all of the disclosures and the
statement of cash flows” (which are required by Generally Accepted Accounting Principles).
CDK should have known that such a statement was a “red flag” that could indicate accounting
irregularities or even fraud. Yet CDK failed to disclose to DPFPS the risks associated with funding
working capital to Creative Attractions without having access to any of its cash flow information
and other standard disclosures.
56.

Ultimately, under CDK’s oversight, DPFPS advanced approximately $13.67

million to fund Creative Attractions working capital. To date none of the $13.67 million
principal or the accrued interest in excess of $6.985 million has been repaid to DPFPS, and is
not likely to be repaid.
57.

Such investments were ill-conceived, involved inappropriate risks, and in some

cases were doomed from the start. All such investments involved CDK mismanaging the
investment and failing to properly and accurately report the fair value and true risks of such

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 investments to DPFPS. All permitted CDK to charge substantial fees to DPFPS related to
investments that were not in DPFPS’s best interests.
4100 Harry Hines and The Beat
58.

As a fiduciary, CDK was obligated to act solely in DPFPS’s interest in connection

with its investments. One such investment was the building located at 4100 Harry Hines Blvd. in
Dallas. CDK recommended the purchase of the 4100 Harry Hines building to DPFPS. Acting as
an investment advisor, CDK pitched an investment where the 40-year-old office building would be
rehabilitated and the adjacent land could be sold or redeveloped into multi-family housing. CDK
also recommended that the top two floors of the building be sold as condos. The DPFPS Board
approved CDK’s investment proposal.
59.

The building was purchased by 4100 Harry Hines Partners LP, an entity formed by

CDK for DPFPS in which DPFPS was the 99% limited partner, and 4100 Harry Hines Partners
GP, LLC was the 1% general partner. 4100 Harry Hines Partners GP, LLC in turn was 100%
owned by DPFPS and managed by CDK. Kroener signed all of formation documents on behalf of
all parties—including 4100 Harry Hines Partners GP, LLC—as the manager, general partner, or
authorized agent.
60.

After the building was purchased and renovated, CDK and DPFPS also signed a

property management agreement. Under this agreement CDK became property manager for 4100
Harry Hines and agreed “to perform the Property Manager’s services, duties, obligations and
functions under [the] Agreement in a diligent, satisfactory and efficient manner, using the level of
skill and competence of a prudent expert so as to operate, maintain and manage the Property on
behalf of [DPFPS].”

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 61.

CDK did not operate the 4100 Harry Hines property in a “satisfactory and efficient

manner.” Instead, CDK charged other tenants in the 4100 Harry Hines building below-market
rents. The tenants who received such “sweetheart” rent deals from CDK included CDK’s outside
attorney. CDK abused its position as property manager to provide its friends and affiliates with
below-market leases at DPFPS’s expense.
62.

This was not CDK’s only self-dealing with respect to 4100 Harry Hines. While

serving as DPFPS’s investment advisor, manager for 4100 Harry Hines Partners GP, LLC, and
property manager for the 4100 Harry Hines building itself, CDK also purchased the top floor of
4100 Harry Hines as a condominium from DPFPS. In other words, CDK purchased real property
for its own benefit directly from an entity that it controlled as a fiduciary for DPFPS. The nature of
CDK’s self-dealing transaction could not be more apparent, as Kroener actually signed the eventual
Office Condominium Purchase and Sale Agreement for both the buyer—CDK—and the seller—
DPFPS’s wholly-owned subsidiary. Furthermore, CDK purchased its interest in 4100 Harry Hines
in large part using funds from an account that it sometimes comingled with DPFPS funds.
63.

Another such investment was a condo complex located at 1001 Belleview known

as The Beat. CDK had recommended that DPFPS purchase the complex as a real estate
investment, which it did through a limited partnership. While acting as manager of this property,
CDK entered into multiple sweetheart deals with friends, associates or persons associated with the
other owners of the limited partnership to sell and rent units at below-market rates. Indeed, CDK
itself purchased two condo units at The Beat at a cost per square foot significantly below the
prevailing market rate charged for other purchasers of similar units at the complex. Such below
market deals were not properly disclosed to, or approved by, DPFPS’s Board. Ultimately, DPFPS
lost more than $6 million on its investment in The Beat.

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 64.

During the entire time CDK served as a fiduciary to DPFPS, it had a continuing

duty to keep DPFPS fully informed about all investments under CDK’s management, including a
duty to disclose its own conflicts of interest and breaches of fiduciary duty with respect to those
investments.
65.

CDK failed to make such disclosures, and its erroneous reports effectively

concealed the true facts from DPFPS during CDK’s tenure. CDK’s purchase of property from
DPFPS investments at below market rates also effectively resulted in additional compensation to
CDK from DPFPS, although CDK never properly disclosed that fact to DPFPS. Only after CDK
was removed, did the true facts emerge regarding the investments under CDK’s management.
66.

In light of the above, DPFPS denies that it owes CDK any additional money – for

claimed fees or otherwise. But even if any fees were properly due and payable, the small amount of
such fees would be more than offset by the hundreds of millions of dollars CDK owes DPFPS in
damages based on the claims asserted below, including disgorgement of tens of millions of dollars
in fees for breaches of fiduciary duties.
67.

The Individual Defendants caused CDK to take the actions described above, in

breach of CDK’s fiduciary duties to DPFPS and the Individual Defendants’ own fiduciary duties as
managers and/or agents of a corporate fiduciary, and/or as a result of their own negligence as
described in DPFPS’s related Third Party Petition filed contemporaneously with this Counterclaim.
Based on the foregoing allegations, DPFPS alleges the following causes of action
collectively and in the alternative as appropriate.
F. CAUSES OF ACTION
COUNT ONE
Breach of Contract
68.

DPFPS incorporates by reference all of the allegations of the foregoing paragraphs.

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 69.

Pursuant to the Investment Management Agreement between CDK and DPFPS,

CDK agreed to do the following (among other things):
a. Advise DPFPS on all aspects of its investments managed by CDK;
b. Monitor, recommend and actively supervise all acts being taken, or which should
be taken or considered with respect to those investments;
c. Advise DPFPS on matters concerning the sale or refinancing of any investment,
and on the dissolution, withdrawal, reorganization or merger of any investment
vehicle;
d. Perform reasonable and prudent due diligence investigation of the acquisition or
disposition of any interest in property;
e. Monitor the occurrence or existence of potential causes for disposition of any
investment;
f. Reasonably and periodically inspect the properties under its management;
g. Promptly prepare and furnish DPFPS with written quarterly and annual reports
concerning market values, the status of DPFPS’s investments (including a
statement of assets and liabilities), and other relevant information; and
h. Consider in reviewing and monitoring any investment all improvement costs,
market surveys, marketing strategies, market conditions, and other things that may
reasonably be thought to affect the current or future operations of any investment.
70.

CDK breached that agreement by (among other things):
a. Failing to keep DPFPS properly advised regarding its investments;
b. Failing to monitor and/or actively supervise certain investments;

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 c. Failing to advise DPFPS when circumstances should reasonably have indicated an
investment should be sold;
d. Failing to conduct reasonable and prudent due diligence regarding certain
investments;
e. Failing to monitor potential causes for disposition of certain investments;
f. Failing to properly inspect certain properties;
g. Failing to appreciate, or keep DPFPS fully informed regarding, conditions that
affected the current and future operations of certain investments;
h. Failing to provide DPFPS with written reports as required; and
i.

Failing to ensure that its advice was provided to DPFPS’s governing Board of
Trustees.

71.

DPFPS fully performed its duties under the Investment Management Agreement.

72.

As a direct and proximate result of CDK’s breach of contract as alleged above,

DPFPS was injured and has suffered substantial damages.
73.

To the extent that CDK does not pay DPFPS for the damages it suffered as a result

of CDK’s breaches of contract as described above within 30 days of the filing of this Counterclaim,
then pursuant to Tex. Civ. Prac. & Rem. Code § 38.001(8), DPFPS also is entitled to recover
reasonable attorney’s fees relating to CDK’s breach of contract.
COUNT TWO
Professional Negligence
74.

DPFPS incorporates by reference all of the allegations of the foregoing paragraphs.

75.

CDK served as a fiduciary and professional advisor, consultant and manager of

DPFPS, and represented itself to be an accomplished and competent investment manager.

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 76.

CDK performed its advising, consulting and management services through, or

under the direction of, the Individual Defendants – all of whom were CDK principals and agents of
the company.
77.

CDK’s actions in managing investments for DPFPS were inconsistent with, and

fell short of, the degree of care exercised by reasonable and prudent managers of pension system
investments.
78.

As a direct and proximate result of CDK’s conduct as alleged above, DPFPS was

injured and has suffered substantial damages. DPFPS is entitled to recover all damages suffered as
a result of the CDK’s negligence.
COUNT THREE
Breach of Fiduciary Duty
79.

DPFPS incorporates by reference all of the allegations of the foregoing paragraphs.

80.

CDK agreed to serve as a fiduciary of DPFPS, both contractually under the

Investment Management Agreement and statutorily under Section 802.204(b) of the Texas
Government Code.
81.

As a fiduciary, CDK owed fiduciary duties of care, loyalty and good faith to

DPFPS. It also owed DPFPS a duty of full disclosure, to act in DPFPS’s best interest with respect
to the investments under CDK’s management, and to put DPFPS’s interests ahead of its own
interests and the interests of others.
82.

CDK breached its fiduciary duties by, among other things:
a. Failing to act as a prudent manager would act under similar circumstances;
b. Failing to keep DPFPS fully informed with respect to its investments under CDK’s
management;

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 c. Failing to disclose certain related-party transactions regarding investments under
CDK’s management; and
d. Placing its own interests, and the interests of others, ahead of DPFPS in connection
with investments under CDK’s management.
e. Executing agreements to financially commit DPFPS without informing DPFPS.
83.

As a direct and proximate result of CDK’s conduct as alleged above, DPFPS was

injured and has suffered substantial damages. DPFPS is entitled to recover all damages suffered as
a result of the CDK’s breaches of fiduciary duties.
G. PRAYER
WHEREFORE, DPFPS respectfully requests that after a trial on the merits, DPFPS have
judgment against CDK for the following:
1.

All damages, actual and consequential, sustained by DPFPS as a result of the

conduct of CDK as described above;
2.

A constructive trust on all proceeds received by CDK as a result of the conduct

alleged herein;
3.

Disgorgement of fees collected by CDK to the fullest extent permitted by law;

4.

Exemplary damages to the extent permitted by law;

5.

Pre-judgment and post-judgment interest as allowed by law;

6.

Reasonable and necessary costs and attorneys’ fees as allowed by law; and

7.

All other relief to which DPFPS may be entitled.

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 H. REQUEST FOR DISCLOSURE
Under Texas Rule of Civil Procedure 194, DPFPS requests that CDK disclose, within fifty
(50) days of the service of this request, the information or material described in Rule 194.2(a)-(f),
(g), and (l).
DATED: April 5, 2016.
Respectfully submitted,

By:

_/s/ J. Gregory Taylor ___________
Mark K. Sales
State Bar No.: 17532050
J. Gregory Taylor
State Bar No.: 19706100
Darrell E. Jordan
State Bar No.: 00000064
Diamond McCarthy LLP
2711 Haskell Ave., Suite 3100
Dallas, Texas 75204
Telephone: (214) 389-5300
Facsimile: (214) 389-5399

Andrea L. Kim
State Bar No.: 00798327
Rebecca A. Muff
State Bar No.: 24083533
Diamond McCarthy LLP
909 Fannin, Suite 1500
Houston, Texas 77010
Telephone: (713) 333-5100
Facsimile: (713) 333-5199
Counsel for Defendant and Third-Party Plaintiff
Dallas Police & Fire Pension System

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 CERTIFICATE OF SERVIVE
I certify that the foregoing Original Counterclaim was served on April 5, 2016 by electronic
service to the following counsel of record for CDK:
Steven A. Schneider
steve@schneidlaw.com
Stuart M. Reynolds, Jr.
stuart@schneidlaw.com
SCHNEIDER MILLER REYNOLDS, P.C.
300 N. Coit Road, Suite 1125
Richardson, Texas 75080

__/s/ J. Gregory Taylor ___________________
J. Gregory Taylor

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