EDITORIAL: How silent clout worked its magic to enrich a Daley nephew’s company

At work, we believe, was a magic name: Daley.

It opened doors that should have remained closed. It short-circuited the vetting of questionable investments. It lost tens of millions of dollars for Chicago city worker pension funds that already were hurting.

When the young man going around town looking to cut real estate development deals was a nephew of a powerful mayor, Richard M. Daley, the deals were cut, even when the deals were shaky.

A silent form of clout paved the way. Nobody had to utter the magic name.

Nothing else better explains how the nephew, Robert G. Vanecko, and his partner, Allison S. Davis, managed to convince the boards of five city pension funds to give them $68 million to invest. Nothing better explains why local banks and others agreed to pony up millions of dollars more for a series of deals of dubious merit that, sooner or later, went bad.

How silent was their clout? Mayor Daley has said he didn’t even know what his nephew was up to, and maybe that was so. For Vanecko’s purposes, it was enough that his financial backers were aware of Uncle Rich.

It’s a classic story of the Chicago Way, and it was laid out in full this weekend by Sun-Times investigative reporter Tim Novak. It’s well worth a close read, especially if you’re a Chicagoan wondering why you might be on the hook for another property tax hike to bail out those very same pension funds. Silent clout will stick it to you every time.

The story begins more than a decade ago when Vanecko, the son of one of Daley’s sisters, and Davis, who had been appointed by Daley to the Chicago Plan Commission, created a real estate development firm, DV Urban Realty Partners. They secured $68 million from the five pension funds and, in 2006, made their first investment, buying a high-rise apartment building at 1212 S. Michigan Ave.

They bought the building, which had sold two years earlier for $43.6 million, for $65.2 million, using $9.9 million of the pension money and a $56 million loan from General Electric Capital. They sank another $16 million in pension money into the property over the next five years. Then, in late 2011, they sold the building for $65.5 million.

And how did everybody make out?

DV Urban turned a $6 million profit, sources told Novak.

But the pension funds didn’t get a dime, actually losing $9.9 million.

Other investments followed and went bust, too, stiffing the pension funds and banks. DV Urban invested in a vacant building that once had been home to the Chicago Defender, even as city inspectors threatened to tear it down unless repairs were made. When the building later was resold, the pension funds got $475,000 — just 18 percent of the pension money DV Urban had put into the deal.

DV Urban invested in an old warehouse that sat on land so poisoned with arsenic and lead that pension funds had to be spent for a $2.6 million cleanup. The property was unloaded at a huge loss.

DV Urban lent millions of dollars to developers who personally guaranteed to repay the money but never did, costing the pension funds more than $5.6 million. The company broke a contract to buy another building in the South Loop, costing the pension funds $4 million. They lost more than $11 million on a deal to build a Mariano’s on the North Side.

The bottom line?

The pension funds lost $54 million of the $68 million they invested with DV Urban, while the company pulled in $9 million in management and development fees, in addition to the money it made on the 1212 S. Michigan deal.

In DV Urban’s defense, we should note that the firm likely was hurt by a downturn in the local economy, and there is something to be said for investing city pension funds in neighborhood projects. But prudence says the pension fund managers should have chosen investors with more diverse portfolios, to hedge their bets. And insiders told Novak that DV Urban failed to provide the pension funds with the proper audited financial statements and tax returns.

Did we mention that top city officials in the Daley administration had seats on four of the five pension boards that agreed to give money to Daley’s nephew? And, for good measure, we should note that a law firm headed by the mayor’s brother Michael — Daley & George — and another mayoral nephew, Patrick Daley Thompson, now the 11th Ward alderman, were paid for work on some of DV Urban’s projects.

All of this, we are told, made Mayor Daley hopping mad. In 2009, after the publication of an earlier spate of stories by Novak revealing DV Urban’s crummy use of pension money, Daley said publicly that this was all news to him. He urged his nephew to “end the business relationship immediately.”

Vanecko did as he was told by Uncle Rich. He walked away from DV Urban.

But, in the end, the company still took in millions — while city workers’ retirement funds lost big.

Silent clout had worked its magic.

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