A deal disclosed: Why Philadelphia master Walter D’Alessio had to step aside

At 82, Walter D’Alessio remains an essential Philadelphian.

In the 1970s, he ran the Philadelphia Industrial Development Corp., the city-Chamber of Commerce partnership that picks land projects. He has chaired its board ever since. He was lead director of the electric giant Exelon. He is chairman of Independence Blue Cross, the region’s dominant health insurer.

And he chaired Brandywine Realty Trust, the top office landlord in Center City, from 2004, until he stepped down in February (he was paid over $200,000 a year), due to what D’Alessio told me was “my error” on an SEC report. He had also headed Brandywine’s Governance Committee.

What happened? A governance problem, Brandywine said, in filings to the U.S. Securities and Exchange Commission:  

In 2015, Independence leased a big chunk of Brandywine’s former Philadelphia Stock Exchange building, through NorthMarq Advisors, a brokerage D’Alessio co-owns.

Independence had “a long-standing brokerage relationship” with NorthMarq, its exclusive broker in putting Independence into Brandywine’s building. So D’Alessio’s brokerage got D’Alessio’s insurer a multimillion-dollar lease with D’Alessio’s landlord.

And he got a cut. “Consistent with customary practice,” as Brandywine later told the SEC, Brandywine paid D’Alessio’s firm a $4.2 million brokerage commission – about 4 percent of the long-term lease – half in 2015 and half in 2016. D’Alessio’s personal share was around $1 million.

Brandywine didn’t at first disclose this to shareholders or the SEC. And that left Brandywine “not in compliance with the independent director requirements” that the New York Stock Exchange imposes on listed companies, Brandywine acknowledged.

“The world has changed,” D’Alessio told me. Rules were revised in 2009 to comply with the federal Sarbanes-Oxley and Dodd-Frank corporate-cleanup laws. Directors can't be "independent" and chair Governance Committees if they get something extra from a company “by virtue of a material relationship.” 

Brandywine says it realized the million-dollar payment “impaired Mr. D’Alessio’s independence” only while putting together its end-of-2016 annual report. D’Alessio’s terms, according to a statement by Brandywine CEO Jerry Sweeney, “were no less favorable to us” than a rival broker would have cut.

Brandywine reported D’Alessio’s 2015 deal on Feb. 17 this year. On that same day, “Mr. D’Alessio retired from the Board, effective immediately.”

“I made a mistake,” D’Alessio told me. He said real estate lawyers saw no problem in 2015 when he received the first half of the payment. But a securities lawyer, reviewing Brandywine’s draft 2016 annual report, “says, ‘Wait a minute, you guys did a deal back there.’ Then we had to send in a modification to the SEC disclosing the transaction.”

D’Alessio feels bad: “I violated an SEC rule.”

But, he adds, “no harm, no foul: Nobody was damaged by it, except the stupid report. We filed an amended report, and I resigned.”  Good thing “it was all found out before anybody at the SEC picked it up.”

“The red light should always go off when a director participates in a transaction,” says Richard P. Jaffe, who heads the private-equity practice at the law firm Duane Morris LLP. “It’s always best practice not to have a director related to a company having a transaction with a company on which he or she sits on a board. Even if it’s market-rate. Even if it’s put out for bid. Conflicts are there, and it always raises a question, having a director who has a relationship.”

Jaffe also says D’Alessio could have legally remained Brandywine chairman, but not as an "independent" director: "Walt’s correct: Standards have risen."

I asked D’Alessio if it wasn’t a problem for clients to have brokers from one firm on both sides of a deal.

That’s “common, ordinary, everyday real estate business,” D’Alessio told me. “Real estate has always been a small group of people” handling “both sides of the business, often in the same house. This goes back to the days of bazaars.”

If two-way brokerages deliver honest deals – if all the players know and trust what prices should be – why do landlords and tenants still pay brokers millions?  “Lawyers can do what brokers do,” D’Alessio said -- but it doesn’t happen often. 

Do Philadelphia leaders resist too much change, because they benefit from and like the city the way it is?  I asked. "Pretty good perception," D'Alessio said. "It's a great place to live" -- not too fast like New York or Washington, not too quiet like his native Pittsburgh.

Insiders are well served by the city the way things work. And that's not likely to change anytime soon.