Bureau Of National Affairs
Judge to Edit Receiver's Report on Union Trust Funds at Risk in ERISA Lawsuit
By Tom Alkire
Friday, November 3, 2000
PORTLAND, Ore. -- A federal district judge said Oct. 31 he would delete the "opinions" found in a receiver's report about a lawsuit involving the alleged misuse of union trust funds by a Portland investment management company (SEC v. Capital Consultants LLC, D. Ore., No. CV00-1290 KI, 10/27/00).
Among the assets of Capital Consultants LLC frozen by federal authorities earlier this year, the receiver identified substantial amounts of money from union trust funds that were placed at risk.
Receiver Thomas Lennon issued his first report Oct. 27 to Judge Garr King of the U.S. District Court for the District of Oregon. Lennon was appointed receiver Sept. 21, after the U.S. Department of Labor and the Securities Exchange Commission seized control of the local investment firm. The two agencies charged the firm with violations of the Employee Retirement Income Security Act and the Securities and Exchange Act (27 BPR 2341, 9/26/00).
In an afternoon hearing Oct. 31, King said Lennon exceeded the scope of his duties of accounting for and protecting the assets of the company by including "comments, opinions and conclusions" that should be up to a judge or jury to decide. Rejecting the report, King said he would make a number of unspecified deletions before accepting it.
In the original version of the report, available in the court clerk's office, Lennon said Capital Consultants had 301 clients and $927 million under its management when he became receiver. Some $442 million of the funds were invested in public equities and cash, and another $485 million were in various private investments, including loans.
According to the report, 77 percent of those assets were union plan funds, including Taft-Hartley plans covering pension, health and welfare, and vacation. More specifically, funds from the Taft-Hartley plans and other union plans accounted for $407 million of the private investments.
While the public investments generally produced expected returns, the private investments were "remarkably unsuccessful and have produced dramatic losses," Lennon's report said.
"Capital Consultants undertook no serious, thorough, nor valid credit underwriting due diligence with respect to its borrowers," the report said. "As result, it holds a large number of the equivalent of 'junk-debt;' borrowers who are incapable of ever repaying principal and collateral that has little or no value. Commensurate with this lack of credit underwriting was an extensive history of concealment of loan problems by the use of loan restructuring, maturity extensions, new advances, debt-for-equity swaps and the like, all to avoid the necessity of declaring loans in default and having the gravity of the Private Investments portfolio disclosed," the report said.
The extent of the losses is not yet known, Lennon said. "It appears that little to none of the over $450 million in outstanding loans are of high enough quality to be worth anything near the amount of client dollars invested by Capital Consultants," he said.
About three-fourths of the private investments are in non-real estate loan investments called collateralized notes, Lennon said. One of the largest borrowers was Wilshire Credit Corp., a Portland-based firm that acquired and serviced loan portfolios and mortgaged-back securities. In 1995, Capital Consultants began loaning Wilshire an increasing amount of money with little if any due diligence, Lennon said.
By 1999, Wilshire had gone through a complex restructuring of the $160 million it had borrowed from Capital Consultants, Lennon said. The collateral Capital Consultants originally received from Wilshire for the loan was transformed into an equity interest in a new entity with no demonstrated ability to repay principal, he said.
"The receiver can find no legitimate business explanation for the extraordinarily complex form of the restructure. But the form of the restructure was used by Capital Consultants to conceal from its clients that the Wilshire loans had little repayment prospects and the value of the collateral was severely diminished," Lennon said.
Union plans and trusts with funds invested in Capital Consultants included Local 290, Plumber, Steamfitter and Shipfitters; the Office and Professional Employees International Union Local No. 11; the Signatory Employers-Idaho Laborers Pension Trust Fund, and the Oregon Laborers Union.
At the end of the status hearing, King urged the lawyers involved on behalf of the government, Lennon, union members, trust plans, a bank and Capital Consultants to cooperate and reduce the cost of the pending litigation. King said he hoped to streamline the proceedings and see what might be done about segregating the issues. Lawsuits have been filed by the SEC, the Labor Department, nine of the union trusts, and by union plan members against trustees of at least four unions. At the hearing, a dozen lawyers were seated at tables in front of King with nearly as many more lawyers observing the proceedings along with reporters, union officials and union plan members.
King said he wanted to keep down the cost of the litigation so that those who lost money would have as much available to them as possible.
For the time being, King said he will retain jurisdiction of the SEC and Labor Department cases. Judge Dennis Hubel will oversee litigation by the union trusts against Capital Consultants and Judge Ancer Haggerty will oversee the litigation by union members against the trustees, King said.
In a related development, two more union members filed suits against pension plan trustees alleging breach of fiduciary duties under ERISA. The newest plaintiffs, represented by the Seattle law firm of Birmingham Thorson & Barnett, seek class action status for about 9,000 members each. Each plan had invested about $40 million with Capital Consultants.
One lawsuit was filed against the trustees of the Denver-based Eighth District Electrical Profit Sharing, Pension Trust, and Welfare Trust (McPherson v. Trustees of the Eighth Dist. Elec. Profit Sharing; Pension and Health and Welfare Plans, D. Ore., No. CV00-1445, 10/26/00). The other lawsuit was filed against trustees of the Portland-based United Association Union Local No. 290 Plumber, Steamfitter and Shipfitter Industry 401(k), Pension Trust and Welfare Trust (Eidem v. Trustees United Ass'n Union Local No. 290 Plumber, Steamfitter and Shipfitter Indus. 401(k), Pension Trust and Welfare Trust, D. Ore., No. CV00-1446, 10/26/00).
In late September, members of two other unions filed similar actions against trustees of their pension and benefit plans. The unions were the Oregon Laborers Union and the Office and Professional Employees International Union, Local No. 11. Also, in late September, nine union pension and benefit trusts filed a collective claim against Capital Consultants (198 DLR A-2, 10/12/00).
During late October, the Bank of the West also filed a motion to intervene.
Copyright © 2000 by The Bureau of National Affairs, Inc., Washington D.C.