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Fiduciary Responsibility


Labor Department Settles Complaints Against Trustees of Union Pension Plans


By Tom Alkire

Wednesday, April 10, 2002


PORTLAND, Ore.--The Department of Labor filed five consent orders with the U.S. District Court for the District of Oregon April 4 settling allegations against more than 40 trustees of union pension and benefit funds concerning alleged violations of the Employee Retirement Income Security Act (Chao v. Kirkland,D. Ore., No. CV02-441, settlement4/04/02); (Chao v. Abbott, D. Ore., No. 02-439, settlement4/04/02); (Chao v. Legino, D. Ore., No. 02-440, settlement 4/04/02); (Chao v. Fullman, D. Ore., No. 02-442, settlement4/04/02); (Chao v. Hazzard, D. Ore., No. 02-443, settlement4/04/02).


At the same time the consent orders were filed, the Labor Department filed the complaints upon which the settlements were based.


The settlements are the latest round of litigation resulting from the demise of Capital Consultants LLC, a Portland investment management company that has been charged with pension fraud. The Labor Department already has a case pending against Capital Consultants.


Capital Consultants has been under federal receivership since September 2000. The department estimates that a large number of union funds lost more than $100 million due to risky investments made by Capital Consultants. Funds from dozens of collectively bargained Taft-Hartley multiemployer plans and other union plans accounted for $407 million of high risk investments made by Capital Consultants, many of which may now be worthless, according to court documents.


The resulting litigation in the U.S. District Court for the District of Oregon has fallen into three broad areas: actions against Capital Consultants, and their legal and financial advisers, by federal regulators and trusts; actions against union fund trustees by union members and the Labor Department; and criminal charges against former Capital Consultant managers and at least one union fund trustee.


Last month a $16 million settlement was reached in the class action cases filed by union members against their fund trustees. However, the funding of the settlement is now in question due to the financial difficulties of the insurance company that provided liability coverage for some of the funds' trustees. All the settlement payments were to be funded by the funds' fiduciary liability policies.


Settlements Do Not Require Trustees to Pay More


The Labor Department's five settlements are part of the class action settlements and do not require the trustees to pay any more money to the trust funds, said Chrys Martin, a Portland lawyer representing most of the fund trustees.


The department's complaints alleged that trustees for 10 funds involving five different unions violated the prudence standard under ERISA by allowing Capital Consultants to invest $150 million in risky investments. The suits alleged that the trustees ignored warnings by outside advisors, ignored their own guidelines on diversification, and permitted Capital Consultants to make a number of risky private investments during the mid- to late 1990s.


The suits also charged that three officers in three different unions who served as trustees were improperly influenced by gifts from Capital Consultants, also in violation of ERISA.


The suits sought the restoration of the funds' losses. However, the settlement of the suits does not call for any more payment to the trusts than was agreed in March in the class action lawsuits.


The Labor Department settlement resulted in the dismissal of 27 trustees from their current positions and a new set of procedures that the funds' must abide by in the years ahead in their investment management.


Martin said the settlement provided nothing new, only that the government wanted the settlement written in its format. She said it was "disingenuous and unfortunate" that the Labor Department took action against the funds' volunteer trustees. The agency first began investigating Capital Consultants in the early 1990s and yet it, too, failed to catch onto its investment schemes, she said.


Suits Focus on 'Collateralized Notes'


The Labor Depatment suits focused on the private investments made by Capital Consultants, many called "collateralized notes." Such notes often were made with very little collateral, the suits said. Often the collateral consisted of expected revenues for services yet to be performed, the suits said.


The five lawsuits detailed how trustees in fund after fund ignored warnings by outside investment "monitors" of the risks of such private investments. Trustees for a number of the funds ignored their funds' guidelines on the amount of their funds that should be invested in such ventures. When the amount of such investments exceed the guidelines, trustees often voted to relax the guidelines, the suits said.


For example, in the case involving the Oregon Laborers-Employers Health and Welfare Trust, the plan called for investments only in readily marketable securities and real estate. Yet during the mid-1990s Capital Consultants invested up to 35 percent of the fund under its management in collateralized notes, the suit said.


Between 1995 and 1999 the trustees of the Oregon Laborers-Employers Pension Plan allowed Capital Consultants to invest 55 percent, or $103 million, of its assets under the firm's management in private placements, the suit said. Trustees of the union's 401(k) plan allowed up to 100 percent of the funds managed by Capital Consultants to be placed in risky private investments, contrary to the fund's diversification policy, the suit said.


Loan Limits Changed


Three funds were administered by the Eighth District of the International Brotherhood of Electrical Workers headquartered in Denver. The union's pension fund in the early 1990s had a $300,000 limit on the amount Capital Consultants could loan to any one borrower in a private placement, according to the suits. In 1996 the trustees changed this limit to 20 percent of fund's assets under management by Capital Consultants. And in 1997 the trustees changed the limit to 50 percent. By 2000, the fund had $46 million under management by Capital Consultants, much of it private placements, the suit said.


The Portland-based United Association Union Local 290 Plumber, Steamfitter and Shipfitter Industries Pension Plan was "repeatedly warned" in 1995 by its outside investment monitor about Capital Consultants' private placements, the suit said. The trustees were warned of the low returns and high risks of such investments, the suit said. The monitor characterized Capital Consultants' nontraditional asset portfolio as "drastically underperforming," the suit said.


Trustees were charged with failure to protect interest, with failure to act with prudence and diligence, failure to heed warnings, and relying on inadequate investment reports.


Three union officials who served as trustees were singled out for accepting gifts from Capital Consultants. John Abbott, a former business manager of the Oregon, Southern Idaho, and Wyoming District Council of Laborers, was named for accepting $194,940 in gratuities from Jeffrey Grayson, the principal owner of Capital Consultants. Abbott has already pleaded guilty to criminal charges and is to begin a 15-month sentence soon, plus must pay restitution.


The other two union officials charged in the complaint for accepting gratuities as trustees were Gary Kirkland, chief executive of the Portland-based Office and Professional Employees International Union Local 11, and Robert Legino, a Denver-area union official who served as a trustee on two funds administered by the Eighth District of the IBEW. A portion of the charges against Kirkland were not included in the settlement and remain in dispute with the Labor Department, according to background information supplied by the department.


Union trustees involved in the Labor Department's actions are from the Oregon and Idaho Laborers Union, Eighth District Council of the IBEW based in Denver, and two Portland-based locals: Local 11 of the OPEIU and Local 290 of the Plumbers, Steamfitters and Shipfitters Union.


Copyright © 2002 by The Bureau of National Affairs, Inc., Washington D.C.

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