BUSINESS WEEK / DECEMBER 22, 1997
At 40,the boyish-looking Terence
R.McAuliffe is the reigning king of Democratic fund-raising.
Says mentor Tony Coelho, a former Democratic lawmaker who gave
McAuliffe his first big fund-raising job in 1982: "He's
got the best Rolodex in America."
No kidding. As finance chairman for
the Clintont/Gore Reelection Committee, McAuliffe pulled in a
staggering $43 million in eight months. That made him the front
runner to head the Democratic National Committee-a job he turned
down. Instead, McAuliffe has turned his attention to his
home building, insurance, and marketing businesses.
But McAuliffe is finding that it's
not easy putting politics behind him. His name has been
linked to the fund-raising scandal that resulted in the disqualification
of Teamsters President Ronald Carey.
The U. S. Attorney's Office in Washington
is trying to learn more about how McAuliffe earned a lucrative
fee in helping Prudential Insurance Co. of America lease a downtown
Washington building to the government.Prudential just settled
a civil case involving that lease for over $300,000 without admitting
And Labor Dept. probers are looking
at possible conflicts of interest in at least two of McAuliffe's
Florida real estate deals that were bankrolled by International
Brotherhood of Electrical Workers pension money. Investigators
want to know why McAuliffe got what look like very sweet deals.
McAuliffe insists that he has done
nothing improper and has no knowledge of any investigation. "I'm
honest as the day is long," he says. "The worst thing
I've ever gotten is a speeding ticket."
McAuliffe paints the controversies
surrounding him as the work of political foes on both sides of
the aisle. But sometimes it's hard to tell where his political
work ends and his business interests begin. His business partners
often are the same Clinton and McAuliffe people he taps for campaign contributions.
For example, Carl H. Lindner Jr.,
chairman of American Financial Group Inc. and a generous giver
to both parties, donated-along with his family and employees-$724,000
to Democrats from 1991 to 1996.
In 1996, he invested in the homebuilding
company McAuliffe was purchasing. And top labor officials who
control millions in campaign dollars-and with whom McAuliffe is
friends-are also his partners in private deals.
Take his relationship with the International
Brotherhood of Electrical Workers. In 1991, McAuliffe formed a
partnership with a pension fund jointly operated by the IBEW and
the National Electrical Contractors Assn., a management trade
Such funds are regulated under the
Taft-Hartley Act, and contributions come from both unionized
electrical workers and from their employers, electrical contractors.
The fund has co-chairmen-one
from the union and one from management-and both labor and
management employees are beneficiaries. The IBEW fund currently
has $6 billion invested in stocks, bonds, and real estate.
In the 1991 deal that McAuliffe packaged
and brought to the fund, the fund put up $38.7 million in cash
for five apartment complexes and a rundown shopping center near
St. Petersburg. McAuliffe got a 50% equity stake, even though
the fund put up all the money.
No investment adviser was involved,
says John M. Grau, co-chairman of the fund and executive
vice-president of the National Electrical Contractors Assn.
because McAuliffe's plan seemed like a slam-dunk: The pension
plan was acquiring the properties at $10 million below their appraised
a deal? Because the seller was the Resolution Trust Corp.,which
had taken control of the properties from Orlando-based
American Pioneer Savings Bank.
The RTC had rescued the S&L and
placed it in receivership a year earlier-costing taxpayers $500
million. American Pioneer had been owned by Richard A. Swann,
father of Dorothy Swann, McAuliffe's wife.
The elder Swann once presided over
a $2 billion commercial empire. But it crashed when regulators
declared the S&L insolvent. Swann filed for personal bankruptcy
on Nov. 21, 1990.
Since then, Swann says, he acts as
McAuliffe's attorney in business ventures and is paid fees for
managing McAuliffe companies. McAuliffe says Swann is not a partner
but is paid to "help with the management." Three such
deals involved the IBEW and its pension funds.
McAuliffe's primary IBEW contact was
Jack F. Moore, now retired as International Secretary of the union
and co-chairman of the jointly managed pension fund.
Moore and McAuliffe, then a young
Washington lawyer, have been close since 1988, when both worked
to help mutual friend and House Democratic Leader Richard
A. Gephardt's run for the Democratic Presidential nomination.
In June, 1992, the IBEW pension fund
did another deal with McAuliffe. It loaned him $5.8 million to
buy 284 acres of Country Run, an Orlando subdivision of mostly
unimproved lots. It, too, had formerly belonged to Swann's
S&L.. McAuliffe's intention was to improve the lots and sell
them or develop the property himself.
The Country Run land itself served
as the primary collateral for the loan. But McAuliffe also pledged
his half ownership of the St. Pete properties as additional security.
Real estate consultant Marilyn K.
Weitzman, president of New York's Weitzman Group Inc. and adviser
to the pension fund on some of its real estate transactions, told
the fund that the loan involved high risk. But because of McAuliffe's
additional collateral, Weitzman told BUSINESS WEEK, she upgraded
the investment from "reasonable" to "excellent."
She told the fund it should expect
at least a 20% return.
That wasn't even close to what it
got. The fund ended up with only a 5.3% annual gain-and a lot
For one thing, McAuliffe's additional
collateral vaporized by August, 1993, when the fund agreed to
buy out all but a small portion of his share in the first deal,
the St. Pete partnership.
Pension trustees say they viewed McAuliffe's
stake as a bargain: The value of the St. Pete properties had dropped,
and McAuliffe was selling at a discount.
Again, no independent investment adviser
was consulted. With McAuliffe's collateral diminished, the fund
was skating on thinner ice if McAuliffe defaulted on the Country
And that's what happened just four
months after McAuliffe cashed out of the St. Pete properties.
"We didn't sell as many [Country Run] lots as we hoped,"
says McAuliffe. "You have ups and downs in real estate."
Once McAuliffe's Country Run loan
was in default, the fund had the right to foreclose and take possession.
But the fund never foreclosed, says Grau, because it didn't want
to be left holding undeveloped land.
Last October, after more than three
years of nonpayment, the fund sold off the Country Run loan in
a package with the St. Pete properties.
The buyer? Terry McAuliffe. He and
partner Lindner are now building homes on the Country Run lots
with their company, American Heritage Homes Inc.
is the second-biggest homebuilder in Orlando.
is the second-biggest homebuilder in Orlando.
Meanwhile, the fund's Country Run
return wound up being about half what similar loans were earning
in that time span, according to the Mortgage Bankers Assn., which
tracks commercial mortgage rates.
As for the St. Pete properties, McAuliffe
sold them to a real estate investment trust. Trustee Grau says
the 6.5% overall return to the fund compares favorably with the
2.3% average return nationally on pension fund real estate investments
from '91 to '96.
McAuliffe raised $43 million in
eight months as finance chairman for Clinton/Gore '96. Previously,
he was finance chairman for the Democratic National Committee.
McAuliffe packages and promotes affinity
credit cards and related products to labor unions and trade associations.
McAuliffe is president of American
Heritage Homes, a Florida
homebuilder acquired in 1996 with Carl Lindner of American
McAuliffe owns Jefferson Capital Holdings,
a Florida-based title and casualty insurance company.
McAuliffe is Washington representative
of, and an investor in, Pacific Capital Group, a Los Angeles venture-capital
firm owned by a former Drexel Burnham Lambert investment banker.
McAuliffe and father-in-law
Richard Swann formed American Capital Management to buy Florida
properties that the RTC took over after putting Swann's S&L
into receivership. Some of the properties were acquired using
union pension money.
Not so, says
Susan Hudson-Wilson, chief executive of Boston-based
Property & Portfolio Research Inc., a real estate specialist.
"For this strategy-purchasing distressed assets from RTC-this
would be an unacceptable return."
She adds that many pension funds followed
similar strategies at the time and earned double-digit returns
because of the lowball prices being paid for RTC properties.
The IBEW not only financed McAuliffe's
ventures, but it also helped boost his stature as a Democratic
fund-raiser by contributing $6 million to party candidates
from 1991 to 1996.
Starting in 1992,
McAuliffe organized a few fund-raisers for the Clinton-Gore
ticket. By 1994, however, he was finance chairman for the Democratic
National Committee. Moore controlled the IBEW'S political contributions
during McAuliffe's rise. Moore did not return phone calls seeking
The Labor Dept.'s inspector general
is looking into the IBEW fund's investments. While McAuliffe's
dealings with the pension fund may not put him in the best light,
any legal repercussions stemming from the Labor Dept. investigation
are likely to fall on the fund's trustees and not on him personally.
The Employee Retirement Income Security
Act, says a spokesperson for the Labor Dept., contains "sweeping
prohibitions against self-dealing and other "insider"
actions by plan trustees that result in a party receiving a benefit
because of the party's relationship to the pension fund."
However, another real estate deal,
this one involving Prudential Insurance, could pose legal woes
for McAuliffe. The issue: whether McAuliffe pocketed an improper
fee for influencing the award of a government contract.
In a letter signed on Mar. 18, 1993,
Prudential agreed to pay McAuliffe $375,000 if the Pension
Benefit Guaranty Corp. (PBGC) signed a 15-year, $187 million
lease to occupy a downtown Washington office building owned by
The U. S. Attorney for the District
of Columbia charged that Prudential falsely certified, after it
won the lease, that it had not hired anyone to help influence
the bidding process, which is illegal under the Competition in
Prudential paid McAuliffe $375,000,
but he says the money was a proper payment for fending off any
congressional attempts to stop the deal.
A PBGC spokeswoman says Prudential's
bid was the lowest, and that no one at the agency was ever contacted
by McAuliffe. She adds that the team of PBGC career staffers who
reviewed the bids stand by their decision. Prudential, through
a spokesman, denied wrongdoing and said it settled the case to
avoid costly litigation. But it wouldn't elaborate on the fee
As the Prudential matter drags on,
McAuliffe isn't out of the woods yet on the Teamsters case, whose
central figure, campaign consultant Martin Davis, is a friend
Davis has pleaded guilty to masterminding
an illegal scheme to raise $1 million for Teamsters President
Carey's 1996 reelection.
Davis told McAuliffe he could help
raise $1 million for the DNC from the Teamsters, but McAuliffe
denies he knew any details of how Davis intended to do this. Davis,
in his guilty plea, says his plan was to launder Teamsters donations
through the DNC in an effort to hide the source of Carey's money.
McAuliffe says he simply directed
Davis to see an aide and never heard any more from him. McAuliffe
testfied before a New York grand jury in September, which is
also interested in his and Davis' role in helping broker a deal
to switch the AFL-CIO'S affinity credit card from one bank
McAuliffe says he is certain he will
be cleared in the Prudential case. And he vehemently denies any
impropriety in his dealings with the IBEW or any involvement in
the Teamsters scandal. All he wants is to be left alone to run
his business affairs in peace, he maintains. But given the controversies
swirling around his dealmaking, he may have to wait a while to
just mind the store.