Pension Trustees A Possible Target
The Labor Department threatens to sue over investments with the failed Capital Consultants firm that lost union benefit funds
By Jeff Manning and James Long of The Oregonian staff
Saturday, April 14, 2001
The U.S. Department of Labor has notified a federal judge in Portland that it soon may sue the trustees of several union pension funds that lost millions in the collapse of Capital Consultants.
"The new actions would allege violations of the Employee Retirement Income Security Act against trustees of several of the plan clients," said Stacey E. Elias, a Labor Department trial attorney, in a March 29 letter to U.S. District Judge Garr M. King that was obtained by The Oregonian.
A Labor Department move against the trustees would follow similar claims by members of five unions who have filed class action lawsuits alleging that some of their trustees were negligent in handing over millions of dollars to Capital Consultants.
But such a lawsuit also could complicate an already contentious legal scene in which the trustees of some of the funds -- including trustees named in the class actions – are suing Capital Consultants and other defendants in an effort to recover millions in lost investments.
The U.S. Securities and Exchange Commission and the Department of Labor forced Capital Consultants into liquidation last fall after filing lawsuits accusing the investment advisory firm of pension law violations and fraud.
More than 100 trustees of 25 trust funds now claim in lawsuits against Capital Consultants that the company hoodwinked them into financing reckless investments and what the government now alleges was a Ponzilike scheme to hide losses of more than $200 million.
The trustees contend that they were fooled by a sophisticated scheme led by Capital Consultants Chairman Jeffrey L. Grayson. But members of five of the union trust funds allege otherwise in their class action lawsuits. They accuse some of the trustees of contributing to the losses through negligence.
The trustees, the lawsuits allege, failed to obey the most basic federal laws requiring prudent investment of trust funds and ignored blatant signs of trouble at Capital Consultants.
John Abbott, a former influential leader of the Oregon Laborers Union and its various trust funds, admitted in February that he took nearly $195,000 in payoffs from Grayson. Abbott told U.S. District Court Judge Anna Brown that he took the money in return for steering Laborers retirement and benefits money to Capital Consultants.
Abbott agreed to a reduced sentence of 15 months in federal prison in exchange for testifying against Jeffrey Grayson and other union officials.
The Oregonian reported in September that at least a half-dozen pension trustees accepted big-game hunting trips and expensive fishing charter junkets to Alaska from Capital Consultants.
The prospect of the Labor Department weighing in against some of the trustees is viewed with consternation not only by the attorneys representing trustees but by attorneys suing some of the same trustees.
Trustees' lawyers fear that a Labor Department action would undermine the trustees' contention that they were innocent dupes of Capital Consultants and therefore were not at fault.
"This scheme was so complex that 300 private investors and some 60 other trusts didn't uncover it," said Chrys Martin, a member of the Bullivant Houser Bailey law team representing three Oregon unions' trust plans and their trustees.
"The (trusts') professional advisers didn't even detect it," she said. "I don't know how the trustees could be expected to recognize it."
Lawyers suing the trustees also are loath to see the Labor Department go after the trustees but for a different reason.
New Labor Department lawsuits, they fear, might drain away trustee assets that otherwise would be available to reimburse their clients.
For instance, said Rich Birmingham, a Seattle attorney for members of Oregon Plumbers Local 290 and Colorado Eighth District electrical workers union plans, the Labor Department's intervention might force the targeted trustees to hire more lawyers at the expense of the trust plans and their liability insurance policies.
Federal pension law, he pointed out, requires the Labor Department to assess a penalty equal to 20 percent of the amount it recovers from fiduciaries in such cases. This money, Birmingham said, "might otherwise go to the plan participants."
Elias, the Labor Department lawyer who threatened to file the new lawsuits, wouldn't identify the trusts or trustees she's thinking of suing. She refused to elaborate on the letter she sent to Judge King.
Members of just five union trusts that lost money in the Capital Consultants affairs have filed suit against their trustees, a small fraction of the 60-odd trusts that placed money with Grayson's firm. For instance, members of the Colorado sheet metal workers' union trusts, which may have lost as much as $23 million in failed Capital Consultants investments, have taken no action.
"There are probably $30 (million) to $50 million in losses out there that nobody's representing," Birmingham said. "If the department wants to do something constructive they could represent them."
Jeff Manning can be reached at 503-294-7606 or by e-mail at firstname.lastname@example.org.
James Long can be reached at 503-221-4351 or by e-mail at email@example.com