The Oregonian

Trustees Settle Suit Over Firm's Collapse

JEFF MANNING and JAMES LONG

03/07/02

Trustees who placed Portland Plumbers union trust funds with investment firm Capital Consultants have agreed to pay $3.7 million to settle a lawsuit filed by members accusing them of negligence.

Pension and benefit trust funds affiliated with Local 290 of the Plumbers, Steamfitters and Shipfitters Union invested about $40 million with Capital Consultants only to see federal regulators seize the firm in September 2000 for running an alleged Ponzi-like scheme. About $29 million of the Plumbers' total was in questionable investments that are either lost or at risk.

Trustees from three other unions -- the Oregon and Idaho Laborers unions and Local 11 of the Office and Professional Employees International Union -- are expected to settle similar class-action lawsuits within days.

Members of six unions in all sued their fund trustees after the collapse, accusing them of imprudently investing their money. Federal pension law requires trustees to "utilize the care and skill of a prudent expert in selecting and monitoring" their funds' investments and advisors.

Capital Consultants catered to union clients, serving 163 labor trust funds nationwide. One hundred seventy-seven private clients also invested with the firm.

A receiver appointed to liquidate Capital Consultants estimates the firm lost $355 million in failed and allegedly fraudulent investments, with most of the money coming from labor funds.

Twelve union trustees from the Plumbers and Laborers have agreed to resign as part of the settlement. The trusts also agreed to hire investigators to look into gifts and gratuities from Capital Consultants to trustees and their professional advisors.

In a September 2001 letter to the trusts, the Labor Department demanded that trustees repay to their trusts "any financial or other benefits, including but not limited to cash, gifts, contracts, reimbursement of expenses, or any other remuneration" received from Capital Consultants.

The union members' settlements, although substantial, won't fill the hole dug by Capital Consultants' failed investments. The Plumbers trustees' payment of $3.7 million, for example, represents less than 13 percent of the estimated $29 million union members have at risk.

Chrys Martin of Bullivant Houser Bailey, a Portland law firm defending the Plumbers trustees, pointed out that her clients had just $4 million in fiduciary liability insurance coverage. According to a settlement document filed in federal court, the members decided not to sue the trustees personally because the cost of their defense would come directly from the insurance money that would otherwise reimburse the losses.

Because of limited insurance coverage, the other union trusts also are offering settlements far below the amount of money the trusts may have lost. There is no legal minimum of insurance coverage union trusts must maintain.

The Idaho Laborers trustees are expected to reimburse the funds $1.9 million, although the union trusts suffered losses of about $10 million, according to Dan Feinberg, an Oakland, Calif., lawyer representing the members.

The Oregon Laborers trustees are expected to pay out $4.3 million, although their funds have lost as much as $40 million, Feinberg said.

The Office and Professional Employees trustees are expected to pay out $953,000. The union's health and welfare and 401(k) funds have about $8.6 million in failed or questionable Capital Consultants investments.

"All these plans were under-insured," Feinberg said. "And that has sad consequences for members."

Capital Consultants put union workers' money into a wide array of high-risk loans, much of it to the former Wilshire Credit, which borrowed $160 million and then defaulted on the debt. Union clients provided $110 million of the $160 million extended to Wilshire.

It was Capital Consultants' efforts to conceal the disastrous Wilshire losses that led to the alleged Ponzi-like scheme that proved the firm's ultimate undoing.

The union trustees who are defendants in these lawsuits are themselves suing Capital Consultants and advisers to recover additional money. Still more money will come in as a court-appointed receiver sells off Capital Consultants' remaining assets. He already has sold one block of Capital Consultants' loans for $60 million.

Two prominent Portland labor leaders could lose their positions with the union trust funds as a result of the settlement.

Matt Walters, one of the 12 who has agreed to resign, is the longtime head of the Plumbers Local 290. Gary Kirkland, chief executive officer of the Office and Professional Employees Local 11, is under Labor Department pressure to resign as a trustee. Kirkland has hired a lawyer and vowed to fight the department in court.

Kirkland has come under fire for taking thousands of dollars in hunting and fishing trips from Capital Consultants. Kirkland's son, Dean Kirkland, organized many of the trips for various trustees as Capital Consultants' chief salesman to labor unions.

Another union official not involved in this settlement, John D. Abbott, was kicked out as co-chairman of the Oregon and Idaho Laborers' funds three years ago because of financial irregularities. He pleaded guilty in February 2001 to taking nearly $200,000 in illegal payoffs from Capital Consultants chairman Jeffrey Grayson. Abbott will begin serving 15 months in federal prison in May.

Lawyers for the 12 trustees who have agreed to resign say their clients have not been accused of any financial misdeeds. Some have wanted to quit the trusts for some time but stayed on to help resolve the Capital Consultants litigation, attorney Martin said.

Leroy Hammer, Dean Morey, Nick Scovill, Jerry Fullman and Matt Walters will resign from the Plumbers trusts.

Resigning from the Oregon and Idaho laborers trusts will be Dale Campbell, George Gritz, Jay Minor, Al Norbraten, Darryl Van Lom, John Sutherland and Steve White.

Although the names were not listed in the settlement agreement filed Thursday in U.S. District Court, Martin confirmed the resignations. She said she didn't know why the Labor Department chose to pressure those individuals to quit while allowing others to remain.

Department of Labor attorneys did not return phone calls.

Martin said the trustees relied on advice from financial advisors, auditors and attorneys. Those outside experts failed to detect Capital Consultants' schemes and it's unreasonable to expect the trustees to have done so, Martin said.

"We are pleased with the terms of the settlement," she said. "Trustees are not professional investors. They are volunteers representing the financial interests of their trades, fellow employees and themselves."

One of the surviving Plumbers trustees predicted the Capital Consultants scandal will make it more difficult to persuade others to serve as trustees. "These unfortunate events will likely deter people from volunteering for trust service," said Ed Gormley, co-chairman of the Plumbers trust. "We have already had a difficult time identifying new volunteers to step forward and take on this important responsibility."

Jeff Manning can be reached at 503-294-7606 or by e-mail at jmanning@news.oregonian.com.

James Long can be reached at 503-221-4351 or by e-mail at jimlong@news.oregonian.com.


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