BY ROBERT P. MADER
OF CONTRACTOR'S STAFF
WASHINGTON — The U. S. Department of Labor filed a consent order on Aug. 2, 2004, ousting four trustees from the board of the Plumbers and Pipefitters National Pension Fund and requiring them to pay $10.98 million in restitution and civil penalties in connection with the imprudent management of the fund's investment in the Diplomat Resort and Country Club in Hollywood, Fla.
Among those ousted was UA General President Martin J. Maddaloni.
In a civil suit filed by the Department of Labor in September 2002, the government alleged that the Pension Fund of the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry had spent $800 million to buy the Diplomat Hotel property and redevelop it, but failed in its fiduciary responsibility to members and retirees (Oct. 2002, p. 1).
The suit, filed in federal district court in Ft. Lauderdale, Fla., alleged that the trustees violated the federal Employee Retirement Income Security Act (ERISA) by imprudently proceeding with the Diplomat project without any feasibility studies, market analyses, market-tested construction budgets, construction schedules, economic models, financing arrangements or other information with which to make an informed decision.
The suit also alleged that the trustees failed to maintain adequate financial controls over construction costs and paid excessive fees to service providers on the project.
The settlement resolves allegations against pension trustees Maddaloni; Thomas Patchell, general secretary-treasurer of the UA; Patrick Perno, administrative assistant to Maddaloni; and management trustees Charles H. Carlson, former chairman of Industrial Piping Co., Marquette, Mich.; and James A. House, part owner of J.A. House Inc., Indianapolis.-Both Carlson and House are past presidents of Mechanical Contractors Association of America.
In addition to paying restitution, Maddaloni and Patchell have permanently resigned their positions as trustees for the fund and the six other ERISA-covered plans they currently serve as fiduciaries. Carlson and House have resigned permanently as trustees. Perno, who became a trustee after the project was initiated, may continue to serve as a trustee of the fund, but must recuse himself from any decision concerning the investment of the assets until Dec. 31, 2006.
The federal district court in Ft. Lauderdale, Fla., must approve the settlement.
"Our policy is not to comment on litigation matters that are pending," said Edward Mackiewicz, Washingtonbased attorney for the management trustees. "The proposed settlement has not been approved by the court, so we don't have a comment at this time."
UA attorney John Cassidy of the Washington law firm Baker Botts LLP did not return a phone call from CONTRACTOR.
"Pension trustees purchased and developed the property without the slightest due diligence to determine the financial viability of the project," Ann Combs, assistant secretary for the U.S. Department of Labor's Pension and Welfare Benefits Administration said in September 2002. Independent Fiduciary Services Inc. has recovered additional funds for the pension plan. IFS is an independent fiduciary appointed in 2000 pursuant to an agreement with Secretary of Labor Elaine Chao. That agreement appointed IFS to manage the Diplomat project. The firm is continuing to pursue additional claims against subcontractors and service providers that the Department of Labor alleged were overpaid for their services.
At a September 1997 board meeting, the pension plan trustees voted to buy the Diplomat property on behalf of the pension plan from Union Labor Life Insurance Co. At that time, the property was abandoned and in a state of disrepair. The UA purchased the property with the intention of subsequently selling it to the pension plan, according to the lawsuit.
The sale of the real estate from the union to the pension plan was prohibited under ERISA, because of the relationship between the union and its pension plan, without an exemption from the Department of Labor. In their exemption application, the trustees failed to disclose that the anticipated development would require the further investment of hundreds of millions of dollars of the plan's assets.
The exemption approved by the department covered only the terms of the $40 million sale of the property from the union to the pension plan, not the prudence of the property's redevelopment using union pension funds.