Chicago Laborers Trusteeship transcripts 09-17-1997

 
	1        OFFICE OF THE INDEPENDENT HEARING OFFICER
	2      LABORERS' INTERNATIONAL UNION OF NORTH AMERICA
	3 
	4   IN RE:		     	   )
	5   TRUSTEESHIP PROCEEDINGS        ) No. 97-30T
	6   CHICAGO DISTRICT COUNCIL       )
	7 
	8 
	9 
	10	    TRANSCRIPT OF PROCEEDINGS had in the
	11   above-entitled cause at the Days Inn, 644 North
	12   Lake Shore Drive, Chicago, Illinois, on the 17th
	13   day of September, A.D. 1997, at 9:25 a.m.
	14 
	15 
	16   BEFORE:  MR. PETER F. VAIRA, Hearing Officer
	17 
	18 
	19 
	20 
	21 
	22 
	23 
	24

 
	1   PRESENT:
	2        COMEY, BOYD & LUSKIN,
	3        (1025 Thomas Jefferson Street, N.W.,
	4        Washington, D.C. 20007-5243), by:
	5        MR. DWIGHT P. BOSTWICK,
	6	    appeared on behalf of the GEB Attorney;
	7        CARMELL, CHARONE, WIDMER, MATHEWS & MOSS,
	8        LTD.,
	9        (225 West Washington Street, Suite 1000,
	10        Chicago, Illinois  60606), by:
	11        MR. SHERMAN CARMELL,
	12        MR. MARTIN P. BARR,
	13        MS. SUZANNE M. LAW,
	14	    appeared on behalf of the Chicago
	15	    District Council of Laborers.
	16        FARACI & FARACI, P.A.,
	17        (111 West Washington Street,
	18        Chicago, Illinois 60602), by:
	19        MR. PETER S. FARACI,
	20	        -and-
	21 
	22 
	23 
	24

 
	1   PRESENT: (Cont'd)
	2 
	3        EARL L. NEAL & ASSOCIATES,
	4        (111 West Washington, Suite 1700,
	5        Chicago, Illinois 60602), by:
	6        MR. GEORGE N. LEIGHTON,
	7	    appeared on behalf of
	8	    John A. Matassa, Jr.
	9 
	10   ALSO PRESENT:
	11        MS. LAURIE HARTMAN
	12 
	13   REPORTED BY:  MARY KAY BELCOLORE, CSR, RPR.
	14	       CORINNE T. MARUT, CSR, RPR.
	15 
	16 
	17 
	18 
	19 
	20 
	21 
	22 
	23 
	24

 
	1        THE HEARING OFFICER:  Let's call the hearing
	2   to order.  Go on the record.
	3	    Mr. Carmell, I believe that -- let's
	4   see, we finished yesterday with the
	5   cross-examination of your last witness and I
	6   believe you have someone else to call.
	7        MR. CARMELL:  Right.
	8        THE HEARING OFFICER:  Okay.
	9        MR. CARMELL:  Mr. Pedersen.  Don't forget to
	10   swear him.
	11        THE HEARING OFFICER:  Ladies, swear in the
	12   witness.
	13	        (WHEREUPON, the witness was sworn.)
	14        THE HEARING OFFICER:  I think the acoustics
	15   may have changed since yesterday.  So, you may
	16   have to use that mike.  It seems to be going.
	17   Each of us may have to get closer to the mike here
	18   this morning.
	19	    Again, go ahead.
	20		CALVIN PEDERSEN,
	21   called as a witness herein, having been first duly
	22   sworn, was examined and testified as follows:
	23		DIRECT EXAMINATION
	24   BY MR. CARMELL:

 
	1        Q.    Would you state your name and spell
	2   your last name.
	3        A.    Calvin Pedersen, P-e-d-e-r-s-e-n.
	4        Q.    And with whom are you associated?
	5        A.    I am with Phoenix Duff & Phelps
	6   Corporation.
	7        Q.    In what position, sir?
	8        A.    I'm president of the company and a
	9   member of the Board of Directors.
	10        Q.    Would you tell the Hearing Officer a
	11   bit about the -- what the nature of Duff & Phelps
	12   and your association with it.
	13        A.    Sure.  Would you like me to start from
	14   the book, Sherman, or just --
	15        Q.    All right.
	16        MR. CARMELL:  Let me put into evidence, if I
	17   might, what has been marked as CDC Exhibit 19
	18   which is entitled "Presentation for Laborers'
	19   Pension Fund, Balance Portfolio, Phoenix Duff &
	20   Phelps."
	21        MR. BOSTWICK:  No objection.
	22        THE HEARING OFFICER:  It's admitted, sir.
	23	        (WHEREUPON, said document,
	24	        previously marked CDC

 
	1	        Exhibit No. 19, for
	2	        identification, was offered
	3	        and received in evidence.)
	4   BY THE WITNESS:
	5        A.    And to respond to Mr. Carmell's
	6   question, if you'll look at Tab 2, a little bit
	7   about our organization.
	8	    Duff & Phelps has been in existence
	9   since the early 1930s and we merged with Phoenix
	10   Security Group in November of 1995 and formed a
	11   money management company that today has some 44 to
	12   $45 billion of assets under management.
	13	    We are among the 25 largest publicly
	14   held investment management companies in the
	15   country.  Our stock is traded on the New York
	16   Stock Exchange.  We invest not only for
	17   institutions like the Laborers' Pension Fund, but
	18   also we have a family of open end retail mutual
	19   funds that are available to the public.
	20	    We have some 540 employees in four
	21   major locations.
	22        Q.    And which location do you work out of?
	23        A.    I am in Chicago.
	24        Q.    The exhibit refers to a balanced

 
	1   portfolio.  Has that -- has the nature of the
	2   portfolio changed with respect to Laborers'
	3   Pension Fund?
	4        A.    It has.  We had been a balanced
	5   portfolio manager from July of 1986 through the
	6   first part of this year, and you'll recall from
	7   yesterday Coleman Brandt saying there were a
	8   number of changes with respect to the assignment
	9   of money managers and our assignment changed and
	10   we became -- we really received two assignments
	11   from the trustees.
	12	    One, to become a fixed income manager
	13   and also to become a cash manager, and that's what
	14   our role is at the moment for the pension fund.
	15        Q.    Would you describe for the Hearing
	16   Officer your role as cash manager.
	17        A.    Yes.  We have a product that we
	18   describe as enhanced cash and normally with large
	19   pension funds they have what you would call a
	20   master trustee where all of the money every day is
	21   swept into a short-term investment account and
	22   it's managed by the bank, the bank being Northern
	23   Trust, Comerica, whoever it is.
	24	    We extend the duration a little bit and

 
	1   invest in some different securities and have been
	2   able to add some value over what a short-term
	3   investment fund has provided and that's what our
	4   assignment is from the Laborers.
	5        Q.    And at a given time, if you know, how
	6   much would be managed in this short-term -- in the
	7   cash account?
	8        A.    Right.  We're just getting underway on
	9   that and it's been described to me from Marco
	10   Consulting that the number is going to be in the
	11   30 to $50 million range.
	12        Q.    Would you describe for the Hearing
	13   Officer as a balanced portfolio manager the
	14   investment philosophy that, if I can call it
	15   Duff & Phelps as opposed to Phoenix Duff &
	16   Phelps --
	17        A.    Sure.
	18        Q.    -- used.
	19        A.    We had been a balanced manager, as I
	20   said, for really the ten-year period ending in
	21   January.  And in that capacity we were operating
	22   under the investment guidelines that the trustees
	23   set out, which were gone over in some detail
	24   yesterday by Mr. Brandt and they are the first

 
	1   exhibit in my report.  I won't belabor the Hearing
	2   Officer with that again.
	3	    And we were charged with managing a
	4   portfolio with a maximum equity position of 40
	5   percent and the balance to be distributed between
	6   bonds and cash, and it was our job to make the

	7   judgment as to how much of the portfolio was
	8   invested in stocks, bonds and cash and that's what
	9   we had been doing.
	10        THE HEARING OFFICER:  Any reason why there
	11   is -- maybe I am misreading the cash, the
	12   definition of what cash is.  Any reason why there
	13   is such a large amount of cash floating around?
	14        THE WITNESS:  Well, typically if you go back
	15   a few years, all of the pension funds in this
	16   country, be they Taft-Hartley, public or corporate
	17   pension fund, the bank STIF fund which they
	18   referred to it, short-term investment fund, was
	19   the identified vehicle to sweep the cash into.
	20	    And as it turns out with a portfolio as
	21   large as the Laborers, a billion dollars, there is
	22   really a pretty permanent amount of cash that is
	23   kind of sitting there.
	24        THE HEARING OFFICER:  Yes, not necessary.

 
	1        THE WITNESS:  It's not necessarily needed the
	2   next day and if you are willing to extend the
	3   maturity or the duration, whatever you want to
	4   call it, a little bit, you can add some extra
	5   value to the portfolio.
	6   BY MR. CARMELL:
	7        Q.    Mr. Pedersen, let me pursue that just
	8   for a moment.  I think what the Hearing Officer
	9   may be getting to is, why would a fund have that
	10   amount of cash?  What is the sources of the cash
	11   that are being invested?
	12        A.    The source of the cash is the other
	13   money managers' cash that is not currently being
	14   used for stocks or bonds.
	15        Q.    And as it has been testified by Mr.
	16   Brandt, there is always a certain amount that is
	17   being held in cash, is that right?
	18        A.    There, with a fund this size, there is
	19   always a certain amount that is available to
	20   invest, that's correct.
	21        Q.    Let me stay with Duff & Phelps.  You
	22   were balanced money manager; you would have had
	23   cash?
	24        A.    That's correct.

 
	1        Q.    And how would the cash be there, and
	2   why was it retained in cash?
	3        A.    Well, we have typically followed the
	4   approach that we were pretty fully invested.  And
	5   that has worked out well for the Laborers' Pension
	6   Fund, with the way both the stock and bond markets
	7   have behaved in the last five years or so.
	8	    But when you are managing a $150
	9   million portfolio, and you are buying and selling
	10   stocks and bonds, you never get it down to the
	11   penny, and you always have some cash that is
	12   sitting there.
	13	    And with a billion dollar pension fund,
	14   30 to 50 million is not an extraordinary amount of
	15   cash to be available for the managers to invest.
	16        Q.    So to beat a dead horse, which I like
	17   to do, if Duff & Phelps had sold a particular, at
	18   that time, stock, although it was considering
	19   purchasing something else a day later, there would
	20   be that moment in time when you would have
	21   received the proceeds of the stock, and that would
	22   be in your cash account?
	23        A.    That's exactly right.
	24        Q.    So then you would, you were obligated

 
	1   and did get as best a return as you could, until
	2   that money could be reinvested in something else?
	3        A.    That's right.
	4        Q.    One time -- well, the banks used to be
	5   custodians of the funds, and investment managers,
	6   unless they were a bank, did not keep the money,
	7   is that correct?  Some of them did not?
	8        A.    There is a bank that is still the
	9   custodian of all the funds.  The money managers do
	10   not have access to the funds, be it Duff & Phelps
	11   or Ark or Brinson.
	12        THE HEARING OFFICER:  But that, Sherman
	13   Carmell's question was that in the old days, when
	14   the cash essentially went to the bank, and the
	15   bank gave you 3-1/2 percent or whatever meager
	16   amount it would be --
	17        MR. CARMELL:  That's right.
	18        THE HEARING OFFICER:  -- at that time, and it
	19   would sit there.
	20        MR. CARMELL:  That is what I was getting to.
	21        THE HEARING OFFICER:  The purpose of this is
	22   to sweep it and put it someplace else, even if
	23   it's overnight, in something that's, has a higher
	24   interest rate.

 
	1        THE WITNESS:  Yeah.
	2   BY MR. CARMELL:
	3        Q.    Has the ability to get a better return
	4   than the old, than the STIF did.
	5        A.    That is the --
	6        Q.    Which is the perfect name for it.
	7        THE HEARING OFFICER:  Perfect name for it,
	8   that's right.
	9   BY THE WITNESS:
	10        A.    That is the only purpose of this
	11   assignment, that's correct.
	12   BY MR. CARMELL:
	13        Q.    Let's turn, if we might, unless you
	14   have something else, back into tab, into tab 4 of
	15   the exhibit, and get into the equity management
	16   and the other materials concerning the investment
	17   by Duff & Phelps when it was a balanced money,
	18   balanced portfolio manager.
	19        A.    All right.  In the first page in tab 4,
	20   we have a statement there with respect to our
	21   investment philosophy.
	22	    And it's a relatively conservative
	23   approach.  We believe in buying large cap
	24   companies.  When you see some of the exhibits

 
	1   later in this report, I think everyone in this
	2   room will recognize, if not all, 90 percent of the
	3   securities that we own for the Laborers' Pension
	4   Fund.
	5	    And our belief is that by owning large
	6   cap, high quality companies, that have good
	7   earnings and the prospects for increasing
	8   dividends, that you can achieve above average
	9   returns in the equity market.
	10	    With respect to the fixed income side,
	11   we have always been a high quality manager.  The
	12   guidelines that have been laid down by the
	13   trustees of the Laborers' Pension Fund are very
	14   consistent with how we operate anyway as a firm.
	15	    So it was a very comfortable assignment
	16   for us when we were hired in 1986.
	17        THE HEARING OFFICER:  Certain types of stocks
	18   or certain vehicles you wouldn't go anywhere near,
	19   such as the options market, is that right, sir?
	20        THE WITNESS:  That is correct.
	21        THE HEARING OFFICER:  Interesting note, that
	22   there is one pension -- one health and welfare
	23   fund in this union someplace else on the earth who
	24   attempted to do that, to buy options.

 
	1        MR. CARMELL:  Health and welfare fund?
	2        THE HEARING OFFICER:  Um-hmm.
	3   BY MR. CARMELL:
	4        Q.    You are what's called a, or what is
	5   called a large cap manager; that is, that, and
	6   there are other investment managers, some who are
	7   called small cap, is that --
	8        A.    Right.
	9        Q.    Let's proceed on into the next page,
	10   which is stock selection process, and advise us as
	11   a large cap manager how you went through that.
	12        A.    Okay.  We have, our senior team is a
	13   core team of four individuals, all who have been
	14   with Duff & Phelps for over 15 years.  And that's
	15   a core equity team, that draws on the research
	16   analyst information, and puts together the stocks
	17   that end up in the portfolio.
	18	    We focus on large cap companies.  There
	19   are firms that buy smaller stocks.  There are
	20   firms that buy mid-cap stocks.  That's not what we
	21   do.  And pension funds will hire other firms to do
	22   that for them.
	23	    We start with a large universe.  If you
	24   can see the second step there, the market cap is

 
	1   roughly 3 billion dollars.  They are generally
	2   companies with established records and dominant
	3   market share.
	4	    I mean, just to name some of the
	5   companies that we own, it's Gillette, it's
	6   Microsoft, it's Coke.  And you know, those
	7   companies have done well recently.  They don't
	8   always do well, but they have recently.
	9	    And then we look at a large number of
	10   statistical characteristics about those companies,
	11   that get into valuation, return on equity,
	12   margins, earnings per share.  And we select
	13   generally 40 to 60 stocks that end up in our
	14   client's portfolio.
	15	    And in the Laborers' Pension Fund right
	16   now, there are 38 stocks, as of the last time we
	17   had it, which was the end of January.
	18        Q.    And that would then lead us to, very
	19   quickly, to the next page, which is the -- you
	20   call it the team approach.  And what is the pie
	21   chart that's there?
	22        A.    It's simply to say that, as I
	23   mentioned, we have four senior people that as a
	24   team run the entire equity process at Phoenix

 
	1   Duff & Phelps.
	2	    We do not have one individual, if you
	3   refer to that as a superstar approach, that if
	4   they left our firm tomorrow, you know, we'd have a
	5   problem.  We have four individuals that have been
	6   with the firm a long time, and each one of those
	7   focus on one of those portions of the pie.
	8	    So, Ray Urban, for example, who heads
	9   our equity area up, focuses on cyclical and energy
	10   stocks.
	11        Q.    That's the next page which gives the
	12   Hearing Officer --
	13        THE HEARING OFFICER:  What tab are you on?
	14        MR. CARMELL:  4.  We are on about the --
	15   BY THE WITNESS:
	16        A.    And that next page that you referred to
	17   just lists the four key people, the industries
	18   that they follow, and the weightings in the equity
	19   portfolio.
	20   BY MR. CARMELL:
	21        Q.    Now, turning to the following page
	22   under tab 4, "Portfolio Construction."  Would you
	23   explain that.
	24        A.    Yes.  This is just to give the Hearing

 
	1   Officer a sense for the kinds of securities that
	2   we invest in.
	3	    And as I said earlier, we are a large
	4   cap manager and you can see those statistics in
	5   the top two lines.  We attempt to buy stocks that
	6   have a below market price to earnings ratio and
	7   you can see that the typical stock that we hold is
	8   selling at 18.6 times earnings versus the market
	9   of 19.7.  We think there is some value there.
	10	    And I'll not go through all of the
	11   detail of the others, but whether you're talking
	12   about dividend yield, dividend growth, which we
	13   feel is very important, future earnings growth,
	14   return on equity, and also the quality of the
	15   stocks, we try and buy securities that have
	16   better -- better features than the market as a
	17   whole.
	18        Q.    And on the next page, which is
	19   performance versus value equity style, explain
	20   this graph.
	21        A.    Well, this is what all of us who are in
	22   the money management business live by.  I refer to
	23   it as the dot in the box.  It doesn't matter so
	24   much anymore what the absolute returns are.  It's

 
	1   how you are compared to your peer group.
	2	    In the case of the Laborers' Pension
	3   Fund, as you heard yesterday, Segal Advisers had
	4   been the investment consultant for a long period
	5   of time to be replaced then by Marco Consulting
	6   earlier this year and this is one of the primary
	7   services that they provide to the trustees to
	8   evaluate how we're doing.
	9        Q.    Because that has a great deal of
	10   significance since it is not an absolute, but
	11   there is a benchmark comparison, would you take at
	12   least one of those --
	13        A.    Sure.
	14        Q.    -- boxes charts and explain it?
	15        A.    Do you mind if I take the one that puts
	16   us in the best light?
	17        Q.    I would hope you would.  Which one
	18   would that be?
	19        A.    Let's just look at the last year and
	20   these are periods ended June 30.
	21        Q.    Which one are we looking at?
	22        A.    We are looking at performance versus
	23   value equity style.  It's the second box on the
	24   page moving to your right.

 
	1        Q.    That's the one with the red triangle at
	2   the very top?
	3        A.    That's correct.
	4        Q.    Okay.
	5        A.    And what that shows is that the
	6   Laborers' Pension Fund return -- and we categorize
	7   that as Chicago value equity because all of our
	8   clients' equity portfolios are identical to the
	9   Laborers.  There is no differentiation from client
	10   to client unless we have specific instructions
	11   from the client to make differentiation.  In the
	12   case of the Laborers, we have not had that.
	13	    So, you can see for the year ended June
	14   30, the Laborers equities were up 43.38 percent.
	15   The S & P was up 34.66 percent.
	16        Q.    That's the -- more the triangle --
	17        A.    So, the triangle is where the Laborers'
	18   Pension Fund performed.
	19        Q.    Right.
	20        A.    The blue triangle down in the box is
	21   what the market did and then you see how the
	22   percentiles of other money managers performed.
	23	    And obviously I did pick the best one
	24   here, but you can see that the equities from the

 
	1   Laborers' Pension Fund for the last year were so
	2   good that the dot was out of the box on the top
	3   side.
	4	    Now, that's not --
	5        Q.    Let me try and look at this.  We know
	6   the red triangle on top.  You have explained
	7   that.  We also know the blue box and we do know
	8   that the S & P 500 is represented by the blue star
	9   or whatever it may be.
	10        A.    Right.
	11        Q.    Below that is a red line and that red
	12   line is keyed to which of the percentiles?
	13        A.    That's the 75th percentile.
	14        Q.    All right.
	15        A.    Well, there are two.  One red line, the
	16   top red line is the 25th percentile.  So, if you
	17   are above that, that means that you're in the top
	18   quartile of people that you're competing against
	19   in terms of what your assignment from the trustees
	20   has been.
	21	    If you're below the second red line,
	22   that means that 75 percent of the people that do
	23   what you do for a living have beaten you.
	24        Q.    And the black line is the median?

 
	1        A.    The black line is the median, that's
	2   correct.
	3        Q.    All right.  So, that -- in that period
	4   of time, Duff & Phelps was in the probably very
	5   top of the top quartile?
	6        A.    Yes.  And to be fair, over the three
	7   years, that was a similar case, but over the five
	8   years we did have a couple years where we did not
	9   do as well and the numbers came down a little bit.
	10        Q.    All right.  And in the boxes that are
	11   below category last quarter, et cetera, what does
	12   that -- let's take the last quarter.
	13        A.    Okay.
	14        Q.    Chicago value equity 22.06 means what?
	15        A.    That means that for the quarter ended
	16   June, the equities that we manage for the
	17   Laborers' Pension Fund were up 22 percent.
	18        Q.    And if we follow that down, the S & P
	19   was 17-1/2 percent, to round it out, and following
	20   down that, the 10th percentile did 17.34?
	21        A.    That's correct.
	22        Q.    So, that follows then in the box of
	23   last year, last three years, last five years?
	24        A.    Exactly right.

 
	1        Q.    Anything further on that tab you have?
	2        A.    No.
	3        Q.    Now we are going to move to tab 5,
	4   which was the fixed income investing --
	5        A.    Yes.
	6        Q.    -- philosophy.
	7        A.    And as you'll recall from yesterday in
	8   managing a balanced portfolio, a portion of the
	9   assets are targeted toward the equity side, a
	10   portion toward the fixed income side.  I've
	11   described our equity investment philosophy.
	12	    On the fixed income side it's similar
	13   in the sense that we take a relatively
	14   conservative approach in a long-term orientation.
	15	    We have an extensive research team that
	16   follows the fixed income securities that we invest
	17   in and, once again, it is what we call a

	18   team-based investment process.  So we don't have
	19   one person at Duff & Phelps that if they get hit
	20   by a truck tomorrow all of a sudden we have got a
	21   real problem.
	22	    So, we buy -- on the second page -- we
	23   buy high-quality securities, we use the fixed
	24   income part of the portfolio as an anchor to

 
	1   windward, if you would.  If you're not
	2   particularly excited about the equity market, the
	3   fixed income or the cash is where you would put
	4   your assets in a balanced portfolio.
	5	    Second page just indicates some of the
	6   things that we focus on, in terms of deciding what
	7   kind of fixed income securities we buy, how we
	8   position the portfolio.
	9	    And the next page kind of takes you
	10   from the bottom up, in terms of the fixed income
	11   strategy committee, which is a group of people
	12   like we have on the equity side, that constantly
	13   look at the fixed income markets, and then the
	14   individual portfolio managers make those
	15   decisions.
	16	    And you end up with a group of
	17   securities in the case of the Laborers' for us
	18   which totals some $100 million, that is put
	19   together.  And then you know the performance is
	20   achieved.  And that is shown on the following
	21   page.
	22        Q.    Was there any direction from the
	23   trustees to Duff & Phelps regarding the
	24   construction of the fixed income portfolio?

 
	1        A.    Only in the statement of investment
	2   policy and guidelines, which Mr. Brandt reviewed
	3   in some detail yesterday.
	4        Q.    Did Duff & Phelps have any issues or
	5   problems in following those investment guidelines?
	6        A.    We did not.
	7	    And we are, we are always asked by the
	8   Board and the consultant whether we have
	9   recommendations for changes or additions or
	10   deletions to the policy.  And that's always been
	11   an open issue I believe with all the money
	12   managers.
	13        Q.    Now, on the next page is the
	14   performance versus universe?
	15        A.    Right.
	16        Q.    And do you follow the same, except for
	17   the benchmark is the Lehman aggregate?
	18        A.    That's correct.  The construct there is
	19   the same as on the equity side.
	20        Q.    Then let's move to Tab 6, but let's go
	21   to the second page.
	22        A.    Um-hmm.
	23        Q.    And this is the partial list of clients
	24   by categories, is that correct?

 
	1        A.    That's correct.
	2        Q.    All right.  And there are four basic
	3   categories, corporate, endowment, etcetera, and
	4   Taft-Hartley funds and public funds?
	5        A.    Right.
	6        Q.    Then the Hearing Officer has the list
	7   here, and can see the construct of those.
	8	    Now, I'd like to turn, if I might, to
	9   Tab 7, which in fact is the, was the Laborers'
	10   Pension Fund balanced portfolio, is that correct?
	11        A.    Yes.
	12        Q.    All right.  And could you go through
	13   that, please?
	14        A.    Sure.  On Tab 2, and this would be
	15   identical information that we would present to the
	16   Board, if we were asked to come in and meet with
	17   the trustees, and what we would lay out there is a
	18   variety of time frames, the most recent quarter,
	19   year, two years, three years, and five years.
	20	    And we talk about the performance that
	21   we have achieved with our part of the portfolio.
	22	    As you can see on the bottom of the
	23   page, when you cut through all of the percentage
	24   performance numbers -- we began our relationship

 
	1   with the Laborers' at Phoenix Duff & Phelps in
	2   July of 1986.  So we are something in excess of
	3   ten years.
	4	    We received some $36 million from the
	5   Board, and that is a net number, which includes
	6   contributions that we received as well as
	7   disbursements that we made at the instruction of
	8   the Board to fund benefits.
	9	    And the total market value of the
	10   account as of the end of January, which was our
	11   last month as a balanced manager, was approaching
	12   $160 million.
	13	    And you can see the top of the page,
	14   the total fund return over that time period of ten
	15   years and one month was 11.1 percent, as compared
	16   to the benchmark portfolio of 10.2 percent.
	17	    On the next page, we, and this gets a
	18   little bit at the question that was asked earlier,
	19   with respect to cash, generally, as a firm, we
	20   have a philosophy of being pretty well fully
	21   invested.
	22	    We are not asset allocators or market
	23   timers in the sense of trying to make major
	24   judgments about where the stock or bond markets

 
	1   are.
	2	    But in this case, you can see that of
	3   the $160 million portfolio, we had $4.6 million in
	4   cash, a very small amount, 2.9 percent.
	5	    But when you take into account that
	6   it's a billion dollar fund, and you add up all of
	7   the other money managers, that gets you to that
	8   somewhere in the 30 to $50 million range of cash
	9   that is generally available to be managed in what
	10   we call the enhanced cash mode.
	11	    We had 43 percent in equities, and the
	12   balanced was in fixed income securities.
	13	    The balance of Tab 7 goes through a lot
	14   of characteristics about the individual holdings.
	15	    The next page with the bar graphs is
	16   simply what I alluded to earlier, with respect to
	17   what we believe to be important characteristics
	18   about the companies that we own.
	19	    One of the major things that we focus
	20   on in terms of buying stocks is dividends.
	21   Typically, we do not buy securities that don't pay
	22   dividends.
	23	    And you can see on Page 5 in Tab 7
	24   that, of the 38 issues that we hold for the

 
	1   Laborers', 28 of those or 73 percent increased
	2   their dividend in the last twelve months, and at a
	3   rate that was 50 percent in excess of the dividend
	4   increase of the typical company in the S&P 500.
	5        THE HEARING OFFICER:  You are, back to your
	6   first point, where you have given the entire
	7   portfolio, the collectible mortgage obligations,
	8   four and a half million dollars, 4.8 --
	9        THE WITNESS:  Yes.
	10        THE HEARING OFFICER:  -- what does that
	11   indicate?  Is that real estate you have invested
	12   in?
	13        THE WITNESS:  Those are, there are a variety
	14   of mortgages, mortgage securities that you can
	15   invest in under the Laborers' Pension Fund
	16   guidelines.
	17        THE HEARING OFFICER:  Those are mortgage
	18   securities?  This is, that is not the real
	19   estate?
	20        THE WITNESS:  No, that is not.  These are
	21   mortgage-backed securities, very much like GNMA
	22   securities.
	23        THE HEARING OFFICER:  Okay, mortgage pool
	24   assumption.

 
	1        THE WITNESS:  Right.
	2        THE HEARING OFFICER:  Okay.
	3   BY THE WITNESS:
	4        A.    Page 6 simply indicates the
	5   diversification of the portfolio.  As I indicated,
	6   we will own over any time period somewhere between
	7   40 and 60 stocks.  We tend to be more concentrated
	8   right now with only 38 stocks.
	9	    But that gives you a flavor for the
	10   diversification, with respect to various
	11   industries.
	12	    And then on Page 7, we list all 38
	13   stocks that we own for the Laborers' Pension
	14   Fund.  And there are 38 securities there.  And of
	15   the 38, there are only five that we are slightly
	16   under water on, and 33 that we have made a
	17   significant amount of money on for the fund.
	18	    And as I indicated, I think anyone in
	19   this room, if you just scan your eye down the list
	20   of those companies that are arrayed
	21   alphabetically, I'd be surprised if you didn't
	22   recognize, if not all, certainly most of the names
	23   of those companies; a very high quality, large cap
	24   portfolio, that is representative in our view of

 
	1   American industry, and good places to invest
	2   money.
	3	    The balance of that report, Mr.
	4   Carmell, is just a lot of detail about the equity
	5   portfolio, the research that we do on the stocks;
	6   and then a similar analysis on the fixed income
	7   portfolio.  I don't know if you want me to belabor
	8   that and go through that also.
	9	    But it's similar rigorous analysis of
	10   the fixed income portfolio.
	11   BY MR. CARMELL:
	12        Q.    The only one that I'd like you to talk
	13   about just for a moment is Page 13, which is I
	14   think an interesting pie chart sector analysis.
	15        A.    Right.
	16        Q.    Comparison between your portfolio and
	17   the benchmark, fixed income portfolio of the
	18   Lehman Government/Corporation.

	19        A.    Yes.
	20        Q.    Okay.
	21        A.    This is an attempt for us, as we do on
	22   the equity side, to simply present to the trustees
	23   how we are positioning the bonds that we manage
	24   for the Laborers' Pension Fund.

 
	1	    And without going through the reasons
	2   for all of it, you can see that in the Lehman
	3   Government corporate index, there is 74 percent
	4   Government bonds.  And we have underweighted
	5   there, that, so we are only 52 percent.
	6	    And if you slide around the pie charts,
	7   you will see there that we are overweighted and
	8   underweighted in certain areas.
	9	    And that's what, that is what we are
	10   being paid to do, to overweight or underweight
	11   those categories that we feel are either going to
	12   outperform or underperform the benchmark, which is
	13   our target.
	14	    And the balance of, the balance of the
	15   book which you have in front of you is simply
	16   again all of the research information, the quality
	17   ratings, and anything you would want to know about
	18   each and every security that is in the portfolio
	19   that we manage.
	20        Q.    I have nothing further.
	21		CROSS-EXAMINATION
	22   BY MR. BOSTWICK:
	23        Q.    Good morning, Mr. Pedersen.
	24        A.    Good morning.

 
	1        Q.    Staying on that last page, I didn't
	2   understand one item.
	3        A.    Yeah.
	4        Q.    Page 13 of the last tab?
	5        A.    Right.
	6        Q.    Tab 7.  What does pass-throughs mean?
	7        A.    Pass-throughs essentially for us are
	8   GNMA securities, Government National Mortgage
	9   Association.  They are fully guaranteed by the
	10   Federal Government.
	11	    And that's one way in which we get into
	12   the mortgage security market.
	13        Q.    How about the liquid, liquid 5 percent,
	14   is that the cash?
	15        A.    That is simply the cash in the account
	16   that is in the bank, short-term investment fund.
	17        Q.    So, this would be 5 percent of what, 5
	18   percent?
	19        A.    5 percent of in this case 90 million.
	20   But if you include the equities, which at this
	21   time were another 60, it would be like I think the
	22   number was 2.9 without going back into the book.
	23        Q.    Who chooses the bank?
	24        A.    The trustees.

 
	1        Q.    Do you ever do any analysis on whether
	2   anyone at the bank has any relatives in that bank?
	3        A.    If anyone at the bank has any
	4   relatives?
	5        Q.    I'm sorry.  If any of the trustees have
	6   any relatives in the bank that's chosen.
	7        A.    No.
	8        Q.    That's not correct?
	9        A.    No.  Well --
	10        Q.    In other words, you do or you don't?
	11        A.    The answer to your question is no, we
	12   don't do an analysis of that kind.
	13        Q.    Mr. Pedersen, are you aware that the
	14   complaint for trusteeship that we're engaged in
	15   here is against the Chicago District Council?
	16        A.    Yes.
	17        Q.    The work that you have done is for the
	18   funds, not the council, is that correct?
	19        A.    That is correct.
	20        Q.    And you have never done any work
	21   whatsoever for the Chicago District Council?
	22        A.    That's correct.
	23        Q.    Turning to the allegations in the
	24   complaint for trusteeship, you have no information

 
	1   about the Chicago Outfit to share with us today,
	2   do you?
	3        A.    No.
	4        Q.    No understanding of who is in the mob
	5   and who is not in Chicago?
	6        A.    That's not part of my interest or what
	7   I do for a living.
	8        Q.    Do you have any understanding of who
	9   the officers of the Chicago District Council are?
	10        A.    Yes.
	11        Q.    Who is that?
	12        A.    I don't know their titles or their
	13   exact positions.  But I know Mr. Lombardo is an
	14   officer in the District Council, I believe
	15   Mr. Matassa is, I know Mr. Caruso is.  And I
	16   couldn't tell you what the titles are or what

	17   their exact positions are.
	18        Q.    Do you have any understanding of
	19   whether these individuals or any other individuals
	20   have any ties to the Chicago Outfit?
	21        A.    First of all, I don't understand what
	22   you mean by Outfit and I guess I don't understand
	23   what you mean by ties.  If you could elaborate a
	24   little bit, maybe I could help you with that.

 
	1        Q.    Are you aware of any associations,
	2   personal, professional or otherwise, between any
	3   Chicago District Council officer and any one in
	4   the Chicago mob?
	5        THE HEARING OFFICER:  The fellows in the back
	6   can't hear you.  You have to use the mike.  The
	7   acoustics in the room have degenerated because of
	8   the space over there.
	9        MR. BOSTWICK:  Is this better here?
	10        THE HEARING OFFICER:  Much better.
	11   BY MR. BOSTWICK:
	12        Q.    Do you have any information regarding
	13   associations, personal or professional
	14   associations, between any members of the Chicago
	15   District Council -- I'm sorry -- any officers of
	16   the Chicago District Council and the Chicago mob?
	17        A.    I have no information.
	18        Q.    Do you have any information about
	19   arrests, indictment or convictions of any officers
	20   of the Chicago District Council?
	21        A.    No.
	22        Q.    Do you have any information about how
	23   the officers of the Chicago District Council
	24   transfer power?

 
	1        A.    No.
	2        Q.    Do you have any information that would
	3   help us determine whether or not the Chicago
	4   District Council has taken adequate steps to
	5   eradicate mob corruption?
	6        MR. CARMELL:  Mr. Hearing Officer, he has
	7   testified he knows nothing about the Chicago
	8   District Council.  This is the only reason we
	9   could continue.  I don't mind it.  I just think --
	10        MR. BOSTWICK:  I have only about four more
	11   questions.
	12        THE HEARING OFFICER:  He is going to
	13   establish some record here that this witness is
	14   removed, has no knowledge of this.
	15        MR. BOSTWICK:  Of any of the specific
	16   allegations.
	17        THE HEARING OFFICER:  And wouldn't have I
	18   guess in the course of his business.
	19        MR. CARMELL:  All right.
	20        MR. BOSTWICK:  Could you read the last
	21   question back.
	22	        (WHEREUPON, the record was read
	23	        by the reporter as requested as
	24	        follows:  Q.    Do you have any

 
	1	        information that would help us
	2	        determine whether or not the
	3	        Chicago District Council has taken
	4	        adequate steps to eradicate mob
	5	        corruption?)
	6        MR. CARMELL:  I object to the form of the
	7   question.  That assumes a fact that there is mob
	8   corruption with respect to particularly this
	9   witness.  In fact, isn't that the ultimate answer
	10   that you have to come to?
	11        THE HEARING OFFICER:  That's the ultimate
	12   answer.  Because of the nature of where he is and
	13   what he is asking here, which means -- and it's
	14   obvious that the witness is not in any way in this
	15   sphere, he may ask that question because I know he
	16   is going to get an answer of no.  So, go ahead,
	17   proceed.
	18   BY THE WITNESS:
	19        A.    No.
	20   BY MR. BOSTWICK:
	21        Q.    Do you have any information about
	22   whether there has been any financial malpractice
	23   in the Chicago District Council?
	24        A.    I have no information on that.

 
	1        Q.    One allegation was made in the
	2   complaint for trusteeship that relates to the
	3   funds and, that is, that corrupt individuals have
	4   been appointed as labor trustees.  Has your firm
	5   ever been retained to look into this question?
	6        MR. CARMELL:  That assumes that the question
	7   ever came up before the complaint.
	8   BY MR. BOSTWICK:
	9        Q.    Has the question ever come up in your
	10   experience?
	11        A.    I mean our firm is in the money
	12   management business, not in the business of the
	13   question that you asked.  So I guess the answer is
	14   either I don't know or no.
	15        Q.    Likewise you can't speak to the issue
	16   of whether the Chicago District Council has
	17   followed the terms of their trust agreement in
	18   appointing the labor side trustees, is that
	19   correct?
	20        A.    I cannot speak to that, that's correct.
	21        Q.    Your firm in the investment management
	22   business I take it has no expertise in uncovering
	23   secret ownership interests with contractors or
	24   service providers, is that correct?

 
	1        A.    That's correct.
	2        Q.    No expertise in uncovering kickback
	3   schemes?
	4        A.    No, just not -- not our business.
	5        Q.    Do you know if anybody has been hired
	6   by the funds to look into these questions?
	7        A.    I don't know that.
	8        MR. BOSTWICK:  That's all the questions I
	9   have.
	10        MR. CARMELL:  Nothing else.
	11        THE HEARING OFFICER:  Thank you, sir.
	12	        (WHEREUPON, the witness was
	13	        excused.)
	14        MR. CARMELL:  Mr. McLaughlin.
	15	        (WHEREUPON, the witness was duly
	16	        sworn.)
	17		JOHN McLAUGHLIN,
	18   called as a witness herein, having been first duly
	19   sworn, was examined and testified as follows:
	20		DIRECT EXAMINATION
	21   BY MR. CARMELL:
	22        Q.    Would you state your name and spell
	23   your last name, please.
	24        A.    John McLaughlin, last name,

 
	1   M-c-L-a-u-g-h-l-i-n.
	2        Q.    And what is your position, please?
	3        A.    I'm a partner with Brinson Partners,
	4   Incorporated.
	5        Q.    Would you spell the name of that
	6   company.
	7        A.    B-r-i-n-s-o-n.  Partners.
	8        MR. CARMELL:  I'd like to offer into evidence
	9   at this time what has been marked as CDC Exhibit
	10   18, which is a prospectus from Brinson Partners,
	11   Inc.
	12        THE HEARING OFFICER:  Okay.  It's admitted.
	13	        (WHEREUPON, said document,
	14	        previously marked CDC
	15	        Exhibit No. 18, for
	16	        identification, was offered
	17	        and received in evidence.)
	18   BY MR. CARMELL:
	19        Q.    All right, Mr. McLaughlin.  Would you
	20   tell us a little bit about your history in the
	21   investment management business and the -- or
	22   profession and that of Brinson Partners.
	23        A.    Yes.  I've been with Brinson Partners
	24   for almost six years now in the account management

 
	1   side.  Prior to that I was with First National
	2   Bank of Chicago in the corporate finance area for
	3   13 years.
	4	    Brinson Partners, if we can go to the
	5   book.
	6        Q.    Yes, let's follow the exhibit.
	7        A.    If you go to tab 1, page 1 in the book,
	8   this is an overview of who Brinson Partners is.
	9	    Brinson Partners is a global investment
	10   management organization.  We have 590 employees.
	11   Our corporate offices are located in Chicago, but
	12   we also have offices throughout the world, Basel,
	13   Frankfurt, Geneva, London, Melbourne, New York,
	14   Paris, Singapore, Sydney, Tokyo and Zurich.
	15	    Our organization has been in place for
	16   over 16 years under the same investment philosophy
	17   and this was started by Gary Brinson in 1979 when
	18   he came to First National Bank of Chicago, and we
	19   currently manage $81 billion in assets.
	20        Q.    All right.  Let's keep going on page
	21   2.
	22        A.    Page 2 is a breakdown of the assets
	23   that we manage and this is by asset category.  You
	24   can see for equities we manage 36.4 billion, 16.1

 
	1   billion U.S., 5 billion global.
	2	    And just for information purposes,
	3   global would mean U.S. and International both.  So
	4   we make the decision whether we are in U.S. or
	5   International.  And then regional and other
	6   country assets.
	7	    Our parent is Swissbanc Corporation and
	8   those are funds that we manage for the parent.  In
	9   the fixed income area we manage 24.1 billion, 5.2
	10   billion in the U.S., 8.2 billion global.  Again,
	11   this being U.S. and International funds.  And then
	12   regional and other country, 10.7 billion.
	13	    And then in asset allocation
	14   assignments, which we call balanced accounts,
	15   which is what we manage for the Laborers, we have
	16   $19.3 billion in assets under management.  4.6

	17   would be assignments in the U.S., 13.9 would be
	18   assignments overseas.
	19	    And then private markets, they would be
	20   venture capital programs.  We have 1.5 billion
	21   under management in that area.
	22        Q.    I want to make for myself a distinction
	23   if I can on this.  Where you say equities and
	24   fixed income, that is where you are simply an

 
	1   equity manager and not a balanced manager?
	2        A.    That's right.
	3        Q.    You distinguish between being an equity
	4   manager and fixed income manager and finally a
	5   balanced manager?
	6        A.    Right.  Where we make the decision
	7   between equities and fixed income.
	8        Q.    Okay.  Thank you.  Let's go on.
	9        A.    Page 3 is our representative client
	10   list.  This doesn't list all the clients of
	11   Brinson Partners, but it's just a sampling of
	12   clients that have retained us.  Foundations,
	13   endowments, religious organizations, public funds,
	14   Taft-Hartley Act funds, corporations, pretty
	15   broadly based.
	16	    And page 4 is a list of our
	17   Taft-Hartley Act clients.  This is not complete,
	18   but it's again a sampling of clients that we have
	19   money under management on.
	20	    Page 5 is an organizational chart.
	21   This shows how Brinson Partners is pretty much
	22   structured.  We refer to this as the three pillars
	23   of the organization.
	24	    We manage model portfolios of Brinson

 
	1   Partners, which means, as Cal Pedersen brought up
	2   here prior, if you invest with Brinson Partners,
	3   you get the same portfolio, the same strategies,
	4   the same stocks.
	5	    The thing that is different is the
	6   guidelines and the benchmark that a client would
	7   choose, where we would make changes in the
	8   portfolio decisions in that manner.
	9        Q.    Let me stop there for a moment, if I
	10   might.
	11        A.    Sure.
	12        Q.    We are going to get to the investment
	13   guidelines of the Laborers'?
	14        A.    Right.
	15        Q.    We will deal with it then.  Sorry.  Go
	16   ahead.
	17        A.    The investment side of the operation,
	18   if you will, is the column on the left.  This is
	19   broken down by asset class, and our asset
	20   allocation group, and individuals that are the
	21   heads of what, we call them the managing partners,
	22   in each one of those groups.
	23	    So the asset allocation group, which is
	24   headed by Dennis Karnosky, makes, works with the

 
	1   team that determines the asset allocation between
	2   U.S., non-U.S. stocks and bonds.  So wherever we
	3   find opportunities, Dennis is making those calls.
	4	    The research that comes into the asset
	5   allocation group comes from the equities, which is
	6   co-headed by Rich Carr and Jeff Diermeier, the
	7   fixed income area, Rich Carr, for the
	8   International side, Denny Hesse, for the U.S.
	9   side, private markets, Bart Holaday; and then
	10   portfolio coordination, which kind of makes sure
	11   that there is consistency in all the portfolios,
	12   is headed by Dale Fritz.
	13        Q.    Let me get some of the spellings for
	14   the court reporters.  Carr is C-a-r-r.  And Hesse
	15   is H-e-s-s-e.  And Bart Holaday is H-o-l-a-d-a-y.
	16        THE HEARING OFFICER:  We have the book here.
	17   It's on Page 5.
	18   BY MR. CARMELL:
	19        Q.    Go ahead.  I'm sorry.
	20        A.    Then the second column is what we call
	21   the account management business development side.
	22   This is where we have all the contact with
	23   clients, and the portfolio monitoring; and
	24   consistency checks occur in this area.  And I'm in

 
	1   the client account management side.
	2	    And in the third box is our back room
	3   operation, the administrative operations of the
	4   firm.  This is a portfolio -- or a functional
	5   organization that has been in place since we were
	6   founded in 1980.
	7        Q.    Let's proceed.
	8        A.    The philosophy, style and process on
	9   Page 6 of Brinson Partners; we are a fundamental
	10   value manager,, by that, I mean what we try to
	11   determine is the intrinsic value of an asset over
	12   a five-year time horizon.
	13	    We compare that intrinsic value of the
	14   asset to what the current market price is.  We
	15   believe over time, market prices, intrinsic value
	16   will form disequilibriums, and there is
	17   opportunity to --
	18        Q.    Why don't you slow down just a little
	19   bit.
	20        A.    There is an opportunity to make money
	21   at times of disequilibrium; because we are
	22   basically an efficient market company, we believe
	23   over time the market price will reflect all the
	24   underlying information in the vehicle, the

 
	1   security, but at different periods in time there
	2   is disinformation in the market, disequilibrium.
	3	    We think by having a sound disciplined
	4   process to identify fundamental value of an asset,
	5   you can make money by buying that asset when it's
	6   out of favor or in disequilibrium with the market.
	7        Q.    Phoenix Duff & Phelps, that is a large
	8   cap manager.  We talked about small cap.  Is there
	9   any such delineation that Brinson uses as to
	10   whether it only invests in large, small, medium?
	11        A.    For this portfolio, we invest in large
	12   and intermediate cap stocks.  We are not, we do
	13   not have a mandate to invest in small cap.  But in
	14   our firm, we do have large, intermediate and small
	15   cap capabilities.
	16        Q.    Let's move to tab 2.
	17        A.    Tab 2 are the investment guidelines.
	18   Do you want to go through all these?  Or maybe I
	19   can just highlight some of the critical areas.
	20        Q.    If you want to highlight some of them,
	21   that's all right.
	22        A.    We have been managing --
	23        Q.    And I'd like you to comment at each one
	24   of them, whether these guidelines are acceptable,

 
	1   from an investment point of view, for Brinson.
	2        A.    Sure.  Well, at the outset, they have
	3   always been acceptable.
	4	    We have been managing money for
	5   Laborers' since, well, through First Chicago,
	6   since 1964.  These guidelines have been in place
	7   since about 1976, and have been amended over that
	8   period of time.
	9	    And we have always been able to operate
	10   in the best interests of the trustees and the fund
	11   under these guidelines.  So these guidelines are
	12   perfectly acceptable.
	13	    I think the point No. 2 states that
	14   there can be no more than a maximum 40 percent in
	15   equities in the portfolio; that was adopted by the
	16   trustees in 1976.  That is something that we have
	17   managed under.
	18	    Point 3 limits, this is a
	19   diversification issue, to no more than 5 percent
	20   of any stock -- no more than 5 percent of the
	21   portfolio can be in any one company's stock.
	22	    Point 4, this relates to the fixed
	23   income portfolio, and tries to achieve a very high
	24   quality portfolio, in that it says 95 percent of

 
	1   the portfolio shall be limited to treasuries,
	2   agencies or the first three quality grades of S&P,
	3   or Standard & Poor's, or Moody's, which is a very
	4   high quality portfolio, compared to the Salomon
	5   Brothers broad investment grade index that we
	6   would benchmark against.
	7	    Other than that, I think most of the
	8   rest of them are just explanatory, not really
	9   directioned.
	10	    Page 8, it's intentioned that the Board
	11   of Trustees allow the investment manager full
	12   discretion.  We have had full discretion on this
	13   portfolio since we have been managing it.
	14	    So -- okay?
	15        Q.    All right.
	16        A.    Page 9 lists again some guidelines for
	17   performance.
	18	    I think the key issue there is under
	19   the total portfolio, the bottom section, it
	20   defines the benchmark that we have to manage
	21   against.  And that's 30 percent, Wilshire 5000, 65
	22   percent, Salomon Brothers, broad investment grade,
	23   and 5 percent, 30-day treasuries.
	24	    So it's a very broadly diversified

 
	1   portfolio, with fairly short tolerances for -- if
	2   you look at the bottom there, ranges, you can see
	3   we can only go between 20 and 40 percent in
	4   equities, 50 to 80 percent in fixed, zero to 40 in
	5   cash.
	6	    So there's ranges have been put on how
	7   much we can move up or down, minimums and
	8   maximums, if you will, of each of the asset
	9   categories.
	10	    Page 10 are guidelines that were
	11   adopted in August, 1997.  And these guidelines
	12   basically incorporated some new -- removed some
	13   old restrictions, incorporated some new
	14   opportunities for us to invest in.
	15	    The first section deals with equity
	16   opportunities, and allows us to do ADRs, but --
	17        Q.    Allows you to do what?
	18        A.    ADRs.  These are American Depository
	19   Receipts, which are a vehicle that foreign
	20   corporations can use to list stock in the United
	21   States.
	22	    We don't normally invest in ADRs.  So
	23   really it did not affect us much there.
	24	    The rest of the equity guidelines were

 
	1   pretty much a restatement of prior guidelines, on
	2   Page 11.  The prohibitions were the same; no
	3   venture capital, no private equity, no options, no
	4   futures or other derivative investments, so a very
	5   clean equity portfolio.  Looking at the Wilshire
	6   5000, which is the broad investment grade equity
	7   market, fixed income guidelines, a few changes
	8   there.
	9	    Basically, we were allowed -- this is
	10   the last paragraph -- they increased the lower
	11   investment grade from 5 percent to 10 percent.
	12   There were some removal of restrictions on
	13   collateralized mortgage obligations, and what we
	14   call Yankee bonds.
	15        Q.    What are Yankee bonds?
	16        A.    Yankee bonds are bonds issued by
	17   foreign corporations in the U.S.
	18	    So I mean, there were just some minor
	19   adjustments to the portfolio, restrictions and
	20   guidelines that are listed on Page 11.
	21	    Page 12, I think again this is just
	22   more guideline information, that the biggest issue
	23   there I think is in the middle of the paragraph,
	24   it talks -- or middle of the page, it talks about

 
	1   the, average option adjusted effective duration of
	2   the portfolio cannot exceed 120 percent of the
	3   benchmark.
	4	    That was to limit fixed income managers
	5   from taking a significantly long position in the
	6   portfolio, again, showing a concern about
	7   liquidity and being able to manage the high
	8   quality type portfolio.
	9	    The next one I think is very key, or
	10   it's typical of the other guidelines, that's
	11   diversify the portfolio to avoid large losses.
	12	    There has always been a very heavy
	13   concern by the trustees that losses be avoided in
	14   the portfolio; so that guidelines have been, the
	15   tolerances have been very narrow.
	16	    And the guidelines would be what I
	17   think some funds might call conservative.  But I
	18   think given the disposition of the trustees to
	19   avoid losses, they are very rational guidelines.
	20        Q.    I want to stop there for a moment.  The
	21   trustees made a, is it correct that the trustees,
	22   through your testimony, made a conscious decision
	23   to give up some potential increase in value in
	24   order to minimize any risk of loss; they did a

 
	1   risk/reward balance?
	2        A.    Right.  I mean --
	3        Q.    Would you explain that just a little
	4   more, what the balance was that the trustees in
	5   your opinion made?
	6        A.    I think what the trustees did was to
	7   recognize that there is a way to manage the risk
	8   of the portfolio through these guidelines, that
	9   maybe they had been a little too restrictive in
	10   the past and maybe had given up a little bit on
	11   the yield side and had loosened it a bit in order
	12   to pick up some return potential but they were not
	13   willing to take a significant amount of risk on to
	14   increase the return potential.
	15	    So, I think they've allowed us to go
	16   into markets that at the time -- as I said, these
	17   guidelines have been kind of an evolving or living
	18   document, if you will, and some of the markets
	19   that we were restricted from were markets that
	20   were developing in early stages, like the 144A
	21   market.  I didn't get into that, but that's a bond
	22   market.
	23	    The trustees have always prohibited us
	24   from getting into that market.  But lately that

 
	1   market has developed significant liquidity and
	2   there are characteristics now that you could add
	3   value and more corporations are moving into that.
	4	    So, the trustees were then willing to
	5   take on this little more risk, but the market had
	6   changed to a point that there was more liquidity,
	7   there was more history there and would give a
	8   manager more opportunity to add value without
	9   taking on more risk.
	10	    So, I think the trustees have been very
	11   cautious in their timing in moving into different
	12   areas rather than to go along with the latest
	13   gimmick that Wall Street has to offer.
	14	    I think they have really deliberated on
	15   that, looked at whether it would work for the fund
	16   and then made the decision after there was some
	17   history to it.
	18        Q.    Thank you.  Would you go on, please.
	19        A.    Page 13, again, just a list of
	20   limitations.  The key here I think is the No. C.
	21        Q.    I'd like also to get back to what is
	22   the second paragraph on page 13, "The fixed income
	23   managers are responsible for notifying the
	24   trustees if in their judgment it is imprudent to

 
	1   manage these assets within any of these
	2   guidelines."
	3        A.    That's correct.
	4        Q.    What did you interpret that to mean?
	5        A.    If there was any undue restrictions in
	6   these guidelines that would prohibit us from
	7   providing a good return to the trustees for the
	8   fund, that we should get back to them and notify
	9   them that the restriction was not appropriate.
	10	    As I pointed out, the restrictions I
	11   think have been appropriate and one of the
	12   restrictions that was removed is in Section C.  It
	13   said private placement debts, which is a very
	14   illiquid market, we cannot invest in except the
	15   144A.
	16	    And because of SEC requirements and SEC
	17   regulations, 144A securities, although they are a
	18   several billion dollar section of the bond market,
	19   are called private placement securities.  So, it's
	20   just kind of a definitional issue there.
	21	    But the trustees realized and at our
	22   suggestion as well as the other managers that we
	23   be allowed to invest in 144A.  So that was a
	24   recognition of a development in a market that we

 
	1   saw as an opportunity.
	2	    Short-term investments, we don't manage
	3   the cash portion of the Laborers fund.  We do make
	4   cash allocation decisions, but the cash is managed
	5   by the custodian bank, Comerica.  So, the
	6   short-term investments are really a function of
	7   Comerica.
	8        Q.    Do you know how Comerica became a
	9   custodian at least for Brinson's account?
	10        A.    I think the history was that they were
	11   with Harris Bank -- they were with First Chicago
	12   first and then moved to Harris Bank.
	13        Q.    Who is "they"?
	14        A.    The Laborers.  And the Harris Bank was
	15   purchased by Citicorp in one of the numerous
	16   mergers going on in the trust market.  I think
	17   they put a competitive bid out.  They looked at
	18   four or five banks I believe and Comerica was
	19   selected on that basis.
	20        Q.    Thank you.  Go ahead.
	21        A.    Okay.  The rest of page 14 are again
	22   just restatements of short-term investments.
	23   Nothing there that I think is critical for us.
	24	    The bottom portion, though, the

 
	1   liquidity, I think that is something we have
	2   always operated under with the trustees.
	3	    The key phrase is, "Contributions are
	4   not expected to cover the benefits and expenses of
	5   the fund," which means there is a high need for
	6   liquidity of the portfolio.
	7	    So, the trustees have asked us to be
	8   conscious of that and to manage the portfolio in a
	9   way that will meet the cash flow needs of the fund
	10   going forward and the issue there is you don't
	11   want to be selling equities in a down market.
	12	    So, you need to be aware that they do
	13   have an ongoing need to pay benefits and we need
	14   to manage the portfolio accordingly.
	15	    Page 15, just again deals with
	16   expenditures of the fund, liquidity issues and the
	17   fund staff will withdraw amounts from each manager
	18   in a manner to improve compliance with the fund's
	19   target asset allocation above.  That is a
	20   rebalance phrase.
	21	    Eventually as the overall portfolio we
	22   call it drifts off the benchmark that we would be
	23   notified by fund staff if they need to take money
	24   from us to move it to another manager in order to

 
	1   get the asset allocation in line to what the
	2   target policy is.
	3        Q.    At present is Brinson a balanced
	4   manager?
	5        A.    Yes, we are.
	6        Q.    And have they always been a balanced
	7   manager?
	8        A.    Yes, we have.
	9        Q.    Let's go to part 3, investment
	10   performance.
	11        A.    Tab 3, page 16, this is typical of the
	12   information we provide to the trustees at our
	13   annual meeting and it reviews the beginning market
	14   value.  We call this a funding statement.  It
	15   starts with the market value and we use the
	16   trailing five years, showing contributions,
	17   withdrawals.
	18	    Really -- since we have managed money,
	19   there have never been contributions to the plan.
	20   The plan has basically been one where we have
	21   received a lump sum of money and have managed that
	22   over time.  We have basically funded withdrawals
	23   for contribution.
	24	    Then we saw the investment return by

 
	1   year and this is to provide the trustees with
	2   information showing them what the cash flow they
	3   could expect or receive from our portfolio is.
	4        Q.    I want to do this in a little more
	5   detail.
	6	    Are you aware that Brinson is the
	7   single largest money manager for the Laborers?
	8        A.    Yes, I am.
	9        Q.    According to this they hold?
	10        A.    268 million.

	11        Q.    Out of about 900 million?
	12        A.    Right.
	13        THE HEARING OFFICER:  Are they a balanced?
	14        MR. CARMELL:  Yes.  They are balanced but by
	15   far the largest single money manager.
	16        THE HEARING OFFICER:  Are you the only
	17   balanced manager they have?
	18        MR. CARMELL:  No.
	19        THE WITNESS:  Yes, we are.
	20        MR. CARMELL:  The only balanced one, as of
	21   now.
	22        THE WITNESS:  As of now right.
	23        THE HEARING OFFICER:  As of now.  First of
	24   July or first --

 
	1        MR. CARMELL:  Correct.
	2        THE HEARING OFFICER:  -- they took away --
	3   they moved them around and --
	4        THE WITNESS:  Right.  We manage what we call
	5   the core portfolio for the trustees.  So this
	6   would be where the kind of the core assets are and
	7   they would go out and hire individual managers for
	8   specific assignments, as you point out, small cap
	9   stocks, bond portfolio, different types.
	10        THE HEARING OFFICER:  The first one who was
	11   in here had been a balanced and now is only -- we
	12   have not heard from any bond managers.
	13        MR. CARMELL:  Yes.  In fact Duff & Phelps.
	14        THE HEARING OFFICER:  Only bond now.
	15        MR. CARMELL:  You have now heard from
	16   balanced which is now an equity, which was Ark,
	17   and a balanced manager which became a fixed
	18   income, which is Duff & Phelps.  And now we are
	19   staying with the core.
	20        THE HEARING OFFICER:  Brinson has the core.
	21        MR. CARMELL:  Brinson has the core.
	22   BY MR. CARMELL:
	23        Q.    I want to go through this since you are
	24   the core manager.

 
	1        A.    Okay.
	2        Q.    You were telling us about --
	3        A.    This deals with the fiscal year of the
	4   plan.  The fiscal year ends May 31st.  So we
	5   traced this back on a fiscal year basis for the
	6   trailing five years to give them some idea of the
	7   flow and this helps the fund administrator, Jim
	8   Jorgensen, do some planning for what he could
	9   expect in terms of cash flow for the overall
	10   portfolio.
	11	    As you can see, by year, the investment
	12   return is listed at the bottom and the withdrawals
	13   are listed in the middle line there.  So, we have
	14   funded between 9 and $10 million per year on
	15   average for the withdrawals for the benefit
	16   program.
	17        Q.    How were you notified of a withdrawal?
	18        A.    At the beginning of the plan year,
	19   which would be on July 1st, Jim Jorgensen would
	20   give us an estimate of how much would be required
	21   and then, as they paid benefits, we are notified
	22   by the benefits, or the benefits administrator I
	23   guess would be the description, that so much money
	24   will be needed in our account to cover the

 
	1   benefits checks there are going out at such and
	2   such a date.
	3	    So, it's -- they are doing a cash flow
	4   analysis.  They look at contributions that come in
	5   per month.  They look at distributions that are
	6   going to be made and then they try on a pro rata
	7   basis to go to the managers and ask the managers
	8   to make up the difference between whatever the
	9   benefit payments are and what the contributions
	10   are.
	11        Q.    For a few moments let's take Brinson
	12   through what it does when it -- after it's
	13   received notice, for the sake of argument, I don't
	14   care, let's take the fiscal year ending 5/31/97
	15   and for the moment assume that at the beginning of
	16   that year you were told that $5-1/2 million was
	17   going to be needed.
	18        A.    It would be more monthly dollar
	19   amount.  They would target -- we should plan on
	20   having $500,000 a month in free cash would be the
	21   directive we would get.  Some months they may only
	22   need 400,000, other months they may need 700,000,
	23   but we need to be able to meet that liquidity when
	24   that arises.

 
	1        Q.    I know it's a very small amount of
	2   your -- of the assets being held in the
	3   portfolio.  What, if anything, does Brinson do
	4   particularly to make sure that it has that money
	5   available?
	6        A.    Well, we start out with the target
	7   amount and we make sure that there are no trade
	8   programs that will be happening on the day that we
	9   need to distribute the funds back to cover the
	10   distributions.
	11	    So, we want to make sure we are not out
	12   buying equities and we don't have the cash to
	13   cover the check that's going out.  So, we make
	14   sure that there is enough cash for the minimum.
	15	    But then we also look at fund flows
	16   coming from the bond, interest payments on bonds
	17   and we may hold a little of that in reserve to
	18   make sure that there is enough cash available to
	19   cover it.
	20	    If one month we had a $500,000 draw and
	21   we had enough cash for that, the next month we
	22   would hold about that much but then maybe another
	23   100,000 just in case it could be a little more.
	24	    So, we are trying to meet the cash flow

 
	1   needs as best we can without impacting performance
	2   of the portfolio.
	3        Q.    Is there anything further on this
	4   particular page?
	5        A.    No.  Again, this is a summary page that
	6   we have provided the trustees so they can see over
	7   history what has been happening by fiscal year.
	8        Q.    Why don't we move to page 17?
	9        A.    Page 17 is a copy of a monthly report
	10   we give the trustees so that they know how their
	11   funds are invested at month end and you can see we
	12   go from 6/30/97 to 7/31/97.
	13	    So, they can see movement in the funds
	14   in the event they may need to balance the
	15   portfolio at the macro level, if you will, the
	16   policy level.
	17	    As of 7/31/97 we had about 58.6
	18   million, about roughly 22 percent of the portfolio
	19   in equities, 206.9 million in bonds, about 77
	20   percent, and then about 2.8 million or a little
	21   over one percent in cash.
	22        Q.    Let me do this since -- is there a
	23   particular reason why what has been obviously a
	24   substantial run-up in the equity market that the

 
	1   equity percentage of the portfolio is 21 percent?
	2        A.    Our strategy, which I haven't gotten to
	3   yet, is that we found the U.S. equity market about
	4   40 percent overvalued.  So, what we have tried to
	5   do on that basis is to go to the lower range of,
	6   if you remember the ranges that were specified
	7   back in the investment guidelines, to protect the
	8   principal of the portfolio.
	9	    Brinson Partners, kind of one of our
	10   characteristic management styles is that we do --
	11   look for risk-adjusted returns.  We don't look to
	12   provide the highest return by taking on the most
	13   risk.  We want to provide what we call a steady or
	14   even stream of wealth creation for the portfolio
	15   by minimizing any downdrafts that could occur to
	16   the portfolio.
	17        Q.    And that comes later on?
	18        A.    That comes later on.  At this stage
	19   this is again just what we call funding
	20   information so the trustees know what the
	21   disposition of their funds are.
	22        Q.    All right.  Let's proceed to the Page
	23   18.
	24        A.    Page 18, this is the investment

 
	1   performance.  We use this for trailing different
	2   periods of time, year to date.  This is on a
	3   calendar year basis through July 31.
	4	    We break out the total account versus
	5   the benchmark, to show our performance verses the
	6   benchmark.  Then we track that back 1, 3, 5, 10,
	7   and since inception.
	8	    And then we break out the components,
	9   what our U.S. equities have done versus the
	10   Wilshire 5000, which is our benchmark, how the
	11   fixed income portfolio has done versus the
	12   benchmark.
	13	    Then the trustees have asked, in terms
	14   of reporting requirements, inflation information,
	15   and 30-day treasury.
	16	    So we provide all this information in a
	17   summary form on Page 18, to give the trustees an
	18   idea of what performance looks like versus the
	19   benchmarks, but also versus general economic
	20   indicators.
	21        Q.    Would you address the last column,
	22   risk?
	23        A.    Risk, this, as I pointed out before,
	24   the risk adjusted return is something that Brinson

 
	1   Partners wants to provide the clients, which is a
	2   steady increase in wealth.
	3	    If we had held the benchmark at the
	4   benchmark weights, we would have taken on about
	5   6.2, 6.42 percent volatility, or potential price
	6   movement, versus our strategy, which has been to
	7   overweight bonds.
	8	    We have had much less, about 10 percent
	9   risk; so we minimize the downdraft.  So we are
	10   trying to stay in a band or a channel, if you
	11   will, where wealth just keeps increasing, but we
	12   don't have tremendous ups and downs, such that if
	13   there is a down in the market, we are not having
	14   to meet liquidity needs or cash flow needs at a
	15   low point; i.e., we are selling equities when
	16   equities are down.
	17	    So that is pretty much the philosophy
	18   that we would go by.
	19        Q.    All right.  Turn to Page 19.
	20        A.    Page 19 is a graphical representation
	21   of what I've referred to in terms of the risk
	22   adjusted return.  This is what we call the wealth
	23   index.
	24	    This shows the volatility of the

 
	1   portfolio, if you will, the up and down movement.
	2	    What we try and provide is the smooth
	3   ride up.  You can see wealth has been increasing
	4   over this period of time.  In different markets
	5   you can see there is small blips down.  In the
	6   market of '87, you can see there was a small blip
	7   down.  But you didn't get the major movers down,
	8   where there was significant risk to the
	9   portfolio.
	10	    This is what we try and provide for all
	11   our clients, which is a smooth ride of wealth
	12   creation.
	13        Q.    On Page 20, chart with the S&P?
	14        A.    Yes.  This gets into our fundamental
	15   valuation process of how we look at different
	16   asset classes.
	17	    And Page 20 is the S&P 500, which is
	18   representative of the stock market today.  And
	19   this information basically compares three things,
	20   the historical price of the S&P, which is the
	21   green line, the earnings per share, or what we
	22   believe one of the drivers of the market is, is
	23   the blue line, blue trend line, then dividends per
	24   share is the red line.

 
	1	    What this shows is that the multiples
	2   currently being paid out there today for U.S.
	3   equities or historical highs have actually
	4   increased above the trend line for the earnings
	5   per share growth.
	6	    Earnings per share growth has been
	7   somewhat parallel with dividend growth.  But the
	8   price of the market has significantly increased.
	9   The trend line growth is significantly greater
	10   than the trend line growth of the earnings per
	11   share, which to us indicates an overvalued
	12   market.
	13	    Page 21, this looks at the stock market
	14   relative to bonds.  And again, because we are an
	15   asset allocator, we have to determine, are bonds
	16   better value than stocks, and kind of what is
	17   going on there, in price relationship.
	18	    This looks from 1981 to the present.
	19   You can see since about late 1993, this looks at
	20   the premium that people are paying to be in stocks
	21   versus bonds.  Now we are at historical highs.
	22   Previous period was 1987.  You can see that the
	23   price of stocks got way out of line, compared to
	24   bonds.  The market then corrected.

 
	1	    We feel there is some drivers as to the
	2   reason why this has been getting out of line
	3   today.
	4	    But we don't believe trees grow to the
	5   sky, and we see this market correcting.  And that

	6   is kind of what this data would show us, is that
	7   bonds are better value today than to spend the
	8   money on stocks.
	9	    Then Page 22, this gets into the
	10   volatility or the risk parameters that I talked
	11   about before.  This looks at the S&P volatility,
	12   since 1942 through present.  You can see there are
	13   different peaks and troughs during different
	14   periods of time.
	15	    On average, the volatility for
	16   equities, about 17 percent, which means that you
	17   can expect if you buy stock, that you will get a
	18   plus or minus 17 percent change in that price over
	19   time on average.
	20	    Today, we are at a historical low in
	21   volatility.  We see that not since the mid to late
	22   1960s has volatility in the S&P market been at the
	23   rate it's at presently.
	24	    However, that trend line is starting to

 
	1   move up.  And that indicates to us that volatility
	2   will be coming back into the market, that will be
	3   having a more dramatic impact on people's
	4   expectations for returns on stocks, the net effect
	5   being that people will be moving out of stocks.
	6	    And that gets to Page 23, which is our
	7   current strategy.  As I pointed out, the normal
	8   policy would be 30 percent in equities, 65 in
	9   bonds, 5 in cash.
	10	    Our current strategy is 20 percent in
	11   equities, 78 percent in bonds and 2 percent in
	12   cash.
	13        Q.    Now, turning to Tab 4, which is the
	14   portfolio review, you have discussed basically --
	15        A.    Most of this is the philosophy and
	16   process.
	17        Q.    Philosophy, all right.
	18        A.    If you would like to -- I don't know if
	19   you want to go through all our equity philosophy
	20   and the charts.  Page 31 is a summary of the
	21   current equity holdings of the portfolio.
	22        Q.    I think the one before that is Page 29,
	23   that there is a certain discipline that Brinson
	24   has?

 
	1        A.    Right.
	2        Q.    Regardless of what the market may be
	3   doing today or tomorrow, the markets?
	4        A.    Well, this is how we pick stocks.
	5	    This is what we do, is we go out and we
	6   try and buy stocks that are underpriced, which are
	7   the stocks in the green part of the bell curve.
	8	    And as stocks move into the yellow,
	9   that is when we start harvesting or selling those
	10   stocks, because those stocks have achieved our
	11   target return rate.
	12	    By the time a stock gets into the red
	13   level, it's a stock that has achieved our target
	14   return rate.  And now it's time for us to redeploy
	15   capital.  So we buy in the green, start selling in
	16   the yellow, and totally liquidate our position in
	17   individual security by the time we hit the red.
	18	    There are only two ways a stock at
	19   Brinson Partners gets sold.  That is, one, if it
	20   achieves the target level, or violates a thesis.
	21	    By violating a thesis, when we buy a
	22   stock, we require the analyst to list out the
	23   reasons why they want to buy that stock.
	24	    And as we track that stock over time,

 
	1   if the stock violates one of the theses, for
	2   instance, they were going to have a price
	3   increase, and they were not able to achieve that
	4   price increase, we would say that's a thesis
	5   violation, so we would then sell that stock.
	6	    But those are the only two ways that we
	7   sell stocks at Brinson Partners.  That is why we
	8   say it's a very disciplined approach.  It's the
	9   approach we have used since Gary Brinson started
	10   the company in 1979.
	11        Q.    You were going to another page?
	12        A.    Page 31.  Page 30 is just over and
	13   underweights versus industry holdings for the U.S.
	14   equity portfolio.  Most of this is summarized on
	15   Page 31.
	16	    There are four ways that we as a
	17   manager can add value in the stock portfolio.  And
	18   that's the market strategy or the beta of the
	19   portfolio.
	20	    Factors, these are stock
	21   characteristics that deal with issues, that are
	22   called bar statistics, but they deal with specific
	23   stock issues that we want to control in the
	24   portfolio.

 
	1	    The industry weights; the pluses are
	2   the overweights, the minuses are the underweights,
	3   versus the benchmark of Wilshire 5000.
	4	    Then example of the securities held in
	5   the portfolio; we currently hold over 75 different
	6   stocks in this portfolio.  And the listing in the
	7   fourth box there are examples of those stocks that
	8   are held.  This isn't complete, but
	9   representative.
	10	    If you want me to go through any more
	11   detail on that or --
	12        Q.    No.
	13        A.    On the fixed income portfolio, Page 32,
	14   again, our process is very disciplined, very
	15   quantitative, and consistent.  We have not varied
	16   our process since we were founded.
	17	    Page 36, if you would like to go to,
	18   that is more summary.
	19        Q.    I'd like you to look for a moment at
	20   35.  That sort of correlates with what you had
	21   talked about the equity market?
	22        A.    Right.  This is an example of our
	23   fundamental valuation process, where we are trying
	24   to determine what's the intrinsic value of the

 
	1   asset.
	2	    What we are looking at here is the
	3   yield curve of the treasury market, and trying to
	4   determine what the appropriate level of the yield
	5   curve should be, given our assumptions about
	6   inflation and other economic indicators.
	7	    The blue line is what our intrinsic
	8   value estimation is, what a yield curve should be
	9   today.
	10	    Then because this is a statistical
	11   process, we put a channel of value about that, if
	12   you will.  It's a plus or minus 10 percent, which
	13   are the dotted blue lines.
	14	    Then we look at the markets, and say,
	15   where is the market today.  The market is the red
	16   line.  So we overlay the market on the blue lines,
	17   to determine is there value in bonds today, and
	18   what should the duration decision be.
	19	    As you can see, today we find
	20   treasuries about 75 basis points overvalued.  So
	21   we find them pretty good value.  We would see that
	22   yield curve falling into the channel of value.
	23	    I think in recent few days, the runup
	24   in the bond market has shown that curve has

 
	1   actually fallen down.
	2	    This is, as you can see, August 7.  As
	3   of today, it would be closer to that channel of
	4   value.  So a lot of money has been made in the
	5   bond portfolio.
	6	    Page 36 is a summary.  Again, there are
	7   four ways that you can make managed -- or you can
	8   make money in management of a bond portfolio.
	9	    That is your interest rate
	10   sensitivity.  That is how much longer or shorter
	11   you are, the benchmark.  Then how you allocate
	12   that strategy is the next box below that.  This is
	13   what we call different strategies to achieve
	14   duration closer to or distant from the benchmark.
	15	    You can see today we are running a very
	16   benchmark-like portfolio, that we don't think
	17   there is a lot of money to be made by going along
	18   the duration.
	19	    The next box is the sectors we invest
	20   in.  This shows versus the benchmark what sectors
	21   we've overweighted or underweighted.  Basically,
	22   we are overweight corporates, and about neutrally
	23   weighted on treasuries, slightly underweighted on
	24   mortgages.

 
	1	    And then the next box are the quality
	2   sectors of the portfolio.  You can see everything
	3   is investment grade.  We have 3.8 percent.  It's
	4   BAA.  That is what we looked at, the tolerance
	5   level of the guidelines to be no more than 10
	6   percent below A level investment grade.
	7	    The next box are the coupons that
	8   result from the bond strategy.
	9        Q.    Mr. McLaughlin, I want to show you what
	10   has been marked as CDC Exhibit 17.
	11        MR. CARMELL:  Dwight, for your purpose, it is
	12   a blank right now, but it's being filled in.
	13        MR. BOSTWICK:  Okay.
	14        MR. CARMELL:  This is the recapture agreement
	15   that was discussed.
	16   BY MR. CARMELL:
	17        Q.    We have marked CDC Exhibit 17 as a
	18   group exhibit, which begins with a letter on the
	19   Laborers' Pension Fund letterhead to Brinson,
	20   dated June 3, 1997, as a document attached
	21   consisting of three pages, titled Recapture of
	22   Brokerage Costs Agreement, Laborers' Pension Fund,
	23   and a one-page attachment, addendum to the
	24   Recapture of Brokerage Costs Agreement.

 
	1	    Are you familiar with this document?
	2        A.    Yes, I am.
	3        Q.    And is this an agreement between
	4   Brinson and the Laborers fund?  No, I'm sorry.
	5   That is between Marco Consulting Group and the
	6   Brinson?
	7        A.    Well, it's really between --
	8        Q.    Why don't you describe it?
	9        A.    It's -- a recapture of brokerage is an
	10   agreement between the fund and Marco Consulting
	11   and as a manager of the fund we have been directed
	12   to use best efforts to participate in the
	13   recapture program.
	14	    Where we see if best execution can
	15   occur through the brokerage listed for Marco
	16   Consulting, we can go ahead and trade securities
	17   through them and then what happens is that a
	18   percentage or one or two cents per share of the
	19   brokerage would be returned or refunded to the
	20   fund based on this relationship.
	21        Q.    Having received this agreement, what is
	22   Brinson's opinion as to whether it is required to
	23   use any of the brokers who might be -- who are

	24   listed in the agreement?

 
	1        A.    I am not sure.
	2        Q.    Are you required to use those brokers?
	3        A.    Oh, no, we are not required.
	4        Q.    What is the criteria?
	5        A.    It's best execution.  That is ERISA.
	6   It's always best execution.  Some of the firms, we
	7   use Merrill Lynch all the time.  By going through
	8   Merrill Lynch we get institutional execution.  So,
	9   this is a program we have no problems and we are
	10   actually operating under this program now.
	11        THE HEARING OFFICER:  Any particular broker
	12   at Merrill Lynch, Bear Stearns, PaineWeber, that
	13   is designated as the recipient of the trades?  Any
	14   particular one you are supposed to call?
	15        THE WITNESS:  No, there is nothing in the
	16   agreement.  Just as we generally trade.  As we
	17   trade, we would say for the Laborers account,
	18   credit to Marco.
	19        THE HEARING OFFICER:  You are going to sell.
	20   You are going to sell, you are going to buy, for
	21   whatever reason you have.
	22        THE WITNESS:  Right.
	23        THE HEARING OFFICER:  And you need best
	24   execution.  You decide that under this situation

 
	1   Bear Stearns is going to give you the best
	2   discount or best return.  You mean there is not
	3   one particular broker who handles that account?
	4        THE WITNESS:  Well, there would be the broker
	5   that Bear Stearns or Merrill has that handles the
	6   Brinson account.
	7        THE HEARING OFFICER:  Okay.
	8        THE WITNESS:  That's who we go through and as
	9   we do the trade we would say this is the Laborers
	10   and give them the account name and we would say --
	11   and on the letter of direction you have some
	12   additional explanation there.  You say and this is
	13   for Marco Consulting.
	14	    So, they would then attribute the
	15   relationship they have, that Bear Stearns or
	16   Merrill Lynch has, with Marco.
	17        THE HEARING OFFICER:  My question is who
	18   picks that broker who gets the benefit of those
	19   trades at Bear Stearns?
	20        THE WITNESS:  For us Bear Stearns picks the
	21   broker that deals with Brinson Partners.
	22        THE HEARING OFFICER:  Okay.  All right.  But
	23   do you have any choice in who picks that broker?
	24        THE WITNESS:  Well, if we don't like

 
	1   somebody, I guess we could go to the management
	2   and say take that guy off.
	3        THE HEARING OFFICER:  But it's Bear Stearns'
	4   choice as to who they come up with, right?
	5        THE WITNESS:  Right, it's a personnel
	6   decision by the company.
	7        THE HEARING OFFICER:  Or Marco, does Marco
	8   have any --
	9        THE WITNESS:  No.
	10        THE HEARING OFFICER:  Wouldn't do that
	11   selection.
	12        THE WITNESS:  No, Marco wouldn't have

	13   anything to do with that.
	14        THE HEARING OFFICER:  Okay.
	15   BY MR. CARMELL:
	16        Q.    In the normal course of your business
	17   Brinson deals with Bear Stearns, is that correct?
	18        A.    Oh, yes, oh, yes.
	19        Q.    And in the normal course of its
	20   business Bear Stearns and Brinson has a broker at
	21   Bear Stearns who they normally interface with, is
	22   that right?
	23        A.    Right, right.
	24        Q.    And in the trades that may be covered

 
	1   under the recapture agreement, you use the same
	2   broker as you normally use?
	3        A.    That's correct.
	4        Q.    At Bear Stearns?
	5        A.    Yes, the one we have always been
	6   using.  It's just now when we do the trade we add
	7   more explanation to the trade.  But there is no
	8   change in broker.
	9        Q.    If I would -- is this correct, and
	10   Mr. Bostwick may object to the leading.  Let me
	11   ask you.
	12        MR. BOSTWICK:  Thanks for the cue.
	13   BY MR. CARMELL:
	14        Q.    Do you trade blocks of stock for all
	15   your accounts at the same time?
	16        A.    Yes, we do.
	17        Q.    And when you trade a block of stock
	18   that is held by the Laborers' Pension Fund as well
	19   as others, what do you do with it if you're
	20   dealing with Bear Stearns?  The whole big block is
	21   going.
	22        THE HEARING OFFICER:  You are going to trade
	23   100,000 shares.
	24   BY MR. CARMELL:

 
	1        Q.    And 1,000 shares is of the Laborers'
	2   Pension Fund.
	3        A.    Right.
	4        Q.    And you are trading through Bear
	5   Stearns.  What do you do, if anything, with
	6   respect to the recapture agreement?
	7        A.    Well, we go out and we get three
	8   quotes.  Maybe I can walk through how we trade.
	9        Q.    Let me get this first.  You have
	10   decided that Bear Stearns is the best execution.
	11        A.    We have gotten three quotes and they
	12   are the best.
	13        Q.    Right.  There is 100 -- a block of
	14   100,000 shares of General Electric that you're
	15   selling and 1,000 of those shares are for the
	16   portfolio of the Laborers' Pension Fund.
	17	    Now, what do you do when you trade the
	18   100,000 under the recapture agreements so the
	19   Laborers would get that credit, if I could call it
	20   that?
	21        A.    Right.  When we send the confirming
	22   ticket -- when we place the order, Bear Stearns
	23   has no idea who we are buying or selling for.
	24   They only know we are selling G.E., 100,000 shares

 
	1   of G.E.
	2	    After we have agreed on the trade, we
	3   then send them a confirming order because they
	4   have to clear the trade through DTC and then they
	5   have to go back to the individual clients'
	6   custodian banks.
	7	    So, on the confirming order we list
	8   Laborers, we list Teamsters, we list General
	9   Motors, we will list all the clients and how many
	10   shares in each account will be credited to or
	11   debited from the respective account with their
	12   respective custodian bank.
	13	    So, in most cases the broker would have
	14   no idea what we were doing.  It would be the back
	15   office that would get the receiving ticket, the
	16   confirming ticket, that would list off who all the
	17   trades go for and how they would allocate the
	18   block down.
	19	    And then they would at that point be
	20   typing stuff in and they would see the annotation,
	21   oh, this is for Marco, credit to Marco.  So, they
	22   would then in their process somehow highlight that
	23   and then capture that trade and make sure that
	24   Marco gets the appropriate credit for that trade.

 
	1        Q.    Now, I would like to return to what you
	2   were going to explain to walk us through a sale of
	3   a block of stock that includes the Laborers'
	4   Pension Fund.
	5        A.    Okay.  The way we sell shares is our
	6   internal policy requires us to get three
	7   competitive bids before we do any transaction and
	8   we have three different traders that will call
	9   three different sources to get competitive bids.
	10   Then we determine which is the best price, best
	11   execution amongst those three bids, and then we
	12   will award to that individual broker.
	13        THE HEARING OFFICER:  Doesn't it take a lot
	14   of time?
	15        THE WITNESS:  To get three bids.
	16        THE HEARING OFFICER:  It takes a lot of
	17   time.  A delay of a half hour if you are trading
	18   that much is going to be half a million dollars.
	19        THE WITNESS:  We are not trying to time the
	20   market.  We are very deliberate.  100,000 block of
	21   stock would be a pretty big trade for us to do.
	22   We would probably parcel that out over several
	23   days.  Depending on how big the stock is and what
	24   the float is for that stock.

 
	1	    I mean you listed G.E., which that is a
	2   pretty big stock and they probably have a million,
	3   2 million share float a day.  But 100,000 shares
	4   trading, either buy or sell in G.E. with a
	5   2 million float, that could have a significant
	6   market impact.  So we may --
	7        THE HEARING OFFICER:  That may be true.
	8        THE WITNESS:  We wouldn't want to trade that
	9   in that big block.  We would want to make sure we
	10   get the best price.  We may have 100,000 shares,
	11   but we may sell that over two or three days and go
	12   back to these brokers so we don't move the
	13   market.  Given the size of our assets it would be
	14   very easy for us to move the market in any day.
	15        THE HEARING OFFICER:  I realize that, but you
	16   got to sell -- a quarter of a point is big money
	17   for you.  Big money on the sale.  I have some
	18   questions.  How long does it take you to get these
	19   estimates?
	20        THE WITNESS:  They are on squawk box.
	21   Brokers on-line almost all the time.  It doesn't
	22   take long to get -- I mean, that is how they make
	23   their money.
	24        THE HEARING OFFICER:  That's true.

 
	1        THE WITNESS:  It's pretty instantaneous and
	2   our decision -- all our traders sit in open outcry
	3   area.  They know.  If we are moving that size of
	4   stock, they know and they are --
	5   BY MR. CARMELL:
	6        Q.    Before the recapture agreement, Brinson
	7   performed best execution?
	8        A.    We still perform best execution.
	9        Q.    Still perform best execution.  So, the
	10   procedure that you have used since the recapture
	11   agreement is no different than the one before as
	12   far as going out and getting three bids and
	13   whatever?
	14        A.    That's correct.
	15        THE HEARING OFFICER:  Got to be something is
	16   different.
	17        THE WITNESS:  As I said, on the confirming
	18   ticket that we send over, we now type in for the
	19   benefit of Marco but there is no difference in how
	20   we solicit bids for stock.
	21        THE HEARING OFFICER:  Solicit bids.  There is
	22   money coming back now that you didn't have coming
	23   back before.
	24        THE WITNESS:  Not coming back to us.

 
	1        THE HEARING OFFICER:  Not to you fellows, to
	2   the funds.
	3        THE WITNESS:  That is handled between the
	4   custodian bank and the broker.  And the custodian
	5   bank is aware of these recapture programs and what
	6   they do then is they have -- all trades are
	7   confirmed through the custodian bank and the
	8   custodian bank has got to track either one of
	9   these trades so they know.
	10	    They get copies of all our confirms.
	11   They are kind of auditing the broker to make sure
	12   that if we have traded $1,000, the Laborers get
	13   credit for $1,000 in trades.
	14   BY MR. CARMELL:
	15        Q.    Is the Marco-Laborers recapture
	16   agreement the only recapture agreement that
	17   Brinson has received?
	18        A.    No.  Well, for the Laborers, but --
	19        Q.    For any other clients?
	20        A.    No.  This is typical.  We have a lot of
	21   clients.  This is becoming a bigger and bigger
	22   area for funds in order to reduce their operating
	23   expenses.  So.
	24        MR. CARMELL:  Could I offer -- did I offer

 
	1   17?
	2        THE HEARING OFFICER:  I don't think you did.
	3        MR. CARMELL:  I would like to offer it at
	4   this time.
	5        THE HEARING OFFICER:  We will admit it.
	6	        (WHEREUPON, said document,
	7	        previously marked CDC
	8	        Exhibit No. 17, for
	9	        identification, was offered
	10	        and received in evidence.)
	11        MR. CARMELL:  I have nothing further.
	12        THE HEARING OFFICER:  Okay.  I think that
	13   before we start I think the ladies would like a
	14   break.  In fact, everyone would like a break.
	15   Give us about ten minutes.
	16        MR. CARMELL:  Thank you.
	17	        (WHEREUPON, a recess was had
	18	        from 10:58 to 11:15 a.m.)
	19        THE HEARING OFFICER:  Okay, gentlemen.
	20		CROSS-EXAMINATION
	21   BY MR. BOSTWICK:
	22        Q.    Good morning.
	23        A.    Good morning.
	24        Q.    It's Mr. McLaughlin?

 
	1        A.    Right.
	2        Q.    We were, before we broke, there were
	3   some rather lengthy examples of how this recapture
	4   agreement worked with Marco Consulting Group?
	5        A.    Right.
	6        Q.    I don't want to try to recap those -- I
	7   probably couldn't if I tried -- those examples.
	8	    But just as a clarification matter,
	9   does Marco Consulting Group under this
	10   arrangement, to your knowledge, get some sort of a
	11   commission or something for the work that they do
	12   on this?
	13        A.    I would assume that there's some
	14   sharing of the recapture portion for Marco having
	15   made the arrangements between the broker and the
	16   client to run the program.  I would assume they
	17   would get something for it.
	18        Q.    You don't know who handles that for
	19   them?
	20        A.    I would have no idea on that.
	21        MR. CARMELL:  For clarification, I know you
	22   just saw the agreement, but there is a provision
	23   in the recapture agreement I think, Dwight, on
	24   paragraph 2.

 
	1        MR. BOSTWICK:  Correct.  That outlines, the
	2   paragraph 2 on Page 1 of the agreement sets forth
	3   the terms of that?
	4        MR. CARMELL:  I believe so, yes.
	5   BY MR. BOSTWICK:
	6        Q.    Is that your understanding as well, Mr.
	7   McLaughlin?
	8        A.    Yes.  All these are very typical, that
	9   whoever the arranger is, they share in the
	10   distribution of the savings under the program.
	11        Q.    How about the custodian bank?  For
	12   monitoring the flow-through, do they receive some
	13   sort of a commission?
	14        A.    No, no.  The custodian bank is paid for
	15   all custody of assets.
	16	    So it's just part of the normal
	17   custodian fees to monitor the commissions and any
	18   of the recapture program.
	19        Q.    Do you know who any -- are there more
	20   than one custodian bank, or is there --
	21        A.    Our custodian is Comerica, so I think
	22   that is the only custodian for the Laborers'.
	23        Q.    Okay.
	24        A.    On the pension fund.

 
	1        Q.    But you are not sure of that?
	2        A.    I'm not sure, but my recollection is
	3   that was the only one.
	4        Q.    You work for the Funds?
	5        A.    That's correct.
	6        Q.    Not the Chicago District Council,
	7   correct?
	8        A.    That's correct.
	9        Q.    You have never done work for the
	10   Chicago District Council?
	11        A.    No.
	12        Q.    So as far as the allegations in the
	13   Complaint for Trusteeship against the Chicago
	14   District Council, you don't have any understanding
	15   of how power is transferred within the Chicago
	16   District Council, for example?
	17        A.    No, I don't.
	18        Q.    And you have no understanding of
	19   whether any of the individuals who are leaders of
	20   the Chicago District Council either currently have
	21   or have had ties to organized crime in Chicago?
	22        A.    No, I don't.
	23        Q.    You don't have any information that
	24   would help us determine whether the Chicago

 
	1   District Council delegates and officers have taken
	2   adequate steps to investigate allegations of mob
	3   corruption?
	4        A.    No, I don't.
	5        MR. CARMELL:  I'm not objecting only based on
	6   your last ruling concerning the other investment
	7   manager that you were going to allow that line of
	8   questioning.
	9        THE HEARING OFFICER:  I understand, I
	10   understand.
	11        MR. CARMELL:  Thanks.
	12   BY MR. BOSTWICK:
	13        Q.    You don't have any information about
	14   whether there's been any financial malpractice
	15   with respect to Chicago District Council either, I
	16   take it?
	17        A.    No, I don't.
	18        Q.    And the one allegation relating to the
	19   Funds that corrupt individuals have been appointed
	20   as labor trustees, has your firm ever been
	21   retained to take a look at that question?
	22        A.    No, they haven't.
	23        Q.    I take it you also can't speak to the
	24   issue of whether the Chicago District Council has

 
	1   appointed their trustees pursuant to the trust
	2   agreements?
	3        A.    No, I have no information on that.
	4        Q.    Does your firm have any expertise in
	5   uncovering secret ownership or kickback
	6   arrangements?
	7        A.    No.  We are an investment management
	8   firm.
	9        Q.    Do you ask for any financial disclosure
	10   statements from the trustees, or is there anything
	11   that is done along those lines that you know of?
	12        A.    No.
	13        Q.    There is no effort at any point along
	14   the line, in the work that you do for the Funds,
	15   for the individuals who are either employees or
	16   labor trustees to actually fill out some form that
	17   indicates whether they have an ownership interest
	18   in service providers or contractors or banks or
	19   consulting firms?
	20        A.    No, we don't require that.
	21        Q.    Do you know of any, any requirement
	22   that that be done, not from your firm's
	23   perspective, but for the Funds in general?
	24        A.    I'm not aware of anything, that we

 
	1   require that.
	2        Q.    That's all the questions I have.
	3        MR. CARMELL:  Nothing else.
	4        THE HEARING OFFICER:  Thank you, sir.
	5	        (Witness excused).
	6        MR. CARMELL:  This is a new one that is in.
	7   That is not one that we have handed over to you
	8   before.  This is 17.
	9        THE HEARING OFFICER:  I do have 17 here.  The
	10   recapture agreement.
	11        MR. CARMELL:  Right.  That was just one for
	12   the witness.
	13	    We are now going to move on in our case
	14   to a different subject and I'd like to -- what I'd
	15   like to do, Mr. Hearing Officer, is to generally
	16   point to you in the transcript where we think that
	17   this -- where we are defending, the issue we are
	18   defending.
	19	    I want you to understand there may be
	20   other parts of the transcript that it goes to, but
	21   what we are coming to now is the testimony of Gene
	22   Scaramella, aappears at page 775 of the
	23   transcript, and that dealt -- that dealt with the
	24   surveillance of Bruno Caruso in June of '97 when

 
	1   he was served with the trusteeship papers and
	2   according to Mr. Scaramella's testimony,
	3   Mr. Caruso went to Fred Roti's house at 231 West
	4   25th Place.
	5        THE HEARING OFFICER:  There is a
	6   disagreement.
	7        MR. CARMELL:  There is a 233 West 25th
	8   Place.  We asked him did you know that that was
	9   Mr. Caruso's mother's home.
	10	    We are now addressing that issue with
	11   exhibits, one which just needs some verification
	12   with the witness.
	13	    The first exhibit on that, sir, is CDC
	14   Exhibit 21, which is a Chicago Title Insurance
	15   Company track index search dated August 4, 1997

	16   for 233 West 25th Place and indicates that the
	17   grantees are Frank Caruso and his wife Catherine,
	18   with a C, Caruso.  It's a three-page document.
	19	    I'd like to introduce it at this time.
	20   We have one over there.  We will get it for you.
	21   Do you have any objection?
	22        MR. BOSTWICK:  I have seen the document.  I
	23   have no objection.
	24        MR. CARMELL:  Thank you.

 
	1        THE HEARING OFFICER:  Okay.  I'll admit it.
	2	        (WHEREUPON, said document,
	3	        previously marked CDC
	4	        Exhibit No. 21, for
	5	        identification, was offered
	6	        and received in evidence.)
	7        MR. CARMELL:  Now, we are going to bring on a
	8   witness who is going to identify some photographs,
	9   not Ken Eto, which are marked as CDC Exhibits
	10   22-A, B and C.
	11	    Mr. Berrafato, would you come to the
	12   witness table, please.
	13	        (WHEREUPON, the witness was duly
	14	        sworn.)
	15	      CHRISTOPHER J. BERRAFATO,
	16   called as a witness herein, having been first duly
	17   sworn, was examined and testified as follows:
	18		DIRECT EXAMINATION
	19   BY MR. CARMELL:
	20        Q.    Would you state your name and spell
	21   your first and last names, please.
	22        A.    Christopher J. Berrafato,
	23   C-h-r-i-s-t-o-p-h-e-r.  B-e-r-r-a-f-a-t-o is the
	24   last name.  I will give you a card.

 
	1        Q.    By whom are you employed,
	2   Mr. Berrafato?
	3        A.    A-1 Photo Service.
	4        Q.    Could you describe what A-1 Photo
	5   Service is and what it does.
	6        A.    It's a legal photography firm that
	7   handles evidentiary photography.
	8        Q.    And how long a period of time has
	9   that -- has A-1 been performing that kind of
	10   service?
	11        A.    Approximately 60 years.
	12        Q.    And how long have you been in that part
	13   of the operation?
	14        A.    I've been with A-1 a little over three
	15   years.
	16        Q.    Have you taken photographs for A-1
	17   which have been used in court?
	18        A.    Yes.
	19        Q.    Have you testified in proceedings
	20   concerning photographs which you have taken?
	21        A.    Yes.
	22        Q.    Now, I want to show you what is now
	23   going to be up on the board, never to be outdone,
	24   as CDC Exhibit 22-A and there is a copy of it in

 
	1   front of you.
	2        MR. CARMELL:  And, Mr. Hearing Officer and
	3   Mr. Bostwick, the back of the photograph carries
	4   identification, which I'll have Mr. Berrafato
	5   speak of.
	6   BY MR. CARMELL:
	7        Q.    Is that a photograph which you took on
	8   or about -- on August 5, 1997?
	9        A.    Yes.
	10        Q.    And could you describe what it
	11   represents?
	12        THE HEARING OFFICER:  Just -- there is some
	13   sort of message coming here.
	14	    Can you give me just 30 seconds,
	15   gentlemen.
	16	        (WHEREUPON, discussion was had
	17	        off the record.)
	18        THE HEARING OFFICER:  Gentlemen, excuse me.
	19   Go ahead.
	20        MR. CARMELL:  No problem.
	21   BY MR. CARMELL:
	22        Q.    Does this truly and accurately
	23   represent the premises from south view of 233 West
	24   25th Place on August 5, '97?

 
	1        A.    Yes, it does.
	2        MR. CARMELL:  I am sure the Hearing Officer
	3   will note what will be facing us on the right side
	4   there is a number 233.
	5        THE HEARING OFFICER:  Right.
	6        MR. CARMELL:  And there is a gate there.
	7   BY MR. CARMELL:
	8        Q.    Approximately where did you take that,
	9   from what angle did you take that?
	10        A.    Looking south from approximately the
	11   south edge of the street.
	12        Q.    Now, I want to show you Exhibit 22-B.
	13   Is that looking south but taken from a more
	14   distant?
	15        A.    Yes, that's approximately the north
	16   side of the street looking south.
	17        THE HEARING OFFICER:  We are looking -- so we
	18   are looking at the same locale but the B is a
	19   little bit further away.
	20        MR. CARMELL:  Right.  And the purpose of that
	21   is with respect to Mr. Scaramella's testimony was
	22   that there were cars parked in that area and that
	23   this was a gate.  There was a gate to which they
	24   walked.

 
	1	    I want the Hearing Officer to see it
	2   not only right up but what it was across the
	3   street, how the street would have looked at that
	4   time.  All right.
	5   BY MR. CARMELL:
	6        Q.    And let me show you what is marked as
	7   Exhibit 22-C, and that is the same view, south?
	8        A.    Yes.
	9        Q.    Is that a south view?
	10        A.    Yes, it is.
	11        Q.    All right.  And the difference is --
	12   let me see.  The difference between B and C is
	13   simply the -- is the angle, that the car we are
	14   looking at, the automobile that is parked is
	15   there, but you are just taking a -- was the
	16   automobile in the same place?
	17        A.    Yes, it was.
	18        THE HEARING OFFICER:  It's the same
	19   location.  We are just looking at it from a
	20   different perspective.
	21        MR. CARMELL:  That's correct.
	22        THE HEARING OFFICER:  Instead of straight on,
	23   we are oblique.
	24        MR. CARMELL:  That's correct.

 
	1   BY MR. CARMELL:
	2        Q.    We are trying to show on C, so there is
	3   no big mystery, that there were cars parked along
	4   there, and that when the testimony was that they
	5   headed towards the gate, this is the idea of what
	6   you had seen, as much as one could see.
	7	    And 22-A, B and C accurately represent
	8   the pictures of the premises, and they haven't
	9   been retouched in any way?
	10        A.    No.
	11        Q.    I have no further questions.
	12        MR. BOSTWICK:  No questions.
	13        THE HEARING OFFICER:  Thank you, sir.
	14	        (Witness excused).
	15        MR. CARMELL:  I'd like to offer 22-A, B and
	16   C.
	17        THE HEARING OFFICER:  We will admit them.
	18	        (WHEREUPON, said documents,
	19	        previously marked CDC Exhibits
	20	        Nos. 22-A, B and C, for
	21	        identification, were offered
	22	        and received in evidence as
	23	        CDC Exhibits Nos. 22-A, B and C.)
	24        MR. CARMELL:  Can we just have a moment?  If

 
	1   we can do this, we can save ourselves a witness.
	2        THE HEARING OFFICER:  Take your time.
	3	        (WHEREUPON, discussion was had
	4	        off the record.)
	5        MR. CARMELL:  I'd now like to offer CDC
	6   Exhibit 23, which is a three-page affidavit of
	7   Bruno Bon, B-O-N.  And it has initials and
	8   interlineations by Mr. Bon of changes that he made
	9   before he signed it.  So this is in the original
	10   condition that we have it.
	11	    And we want to offer this with the
	12   following two representations:  One, the affiant,
	13   Bruno Bon, is not a relative of Bruno Caruso, and
	14   that the affiant, Bruno Bon, is the brother-in-law
	15   of Joe Rizza, who is mentioned in the affidavit.
	16        MR. BOSTWICK:  And with those

	17   representations, I will stipulate to that
	18   document.  We won't have to call Mr. Bon.
	19        THE HEARING OFFICER:  That's fine, accepted.
	20        MR. CARMELL:  Fine.  Again for your
	21   convenience, Mr. Vaira, this goes to the testimony
	22   of John O'Rourke, concerning certain alleged
	23   meetings between Bruno Caruso and John Monteleone
	24   at this Rizza operation, and appears at Pages,

 
	1   best I can recall, 501 to 503 of the record; may
	2   appear elsewhere, but I think that's the main part
	3   of it.
	4        THE HEARING OFFICER:  Okay.
	5        MR. CARMELL:  I'd like to call --
	6        THE HEARING OFFICER:  So we will admit 23.
	7        MR. CARMELL:  Yes, thank you.
	8	        (WHEREUPON, said document,
	9	        previously marked CDC Exhibit
	10	        No. 23, for identification, was
	11	        offered and received in evidence as
	12	        CDC Exhibit No. 23.)
	13        MR. CARMELL:  We would like to call Robert
	14   Scigalski.
	15	        (WHEREUPON, the witness was duly
	16	        sworn.)
	17        MR. BOSTWICK:  If I could just make a brief
	18   comment before we start this, the next two
	19   witnesses have already testified, obviously, and I
	20   would expect that there is going to be some
	21   limitations on going over old ground.
	22        THE HEARING OFFICER:  I understand.  I
	23   assume, I assumed that, yes, okay.
	24        MR. CARMELL:  Yeah, I'm not going to go over

 
	1   old ground.
	2        THE HEARING OFFICER:  Oh, new ground?
	3        MR. CARMELL:  New ground, going to create new
	4   ground, and then trample it.
	5		ROBERT SCIGALSKI,
	6   called as a witness herein, having been first duly
	7   sworn, was examined and testified as follows:
	8		DIRECT EXAMINATION
	9   BY MR. CARMELL:
	10        Q.    In what year did you begin your
	11   investigation or did you begin to investigate the
	12   Chicago District Council?
	13        A.    1996.
	14        Q.    And do you remember approximately the
	15   month it was?
	16        A.    I believe it was early May.
	17        Q.    And how much time did you put into the
	18   investigation until the Complaint was issued in
	19   June of 1997?
	20        A.    I don't know exactly how much time.
	21   But it was a lot of time.
	22        Q.    Did you spend a lot of time in Chicago,
	23   in the course of it?
	24        A.    Yes, I did.

 
	1        Q.    How, in the course of the investigation
	2   of the Chicago District Council, how many
	3   individuals did you interview in person or by
	4   telephone, not names, just numbers?
	5        A.    Without reviewing the information that
	6   I provided to both the IG and the attorneys, I
	7   wouldn't be able to; I have no idea.  I mean, I
	8   could generally say there were an awful lot.
	9   But --
	10        Q.    Well, and I want, Bob, I want you to
	11   know that this is not trapping you; I'm just
	12   trying to get a range.  If you don't have the
	13   range, then we'll get the information, and you'll
	14   look at it.
	15        A.    That information is available.
	16        Q.    Is it like 50 people, 100 people?  That
	17   is what I'm trying to get the range of.
	18        A.    I honestly don't know.  I don't know
	19   whether I would, specifically was involved in --
	20   many of the interviews that I worked on
	21   administratively were not necessarily interviews
	22   that I conducted myself, if that's a way of
	23   explanation.
	24        Q.    I want to know the interviews that you

 
	1   conducted yourself.
	2        THE HEARING OFFICER:  Face to face, or by
	3   telephone.
	4	    What you normally do in this situation,
	5   is it more than ten, more than 20, some rough
	6   number.
	7   BY MR. CARMELL:
	8        Q.    That's all.
	9        A.    I would have to say probably 25 people,
	10   maybe more than that.
	11        Q.    And --
	12        A.    But that is not an accurate, you know,
	13   that is not accurate.  I don't know.  I think I
	14   remember that it's about something like that, but
	15   I don't really --
	16        THE HEARING OFFICER:  It could be more.
	17        THE WITNESS:  Sure.
	18   BY MR. CARMELL:
	19        Q.    Did you interview employers in the
	20   course of this investigation?
	21        A.    Yes.
	22        Q.    Did you interview members of local
	23   unions, other than what we call the targeted
	24   locals?

 
	1        A.    Yes.
	2        Q.    Approximately how many employers did
	3   you interview?
	4        A.    Well, I recall interviewing one.  So
	5   employers may not be accurate.
	6	    I may have interviewed somebody who was
	7   an employer, and I don't know exactly if he is an
	8   employer or not.
	9        Q.    How many members did you interview?
	10        MR. BOSTWICK:  Now, is this other than the
	11   target locals, or the target locals as well?
	12        MR. CARMELL:  Yeah.
	13   BY MR. CARMELL:
	14        Q.    Well, first, other than the target
	15   locals.
	16        A.    Maybe 10 or 15.  I don't recall.
	17        Q.    And of the, what has been referred to
	18   as the target locals, how many members did you

	19   interview?
	20        A.    You are referring to the target
	21   locals?
	22        Q.    Locals 1, 2, 5 --
	23        THE HEARING OFFICER:  1001.
	24   BY MR. CARMELL:

 
	1        Q.    1001 and 1006.
	2        MR. BOSTWICK:  1006, and I think you missed
	3   225.
	4   BY MR. CARMELL:
	5        Q.    And 225.  Let me make it easier,
	6   because that's pretty hard to do.
	7	    In total, how many members of all local
	8   unions affiliated with the District Council did
	9   you interview?
	10        MR. BOSTWICK:  Personally?
	11        MR. CARMELL:  Personally.  It's always
	12   personally, either face-to-face or by telephone.
	13   BY THE WITNESS:
	14        A.    Personally, maybe 10 or 15.
	15   BY MR. CARMELL:
	16        Q.    How many delegates to the District
	17   Council did you interview in person or by
	18   telephone?
	19        A.    Three.
	20        Q.    In the course of your investigation of
	21   Chicago District Council the records of how many
	22   locals did you examine?
	23        A.    Well, I reviewed all available records
	24   of the target locals that I could, that it was my

 
	1   assignment to do, and that was it.  I don't know
	2   how many.  You mean how many records did I review
	3   specifically?
	4        Q.    No.  How many locals?
	5        A.    I would say I reviewed some records
	6   relating to most of the target locals.  I can't
	7   really get into numbers because I don't remember
	8   and I'd have to review the actual files to
	9   determine that.
	10        Q.    Did you review records other than the
	11   target locals?
	12        A.    Did I review records other than the
	13   target locals?
	14        Q.    Of locals other than the target
	15   locals.
	16        A.    I don't recall doing that.
	17        THE HEARING OFFICER:  How many records did
	18   you say again you examined of locals?
	19        MR. CARMELL:  I was going to get to how many
	20   records.
	21        THE HEARING OFFICER:  Okay.
	22   BY MR. CARMELL:

	23        Q.    You examined records of the target
	24   locals.  Did you examine minutes?

 
	1        A.    Yes, I did.
	2        Q.    How far back were the minutes?
	3        A.    Some of the minutes went very far
	4   back.  And I believe without reviewing my past
	5   testimony, I talked about that, some of them went
	6   back I believe as far as ten years, but I would
	7   have to review what was present in my mind at the
	8   time that I testified last.
	9        Q.    Did you review financial records of the
	10   target locals?
	11        A.    Yes.
	12        Q.    How far back did they go?
	13        A.    I don't recall.
	14        Q.    Did you review correspondence?
	15        A.    Yes.
	16        Q.    And do you recall how far back you went
	17   to look at correspondence?
	18        A.    I would say approximately ten years
	19   but, again, I'd have to go and and look at my
	20   notes and look at my investigation to determine
	21   the exact period.
	22        Q.    Do you have any knowledge whether any
	23   of these target locals were audited by accountants
	24   designated by the Inspector General?

 
	1        A.    Yes.
	2        Q.    Which locals were they?
	3        A.    Mr. Caruso's local was audited.  That's
	4   the one I specifically recall.  I don't recall
	5   personally which other ones were audited.
	6   Local 225 was recently audited.
	7        Q.    Did you review any records of the
	8   Chicago District Council itself, the entity
	9   District Council?
	10        A.    Yes.
	11        Q.    And did you review minutes?
	12        A.    Yes.
	13        Q.    And how far back do those minutes go?
	14        A.    Approximately ten years or longer and,
	15   again, I'm not exact on that.
	16        Q.    Did you review financial records of the
	17   District Council?
	18        A.    I don't recall reviewing financial
	19   records in the District Council.
	20        Q.    Did you review correspondence in the
	21   District Council files?
	22        A.    I did.
	23        Q.    And how far back did you look?
	24        A.    I would say approximately ten years.

 
	1        Q.    Do you know if the District Council was
	2   audited by accountants from the Inspector
	3   General's office?
	4        A.    No, I don't.
	5        Q.    In the course of investigation of the
	6   District Council did you personally present
	7   pictures of current officers to any individuals?
	8        A.    Did I personally present pictures of
	9   current officers?
	10        Q.    Yes.
	11        A.    To individuals.  No.
	12        Q.    Did you participate at all in the
	13   arrangements for taking of pictures of officers of
	14   the Chicago District Council?
	15        A.    I was not one of the individuals who
	16   took photographs -- let me think about that.
	17	    No, I did not participate in the taking
	18   of pictures of the District Council members.
	19        Q.    Do you know whether in fact pictures
	20   were taken of the officers of the District
	21   Council?
	22        A.    They were.
	23        Q.    Do you know whether in fact pictures
	24   were taken of any officers of any -- any other

 
	1   persons.  Let me strike the question because I
	2   mumbled it.
	3	    Are you aware of whether pictures were
	4   taken of any other officers or members of locals
	5   affiliated with the District Council?
	6        A.    I am aware that photographs were
	7   taken.
	8        Q.    Do you know who they were?
	9        A.    Offhand, I would be inaccurate to tell
	10   you which ones were taken because I didn't take
	11   th