Union Officials Sued For Bad Pension Fund Deals With Fund-Raiser, Terence McAuliffe

Associated Press

Labor Dept. Sues Over Fund-Raiser

By Karen Gullo - Associated Press Writer
Sept. 30, 1999

WASHINGTON -- Two unions officials are being accused by the Labor Department of investing employees' pension funds in "imprudent" deals with companies owned by a top fund-raiser for President Clinton and Hillary Rodham Clinton.

Terence McAuliffe, the fund-raiser who recently offered to help the Clintons buy a home in New York, is not a defendant in the lawsuit. The Labor Department regulates those who manage workers' pensions, not those who do business with such funds.

A lawsuit filed by the Labor Department says that in one instance, McAuliffe made $2.45 million on a deal in which the fund bought him out of a real estate partnership. He had invested $100, the pension fund $39 million. The lawsuit names as defendants Jack Moore, former executive secretary of the International Brotherhood of Electrical Workers, and John Grau, executive vice president of the National Electrical Contractors Association. The two managed the unions' National Electrical Benefit Fund, at the time worth $6 billion.

The department alleges the pension fund lost money as a result of a loan and a partnership deal that involved more than $47 million in investments with McAuliffe's companies. Tax records show the fund did not receive all the principal and interest due under the loan."Both trustees, Moore and Grau, authorized each of the imprudent investments," the suit said. "If the fund had not made these investments, it would have had the money ... to invest in prudent investments that would have earned a greater return."

Moore and Grau deny the government's allegations. A lawyer for McAuliffe says the pension fund made some money on the investments, just not as much as hoped. "The pension fund could have done better, but it also could have done a lot worse," attorney Richard Ben-Veniste said. "The pension fund is not out any money." James Kefauver, a lawyer for Moore and Grau, agreed. "It's their position that the fund made money, although not as much as they would have liked," he said.

The pension fund made a return of 6.5 percent on the investments with McAuliffe, according to Jim Spellane, spokesman for IBEW. Other large pension funds made a median return of 10.9 percent on their investments during the first half of the 1990s, according to a study by consulting firm Watson Wyatt.

Spellane declined to discuss the transactions further, citing the litigation.

A former investment banker who made a fortune in home building, telecommunications and title insurance, McAuliffe has been a key figure in the Clintons' inner circle. He was the president's chief fund-raiser in the 1996 election and now is raising money for Mrs. Clinton's possible Senate bid in New York.

This month he put up $1.35 million as collateral to guarantee the Clintons' mortgage on a $1.7 million house in Chappaqua, N.Y. Public interest groups and some Republicans complained the arrangement was improper because of McAuliffe's political ties, and the Clintons have decided not to accept his help.

The lawsuit, which was filed in May in U.S. District Court in Maryland, details business dealings between the pension fund and McAuliffe dating to November 1990. That is when the fund formed a partnership with McAuliffe's company, American Capital Management Co. Records show the company was set up by McAuliffe's father-in-law, Richard Swann, a former Democratic Party fund-raiser who owned a failed savings and loan that had been taken over by the government six months earlier.

The fund paid $39 million for the partnership to buy a shopping center and apartment complexes from the Resolution Trust Corp., the federal S&L bailout agency that had taken over the properties from Swann's institution.

McAuliffe, who owned half the partnership, put up just $100, the suit alleges. By 1993, the fund had paid McAuliffe $2.45 million to buy out most of his share, the suit said. The fund also lent another McAuliffe company $6 million to buy property in Orlando, Fla., to build and sell homes.

The new investment was supposed to yield an 18.6 percent return, the suit said. But lot sales and revenues didn't meet projections, and the loan quickly went into default. By 1996, the unpaid balance was $8.6 million, tax records show. The fund finally got out of the deals in 1997. Moore and Grau agreed to let McAuliffe purchase the fund's share of the partnership and buy off his loan for $30 million. The fund's 1997 tax records said "the loan price was less than the loan amount plus accrued interest."

The suit doesn't say whether the fund received any revenue from the deals.Swann said the fund received $4 million from lot sales on the Orlando property and other income from the leases on the apartments and shopping center.

He also said the partnership took out mortgages on the shopping center and apartments and used those funds to pay $23 million back to the fund. "We had our accountants go through the deals and we calculated their return at 10.5 percent," Swann said.