Dem. Chief’s Shady Business Past with the IBEW

[Excerpted from Btron York’s article on National Review Online:

Democratic National Committee chairman Terry McAuliffe has been a leading critic of President Bush’s business dealings with the Harken Energy Corporation, as well as the president’s corporate-reform efforts. “It’s time this CEO, President Bush, took responsibility for his actions as a private businessman,” McAuliffe said shortly after the Harken matter appeared in the press.

But even as he questions the president’s credibility on the issue of corporate responsibility, there are questions about McAuliffe’s own past as a private businessman … In the late 1990s, some of McAuliffe’s business ventures came under investigation by the U.S. Department of Labor, which filed suit against two labor-union officials, both of them with the International Brotherhood of Electrical Workers pension fund, for entering into questionable business arrangements with McAuliffe. Both officials later agreed to pay hundreds of thousands of dollars in penalties for their actions, and the union itself had to reimburse its pension fund by nearly $5 million.

The lawsuit that details McAuliffe’s dealings with the electrical workers’ pension fund is Herman v. Moore, filed in May 1999. The title refers to Jack Moore, a friend of McAuliffe’s who ran the pension fund (Herman was Alexis Herman, the Secretary of Labor when the suit was filed). At the time, Moore was a long-time electrical workers’ union official who had virtually unchallenged authority to choose where to invest the pension fund’s $6 billion store of capital.

According to Herman v. Moore, on November 19, 1990, the [pension] fund entered into a partnership with a firm called American Capitol Management Company, which was owned by McAuliffe. The purpose of the partnership, according to the suit, was “to acquire, hold, improve, lease, operate, and sell a shopping center and various apartment complexes located in central Florida.”

The suit continues:”In 1991, the limited partnership acquired the Woodlands Square Shopping center and five apartment complexes through $39 million in capital contributions from the fund. American Capitol Management Company made one capital contribution of $100….At the outset, each partner held a 50-percent interest in the limited partnership. If the limited partnership’s properties sold at a profit, American Capitol Management Company and the fund would share in the gains according to their percentage partnership interests.”

The next year, according to the suit, McAuliffe proposed another venture for the partnership: the purchase of a parcel of land near the apartment complexes which could be divided up into more than 500 single-family lots. Instead of another lopsided buying arrangement, the fund came up with the idea of lending McAuliffe up to $10 million to buy the property, which was known as Country Run. As collateral, McAuliffe put up the Country Run land itself, plus his 50-percent interest in the    apartment/shopping center venture.

But not long after the Country Run loan was finalized, McAuliffe got out of the apartment/shopping-center deal. According to the lawsuit, in June 1992 the pension fund paid McAuliffe $450,000 for a portion of his 50-percent share. Then, in August 1993, the fund paid McAuliffe $2,000,000 for most of the rest of his share — for a total return of $2.45 million on that    original $100 stake.

In the years that followed, the Country Run project went nowhere; according to the lawsuit, by the end of 1996, lot sales to homebuilders were less than half the number that had been predicted. The pension fund’s loan to McAuliffe, according to the suit, “was in default continuously from December 1992 until October 1997.” In 1997, McAuliffe found another partner and bought out the loan. In the end, Labor Department investigators found, the pension fund got a relatively meager return on its money — significantly less than it would have earned in a more conservative investment.

On October 16, 2001, Jack Moore and another official named in the suit agreed to pay six-figure penalties for their role in the McAuliffe ventures, and the electrical workers union was forced to  reimburse the pension fund for its officers’ failure to act “with the care, skill, prudence, and diligence…that a prudent person acting in a like capacity and familiar with such matters would use.” McAuliffe was not charged with any wrongdoing; his $2.45 million payday, while a violation of common-sense norms of business propriety, did not break any laws.

A Democratic-party spokeswoman dismisses suggestions that McAuliffe’s record might damage his credibility. “First of all, Terry McAuliffe isn’t president of the United States,” says the DNC’s Jennifer Palmieiri. “He doesn’t have the responsibility or the ability to restore confidence in the markets.”

Nevertheless, McAuliffe’s business career might attract increased scrutiny should he continue his high-profile criticism of the president’s business history. Already there have been mentions of McAuliffe’s extraordinarily well-timed investment in the now-bankrupt Global Crossing, in which McAuliffe invested $100,000 and made $18 million.