DOL Sues Union Pension Bosses over Hotel Boondoggle in Fla.

Attnys with the U.S. Dept. of Labor asked a federal judge in Ft. Lauderdale to remove five trustees of the Plumbers & Pipefitters national pension fund on Sept. 12. The suit, filed in the U.S. Dist. Ct. for the Sou. Dist. of Fla., alleges a pattern of poor planning, financial favoritism, and hundreds of millions of dollars in cost overruns surrounding the frmr. Diplomat Hotel in Hollywood, Fla.

One of the officials whom DOL is seeking to remove is natl. Plumbers union president Martin Maddaloni, already under investigation for participating in insider stock trades involving the pension funded Union Labor Life Insurance Company (Ullico). Maddaloni is one of many union presidents who sit on the Ullico board.

A Ullico subsidiary bought the Diplomat in May 1991, then closed the hotel in July, and allowed the property to fall into disrepair. In 1997, the United Assn. of Plumbers & Pipefitters (UA) approached Ullico about buying the property. On Sept. 11 of that year, the Trustees of the UA’s Natl. Pension Fund, incl. Maddaloni, met to consider the acquisition. According to the DOL complaint, the trustees failed to discuss the proposed renovation, its architectural designs or budget. Yet, the trustees voted unanimously to buy the Diplomat from Ullico for $40 million, and committed $100 million of the members’ pension funds to cover acquisition costs and initial redevelopment.

Maddaloni and the other trustees retained Thomas Driscoll to oversee the project, who had first recommended the Diplomat to Maddaloni. In Dec., 1997, Driscoll presented a radical new plan to implode the old hotel, rather than renovate it, then build a much larger facility. When the new plan was approved in Feb. 1998, a construction project first estimated at $277.2 million had jumped to $400 million. On April 17, the old Diplomat was imploded.

At the same time, trustee Thomas Patchell directed Driscoll to retain STI as the construction manager. Soon after, Driscoll’s company retained B&R Consultants to oversee the concrete contract. According to the complaint, STI’s experience was limited to renovation, and their contract contained no limits on costs, disincentives for cost overruns, and no completion date. But acc. to DOL, three brothers — Mickey, David and James Cahill — were respectively, an officer of B&R, general counsel of STI, and an official with the UA. In addition to the personal connections between the contractors and the union, STI paid for a trip to Italy by Maddaloni, Patchell, and their wives in Sept. 1998 to inspect marble to be used for the hotel.

In Dec. 1998, accountants with Ernst & Young estimated a rate of return on the Pension Fund’s investment in the Diplomat to be 2.6% — far below Driscoll’s prediction of 13.6% in 1997. The trustees responded by transferring another $50 million of UA members’ pension funds into the Diplomat. By May 1999, the projected cost had ballooned to $644.3 million.

In Nov. 1999, the independent fiduciary imposed on the project by DOL terminated Driscoll’s company from the project, after finding that Driscoll collected more than $1.2 million from the Pension Fund in office space, furniture, utilities and other expenses. In Oct. 2000, the fiduciary conducted an independent appraisal of the property and estimated the project’s value at $587 million, 27% below the current cost estimate of $800 million, all from the UA’s pension fund.

Because the Trustees “failed to discharge their duties…for the exclusive purpose of providing benefits to participants and their beneficiaries,” DOL charged them with violating the Employee Retirement Income Security Act (ERISA), U.S.C. 29, Sec. 1104(a)(1)(A) and (B). In addition to the trustees’ removal, DOL is also seeking an order forcing them to restore all pension funds lost in the boondoggle. [DOL 9/12/02]