DOL Removes Pension Trustees, Collects $10.98 Million

The U. S. Dept. of Labor filed a consent order on Aug. 2, ousting four trustees from the board of the Plumbers and Pipefitters National Pension Fund and requiring them to pay $10.98 million in restitution and civil penalties in connection with the imprudent management of the fund’s investment in the Diplomat Resort and Country Club in Hollywood, Fla.


“The Plumbers trustees mismanaged the investment and placed the retirement benefits of thousands of union workers at risk,” said U. S. Secretary of Labor Elaine L. Chao. “Our legal action recovered nearly $10 million for workers in the Plumbers pension plan.”


The settlement resolves allegations against pension trustees Martin J. Maddaloni, Pres. of the United Assn. of Journeymen & Apprentices of the Plumbing and Pipefitters Industry; Thomas Patchell, Gen. Secy.-Treasurer of the Plumbers union; Charles H. Carlson, frmr. Chairman of Industrial Piping Company; James A. House, part owner of, J. A. House, Inc., a bankrupt refrigerant manufacturing corporation; and Patrick Perno, admin. Asst. to Maddoloni.  In addition to paying restitution, Maddaloni and Patchell have permanently resigned their positions as trustees for the fund and the six other pension and benefit plans they currently serve as fiduciaries.


Carlson and House resigned permanently as trustees. Perno, who became a trustee after the project was initiated, may continue to serve as a trustee of the fund, but will recuse himself from any decision concerning the investment of the assets until Dec. 31, 2006. The federal district court in Ft. Lauderdale, Fla. must approve the settlement.


The Labor Department sued the trustees in September 2002 for violating the Employee Retirement Income Security Act (ERISA) when they imprudently proceeded with the Diplomat project without conducting the analysis required to make an informed decision. The suit also alleged that the trustees failed to maintain adequate financial controls over construction costs and paid excessive fees to service providers on the project. Some of the funds have been recovered for the pension plan by Independent Fiduciary Services, Inc., (IFS), an independent fiduciary appointed in 2000 pursuant to an agreement with the Secretary. That agreement appointed an independent fiduciary to manage the Diplomat project. IFS is continuing to pursue additional claims against subcontractors and service providers involved in the Diplomat project.


In Sept. 1997, the Trustees of the UA’s Natl. Pension Fund, incl. Maddaloni, met to consider the acquisition of the Diplomat resort. 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 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.


The settlement resulted from an investigation conducted by the Atlanta regional office of the Employee Benefits Security Administration (EBSA). [EBSA, 8/3/04, 9/12/02]