It’s no secret that many union-sponsored pension plans lack the assets needed to cover liabilities. And a major reason for this lies with the gullibility, and on due occasion dishonesty, of their fiduciaries. Major case in point: the theft of tens of millions of dollars from six union pension plans entrusted to Chicago-based equity fund manager John Orecchio. On July 22, the U.S. Attorney’s Office for the Northern District of Illinois filed an information count against Orecchio, charging him with embezzling approximately $24 million from his clients. The action, which follows a similar Securities & Exchange Commission complaint of nearly three years ago, provides a window into the overlapping worlds of high finance and organized labor. It also should serve as a reminder to the see-no-evil, hear-no-evil Obama Labor Department that union members have a right to maximum transparency as to how their dues and retirement contributions are being spent.
John A. Orecchio, now 43, is co-founder and CEO of AA Capital Partners, an equity fund formerly located at 10 South LaSalle Street in Chicago. Several years ago, he had all kinds of money to invest. Union pension fund managers were among those who saw the former ABN Amro investment banker as someone who could make them rich in a hurry. As time progressed, however, he looked more like a con artist in a hurry. Between sometime in 2002 and September 13, 2006, say federal prosecutors, Orecchio, acting on behalf of AA Capital, placed $169 million worth of union funds into trust accounts. He then proceeded to make a series of fraudulent “capital calls” on the accounts. Rather than direct the money into legitimate investments, fees or overhead, Orecchio knowingly converted it to his own use, resulting in losses of roughly $24 million.
At least that’s the official figure for now. Back in September 2006, the SEC had filed a fraud complaint against Orecchio and his company, alleging he’d misappropriated $10.7 million from clients. But even $24 million may be on the low side. In previous court filings, Orecchio has acknowledged causing $60 million in losses. Whatever the true amount, few dispute he had ambition or a taste for the good life. According to W. Scott Porterfield, the court-appointed lawyer in the SEC case, Orecchio diverted large portions of his clients’ investments toward covering AA Capital operating losses and paying for expenses (“reimbursements”) of a Michigan horse farm and a Detroit strip club he owned. He also racked up millions of dollars in travel and entertainment expenses – $4.3 million in 2006 alone – whose tab included $78,795 for a trip to South Africa and $80,468 for a trip to Antigua. He also shelled out $1 million in donations to a variety of organizations including the Michigan Democrats and Citizens for Greater Detroit. In by far his biggest boondoggle, Orecchio pumped $32 million into Xyience, a sports-drink company affiliated with the Ultimate Fighting Championship franchise owned by the Fertitta brothers of Las Vegas. The company, run by a twice-convicted felon named Russell Pike, eventually went bankrupt; a court receiver recovered about $9 million.
The extent to which investors’ money was commingled may not yet be fully known. But one thing is clear: Union members got burned. Among the labor organizations putting worker retirement contributions into Orecchio-managed accounts were International Union of Operating Engineers Local 324, Michigan Teamsters Joint Council 43, and Millwrights Local 1102, each based in the Detroit area. The financial wizards who ran the IUOE Local 324 pension plan, for example, placed $60 million with AA Capital and another $28 million into the renovation of a Detroit office building that it sold in 2004 for a mere $4.5 million.
The Millwrights case is especially telling not only for the size of the losses, but also for the union’s dealings with a major brokerage house and its connection to a separate Detroit-area scandal. Millwrights Local 1102, affiliated with the United Brotherhood of Carpenters and Joiners, wired some $8.3 million of its massive $150 million pension fund to AA Capital Partners. Apparently, plan managers had received word from Merrill Lynch that Orrechio had worked out a deal to build a Hard Rock Hotel & Casino in Biloxi, Mississippi, and that this would be a lucrative ground-level opportunity. Unfortunately, the union lost large sums of money. And it subsequently sued Merrill Lynch for damages, claiming that a company senior vice president promoted AA Capital without performing due diligence and that Orecchio paid for Merrill Lynch brokers’ entertainment, such as lap dance sessions, out of company funds. Merrill Lynch, now a ward of Bank of America, counters that it didn’t advise the unions to invest in AA Capital and that it made no money off the deal anyway.
The Michigan-based Carpenters union has another connection. Late this May the U.S. Attorney’s Office for the Eastern District of Michigan announced the indictment of one Joseph R. Jewett. A resident of Las Vegas, Jewett, 68, is accused of providing kickbacks to Walter Ralph Mabry, who at the time was executive secretary-treasurer of the Michigan Regional Council of Carpenters and chairman of the board of trustees of the Carpenters’ Pension Trust Fund. The kickbacks included a share in the $800,000 profit from the Biloxi investment. Jewett also is accused of using investor money to buy Mabry free concert tickets and hotel stays, laundering pension funds, and making fraudulent wire transfers from banks in Troy, Michigan to Jewett’s bank account in Las Vegas. Mabry, along with former Council President Anthony Michael, already had been sentenced in 2006 on an unrelated charge of conspiring to obtain discounts for construction of Mabry’s dream home in the Detroit suburb of Grosse Pointe Park in return for representation of the contractors’ employees.
While it’s gratifying that Orrechio and his union cronies are under the public spotlight, it’s important to note a larger issue. These prosecutions are the result of investigators having access to information available in annual union financial reporting forms. Greater detail of information, by definition, would mean more opportunities to track potentially fraudulent fund transfers. Unfortunately, the Obama administration has other ideas. The U.S. Department of Labor (DOL), now headed by avowed union ally Hilda Solis, this spring rolled back a Bush-era rule change to inject more detail into Form LM-30, which requires union officials to disclose their ties to investment managers. The new regulation, said a DOL official, would “not be a good use of resources.” Take note: The AFL-CIO last year sued the department to rescind the regulation. One of the attorneys for the plaintiff, Deborah Greenfield, worked on the Obama transition team on labor issues and is now a ranking DOL deputy.
Union officials know they have a friend in the new administration. But that doesn’t mean the employees they represent are in good hands. Typically, ranking officials and their employees have retirement plans apart from those of rank-and-file members – and theirs tend to be more solvent. The pension plan for employees at the Operating Engineers’ international headquarters in Washington, D.C., for example, is 108 percent funded, whereas the plan for the union’s Local 324 is only 81 percent funded. An expanded LM-30 form would be an effective antidote to renegade money managers like John Orecchio. But apparently some believe that would be a misuse of resources.