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September 16, 2002
Labor Department Sues Plumbers' Pension Trustees
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U.S. Department of Labor has sued trustees of the Plumbers and Pipefitters National Pension Fund to remove them as plan trustees and restore losses in connection with what the department calls "the imprudent management" of the plan's investment in the Diplomat Resort and Country Club in Florida.

"This case is about the trustees' failure to prudently manage and invest their members' pension funds through its involvement in the Diplomat Resort project," said Ann Combs, Assistant Secretary for the Department of Labor's Pension and Welfare Benefits Administration. "Pension trustees purchased and developed the property without the slightest due diligence to determine the financial viability of the project. The Department of Labor even had to require independent management of the project to bring it to proper completion, but the damage had already been done by the trustees' mismanagement."

Named as defendants are pension plan trustees Martin J. Maddaloni, Thomas Patchell, Patrick Perno, Charles H. Carlson and James A. House.

The suit, filed in federal district court in Ft. Lauderdale, Fla., alleges that the trustees violated the federal Employee Retirement Income Security Act (ERISA) by imprudently proceeding with the Diplomat project without any feasibility studies, market analyses, market-tested construction budgets, construction schedules, economic models, financing arrangements or other information with which to make an informed decision. The suit also alleges that the trustees failed to maintain adequate financial controls over construction costs and paid excessive fees to service providers on the project.

At a September 1997 board meeting, the pension plan trustees voted to buy the Diplomat property on behalf of the Plumbers' pension plan from Union Labor Life Insurance Company (ULLICO). At that time, the property was abandoned and in a state of disrepair. The United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada, the pension plan sponsor, purchased the property with the intention of subsequently selling it to the pension plan.

The sale of the real estate from the union to the pension plan was prohibited under ERISA because of the relationship between the union and its pension plan, absent an exemption from the Department of Labor. In their exemption application, the trustees failed to disclose that the anticipated development would require the further investment of hundreds of millions of dollars of the plan's assets. The exemption approved by the department covered only the terms of the $40 million sale of the property from the union to the pension plan, not the prudence of the property's subsequent redevelopment using union pension funds. The plan invested more than $800 million in the Diplomat project.

Under the lawsuit, the department is seeking a court order to require the defendants to reimburse the plan for losses, remove the trustees from their positions with the plan and permanently bar them from serving as a fiduciary or service provider for any employee benefit plan governed by ERISA.

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