HRD-82-13 Investigation to Reform Teamsters' Central States Pension

kEPORT By THE - Nat to be released a&i& fhg am-j mea +xcept Qfl the hisb ot spaciffe rppf-ova! ot comgt-Momrl iiala8tionr. Comptroller General OF THE UNITEDSTATES Investigation To Reform Teamsters’ Central States Pension Fund Found Inadequate The Federal Government’s 6-year investigation of the Teamsters’ Central States, Southeast and South- west Areas Pension Fund has cost about $8 million. It disclosed that former Fund trustees and officials allegedly mismanaged Fund assets and failed to carry out their fiduciary responsibilities. Despite apparent benefits, the Department of La- bor’s investigation and subsequent Labor and the Internal Revenue Service (I RS) dealings with the Fund trustees had significant shortcomings and left numerous unresolved problems. Consequently, the agencies had to initiate a second investigation of the Fund. Labor and IRS have taken or are taking actions on what needs to be done in general consonance with GAO’s views and recommendations to (1) assure that past mistakes are not repeated in the current investigation, !2) remove the trustees’ control and influence over the Fund’s assets and moneys, and (3) have the Fund continue using an independent investigation manager to handle its assets after the current managers’ contracts expire. The Fund’s financial soundness has improved by recent investment performance, but it is stili thinly funded and has an unfunded liability of $6.05 billion. HRD-82-13 APRIL 28,1982 Request for copies of GAO reports should be sent to: U.S. General Accounting Office Document Handling and Information Services Facility P.O. Box 6015 Gaithersburg, Md. 20760 Telephone (202) 275-6241 The first five copies of individual reports are free of charge. Additional copies of bound audit reports are $3.25 each. Additional copies of unbound report (i.e., letter reports) and most other publications are $1.60 each. There will be a 25% discount on all orders for 100 or more copies mailed to a single address. Sales orders must be prepaid on a cash, check, or money order basis. Check should be made out to the “Superintendent of Documents”. COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON DC. 20548 B-199238 The Honorable William V. Roth, Jr., Chairman The Honorable Sam Nunn, Ranking Minority Member Permanent Subcommittee on Investigations Committee on Governmental Affairs United States Senate In response to your June 13, 1978, request and later dis- cussions with your offices, we have reviewed the Government's investigation of the Teamsters' Central States, Southeast and Southwest Areas Pension Fund. In August and September 1980 and October 1981, we testified before the Permanent Subcommittee on our findings and conclu- sions. This report summarizes the results of our review and contains recommendations to the Secretary of Labor, the Commis- sioner of Internal Revenue, and the Attorney General on (1) improvements needed in the current investigation at the Fund, (2) actions needed to remove the trustees' control and influence over the Fund's assets and moneys, and (3) actions needed to assure lasting reforms to the Fund's operations and financial soundness. The report also describes the actions taken or to be taken by the Departments of Labor and Justice and the Internal Revenue Service in consonance with our views and recommendations. As arranged with your offices, unless you publicly announce its contents earlier, we will make no further distribution of this report for 30 days. At that time, we will send copies to the Secre- tary of Labor; the Commissioner of Internal Revenue: the Attorney General: the Executive Director, Teamsters' Central States, South- east and Southwest Areas Pension Fund: and other interested parties / and make copies available to others upon request. Y Acting Comptroller of the United States COMPTROLLER GENERAL'S REPORT INVESTIGATION TO REFORM TO THE PERMANENT SUBCOMMITTEE TEAMSTERS' CENTRAL STATES ON INVESTIGATIONS, SENATE PENSION FUND FOUND INADEQUATE COMMITTEE ON GOVERNMENTAL AFFAIRS ------DIGEST Despite some apparent benefits of the Federal Government's investigation of the Teamsters' Central States, Southeast and Southwest Areas Pension Fund, GAO believes that the investigation and subsequent dealings by the Department of Labor and the Internal Revenue Service (IRS) with the Fund's trustees had shortcomings and deficiencies and left numerous problems unresolved. Consequently, the agencies had to initiate a second investigation of the Fund. The Fund is one of the largest private pension funds in the Nation and, as of December 31, 1980, it had about $3.1 billion in assets and about 505,400 participants. For many r years, the Fund's trustees have been a subject of contro- versy and allegations of misusing and abusing the Fund's assets and making questionable loans to people linked to organized crime. Therefore, in mid-1975 Labor initiated an investigation of the Fund under the mployee Retirement Income Security Act (ERISA). The Senate Permanent Subcommittee deferred its own investigation in 1975 to avoid duplicating Labor's work. However, the Subcommittee was not satisfied with Labor's progress. GAO's report responds to the Subcom- mittee's request for a comprehensive review of the adequacy and effectiveness of Labor's investigation and its coordination with IRS and the Department of Justice, (See pp. 1 to 9.) LABOR'S INVESTIGATION WAS INCOMPLETE AND HAMPERED BY POOR MANAGEMENT, INEFFECTIVE COORDINATION, AND STAFFING PROBLEMS_ Labor's objective of having a Government-wide coordinated investigation did not succeed because IRS declined to par- ticipate in a joint investigation, IRS' "go-it-alone" attitude and unwillingness to join the investigation did not adversely affect Labor's investigation until IRS decided in June 1976, without prior notice to the Fund or Labor, to revoke the Fund's tax-exempt status. IRS' action disrupted Labor's investigation and, according to Labor officials, created a "chaotic situation." (See pp. 15 to 16.) Labor's investigation disclosed many alleged significant problems in the former trustees' management of the Fund's operations. However, Labor narrowly focused on the Fund's TearSheet i HRD-82-13 APRIL 28,1982 real estate mortgage and collateral loans because of the significant dollar amounts involved and Labor's primary goal of protecting the Fund's assets. Labor ignored other areas of alleged abuse and mismanagement of the Fund's operations by the former trustees and left unresolved questions of potential civil and criminal violations and alleged mismanagement raised by its own investigators. The investigation was also incomplete in that the records had not been obtai,ned or planned third-party investigations completed on all of the 82 loans targeted for investigation even though apparent significant fiduciary violations and imprudent practices were found. (See pp- 22 to 30.) GAO's review as well as an internal Labor management report of May 1979-- the so-called Ketch-Crino report--disclosed that the Special Investigations Staff (SIS), which was re- sponsible for the investigation, had significant staffing, management, and coordination problems which adversely af- fected SIS' ability to conduct an effective investigation. The Ketch-Crino report concluded that "future SIS effectiveness is doubtful." As a result, SIS was abolished in May 1980. (See ppm 31 to 41.) GAO also found that, despite interagency agreements, problems in coordination arose periodically between Labor and Justice-- which restricted the flow of investigative information from Labor to Justice at times. Also, an impetus for the investigation was allegations linking the trustees to organized crime. Labor believed the new enforcement tools under ERISA gave it the opportunity to detect and seek re- moval of anyone who might be improperly influencing the Fund and its trustees. Labor's strategy was to have dual objectives to detect civil and criminal violations. Despite Labor's high hopes and goals, the investigation's objective to detect information for criminal investigation and pro- secution was not entirely successful, and the results fell short of Labor's and Justice's expectations. In 5 years of investigative activity, Labor made only 11 formal referrals of loan information to Justice which had potential for criminal investigation. Also, Labor's and Justice's ef- forts resulted in only one criminal conviction. (See PP. 42 to 55.) LABOR AND IRS DID NOT REQUIRE A WRITTEN AGREEMENT IN RESTORING THE FUND'S TAX- EXEMPT STATUS AND DID NOT INSURE THE FUND'S NEW TRUSTEES MET STATED QUALIFICATIONS IRS, after coordinating with Labor, restored the Fund's tax-exempt status in April 1977. However, rather than have the trustees enter into a written agreement with Labor, such as a court-enforced consent decree, IRS--with Labor's ii approval-- based the requalification on the trustees' agreement to operate the Fund in accordance with ERISA and to comply with eight specific conditions prescribed by Labor and IRS. GAO believes that without a court enforceable consent decree Labor and IRS did not have an effective means to require the trustees to adhere to the conditions that they might otherwise have had. Furthermore, as a condition for requalification the Fund agreed to Labor's and IRS' demand that the four holdover trustees resign. Labor and IRS also developed qualifications the new trustees should meet. However, Labor and IRS did not play an active role in insuring that the new trustees had met the qualifications they had developed even though Labor knew some of the former trustees--who allegedly mismanaged the Fund--were members of the Teams- ters' union organizations that selected some of the new trustees. (See pp+ 56 to 67.) TRUSTEES TRY TO REASSERT CONTROL OVER FUND'S ASSETS AND INVESTMENTS As another condition for requalification, in June 1977, the trustees appointed independent investment managers--the Equitable Life Assurance Society of the United States and Victor Palmieri and Company, Incorporated--to handle most of the Fund's assets.

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