In the late 1990s, some of McAuliffe's business ventures came under investigation by the U.S. Department of Labor, which filed suit against two labor-union officials, both of them with the International Brotherhood of Electrical Workers pension fund, for entering into questionable business arrangements with McAuliffe. Both officials later agreed to pay hundreds of thousands of dollars in penalties for their actions, and the union itself had to reimburse its pension fund by nearly $5 million.
In one deal, McAuliffe and the fund officials created a partnership to buy a large block of commercial real estate in Florida. McAuliffe put up $100 for the purchase, while the pension fund put up $39 million. Yet McAuliffe got a 50-percent interest in the deal; he eventually walked away with $2.45 million from his original $100 investment. In another instance, the pension fund loaned McAuliffe more than $6 million for a real-estate development, only to find that McAuliffe was unable to make payments for nearly five years. In the end, the pension fund lost some of its money, McAuliffe moved on to his next deal, and fund officials found themselves facing the Labor Department's questions.
A SWEET, SWEET DEAL
The lawsuit that details McAuliffe's dealings with the electrical workers' pension fund is Herman v. Moore, filed in May 1999. The title refers to Jack Moore, a friend of McAuliffe's who ran the pension fund (Herman was Alexis Herman, the Secretary of Labor when the suit was filed). McAuliffe and Moore met when they were both supporters of Democratic Rep. Richard Gephardt's 1988 presidential campaign. At the time, Moore was a long-time electrical workers' union official who had virtually unchallenged authority to choose where to invest the pension fund's $6 billion store of capital.
According to Herman v. Moore, on November 19, 1990, the fund entered into a partnership with a firm called American Capitol Management Company, which was owned by McAuliffe and his wife, Dorothy. The purpose of the partnership, according to the suit, was "to acquire, hold, improve, lease, operate, and sell a shopping center and various apartment complexes located in central Florida."
The suit continues:
In 1991, the limited partnership acquired the Woodlands Square Shopping center and five apartment complexes through $39 million in capital contributions from the fund. American Capitol Management Company made one capital contribution of $100....At the outset, each partner held a 50-percent interest in the limited partnership. If the limited partnership's properties sold at a profit, American Capitol Management Company and the fund would share in the gains according to their percentage partnership interests.
The next year, according to the suit, McAuliffe proposed another venture for the partnership: the purchase of a parcel of land near the apartment complexes which could be divided up into more than 500 single-family lots. Instead of another lopsided buying arrangement, the fund came up with the idea of lending McAuliffe up to $10 million to buy the property, which was known as Country Run. As collateral, McAuliffe put up the Country Run land itself, plus his 50-percent interest in the apartment/shopping center venture.
But not long after the Country Run loan was finalized, McAuliffe got out of the apartment/shopping-center deal. According to the lawsuit, in June 1992 the pension fund paid McAuliffe $450,000 for a portion of his 50-percent share. Then, in August 1993, the fund paid McAuliffe $2,000,000 for most of the rest of his share for a total return of $2.45 million on that original $100 stake. It was an unusually generous deal for the fund's officers to give McAuliffe especially since it meant that McAuliffe no longer had the property which he had put up as collateral for the Country Run loan.
In the years that followed, the Country Run project went nowhere; according to the lawsuit, by the end of 1996, lot sales to homebuilders were less than half the number that had been predicted. The pension fund's loan to McAuliffe, according to the suit, "was in default continuously from December 1992 until October 1997." In 1997, McAuliffe found another partner and bought out the loan. In the end, Labor Department investigators found, the pension fund got a relatively meager return on its money significantly less than it would have earned in a more conservative investment.
"The fund lost money as a result of the [Country Run] loan in 1992 and the purchases of additional partnership interests from American Capitol Management Company [the buyout of McAuliffe] in 1992 and 1993," says the lawsuit. "In addition, if the fund had not made these investments, it would have had the money it invested in Country Run and the additional partnership purchases available to invest in prudent investments that would have earned a greater return."
