Labor Secretary Donovan Quits : Acts After Judge Refuses to Drop Larceny, Fraud Charges in N.Y.

Secretary of Labor Raymond J. Donovan, whose four-year tenure has been troubled by persistent but unproved allegations of wrongdoing as a former New Jersey contractor, resigned from the Cabinet on Friday shortly after a New York state judge refused to dismiss pending charges of larceny and fraud against him.

Donovan, 54, who has been on an unpaid leave of absence since his indictment on the charges last October, said he now feared that the pretrial and trial process would take longer than he originally expected. He said he was confident that he would be exonerated but did not wish his “personal circumstances to distract the President” from the work of his Administration.

President Reagan, who has consistently supported Donovan in the midst of his legal troubles, said in a statement that he accepted his resignation “with deep regret” and with “my heartfelt gratitude for all of his efforts on behalf of this Administration.”

‘Presumption of Innocence’

Reagan, observing that Donovan “has not been convicted of anything” and is “entitled to the benefit of a presumption of innocence,” said he agreed that the secretary needed “to devote himself fully to his defense.” That, Reagan said, “precludes his continuing in office.”

Undersecretary Ford B. Ford, who has been running the department in Donovan’s absence, is expected to remain in that role for the time being, department sources said. Besides Ford, others mentioned Friday as possible successors to Donovan include former Rep. John Erlenborn (R-Ill.); Ed Rollins, White House political adviser; James C. Miller, chairman of the Federal Trade Commission, and Kay McMurray, head of the Federal Mediation and Conciliation Service.

Donovan, in a statement issued by the Labor Department, said he was “disappointed by the failure of the court to throw out this indictment” but was “absolutely unshaken” in his belief that a jury will find him innocent of all charges.

Donovan’s resignation followed a decision by Judge John P. Collins of the New York Supreme Court, the state’s trial-level court, who denied a motion by Donovan’s lawyers to dismiss the case against him on grounds of insufficient evidence.

“The evidence in this case, if proved and believed, demonstrates a carefully contrived scheme to steal property,” Collins wrote in a 27-page decision. “There is no justification warranting this court to dismiss the indictment in the interests of justice.”

Collins has yet to rule on a separate defense motion seeking dismissal on grounds that evidence from 27 wiretap tapes presented to the grand jury was collected illegally by the FBI. A hearing is scheduled Tuesday.

But Donovan’s lawyers told their client that they had little hope that a trial could be avoided. And such a proceeding, they said, might not begin until next month and could last six to eight weeks.

White House spokesman Larry Speakes said Donovan telephoned White House Chief of Staff Donald T. Regan shortly before noon Friday and said he wanted to see him. Arriving at the White House 40 minutes later, Donovan told Regan that he wanted to meet with the President to resign.

Expresses ‘Sympathy’

Donovan and Regan met with Reagan in the Oval Office at 1:35 p.m., and the secretary tendered his resignation. Speakes said Donovan expressed his appreciation for the President’s support during the last year, and Reagan expressed his “sympathy” for Donovan and his family.

Speakes insisted that Donovan was not encouraged to resign. “It was his desire,” the spokesman said.

Another White House official, speaking anonymously, also contended that nobody had asked Donovan to leave. “We stuck with him all the way,” the official said. “There was no pressure.”

Started at Hearings

Allegations that Donovan had had unsavory connections with organized-crime figures while serving as executive vice president of the Schiavone Construction Co. of Secaucus, N.J., first were aired at his Senate confirmation hearings in early 1981. Donovan contended that the charges were unfounded and attributed them to his New Jersey origins, saying outsiders suspect that everyone in the construction industry there is tainted by crime.

Critics also charged that Donovan lacked credentials for the Labor Department post. They said he had distinguished himself mainly by raising $600,000 for Reagan’s 1980 campaign for the Republican presidential nomination.

During an investigation into labor racketeering in the New York area, Bronx Dist. Atty. Mario Merola came across new evidence last year that resulted in his obtaining a state grand jury indictment in October against Donovan and nine associates, most of them current officers of the Schiavone Co.

False Billings Alleged

The 137-count indictment, which Donovan promptly labeled “a politically motivated rehash of old charges,” alleged that Donovan, while a private businessman, had submitted false and fraudulent billings to the New York City Transit Authority in connection with a subway construction project. The defendants had conspired to defraud the authority of about $7.4 million, the indictment said.

Reagan strongly supported Donovan throughout his legal battles, but key White House advisers said privately that they considered him the Administration’s least effective Cabinet member.

Two years ago, James A. Baker III, then White House chief of staff, was quoted in a Dallas newspaper as telling a reporter on a turkey-hunting trip that Donovan, having then been cleared by special prosecutor Leon Silverman’s investigation, should resign because it would be “right for the President.” Baker never denied the quotation.

Increased Enforcement

Although his relations with organized labor remained strained, Donovan thought of himself as closer to the working man and woman than to their leaders. He emphasized programs to protect union pension plans from raids by criminal elements and beefed up enforcement efforts against labor racketeering in the department’s Office of Inspector General.

Donovan also was a leading force in cleaning up management of the scandal-scarred Teamsters Union Central States Pension Fund in Chicago, which has $3.5 billion in assets.

He stirred up controversy in his first year by cutting $9 billion from his department’s budget--one of the largest cuts in government--in response to Reagan’s mandate to trim waste.

Another of his priorities was to make the Occupational Safety and Health Administration less confrontational in dealing with employers. Donovan ordered OSHA to try to cooperate with industry in ridding the workplace of hazards, and aides cited figures that injuries in the workplace last year had reached an all-time low.

Also contributing to this story were Times Staff Writers Bob Drogin and George Skelton.