Donovan Innocent of Fraud Charges : Ex-Labor Secretary, 7 Others Cleared of All Counts Based on Subway Deal

Former Labor Secretary Raymond J. Donovan, the nation’s first Cabinet officer indicted in office, was found not guilty Monday of all grand larceny and fraud charges after an eight-month trial in state court.

The jury, which deliberated for 9 1/2 hours, also found his seven co-defendants innocent of all charges stemming from a subway construction contract.

Donovan stood with arms folded as the jury’s foreman read the verdict. As he was proclaimed not guilty on the first and most serious count of grand larceny, the former seminarian made the sign of the cross.

His wife, Catherine, who was seated in the gallery, clutched a friend’s hand and sobbed.

Donovan, 56, resigned as labor secretary in March, 1985, six months after he was indicted.

‘Nightmare Is Behind Us’

“A 2 1/2-year nightmare that began in September of 1984 is now behind us,” an emotional Donovan said outside the courtroom. “I just want to say the jury has reawakened my faith in our system. It was shattered here for nine months.”

When asked if he would serve again in government, Donovan replied: “I will not.”

In Washington, President Reagan voiced his pleasure with the jury’s decision.

“I have always known Ray Donovan as a man of integrity, and I am happy to see this verdict. I have never lost confidence in him,” the President said in a statement read by White House spokesman Ben Jarrett.

The jury spent two days deliberating after a trial capped by two days of tumult in the courtroom when juror Milagros Arroyo, 30, became emotionally distraught and was dismissed.

Alternate Juror Seated

Judge John P. Collins on Saturday seated an alternate juror who had heard all the evidence at the trial but had not been in on the beginning of deliberations.

The 137-count state indictment, filed Sept. 24, 1984, concerned Donovan’s work as executive vice president and part owner of the Schiavone Construction Co. of Secaucus, N. J., before he joined the Reagan Administration in 1981.

While in office, Donovan was dogged by allegations of ties to organized crime figures. After two investigations, a special federal prosecutor, Leon Silverman, concluded in 1982 that he had found “insufficient credible evidence” to prosecute Donovan on the allegations. A separate investigation by the U.S. attorney in Manhattan in 1980 also found no grounds for prosecution.

Donovan has steadfastly maintained that he is innocent of any wrongdoing, and he charged that Bronx District Atty. Mario Merola, a Democrat, had brought the indictment to win publicity and embarrass the Reagan Administration during the 1984 presidential campaign. Merola’s goal, Donovan said in a recent interview, was not “truth or justice” but to “hang Ray Donovan’s pelt on the wall.”

The Bronx trial involved charges that Donovan and other Schiavone company executives conspired with a small Bronx earth-moving company in the late 1970s to defraud the New York City Transit Authority of $7.4 million during construction of the East 63rd Street subway tunnel from Manhattan to Queens.

Bogus Firm Cited

According to prosecutors, Donovan and other Schiavone executives set up a bogus minority-owned subcontractor, the Jopel Trucking & Contracting Co., as a “front” to help qualify for the $186-million subway contract. The contract required Schiavone to make a “good faith effort” to subcontract 10% of its work to minority-owned business enterprises.

Prosecutors said Schiavone executives told the transit authority that it was giving Jopel a $12.4-million subcontract to haul 1 billion pounds of dirt, mud and rocks from the tunnel site. But prosecutors said that Jopel received only $5 million and that the other $7.4 million was diverted back to Schiavone through inflated billing, false payrolls and a phony equipment leasing scheme.

‘Sweetheart Deal’

During his summation, prosecutor Stephen R. Bookin charged that the arrangement was a “sweetheart deal” intended to “hoodwink” the transit authority. He said that the Schiavone company “never intended to use good faith efforts” to subcontract to legitimate minority-owned companies. “They made representations to the transit authority that they never intended to fulfill,” he said.

The now-defunct Jopel company was founded by state Sen. Joseph L. Galiber of the Bronx, who is black, and William (Billy the Butcher) Masselli, a reputed “soldier” in the Genovese organized crime family. Both men were defendants in the case.

The other defendants were Richard C. Callaghan, Schiavone’s senior vice president; Joseph A. DiCarolis, president and chief operating officer; Morris J. Levin, secretary and chief counsel; Albert J. Magrini, vice president, and Gennaro Liguori, second vice president. The two companies were also charged.

Drew Worldwide Attention

Although Donovan’s indictment and arraignment drew international attention, the historic case quickly faded from public view. Pretrial hearings and lengthy legal wrangling dragged on for two years.

Once the trial began last September, dull, often confusing testimony on accounting procedures and subway design dominated the dimly lit, nearly empty sixth-floor courtroom. Napping was common as some witnesses read aloud from lengthy contracts or from lists of checks, invoices and financial records. At one point, jurors applauded when one witness completed 22 days of testimony.

The case hinged on differing interpretations of obscure state rules regulating minority business enterprises in federally funded construction projects. Defense lawyers did not dispute the prosecutor’s facts but argued that no crime had been committed. Little of the testimony concerned Donovan’s alleged role.

Charges Cut to 10

Judge Collins ordered that the original 137-count indictment be cut to 10 counts when the prosecution rested its case last month. The final charges included one count of grand larceny, four counts of false filing of business records and five counts of offering false instruments for filing.

Collins ruled also that, to return a guilty verdict on the larceny charge, jurors must establish guilt “to a moral certainty, excluding every other rational hypothesis,” that the defendants intended to defraud the transit authority on Aug. 11, 1978, when they signed the tunnel contract. That ruling imposed a stricter standard of proof than finding guilt beyond a reasonable doubt.

“The key issue was what was in the defendants’ minds on that particular day,” said Theodore Wells, the lead defense lawyer.

40 Witnesses Testify

In taking more than seven months to present his case, prosecutor Bookin called 40 witnesses and introduced 558 exhibits involving an estimated 50,000 pages of documents. He played 32 court-ordered wiretap tapes recorded during an unrelated FBI organized crime investigation at Masselli’s meat-packing plant in 1979. Only one Schiavone officer--DiCarolis--was heard on the hours of tapes, and only briefly.

But jurors heard Masselli boast on the tapes that he offered guaranteed profits to help the Schiavone company meet its minority contract requirements. “They’re paying us to use us,” Galiber agreed, according to a transcript. Defense lawyers called the claims “puffery and exaggeration.”

The 16 defense lawyers presented no witnesses or evidence of their own, gambling that the jury was not convinced of the state’s case and that jurors would resent further prolonging of the trial. Defense lawyers said that they had presented their case by cross-examining prosecution witnesses and by delivering detailed summations.

Called Normal Practice

Defense lawyers argued that the equipment-leasing arrangement was a normal business practice to help the minority-owned firm get started in the construction business. They said that Schiavone’s 10% subcontract with Jopel included not just cash payments but the value of labor, equipment and materials. They noted that the transit authority knew about the arrangement and did not claim it was defrauded.

Defense lawyers argued also that federal prosecutors had investigated the deal and that the federal government, which provided 80% of the money for the 16-story-deep subway tunnel, would have taken action if the Schiavone company had violated the law.

“Nobody has the $7.4 million,” Wells said during his summation. “The money went to build the tunnel. That’s where the $7.4 million is.”

Prosecutor’s Character Hit

Defense lawyers repeatedly assailed Bookin’s character as well as his case. They likened the case to the “Twilight Zone” and “Alice in Wonderland” and said that Bookin had concocted a “crazy” case of “bizarre allegations” for publicity.

“There’s something twisted and distorted in the way this man’s mind works,” said defense lawyer Robert Hill Schwartz during his summation. Schwartz added: “I’ve heard of the insanity defense, but never before of an insanity prosecution.”

Donovan’s lawyer, William O. Bittman, charged that Bookin had “invented evidence” but failed to present a single witness or document incriminating Donovan. He called the case a “personal tragedy” for Donovan and his family.

Signature Seen as Key

Bittman said that the “heart of the case” against Donovan was his signature on 28 Schiavone checks, totaling about $1.8 million, to Jopel. But Bittman said that Donovan routinely authorized checks for the subway project and had co-signed checks totaling more than $32 million--about 5,739 checks in all--during the same period.

Several defense lawyers estimated that defense costs in the case will exceed $10 million.

The chairman and founder of the Schiavone company, Ronald A. Schiavone, was also named in the original indictment, but he had his case severed before the trial began because of ill health. Collins dismissed charges last month against another Schiavone employee.