Pension Plans Looted as Safeguards Weaken : Fraud: Despite warnings, about $4 billion in retirement income may have been taken by racketeers.

When his wife fell gravely ill, George Hohol wanted to quit his job as a welder so he could get his pension money to pay her soaring medical bills. But she begged him to keep working so they would have health insurance.

Hohol stayed on the job, but his health insurance was canceled a few months later without warning because his employer had stopped paying the premium. Then the paychecks started to bounce, and finally the company closed in late 1986.

The worst was yet to come. When Hohol tried to get the $29,000 accumulated in his pension plan over 22 years, he got excuses and delays instead. Ultimately he learned the money was gone, lost in an elaborate fraud scheme by the owner and a lawyer for the small company, DuPage Boiler Works, in the Chicago suburb of Naperville.

Hohol, a proud man who came to the United States from Poland after spending World War II in German labor camps, was $52,000 in debt and had been on unemployment for the first time in his life when his wife died in 1987.

“My wife cried and cried because she hadn’t let me quit before and get my money,” Hohol said. “Her heart was broken, and I’m sure she died faster.”

Hohol and his wife were victims of what a federal official describes as “a new generation of racketeers”--businessmen and lawyers who exploit weak government regulation to misuse and steal the retirement income of workers across the country.

The U.S. Labor Department, according to its acting inspector general, has proved powerless to deter abuse or to bring the wrongdoers to justice. The inspector general estimates that $4 billion in pension funds are being misused, but in reality, no one knows how deep the problem is.

“The nation’s pension and welfare plans are vulnerable to fraud and corruption because of a flawed enforcement strategy adopted by the Labor Department that relies too much on civil remedies and not enough on criminal prosecution,” said Raymond Maria, the acting inspector general.

Most pension plans, the experts say, are run honestly. Most workers will find their money waiting for them when they retire. And many pension plans--but by no means all--are federally insured in case the money runs out.

Most abuse is found among relatively small employers--the same ones that are least likely to be covered by federal insurance.

The wrongdoers include small business owners who can’t resist dipping into pension funds, such as a California construction company where $227,000 in pension funds was used to run the business.

And they include those who appear intent on looting the funds from the start, such as a New Mexico potash mine owner accused of siphoning off $9 million in worker retirement funds to pay personal debts and finance a lavish life style.

The enormous size of today’s pension funds makes them attractive targets for the unobserved and the unscrupulous.

Assets in private pension funds tripled in the last 10 years to $1.7 trillion--about $7,000 for every man, woman and child in the country. More than 76 million workers and retirees are covered by a pension plan.

But internal government audits, interviews and court records raise questions about whether the federal government’s ability to keep this vast pool of money safe for workers has kept pace with the mushrooming growth.

Consider this statistic: The U.S. Labor Department agency responsible for monitoring the nation’s 870,000 pension plans has only 260 auditors and investigators assigned to the task.

They review fewer than 1% of the plans each year. The least attention goes to the most vulnerable plans, the small ones that are not supervised by the outside auditors and layers of lawyers hired by large corporations.

Congress and the Labor Department inspector general’s office, the internal watchdog that is supposed to make sure the department is doing its job, have issued repeated warnings about the inadequate resources. In 1986, a Senate committee concluded that inadequate staffing has dangerously compromised the department’s ability to protect worker pensions.

And earlier this year, a study of 168 plans by the inspector general’s office uncovered $18.7 million in misused funds. At that rate, the office said, there would be $4-billion worth of fraud and abuse systemwide.

Not long ago, the problem was far worse. Before Congress enacted the Employee Retirement Income Security Act (ERISA) in 1974, only a minuscule 3% of workers received the full benefits to which they were entitled.

The 1974 law put the Labor Department’s Pension and Welfare Benefits Administration in charge of monitoring pension plans. In 1978, when Jimmy Carter was President, the office conducted 8,598 reviews and investigations. By 1988, the figure had plummeted to 1,632 despite the threefold increase in pension-fund assets.

A PWBA spokeswoman explained that the agency has undertaken larger, more sophisticated cases in recent years. “Our enforcement strategy is that quality is more important than quantity,” she said.

The agency concentrates on the largest 5% of the plans, which hold roughly 90% of pension assets. The 93% of the plans with fewer than 100 participants are least likely to be reviewed, and they are not required to hire outside auditors to ensure that the money is being handled legally.

“Making sure $1.7 trillion is invested wisely for the workers and retirees is an impossible task,” said Karen W. Ferguson, director of the Pension Rights Center, an advocacy group for workers based in Washington. “It is not the fact that the Labor Department is not doing its job, but the fact that it is an impossible job to do given their limited resources.”

Government regulators such as the Internal Revenue Service and the Securities and Exchange Commission try to maximize limited resources through criminal prosecutions that send a strong message of deterrence.

But the Pension and Welfare Benefits Administration relies almost entirely on civil and administrative sanctions. Of the PWBA’s 5,000 investigations in the last three years, only 95 were classified as criminal and only 26 convictions resulted.

Maria, the acting inspector general, contends this strategy reassures would-be pension pillagers: The worst that will happen, in the unlikely event they are caught, is likely to be a civil fine.

Pension-fund regulation today, the inspector general’s office and others argue, is comparable to the woeful monitoring that contributed to the collapse of the savings and loan industry, a debacle expected to cost taxpayers at least $150 billion.

The Pension Benefit Guaranty Corp., which was set up by the 1974 ERISA law to insure workers’ pensions, has a deficit of $4 billion--the difference between what they owe pensioners and what they can expect to receive in the form of employer premiums.

A big chunk of the $4 billion is a disputed $2.3 billion in pension obligations left by the 1986 bankruptcy of LTV Corp. Although the PBGC has gone to court against LTV in a fight over responsibility for making the pension payments, it has also been making the payments for the last three years.

In 1987, for the first time, the PBGC paid out more money to cover pension obligations than it collected in employer premiums. The General Accounting Office, an investigative arm of Congress, warned that the fund would be broke--unable to meet its current obligations--by 2001.

Congress reacted by increasing the insurance premium paid by employers, now the sole source of revenue for the PBGC. But PBGC officials are still concerned about potential problems with under-funded pension plans in big industries, such as the airlines.

The Labor Department’s inspector general’s office says a major shortfall could ultimately land in the taxpayers’ laps, just as Congress turned to the taxpayers after another government insurance agency fell short of the funds it needed to pay insured depositors at failed S&Ls.;

Pension fund system representatives and some Labor Department officials say such concerns are exaggerated.

“Generally, the private pension system is probably stronger than it has ever been,” said Alan D. Lebowitz, deputy assistant secretary for operations at the PWBA. “People should not be overly concerned about the stability of the system or the integrity of the system.”

Nonetheless, the Labor Department recently informed Congress that it was considering tighter regulations on audits by outside accountants, one of the recommendations from the inspector general.

Although he maintained that corruption has been restricted to a small number of pension plans, Lebowitz acknowledged: “I think they are highly vulnerable to abuse. Pension funds are pots of money sitting there to pay future benefits.”

Jeanette Kurns grew concerned in early 1986. Paychecks from DuPage Boiler Works, the company where her husband--like George Hohol--had worked for 22 years, were getting tough to cash. The local bank refused to honor them, and she had to be on the doorstep of the bank that issued the checks early in the morning to get them cashed before funds in the account ran out.

For a half century, DuPage Boiler Works had run smoothly, if somewhat modestly. The work was steady, the overtime occasional. And if the hourly pay was less than other places, the workers were reminded every year that the company was setting money aside for them in a pension fund.

But in October, 1984, the company had been sold to a man who identified himself as Robert Caldwell. He had big plans and built a fancy new office to go with them. He was driven to work in a limousine and gave the workers free turkeys the first Thanksgiving and again that Christmas.

Only later would they discover that their pensions had probably financed that generosity.

Within two weeks of taking over, Caldwell had begun raiding the profit-sharing account, according to court records. He had $350,000 transferred to another account and used some of the money to pay debts of another company he owned. Some of it went to such expenditures as a fur coat for himself and $45,000 worth of clothes for his wife, according to Joan B. Safford, a federal prosecutor in Chicago.

Caldwell was actually Morton Scherl, a white-collar criminal with an arrest record dating to the mid-1960s in Los Angeles. When he bought DuPage Boiler, using the company’s own money for the purchase, he was a fugitive wanted in New York, Massachusetts and Florida.

By May, 1986, Scherl and William B. Goodstein, a Chicago lawyer, had wiped out DuPage Boiler’s $741,000 profit-sharing account. About $35,000 had gone in small amounts to retiring workers to silence their complaints about not getting their pensions. The rest, court records show, went to Scherl and Goodstein and a variety of their businesses.

In sucking the cash out of DuPage, Scherl had also stopped paying the utility bills or paying for raw material. And even though money was still being deducted from paychecks, he stopped paying withheld taxes to the IRS and cancelled the health insurance.

For seven months in 1986, Jeanette Kurns tried to get someone to take a look at what was going on at DuPage. She wrote to President Ronald Reagan, the Labor Department, the IRS and various state agencies. She has a large blue binder filled with her futile correspondence and notes of her telephone conversations.

“It was like a brick wall everywhere I turned, especially at the Labor Department in Washington,” Kurns said. “The Department of Labor told me this was going on in such wide numbers that they didn’t have enough investigators to go out and check.”

Wives of other workers also were urging the Labor Department to look into the problems, with similar results.

Charles Lerner, the PWBA enforcement director, refused to comment directly on the DuPage Boiler case. But he said citizen complaints are one source for the agency’s investigations of pension-fund problems.

“We get thousands and thousands of phone calls,” he explained. “The numbers are so huge.”

Eventually state authorities and the U.S. attorney’s office began to investigate DuPage Boiler Works in the fall of 1986.

That October, an IRS agent approached Scherl in the coffee shop of a Sheraton Hotel outside Chicago and told him he was under arrest. Scherl dashed through the hotel kitchen into the parking lot and fled. It was a year and a half before he was captured in Baltimore, where he was in the midst of another scheme.

Scherl recently pleaded guilty in federal court in Chicago to misusing DuPage Boiler’s pension funds and other charges and is awaiting sentencing. Goodstein, the lawyer, was convicted and sentenced to three years in prison.

At Goodstein’s trial, George Hohol and Jeanette Kurns were among several witnesses who testified about the financial hardship resulting from the pension fraud. Safford, a veteran prosecutor with a reputation for toughness, was so upset by Hohol’s story that she left the courtroom to avoid crying in front of the jury.

Witnesses also described their frustrations with the Labor Department, prompting the presiding judge, Charles P. Kocoras, to offer lawyers in the case his view on the department’s response.

“One of the witnesses said she called Washington and they told her not to worry about it,” Kocoras said from the bench. “Here they are getting fleeced out of all of this money, and Washington is advising these people not to worry.”

The Pension Benefit Guaranty Corp. was established by the ERISA law to insure the pensions of workers and retirees. If employers do not provide enough money to cover promised benefits when a plan is ended, the agency will pay them up to a ceiling that is now set at $2,028 a month.

However, the PBGC insures only what are called defined-benefit plans, which promise a specific monthly benefit at retirement. As a result, only 107,500 of the 870,000 pension plans are insured, although the covered plans represent 40 million workers and retirees out of the 76 million enrolled in pension plans.

Defined-contribution plans, whose ultimate pension benefit is not predetermined, are not insured by the PBGC. Most common among these are profit-sharing plans, employee stock ownership plans and 401(k) savings plans.

James B. Lockhart, executive director of the PBGC, said the percentage of workers covered by defined-benefit plans has declined steadily in the 1980s. More worrisome to Lockhart is the fact that most new pension plans are defined-contribution plans, which are not insured by the government.

The DuPage Boiler Works profit-sharing plan was not insured. After the company closed its doors, a court-appointed trustee for the pension plan recovered enough during bankruptcy proceedings to pay workers about 80% of their pensions. But the faith of people like Jeanette Kurns was shaken badly.

“You think that money is as safe as the money in your bank account,” she said.

Lerner, the PWBA enforcement director, said the agency has tried to cover more plans by focusing its enforcement on financial consultants who advise multiple plans and on financial institutions that hold the assets of many plans.

But an examination of cases against consultants and financial businesses in recent years raises doubts about the agency’s effectiveness in this arena.

Last May, the department filed a civil lawsuit against the New York brokerage house Shearson Lehman Hutton, two smaller investment firms, three former brokers and several fund trustees. The defendants played a role in managing $560 million belonging to several Teamsters Union pension and welfare plans in Utica, N.Y.

The suit, which is pending, charged that the plans lost money in a scheme in which the brokers bought stocks and placed them in a holding account for several days. Losing trades were assigned to pension-fund accounts and profitable trades went into the accounts of friends, relatives and other customers, including some plan trustees, the suit contends.

But this was not a case of the Labor Department’s ferreting out alleged wrongdoing. The lawsuit followed a 6-year-old criminal investigation by federal prosecutors and the Securities and Exchange Commission, which had already led to guilty pleas by three brokers.

The department was equally late in the case of Glen E. Dawson of Annapolis, Md., a former IRS auditor who invested funds for about 200 small pension funds and drove a Mercedes-Benz sports car bearing a license plate reading “ERISA.”

Dawson, who handled pension investments for doctors and accountants, promised high returns for the pension funds of the professionals and their employees.

ERISA prohibits those responsible for pension money from accepting fees for investing the funds in a particular institution. But for several years, according to a lawsuit filed in Baltimore, Dawson invested pension-fund assets with companies that paid him substantial commissions and fees in return.

One client, a Midwestern accountant, said he was questioned by a Labor Department investigator in 1983 about Dawson’s operation. The accountant said he provided a sworn statement to a department lawyer that year but never heard anything further and kept using Dawson.

Dawson stayed in business until outside events intervened. He was also chairman of a Baltimore savings and loan association, and the state seized the S&L; in December, 1985, because it was insolvent.

Court records show that the S&L; had lent Dawson $105,000 and that he had invested pension-fund money in the thrift when it was struggling to survive what Maryland regulators charged was “gross mismanagement and plundering” by its officers, including Dawson.

In August, 1986, the Labor Department filed a civil lawsuit accusing Dawson of violating ERISA. Court files indicate the pension plans operated by Dawson, which were uninsured, had lost up to $1 million in what the lawsuit called a pattern of unlawful transactions covering seven years and 130 plans.

Last year, a federal judge banned Dawson from the pension business and ordered him to repay the plans a total of $70,000 in restitution. Dawson had filed for bankruptcy earlier, and a lawyer in the case said $70,000 was about all he had left by the time the Labor Department got to him.