Pension Fraud Regulators Run on ‘Different Tracks’ and a Big Case Folds

The federal government spent two years and $200,000 investigating allegations of pension fraud by the president of a construction company with a contract to build this city’s downtown transit mall.

But in the end, the case was damaged by a U.S. Labor Department letter that, according to the top federal prosecutor in Northern California, influenced him to dismiss criminal charges against the executive, David G. Weiss.

The incident illustrates a central conflict in the battle to protect the pension funds of 76 million Americans: Regulators see their first priority as recovering money for beneficiaries, while law enforcement officials want criminal convictions that send a strong message of deterrence.

“These regulators are on a different track,” said Joseph P. Russoniello, the U.S. attorney in San Francisco. “They don’t understand or fully appreciate how an action can affect the government in trying to make a criminal case. It would be the same as a unit of the Department of Defense saying to a contractor, ‘Sure, we know your product is defective,’ or, ‘You didn’t do adequate testing or misappropriated money. But that’s OK.’ ”

Charles Lerner, a regulator who is enforcement director of the Labor Department’s pension agency, declined to discuss the Weiss case. But he explained that, although his investigators often cooperate in criminal cases, their first priority is to restore money to pension plans--and civil solutions accomplish that faster.

It was state authorities who first uncovered evidence of possible misuse of pension and health plan funds at Weiss Bros. Construction Co., the main contractor on San Jose’s 33-million transit mall.

In January, 1987, workers complained to the district attorney’s office about Weiss. The district attorney investigated and charged Weiss in state court in late 1987 with bribing city inspectors in connection with the project. He has pleaded not guilty and is awaiting trial on the state charges.

Federal authorities were brought in because the state investigation uncovered evidence that federal pension laws may have been violated. Weiss Bros.’ contract with its employees required the company to maintain pension and health plans for workers on the transit project. But substantial chunks of the money apparently were used to pay company expenses.

The federal investigation, which was supervised by the U.S. attorney’s office in San Francisco, also found that David Weiss may have used corporate money for personal purposes, such as making payments on his historic, 7,000-square-foot mansion in Palo Alto.

A prosecutor and two investigators spent two years full-time on the pension aspects of the case. They examined more than 50,000 pages of documents and bank records seized with a search warrant from Weiss Bros. in April, 1987.

“It was very complicated,” said Terry Lee, the prosecutor who led the inquiry. “There were transactions in numerous financial institutions across the country. It took forever and ever. It was a very, very interesting puzzle to sort out.”

For instance, according to court records, the prosecutors tracked an $85,000 withdrawal from the health plan on April 2, 1986, into a Weiss Bros. business account. From there, the money went to a law firm, which investigators discovered had used the money to pay an unrelated civil judgment against Weiss Bros.

Meanwhile, some initial complaints regarding pension-fund abuses had been passed on to the Labor Department’s Pension and Welfare Benefits Administration, which monitors pension funds. While evidence was being assembled in the criminal case, the PWBA took a unilateral step that would have a major impact on the case.

On July 14, 1987, the PWBA area director in San Francisco notified the company that the agency had concluded an investigation of its benefit-fund practices and found that federal laws may have been violated.

The PWBA letter, which is contained in court files in San Jose, said that $205,000 had been transferred improperly out of the health and pension plans, that the company had been $163,000 behind in its payments to the pension plan and that ineligible employees had received pensions.

The PWBA asked the company for a written description of its corrective steps. By this time, however, the company had restored the $205,000 to the health and pension plans--although not until after the investigation started--and the agency said it would not take further action.

“You are strongly cautioned to refrain from such actions in the future,” wrote the PWBA area director, Leonard L. Garofolo.

Russoniello, the U.S. attorney, said his office was unaware of the letter for months as the investigators proceeded to piece together the criminal case.

In July, 1988, a federal grand jury indicted Weiss and the company on charges of embezzling $227,000 from the pension and health plans. Weiss also was charged with tax evasion. He faced a lengthy prison term if convicted.

But the government lost the first round. Weiss was tried on the tax charges first, and he was acquitted in March, 1989.

Charles R. Breyer, his lawyer, said the acquittal opened the door for a plea agreement on the embezzlement charges. He felt the acquittal on the tax charges might help show jurors that Weiss was being prosecuted unfairly for acts that were not criminal, particularly when coupled with the PWBA letter.

“Ultimately, I think the letter did have some weight with the U.S. attorney in finally disposing of the case,” said Breyer, who described the pension charges as technical transgressions and contended much of the pension money involved would have reverted to Weiss anyway as surplus funds that were not necessary to meet obligations to retirees. Russoniello agreed that the letter affected the outcome.

“The government’s case was undermined by the publication of the fact that the agency that had the responsibility for regulating these funds did not see the conduct as outrageous and criminal,” he said. “It was a serious impediment to our effort. It made the ultimate disposition that we reached seem favorable or acceptable to the government.”

In the resulting plea bargain, all charges against David Weiss were dismissed. The company pleaded guilty to 10 counts of embezzlement and agreed to pay a fine of $100,000 plus $150,000 toward the cost of the investigation. The company and Weiss were barred from state and federal public works contracts for five years.

Terry Lee was disappointed. “As prosecutors, we want to put people in jail,” she said. “But when the government agencies are disagreeing with each other or behaving in a different fashion, it damages an investigation.”