Flawed Pension Safeguard Costs Miners Millions

Like many Texas businessmen in 1985, Tom Lundberg was being squeezed by collapsing real estate prices. But he hit upon a novel solution: buying a New Mexico potash mine at a time when the potash industry was as bad off as Texas real estate.

Peculiar as Lundberg’s plan might have seemed, a clue to his intentions may have emerged at the closing of the potash mine sale on Dec. 31, 1985. He and his lawyer, John N. Sanders, delayed the final signing for two hours while they waited for a letter listing the exact assets in the mine workers’ pension plans.

Lundberg signed when he got the answer. And within 15 days, according to court records, he had already moved $2 million out of one pension fund. A million dollars of it went to Sanders as legal fees, and $443,000 to Lundberg to pay some of his real estate debts, according to the records.

That was just the beginning.

Over 18 months, a total of about $9 million was withdrawn from the retirement accounts of 900 mine workers and retirees in what a federal grand jury in Albuquerque charged last March was a series of elaborate sham transactions that amounted to embezzlement.

Before authorities or the workers realized what had happened, Lundberg Industries was in bankruptcy and, court documents show, the once-robust pension plans were within weeks of running out of money.

“The scary part about pension fraud is that we don’t even know about it until somebody goes into bankruptcy,” said Michael F. Treworgy, the regional inspector general for the U.S. Department of Labor. “How many others do we not know about?”

It was not the Labor Department that discovered the problems in the pension plans at Lundberg Industries, although monitoring them is the agency’s responsibility. Mine workers who asked the Labor Department’s pension division for help ran into a stone wall.

“The employees were aware of some of their rights as far as the pensions went, but they couldn’t get any answers,” said W.T. Martin, the local attorney representing the workers. “They got the runaround.”

So the workers and retirees, resorting to an unusual New Mexico law, collected 600 signatures on a petition requiring the local district attorney to open a grand jury investigation. Meanwhile, the bankruptcy filing triggered a federal investigation.

The case demonstrates not only the Labor Department’s unresponsiveness but also the failure of a key element of the department’s strategy to safeguard the pension funds of 76 million Americans.

1% of Cases Examined

There are more than 870,000 pension plans, yet the Labor Department’s Pension and Welfare Benefits Administration has only 260 investigators and auditors who can examine fewer than 1% of the plans a year. So the agency relies on what it calls a “fail-safe” system--accountants, actuaries and financial advisers hired by the pension plans to review their records and investments.

But the Labor Department inspector general’s office contends that there are no incentives for accountants and actuaries to report abuses they discover, and the accusations in the Lundberg case seem to back up the assertion. Among those indicted with Lundberg and Sanders on federal conspiracy, embezzlement and mail fraud charges were the actuary for the pension plans, an employee benefits specialist and a financial consultant with a criminal record.

Further, court records show that Lundberg withheld critical information from his outside auditors, Ernst & Whinney. When asked at a court hearing why he did not tell the auditors about one $2-million transaction involving pension fund money, Lundberg replied: “I’d forgotten about it, frankly.”

Lundberg and the others have pleaded innocent to the federal charges and to similar state charges. Lundberg’s attorney said that neither he nor his client would discuss any of the allegations.

But interviews and thousands of pages of court records show how millions of dollars that 900 workers and retirees thought was safe disappeared in a swirl of complex deals that preceded the bankruptcy of Lundberg Industries.

“It’s a pretty worried feeling when you work on a job for 25 years and find your pension has been stolen,” said Leo T. Evans, a retired potash worker. “You don’t have another 25 years to do it all over again.”

Thomas D. Lundberg was described by one acquaintance as a taller, thinner Phil Donahue who speaks softly and sometimes conceals his shrewdness by pretending to be confused.

He was born in 1934 and grew up in Midlothian, Tex., a small town south of Dallas. An industrial chemist, he also became involved in real estate investments and owned about 10% of two small Texas banks. He developed what Sanders later described as a “cash bind” when the collapse of oil prices and real estate values drove the Texas economy into a depression in the mid-1980s.

In Denver, meanwhile, a big cement and potash company called Ideal Basic Industries was confronting its own cash-flow troubles. In the second half of 1985, the firm defaulted on $300 million in debt and, in a more traditional response to such difficulties, was moving desperately to raise money by selling assets, including its potash mine in Carlsbad, N.M.

Hundreds of miles of tunnels dug by potash miners wind beneath the desert near the southeastern tip of New Mexico, where the bulk of the nation’s potash is mined. The product, which comes out of the ground in large lumps, is used widely in the agricultural industry for fertilizer and refined for use in some food and pharmaceutical products.

Lundberg had once bought potash from Ideal Basic for his chemical businesses and one Sunday at a Dallas Cowboys football game, an Ideal Basic salesman told him that the Carlsbad mine and a companion processing plant in Dumas, Tex., were on the block.

As Lundberg discussed the deal in the next few days with Sanders, it appeared to offer the solution to Lundberg’s cash-flow problems, according to a letter that the attorney later wrote. Sanders described the deal in that letter as a way for Lundberg to “resolve all of his past financial problems as well as be a stepping stone for future acquisitions.”

By Dec. 31, 1985, Lundberg had arranged to buy the operation for $3 million and the assumption of various obligations. Lundberg did not put any money down, and his first payment on the $3 million was not due for a year.

As part of the transaction, Lundberg agreed to pay Ideal Basic 75% of what he got for selling 160,000 tons of potash already mined and in warehouses.

The acquisition also made Lundberg the trustee for three pension plans covering company workers and retirees. According to the letter Lundberg received at the closing session, the plans had more than enough money to cover their obligations to workers. In fact, there was an estimated $1 million extra.

Lundberg testified in a civil suit in 1987 that he intended from the outset to terminate the three pension plans, create a substitute plan and use the surplus for business expenses.

Pension plans can be terminated legally if sufficient assets exist to pay off current and future obligations to beneficiaries. Normally, a company ending a plan buys an annuity to cover the obligations and then uses the surplus for other business purposes.

Although the practice is controversial among workers, it is also increasingly common. A new benefit plan must be created and the termination must be approved by the federal Pension Benefit Guaranty Corp., which insures many pension funds and reviews financial records for proposed terminations.

Lundberg, however, did not wait to terminate the plans before dipping into them.

According to the federal indictment, Lundberg and Sanders met on Jan. 15, 1985, with C. David Donaldson, an employee benefits specialist, and Joe Wall, a Nashville, Tenn., businessman, to extract $2 million from one of the pension plans.

It was one of several transactions that the indictment charges constituted a conspiracy by Lundberg, Sanders, Donaldson and two others to embezzle pension funds. The others were Samuel A. Longo, a financial consultant from Malibu and Dallas, and David J. Boatright, an actuary from Nashville. Wall was not accused of any wrongdoing. California records show that Longo was sentenced to prison in a check-writing scheme that resulted in the collapse of Orange Empire National Bank in Anaheim in 1965.

Lent Pension Money

The pension plan transaction was fairly simple, according to the indictment. As pension trustee, Lundberg lent $2 million in pension money to Wall. Then Wall immediately returned the $2 million to Lundberg as a down payment to buy the machinery at the mine from Lundberg for $28 million. Lundberg then agreed to rent the equipment back from Wall for $318,000 a month.

Lundberg has testified that the $2 million was a loan from Wall and was for company operating expenses. But the indictment charges that only $320,000 went to Lundberg Industries; Sanders got $1 million for legal fees, and $443,000 was used to pay some of Lundberg’s debts.

According to the charges, Lundberg never paid Wall rent, and the transaction was not reported to the company’s auditors. The machinery did not belong to Lundberg anyway. Ideal Basic had a lien on it until Lundberg paid the $3 million he owed for the company.

Another deal cited by the government used pension money to bail Lundberg out of a soured real estate investment.

In March, 1986, Lundberg and a partner paid $3 million for 127 acres of vacant land south of Dallas. By fall, the lender had started to foreclose because the payments had not been made.

In November, Lundberg established a company called 127 Inc., and made it the owner of the 127 acres. A month later, he transferred 100% of the 127 Inc., stock to another company controlled by Longo, according to the indictment.

Lundberg then arranged with the lender to transfer the loan to 127 Inc., and resigned as a director of the corporation, absolving him of the debt. He then authorized two pension fund loans totaling $1.55 million to 127 Inc., and the company used some of the money to bring the payments current on the land.

In another transaction detailed in the indictment, Lundberg reaped an enormous profit by using pension fund money to buy his own stock in Lundberg Industries at a time when the company was insolvent.

According to the indictment, in late 1986 he sold 17 shares of his personal stock in Lundberg Industries to the company for $903,905. As trustee of the pension plans, he then authorized spending $903,905 in pension money to buy the stock from the company.

Lundberg had paid $100 a share for the stock and the pension fund paid $53,170 per share, which was passed on to Lundberg. When the transaction occurred, bankruptcy court records show that Lundberg Industries was insolvent.

The indictment says that Lundberg’s use of the pension fund money alarmed his nephew, Gregg Lundberg, who had been brought to Carlsbad from Los Angeles early in 1986 to be comptroller of Lundberg Industries. Gregg Lundberg was an accountant who was attending law school in Los Angeles at the time. His father, Kenneth, a former K mart manager, had been hired as manager of the mining operation.

In November, 1986, according to the indictment and Gregg Lundberg’s lawyer, Gregg and his father objected that some uses of pension fund money were inappropriate. To settle the dispute, the indictment said, Tom Lundberg agreed to buy his brother’s 40% interest in Lundberg Industries for $600,000. That was 15 times the $40,000 Kenneth had paid for the stock less than a year earlier. The $600,000 came from Lundberg Industries.

The company had been a family affair from the day Lundberg bought it. He brought Kenneth in as general manager and paid him $100,000 and a $150,000 bonus in 1986. Gregg was paid $55,000 and a $50,000 bonus. Tom’s wife, Lois, received $100,000 in salary and a bonus.

Lundberg himself collected $125,000 in salary and a $150,000 bonus in 1986. He kept his 4,000-square-foot house near Dallas and penthouse condominium on the Gulf of Mexico and routinely chartered private planes at company expense for trips to the mine in Carlsbad and elsewhere.

In November, 1986, Lundberg had good reason to buy out Kenneth and send Gregg back to California.

He was awaiting the big pension payoff.

In July, he had started the process of terminating the pension plans to obtain the surplus assets. The surplus he anticipated receiving was not the $1 million estimated six months before, but $3.6 million.

Evaluating pension plan assets against obligations is done by actuaries through mathematical tables. Different actuaries often arrive at different results.

Lundberg hired Boatright to evaluate his plans, and Boatright came up with a surplus of $3.6 million. His calculations were submitted to the Pension Benefit Guaranty Corp. and brought a routine approval of the termination.

The federal indictment charged that the calculations were fraudulent because they were based on overvalued pension fund assets and failed to include significant transactions that affected the financial health of the funds.

The indictment also charged that Lundberg Industries never bought the annuities to fund the mandatory substitute plan, which ultimately would leave the federal pension insurance agency with a bill for more than $6.5 million.

On Jan. 5, 1987, a deposit of $3.6 million, representing the surplus, was made in one of Lundberg’s business accounts and Lundberg testified that most of the money went into the company’s operating account.

Despite the infusion from the pension funds, Lundberg failed to make his required $180,000 payment to Ideal Basic on the $3-million purchase note for the mine. Instead, he sued Ideal Basic in federal court in Albuquerque.

The suit said that Ideal Basic had blocked Lundberg’s efforts to obtain permanent financing for the mining operation--and, strangely, that the pension funds had been underfunded when he acquired them.

Paavo T. Tuominen, Ideal Basic’s senior vice president, said in an interview that the company viewed the lawsuit as a “smoke screen” to allow Lundberg to avoid paying what he owed Ideal Basic, which was far more than $180,000.

According to a countersuit filed by Ideal Basic, the mine’s potash inventory was sold by Lundberg in 1986 and Ideal Basic should have been paid $6.4 million as its 75% of the proceeds under the purchase agreement. But Lundberg refused to pay the money.

After filing the lawsuit against Ideal Basic, Lundberg Industries slid steadily toward bankruptcy while the amount that Lundberg took out of the company in salary and other payments rose sharply. Bankruptcy court records show, for instance, that in the 45 days after the company filed for bankruptcy, Lundberg and his wife received $120,412 from the business.

Lundberg was hardly living as someone whose company was on the verge of bankruptcy. In a deposition, he acknowledged paying $55,766 to buy a new Mercedes-Benz for his wife on March 5, 1987. On March 16, he paid $150,000 in cash for a house for his son.

After Lundberg Industries filed for bankruptcy, the mine workers in Carlsbad gathered the signatures for a petition to require the local district attorney to begin a grand jury investigation. The grand jury started in the fall of 1987.

At roughly the same time, the federal judge in the bankruptcy case in Dallas appointed a trustee to take over the operations of Lundberg Industries. The trustee, lawyer David W. Elmquist, discovered that the company was at least $14 million in debt and that the pension funds were almost broke.

Elmquist said in an interview that he did not find any evidence that the Labor Department was aware of the problems with the pensions until after he took over the case and discovered a series of questionable transactions. He notified the Labor Department.

The potash workers and retirees did not lose their pensions. The Pension Benefit Guaranty Corp. stepped in quickly and took over the pensions. And then the Labor Department began an investigation into what happened to the pension fund assets of Lundberg Industries.