EBSA Press Release: Derivative Investments Cause of Plumbers Plan Losses Says Labor Department Lawsuit [08/08/1996]

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The Labor Department's Pension and Welfare Benefits Administration has filed a lawsuit in a case involving derivatives, highly complex synthetic investments with value derived from assets such as mortgages, commodities, interest rates or stocks.

Trustees and former securities brokers to the Connecticut Plumbers & Pipefitters pension fund were sued yesterday to recover more than $3 million in losses from overly risky investments in derivatives.

The lawsuit, filed in New Haven federal court, seeks to recover all losses plus any gains the fund's assets would have earned had the defendants invested plan funds in other appropriate financial instruments. It also seeks to remove the trustees from their positions with the fund and permanently bar them from service to any plan governed by the Employee Retirement Income Security Act (ERISA).

Headquartered in Wallingford, Conn., the fund covered 2,475 participants and had $106 million in assets in March, 1994.

According to the suit, the trustees and broker Steven G. Hassenmiller purchased 79 collaterialized mortgage obligations (CMOs), a class of derivatives, for the plan through his various employers, including Paine Webber, Westcap Government Securities and Arbour Financial Corp.

The lawsuit says they failed to analyze the investment risks, losing more than $3 million.

Among the defendants named in the lawsuit are trustees Frank R. Krzywicki, Hubert J. Barnes, Cameron Champlin, John T. Higgins, Eugene Hull, John W. Olsen, William P. Shannon, U. Arthur Spose, Robert K. Hilton, Robert A. Polisky, Gregory Salmini, Alan Spose, Fred Otto and Thomas Debrinski. The trustees allegedly:

• authorized the purchases and sales of overly-risky investments for which they had an inadequate understanding,
• improperly delegated to Hassenmiller discretion in setting the timing and price of the purchases and sales of the fund's CMO investments,
• never required Hassenmiller to comply with the fund's requirements regarding investment managers,
• never established investment guidelines with which Hassenmiller had to comply as required by the fund's documents,
• failed to properly appoint, monitor and remove Hassenmiller as an investment manager and advisor,
• failed to effectively monitor the fund's investments in CMO investments.

In April 1994, the trustees hired Criterion Investment Management to assume management of the mortgage-backed securities from Hassenmiller. On Criterion's recommendation, the entire fund portfolio in CMOs was sold at a total loss in excess of $3 million.

The lawsuit is the result of an investigation by the Boston regional office of the department's Pension and Welfare Benefits Administration into alleged violations of the federal pension law.

(Reich v. Hassenmiller)

(Civil Action No. 3:96 CV 1514 CDJS)