Labor Department Obtains Consent Judgments Against Trustees And Managers Of New York Health Plan

Archived News Release — Caution: Information may be out of date.

The U. S. Department of Labor has obtained consent judgments barring six trustees and managers affiliated with the International Workers' Guild (IWG) health plan from serving as fiduciaries of any employee benefit plan governed by federal pension law. Diversions of assets and underfunding of the health plan had left it with between $8 to $28 million in unpaid medical claims.

The plan, created in 1995, was marketed to small employers through consultants, insurance agents and related professionals. The department alleged that IWG was a "sham union" which operated the health plan for employers via "bogus" collective bargaining agreements with the National Association of Business Owners and Professionals, a sham "employer association". The plan was administered by Fidelity Group, Inc., of Great Neck, NY. At its peak, it had over 10,000 participants in 32 states.

Settling defendants include all four plan trustees, Paul Askew, Charles Bradley, Terence Rhue and Noel Shaw, as well as two management-level employees of the Fidelity Group: David Spooner and Lee Jarmolowsky.

Under the terms of the judgments, the trustees are barred for 10 years and Mr. Spooner is barred for life, from activities governed by the Employee Retirement Income Security Act. They may not act as fiduciaries, provide services, receive compensation, market a plan, recruit participants, or sell property to any ERISA plan. Defendant Jarmolowsky, who was not involved in the diversion of plan assets, has consented to an injunction which permanently prohibits him from acting as a fiduciary to any ERISA plan.

The department originally filed its lawsuit on Dec. 15, 1998 alleging that the trustees and others violated ERISA by:

• paying excessive administrative fees from health plan assets to Fidelity for its service as the third-party administrator;
• diverting assets of the health plan to IWG and NABOP in the form of sham union and association fees;
• failing to monitor and administer the fund's claims processing system and adjudication system,
• thereby resulting in a $25 million backlog of unprocessed health claims;
• failing to assure the financial soundness of the plan through the use of adequate underwriting and sound actuarial analysis;
• failing to establish adequate contributions rates and maintain cash reserves to assure the payment of claims;
• allowing the plan to become insolvent and using plan money for prohibited purposes; and
• permitting the NABOP and IWG to be created or operated primarily to divert plan assets from the payment of health benefits.

The court entered a temporary restraining order removing the plan administrator, Fidelity Group, Inc., its officers Eugene Duncan, Dwayne Samuels, and its employees Lee Jarmolowsky and David Spooner; the National Association of Business Owners and Professionals Inc., and its officers Yvonne Duncan and Carol Samuels; and plan trustees Paul Askew, Charles Bradley, Noel Shaw Jr. and Terence Rhue.

On Dec. 24, 1998, the Labor Department obtained a preliminary injunction freezing the assets of the plan trustees, the affiliated organizations and their principals. The court also appointed David W. Silverman as the independent fiduciary to oversee the operation and management of the plan. Upon Mr. Silverman's recommendation, the court terminated the plan's operations in January 1999. Since that time, Mr. Silverman has been marshaling plan assets to pay outstanding participant health claims.

Litigation continues against the Dwayne Samuels, Eugene Duncan, Fidelity Group, Inc., Carol Samuels, Yvonne Duncan, NABOP; and IWG.

The consent judgments with settling defendants were entered by District Judge Jacob Mishler of the United States District Court in Uniondale, Long Island, N.Y. on June 23, July 5, July 6, and Aug. 24.

The case resulted from an investigation conducted by the New York Regional Office of the department's Pension and Welfare Benefits Administration into alleged violations of ERISA. Jonathan Kay, acting director of the New York Regional Office of PWBA said, “The Labor Department encourages employers and workers to contact us at 212-637-0620 for help with any problems relating to private-sector pension and health plans.”

(Herman v. Fidelity Group, Inc.)
Civil Action No. CV-98-7683

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Archived News Release — Caution: Information may be out of date.