SAN FRANCISCO - Although the Labor Department already has settled a lawsuit against Norcal Waste Management Inc. in a different matter, it still wants to ban Norcal's trustee from doing business for allegedly losing $3.3 million in investing plan assets in a failing company.
In its lawsuit filed in U.S. District Court in San Francisco Feb. 14, the Labor Department wants to ban the Bank of America, San Francisco, from serving as a trustee for any plan covered by the Employee Retirement Income Security Act and wants the bank to restore all losses to Norcal's defined benefit plan. Bank of America officials say the bank was a directed trustee to the plan and the bad investment wasn't its fault.
The Labor Department already settled a lawsuit for $3.5 million against Norcal to somewhat recover the defined benefit plan's losses and for a separate lawsuit involving the company's employee stock ownership plan, department sources said. The department has rejected the Bank of America's offer to pay an additional $2.5 million for the lawsuit involving the defined benefit plan, the bank said. Negotiations are continuing.
Marc Machiz, associate solicitor for the Labor Department, said the department wants to restore the loss to the Norcal plan and make sure that other assets held in trust by the bank are safe.
The Bank of America was trustee to the defined benefit plan of Norcal, which according to the 1996 Money Market Directory of Pension Funds is worth nearly $21 million. Allegedly, Bank of America allowed the plan to purchase $3.3 million in common stock in Techno-Therm Inc., Erie, Colo., a space heater manufacturing company.
In a statement to Pensions & Investments, Bank of America said that the decision to invest in Techno-Therm was made by Norcal and not by the bank, which believed it was a directed trustee of the Norcal plan.
"In this case, the investment committee gave the bank express, written directions to invest $3.3 million of plan assets in Techno-Therm," the statement read. "The bank was not asked, nor did it undertake on its own, to investigate the prudence of the Techno-Therm investment; that was the duty of the investment committee."
The bank added that its directed trust agreement was a longstanding practice between the parties on other transactions. It also said it did not believe that the lawsuit "should or will have any impact on its business."
According to information available prior to the common stock purchase, Techno-Therm was not doing well, the Labor Department said; less than two years after Norcal's stock purchase, the value of its total investment in Techno-Therm fell to $2. In 1993, Techno-Therm filed for bankruptcy.
But the Bank of America said that as a directed trustee, it was obligated to follow the instructions of Norcal's investment committee. It didn't know of any problems with the investment until it was told to write off the cost by the Norcal pension committee.
The Techno-Therm stock was purchased on the condition that Daniel Horst, Techno-Therm's president and owner, could use the investment to repay a $1 million debt to Consolidated Environmental Industries Inc., a wholly owned Norcal subsidiary, the Labor Department said. The bank said it was never shown documents describing Mr. Horst's use of the money.
The Labor Department contends that Bank of America didn't fully investigate the relationship between the companies. According to a Labor Department statement, Consolidated borrowed $1 million from Norcal and then loaned the money to Mr. Horst.
