Denny McLain and his former business partner, Roger Smigiel, will report to federal prison next month and have been ordered to repay $2.5 million to the pension fund of the now-defunct Peet Packing Co. in Chesaning, Mich.
But if they can't pay, there's always Farmington Hills-based Michigan National Bank.
Michigan National and Kalamazoo-based First of America Bank Corp. are staring at a $3 million civil lawsuit in federal court, filed by the Peet pension fund board. The lawsuit attempts to replace money taken from the fund by Messrs. McLain and Smigiel, who spent it on motorcycles, condominiums and various investments. They, business associate Jeffrey Egan and various companies they created also are defendants in the suit.
A hearing on motions by both banks to be dropped as defendants is set for May 29 before U.S. District Judge John O'Meara.
The pension fund's board contends First of America improperly gave up $12.5 million in pension fund assets to Messrs. McLain and Smigiel, who appointed themselves pension trustees in early February 1994. And, the suit says, Michigan National - which Messrs. McLain and Smigiel selected as custodian of pension fund assets - improperly transferred $3.06 million of the money to a shell corporation designed to defraud the fund.
But Michigan National attorney David Vigna said his clients "don't think there's any merit to the suit." The bank has moved to dismiss on the grounds it was merely the custodian of the pension plan's assets, and had no discretion or control over them.
All three men were indicted on federal pension fraud charges in May 1996. Mr. Egan pleaded guilty to a single count in September, while a jury convicted Messrs. McLain and Smigiel in December.
Earlier this month, Mr. Egan was sentenced to 15 months in prison, with the recommendation that half of the time be served in a halfway house. He also was ordered to help Messrs. McLain and Smigiel repay the $2.5 million. Mr. McLain has been sentenced to eight years and one month in federal prison, and Mr. Smigiel has been sentenced to seven years.
Meanwhile, First of America has asked for an immediate judgment in its favor on grounds that it merely transferred the pension plan's $12.5 million in assets to Michigan National in February 1994, when it received word that Messrs. McLain and Smigiel were the new trustees. First of America contends it cannot be held responsible because all of the theft took place after it was replaced as trustee.
Mark Steckloff, attorney for the pension fund, said both banks' motions should fail.
Regardless of the fact that First of America had been replaced as trustee, Mr. Steckloff said, the bank "had a duty not to release the money to unauthorized trustees, to people they knew could not act on behalf of the plan."
First of America attorney John Allen disagreed.
"As the trustee, our duty was not to say who the next trustee is going to be," Mr. Allen said. "When they tell us we're fired, our duty is to salute smartly and say, 'Thank you for the opportunity to have served.' . . . Otherwise, a trustee could refuse to turn over assets and keep managing the money and earning fees, when the people in charge have said they want someone else to do it. The controlling authority was the (Peet) board."
As for Michigan National, Mr. Steckloff said that bank doesn't need investment discretion under federal law to be found responsible for what happened to the money.
Mr. Vigna declined to comment on Mr. Steckloff's arguments beyond what is in Michigan National's motion.
The pension fund's complaint, filed in March, says Messrs. McLain and Smigiel started their purchase of Peet Packing in October 1993, signing a deal to buy 51% of Peet stock for $17 a share, and agreeing to buy the other 49% of the shares for $17 each "within 30 to 90 days."
During that time, Messrs. McLain and Smigiel began negotiating with First of America on Peet's delinquent $1.4 million in loans to First of America, the suit says.
According to the complaint, Messrs. McLain and Smigiel were unsuccessful in convincing First of America to extend them credit either to buy Peet's shares or for operating expenses, despite their threats to terminate First of America from its role as pension trustee if the bank didn't agree to new loans. Instead, Messrs. McLain and Smigiel borrowed $1.1 million from The Dennehy Agency Inc., an insurance agency in Troy, Mich., to fund the purchase, which on Jan. 20, 1994, wound up to be $10 a share in cash and another $7 a share over three years. Dennehy later was repaid, but is not a party to the suit.
Then, on Feb. 4, Messrs. McLain and Smigiel, acting as Peet's board, wrote First of America, saying it had been replaced as pension trustee - by Messrs. McLain and Smigiel as individuals. This was improper, the suit said, because plan documents say only a bank or trust company can act as trustee of the pension. At any rate, federal law had made Mr. McLain ineligible to serve as a trustee because of his 1988 guilty plea to federal racketeering and drug charges.
Nevertheless, First of America sold all of the plan's assets, raising $12.5 million, and transferred the money to Michigan National, which had signed a custodial agreement.
Mr. Egan incorporated several shell companies through which pension fund money was diverted - companies with names that were similar to those of well-known investment houses.
The suit says Messrs. McLain and Smigiel later created and back-dated loan and mortgage documents to cover their tracks.
The suit says Messrs. McLain and Smigiel provided false information to company and union staffers looking into the pension fund raid through 1994 and 1995.
The suit seeks damages from First of America; Michigan National; all of Mr. Egan's shell corporations; Messrs. McLain, Smigiel and Egan individually; and Troy-based Cambridge Financial Services Inc., which the suit says Messrs. McLain and Smigiel used to invest $6 million of pension fund money in mutual funds in such a way that it maximized commissions to Mr. Egan. Cambridge Financial Services has denied "any involvement in any of the transactions" mentioned in the case.