PBGC, Labor Department band together to fight alleged fiduciary abuse at Revstone

Federal pension overseers, joining forces to stop what they say is widespread fiduciary misconduct by Revstone Industries LLC Chairman George Hofmeister, are winning some crucial victories. But they know they have more battles ahead.

For now, officials at the Department of Labor are hoping to persuade U.S. District Judge Karen Caldwell of the Eastern District of Kentucky to bar Mr. Hofmeister and his investment adviser Bernard Tew from ever serving as pension fiduciaries. Ms. Caldwell refrained from making a decision at a July 19 hearing, although a final order is expected within a matter of weeks.

Next up at bat is the Pension Benefit Guaranty Corp., which has positioned itself as an unsecured creditor as Revstone goes through Chapter 11 bankruptcy proceedings.

While it is not unusual for officials at the Labor Department and the PBGC to collaborate when they suspect defined benefit assets are being misused, “what is unique is the size and high-profile nature” of the companies involved, said a PBGC official who declined to be identified. “The big thing right now is they're trying to affect the sales of various operating units to various buyers. There are a lot of moving pieces here.”

That's putting it mildly. Southfield, Mich.-based Revstone, with plants and offices throughout North America, has been under civil and criminal investigation by the Labor Department's Employee Benefits Security Administration for alleged fraud and financial mismanagement at several subsidiaries since 2009 in what EBSA officials say is a pattern of “reckless behavior” that has cost the pension funds $39 million. In one court document, DOL officials claim that Messrs. “Hofmeister and Tew's disloyal and self-serving behavior is the epitome of what Congress sought to avoid in enacting ERISA.”

In a 2012 news release, Revstone acknowledged reporting to the EBSA deficient transactions that put some assets at risk involving less than 10% of plan assets, and said the plans' investment strategy “has been executed in the best interests of both the plan and its participants.” Both men declined to comment, and calls to their attorneys were not returned.

The alleged fiduciary misdeeds prompted DOL lawyers to sue Messrs. Hofmeister and Tew last August to recover $34 million in assets from Revstone Transportation subsidiary Metavation LLC, a Southfield, Mich., vehicle parts manufacturer formerly known as Hillsdale. A second DOL lawsuit, filed in May against the two men, as well as other pension trustees for Revstone subsidiaries Fairfield Casting LLC and Fourslides Inc., is seeking to restore $4.9 million to the pension plans of those two companies.

The subsidiaries named in the DOL lawsuits are owned by irrevocable trusts in the names of Mr. Hofmeister's adult children, who are the legal owners of most of Revstone's holdings. In court documents, Mr. Hofmeister stated he has bought and sold “about 150 companies” since 1986.

According to DOL documents, the transfer of pension assets to those trusts and some prohibited loans to companies controlled by Mr. Hofmeister were part of “virtually identical investment schemes.” The documents said he used pension assets to finance other Revstone subsidiaries and for personal reasons, including purchase of a $25 million home and payment of personal judgments from earlier lawsuits. Form 5500 filings available for the two Hillsdale pension plans show Mr. Tew being paid $653,314 in fees in 2011 alone.

Subsequent restructurings at Revstone, including creation of a new holding company, Spara LLC, were just “reshuffling of the deck chairs,” DOL lawyers argued in their court filings.

As Revstone and Mr. Hofmeister continued to acquire and sell subsidiaries — and attract lawsuits by other creditors that led to the company filing for Chapter 11 bankruptcy protection in December — PBGC officials got involved. In March, they moved to take over Metavation's two defined benefit plans before Revstone could sell off its interest in the company. The PBGC will have to deal with an estimated $46 million shortfall in the two plans, which Revstone Transportation assumed when it acquired Hillsdale and renamed it. PBGC officials used the termination strategy to get on Metavation's unsecured creditors committee, which is getting crowded and complicated.

“They are restructuring a large number of entities, but only a small number are in bankruptcy. It's made it a challenging case for all the creditors,” said the PBGC official.

Metavation parent company Revstone Transportation in a statement disputed the PBGC's 50% funded estimate for the two plans, which was based on figures the company provided and then was calculated by the PBGC on a termination basis. The PBGC calculations showed $47 million in assets and $93 million in liabilities. Revstone estimated the plans to be “78% to 85% funded” in its March statement.

Revstone also disagreed with the PBGC's warning that selling Metavation would compromise the pension plans, arguing a new owner could make the plans stronger, and said that it would work with the agency to resolve “the perceived issues.”

With the outcome of those talks and the bankruptcy case less than certain, PBGC lawyers also recently filed liens against some Revstone subsidiaries not in bankruptcy to collect nearly $2 million in overdue pension contributions for the Hillsdale plans. The agency is seeking opportunities to file more liens, the official said: “We had to look at what the control groups were. We're certainly going to look diligently and pursue it aggressively.”

The big question now is whether the government pursuers can get there while there are still pension assets to protect.