PHOENIX, Ariz. - A U.S. District Court in Phoenix approved a $93.3 million settlement of lawsuits involving four Arizona union funds and Mitchell Hutchins Institutional Investors.
The Labor Department had sued more than two dozen fund trustees over real estate investments made primarily in Arizona between 1984 and 1989.
Separately, new fund trustees had sued Mitchell Hutchins, the funds' investment adviser.
The settlement is the largest such recovery in dollar terms involving the Labor Department.
The Arizona State Carpenters Pension fund will receive $32 million; the Arizona Laborers, Teamsters and Cement Masons Local 395 Pension fund, $35 million; the Operating Engineers Local 428, $25 million; and the Operating Engineers' health and welfare fund, $1 million.
According to the Labor Department's Pension and Welfare Benefits Administration's complaint in the case, each funds' guidelines allocated 90% to fixed-income investments; about 50% of this was allocated to real estate investments.
Based on those guidelines, each board designated about 40% of its assets to real estate, primarily in Arizona, with a heavy emphasis on new construction.
Marc Machiz, associate solicitor for the Labor Department, said trustees made their first mistake in allocating such a high amount to one asset class.
"ERISA requires diversification," Mr. Machiz said. "It was a statutory failure to do so," he added.
The PWBA alleged Mitchell Hutchins and trustees failed to consider the volatility of real estate in the Southwest.
The trustees kept investing in real estate for the five-year period despite reports from Mitchell Hutchins or other advisers, accountants and performance evaluators.
It's hard to tell how much each fund lost as a result of the real estate investments because the issue was not tried in court, Mr. Machiz said.
But the investments themselves were "not even close to acceptable," he said.
According to Form 5500 reports from 1989, the $106 million Carpenters fund invested $53 million in real estate; the $205 million Arizona Laborers, Teamsters and Cement Masons invested $81 million; the $118 million Operating Engineers pension fund invested $46.6 million; and its $5 million health and welfare fund invested $1.6 million.
Mr. Machiz said trustees have a pending case in U.S. District Court in Phoenix alleging the funds' custodial bank, Citibank, based in New York, did not give adequate information on the reports, thus camouflaging the actual picture.
But despite this, a good fiduciary would have been diligent enough to discover these problems, Mr. Machiz said.
The $93.3 million will come from a number of sources, Mr. Machiz said.
Manufacturer's Hanover Trust Co., Mitchell Hutchins' owner until late 1988, will pay $50.8 million; PaineWebber Group Inc., Mitchell Hutchins' current owner, will pay $29.2 million; trustees will pay $9 million; William Miller and John E. Jeffries, two employees of Mitchell Hutchins who shared responsibility for managing the funds' accounts, will pay $3 million; attorneys to the trustees will pay $1.3 million.