Or, how a former baseball star and convicted felon
flouted ERISA to become a trustee of a pension fund and
remove $3 million of its assets.
Or, how a former baseball star
and convicted felon flouted ERISA to become a trustee of a
pension fund and remove $3 million of its assets.
ERISA was intended to protect pension assets from the
predations of people with ideas of using the money for
anything other than retirement income for the plan
But when former Major League Baseball star Denny McLain
bought a financially strapped, 110-year-old meatpacking
company in Chesaning, Michigan, ERISA's protections fell to
the side. McLain made his mark on baseball history as the
majors' last 31-game winner, a Most Valuable Player, and a
two-time Cy Young Award honoree, in 1968 and 1969. But the
Detroit Tigers star's fall from grace was swift: A year
later baseball suspended him for betting on games, and his
career sputtered to an end soon after.
Sadly, McLain's most recent career, as an entrepreneur
and pension trustee, is following a more destructive
Three years ago, he and a partner, Michigan
businessperson Roger Smigiel, rode to the rescue of Peet
Packing. Within a month after the sale closed, $3 million
had been taken from Peet's hourly worker pension fund-one
of the healthiest parts of the company. McLain and Smigiel
used part of the money to fund a circuitous succession of
money transfers, loans, and investments.
They now face up to 20 years in prison, after being
found guilty of embezzlement of pension funds, two counts
of money-laundering, one of mail fraud, and one of
conspiracy in a federal court in Detroit, the scene of
McLain's earlier rise and fall. Sentencing is expected this
It will not be McLain's first trip to prison. After
retiring from baseball, he was convicted of racketeering,
extortion, and cocaine trafficking in Florida. His case was
overturned on appeal. On retrial, he pled guilty to lesser
charges and received a reduced sentence.
How was a former felon able to flout ERISA's rules to
get control of a healthy pension plan long enough to
"borrow" almost a quarter of its assets and leave it
When McLain and Smigiel bought Peet in January 1994,
they faced an enormous need for cash. The partners promised
to pay $17 in cash and notes for each of the company's
210,000-some outstanding shares. First, they borrowed $1.1
million to pay $10 cash per share to the Peet family, which
owned 53% of the company. But they needed another $2.5
million to pay the other $7 a share to the family in notes,
and to pay the minority shareholders. And the company had
defaulted on loans to its bank, First of America, which
wanted Peet to repay $1.4 million in secured and unsecured
McLain and Smigiel began negotiating with Fremont
Financial, which was considering making a significant loan
to the packing house. Fremont Financial is an asset-based
lender, a non-bank financial institution that makes the
risky kinds of loans that most banks avoid by taking
collateral and charging interest premiums. But negotiations
were dragging on and First of America was threatening to
Then a local investment advisor, Jeff Egan, came on the
scene with an interim plan. He wanted to act as the money
manager of Peet's pension assets. Until the new loan was
arranged, he proposed to create a conduit through which
money could be channeled from the pension fund to McLain
and Smigiel. In addition to the $13 million in the hourly
plan, Peet had two salaried plans with between $1 million
and $2 million in assets.
McLain and Smigiel assumed that, as trustee of the
pension plans, First of America would not permit the
transfer of assets to a shell corporation set up by Egan.
So they made themselves trustees, replacing First of
America. They then transferred $13 million of pension
assets to a new custodial bank, Michigan National, which
they instructed to wire $3.06 million to Vanguard
Investments, a shell corporation set up by Egan.
Vanguard wired the money to Alliance Credit, another
Egan shell, which wired $2.5 million to Peet. McLain and
Smigiel put this in a special-use account in Peet's name at
the National Bank of Detroit.
Alliance kept $560,000 and invested it in the preferred
stock of MCA Financial, a Michigan-based company with $5
million in common equity. Egan earned a $55,000 commission
for selling the preferred and was the legal owner, since he
owned the shell corporation that had title to the
ERISA prohibits McLain, who is a convicted felon, from
acting as a pension trustee, and the plan documents
themselves only permitted a bank or a financial institution
to do so. But by this time, First of America had allowed
McLain and Smigiel to take over as trustees. Apparently,
the trust officer looked at the contract between Peet
Packing and the bank, rather than the underlying plan
documents. The plan documents defined permitted successors
to the trustee, which were not defined in the contract.
First of America, which has other pension plans as trust
clients, did no investigation to learn whether McLain had a
Egan called the wire transfer to Peet a mortgage loan,
even though, when Peet first received the money, no loan
documentation was involved. In September of 1994, Egan did
record the mortgage and created a security interest on
behalf of the pension fund.
Meanwhile, the $2.5 million at National Bank of Detroit
was quickly put to use. Peet transferred $1.4 million to an
escrow account at First of America, so that First of
America would not foreclose on its still outstanding loan.
It made a partial payment of almost $600,000 to the
businessperson who had lent McLain and Smigiel the money
they used to close the sale. And when Fremont agreed to
make the loan to Peet, the proceeds paid off First of
America, which then released the escrow account assets back
to National Bank of Detroit. The National Bank of Detroit
account saw regular withdrawals to pay for such items as a
condominium for McLain and a Harley-Davidson motorcycle and
a country club membership for Smigiel.
Smelling something fishy
Some of this activity attracted notice. Peet's human
resources director overheard phone calls about moving
accounts and money from the pension fund. During the summer
of 1994, he suggested to the president of the United Food
and Commercial Workers Local 39 that something fishy seemed
to be happening. The union began to ask for a schedule of
transactions within the pension fund.
The Federal Bureau of Investigation and the Pension
Welfare Benefit Administration started looking into the
matter. And the pension fund hired Mark Steckloff, an
attorney with the Sachs, Waldman, O'Hare law firm in
Detroit, in late 1994 to conduct its own investigation.
By the time Peet made the schedule of transactions
available to the pension fund in early 1995, the company
had returned some of the money to the plan. But the pension
fund saw that $2.5 million was still missing.
In March of 1995, the plan documents were rewritten so
that four trustees would guard the assets. Two are union
representatives and two are members of Peet management. The
new trustees hired new money managers.
The following summer, however, Peet declared bankruptcy
and is now in Chapter 7 liquidation. Instead of its $2.5
million, the plan has a security interest in the plant and
200 acres of land. The bankrupt estate is still the legal
owner of the real property. Those assets have some value,
says Steckloff, but not $2.5 million worth.
The pension fund, which was slightly overfunded when
McLain and Smigiel bought the company, is now underfunded.
But the plan is providing full benefits to its 475
beneficiaries. If it runs short, the Pension Benefit
Guaranty Corporation will be obliged to make good on the
plan's guaranteed benefits. Some of the company's pension
obligations did not have a PBGC guarantee, however.
The FBI and PWBA investigations resulted in the charges
against McLain and Smigiel. The trial culminated in their
convictions last December. Egan, who testified for the
prosecution, had a plea agreement limiting his sentence to
a maximum of 30 months for one count of embezzlement from a
Steckloff says that civil suits are also in the offing.
The plan would like to recover lost principal and interest,
legal costs, and disgorgement of profits. First of America,
as the former trustee, is vulnerable to accusations that it
violated its obligations when it released plan assets on
the direction of Smigiel and McLain, who were not permitted
to act as trustees, he adds.