Table of Contents | Published in February 1997

Denny McLain's Last Out

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.

By Tina Ruyter | February 1997

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 beneficiaries.

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 pattern.

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 month.

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 underfunded?

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 debt.

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 foreclose.

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 stock.

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 criminal record.

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 pension fund.

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.