Suit: Union Funds 'Diverted' to CA Resort

November 22, 2004 ( - The Department of Labor (DoL) filed a lawsuit against a Pipefitters union local, alleging officials diverted more than $36 million to the Konocti Harbor Resort and Spa facilities on Clear Lake in Kelseyville, California.

A DoL news release said the federal court suit against current and former trustees, the plan administrator, and Local 38 of the United Association of Plumbers, Pipefitters and Journeymen alleged that the assets came from five employee benefit plans. By doing so, the defendants violated the Employee Retirement Income Security (ERISA), the DoL charged.

>According to the suit, Local 38 controls a non-ERISA “convalescent trust fund” that owns and operates the Konocti resort. DoL alleged that several of the defendants diverted approximately one-third of all pension assets – more than $36 million – to the convalescent fund.  

>The trustees asserted they were unaware of the diversion even though it was reported on financial statements as a “receivable.”   Some or all of the diverted assets were used to build and improve Konocti’s 5000-seat outdoor amphitheatre, 1000-seat concert hall, and other infrastructure, the suit charged. The retirement, health, scholarship, apprenticeship, and vacation and holiday funds cover more than 2,000 participants employed throughout northern California.  

>Further, the Labor Department suit alleged that the current and former trustees and the administrator maintained inadequate financial controls, violated plan documents, and imprudently spent millions to build and maintain facilities at Konocti despite the resort’s continuing financial losses.   According to the suit, the trustees did not require loan agreements or obtain a security interest in the resort.   Local 38 also profited from a $6 million loan it made to the convalescent fund to prevent a bank foreclosure that would have forced the sale of the Konocti property in 2000, the suit charged.

>In addition to an accounting of all plan assets, the suit asks for a restoration of all losses to the plans, to correct transactions prohibited by law, give the plans a security interest in the convalescent fund and Konocti and to return any illegal profits paid to the defendants.   The suit also asks the court to remove the plan officials as fiduciaries and to permanently bar them from service to ERISA plans in the future.

>The lawsuit named as defendants trustees Lawrence Mazzola, business manager and financial secretary-treasurer of Local 38, Lawrence Mazzola, Jr., William Fazande, Larry Lee, James Shugrue, Vohon Kazarian, Tom Irvine, Robert Buckley, Robert Buckley Jr., Art Rud, Ron Fahy, and Robert Nurisso; plan administrator Frank Sullivan; and Local 38).   The suit was filed in federal district court in San Francisco.