The Heat Is On Clinton's Moneyman Terry McAuliffe

[Bill Nalty]

http://www.businessweek.com

Business Week
December 22, 1997

Government: INVESTIGATIONS

THE HEAT ON CLINTON'S MONEYMAN

Controversy is swirling around fund-raiser Terry McAuliffe

By Paula Dwyer in Washington

At 40, the boyish-looking Terence R. McAuliffe is the reigning
king of Democratic fund-raising. Says mentor Tony Coelho, a former
Democratic lawmaker who gave McAuliffe his first big fund-raising
job in 1982: ``He's got the best Rolodex in America.'' No kidding.
As finance chairman for the Clinton/Gore Reelection Committee,
McAuliffe pulled in a staggering $43 million in eight months. That
made him the front-runner to head the Democratic National Committee --
a job he turned down. Instead, McAuliffe has turned his attention
to his homebuilding, insurance, and marketing businesses.

But McAuliffe is finding that it's not easy putting politics
behind him (table). His name has been linked to the fund-raising
scandal that resulted in the disqualification of Teamsters President
Ronald Carey. The U.S. Attorney's Office in Washington is trying to
learn more about how McAuliffe earned a lucrative fee in helping
Prudential Insurance Co. of America lease a downtown Washington
building to the government. Prudential just settled a civil case
involving that lease for over $300,000 without admitting any
liability. And Labor Dept. probers are looking at possible conflicts
of interest in at least two of McAuliffe's Florida real estate deals
that were bankrolled by International Brotherhood of Electrical
Workers pension money. Investigators want to know why McAuliffe
got what look like very sweet deals.

McAuliffe insists that he has done nothing improper and has no
knowledge of any investigation. ``I'm honest as the day is long,''
he says. ``The worst thing I've ever gotten is a speeding ticket.''

McAuliffe paints the controversies surrounding him as the work of
political foes on both sides of the aisle. But sometimes it's hard to
tell where his political work ends and his business interests begin.
His business partners often are the same people he taps for campaign
contributions. For example, Carl H. Lindner Jr., chairman of American
Financial Group Inc. and a generous giver to both parties, donated--
along with his family and employees--$724,000 to Democrats from 1991
to 1996. In 1996, he invested in the homebuilding company McAuliffe
was purchasing. And top labor officials who control millions in
campaign dollars--and with whom McAuliffe is friends--are also
his partners in private deals.

Take his relationship with the International Brotherhood of
Electrical Workers. In 1991, McAuliffe formed a partnership with a
pension fund jointly operated by the IBEW and the National Electrical
Contractors Assn., a management trade group. Such funds are regulated
under the Taft-Hartley Act, and contributions come from both unionized
electrical workers and from their employers, electrical contractors.
The fund has co-chairmen--one from the union and one from management--
and both labor and management employees are beneficiaries. The IBEW
fund currently has $6 billion invested in stocks, bonds, and real
estate.
In the 1991 deal that McAuliffe packaged and brought to the fund,
the fund put up $38.7 million in cash for five apartment complexes
and a rundown shopping center near St. Petersburg. McAuliffe got a
50% equity stake, even though the fund put up all the money.

No investment adviser was involved, says John M. Grau, co-chairman
of the fund and executive vice-president of the National Electrical
Contractors Assn., because McAuliffe's plan seemed like a slam-dunk:
The pension plan was acquiring the properties at $10 million below
their appraised price.

CLOSE CONTACT. Why such a deal? Because the seller was the Resolution
Trust Corp., which had taken control of the properties from
Orlando-based American Pioneer Savings Bank. The RTC had rescued the
S&L and placed it inreceivership a year earlier--costing taxpayers
$500 million. American Pioneer had been owned by Richard A. Swann,
father of Dorothy Swann, McAuliffe's wife. The elder Swann once
presided over a $2 billion commercial empire. But it crashed when
regulators declared the s&l insolvent. Swann filed for personal
bankruptcy on Nov. 21, 1990.

Since then, Swann says, he acts as McAuliffe's attorney in
business ventures and is paid fees for managing McAuliffe companies.
McAuliffe says Swann is not a partner but is paid to ``help with the
management.'' Three such deals involved the IBEW and its pension funds.

McAuliffe's primary IBEW contact was Jack F. Moore, now retired
as International Secretary of the union and co-chairman of the jointly
managed pension fund. Moore and McAuliffe, then a young Washington
lawyer, have been close since 1988, when both worked to help mutual
friend and House Democratic Leader Richard A. Gephardt's run for the
Democratic Presidential nomination.

In June, 1992, the IBEW pension fund did another deal with McAuliffe.
It loaned him $5.8 million to buy 284 acres of Country Run, an Orlando
subdivision of mostly unimproved lots. It, too, had formerly belonged
to Swann's s&l. McAuliffe's intention was to improve the lots and sell
them or develop the property himself.

HEADACHES. The Country Run land itself served as the primary collateral
for the loan. But McAuliffe also pledged his half ownership of the St.
Pete properties as additional security. Real estate consultant Marilyn
K.
Weitzman, president of New York's Weitzman Group Inc. and adviser to
the pension fund on some of its real estate transactions, told the fund
that the loan involved high risk. But because of McAuliffe's additional
collateral, Weitzman told business week, she upgraded the investment
from ``reasonable'' to ``excellent.'' She told the fund it should expect
at least a 20% return.

That wasn't even close to what it got. The fund ended up with only
a 5.3% annual gain--and a lot of headaches. For one thing, McAuliffe's
additional collateral vaporized by August, 1993, when the fund agreed
to buy out all but a small portion of his share in the first deal,
the St. Pete partnership. Pension trustees say they viewed McAuliffe's
stake as a bargain: The value of the St. Pete properties had dropped,
and McAuliffe was selling at a discount.

Again, no independent investment adviser was consulted. With
McAuliffe's collateral diminished, the fund was skating on thinner
ice if McAuliffe defaulted on the Country Run property. And that's
what happened just four months after McAuliffe cashed out of the St.
Pete properties. ``We didn't sell as many [Country Run] lots as we
hoped,'' says McAuliffe. ``You have ups and downs in real estate.''

Once McAuliffe's Country Run loan was in default, the fund had the
right to foreclose and take possession. But the fund never foreclosed,
says Grau, because it didn't want to be left holding undeveloped land.
Last October, after more than three years of nonpayment, the fund sold
off the Country Run loan in a package with the St. Pete properties.
The buyer? Terry McAuliffe. He and partner Lindner are now building
homes on the Country Run lots with their company, American Heritage
Homes Inc. Today, McAuliffe is the second-biggest homebuilder in
Orlando.

Meanwhile, the fund's Country Run return wound up being about half
what similar loans were earning in that time span, according to the
Mortgage Bankers Assn., which tracks commercial mortgage rates. As for
the St. Pete properties, McAuliffe sold them to a real estate investment
trust. Trustee Grau says the 6.5% overall return to the fund compares
favorably with the 2.3% average return nationally on pension fund real
estate investments from '91 to '96.

ROTTEN RETURNS? Not so, says Susan Hudson-Wilson, chief executive
of Boston-based Property & Portfolio Research Inc., a real estate
specialist. ``For this strategy--purchasing distressed assets from
RTC--this would be an unacceptable return.'' She adds that many
pension funds followed similar strategies at the time and earned
double-digit returns because of the lowball prices being paid for
RTC properties.

The IBEW not only financed McAuliffe's ventures, but it also
helped boost his stature as a Democratic fund-raiser by contributing
$6 million to party candidates from 1991 to 1996. Starting in 1992,
McAuliffe organized a few fund-raisers for the Clinton-Gore ticket.
By 1994, however, he was finance chairman for the Democratic National
Committee. Moore controlled the IBEW's political contributions during
McAuliffe's rise. Moore did not return phone calls seeking comment.

The Labor Dept.'s inspector general is looking into the IBEW fund's
investments. While McAuliffe's dealings with the pension fund may not
put him in the best light, any legal repercussions stemming from the
Labor Dept. investigation are likely to fall on the fund's trustees
and not on him personally. The Employee Retirement Income Security Act,
says a spokesperson for the Labor Dept., contains ``sweeping
prohibitions
against self-dealing and other ``insider'' actions by plan trustees
that result in a party receiving a benefit because of the party's
relationship to the pension fund.''

However, another real estate deal, this one involving Prudential
Insurance, could pose legal woes for McAuliffe. The issue: whether
McAuliffe pocketed an improper fee for influencing the award of a
government contract.

In a letter signed on Mar. 18, 1993, Prudential agreed to pay
McAuliffe $375,000 if the Pension Benefit Guaranty Corp. (PBGC) signed
a 15-year, $187 million lease to occupy a downtown Washington office
building owned by the insurer.
The U.S. Attorney for the District of Columbia charged that
Prudential falsely certified, after it won the lease, that it had
not hired anyone to help influence the bidding process, which is
illegal under the Competition in Contracting Act. Prudential paid
McAuliffe $375,000, but he says the money was a proper payment for
fending off any congressional attempts to stop the deal.

VEHEMENT DENIALS. A PBGC spokeswoman says Prudential's bid was the
lowest, and that no one at the agency was ever contacted by McAuliffe.
She adds that the team of PBGC career staffers who reviewed the bids
stand by their decision. Prudential, through a spokesman, denied
wrongdoing and said it settled the case to avoid costly litigation.
But it wouldn't elaborate on the fee issue.

As the Prudential matter drags on, McAuliffe isn't out of the woods
yet on the Teamsters case, whose central figure, campaign consultant
Martin Davis, is a friend of McAuliffe. Davis has pleaded guilty to
masterminding an illegal scheme to raise $1 million for Teamsters
President Carey's 1996 reelection. Davis told McAuliffe he could help
raise $1 million for the DNC from the Teamsters, but McAuliffe denies
he knew any details of how Davis intended to do this. Davis, in his
guilty plea, says his plan was to launder Teamsters donations through
the dnc in an effort to hide the source of Carey's money. McAuliffe
says he simply directed Davis to see an aide and never heard any
more from him. McAuliffe testified before a New York grand jury in
September, which is also interested in his and Davis' role in helping
broker a deal to switch the afl-cio's affinity credit card from one
bank to another.

McAuliffe says he is certain he will be cleared in the Prudential
case. And he vehemently denies any impropriety in his dealings with
the IBEW or any involvement in the Teamsters scandal. All he wants is
to be left alone to run his business affairs in peace, he maintains.
But given the controversies swirling around his dealmaking, he may
have to wait a while to just mind the store.

By Paula Dwyer in Washington

Business Week: December 22, 1997
Government: INVESTIGATIONS

A Lot of Balls in the Air

Many of Terry McAuliffe's business deals are intertwined with his
political interests

MARKETING
McAuliffe packages and promotes affinity credit cards and related
products to labor unions and trade associations.

HOMEBUILDING
McAuliffe is president of American Heritage Homes, a Florida
homebuilderacquired in 1996 with Carl Lindner of American
Financial Group.

INSURANCE
McAuliffe owns Jefferson Capital Holdings, a Florida-based title
and casualty insurance company.

FUND-RAISING
McAuliffe raised $43 million in eight months as finance chairman
for Clinton/Gore '96. Previously, he was finance chairman for the
Democratic National Committee.

INVESTING
McAuliffe is Washington representative of, and an investor in, Pacific
Capital Group, a Los Angeles venture-capital firm owned by a former
Drexel Burnham Lambert investment banker.

REAL ESTATE
McAuliffe and father-in-law Richard Swann formed American Capital
Management to buy Florida properties that the RTC took over after
putting Swann's S&L into receivership. Some of the properties were
acquired using union pension money.

Copyright 1997 The McGraw-Hill Companies, Inc.
Transmitted: 12/12/97 18:39 (B3558107)