[Senate Hearing 109-144]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 109-144
 
PROTECTING AMERICA'S PENSION PLANS FROM FRAUD: WILL YOUR SAVINGS RETIRE 
                             BEFORE YOU DO?

=======================================================================

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING PROTECTING AMERICA'S PENSION PLANS FROM FRAUD, FOCUSING ON 
 THE DEPARTMENT OF LABOR'S EMPLOYEE BENEFITS SECURITY ADMINISTRATION'S 
 ENFORCEMENT STRATEGY, EFFORTS TO ADDRESS WEAKNESS IN ITS ENFORCEMENT 
             PROGRAM ALONG WITH THE CHALLENGES THAT REMAIN

                               __________

                              JUNE 9, 2005

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                   MICHAEL B. ENZI, Wyoming, Chairman

JUDD GREGG, New Hampshire            EDWARD M. KENNEDY, Massachusetts
BILL FRIST, Tennessee                CHRISTOPHER J. DODD, Connecticut
LAMAR ALEXANDER, Tennessee           TOM HARKIN, Iowa
RICHARD BURR, North Carolina         BARBARA A. MIKULSKI, Maryland
JOHNNY ISAKSON, Georgia              JAMES M. JEFFORDS (I), Vermont
MIKE DeWINE, Ohio                    JEFF BINGAMAN, New Mexico
JOHN ENSIGN, Nevada                  PATTY MURRAY, Washington
ORRIN G. HATCH, Utah                 JACK REED, Rhode Island
JEFF SESSIONS, Alabama               HILLARY RODHAM CLINTON, New York
PAT ROBERTS, Kansas

               Katherine Brunett McGuire, Staff Director

      J. Michael Myers, Minority Staff Director and Chief Counsel

                                  (ii)

  




                            C O N T E N T S

                               __________

                               STATEMENTS

                         THURSDAY, JUNE 9, 2005

                                                                   Page
Enzi, Hon. Michael B., Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Kennedy, Hon. Edward M., a U.S. Senator from the State of 
  Massachusetts, opening statement...............................     2
Lebowitz, Alan D., Deputy Assistant Secretary for Program 
  Operations, Employee Benefits Security Administration, U.S. 
  Department of Labor, Washington, DC.; and Barbara D. BovbJerg, 
  Director, Education, Workforce, and Income Security Issues, 
  U.S. Government Accountability Office, Washington, DC..........     4
    Prepared statements of:
        Mr. Lebowitz.............................................     7
        Ms. Bovbjerg.............................................    22
Endicott, John, Business Manager and Trustee, Local Union 290, 
  Plumbers, Steamfitters and Marine Fitters, Tualatin, Oregon; 
  Barclay Grayson, Former Chief Executive Officer, Capital 
  Consultants, Portland, Oregon; Stephen F. English, Bullivant 
  Houser Bailey, Portland, Oregon; and James S. Ray, Law Offices 
  of James S. Ray, Alexandria, Virginia..........................    40
    Prepared statements of:
        Mr. Endicott.............................................    43
        Mr. Grayson..............................................    47
        Mr. English..............................................    51
        Mr. Ray..................................................    54

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Response to questions of Senators Enzi, Kennedy, Hatch, and 
      Bingaman by Alan Lebowitz..................................    67
    Response to questions of Senator Hatch by John Endicott......    82
    Response to questions of Senators Kennedy and Hatch by 
      Stephen English............................................    83
    Response to questions of Senators Kennedy and Bingaman by GAO    84
    Response to a question of Senator Hatch by Barclay Grayson...    86
    Response to questions of Senators Kennedy and Hatch by James 
      S. Ray.....................................................    87
    Michael J. Esler.............................................    89

                                 (iii)

  


PROTECTING AMERICA'S PENSION PLANS FROM FRAUD: WILL YOUR SAVINGS RETIRE 
                             BEFORE YOU DO?

                              ----------                              


                         THURSDAY, JUNE 9, 2005

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:58 a.m., in 
Room 430, Dirksen Senate Office Building, Hon. Mike Enzi, 
chairman of the committee, presiding.
    Present: Senators Enzi, Kennedy, and Bingaman.

                   Opening Statement of Chairman Enzi

    The Chairman. We are a couple of minutes early, but we are 
here and ready to go, so we will go ahead and start the train.
    Senator Kennedy. This is the on-time chairman.
    [Laughter.]
    I was a little intimidated, even after 43 years, I still 
remember back in the 4th grade, getting to my teacher's 
classes--
    [Laughter.]
    The Chairman. I will go ahead and call the hearing to 
order. I want to thank you for coming to today's investigative 
hearing, our first investigative hearing.
    Before we begin, I would like to thank the committee's 
ranking member, Senator Kennedy, for his support throughout the 
investigation of these issues and the other ones that we are 
working on.
    I would also like to thank the witnesses who will testify 
before us today for taking time out of their schedules to be 
here. Your testimony will provide the committee with the 
direction, the detail, and the guidance that we need if we are 
to effectively address the vital issues that will be raised 
during this important hearing.
    At present, approximately 90 million workers are enrolled 
in 700,000 pensions and retirement savings plans. In addition, 
there are 60 million workers who are part of a network of 
almost 6 million health and welfare plans. Many of these 
workers face some prospects of risk in their retirement and 
benefit funds from a host of potential predators. These threats 
arise from weaknesses in oversight by Federal Agencies, 
trustees who lack investment expertise and whose better 
judgment can be influenced by gifts and gratuities, and by 
administrators and other professional advisors who fail to 
perform their duties effectively.
    Today, we will be considering these and other issues as we 
take a closer look at the largest pension fraud in U.S. 
history. It is a complicated story that involves the investment 
firm of Capital Consultants LLC and its efforts to elude the 
detection of the Department of Labor. It includes a cast of 
people across the country that had no idea that their pension 
funds were in jeopardy until it was too late. By then, through 
a complex Ponzi scheme, Capital Consultants defrauded 
approximately 300,000 pension plan participants and their 
families out of more than $500 million. Our witnesses will 
describe how the fraud was perpetrated, how the loss of these 
funded affected lives, and what the Federal Government is 
prepared to do to prevent these kinds of pension frauds in the 
future.
    As we take a look at the details of the case, we will be 
looking to our witnesses for their insights on the following 
issues. Are the Department of Labor and other relevant agencies 
prepared to prevent future pension frauds so that workers will 
receive all of their vested benefits? Do employers and 
employees have the financial literacy to understand the pension 
system and to recognize the signs of pension fraud? Will the 
Federal Government use the successful recovery of more than 70 
percent of the funds taken in this fraudulent scheme as a model 
that the Federal Government and the States can use to address 
future pension fraud cases? Finally, what can we in Congress 
legislatively, through our hearings and oversights, do that 
will aid in addressing and preventing pension fraud?
    The Department of Labor and the Securities and Exchange 
Commission can be very proud of their participation in 
uncovering this scheme, the complexity of which underscores the 
difficulty of identifying pension fraud schemes in general. The 
size of the fraud in the Capital Consultants case highlights 
the importance of examining the lessons learned, and its 
potential to destroy the future earnings of our retirees makes 
it essential for the committee to determine the extent to which 
the Department of Labor is prepared to prevent future pension 
fraud.
    To assist in examining the Ponzi scheme, I asked my staff 
to prepare a chart that clearly illustrates how the pension 
funds were used to cover losses due to risky investments and 
conceal them through a complex web of corporations created for 
that purpose, and we have a chart over here that illustrates 
that.
    In addition, the staff prepared a chart that lists some of 
the responsibilities of those entrusted with the fiduciary 
responsibility for the pension funds, and that chart is over 
there.
    Before introducing the witnesses, I would like to introduce 
Senator Kennedy for any opening remarks he might have.

                  Opening Statement of Senator Kennedy

    Senator Kennedy. Thank you very much, Mr. Chairman. As we 
know, our committee and the Finance Committee have jurisdiction 
over these pension funds and we have all been enormously 
concerned by the headlines of recent times as well as long and 
continuing interest in the protection of pension funds. We 
recognize that we have some very, very important 
responsibilities in terms of oversight, in terms of 
legislating, and I commend the chair for the extensive series 
of hearings that he has had in terms of looking at all aspects 
of the pension issue and also for doing the oversight work that 
is so important for us as a committee and for us in the Senate.
    He was talking about how he asked his staff to present 
these charts so it would clearly explain what happened. I am 
looking at that chart, and it is all so clear to me now.
    [Laughter.]
    We will come back to that.
    The unethical practices of executives of Enron and Global 
Crossing and Tyco and Worldcom have undermined the financial 
security of tens of thousands of hard-working men and women and 
shattered the trust of millions of other Americans. Now, with 
this greedy, dishonest, and irresponsible handling of $1 
billion in retirement and other funds, the executives of 
Capital Consultants have joined that shameful list.
    Capital Consultants' record of mismanagement and lies is 
appalling. The company operated a private investment portfolio 
of risky loans that were inadequately underwritten and poorly 
documented, charged clients excessive fees. As long ago as 
1995, the Department of Labor ordered the firm to repay $2 
million in fees that it overcharged to a pension fund in 
Oregon.
    Yet Capital Consultants continued to pull the wool over the 
eyes of its clients with a sophisticated scam. When one of its 
biggest debtors went bankrupt, Capital Consultants began a 
complex Ponzi scheme rather than disclosing the truth to its 
clients. The fraud involved placing the resources of employees' 
pension funds and health care funds into shell companies to 
pass the money back to Capital Consultants. Clients who asked 
questions were lied to and deceived and the devious practice 
continued until 2000.
    This Congress has ushered in new tax cuts for the wealthy 
and has passed a bankruptcy bill that I believe caters to the 
credit companies and a class action reform measure that shields 
corporate defendants when the obvious need is for reform that 
will restore trust in our financial markets. We know that 
employees across the country are still overinvested in company 
stock and we need to deal with kickbacks and conflicts of 
interest by managers and financial service companies that 
oversee people's hard-earned pensions. We need to ensure that 
cases like Capital Consultants do not happen again.
    I look forward to the testimony of our witnesses and to 
working with my colleagues in Congress to curb the abuses that 
have left far too many hard-working Americans without the 
financial security which they worked so hard for and rightfully 
deserve.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, and I appreciate the 
excellent explanation you did of the chart.
    [Laughter.]
    Your testimony covered that well.
    Our first panel today on ``Protecting America's Pension 
Plans from Fraud: Will Your Savings Retire Before You Do?'' is 
the government panel, and the first witness on the panel is 
Alan Lebowitz, who is the Deputy Assistant Secretary for 
Program Operations at the Department of Labor. The second 
witness is Barbara Bovbjerg from the Government Accountability 
Office. We appreciate your being with us today.
    Mr. Lebowitz?
    Incidentally, your entire statement will be a part of the 
record, as well as any additional opening statements by members 
of the committee. So any effort you can make to condense the 
testimony so that we can do questions will be appreciated. Mr. 
Lebowitz?

STATEMENTS OF ALAN D. LEBOWITZ, DEPUTY ASSISTANT SECRETARY FOR 
PROGRAM OPERATIONS, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, 
   U.S. DEPARTMENT OF LABOR, WASHINGTON, DC.; AND BARBARA D. 
 BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY 
 ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC.

    Mr. Lebowitz. Good morning, Chairman Enzi, Senator Kennedy, 
and members of the committee. Thank you for inviting me here 
today to share information about the Department's enforcement 
role under the Employee Retirement Income Security Act, ERISA. 
I am Alan Lebowitz, Deputy Assistant Secretary for Program 
Operations at the Employee Benefit Security Administration at 
the Labor Department. My testimony will discuss EBSA's 
enforcement program and our investigation of Capital 
Consultants LLC, its principals, and numerous related 
investigations.
    Under ERISA, the Secretary is responsible for protecting 
the rights and financial security of more than 730,000 private 
pension plans and 6 million private health and welfare plans, 
which together hold more than $4 trillion in assets and cover 
more than 150 million Americans. EBSA is responsible for 
administering and enforcing the fiduciary and reporting and 
disclosure provisions of Title I of ERISA. Our enforcement 
activities are conducted through 10 regional offices throughout 
the United States.
    We have a total staff of 887, including 470 field 
investigators. The Office of the Solicitor, which estimates 
that it expends about 75 FTE annually on our behalf, provides 
legal support for us. Our investigative staff has varied 
professional backgrounds, including law, accounting, and 
business, which are complemented by our own specialized 
training programs.
    We conduct a wide range of civil and criminal 
investigations to determine whether ERISA and the related 
Federal Criminal Code have been violated. Investigations are 
opened based on a variety of sources, including complaints from 
participants, referrals from the national office or other 
government agencies, and reviews of the annual report Form 
5500.
    We regularly work in coordination with other Federal and 
State enforcement agencies, including the Department's Office 
of the Inspector General, the Internal Revenue Service, the 
Securities and Exchange Commission, and the Justice Department, 
as well as Federal banking agencies.
    The amount of time it takes to complete an investigation 
will, of course, vary, from a few weeks to several years, 
depending on its complexity, the cooperation of the parties, 
and whether the investigation is resolved through voluntary 
compliance or through contested litigation. Our goal in each 
investigation is to restore any money to the plan that was lost 
as a result of fiduciary breaches and to ensure the safety of 
the plan in the future.
    In fiscal year 2004, EBSA closed 4,399 civil cases, over 60 
percent of which found and corrected ERISA violations. Total 
monetary results from these cases exceeded $3 billion. In the 
criminal area, 152 cases were closed, 121 individuals were 
indicted, and 62 cases resulted in convictions or guilty pleas. 
We also have very active compliance assistance and educational 
programs designed to help plan officials understand their 
responsibilities and identify and correct problems.
    We opened our first investigation of CCL in March 1992 
based on information indicating that CCL engaged in prohibited 
transactions and self-dealing. The investigations were 
completed in March 1993 and revealed violations of ERISA, 
because under CCL's fee arrangement, it could use its 
investment discretion to increase its own compensation. Along 
with an annual management fee, an extra transaction-based fee 
was charged each time CCL made a real estate investment for a 
client plan.
    The case was resolved with a complaint and consent order in 
December 1995, under which CCL paid $2 million to its plan 
client and a civil penalty to the Government of $182,000. The 
order also permanently enjoined CCL and Jeffrey Grayson from 
entering into fee arrangements of this type.
    Our Seattle office opened its second investigation of CCL 
in October 1997, based upon the receipt of a complaint filed 
against Jeffrey Grayson and CCL by one of its plan clients. The 
investigation involved CCL's investment of plan assets in loans 
called collateralized notes, or loans for which the collateral 
consisted largely of the borrower's potential revenues.
    A series of loans totaling $160 million of their clients' 
assets was made to Wilshire Credit Corporation from July 1995 
to October 1998. When Wilshire defaulted on these loans, CCL 
did not report or acknowledge or the resulting losses to its 
clients. Instead, it engaged in a series of transactions with 
other entities to facilitate paper sales of all or a portion of 
the Wilshire loans at an artificially high price.
    In reality, CCL carried out a Ponzi scheme under which it 
loaned an additional $72 million of plan funds during 1999 and 
2000 to those entities that in turn used the funds to make 
purported interest payments on the original $160 million loans. 
Keep in mind that during this period, CCL continued to charge 
its clients a 3 percent annual management fee based on the full 
$160 million valuation.
    In the summer of 2000, our investigative findings were 
shared with the SEC. The Commission and the Department decided 
to proceed jointly against CCL. The Department had an indepth 
knowledge of the underlying facts while the SEC could more 
readily have a receiver appointed over the entire business of 
CCL, which included nonERISA clients as well as ERISA plans.
    Pursuant to complaints filed by us and the SEC on September 
21, 2000, the U.S. District Court in Oregon entered court 
orders appointing the receiver to make an accounting, and to 
protect the interest of CCL's ERISA plan clients and other 
investors, the court froze the defendants' personal assets and 
enjoined them from doing business with ERISA plans. The 
receiver estimates that the total amount of litigation 
settlements and marshaled assets accumulated in the 
receivership to date is $291 million, of which $193 million has 
already been distributed to CCL's private placement clients, 
including ERISA plans.
    In addition to the investigation of CCL, we opened 58 
related investigations and filed 19 lawsuits against trustees 
of 34 plans in Oregon, Idaho, California, Nevada, Utah, 
Arizona, Colorado, Minnesota, and Ohio. In these lawsuits, the 
Department alleged that the trustees of those plans imprudently 
authorized CCL to invest in high-risk investments, failed to 
adequately investigate the merits of the investments, and 
failed to adequately monitor the investments. We also found 
that a number of trustees violated ERISA's self-dealing 
provisions by accepting gratuities from CCL, including free 
hunting trips, rifles, and tickets to football games.
    The resolution of these cases resulted in the recovery of 
an additional $9.2 million, $1.8 million in civil penalties, 
and called for the retirement or resignation of 51 trustees and 
permanent injunctions barring 31 plan trustees and one 
investment advisor from serving as ERISA fiduciaries or service 
providers.
    Just as important, the consent order imposed significant 
internal reforms on the affected employee benefit plans.
    Our work on the task force that conducted related criminal 
investigations that included the FBI, the IRS, the Inspector 
General's office, and the Office of Labor Management Standards, 
resulted in the Justice Department indicting 11 individuals for 
various crimes for their participation in the CCL debacle. 
Seven of these individuals pleaded guilty. One was convicted 
and two were acquitted following a bench trial, and one case 
was dismissed. Four defendants served prison time, ranging from 
15 to 24 months.
    The scheme created by CCL and its principals was a very 
sophisticated fraud that had a veneer of respectability 
provided with the cooperation of its many professionals, 
including attorneys, accountants, and investment advisors. 
ERISA clearly places the ultimate responsibility for the 
governance of plans on individual plan fiduciaries. CCL was 
able to find fiduciaries who completely failed to responsibly 
oversee the assets of the plans for which they were 
responsible. These fiduciaries, in league with CCL, failed to 
live up to their solemn obligation to protect and preserve the 
hard-earned benefits of the workers in their plan.
    All too often, these trustees, supported by their 
professional advisors, failed to understand the nature of CCL's 
investments, to review the investments, or even adhere to the 
plan's own investment guideline. Indeed, as late as June 2000, 
counsel for several plans was disputing that his clients had 
even experienced a loss.
    Mr. Chairman, for some now who try to excuse their own 
illegal behavior by pointing fingers at others, including the 
Department, is to us incredible.
    This concludes my testimony, Mr. Chairman, and I would be 
pleased to answer any questions that you may have.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Lebowitz follows:]

                 Prepared Statement of Alan D. Lebowitz

                           EXECUTIVE SUMMARY

Background

    EBSA is responsible for administering and enforcing the fiduciary, 
reporting, and disclosure provisions of Title I of ERISA. EBSA conducts 
both civil and criminal investigations relating to employee benefit 
plans. Its enforcement activities are conducted through 10 regional and 
5 district offices throughout the United States. The Agency's 
investigative staff has various backgrounds including law, business and 
accounting. EBSA also complements these backgrounds with specialized 
training.

Enforcement Results

    In fiscal year 2004, EBSA closed 4,399 civil cases, achieving more 
than $3 billion in monetary results. In the criminal area, EBSA 
obtained 121 indictments during the fiscal year and closed 152 cases 
with 62 convictions and guilty pleas.

Capital Consultants Investigations

    CCI (later renamed CCL) was an investment management firm located 
in Portland, Oregon, that managed more than $900 million for 
approximately 340 clients, many of which were employee benefit plans. 
The firm was owned and controlled by Jeffrey Grayson, who was its chief 
executive officer, and his son, Barclay Grayson, who was its president.
    EBSA's first investigation of CCI was opened in March 1992, and 
completed in March 1993. The investigation disclosed that CCI and 
Jeffrey Grayson entered into prohibited fee arrangements with client 
plans that allowed them to increase their own compensation. This case 
was resolved by a consent order that required CCI to pay an ERISA plan 
$2 million along with other injunctive relief and penalties.
    The second investigation was opened in October 1997 and disclosed 
that CCL placed its clients' funds into high-risk private loans and 
equities, including a $160 million loan to Wilshire Credit Corp. When 
this loan failed, CCL carried out a complex ponzi-like scheme to hide 
the default by agreeing to loan an additional $100 million of clients' 
funds during 1999 and 2000 to shell entities to make the purported 
interest payments on the Wilshire loan.

Government Legal Actions

    On September 21, 2000, the Department and the SEC filed 
simultaneous complaints and consent orders against CCL, shutting it 
down and placing it into receivership. The Receiver estimates that the 
total amount of settlements and marshaled assets accumulated in the 
receivership to date is $291 million of which about $193 million was 
already distributed to CCL's private placement clients, including the 
ERISA plans.
    The Department filed 19 additional lawsuits against fiduciaries of 
34 employee benefit plans. In addition to money collected by the 
Receiver and through the mediation in third party litigation, the 
Department obtained substantial restitution, civil penalties and other 
injunctive relief. Criminally, the Department of Justice charged 11 
individuals with various criminal counts, of which eight were convicted 
or pled guilty.
                                 ______
                                 
                          INTRODUCTORY REMARKS

    Good morning, Chairman Enzi and members of the committee. Thank you 
for inviting me here today to share information about the Department's 
role in enforcing the provisions of the Employee Retirement Income 
Security Act of 1974 (ERISA). I am Alan D. Lebowitz, the Deputy 
Assistant Secretary for Program Operations of the Employee Benefits 
Security Administration. I am here today representing the Employee 
Benefits Security Administration (EBSA),\1\ and its employees, who work 
diligently to protect the interests of plan participants and support 
the growth of our private benefits system.
---------------------------------------------------------------------------
    \1\ Prior to its name change in February 2003, EBSA was known as 
the Pension and Welfare Benefits Administration.
---------------------------------------------------------------------------
    My testimony will discuss EBSA's investigation of Capital 
Consultants, LLC, its principals, Jeffrey and Barclay Grayson, and 
numerous related investigations. Additionally, I will describe the 
structure of EBSA's enforcement program and the process we follow to 
conduct investigations of potential pension fraud.

Background

    EBSA is responsible for administering and enforcing the fiduciary, 
reporting and disclosure provisions of Title I of ERISA. Under ERISA, 
the Secretary of Labor is responsible for protecting the rights and 
financial security of more than 730,000 private pension plans and 6 
million private health and welfare plans, which together hold 
approximately $4.5 trillion in assets and cover more than 150 million 
Americans.
    EBSA headquarters are located in Washington, D.C., and its 
enforcement activities are conducted in 10 regional offices and 5 
district offices throughout the United States. EBSA's staff has the 
highest average educational attainment of any agency in the Department 
of Labor. EBSA has a total authorized staff of 887, including the 470 
investigative staff members that work out of the field offices.
    Our investigators have expertise in a wide variety of fields 
including law, accounting, banking, securities, and business. We 
recruit entry-level investigators and auditors who have specialized 
experience in such areas as accounting, finance, economics, business, 
insurance, securities, and banking, or who have graduated with advanced 
degrees. For other than entry-level investigative positions, EBSA 
requires specialized experience relevant to conducting complex 
financial investigations, such as past work experience in government, a 
law firm, a pension plan administration firm, or a bank trust 
department.
    Our Agency has an active training program for its employees. EBSA 
provides a basic training course on the fiduciary provisions of ERISA, 
as well as courses on investigative techniques, and criminal 
enforcement to all investigative staff. Individuals without an 
accounting background attend EBSA's Employee Benefit Plan Accounting 
training. These courses are all residential programs of at least 2 
weeks in length, and offer academic and practical instruction led by 
EBSA staff and guests from government and the benefits field. In 
addition, EBSA's Office of Enforcement provides annual field office 
training on topics determined by enforcement priorities, regulatory and 
legal developments, and industry trends. Also, some of our 
investigators attend such courses as Financial Forensic Techniques at 
the Federal Law Enforcement Training Center when training slots are 
available. EBSA encourages on-board staff to acquire additional 
training, and agency funding has enabled individuals to attain the 
Certified Employee Benefits Specialist designation and other 
credentials.
    DOL shares responsibility and closely coordinates with the Internal 
Revenue Service and the Pension Benefit Guaranty Corporation in its 
administration and enforcement of the provisions of ERISA, which are 
designed to protect participants and beneficiaries in employee benefit 
plans sponsored by private-sector employers.
    Investigative authority is vested in the Secretary of Labor by 
Section 504 of ERISA, 29 U.S.C.  1134, which states in part:

        ``The Secretary shall have the power, in order to determine 
        whether any person has violated or is about to violate any 
        provision of this title or any regulation or order thereunder . 
        . . to make an investigation, and in connection therewith to 
        require the submission of reports, books, and records, and the 
        filing of data in support of any information required to be 
        filed with the Secretary under this title . . .''

    In addition, the Comprehensive Crime Control Act of 1984 amended 
ERISA Section 506(b) to give the Secretary explicit authority to 
investigate criminal violations of Title 18 of the United States Code 
insofar as they relate to employee benefit plans.
    The broad provisions in Title I protect not only retirement and 
health benefits, but other employee benefits as well. The core of Title 
I of ERISA consists of provisions that address the conduct of persons 
(fiduciaries) who are responsible for operating pension and welfare 
benefit plans (including group health plans, life insurance, 
disability, dental plans, etc.). Fiduciaries are required to discharge 
their duties solely in the interest of plan participants and 
beneficiaries for the exclusive purpose of providing benefits and 
defraying reasonable expenses of plan administration. In discharging 
their duties, fiduciaries must act prudently and in accordance with the 
documents governing the plan, to the extent such documents are 
consistent with ERISA. Certain transactions between an employee benefit 
plan and ``parties in interest,'' including fiduciaries and others who 
may be in a position to exercise improper influence over the plan, are 
prohibited by ERISA. If a fiduciary's conduct fails to meet ERISA's 
standards, the fiduciary is personally liable for any resulting losses 
to the plan.

Subpoena Authority

    Under section 504 of ERISA, the Secretary of Labor has authority to 
issue administrative subpoenas for testimony and for the production of 
documents. The Secretary does not need to show reasonable cause to 
believe that a violation may exist unless the Secretary is seeking to 
require a plan to submit books and records more than once in a 12-month 
period or unless the Secretary is seeking to enter a place and inspect 
books and records and question persons.
    Typically, the subject of an EBSA subpoena complies by submitting 
the requested documents or testimony. In cases where the subject fails 
to respond adequately to the subpoena, the Department may enforce the 
subpoena by bringing an enforcement action in Federal District Court. 
The court may compel compliance with the subpoena by imposing 
appropriate sanctions, including incarceration in cases of civil 
contempt.

Investigative Process

    Under the leadership of its Regional Director, the investigative 
staff in each of EBSA's field offices conducts investigations to detect 
and correct violations of Title I of ERISA and related criminal laws. 
The Regional Directors report to EBSA's Deputy Assistant Secretary for 
Program Operations through the Office of Enforcement in Washington, 
which is responsible for coordinating the Agency's enforcement 
activities. The Solicitor's Office, a separate Agency within the 
Department of Labor that provides legal representation for the entire 
Department, provides litigation and other legal support through their 
National and Regional offices. The Solicitor's Office has about 75 
attorneys devoted to ERISA in the National Office and the Regions at 
this time.
    In carrying out its enforcement responsibilities, EBSA conducts a 
wide range of activities, including civil and criminal investigations, 
to determine whether the provisions of ERISA and sections of Title 18 
of the United States Code, as they relate to employee benefit plans, 
have been violated. EBSA regularly works in coordination with other 
Federal and State enforcement agencies, including the Department's 
Office of Inspector General, the Internal Revenue Service, the 
Department of Justice, the Federal Bureau of Investigation, the 
Securities and Exchange Commission, the PBGC, the Federal banking 
agencies, State insurance commissioners, and State attorneys general.
    EBSA field offices manage their investigative activity within broad 
guidelines identified by the Agency's long-term Strategic Enforcement 
Plan (StEP), which was published in the Federal Register on April 6, 
2000. The StEP establishes a general framework by which EBSA's 
enforcement resources are focused to achieve the Agency's policy and 
operational objectives as established by the Secretary and Assistant 
Secretary. Short-term enforcement priorities are established annually, 
through the Program Operating Plan (POP) Guidance issued by the 
national office. Preparation of the POP Guidance begins with the 
identification of recent enforcement trends, an analysis of particular 
areas of noncompliance, and a review of current policy considerations. 
In this manner EBSA shifts its enforcement resources to respond quickly 
when new and emerging issues are spotted while staying within the long-
term framework established by the StEP.
    It is through the POP Guidance that EBSA establishes each fiscal 
year's national enforcement projects, provides guidance for choosing 
regional enforcement projects, identifies any other specific policy 
priorities that will require investigative resources, integrates the 
Agency's GPRA goals into the planning process, and provides general 
guidance with regard to the selection of investigations. EBSA has 
currently identified five national enforcement projects. Each region is 
required to make sufficient investigative resources available to 
perform necessary investigative functions in connection with these 
designated national projects. The national enforcement initiatives are 
Health Fraud/Multiple Employer Welfare Arrangements (MEWAs), Employee 
Contributions Project, Rapid ERISA Action Team (REACT), Orphan Plan 
Project, and Employee Stock Ownership Plans (ESOPs). In addition, each 
region is encouraged to develop regional enforcement projects to target 
issues within its geographic jurisdiction.
    EBSA field offices open investigations based on a variety of 
considerations, including complaints from participants or other people, 
referrals from the National Office or other government agencies, 
computer targeting, and Form 5500 reviews (annual reports which contain 
detailed information on the financial condition of plans). Our goal in 
each investigation is to restore any money to the plan that was lost as 
a result of fiduciary breaches, and ensure the safety of the plan in 
the future.
    Generally, a field investigator examines a plan to determine 
whether it is operated in accordance with its terms and the rules set 
forth in Title I of ERISA. The ERISA Enforcement Manual guides the 
conduct of EBSA investigations. Of particular concern in most 
investigations is whether the fiduciaries are carrying out their 
fiduciary duties appropriately, especially with regard to monitoring 
service providers; prudent investment of plan assets; the payment of 
plan expenses; proper diversification of investments; avoidance of 
self-dealing and prohibited transactions; the timely collection of 
contributions; and adherence to required claims procedures.
    The type of records examined during the investigation varies 
depending on the nature of the case and the issues identified. Records 
are requested at the outset of the investigation and are generally 
identified in a letter sent to the Plan Administrator. All plan records 
relating to the maintenance of the plan are reviewed, including the 
plan document, trust agreement, collective bargaining agreement (if 
any), summary plan description, summary annual report, Form 5500, 
fidelity bond, and plan financial records. In addition, depending on 
the type of plan and the reason for the case opening, written and 
electronic records specific to a particular issue are requested. EBSA 
has broad authority to issue administrative subpoenas to compel the 
production of documents or testimony.
    The amount of time it takes to complete an investigation varies 
from a few weeks to several years depending on the complexity of the 
issues involved, the cooperation of the parties in complying with 
document requests and subpoenas, and whether the investigation is 
resolved through voluntary compliance or through contested litigation. 
Procedurally, an investigation is closed when no violations are found 
and the Regional Director issues a no action letter. When violations 
are detected, the Regional Director will determine whether to pursue 
corrective action through voluntary compliance (VC). If so, the 
Regional Director will issue a VC notice letter which advises plan 
fiduciaries or other responsible parties of the results of the 
investigation and the sections of ERISA violated and invites the 
recipients to discuss how the violation(s) will be corrected and losses 
restored to the plan. In cases where VC efforts failed or that involve 
issues for which VC is not appropriate, the investigation may be 
referred to the local Regional Solicitor's Office or the Plan Benefits 
Security Division of the Solicitor's Office (SOL) in Washington, DC, 
with a recommendation that litigation be initiated. If criminal 
violations are found, the case is referred to the U.S. Attorney's 
Office for consideration of prosecution.

Compliance and Participant Assistance

    EBSA conducts numerous educational and outreach activities to 
ensure fiduciaries understand and comply with their responsibilities 
under the law. Our newest Campaign, ``Getting It Right--Know Your 
Fiduciary Responsibilities,'' includes nationwide educational seminars 
to help plan sponsors understand the law. The program teaches plan 
sponsors steps for avoiding the most common problems EBSA encounters in 
its enforcement activities, emphasizing the obligation of fiduciaries 
to:

     Understand the terms of their plans;
     Select and monitor service providers carefully;
     Make timely contributions to fund benefits;
     Avoid prohibited transactions; and
     Make timely disclosures to workers and reports to the 
Government.

    Nine seminars have been held to date and two more have been 
scheduled.
    EBSA has established the Voluntary Fiduciary Correction Program 
(VFCP). The VFCP is a voluntary enforcement program that encourages 
plan sponsors and their advisors to self-identify and correct many 
types of violations of Title I of ERISA. The program allows plan 
officials to identify and fully correct certain transactions such as 
prohibited purchases, sales and exchanges, improper loans, delinquent 
participant contributions, and improper plan expenses. The program 
includes 18 specific transactions and their acceptable means of 
correction, eligibility requirements, and application procedures. If an 
eligible party documents the acceptable correction of a specified 
transaction, EBSA will issue a no-action letter.
    EBSA also provides assistance to plan participants and 
beneficiaries regarding their plan benefits through Benefits Advisors. 
The Benefits Advisors provide direct technical assistance to plan 
participants and beneficiaries by responding to more than 163,000 
inquiries and complaints to EBSA's toll free number and Web site in 
fiscal year 2004 alone. They recovered over $76.4 million in benefits 
for participants that were improperly denied through an informal 
resolution process with the employer. Benefits Advisors explain how the 
relevant statutes apply to the participant or beneficiary and inform 
the employer about his or her responsibilities under the law. The 
Benefit Advisors facilitate resolution of complaints without formal 
investigation or litigation when possible. If the Benefits Advisors 
determine that a complaint is valid but are unable to resolve it 
informally, the complaint is referred for investigation. In 2004, EBSA 
restored over $307.97 million from 1,236 investigations opened as a 
result of referrals from Benefits Advisors. EBSA has a total of 111 
Benefits Advisors in the national and field offices.
    The Agency's Web site hosted 1.73 million unique Web visitors in 
fiscal year 2004, giving them access to numerous FAQs, publications and 
other useful compliance and consumer information. EBSA now has 63 
publications in print; over 800,000 hard copies were distributed last 
year, and the publications are posted on the Agency's Web site.

EBSA's Fiscal Year 2004 Enforcement Results

    In fiscal year 2004, EBSA opened 4,131 civil cases and closed 4,399 
civil cases. Over 60 percent of the civil cases closed (or 2,642 civil 
cases) were closed with fiduciary results. This means that violations 
of ERISA's fiduciary duties and prohibited transaction provisions were 
found and corrected. During that year, EBSA referred 310 investigations 
to the SOL for litigation. Often these referrals were resolved through 
voluntary compliance rather than contested litigation. In fiscal year 
2004, SOL filed litigation in 125 cases, an increase of 16 filings over 
the prior fiscal year.
    In fiscal year 2004, EBSA opened 205 criminal cases and closed 152 
criminal cases. One hundred twenty-one individuals were indicted in 
connection with EBSA's criminal investigations during the fiscal year. 
Sixty-two criminal cases were closed with convictions or guilty pleas 
during fiscal year 2004.
    EBSA's investigations and compliance assistance efforts have a 
large financial impact on plans and their participants. Total monetary 
results for fiscal year 2004 were over $3 billion. These recoveries 
include the value of actions which EBSA obtained to correct prohibited 
transactions ($2.4 billion), money restored to the plan or plan 
participants to correct losses resulting from fiduciary breaches 
($199.7 million), assets which were protected from significant risk by 
EBSA intervention that secured appropriate safeguards to protect the 
plan assets and reduce the risk of future losses ($141.6 million), and 
benefits recovered on behalf of individual plan participants ($76.4 
million). Additionally, $264.6 million in corrections were achieved 
through the VFCP.

Criminal Enforcement

    Under the Comprehensive Crime Control Act of 1984, the Secretary of 
Labor is given responsibility to investigate violations of the criminal 
provisions of ERISA and Title 18 of the U.S. Code that relate to 
employee benefit plans. To fulfill that responsibility, EBSA conducts 
criminal investigations as part of its enforcement program. Field 
managers consult with local U.S. Attorneys as early as possible in a 
criminal investigation to determine whether there is prosecutorial 
interest in the case and to receive any necessary direction.
    EBSA's investigators evaluate the facts of every case for possible 
criminal violations. A civil investigation may turn into a criminal 
investigation when facts indicating possible criminal misconduct are 
uncovered and the case is referred to the appropriate U.S. Attorney for 
consideration of criminal prosecution. In some instances, civil and 
criminal investigations will be conducted at the same time using 
separate field investigators and supervisory oversight in order to 
avoid the illegal disclosure of grand jury information as well as to 
avoid the appearance of using the civil process to conduct a criminal 
investigation. In other instances, the investigation will be conducted 
as a criminal investigation only.
    EBSA dedicates approximately 15 percent of its investigative 
resources to criminal cases. EBSA's criminal investigations are often 
worked jointly with agents from the Department of Labor's OIG, the 
Office of Labor Management Standards in the Department's Employment 
Standards Administration; the FBI; the IRS; and the Postal Inspection 
Service. Criminal investigations cover a wide variety of pension and 
welfare plans, including 401(k) plans and Multiple Employer Welfare 
Arrangements (MEWAs), as well as service providers such as investment 
managers and third party administrators.

Reporting and Disclosure

    ERISA section 103 requires employee benefit plans to file an annual 
report (Form 5500) with the Secretary of Labor. The Secretary has 
authority under section 502(c)(2) of ERISA to assess civil penalties of 
up to $1,100 per day against plan administrators who fail or refuse to 
file complete and timely annual reports. EBSA identifies deficient, 
late or non-filers by reviewing and maintaining the ERISA Form 5500 
Database. Non-filers are usually identified through referrals from 
other EBSA offices, the Internal Revenue Service, or computer 
targeting.
    Our primary objective is to obtain compliance with ERISA's 
reporting and disclosure requirements. As a result, civil monetary 
penalties are usually significantly abated, once compliance is 
achieved. In fiscal year 2004, EBSA resolved 3,282 deficient filer 
cases, assessing $3,058,000 in penalties. In fiscal year 2004, EBSA 
also pursued 360 non-filer cases, assessing $829,500 in related 
penalties and the Agency closed 276 late filer cases with $172,000 in 
civil penalties.
    EBSA's Delinquent Filer Voluntary Compliance (DFVC) program was 
established to assist filers in correcting situations involving the 
late filing or non-filing of Form 5500 annual reports. This program, 
which began in 1995 and was significantly revised in 2002, encourages 
delinquent filers to come forward and correct violations by offering 
significantly reduced civil monetary penalties. Participation in this 
program also protects plan filers from potential Internal Revenue 
Service late filing penalties. Since the 2002 revision, the DFVC 
program has received over 37,000 filings and $25.6 million in reduced 
civil penalty payments. The DFVC program has been enormously successful 
in getting these plans on our ``radar screen'' so they can be 
effectively monitored.
    When Congress enacted ERISA in 1974, it included a requirement that 
a plan's annual report must include an audit opinion issued by an 
independent qualified public accountant (IQPA) stating whether the 
plan's financial statements (and other schedules required to be 
included in the annual report) are presented fairly in conformity with 
generally accepted accounting principles (GAAP). The audit requirement 
is intended to ensure the integrity of financial information that is 
incorporated in the annual reports. While ERISA's auditing provisions 
have worked to provide DOL and plan participants and beneficiaries with 
information about the safety of plan operations, experience has shown 
that IQPA audits do not consistently meet professional standards. The 
Department's Office of Inspector General separately identified this as 
a high-risk area.
    In fiscal year 2005, EBSA is placing special emphasis on reviewing 
the audit practices of the 37 CPA firms that audit plans holding the 
overwhelming majority of reported assets. This review will include 
examining policies and procedures that these firms employ to assure the 
quality and completeness of their audit work. As part of reviewing each 
CPA firm, a sample of plan audit engagements will be selected for more 
detailed review and analysis. In addition to reviewing these firms' 
overall employee benefit plan audit practices, our Office of the Chief 
Accountant will review audit workpapers of these and other firms to 
assess the quality of the underlying audit work. As in the past, 
deficient plan auditors will be referred to the AICPA's Professional 
Ethics Division or to the appropriate State board of accountancy.
    The accounting profession has also taken steps to improve the 
quality of plan audits. In October 2003, the American Institute of 
Certified Public Accountants (AICPA) created an Employee Benefit Plan 
Audit Quality Center (Center) with the goal of improving the quality of 
employee benefit plan audits. The Center is composed of CPA firms who, 
through voluntary membership, made a commitment to audit quality by 
adhering to the Center's membership requirements affecting their 
management practices, including the designation of a partner-in-charge 
of the quality of the firm's employee benefit plan audit practice. The 
Center's membership requirements also include obtaining employee 
benefit plan specific training; establishing and maintaining quality 
control practices and procedures specific to the firm's employee 
benefit plan audit practice; self monitoring of adherence to policies 
and procedures; and making the results of their external peer review of 
their audit practice publicly available. Over 900 firms joined the 
Center in its first year of operation.

EBSA's First Investigation of Capital Consultants

    Capital Consultants, Inc. (CCI) was an investment management firm 
located in Portland, Oregon, that managed more than $900 million for 
approximately 340 clients, many of which were employee benefit plans. 
More than 60 of these employee benefit plans were jointly administered 
union pension and welfare benefits plans located primarily in the 
Pacific Northwest. In addition, CCI provided investment services to 
numerous private trusts and individual clients.
    The firm was owned and controlled by Jeffrey Grayson, who was its 
chief executive officer, and his son, Barclay Grayson, who was its 
president. Effective June 30, 1999, Capital Consultants underwent a 
corporate restructuring and was renamed Capital Consultants, LLC. 
Therefore, the company is sometimes referred to as CCI and sometimes 
CCL, depending on the time frame, but its ownership, officers, and line 
of business remained the same.
    EBSA opened its first investigation of CCI in March 1992, based on 
information indicating that CCI engaged in prohibited transactions and 
self-dealing. In addition to the investigation of CCI, EBSA opened 
three other investigations of plans that entered into investments 
through CCI. They were the Oregon Laborers-Employers Pension Trust, 
Northern Alaska Carpenters Retirement Fund, and the Morse Brothers, 
Inc. Profit Sharing Plan.
    The investigations were completed in March 1993 and referred to 
SOL. The investigations revealed that CCI and Jeffrey Grayson violated 
ERISA by entering into a fee arrangement with the Oregon Laborers-
Employers Pension Trust (Oregon Laborers Trust) that enabled them to 
increase their own compensation. Investment managers usually charge 
their clients a fee based on a percentage of assets under management. 
Under CCI's fee arrangement with the Oregon Laborers Trust, CCI and 
Grayson charged the usual fee based on assets under management and 
charged an extra fee for real estate related investments. This extra 
fee, which they called an ``acquisition fee,'' was charged each time 
CCI made a real estate related investment for a plan. This was a one-
time fee based on a percentage of the gross asset value of the 
transaction.
    As investment manager, CCI and Jeffrey Grayson had the discretion 
to determine the amount and frequency of the Oregon Laborers Trust's 
real estate-related investments. Therefore, this fee arrangement placed 
them in the position of being able to affect their own compensation. 
Each time CCI and Jeffrey Grayson invested the Oregon Laborers Trust's 
assets in another real estate-related investment; CCI and Jeffrey 
Grayson would receive an additional fee.
    The investigation did not, however, establish any evidence that CCI 
and Jeffrey Grayson increased the Trust's real estate investments with 
the motive of increasing their fees, and a number of trustees stated 
that they specifically authorized the real estate related investments. 
Nevertheless, under ERISA, a fiduciary cannot set its own compensation, 
regardless of whether that fee is reasonable. To the extent CCI set its 
fees, rather than a fiduciary independent of CCI, it violated ERISA.
    The investigations also revealed that CCI invested more than $100 
million of its clients' assets, including almost $90 million in loans 
and $13 million in stock purchases, in Crown Pacific, Ltd. (Crown), 
from which CCI received $5.2 million in fees as its consultant. This 
allegation related not only to the Oregon Laborers Trust but also to 
the other two plans under investigation, the Northern Alaska Carpenters 
Retirement Fund and the Morse Brothers Profit Sharing Plan. The timing 
of the transactions suggested that CCI and Jeffrey Grayson might have 
invested their client plans' assets in Crown in return for consulting 
fees from Crown. If true, this too would violate the self-dealing 
provisions of ERISA. However, there was no direct evidence of a 
relationship between CCI's consulting agreements with Crown and the 
investments that CCI caused the Plans to make in Crown. Neither was 
there direct evidence that CCI had invested plan assets in Crown 
specifically because CCI was being paid the consulting fees. Jeffrey 
Grayson actually performed consulting services for Crown, and there was 
only one instance of a simultaneous correlation between CCI's loans to 
Crown and Crown's payment of consulting fees to Jeffrey Grayson. 
Moreover, the loans, which were secured by land, personal guaranties, 
and stock did not appear to cause any losses to the plans. Therefore, 
the decision was made to proceed solely on the fee arrangement issue.
    As is its usual practice, pursuant to Executive Order 12778, SOL 
engaged in settlement negotiations before filing the complaint and 
reached agreement on a consent order, which was filed simultaneously 
with the complaint in December 1995 in the U.S. District Court for the 
District of Oregon. The consent order provided that CCI would pay the 
Oregon Laborers Trust $2 million, and permanently enjoined CCI and 
Jeffrey Grayson from operating and collecting fees under any fee 
arrangement which would permit them to use their discretion over the 
assets of ERISA-covered plans to affect the amount of their fees from 
such plans. In February 1996, the Secretary of Labor assessed a 502(l) 
civil penalty \2\ of $182,000 against Jeffrey Grayson and CCI. All of 
the payments required by the consent order and civil penalty assessment 
were made.
---------------------------------------------------------------------------
    \2\ Under Section 502(l) of ERISA, the Secretary of Labor must 
assess a penalty against any recoveries obtained pursuant to settlement 
or court order. In effect, the penalty, which is payable to the 
Treasury, acts as a tax on settlements with the Secretary, creates a 
disincentive to settlement, and makes it more difficult for the 
Secretary to intervene in private actions without making settlement 
much more difficult for private litigants. Moreover, because the assets 
available to fund settlements are typically limited, the penalty often 
comes from amounts that could otherwise have been paid to reduce plan 
losses or enhance future benefits. Because of these problems, the 
Department has, for many years, urged Congress to amend section 502(l) 
of ERISA to make the penalties discretionary, rather than mandatory.
---------------------------------------------------------------------------

EBSA's Second Investigation of Capital Consultants

    EBSA's Seattle District Office opened its second investigation of 
CCL in October 1997, based upon the receipt of a complaint filed 
against Jeffrey Grayson and CCL by one of its plan clients, the A.G.C. 
International Union of Operating Engineers Local 701 Pension Trust 
Fund. The complaint's principal allegation was that CCL made imprudent 
real estate investments for the plan, contrary to the Plan's investment 
guidelines and without the approval of the trustees. Although the 
Operating Engineers Fund settled its lawsuit in March 1998, EBSA's 
investigations continued. The breadth of the fiduciary misconduct which 
was uncovered in EBSA's second investigation was astonishing, 
ultimately causing EBSA to open 58 investigations, devote over 13 civil 
and criminal investigative staff years to date, collect and review 
hundreds of thousands of pages of documents covering dozens of private 
loans and equity investments, and institute 19 separate lawsuits 
against plan trustees.
    This second investigation of CCL involved CCL's investment of plan 
assets in loans called ``collateralized notes,'' which were loans for 
which the collateral consisted largely of the borrower's potential 
revenues. These loans were unlike the loans to Crown, which were 
secured by land, personal guaranties and stock. The bulk of the loans 
were first made to Wilshire Credit Corporation (WCC) beginning in July 
1995, more than 2 years after EBSA's first investigation had ended. 
Subsequent loans were made largely to shell corporations and entities 
that did not exist at the time of the first investigation. Thus, EBSA's 
second CCL investigation did not involve the same loans, the same 
borrowers, or the same type of collateral as the first case.
    WCC was an Oregon S-Corporation, which acquired and serviced 
performing and non-performing consumer loans. CCL and Jeffrey and 
Barclay Grayson invested $160 million of their clients' assets in a 
series of loans to WCC from July 1995 through October 1998. The loans 
were ``interest only'' with a stipulated maturity date but no periodic 
payments of principal. The collateral for the loans was cash amounting 
to only 15 percent of the loan amount and WCC's expected revenues from 
loan servicing contracts with third parties, primarily Wilshire 
Financial Services Group (``WFSG''), a publicly traded corporation 
managed by the principals of WCC. WCC's expected revenues were not 
guaranteed, and if WCC's business volume declined, the fees from third 
parties would not sufficiently collateralize the loan. The WCC loan 
agreements were amended several times to allow for increased principal, 
reduced collateral, extended maturity dates and lower interest rates. 
This made the terms of the loans even less favorable to the investors 
and increased the risk of nonperformance.
    Shortly after the final loan was made to WCC, WFSG experienced 
severe financial problems. As a result, WFSG was no longer an income 
source for WCC, and WCC defaulted on the loans. In fact, WFSG filed for 
Chapter 11 bankruptcy in March 1999, and its Reorganization Plan 
indicated that the $160 million in loans from CCL clients to WCC, 
consolidated into ``the Wilshire Loan,'' was valued at only $6.45 
million on a liquidation basis.
    Rather than report or acknowledge investors' losses on the WCC 
investment, CCL and Jeffrey and Barclay Grayson engaged in a series of 
transactions with other companies (Sterling Capital, LLC; Oxbow Capital 
Partners, LLC; Brooks Financial, LLC and Beacon Financial Group, LLC) 
to facilitate ``paper sales'' of all or a portion of the Wilshire Loan 
at an inflated price. This concealment is what some have referred to as 
the ``ponzi scheme.'' Essentially, CCL was able to continue to make 
interest payments on the loans.
    First, in November 1998, Daniel Dyer, a prior recipient of CCL 
loans, created Sterling Capital LLC (Sterling). Sterling was a shell 
company with no assets or revenues, yet it entered into an agreement 
with CCL to purchase the Wilshire Loan for $160 million plus interest. 
Sterling retained the right to terminate payments under the agreement 
at any time and without further liability.
    Subsequently, in January 1999, Dyer created Oxbow Fund I, a venture 
capital fund which was to raise funds from investors through a private 
offering and use the funds to pay for Sterling's purchase of the 
Wilshire Loan. Oxbow Fund I was to be marketed by Dyer through his 
ownership of a broker/dealer firm, CJM Planning Corporation. Dyer's 
purchase of CJM Planning had been funded in 1998 through loans from 
CCL's clients. Also, CCL assured its clients by letter that the 
Wilshire Loan was being sold to Sterling for $160 million plus interest 
at prime + 3.75 percent. CCL continued to value the Wilshire Loan at 
$160 million and charged its clients a fee of 3 percent per annum on 
the face value.
    The Oxbow Fund I offering failed to attract any significant 
investors. As a consequence, Dyer told CCL that Sterling could not make 
the Wilshire Loan payments and he wanted to terminate the agreement. 
Instead, Sterling entered into an agreement with CCL and another 
company, Brooks Financial LLC (Brooks), whereby Brooks agreed to take 
over two thirds of Sterling's loan obligation.
    Brooks was a shell company formed by the owner of Florida 
Automobile Finance Corporation, a sub-prime automobile finance company. 
Brooks' agreement to purchase two-thirds of the Wilshire Loan was 
specifically conditioned on receiving a $50 million loan from CCL. On 
that same day, CCL entered into a loan agreement with Brooks, 
committing CCL's clients to loan Brooks up to $50 million. Pursuant to 
the agreement, CCL loaned $38.1 million to Brooks. CCL used $7.843 
million from its clients' escrow account to make ``interest payments'' 
on the Wilshire Loan. CCL reported to its clients throughout this 
period that Brooks was making timely interest payments and the clients' 
investment in the Wilshire Loan was still worth a total of $160 
million.
    Then, in January 2000, CCL entered into a second loan agreement 
committing its clients' funds to loaning up to another $50 million to 
Beacon Financial LLC (Beacon), a newly created shell company under 
common ownership with Brooks. CCL loaned approximately $33.88 million 
to Beacon. Again, CCL retained another $7.37 million in escrow and used 
this money to make monthly interest payments on the Wilshire Loan. CCL 
repeatedly assured its clients that both Brooks and Beacon were 
performing on their respective loans and were making the interest 
payments on the Wilshire Loan. As a consequence, CCL continued to 
report the Wilshire Loan at its original value of $160 million.
    Throughout this period, CCL billed its clients 3 percent per annum 
for investment management fees on the Wilshire Loan and the Brooks and 
Beacon loans.
    This not only caused their clients to pay fees in excess of those 
amounts to which CCL and Jeffrey and Barclay Grayson were entitled, but 
also concealed from their clients the declining value of their 
investments. A diagram of the scheme is attached as Appendix A to the 
written statement.
    In February 2000, after completing its investigation of CCL and its 
principals, EBSA referred the case to SOL for litigation. In July 2000, 
per the SEC's request, a copy of the EBSA Report of Investigation, 
along with voluminous exhibits, was provided to the SEC in Los Angeles. 
The SEC and the Department decided to proceed against CCL jointly. This 
litigation strategy was advantageous because the Department had an 
indepth knowledge of the underlying facts and the SEC could more 
readily have a receiver appointed over the entire business of CCL, 
which included non-ERISA clients as well as the ERISA plans.
    On September 20, 2000, SOL and SEC attorneys jointly met with 
counsel for CCL and its principals in Oregon. Counsel for CCL and its 
principals represented that their clients agreed to the receivership. 
SOL and SEC attorneys negotiated the language of their respective 
consent orders. The consent orders were presented to the U.S. District 
Court and were entered by the Court on September 21, 2000. The court 
orders appointed a receiver to make an accounting and to protect the 
interests of CCL's ERISA plan clients and other investors. Through the 
consent orders, the SEC was able to freeze the defendants' personal 
assets and EBSA was able to enjoin them from doing business with ERISA 
plans.
    CCL has been in receivership since the suit was filed in September 
2000. Settlements totaling more than $101 million have been reached in 
private litigation, resolving claims brought by the court-appointed 
receiver, trustees of ERISA plans and other investors against plan 
fiduciaries and other parties who provided services to or had business 
relationships with CCL.\3\ These settlement amounts were made a part of 
the receivership estate. To date, the receiver has marshaled estate 
assets of more than $189 million in part by collecting on outstanding 
loans and selling CCL's assets. The receiver estimates that the total 
amount of settlements and marshaled assets accumulated in the 
receivership to date is $291 million of which about $193 million was 
already distributed to CCL's private placement clients, including the 
ERISA plans.
---------------------------------------------------------------------------
    \3\ Over $42 million was paid as a result of additional litigation 
by the Department and others against plan fiduciaries and service 
providers. This number is not included in the receivership assets.
---------------------------------------------------------------------------
    Barclay Grayson settled with the receiver and private plaintiffs 
for $500,000, but the Department did not agree to the settlement. The 
Department is currently in settlement negotiations with him to obtain 
injunctive relief. Barclay Grayson is bankrupt and the Bankruptcy Court 
has discharged all of his debts. Jeffrey Grayson suffered a stroke and 
is currently in a nursing home. The receiver has sold Jeffrey Grayson's 
property. His remaining assets have been frozen and he is currently 
drawing a monthly stipend to cover his living and medical expenses.
    The receiver has approximately $76.36 million remaining for 
distribution. It will be distributed in accordance with the court-
approved distribution plan, minus the remaining receivership fees and 
expenses, which are approximately $1 million. The total cost of the 
receivership is $8.5 million. Overall, the employee benefit plans 
recovered well over 70 percent of their losses through the 
receivership, and many plans have recovered additional losses through 
settlements of litigation resulting in at least $42 million.

Related Litigation Against Trustees

    In addition to the investigation of CCL, EBSA's Seattle, San 
Francisco, Cincinnati, Detroit, Kansas City, and Los Angeles offices 
opened investigations of plans that invested in private placements 
through CCL. In total, EBSA opened 58 related investigations and filed 
19 lawsuits against trustees of 34 plans in Oregon, Idaho, California, 
Nevada, Utah, Arizona, Colorado, Minnesota and Ohio. In these lawsuits, 
the Department alleged that the trustees imprudently authorized CCL to 
invest in high-risk investments (the collateralized notes), failed 
adequately to investigate the merits of the investments, and failed 
adequately to monitor the investments. In some cases, the complaints 
also alleged that the investments violated the plans' own investment 
guidelines, and that a number of trustees violated ERISA's self-dealing 
provisions by accepting gratuities from CCL, including free hunting 
trips, rifles, and tickets to football games.
    In April 2002, the Department entered into consent orders with 10 
plans and their trustees in the District of Oregon. The consent orders 
provided for the resignation of a number of trustees and permanently 
enjoined others from serving as ERISA fiduciaries or service providers. 
The consent orders also provided for significant plan reforms, 
including internal controls and procedures relating to plan 
investments, contracts with service providers, written investment 
guidelines, communication procedures, quarterly meetings, reviewing and 
monitoring plan fiduciaries, the pursuit of litigation, and the 
retention of experts to serve as investment monitors, managers, 
auditors, and attorneys. The plan reforms are binding on the plans' 
current trustees as well as successor trustees.
    Contemporaneously with the filing of the consent orders, private 
plaintiffs settled their class action lawsuits against the same plan 
fiduciaries as a result of court-ordered mediation in which the 
Department participated. In the mediation, the private litigants 
obtained settlements totaling $15.8 million. Of that amount, $9.5 
million was to be paid by Legion Insurance Company, which is currently 
in liquidation in Pennsylvania. It is expected, however, that much or 
all of that money eventually will be recovered as a result of private 
negotiated settlements with the State insurance guaranty funds and 
through the liquidation of Legion by the Pennsylvania State Insurance 
Commission.
    After the April 2002 settlements, the Department continued to 
monitor the receivership and to pursue cases against other trustees. In 
March 2004, the Department obtained consent orders providing for 
restitution of $4.875 million to 12 employee benefit plans in 
California, Nevada and Utah. The consent orders also required payment 
of $975,000 in civil penalties to the Government. In addition, the 
consent orders provided for plan reforms, including internal controls 
and procedures relating to plan investments similar to those contained 
in the earlier settlements. The consent orders resolved five lawsuits 
and covered more than 17,000 participants and beneficiaries.
    In January 2005, the Department obtained additional consent orders 
providing for restitution of $4.31 million to 10 employee benefit plans 
in Arizona, Colorado, Minnesota and Ohio that invested plan assets 
through CCL. The consent orders also required payment of $862,413 in 
civil penalties to the Government. In addition, the consent orders 
provided for plan reforms similar to those in the other cases. The 
consent orders resolved eight lawsuits and covered more than 25,000 
participants and beneficiaries.
    In total, the Department filed 19 lawsuits against plan trustees, 
covering 34 employee benefit plans. The consent orders issued in these 
cases called for the retirement or resignation of 51 plan trustees, and 
permanent injunctions barring 31 plan trustees and one investment 
advisor and his firm from serving as ERISA fiduciaries or service 
providers. The orders also imposed significant internal reforms on the 
34 affected plans to help prevent future fiduciary breaches. In 
addition to the money collected by the Receiver, and the $15.8 million 
recovery from the Oregon mediation (subject to Legion's insolvency 
proceedings), the Department obtained $9.2 million to date in these 
cases against trustees, and assessed and received a total of 
$1,837,427.86 in civil penalties.

Criminal Investigations of CCL and Related Entities

    In December 1999, in coordination with the U.S. Attorney's Office 
for the District of Oregon in Portland, Oregon, EBSA and other law 
enforcement agencies began the criminal investigation of the CCL 
matter. By the summer of 2000, under the direction of the U.S. 
Attorney's Office, the investigation had developed into a task force 
which included EBSA, the Internal Revenue Service, the Department of 
Labor's Office of Inspector General and the Office of Labor Management 
Standards, as well as the Federal Bureau of Investigation.
    The criminal investigations of Jeffrey and Barclay Grayson led to 
other investigations surrounding the CCL debacle. By December 2000, 
under the direction of the U.S. Attorney's Office, the task force 
opened an investigation of Lawrence Mendelsohn and Andrew Wiederhorn, 
owners of Wilshire Credit Corporation. In June 2001, the investigations 
into CCL and its officers and employees expanded to Dean Kirkland, the 
principal salesperson for CCL. These investigations revealed that CCL 
had engaged in a practice of paying gratuities to trustees of union 
sponsored employee benefit plans which invested funds through CCL.
    From May 2002 to July 2002, the task force conducted a number of 
criminal cases on various trustees of union sponsored benefit plans. As 
a result of a task force investigation guilty verdicts and pleas were 
obtained from Barclay Grayson and Dean Kirkland of CCL; plan trustees 
John Abbott, Robert Mayhew, John Lontine, and Dennis Talbot; and Andrew 
Wiederhorn and Larry Mendelsohn of Wilshire. Two other trustees Gary 
Kirkland and Robert Legino were acquitted of gratuities charges after a 
lengthy trial. The charges against Jeffrey Grayson were dismissed due 
to Grayson's mental and physical impairment. An attorney from the 
Department of Justice's Criminal Division participated in the 
prosecution of the plan trustees and Dean Kirkland.

Conclusion

    CCL owed a duty of undivided loyalty to its benefit plan investors 
under ERISA. It breached that duty on an almost unprecedented scale 
causing hundreds of millions of dollars in losses to both ERISA plans 
and non-ERISA investors. It took an extraordinary effort to uncover 
CCL's misconduct and to remedy the violation because the transactions 
were extraordinarily complex and CCL consistently misled its investors 
about the nature of the transactions and the existence and magnitude of 
the resulting losses. There simply were no easy shortcuts available to 
the Agency to uncover and remedy CCL's violations.
    As a result of EBSA's efforts, in tandem with the work of the SEC 
and private litigants, the participants of the ERISA-covered plans will 
recover well over 70 percent of their losses. The Department and the 
SEC had a receiver appointed to marshal CCL's assets and protect the 
interest of CCL's investors. The Department also enjoined Jeffrey and 
Barclay Grayson from doing business with ERISA plans. In total, the 
Department filed 19 lawsuits against the plan trustees of 34 employee 
benefit plans and obtained consent orders calling for the resignation 
and retirement of 51 trustees and permanent injunctions barring 31 
additional trustees (as well as one investment manager) from ever 
serving as ERISA fiduciaries or service providers. The additional 
injunctive relief obtained by the Department included significant plan 
reforms, including internal controls and procedures relating to plan 
investments that will provide long-term protections for plan 
participants and beneficiaries. In addition to the money collected by 
the receiver and through the mediation in the third party litigation, 
the Department obtained restitution of $9.2 million to date in cases 
against plan trustees. A total of $1,837,427.86 in civil penalties were 
assessed and paid. A chart that describes the results of the civil 
investigations is attached as Appendix B to the written statement.
    EBSA's work also resulted in the Justice Department indicting 11 
individuals for various crimes resulting from their participation in 
the CCL debacle. Seven of these individuals pleaded guilty. One case 
was dismissed, while two individuals were acquitted in a bench trial 
and one was convicted. Four defendants served prison time ranging from 
15 to 24 months, for a total of 81 months served, while others served 
probation. A chart that describes the results of the criminal 
investigations is attached as Appendix C to the written statement.
    The scheme was of great sophistication and had a veneer of 
respectability provided by the cooperation of so many professionals 
including attorneys, accountants, and investment advisors. EBSA's 
investigation uncovered a complex scheme to defraud investors through 
the unprecedented use of newly created shell companies, paper 
transactions, and false reports.
    Finally, ERISA places the ultimate responsibility for the 
governance of plans on individual plan fiduciaries. CCL was able to 
find fiduciaries that failed to responsibly oversee the retirement 
assets of the plans' participants and beneficiaries. These fiduciaries, 
as well as CCL, failed to prudently discharge their obligations to the 
plans' participants. All too often, the trustees (and their advisors) 
failed to understand the nature of CCL's investments, to review the 
investments, or even adhere to the plans' own investment guidelines.
    Mr. Chairman and members of the committee, thank you again for the 
opportunity to appear before you to discuss EBSA's enforcement program 
and this very important case. This concludes my testimony. I would be 
pleased to answer any questions you may have.



                               APPENDIX C


----------------------------------------------------------------------------------------------------------------
               Name                    Date       Jail    Probation    Fines   Restitution         Charges
----------------------------------------------------------------------------------------------------------------
Barclay Grayson..................     11/20/01        24    36 (mo)      $100          -0-  Guilty Plea
                                                                                            18 U.S.C. 1341
John Abbott......................     11/21/01        15    12 (mo)      $200     $194,400  Guilty Plea
                                                                                            18 U.S.C. 1954;
                                                                                            26 U.S.C. 7206(1)
Larry Mendelsohn.................      5/24/04       -0-    18 (mo)      $100     $105,454  Guilty Plea
                                                                                            26 U.S.C. 7206(1)
Jeffrey Grayson..................      5/26/04       -0-        -0-       -0-          -0-  Dismissed
Andrew Wiederhorn................      6/03/04        18        -0-   $25,200   $2,000,000  Guilty Plea
                                                                                            18 U.S.C. 1954;
                                                                                            26 U.S.C. 7206(1)
Gary Kirkland....................      6/15/04       -0-        -0-       -0-          -0-  Acquitted
Robert Legino....................      6/15/04       -0-        -0-       -0-          -0-  Acquitted
Robert Mayhew....................      7/01/04       -0-    12 (mo)    $1,000          -0-  Guilty Plea
                                                                                            29 U.S.C. 1131;
                                                                                            18 U.S.C. 2
John Lontine.....................      7/01/04       -0-    12 (mo)    $1,000          -0-  Guilty Plea
                                                                                            29 U.S.C. 1131;
                                                                                            18 U.S.C. 2
Dennis Talbott...................      7/15/04       -0-    36 (mo)    $1,000          -0-  Guilty Plea
                                                                                            18 U.S.C. 1954
Dean Kirkland....................      2/10/05        24    24 (mo)    $5,000      $15,756  Conviction
                                                                                            18 U.S.C. 1954;
                                                                                            18 U.S.C. 1343;
                                                                                            18 U.S.C. 1503(a)
----------------------------------------------------------------------------------------------------------------
Key
Title 18 U.S.C. 2           Principals.
Title 18 U.S.C. 1341        Frauds and Swindles.
Title 18 U.S.C. 1343        Fraud by wire, radio, or television.
Title 18 U.S.C. 1503(a)      Influencing or injuring officer or juror generally.
Title 18 U.S.C. 1954        Offer, acceptance, or soliciation to influence operations of employee benefit plan.
Title 26 U.S.C. 7206(1)      Making and subscribing a false return, statement or other document.
Title 29 U.S.C. 1131        Willful violation of Part I of ERISA.


    The Chairman. Ms. Bovbjerg?
    Ms. Bovbjerg. Thank you, Mr. Chairman, Senator Bingaman. 
Thank you for inviting me here today to discuss past GAO work 
on the Department of Labor's enforcement of ERISA.
    Labor's Employee Benefit Security Administration, EBSA, is 
charged with safeguarding the economic interests of the more 
than 150 million people who participate in employee benefit 
plans. Recent abuses by plan fiduciaries, trading scandals in 
mutual funds, and the bankruptcy of companies like United 
Airlines and Enron have exposed vulnerabilities in our 
country's pension system. They also underscore the importance 
of legal protections for workers and the vigorous enforcement 
of such protections.
    Today, I will discuss three things. First, the ways in 
which EBSA enforces ERISA. Second, the measures EBSA has taken 
to improve. And finally, the challenges that remain. My remarks 
are based on a body of GAO work on pension vulnerabilities and 
ERISA enforcement.
    First, EBSA's enforcement practices. EBSA's enforcement 
program is conducted by its regional offices and focuses 
primarily on investigations. Investigations result mainly from 
participant complaints, but are also initiated as part of a 
coordinated national enforcement effort. For example, one of 
EBSA's current national priorities focuses on employee 
contributions to defined benefit plans, which is a type of 
retirement saving that has grown dramatically in recent years.
    In an effort to leverage its enforcement resources, EBSA 
also carries out education programs for plan participants, 
sponsors, and service providers. For participants, EBSA seeks 
to establish an environment where individual law workers can 
recognize potential legal violations and report them. For 
sponsors and service providers, EBSA has launched campaigns to 
explain and publicize fiduciary responsibilities under ERISA. 
In addition, EBSA has initiated the voluntary fiduciary 
correction program, which encourages plan officials to identify 
and correct ERISA violations on their own. EBSA's 
investigations, education, and voluntary corrections are 
intended to comprise a multifaceted approach to enforcement.
    Let me now turn to recent improvements in EBSA's 
enforcement. In the past, most recently in 2002, we reported 
weaknesses in this program that we felt affected its efficiency 
and effectiveness. Since then, EBSA has taken a number of steps 
to improve. For example, we observed that EBSA knew little 
about the levels of compliance with different aspects of the 
law, making it difficult, if not impossible, to really target 
enforcement resources at the areas of greatest need.
    In response, EBSA has completed a compliance study on large 
multiemployer health plans and is currently conducting a study 
to determine the level of timely employee contribution 
transmission. Although these studies are more limited than the 
broader survey we believe is needed, they represent important 
steps toward better targeting of resources.
    And such improvement, as Mr. Lebowitz says, has borne 
fruit. Prohibited transactions corrected and plan assets 
restored rose from $566 million in 2002 to $2.5 billion in 
2004.
    But despite these improvements, of course, challenges 
remain, and some have their roots in the law. The primary 
source of pension information, for example, the Form 5500, is 
not timely and it hinders its utility as an enforcement tool. 
Statutory deadlines allow sponsors 285 days to file information 
and, as we reported last week in our report on this topic, 
processing adds more time. As a result, EBSA today is using 
2003 Form 5500 data for enforcement targeting, which does 
little to help identify compliance problems as they emerge.
    EBSA is also hobbled by ERISA in assessing penalties. Work 
we did last year for Senator Kennedy highlighted EBSA's 
inability to assess penalties in certain circumstances. As a 
consequence, EBSA has fewer enforcement tools than other 
regulatory agencies like the SEC.
    But not all enforcement shortcomings stem from legal 
restrictions. Some would benefit from managerial changes. For 
example, recent evidence of abusive trading practices in mutual 
funds and conflicts of interest by pension consultants 
highlight the need for EBSA to work even more closely with the 
SEC, as they did with Capital Consultants. Last year, these 
agencies each acted separately to address mutual fund issues, 
but some of the actions originally proposed by the SEC could 
have had adverse effects on pension funds as investors. These 
two agencies should have worked more closely together on these 
issues, as pension plans invest about one-fifth of their 
capital in mutual funds. Certainly limited enforcement 
resources could be better utilized if the agencies better 
coordinated in areas of mutual interest.
    To conclude, EBSA is a relatively small agency with a 
crucially important responsibility of protecting retirement 
income savings at a time when private pensions and Social 
Security are increasingly under fiscal pressure. Although the 
agency strengthened its enforcement program, pension fraud 
continues to harm working Americans and threaten their 
standards of living in retirement. Better law and continuous 
improvement in enforcement will be necessary to assure workers 
that pension promises made will be retirement income promises 
delivered.
    That concludes my statement, Mr. Chairman. I would be happy 
to answer any questions you have.
    The Chairman. Thank you very much.
    [The prepared statement of Ms. Bovbjerg follows:]

               Prepared Statement of Barbara D. Bovbjerg

               EMPLOYEE BENEFITS SECURITY ADMINISTRATION
    IMPROVEMENTS HAVE BEEN MADE TO PENSION ENFORCEMENT PROGRAM BUT 
                     SIGNIFICANT CHALLENGES REMAIN

Why GAO Did This Study

    Congress passed the Employee Retirement Income Security Act 1874 
(ERISA) to address public concerns over the mismanagement and abuse of 
private sector employee benefit plans by some plant sponsors and 
administrators. The Department of Labor's Employee Benefits Security 
Administration (EBSA) shares responsibility with the Internal Revenue 
Service and the Pension Benefit Guaranty Corporation for enforcing 
ERISA. EBSA Works to safeguard the economic interest of more than 150 
million people who participate in an estimated 6 million employee 
benefit plans with assets in excess of $4.4 trillion. EBSA plays a 
primary role in ensuring that employee benefit plans operate in the 
interests of plan participants, and the effective management of its 
enforcement program is pivotal to ensuring the economic security of 
workers and retirees.
    Recent scandals involving abuses by pension plan fiduciaries 
service providers, as well as trading scandals in mutual funds that 
affected plan participants and other investors highlight the importance 
of ensuring that EBSA has an effective and efficient enforcement 
program. Accordingly, this testimony focuses on describing EBSA's 
enforcement strategy, EBSA's efforts to address weaknesses in its 
enforcement program along with the challenges that remain.

What GAO Found

    EBSA's enforcement strategy is a multifaceted approach of targeted 
plan investigations. To leverage its enforcement resources, EBSA 
provides education to plan participants and plan sponsors. EBSA allows 
its regional offices the flexibility to tailor their investigations to 
address the unique issues in the regions, within a framework 
established by EBSA's Office of Enforcement. The regional offices then 
have a significant degree of autonomy in developing and carrying out 
investigations using a mixture of approaches and techniques they deem 
most appropriate. Participant leads are still the major source of 
investigations. EBSA officials told us that they open about 4,000 
investigations into actual and potential violations of ERISA annually. 
To supplement their investigations, the regions conduct outreach 
activities to educate both plan participants and sponsors. The purpose 
of these efforts is to gain participants' help in identifying potential 
violations and to educate sponsors in properly managing their plans and 
avoiding violations. Finally, EBSA maintains a Voluntary Fiduciary 
Correction Program through which plan officials can voluntarily report 
and correct some violations without penalty.
    EBSA has taken steps to address many of the recommendations we have 
made over the years to improve its enforcement program, including 
assessing the level and types of noncompliance with ERISA, improving 
sharing of best investigative practices, and developing a human capital 
strategy to better respond changes in its workforce. EBSA reported a 
significant increase in enforcement results for fiscal year 2004, 
including $3.1 billion in total monetary results and closing about 
4,400 investigations, with nearly 70 percent of those cases resulting 
in corrections of ERISA violations. Despite this progress, EBSA 
continues to face a number of significant challenges to its enforcement 
program, including (1) the lack of timely and reliable plan 
information, which is highlighted by the fact that EBSA is currently 
using plan year 2002 and 2003 plan information for its computer 
targeting, (2) restrictive statutory requirements that limit its 
ability to assess certain penalties, and (3) the need to better 
coordinate enforcement strategies with the Securities and Exchange 
Commission, which is highlighted by recent scandals involving the 
trading practices and market timing in mutual funds and conflicts of 
interest by pension consultants.



    Mr. Chairman and members of the committee, I am pleased to be here 
today to provide an overview of our past work reviewing the Department 
of Labor's Employee Benefits Security Administration (EBSA) enforcement 
program. EBSA works to safeguard the economic interest of more than 150 
million people who participate in an estimated 6 million employee 
benefit plans with assets in excess of $4.4 trillion. EBSA plays a 
primary role in ensuring that employee benefit plans operate in the 
interests of plan participants, and the effective management of its 
enforcement program is pivotal to ensuring the economic security of 
workers and retirees.
    Congress passed the Employee Retirement Income Security Act of 1974 
(ERISA) to address public concerns over the mismanagement and abuse of 
private sector employee benefit plans by some plan sponsors and 
administrators. ERISA is designed to protect the rights and interests 
of participants and beneficiaries of employee benefit plans and 
outlines the responsibilities of the employers and administrators who 
sponsor and manage these plans. The recent bankruptcies of some large 
corporations and the effects on employees' retirement savings and the 
Federal pension insurance program expose certain vulnerabilities in our 
private pension system. Such problems point out the need for 
comprehensive pension reform. Also, recent scandals involving abuses by 
pension plan fiduciaries and service providers, as well as trading 
scandals in mutual funds that affected plan participants and other 
investors highlight the importance of ensuring that EBSA has an 
effective and efficient enforcement program.
    Today, I would like to discuss the evolution of EBSA's enforcement 
program and the challenges that remain. GAO has conducted several 
studies of ERISA enforcement issues, and my statement is largely based 
on that work.
    In summary, EBSA's enforcement strategy is a multifaceted approach 
of targeted plan investigations supplemented by outreach and education. 
To leverage its enforcement resources to prevent and detect violations 
and promote overall compliance with ERISA, EBSA provides education to 
plan participants and sponsors and allows the voluntary self-correction 
of certain transactions without penalty. EBSA's education program for 
plan participants aims to increase their knowledge of their rights and 
benefits under ERISA. EBSA has taken steps to address many of the 
recommendations we have made over a number of years to improve its 
enforcement program, including assessing the level and types of 
noncompliance with ERISA, improving sharing of best investigative 
practices, analyzing the sources of cases, and developing a human 
capital strategy to better respond changes in its workforce. EBSA 
reported a significant increase in enforcement results for fiscal year 
2004, including $3.1 billion in total monetary results and closing 
nearly 4,400 investigations, with nearly 70 percent of those cases 
resulting in corrections of ERISA violations. Despite this progress, 
EBSA continues to face a number of significant challenges to its 
enforcement program. Such challenges include lack of timely and 
reliable plan information, restrictive statutory requirements that 
limit its ability to assess certain penalties, and the need to better 
coordinate enforcement strategies with the Securities and Exchange 
Commission. As we have previously reported, legislative changes will be 
required to address some of these issues. Furthermore, the Congress 
should consider providing EBSA with additional enforcement tools, such 
as enhanced penalty authority, to meet these challenges. Finally, EBSA 
needs to continue to look for ways to better target investigations to 
leverage its limited resources.

Background

    Three agencies share responsibility for enforcing ERISA: the 
Department of Labor (EBSA), the Department of the Treasury's Internal 
Revenue Service (IRS), and the Pension Benefit Guaranty Corporation 
(PBGC). EBSA enforces fiduciary standards for plan fiduciaries of 
privately sponsored employee benefit plans to ensure that plans are 
operated in the best interests of plan participants. EBSA also enforces 
reporting and disclosure requirements covering the type and extent of 
information provided to the Federal Government and plan participants, 
and seeks to ensure that specific transactions prohibited by ERISA are 
not conducted by plans.\1\ Under Title I of ERISA, EBSA conducts 
investigations of plans and seeks appropriate remedies to correct 
violations of the law, including litigation when necessary.\2\ IRS 
enforces the Internal Revenue Code (IRC) and provisions that must be 
met which give pension plans tax-qualified status, including 
participation, vesting, and funding requirements. The IRS also audits 
plans to ensure compliance and can levy tax penalties or revoke the 
tax-qualified status of a plan as appropriate. PBGC, under Title IV of 
ERISA, provides insurance for participants and beneficiaries of certain 
types of tax-qualified pension plans, called defined benefit plans, 
that terminate with insufficient assets to pay promised benefits. 
Recent terminations of large, underfunded plans have threatened the 
long-term solvency of PBGC. As a result, we placed PBGC's single-
employer insurance program on our high-risk list of programs needing 
further attention and congressional action.\3\
---------------------------------------------------------------------------
    \1\ Certain transactions are prohibited under the law to prevent 
dealings with parties who may be in a position to exercise improper 
influence over the plan. In addition, fiduciaries are prohibited from 
engaging in self-dealing and must avoid conflicts of interest that 
could harm the plan.
    \2\ Prior to 1979, there was overlapping responsibility for 
administration of the parallel provisions of Title I of ERISA and the 
Internal Revenue Code (IRC) by the Department of Labor and IRS, 
respectively.
    \3\ See GAO, Pension Benefit Guaranty Corporation Single-Employer 
Program: Long-Term Vulnerabilities Warrant High-Risk Designation, GAO-
03-1050SP (Washington, D.C.: Jul. 23, 2003).
---------------------------------------------------------------------------
    ERISA and the IRC require plan administrators to file annual 
reports concerning, among other things, the financial condition and 
operation of plans. EBSA, IRS, and PBGC jointly developed the Form 5500 
so that plan administrators can satisfy this annual reporting 
requirement. Additionally, ERISA and the IRC provide for the assessment 
or imposition of penalties for plan sponsors not submitting the 
required information when due.
    About one-fifth of Americans' retirement wealth is invested in 
mutual funds, which are regulated by the Securities and Exchange 
Commission (SEC), primarily under the Investment Company Act of 1940. 
The primary mission of the SEC is to protect investors, including 
pension plan participants investing in securities markets, and maintain 
the integrity of the securities markets through extensive disclosure, 
enforcement, and education. In addition, some pension plans use 
investment managers to oversee plan assets, and these managers may be 
subject to other securities laws.

EBSA Uses a Multifaceted Enforcement Strategy

    EBSA's enforcement strategy is a multifaceted approach of targeted 
plan investigations supplemented by providing education to plan 
participants and plan sponsors. EBSA allows its regions the flexibility 
to tailor their investigations to address the unique issues in their 
regions, within a framework established by EBSA's Office of 
Enforcement. The regional offices then have a significant degree of 
autonomy in developing and carrying out investigations using a mixture 
of approaches and techniques they deem most appropriate. Participant 
leads are still the major source of investigations. To supplement their 
investigations, the regions conduct outreach activities to educate both 
plan participants and sponsors. The purpose of these efforts is to gain 
participants' help in identifying potential violations and to educate 
sponsors in properly managing their plans and avoiding violations. The 
regions also process applications for the Voluntary Fiduciary 
Correction Program (VFCP) through which plan officials can voluntarily 
report and correct some violations without penalty.

EBSA Enforces ERISA Primarily Through Targeted Investigations

    EBSA attempts to maximize the effectiveness of its enforcement 
efforts to detect and correct ERISA violations by targeting specific 
cases for review. In doing so, the Office of Enforcement provides 
assistance to the regional offices in the form of broad program policy 
guidance, program oversight, and technical support. The regional 
offices then focus their investigative workloads to address the needs 
specific to their region. Investigative staff also have some 
responsibility for selecting cases.
    The Office of Enforcement identifies national priorities--areas 
critical to the well-being of employee benefit plan participants and 
beneficiaries nationwide--in which all regions must target a portion of 
their investigative efforts. Currently, EBSA's national priorities 
involve, among other things, investigating defined contribution pension 
plan and health plan fraud. Officials in the Office of Enforcement said 
that national priorities are periodically re-evaluated and are changed 
to reflect trends in the area of pensions and other benefits.
    On the basis of its national investigative priorities, the Office 
of Enforcement has established a number of national projects. 
Currently, there are five national projects pertaining to a variety of 
issues including employee contributions to defined contribution plans, 
employee stock ownership plans (ESOP), and health plan fraud. EBSA's 
increasing emphasis on defined contribution pension plans reflects the 
rapid growth of this segment of the pension plan universe. In fiscal 
year 2004, EBSA had monetary results of over $31 million and obtained 
10 criminal indictments under its employee contributions project. 
EBSA's most recent national enforcement project involves investigating 
violations pertaining to ESOPs, such as the incorrect valuation of 
employer securities and the failure to provide participants with the 
specific benefits required or allowed under ESOPs, such as voting 
rights, the ability to diversify their account balances at certain 
times, and the right to sell their shares of stock.\4\ Likewise, more 
attention is being given to health plan fraud, such as fraudulent 
multiple employer welfare arrangements (MEWAs).\5\ In this instance, 
EBSA's emphasis is on abusive and fraudulent MEWAs created by promoters 
that attempt to evade State insurance regulations and sell the promise 
of inexpensive health benefit insurance but typically default on their 
benefit obligations.\6\
---------------------------------------------------------------------------
    \4\ In 2002, we reported that the financial collapse of the Enron 
Corporation and other large firms and the effects on workers and 
retirees had raised questions about retirement funds being invested in 
employer securities and the laws governing such investments. We 
recommended that the Congress consider amending ERISA to require plan 
sponsors to provide defined contribution plan participants with an 
investment education notice that includes information on the risks of 
certain investments such as employer securities and the benefits of 
diversification. See GAO, Private Pensions: Participants Need 
Information on the Risks of Investing in Employer Securities and the 
Benefits of Diversification, GAO-02-943 (Washington, DC: Sept. 6, 
2002).
    \5\ A MEWA is a welfare benefit plan or any other arrangement 
(other than an employee welfare benefit plan), which is established or 
maintained for the purpose of offering or providing a welfare benefit 
to employees of two or more employers. Typically, such arrangements 
often involve small employers that are either unable to find or cannot 
afford the cost of health care coverage for their employees.
    \6\ See GAO, Employee Benefits: States Need Labor's Help Regulating 
Multiple Employer Welfare Arrangements, GAO/HRD-92-40 (Washington, 
D.C.: Mar. 10, 1992).
---------------------------------------------------------------------------
    EBSA regional offices determine the focus of their investigative 
workloads based on their evaluation of the employee benefit plans in 
their jurisdiction and guidance from the Office of Enforcement. For 
example, each region is expected to conduct investigations that cover 
their entire geographic jurisdiction and attain a balance among the 
different types and sizes of plans investigated. In addition, each 
regional office is expected to dedicate some percentage of its staff 
resources to national and to regional projects--those developed within 
their own region that focus on local concerns. In developing regional 
projects, each regional office uses its knowledge of the unique 
activities and types of plans in its jurisdiction. For example, a 
region that has a heavy banking industry concentration may develop a 
project aimed at a particular type of transaction commonly performed by 
banks. We previously reported that the regional offices spend an 
average of about 40 percent of their investigative time conducting 
investigations in support of national projects and almost 25 percentage 
of their investigative time on regional projects.
    EBSA officials said that their most effective source of leads on 
violations of ERISA is from complaints from plan participants. Case 
openings also originate from news articles or other publications on a 
particular industry or company as well as tips from colleagues in other 
enforcement agencies. Computer searches and targeting of Form 5500 
information on specific types of plans account for only 25 percent of 
case openings. In 1994, we reported that EBSA had done little to test 
the effectiveness of the computerized targeting runs it was using to 
select cases. Since then, EBSA has scaled down both the number of 
computerized runs available to staff and its reliance on these runs as 
a means of selecting cases.\7\ Investigative staff are also responsible 
for identifying a portion of their cases on their own to complete their 
workloads and address other potentially vulnerable areas.
---------------------------------------------------------------------------
    \7\ See GAO, Pension Plans: Stronger Labor ERISA Enforcement Should 
Better Protect Plan Participants, GAO/HEHS-94-157 (Washington, D.C.: 
August 8, 1994).
---------------------------------------------------------------------------
    As shown in figure 1, EBSA's investigative process generally 
follows a pattern of selecting, developing, resolving, and reviewing 
cases. EBSA officials told us that they open about 4,000 investigations 
into actual and potential violations of ERISA annually. According to 
EBSA, its primary goal in resolving a case is to ensure that a plan's 
assets, and therefore its participants and beneficiaries, are 
protected. EBSA's decision to litigate a case is made jointly with the 
Department of Labor's Regional Solicitors' Offices. Although EBSA 
settles most cases without going to court, both the Agency and the 
Solicitor's Office recognize the need to litigate some cases for their 
deterrent effect on other providers.



    As part of its enforcement program, EBSA also detects and 
investigates criminal violations of ERISA. From fiscal years 2000 
through 2004, criminal investigations resulted in an average of 54 
cases closed with convictions or guilty pleas annually. Part of EBSA's 
enforcement strategy includes routinely publicizing the results of its 
litigation efforts in both the civil and criminal areas as a deterrent 
factor.

EBSA Uses Education, Outreach, and a Voluntary Fiduciary Correction 
                    Program to Supplement Its Investigations

    To further leverage its enforcement resources, EBSA provides 
education to plan participants, sponsors, and service providers and 
allows the voluntary self-correction of certain transactions without 
penalty. EBSA's education program for plan participants aims to 
increase their knowledge of their rights and benefits under ERISA. For 
example, EBSA anticipates that educating participants will establish an 
environment in which individuals can help protect their own benefits by 
recognizing potential problems and notifying EBSA when issues arise. 
The Agency also conducts outreach to plan sponsors and service 
providers about their ongoing fiduciary responsibilities and 
obligations under ERISA.
    At the national level, EBSA's Office of Participant Assistance 
develops, implements, and evaluates agencywide participant assistance 
and outreach programs. It also provides policies and guidance to other 
EBSA national and regional offices involved in outreach activities. 
EBSA's nationwide education campaigns include a fiduciary education 
campaign, launched in May 2004, to educate plan sponsors and service 
providers about their fiduciary responsibilities under ERISA. This 
campaign also includes educational material on understanding fees and 
selecting an auditor.
    EBSA's regional offices also assist in implementing national 
education initiatives and conduct their own outreach to address local 
concerns. The regional offices' benefit advisers provide written and 
telephone responses to participants. Benefit advisers and investigative 
staff also speak at conferences and seminars sponsored by trade and 
professional groups and participate in outreach and educational efforts 
in conjunction with other Federal or State Agencies. At the national 
level, several EBSA offices direct specialized outreach activities. As 
with EBSA's participant-directed outreach activities, its efforts to 
educate plan sponsors and service providers also rely upon Office of 
Enforcement staff and the regional offices for implementation. For 
example, these staff make presentations to employer groups and service 
provider organizations about their ERISA obligations and any new 
requirements under the law, such as reporting and disclosure 
provisions.
    To supplement its investigative programs, EBSA is promoting the 
self-disclosure and self-correction of possible ERISA violations by 
plan officials through its Voluntary Fiduciary Correction Program.\8\ 
The purpose of the VFCP is to protect the financial security of workers 
by encouraging plan officials to identify and correct ERISA violations 
on their own. Specifically, the VFCP allows plan officials to identify 
and correct 18 transactions, such as delinquent participant 
contributions and participant loan repayments to pension plans. Under 
the VFCP, plan officials follow a process whereby they (1) correct the 
violation using EBSA's written guidance; (2) restore any losses or 
profits to the plan; (3) notify participants and beneficiaries of the 
correction; and (4) file a VFCP application, which includes evidence of 
the corrected transaction, with the EBSA regional office in whose 
jurisdiction it resides. If the regional office determines that the 
plan has met the program's terms, it will issue a ``no action'' letter 
to the applicant and will not initiate a civil investigation of the 
violation, which could have resulted in a penalty being assessed 
against the plan.
---------------------------------------------------------------------------
    \8\ In April 2005, the Department of labor published in the Federal 
Register a revised VFCP that according to EBSA, simplified and expanded 
the original program.
---------------------------------------------------------------------------

EBSA Has Taken Steps to Address Weaknesses in Its Enforcement Program, 
                    but Significant Challenges Remain

    EBSA has taken steps to address many of the recommendations we have 
made over a number of years to improve its enforcement program, 
including assessing the level and types of noncompliance with ERISA, 
improving sharing of best investigative practices, and developing a 
human capital strategy to better respond changes in its workforce. EBSA 
reported a significant increase in enforcement results for fiscal year 
2004, including $3.1 billion in total monetary results and closing 
nearly 4,400 investigations, with nearly 70 percent of those cases 
resulting in corrections of ERISA violations. Despite this progress, 
EBSA continues to face a number of significant challenges to its 
enforcement program, including the lack of timely and reliable plan 
information, restrictive statutory requirements that limit its ability 
to assess certain penalties, and the need to better coordinate 
enforcement strategies with the SEC.

EBSA Has Made Progress in Improving Its Enforcement Program

    EBSA has taken a number of steps, including addressing 
recommendations from our prior reports that have improved its 
enforcement efforts across a number of areas. For example, EBSA has 
continued to refine its enforcement strategy to meet changing 
priorities and provided additional flexibility to its regional office 
to target areas of investigations. More recently, EBSA implemented a 
series of recommendations from our 2002 enforcement report that helped 
it strategically manage its enforcement program, including conducting 
studies to determine the level of and type of noncompliance with ERISA 
and developing a Human Capital Strategic Management Plan (see table 
1).\9\
---------------------------------------------------------------------------
    \9\ See GAO, Pension and Welfare Benefits Administration: 
Opportunities Exist for Improving Management of the Enforcement 
Program, GAO-02-232 (Washington, DC: March 15, 2002).

 Table 1: Examples of EBSA's Actions in Response to GAO Recommendations
                   to Improve its Enforcement Program
------------------------------------------------------------------------
                                  GAO recommendation   Examples of EBSA
         GAO observation                to EBSA             Actions
------------------------------------------------------------------------
EBSA had not adequately           Develop a cost-     In fiscal year
 estimated the nature of           effective           2001 conducted
 employee benefit plans'           strategy for        national
 noncompliance with ERISA          assessing the       compliance study
 provisions.                       level and type of   of group health
                                   ERISA               plans' compliance
                                   noncompliance       with new health
                                   among employee      care laws in
                                   benefit plans.      ERISA.
                                                      In 2003 conducted
                                                       compliance study
                                                       focusing on large
                                                       multiemployer
                                                       health plans.
                                                      Currently
                                                       conducting
                                                       baseline study to
                                                       determine the
                                                       level of
                                                       compliance with
                                                       ERISA
                                                       requirements on
                                                       timely
                                                       transmission of
                                                       employee
                                                       contributions to
                                                       pension plans.
EBSA had not routinely analyzed   Conduct regular     Conducted analysis
 the full range of cases           reviews of the      on cases closed
 investigated to determine which   sources of cases    in fiscal years
 sources were the most effective   that lead to        2001, 2002, and
 in terms of detecting and         investigations.     2003.
 correcting violations.                               Agreed to perform
                                                       reviews of the
                                                       sources of cases
                                                       that lead to
                                                       investigations on
                                                       an annual basis
                                                       as long as
                                                       resources permit.
EBSA did not coordinate the       Coordinate the      Established a Best
 sharing of best practices         sharing of best     Practices Sharing
 information among its regions     practices           Team composed of
 regarding case selection and      information among   enforcement staff
 investigative techniques.         regions relating    and regional
                                   to the optimum      representatives.
                                   and most           Developed an
                                   productive          intranet site to
                                   techniques for      allow EBSA
                                   selecting and       investigators to
                                   conducting          share best
                                   investigations.     practices, such
                                                       as investigative
                                                       plans, subpoenas,
                                                       letters, and
                                                       investigative
                                                       guides.
EBSA lacked a centrally           Develop a closed    In fiscal year
 coordinated quality review        case quality        2003, an EBSA
 process to ensure that its        review process      team composed of
 investigations are conducted in   that ensures the    Office of
 accordance with its               independence of     Enforcement and
 investigative procedures..        reviewers and       field managers
                                   sufficiently        developed a
                                   focuses on          closed case
                                   substantive         quality review
                                   technical issues.   program that
                                                       focuses on
                                                       substantive
                                                       technical case
                                                       issues and is
                                                       reported
                                                       centrally. The
                                                       program also
                                                       includes
                                                       procedures to
                                                       ensure the
                                                       independence of
                                                       the case
                                                       reviewer.
Certain requirements, such as     Analyze barriers    EBSA modified key
 notifying plan participants of    to participation    features of the
 potential violations and          in the VFCP and     program
 levying excise taxes on           explore ways to     eliminating
 prohibited transactions, may      reduce them.        notice
 hinder participation in the                           requirements to
 VFCP..                                                participants, and
                                                       provided a
                                                       limited excise
                                                       tax exemption for
                                                       those who
                                                       participate in
                                                       the program.
EBSA gave limited attention to    Conduct a           EBSA conducted an
 human capital management          comprehensive       employee
 despite anticipated workforce     review of its       workforce
 and enforcement workload          future human        analysis and an
 changes. For example, the         capital needs,      employee training
 Agency had not considered         including the       needs assessment.
 succession planning and           size of its         In 2003, EBSA
 workforce retention, which        workforce; the      issued its Human
 could undermine the continuity    skills and          Capital Strategic
 and effectiveness of its          abilities needed;   Management Plan.
 enforcement program..             succession          The plan
                                   planning            identified
                                   challenges; and     strategies that
                                   staff deployment    address current
                                   issues.             and project
                                                       skills shortages,
                                                       anticipated
                                                       future staffing
                                                       needs, competency
                                                       requirements to
                                                       ensure that
                                                       employees possess
                                                       or acquire the
                                                       critical skills
                                                       needed to
                                                       accomplish
                                                       program mission
                                                       and functions,
                                                       and the
                                                       recognition and
                                                       reward of quality
                                                       performance.
------------------------------------------------------------------------
Source: GAO summary and analysis of EBSA documents.

    EBSA has reported a substantial increase in results from its 
enforcement efforts since our last review. For fiscal year 2004, EBSA 
closed 4,399 civil investigations and reported $3.1 billion in total 
results, including $2.53 billion in prohibited transactions corrected 
and plan assets protected, up from $566 million in fiscal year 2002. 
Likewise, the percentage of civil investigations closed with results 
rose from 58 percent to 69 percent. Also, applications received for the 
VFCP increased from 55 in fiscal year 2002 to 474 in 2004. EBSA has 
been able to achieve such results with relatively small recent 
increases in staff. Full-time equivalent (fte) authorized staff levels 
increased from 850 in fiscal year 2001 to 887 ftes in fiscal year 2005. 
The President's budget for fiscal year 2006 requests no additional 
ftes.

Untimely and Incomplete Plan Information Continues to Hinder 
                    Enforcement Efforts

    Previously, we and others have reported that ERISA enforcement was 
hindered by incomplete, inaccurate, and untimely plan data.\10\ We 
recently reported that the lack of timely and complete Form 5500 data 
affects EBSA's use of the information for enforcement purposes, such as 
computer targeting and identifying troubled plans.\11\ EBSA uses Form 
5500 information as a compliance tool to identify actual and potential 
violations of ERISA. Although EBSA has access to Form 5500 information 
sooner than the general public, the Agency is affected by the statutory 
filing deadlines, which can be up to 285 days after plan year end, and 
long processing times for paper filings submitted to the ERISA Filing 
Acceptance System. EBSA receives processed Form 5500 information on 
individual filings on a regular basis once a form is completely 
processed. However, Agency officials told us that as they still have to 
wait for a sufficiently complete universe of plan filings from any 
given plan year to be processed in order to begin their compliance 
targeting programs. As a result, EBSA officials told us that they are 
currently using plan year 2002 and 2003 Form 5500 information for 
computer targeting. They also said that in some cases untimely Form 
5500 information affects their ability to identify financially troubled 
plans whose sponsors may be on the verge of going out of business and 
abandoning their pension plans, because these plans may no longer exist 
by the time that Labor receives the processed filing or is able to 
determine that no Form 5500 was filed by those sponsors.
---------------------------------------------------------------------------
    \10\ See, GAO, Employee Benefit Plans: Efforts to Streamline 
Reporting Requirements and Improve Processing of Annual Plan Data, GAO/
HEHS-98-45R (Washington, DC: Nov. 14, 1997).
    \11\ See GAO, Private Pensions: Government Actions Could Improve 
the Timeliness and Content of Form 5500 Pension Information, GAO-05-491 
(Washington, DC: June 3, 2005).
---------------------------------------------------------------------------
    The Form 5500 also lacks key information that could better assist 
EBSA, IRS, and PBGC in monitoring plans and ensuring that they are in 
compliance with ERISA. EBSA, IRS and PBGC officials said that they have 
experienced difficulties when relying on Form 5500 information to 
identify and track all plans across years. Although EBSA has a process 
in place to identify and track plans filing a Form 5500 from year to 
year, problems still arise when plans change employer identification 
numbers (EIN) and/or plan numbers. Identifying plans is further 
complicated when plan sponsors are acquired, sold, or merged. In these 
cases, Agency officials said that there is an increased possibility of 
mismatching of EINs, plans, and their identifying information. As a 
result, EBSA officials said they are unable to (1) verify if all 
required employers are meeting the statutory requirement to file a Form 
5500 annually, (2) identity all late filers, and (3) assess and collect 
penalties from all plans that fail to file or are late. Likewise, PBGC 
officials said that they must spend additional time each year trying to 
identify and track certain defined benefit plans so that they can 
conduct compliance and research activities. EBSA officials said they 
are considering measures to better track and identify plans but have 
not reached any conclusions. Our recent report makes a number of 
recommendations aimed at improving the timeliness and content of Form 
5500 that will likely assist EBSA's enforcement efforts.\12\
---------------------------------------------------------------------------
    \12\ See GAO-05-491.
---------------------------------------------------------------------------
    In addition to problems with Form 5500 information, concerns remain 
about the quality of annual audits of plans' financial statements by 
independent public accountants. For many years, we, as well as the 
Department of Labor's Office of Inspector General (OIG), have reported 
that a significant number of these audits have not met ERISA 
requirements. For example, in 1992 we found that over a third of the 25 
plan audits we reviewed had audit weaknesses so serious that their 
reliability and usefulness were questionable. We recommended that the 
Congress amend ERISA to require full-scope audits of employee benefit 
plans and to require plan administrators and independent public 
accountants to report on how effective an employee benefit plan's 
internal controls are in protecting plan assets.\13\ Although such 
changes were subsequently proposed, they were not enacted. In 2004, 
Labor's OIG reported that although EBSA had reviewed a significant 
number of employee benefit plan audits and made efforts to correct 
substandard audits, a significant number of substandard audits remain 
uncorrected. Furthermore, plan auditors performing substandard work 
generally continue to audit employee benefit plans without being 
required to improve the quality of the audits.\14\ As a result, these 
audits have not provided participants and beneficiaries the protections 
envisioned by Congress. Labor's OIG recommended, among other things, 
that EBSA propose changes to ERISA so that EBSA has greater enforcement 
authority over employee benefit plan auditors.
---------------------------------------------------------------------------
    \13\ Under ERISA, investments held by certain regulated 
institutions, such as banks and insurance companies, may be excluded 
from the scope of a plan audit The resulting lack of audit work can 
result in an auditor disclaiming an opinion on the plan's financial 
statements. See GAO, Employee Benefits: Improved Plan Reporting and CPA 
Audits Can Increase Protection under ERISA, GAO/AFMD-92-l4 (Washington, 
D.C.: April 9, 1992) and Employee Benefits: Limited Scope Audit 
Exemption Should Be Repealed, GAO/T-AIMD-98-75 (Washington, D.C.: 
February 12, 1998).
    \14\ See U.S. Department of Labor Office of Inspector General--
Office of Audit, EBSA Needs Additional Authority to Improve the Quality 
of Employee Benefit Plan Audits. (Washington, D.C.: Sept. 30, 2004).
---------------------------------------------------------------------------

Restrictive Statutory Requirements Limit Assessment of Fiduciary 
                    Penalties

    As we have previously reported, restrictive legal requirements have 
limited EBSA's ability to assess penalties against fiduciaries or other 
persons who knowingly participate in a fiduciary breach.\15\ Unlike the 
SEC, which has the authority to impose a penalty without first 
assessing and then securing monetary damages, EBSA does not have such 
statutory authority and must assess penalties based on damages or, more 
specifically, the restoration of plan assets.\16\ Under Section 502(1), 
ERISA provides for a mandatory penalty against (1) a fiduciary who 
breaches a fiduciary duty under, or commits a violation of, Part 4 of 
Title I of ERISA or (2) against any other person who knowingly 
participates in such a breach or violation. This penalty is equal to 20 
percent of the ``applicable recovery amount,'' or any settlement agreed 
upon by the Secretary or ordered by a court to be paid in a judicial 
proceeding instituted by the Secretary. However, the applicable 
recovery amount cannot be determined if damages have not been valued. 
This penalty can be assessed only against fiduciaries or knowing 
participants in a breach who, by court order or settlement agreement, 
restore plan assets. Therefore, if (1) there is no settlement agreement 
or court order or (2) someone other than a fiduciary or knowing 
participant returns plan assets, the penalty may not be assessed. For 
example, last year we reported that ERISA presented legal challenges 
when developing cases related to proxy voting by plan fiduciaries, 
particularly with regards to valuing monetary damages.\17\ As a result, 
because EBSA has never found a violation that resulted in monetary 
damages, it has never assessed a penalty or removed a fiduciary because 
of a proxy voting investigation. Given the restrictive legal 
requirements that have limited the use of penalties for violations of 
ERISA's fiduciary requirements, we recommended that Congress consider 
amending ERISA to give the Secretary of Labor additional authority with 
respect to assessing monetary penalties against fiduciaries. We also 
recommended other changes to ERISA to better protect plan participants 
and increase the transparency of proxy voting practices by plan 
fiduciaries.
---------------------------------------------------------------------------
    \15\ See GAO/HEHS-94-157.
    \16\ EBSA can also seek removal of a fiduciary for breaches of 
fiduciary duty or seek other sanctions.
    \17\ See GAO, Pension Plans: Additional Transparency and Other 
Actions Needed in Connection with Proxy Voting, GAO-04-749 (Washington, 
D.C.: August 10, 2004).
---------------------------------------------------------------------------

Recent Scandals Highlight the Need for Better Coordination With SEC

    Recent events such as the abusive trading practices of late trading 
and market timing in mutual funds and new revelations of conflicts of 
interest by pension consultants highlight the need for EBSA to better 
coordinate enforcement strategies with SEC. Last year we reported that 
SEC and EBSA had separately taken steps to address abusive trading 
practices in mutual funds.\18\ At the time we issued our report, SEC 
had taken a number of actions to address the abuses including:
---------------------------------------------------------------------------
    \18\ See GAO, Mutual Funds: SEC Should Modify Proposed Regulations 
to Address Some Pension Plan Concerns, GAO-04-799 (Washington, D.C.: 
July 9, 2004).

     charging some fund companies with defrauding investors by 
not enforcing their stated policies on market timing,
     fining some institutions hundreds of millions of dollars 
(some of this money was to be returned to long-term shareholders who 
lost money due to abusive practices),
     permanently barring some individuals from future work with 
investment companies, and
     proposing new regulations addressing late trading and 
market timing.
    Separate from SEC activities, EBSA began investigating possible 
fiduciary violations at some large investment companies, including 
those that sponsor mutual funds, and violations by plan fiduciaries. 
EBSA also issued guidance suggesting that plan fiduciaries review their 
relationships with mutual funds and other investment companies to 
ensure they are meeting their responsibilities of acting reasonably, 
prudently, and solely in the interest of plan participants. Although 
SEC's proposed regulations on late trading and market timing could have 
more adversely affected some plan participants than other mutual fund 
investors, EBSA was not involved in drafting the regulations because it 
does not regulate mutual funds.
    In another example of how EBSA and SEC enforcement responsibilities 
can intersect, SEC recently found that potential conflicts of interest 
may affect the objectivity of advice pension consultants are providing 
to their pension plan clients.\19\ The report also raised important 
issues for plan fiduciaries who often rely on the advice of pension 
consultants in operating their plans. Recently, EBSA and SEC issued 
tips to help plan fiduciaries evaluate the objectivity of advice and 
recommendations provided by pension consultants.
---------------------------------------------------------------------------
    \19\ See SEC, Staff Report Concerning Examinations of Select 
Pension Consultants, The Office of Compliance Inspections and 
Examinations (Washington, D.C.: May 16, 2005).
---------------------------------------------------------------------------

Concluding Observations

    Americans face numerous challenges to securing their economic 
security in retirement, including the long-term fiscal challenges 
facing Social Security; the uncertainty of promised pension benefits; 
and the potential volatility of the investments held in their defined 
contributions plans. Given these concerns, it is important that 
employees' benefits are adequately protected. EBSA is a relatively 
small Agency facing the daunting challenge of protecting over $4 
trillion in assets of pension and welfare benefits for millions of 
Americans. Over the years, EBSA has taken steps to strengthen its 
enforcement program and leverage its limited resources. These actions 
have helped better position EBSA to more effectively enforce ERISA.
    EBSA, however, continues to face a number of significant challenges 
to its enforcement program. Foremost, despite improvements in the 
timeliness and content of the Form 5500, information currently 
collected does not permit EBSA and the other ERISA regulatory agencies 
to be in the best position to ensure compliance with Federal laws and 
assess the financial condition of private pension plans. Given the 
ever-changing complexities of employee benefit plans and how rapidly 
the financial condition of pension plans can deteriorate, it is 
imperative that policymakers, regulators, plan participants, and others 
have more timely and accurate Form 5500 information. In addition, there 
is a legitimate question as to whether information currently collected 
on the Form 5500 can be used as an effective enforcement tool by EBSA 
or whether different information might be needed. Without the right 
information on plans in a timely manner, EBSA will continue to have to 
rely on participant complaints as a primary source of investigations 
rather than being able to proactively identify and target problem 
areas. Second, in some instances, EBSA's enforcement efforts continue 
to be hindered by ERISA, the very law it is charged with enforcing. For 
example, because of restrictive legal requirements, EBSA continues to 
be hindered in assessing penalties against fiduciaries or others who 
knowingly participate in a fiduciary breach. Congress may want to amend 
ERISA to address such limits on EBSA's enforcement authority. Finally, 
the significant changes that have occurred in pension plans, the 
growing complexity of financial transactions of such plans, and the 
increasing role of mutual funds and other investment vehicles in 
retirement savings plans require enhanced coordination of enforcement 
efforts with SEC. Furthermore, such changes raise the fundamental 
question of whether Congress should modify the current ERISA 
enforcement framework. For example, it is important to consider whether 
the current division of oversight responsibilities across several 
agencies is the best way to ensure effective enforcement or whether 
some type of consolidation or reallocation of responsibilities and 
resources could result in more effective and efficient ERISA 
enforcement. We look forward to working with Congress on such crucial 
issues.
    Mr. Chairman, this concludes my statement. I would be happy to 
respond to any questions you or other members of the committee may 
have.

Contact and Acknowledgments

    For further information, please contact me at (202) 512-7215. Other 
individuals making key contributions to this testimony included Joseph 
Applebaum, Kimberley Granger, Raun Lazier, George Scott, and Roger 
Thomas.

    The Chairman. I appreciate the testimony by both of you. I 
am just guessing, but I suspect that I am the only person in 
Congress that has actually filled out Form 5500 and been 
audited on them.
    Ms. Bovbjerg. You likely are.
    [Laughter.]
    The Chairman. One of my pet peeves on it always was that 
both pensions and health benefits use the same form, and the 
questions do not apply to both. So I asked why there was the 
same Form 5500 for two such different functions and I was told 
it was the fault of the Paperwork Reduction Act. To do two 
forms would penalize the agency. Pretty poor excuse, I think.
    But at any rate, there are some problems and we need to 
know how to find the answers to those problems a little bit 
earlier. Mr. Lebowitz, can you elaborate on some of the 
hardships and difficulties that members faced when they found 
out their retirement savings had been lost?
    Mr. Lebowitz. In the CCL--in connection with----
    The Chairman. Yes, in CCL. We are going to confine it to 
that.
    Mr. Lebowitz. Well, it varied dramatically from plan to 
plan. There were, as I said in my testimony, dozens of plans 
that had invested some of its assets with CCL and some of these 
plans invested a rather significant proportion of their assets, 
one, if I am not mistaken, as much as 70 percent of its assets.
    So for those plans, the consequence of CCL's collapse was 
catastrophic. Others had invested smaller amounts, but 
something in the order of the low 20s, plans had invested 10 
percent or more of their total assets in these collateralized 
notes through CCL. Some of these were health plans. Some of 
them were 401(k) plans, where the losses directly translated to 
losses to participants. And others were traditional defined 
benefit plans where ultimately the employers contributing to 
the plans had to make up those losses.
    The Chairman. Over the past several years, EBSA has stepped 
in many times to protect plan participants against these 
effects of corporate fraud, but EBSA subjected Capital 
Consultants to intense scrutiny for several years without 
spotting these Ponzi-like schemes. When the SEC got involved, 
they spotted the fraud in a few weeks and took action to close 
Capital Consultants. Why didn't EBSA spot the Capital 
Consultants' fraud sooner?
    Mr. Lebowitz. Well, the Ponzi scheme really developed 
rather late in the process. As I said in my oral testimony, our 
investigation opened in October of 1997 and the scheme that is 
described on the chart over there was really something that 
came about in 1999 and 2000, after the collapse of Wilshire 
Financial and its consequent effect on CCL.
    When we--in the middle of 2000, sometime in June of 2000, I 
believe, we began to communicate with the SEC about what we had 
found. They were interested in knowing what we knew and we were 
certainly interested in bringing them into it. So we made 
available to the Commission our entire investigative record.
    Now, as far as I know, up to that point, they had not 
undertaken any formal investigation. So everything they knew 
about CCL which formed the basis for their ability to bring the 
action that they and we brought in September was based on our 
investigation.
    So I think that, in fairness, one needs to look back and 
see that the Commission was able to take advantage of all the 
work that our investigators had done in putting the case 
together over the 2 or 3 years prior to their becoming involved 
in it. Then, of course, they moved very quickly and were very 
effective in what they did.
    The Chairman. For either of you, since they had to do Form 
5500s on this and the Form 5500s, if you have more than 100 
employees, have to be audited, why didn't the accounting firm 
that did the auditing find some of this?
    Mr. Lebowitz. That is a question we have asked many times, 
many auditors. CCL, of course, is itself not a plan. It was an 
investment advisor, investment manager that held plan assets, 
and as such, it is a plan fiduciary and, therefore, subject to 
ERISA's rules. The 5500s are filed by the individual plans that 
invested in CCL, the 60 or so that I described earlier. It is 
those plans' auditors who have a responsibility under ERISA's 
audit rules to opine on the fairness of the financial 
statements that are prepared by the plan administrator.
    We looked--our Chief Accountant's Office looked very 
closely at the 20 plans that had invested material amounts, 10 
percent or more of their assets, in CCL over a period of years, 
and what we found was, unfortunately, not surprising based on 
our history of reviewing the quality of ERISA audits over the 
years. So what we found was that, for the most part, plan 
auditors were more than willing to just accept the valuations 
that CCL and its service providers, its auditors and 
evaluators, attached to these assets and rarely raised any 
question about it.
    There were a couple of instances where the auditors did 
raise questions, and a couple of instances where plan 
investment advisors made very strong comments to their clients 
about their concerns about CCL investments, and those plans 
were able to get out without any harm. So it was capable of 
being detected by careful auditing and by careful review, but 
for the most part, plans' auditors failed in their 
responsibility to do that.
    The Chairman. My time has expired in the first round, so I 
will go to Senator Bingaman.
    Senator Bingaman. Thank you very much. Thanks for having 
this hearing, Mr. Chairman. I think you are uniquely qualified 
to be helping Congress do some oversight on this important 
issue.
    From the little I know about this--I don't claim any great 
expertise--it sounds to me like the Department of Labor is 
really not geared up to do effective monitoring or enforcement 
in this area. I read the report from GAO and they say that we 
are using plan year 2002 and 2003 plan information in your 
computer targeting, and you lack timely and reliable plan 
information. Is that an accurate criticism, as you understand 
it, Mr. Lebowitz?
    Mr. Lebowitz. It is accurate. The Form 5500, as Ms. 
Bovbjerg said in her testimony, the Form 5500 does not have to 
be filed until seven-and-a-half months after the close of the 
plan year to which it applies. And then there is obviously a 
period of time for review and processing. There is an enormous 
amount of paper. There are about 1.4 million 5500 series 
returns that are filed with us. It is a joint form that 
contains information for us, the Internal Revenue Service, and 
the Pension Benefit Guaranty Corporation. As the chairman 
noted, it is a very complex form. It is very difficult, very 
technical. And then there is information that comes--that has 
to be presented on the form but comes from other parties, from 
the plan's auditors, from the plan's actuaries, all of which 
adds to the time and to the complexity of it.
    And our system for receiving and processing these 1.4 
million forms which contain somewhere on the order of 25 or 30 
million pages is one that is rapidly coming to the end of its 
life. We have been spending a good bit of time developing 
approaches that would streamline that process, take advantage 
of modern technologies, and move us away from this enormous 
amount of paper which is----
    Senator Bingaman. Is there a plan to do that, to 
essentially change this system and come up with a new 
streamlined, more timely system?
    Mr. Lebowitz. There are a variety of options that are being 
considered now----
    Senator Bingaman. But there is nothing proposed yet?
    Mr. Lebowitz. There is nothing that the Department has 
proposed at this point, that is right.
    Ms. Bovbjerg. We have made recommendations that they move 
to an electronic filing system.
    Senator Bingaman. Right.
    Ms. Bovbjerg. It seems absolutely essential to speed things 
up in the processing side and to have better access to the 
information. But the deadline for getting the information in 
and the 285 days is statutory.
    I know that one of the things that we certainly talked 
about is whether, if you were going to alter that statutory 
deadline, whether it would be appropriate to treat everyone the 
same, which it probably is not, or whether you would try to 
look at a shorter deadline for riskier plans.
    Senator Bingaman. Getting to this issue of riskier plans, 
does the Department of Labor currently have open investigations 
going against investment advisors? This was a case where you 
had about a half-billion dollars in fraud that was perpetrated 
by this Capital Consultants group, as I understand it. Does the 
Department of Labor have other cases like that that are 
currently being investigated that are coming to a head, or what 
is the status?
    Mr. Lebowitz. We have--over the years, we have had 
investigations, or undertaken investigations of financial 
services companies that provide investment management and other 
fiduciary services to plans and have found violations of 
various sorts. I don't know that we found anything quite like 
what we ultimately found in the CCL matter, but review of 
investment managers is a part of our enforcement program.
    Senator Bingaman. But you do have cases currently under 
investigation of investment advisors?
    Mr. Lebowitz. Yes. Yes, we do.
    Senator Bingaman. OK. There is a suggestion in here, in the 
GAO report, that there is a need for the restrictive statutory 
requirements that limit the ability of the Department of Labor 
to assess certain penalties. Are you of the view that we should 
stiffen those penalties or change those statutory provisions? 
Mr. Lebowitz, is this something that you considered asking 
Congress to do, or do you request that we do this, or----
    Mr. Lebowitz. At this point, there is no--the Department 
has not made a request of that sort with regard to ERISA's 
penalties. There are a variety of penalties, civil money 
penalties, in the statute now, most of which relate to late 
filing and matters that--documents that have to be made 
available to the Department. And then there is a civil penalty 
under Section 502(l) of ERISA, which is sort of an add-on to 
amounts that are recovered in the course of litigation or in 
settlement agreements.
    The SEC, for example, has some additional penalties that it 
uses rather effectively in the course of undertaking its 
investigations. There are other models to look at, but we have 
not made any formal request at this point.
    Senator Bingaman. My time is up, Mr. Chairman. Go ahead.
    The Chairman. Thank you. To return to the question I was 
asking earlier, Mr. Lebowitz, the commercial bank regulators 
visit every bank regularly to make sure it is being managed in 
a safe and sound manner. By contrast, EBSA has, I thought it 
was about 400 investigators, I think you said 867, to 
investigate 700,000 private pension plans and 6 million health 
and welfare plans. That is almost 17,000 plans per 
investigator. How do you proactively target the troubled plans 
to investigate?
    Mr. Lebowitz. Well, it is a challenge, Mr. Chairman. Just 
to clarify the number, our total staff for the entire agency, 
authorized staff, is 887 FTE, and our investigative staff is 
470.
    At that level, we obviously have to be very careful and 
very analytical in terms of the cases that we select for 
targeting. We use a variety of sources. We traditionally have 
not done random reviews of plans or of service providers, but 
rather have opened cases based on indicators from the annual 
report, from complaints filed by participants, from referrals 
from other agencies, and we have--we measure our performance, 
or GIPRA goal, our principal GIPRA goal in the enforcement area 
is one that measures how well we do at targeting. It basically 
looks to see what proportion of the cases that we open actually 
end up finding violations and correcting those violations. The 
percentage--and that is how we define success in terms of our 
Agency's performance objectives.
    It is a process that involves very careful analysis of the 
information that comes to us and we have been improving that 
percentage every year. But it is a challenge to make sure that 
we are--that we have a presence across the board, not just in 
one segment of this very large plan universe and service 
provider universe, but that we are seen as being involved in 
investigations in connection with small plans, large plans, and 
service providers of various sorts, as well as geographically.
    Ms. Bovbjerg. If I could break in for a minute----
    The Chairman. Sure.
    Ms. Bovbjerg. We had recommended that EBSA do a little 
compliance survey of a sample of plans that would be 
projectable so you would have some sense of what really are the 
problems out there. This is something that the IRS has done 
with pension plans for their responsibilities under the IRC to 
review funding, investing, and some of those elements of 
pension plans. They pulled the sample and audited the plans. 
This is a way to really know where the compliance problems are 
out there, a projectable way, and another way that you could 
target resources.
    I think that EBSA has done some of these things in sort of 
different pieces of their plan responsibilities, but I think a 
more comprehensive look at it would be warranted.
    The Chairman. OK. I also have--it is a little more into 
some technical things on what that percentage of success is and 
how it is determined that we will follow up on in writing.
    Ms. Bovbjerg, for 20 years, GAO has consistently 
recommended stronger enforcement of ERISA by the Department of 
Labor. In your assessment, does the Department of Labor have 
the latitude to strengthen its enforcement strategies or is 
legislative action needed to empower that kind of change?
    Ms. Bovbjerg. Some of both. I think the Department has been 
responsive to many of our recommendations for manager changes 
of enforcement and I applaud them for that. I think there is 
still more to be done. Some of it would be legislative, and one 
of the points about penalties, you can't assess penalties 
against fiduciaries for violation of fiduciary duty unless you 
have an estimate of monetary damage. If it is a proxy voting 
issue, you may not ever be able to estimate monetary damage. So 
they can't assess a penalty. That is statutory. That would 
require a change to the law.
    There are a number of legal changes that we have 
recommended over the years to ERISA, both to strengthen the law 
and to provide additional tools for EBSA to use. I think that 
they have made a lot of progress in this area, but we are 
particularly concerned about targeting. We think that they need 
to be more proactive and less reactive to complaints. Certainly 
following up on complaints is important, but it should not be 
the primary approach.
    The Chairman. Thank you. My time has expired again.
    Senator Bingaman?
    Senator Bingaman. Thank you, Mr. Chairman. I will ask a 
couple more questions, if I could here.
    The Securities and Exchange Commission has come out with 
this study which has been referred to a few times, I think, and 
as I understand it, they have basically concluded that after 
their review of some of these investment advisors, registered 
investment advisors, they have concluded that maybe half of 
them or more have some kind of a conflict, I mean, that they 
basically have a financial deal with some financial company 
that they are then recommending to their clients they invest in 
these firms.
    Is this something that--what is the Department of Labor 
doing about that? First, do you agree with their conclusion? Do 
you think they are right? This sounds like something that would 
violate ERISA. Am I wrong about that?
    Mr. Lebowitz. It could, and we consulted with the 
Commission staff over the course of the period during which 
they did that study, and shortly afterwards, we jointly issued 
guidance for plan fiduciaries to follow----
    Senator Bingaman. Yes, but what if they don't?
    Mr. Lebowitz. I think it is probably useful to take a half-
step back here and think about what the Commission said. The 
Commission is the regulator of investment advisors under 
various securities laws. We don't regulate investment advisors, 
per se. We regulate plan fiduciaries. So the first part of any 
investigation that we do----
    Senator Bingaman. What is that distinction again, now? I 
thought investment advisors had some kind of a fiduciary 
responsibility. Do they not?
    Mr. Lebowitz. They do under the securities laws. They are, 
as I understand it, they are considered to be fiduciaries for 
purposes of the Investment Advisors Act. But the ERISA 
definition of fiduciary is more of a functional thing. It 
doesn't really matter what you are called. It matters what you 
do. So an investigation by us to determine whether a fiduciary 
has violated ERISA first has to determine whether the party is 
a fiduciary, which means going in and looking very carefully at 
the kinds of services that that entity is providing and 
determine whether it fits under ERISA's rather technical 
definition of fiduciary, meaning do they have discretion and 
control over plan administration or management. That is what we 
have to find.
    In the Commission's case, the investment advisor is, by 
virtue of filing a Form ADV, it is--and registering--it is a 
fiduciary with respect to----
    Senator Bingaman. So are you saying that the SEC, by virtue 
of their authority, is better positioned to deal with this 
problem of conflict of interest on the part of investment 
advisors than you are?
    Mr. Lebowitz. They are certainly--I would think--I would 
agree that they are in a better position to deal with the issue 
of these kinds of conflicts by investment advisors whom they 
regulate. Now, their concern is whether the potential conflicts 
or the actual conflicts that they found were adequately 
disclosed. Adequate disclosure may or may not be enough under 
ERISA if there are real--if there is real self-dealing going 
on. It doesn't necessarily cure the ERISA problem. It might 
cure the securities law problem.
    Senator Bingaman. Well, it would seem to me that it would 
be worthwhile for us to have a clear definition of the 
responsibility to ensure that not only that disclosure occur, 
but that conflict of interest or self-dealing kinds of 
arrangements be prohibited, and you are basically saying that 
you are unable to do that because of your limited authority. 
SEC is unable to do that because they are really more 
interested in disclosure than they are with the problem of 
self-dealing. So are you saying there is a gap in there? There 
is no one whose job it is to prevent this self-dealing from 
occurring?
    Mr. Lebowitz. No, and I certainly wouldn't want to speak 
for the Commission and can't speak for the Commission in terms 
of what they are interested in. But the nature of this study 
that they did focused on whether these potential conflicts were 
adequately disclosed to the plan clients of these investment 
advisors.
    I don't know that there is a gap necessarily, Senator, but 
it is a complex area and it highlights the fact that while we 
operate in the same general area as the SEC, we have a 
different law and the people who are subject to our law are not 
necessarily the same ones or subject in the same way that they 
are to the securities laws, and it is difficult sometimes to 
parse through all of that to make sure that everything that 
should be covered is covered.
    Ms. Bovbjerg. Could I jump in 1 second?
    Senator Bingaman. Yes, please. Go ahead.
    Ms. Bovbjerg. I think that from what I understand of the 
back and forth, these investment advisors could be fiduciaries 
under ERISA. We don't know. And if the SEC has pulled a sample, 
which is what I understand they did, and they found that about 
half of them had conflicts, it bears looking at. It bears 
looking at----
    Senator Bingaman. Bears looking at by whom?
    Ms. Bovbjerg. From the two agencies together. This is one 
of those areas where we really think that they need to continue 
to try to have a more collaborative enforcement process.
    Senator Bingaman. So you are saying that if this survey by 
the SEC turned out half of 1,700 people they surveyed, 1,700 
investment advisors that they surveyed have conflicts, you are 
saying the Department of Labor ought to get the information 
from the SEC as to which investment advisors they believe have 
conflicts and run that to ground?
    Ms. Bovbjerg. What I think I--the question it makes me ask 
is, well, how many--might some of these investment advisors be 
fiduciaries under ERISA, and as an analyst, I would want to 
pull a representative sample and just take a look at a few of 
them to see what the incidence might be. Maybe none of them 
are, but we don't know.
    Mr. Lebowitz. If I might just clarify a couple of the 
numbers here, as I understand it, there are 1,700 registered 
investment advisors who indicate that they provide pension 
consulting services. That is the total number. And the 
Commission looked at something on the order of 25 of them, I 
think. They did not look at all 1,700.
    Senator Bingaman. I see.
    Mr. Lebowitz. And they have provided us with the 
information that we have asked for with regard to the identity 
some of the advisors that they looked at where they found 
problems.
    Senator Bingaman. And are you taking action with regard to 
those?
    Mr. Lebowitz. We will certainly look very carefully at what 
they give us.
    Senator Bingaman. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Ms. Bovbjerg, in the past, GAO reports have highlighted 
some confusion over the ability of individual States to 
regulate the employer-based health plans. Given the existing 
ERISA framework, what more can individual States do to help 
combat pension fraud? What role can States play?
    Ms. Bovbjerg. We did that work a really long time ago and I 
am concerned that things have changed substantially since then 
with regard to health plans and with regard to Labor's 
responsibility for health plans under HEPA that I am really 
afraid to go there. We could get back to you for the record, 
though.
    The Chairman. I will submit a written question to you on 
that, then, so that we can do that.
    Mr. Lebowitz, the sophisticated financial instruments today 
can provide high rates of return, but usually that means high 
rates of risk, as well, and as we found in this situation, they 
can also mask fraud, as in Enron, Capital Consultants, some of 
the other corporate scandals. Now, the riskiest transactions 
were hard for investigators and regulators to spot. They were 
footnoted or otherwise obscured. How are your investigators 
trained to recognize the suspicious financial activity? Is that 
where some of the targeting comes in?
    Mr. Lebowitz. I might just note that many of these frauds 
were not detected by lots of people in the financial markets, 
not just government agencies, but other investors, very large, 
sophisticated financial institutions themselves were fooled by 
them. So they are very difficult to find.
    Our investigators are very determined and very highly 
skilled people. They work methodically, as the investigative 
team that worked on the CCL case did, to go through the 
elements of the proof that are necessary to develop an ERISA 
case, which, as I said, starts with the notion of whether--the 
idea of whether the entity is a fiduciary under ERISA, then to 
determine whether what that entity did constituted a breach of 
their fiduciary responsibilities, and then to determine whether 
that breach actually caused any losses.
    It is a complicated and difficult process. I have great 
confidence in our investigators. I think they are very 
dedicated, highly skilled people, and work very hard at what 
they do and very determined to get to the bottom of things. 
Sometimes, just by the nature of what they are looking at, it 
takes a long time.
    The Chairman. I appreciate all the responses. I do have a 
few questions that get into more technical detail of numbers 
and things, which I really enjoy, but I won't subject everybody 
to those.
    Senator Kennedy was called to the Judiciary Committee over 
a nominee, so he won't be here for questions on this, but for 
all members of the committee, we leave the record open for 10 
days so that they can submit questions immediately, not 10 days 
from now, and then we can get a response from you that will be 
a part of building this record.
    Of course, what we really need to know is what sorts of 
legislative things can be done to make a change, make things 
easier for the investigators, but still fair for everybody 
involved and not overburden people with paperwork. I will be 
concentrating on the Form 5500 a little bit, but I have been 
doing that for 8 years and it hasn't done any good, so----
    Mr. Lebowitz. Well, we have a booklet called ``A 
Troubleshooter's Guide to the 5500.'' We will be happy to send 
you one, Senator.
    The Chairman. I used to subscribe to a special service that 
put out a notebook that was about that thick that helped me to 
determine what each line meant, regardless of what it said.
    [Laughter.]
    Ms. Bovbjerg. We encourage you to submit it electronically.
    The Chairman. Electronically might help. It would help if 
the instructions were embedded in the electronic work so that a 
person didn't have to have a number of references to go to 
and--actually, it would really help again if they divided it so 
that health was different than pensions, which are completely 
different animals, in my opinion, and the questions never 
applied, which is why you had to have the huge manual to 
understand what the question meant. So it might be time to redo 
it so that there are two forms, but that they are easier to 
fill out.
    Of course, I once suggested to the IRS that if they put a 
little bit more instruction in their forms, that it would be 
easier to fill out, as well, and that is where I learned about 
the Paperwork Reduction Act. They can add to the manual as much 
as they want without being penalized, but to add to the form 
has a pretty strong Congressional penalty. So we will see if we 
can't get a few more accountants so we can help people to 
understand that.
    Thank you very much for your testimony today and we will 
move to the second panel. I would appreciate it if the two of 
you would listen to the testimony in the second panel, which 
may give some insight to the questions that we will be asking 
based on their testimony, asking of you based on their 
testimony.
    As is traditional, while they are getting settled, I will 
introduce the panel and then we will call on them individually 
to give their statements.
    The first witness on the second panel is Mr. John Endicott 
from Oregon. He is the Business Manager and Financial Secretary 
of Local 290 of the Plumbers, Steamfitters and Marine Fitters 
Union.
    The next witness will be Mr. Barclay Grayson from Portland, 
Oregon, and served as the former Vice President and CEO of 
Capital Consultants before operations were closed.
    The next witness is the attorney Stephen English with the 
law firm of Bullivant Houser Bailey in Portland, Oregon, and 
Mr. English served as the lead attorney for the successful 
recovery effort.
    And the final witness is attorney James S. Ray from the Law 
Offices of James S. Ray in Alexandria, Virginia.
    We appreciate your taking the time from your busy schedules 
to provide us with some information. Again, your complete text 
will be a part of the record. You will also have a chance to 
expand on that after the hearing if you wish to do that. We 
just appreciate any information you can give that will make 
sure that our pension is intact.
    Mr. Endicott?

  STATEMENTS OF JOHN ENDICOTT, BUSINESS MANAGER AND TRUSTEE, 
  LOCAL UNION 290, PLUMBERS, STEAMFITTERS AND MARINE FITTERS, 
   TUALATIN, OREGON; BARCLAY GRAYSON, FORMER CHIEF EXECUTIVE 
  OFFICER, CAPITAL CONSULTANTS, PORTLAND, OREGON; STEPHEN F. 
 ENGLISH, BULLIVANT HOUSER BAILEY, PORTLAND, OREGON; AND JAMES 
   S. RAY, LAW OFFICES OF JAMES S. RAY, ALEXANDRIA, VIRGINIA

    Mr. Grayson. Chairman Enzi, first, I would like to thank 
you very much for the opportunity to come and share with you 
the stories of the hard-working members of Plumbers and Pipe 
Fitters Local 290.
    My name is John Endicott. I am from Gresham, Oregon. I have 
been a steamfitter for over 30 years and have been a member of 
the United Association Local 290 Plumber and Steamfitter and 
Marine Fitter Union since 1972. I am the Business Manager of UA 
Local 290, which is located in Tualatin, Oregon. I have been a 
union trustee since March 2002, and I currently serve as 
Secretary of the UA Local 290 pension plan and trust 401(k) 
plan, health and welfare plan, pre-funded retiree health trust, 
educational reimbursement trust, Local 290 training trust, and 
the Local 290 scholarship trust, among other local trust funds.
    In my current position as Business Manager, I represent 
approximately 4,300 steamfitters and plumbers. Virtually all of 
the membership participates in one or more of the trusts. Most 
of those members have families who are also beneficiaries of 
the trusts. In the aggregate, our trusts administer pension, 
health and welfare, and other benefits for over 22,000 
participants and beneficiaries, recognizing there is a 
substantial overlap where members and their families 
participate in one or more of the trusts.
    A census of the membership in 2004 shows that members of my 
local and participants and beneficiaries of my local's trust 
live in 30 of the 50 States in this country, including Alabama, 
Georgia, Wyoming, Iowa, Maryland, Nevada, New Mexico, North 
Carolina, and Washington. The majority of our active members 
live and work in Oregon, Washington, and Northern California.
    I want to tell you about the serious impact that the 
collapse of Capital Consultants had on me and my fellow union 
members and the debacle that we faced when we first heard that 
much of our hard-earned pension, health, and other benefits had 
been stolen, misappropriated, or lost through reckless and 
fraudulent schemes concocted by corrupt money managers we had 
entrusted to handle our funds.
    In addition, Mr. Chairman, I want to mention some things I 
think the Federal Government needs to do in order to protect 
workers' pensions and benefit trust funds. This is money that 
our members have spent a lifetime accumulating and need to 
depend upon to pay for their retirement, medical, and other 
benefits in sickness and old age.
    Mr. Chairman, the members of my local are all hard-working 
men and women. Many of us have labored for decades with our 
hands and our backs. We know a lot about plumbing and 
pipefitting. When it comes to investing our trust fund assets, 
we turn to professionals to give us advice. We rely on 
investment managers, pension consultants, lawyers, accountants, 
and insurance agents when it comes to the decisions about 
investments in stock funds, real estate, trusts, hedge funds, 
or collateralized notes. To help us make the kinds of prudent 
decisions we need to be making with our members' money, 
trustees like me depend upon the advice of those professionals 
that we hire.
    Beginning in approximately 1975, my local began to invest 
through the Capital Consultants firm in Portland, Oregon. By 
June of 2000, the UA Local 290 trust had entrusted more than 
$159 million of our workers' pension and other trust fund money 
with that firm. This was all the money the trust was trying to 
safeguard for our members, money that they would require for 
their retirement and for their medical bills and the like. 
Those funds represented much of the safety net our members were 
depending upon.
    Capital Consultants knew that they had an obligation to 
invest that money prudently and in the best interest of our 
participants and beneficiaries. However, in a blink of an eye, 
much of that money evaporated into thin air, almost like a 
cloud of steam, along with all the hopes and dreams of most of 
our members. I, like our 4,300 members and their families, were 
shocked and devastated to discover that we had lost more than 
$75 million, most of that in what Capital Consultants described 
as insured collateralized note program. Unbeknownst to us, the 
notes were neither insured nor collateralized. Our 401(k)s were 
frozen, which meant that we could not move our investments.
    Mr. Chairman, we had hired professionals to guide and 
advise us, and those professionals had all assured us that 
Capital Consultants was doing a good job and our money was 
safe. Unfortunately, as we were later to discover, many of 
those professionals we had paid were dead wrong. The 
professionals we depended upon had simply failed us. They just 
didn't do the kind of work or exercise the due diligence that 
we have a right to expect. They didn't provide the level of 
oversight that we depended upon. We were fooled, and as a 
result, our members lost.
    How could this have happened to us? Equally important, how 
can we protect others from experiencing this type of loss in 
the future?
    First, the representatives of Capital Consultants lied to 
us. As we later learned, Capital Consultants never told us the 
true nature of their investments in private placement loans. 
For example, they represented that our investments through 
Capital Consultants' collateralized note program were secured 
by collateral and that the notes were insured. Neither was 
true.
    What we later learned was that when the loans failed or 
when investigators sought to terminate the relationship with 
Capital Consultants, Capital Consultants simply sought out more 
pension money to prop up the failed loans or to liquidate 
clients who wanted to terminate Capital Consultants. In the 
most egregious case, Capital Consultants had loaned more than 
$157 million of mostly union trust fund money, and when those 
loans were discharged in bankruptcy, Capital Consultants hid 
that fact by lying to the trust and representing that it had a 
new investor who had assumed those loans. What Capital 
Consultants did not tell us was that it had pumped an 
additional $80 million through entities functionally controlled 
to create an appearance that the failed loans were actually 
performing.
    Second, the Government entities charged with oversight of 
investment managers for employee benefit plans subject to ERISA 
should have more clearly defined authority to act on the local 
level. I understand that Capital Consultants was under scrutiny 
and investigation by the Department of Labor through most of 
the 1990s. At the local level, we had little, if any, 
information from the Department of Labor that Capital 
Consultants was under investigation.
    In addition to having clear authority to act at the local 
level, the Department of Labor should employ personnel 
specifically trained to understand the investment money 
managers make with employee benefit plan assets. Alternatively, 
the Labor Department should work closely with the Securities 
and Exchange Commission to enforce compliance regarding 
investments made by investment managers.
    Third, clarify civil laws and regulations that apply to 
pension consultants, investment managers, and other 
professionals who advertise the ability to monitor employee 
benefit plan investment managers. These financial professionals 
place themselves between the trustees and the investment 
managers and their credentials suggest that they are in the 
best position to warn of improprieties in an investment 
manager's operations.
    Finally, enforce the criminal law. A man who robs a store 
of a few hundred dollars at gunpoint might be sentenced to 10 
years in prison. The sentences in this case seem very light in 
comparison to the losses.
    Thank you for giving me the opportunity to share with you 
my concerns and those of the members of my local union. Thank 
you, Mr. Chairman.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Endicott follows:]

                  Prepared Statement of John Endicott

    Mr. Chairman and members of the committee, my name is John 
Endicott. I am from Gresham, Oregon. I have been a steamfitter for over 
30 years and have been a member of the United Association Local 290 
Plumber, Steamfitter and Marine Fitter union since 1972. I am the 
Business Manager of U.A. Local 290, which is located in Tualatin, 
Oregon.
    I have been a union trustee since March 2002, and I currently serve 
as Secretary of the U.A. Local No. 290 Plumber, Steamfitter, and 
Shipfitter Industry Pension Plan and Trust; the U.A. Local No. 290 
Plumber, Steamfitter, and Shipfitter Industry 401(k) Plan and Trust; 
the U.A. Local No. 290 Plumber, Steamfitter, and Shipfitter Industry 
Health and Welfare Plan and Trust; the U.A. Local No. 290 Pre-Funded 
Retiree Health Trust; U.A. Local No. 290 Educational Reimbursement 
Trust; U.A. Local No. 290 Training Trust; and the U.A. Local No. 290 
Scholarship Trust, among other Local trust funds.
    In my current position as Business Manager I represent 
approximately 4,300 steamfitters and plumbers. Virtually all of the 
membership participates in one or more of the Trusts. Most of those 
members have families who are also beneficiaries of the Trusts. In the 
aggregate, our Trusts administer pension, health, and welfare, and 
other benefits for over 22,000 participants and beneficiaries, 
recognizing that there is substantial overlap where members and their 
families participate in more than one Trust. A census of the membership 
in 2004 shows that members of my Local, and participants and 
beneficiaries in my Local's Trusts, live in 30 of the 50 States in this 
country, including Alabama, Georgia, Wyoming, Iowa, Maryland, Nevada, 
New Mexico, North Carolina, and Washington.\1\ The majority of our 
active members live and work in Oregon, Washington, and Northern 
California.
---------------------------------------------------------------------------
    \1\ The remaining States with members, participants or 
beneficiaries include Arkansas, Arizona, California, Colorado, 
Delaware, Florida, Hawaii, Idaho, Louisiana, Minnesota, Missouri, 
Mississippi, Montana, North Carolina, North Dakota, Oklahoma, Oregon, 
Pennsylvania, South Dakota, Texas, and Wisconsin.
---------------------------------------------------------------------------
    I want to tell you about the serious impact that the collapse of 
Capital Consultants had on me and on my fellow union members and the 
debacle that we all faced when we first heard that much of our hard-
earned pension, health and other benefits had been stolen, 
misappropriated or lost through reckless and fraudulent schemes 
concocted by corrupt money managers who we had entrusted to handle our 
funds. In addition, Mr. Chairman, I want to mention some things that I 
think the Federal Government needs to do in order to protect workers' 
pension and benefit trust funds. This is money that our members have 
spent a lifetime accumulating and need to depend upon to pay for their 
retirement, medical and other benefits in sickness and old age.
    Mr. Chairman, the members of my Local are all hard-working men and 
women. Many of us have labored for decades with our hands and our 
backs. We know a lot about plumbing and pipefitting. When it comes to 
investing our Trust Fund assets, we turn to professionals to give us 
advice. We rely on investment managers, pension consultants, lawyers, 
accountants, and insurance agents when it comes to decisions about 
investments in stock funds, real estate trusts, hedge funds or 
collateralized notes. To help us make the kinds of prudent decisions we 
need to be making with our members' money, trustees like me depend upon 
the advice of those professionals that we hire.
    Beginning in approximately 1975, my Local began to invest through 
the Capital Consultants firm in Portland, Oregon. By June of 2000, the 
U.A. 290 Trusts had entrusted more than $159 million of our workers' 
pension and other Trust fund money with that firm. This was all money 
that the Trusts were trying to safeguard for our members--money that 
they would require for their retirement and for their medical bills and 
the like. Those funds represented much of the safety net our members 
were depending upon. Capital Consultants knew that and they had an 
obligation to invest that money prudently and in the best interests of 
our participants and beneficiaries. However, in just a blink of an eye, 
much of that money evaporated into thin air--almost like a cloud of 
steam--along with all of the hopes and dreams of most of our members. 
I, like our 4,300 members and their families, was shocked and 
devastated to discover that we had lost more than $75 million, most of 
that in what Capital Consultants described as an insured, 
collateralized note program. Unbeknownst to us, the notes were neither 
insured nor collateralized. Our 401(k)s were frozen, which meant that 
we could not move our investments.
    Mr. Chairman, we had hired professionals to guide and advise us, 
and those professionals had all assured us that Capital Consultants was 
doing a good job and our money was safe. Unfortunately--as we were 
later to discover--many of those professionals we had paid were dead 
wrong. The professionals we depended upon had simply failed us. They 
just didn't do the kind of work or exercise the due diligence that we 
have a right to expect. They didn't provide the level of oversight that 
we depended upon. We were fooled and--as a result--our members lost.
    How could this have happened to us and, equally important, how can 
we protect others from experiencing this type of loss in the future? 
First, the representatives of Capital Consultants lied to us. As we 
later learned, Capital Consultants never told us the true nature of 
their investments in private placement loans. For example, they 
represented that our investments through Capital Consultants 
Collateralized Note Program were secured by collateral and that the 
Notes were insured. Neither was true. What we later learned was that 
when loans failed or when investors sought to terminate their 
relationship with Capital Consultants, Capital Consultants simply 
sought out more pension money to prop up the failed loans or to 
liquidate clients who wanted to terminate Capital Consultants. In the 
most egregious case, Capital Consultants had loaned more than $157 
million of mostly union trust fund money and when those loans were 
discharged in bankruptcy Capital Consultants hid that fact by lying to 
the Trusts and representing that it had a new investor who had assumed 
the loans. What Capital Consultants did not tell us was that it pumped 
an additional $80 million through entities it functionally controlled 
to create an appearance that the failed loans were actually performing.
    Second, the governmental entities charged with oversight of 
investment managers for employee benefit plans subject to ERISA should 
have more clearly defined authority to act on the local level. I 
understand that Capital Consultants was under scrutiny and 
investigation by the Department of Labor through most of the 1990s. At 
the local level, we had little if any information from the Department 
of Labor that Capital Consultants was under investigation. In addition 
to having clear authority to act at the local level, the Department of 
Labor should employ personnel specifically trained to understand the 
investments money managers make with employee benefit plan assets. 
Alternatively, the Department of Labor should work closely with the 
Securities and Exchange Commission to enforce compliance regarding 
investments made by investment mangers.
    Third, clarify civil laws and regulations that apply to pension 
consultants, investment managers and other professionals who advertise 
the ability to monitor employee benefit plan investment managers. These 
financial professionals place themselves between the Trustees and the 
investment managers and their credentials suggest that they are in the 
best position to warn of improprieties in an investment manager's 
operations.
    Finally, enforce the criminal law. A man who robs a store of a few 
hundred dollars at gun point might be sentenced to 10 years in prison. 
The sentences in this case seem very light in comparison to the losses.
    Thank you for giving me the opportunity to share with you my 
concerns and those of the members of my Local.

    The Chairman. Mr. Grayson?
    Mr. Grayson. Good morning. My name is Barclay Grayson. I am 
35 years old. I have a wife and three young children. I 
obtained my undergraduate business degree from the University 
of Oregon in 1992 and I obtained my MBA from Colombia Business 
School with an emphasis in finance and real estate in 1996. I 
am currently Senior Vice President of BDC Advisors based in 
Portland, Oregon, where I facilitate senior housing real estate 
acquisitions.
    In 1996, I joined my father's registered investment 
advisory firm which he founded in 1968. At its height, Capital 
managed assets in excess of $1 billion. Approximately 75 
percent of these assets were Taft-Hartley regulated funds, of 
which half were derived from my father and the other half from 
Dean Kirkland, who was my father's primary union salesman. The 
company invested about half of its finance capital in privately 
originated loans and investments.
    One of Capital's private borrowers was named Wilshire 
Credit Corporation, led by Andrew Wiederhorn. Over a period of 
9 years, Wilshire borrowed over $150 million from Capital, 
which it used to acquire high-risk, sub-performing loans. These 
loans represented nearly 15 percent of Capital's total assets.
    Two years after I joined the firm, Wilshire defaulted on 
its loans and effectively failed. Instead of closing Wilshire's 
default and shutting down the borrower, Capital advised its 
clients that it was undertaking a ``workout.'' This workout 
first involved maximizing what little was left following the 
collapse of Wilshire. It next involved the formation of three 
new shell entities that then collectively borrowed in excess of 
$80 million of additional funds from Capital's clients. The 
majority of these funds were used to make high-risk used car 
and credit card loans. The balance was used to keep the 
original Wilshire loans current.
    As a result of these complex transactions, the company's 
clients largely had no idea that their ongoing contributions 
were effectively being circulated through each of these shell 
borrowers to keep their Wilshire investments current. This gave 
the false impression that all the firm's loans were fully 
performing, fully secured, and of limited risk.
    At the end of 1999, a year following the effective loss of 
the Wilshire assets, my father appointed me President of the 
company. In mid-2000, the SEC determined that the initial 
Wilshire loans were likely worthless and that the loans being 
made going forward were highly risky and the disclosures to 
clients were insufficient. This resulted in Capital being 
placed into court-ordered receivership on September 21, 2000.
    I immediately cooperated with all parties to maximize the 
recovery of client assets following being placed into 
receivership and assisted in the ensuing Department of Justice 
investigation. It quickly became clear to me that I had failed 
to live up to my fiduciary disclosure duties as President 
relative to what is required on behalf of the firm's clients.
    In 2001, I therefore pled guilty to one count of mail 
fraud. I thereafter entered into a global settlement with all 
the company's clients and the SEC. Due to my extensive 
cooperation, the prosecution ultimately recommended that I be 
sentenced to 1 year of home detention. However, due to public 
accountability issues, I received a sentence of 18 months and a 
3-year term of subsequent probation.
    After spending 14 months at FPC Sheridan, I returned home 
and started over. Due to my conduct and extraordinary 
assistance, the sentencing judge terminated my probation 2 
years early. She explained this was a very rare occurrence, but 
was warranted.
    There are three natural questions that would follow after 
hearing this story. The first question that arises is why did 
Capital loan so much money to Mr. Wiederhorn. These reasons 
include, one, my father received improper personal loans from 
Mr. Wiederhorn. Two, Capital received a management fee of 3 
percent of promptly invested assets. Three, Mr. Wiederhorn 
acquired earlier failed investments at face value from the 
company. And four, Capital's excessive concentration with Mr. 
Wiederhorn resulted in a loss of control.
    The second question is why did the union clients invest so 
much money into Capital's private investment program initially 
and why did the money keep flowing in for so long after 
Wilshire's failure? There were several reasons. One, gifts and 
gratuities provided by my father and Dean Kirkland to the 
firm's trustees were extensive. They included extensive 
dinners, golf trips, club memberships, lavish parties, sporting 
events, fishing and hunting trips, foundations, hiring of union 
members, donations to causes, raffles, loans, and employment of 
trustees postunion employment. Second, we had established 
relationships with service providers associated with 
recommending which investment advisors were selected for 
management.
    The third question is whether there was any regulatory 
oversight of us. Due to complaints dating back to the early 
1990s, the DOL reviewed many of Capital's private investments. 
No specific issues were found to exist with Wilshire, but the 
DOL did determine that Capital was charging excessive fees 
relative to one investment on behalf of one client which 
resulted in a $2 million fine that was, in fact, returned to 
one of the affected clients. There was little detailed follow-
through to ensure that the funds Capital used to pay this fine 
were derived from legitimate sources, of which they were not.
    Although the DOL opened another investigation into 
Capital's private investments, including Wilshire, in 1997, the 
company continued to be allowed to operate for almost 3 more 
years until the SEC announced the receivership proceedings. All 
told, the DOL effectively witnessed over 8 years of abuses 
without taking significant action to close the firm.
    Based on my observations, the DOL has a limited 
understanding of private investments and a general lack of 
accounting skills. This results in the DOL having long open 
files, which makes them largely ineffective. In this case, the 
DOL were largely reactionary as opposed to being proactive.
    The SEC began its core investigation in 2000. They first 
spoke to past employees and existing borrowers of Capital. They 
then came in hard and fast with a team of forensic accountants. 
They looked at every private investment in the portfolio and 
they met with all members of the private investment management 
team at Capital. Within very short order, they were working 
toward placing Capital into receivership.
    The last question relates to what recommendations I would 
make to you to better check pension assets going forward. 
First, we need to educate. Courses and licensing should be 
required for all parties associated with Taft-Hartley regulated 
funds. No such requirements exist. Trustees would particularly 
benefit. And second, courses and licensing should be required 
for all parties investing in privately-held loans and 
investments. Many are ill-prepared to properly analyze private 
investments.
    Second, we need to strengthen regulatory oversight. The DOL 
needs to employ highly-trained accountants and business experts 
like the SEC who will audit pension investments at least once 
every 2 years, as well as all the service providers providing 
services to the unions themselves to ensure that no conflicts 
of interest exist. Second, the DOL needs to implement more 
strict Taft-Hartley investment guideline requirements that set 
real limits on investment alternatives and investment 
concentration.
    Third, we need to expand the laws regulating Taft-Hartley 
assets. No. 1, limiting receipt of gifts and gratuities by 
trustees and service providers associated with the trust, in my 
opinion, to no more than $100 per item or event and no more 
than $500 annually would be satisfactory. The law should be 
clear that if a trustee or service provider accepts a gift or 
gratuity over a stated level, regardless of whether influence 
can be proven, it is a violation of the law. Second, any 
trustees or service providers desiring to accept gifts or 
gratuities within legal limits should be required to disclose 
said items to the trustees--the rest of the trustees--prior to 
taking receipt. And third, to help mitigate future pension 
losses, there should be a minimum level of E&O insurance 
coverage required for all investment advisors. This minimum 
should be tied to each manager's total assets, in my opinion, 
under management so as to provide additional coverage, but yet 
still be cost effective for providers.
    That is my testimony. Thank you.
    The Chairman. Thank you, and especially for your 
willingness to testify and your specific suggestions.
    [The prepared statement of Mr. Grayson follows:]

                 Prepared Statement of Barclay Grayson

    Good afternoon, my name is Barclay Grayson. I am 35 years old. I 
have a wife and three young children. I obtained my undergraduate 
business degree from the University of Oregon in 1992 and I obtained an 
MBA from Colombia Business School with an emphasis in Finance and Real 
Estate in 1996. I am currently Senior Vice President of BDC Advisors, 
LLC, based in Portland, OR, where I facilitate senior housing real 
estate acquisitions.
    In 1996, I joined my father's registered investment advisory firm 
which he founded in 1968. At its height, Capital managed assets in 
excess of $1 billion. Approximately 75 percent were Taft-Hartley 
regulated funds, of which half were derived from my father and the 
other half from Dean Kirkland who was my father's primary union 
salesman. The company invested about half of its clients' capital in 
privately originated loans and investments.
    One of Capital's private borrowers was named Wilshire Credit 
Corporation, led by Andrew Wiederhorn. Over a period of 9 years, 
Wilshire borrowed over $150 million which it used to acquire high risk, 
sub-performing loans. These loans represented nearly 15 percent of 
Capital's total assets. Two years after I joined the firm, Wilshire 
defaulted on its loans and effectively failed.
    Instead of disclosing Wilshire's default and shutting down the 
borrower, Capital advised its clients that it was undertaking a ``work-
out.'' This work-out first involved maximizing what little was left 
following the collapse of Wilshire. It next involved the formation of 
three new shell entities that then collectively borrowed $80 million of 
additional funds from Capital's clients. The majority of these funds 
were used to make high risk car and credit card loans. The balance was 
used to keep the original Wilshire loans current. As a result of these 
complex transactions, the Company's clients largely had no idea that 
their ongoing contributions were effectively being circulated through 
each of these shell borrowers to keep their Wilshire investments 
current. This gave the false impression that all of the firm's loans 
were fully performing, fully secured and of limited risk.
    At the end of 1999, a year following the effective loss of the 
Wilshire assets, my father appointed me president of the company. In 
mid-2000 the SEC determined that the initial Wilshire loans were likely 
worthless, that the loans being made going forward were highly risky 
and that the disclosures to clients were insufficient. This resulted in 
Capital being placed into court-ordered receivership on September 21, 
2000. I immediately cooperated with all parties to maximize the 
recovery of client assets and assist in the ensuing DOJ investigation. 
It quickly became clear to me that I had failed to live up to my 
fiduciary duties as President relative to required disclosures to the 
firm's clients. In 2001, I therefore pled guilty to one count of mail 
fraud. I thereafter entered into a global settlement with all of the 
company's clients and the SEC.
    Due to my extensive cooperation, the prosecution ultimately 
recommended that I be sentenced to 1 year of home detention. However, 
due to public accountability issues, I received a sentence of 18 months 
and a 3 year term of subsequent probation. After spending 14 months at 
FPC Sheridan, I returned home and started over. Due to my conduct and 
extraordinary assistance, the sentencing Judge terminated my probation 
2 years early. She explained that this was a very rare occurrence but 
was warranted.
    There are three natural questions that would follow after hearing 
this story:
    The first question that arises is why did Capital loan so much 
money to Mr. Wiederhorn.
    The reasons include:
    1. My father received improper personal loans from Mr. Wiederhorn;
    2. Capital received management fees of 3 percent from clients on 
promptly invested assets;
    3. Mr. Wiederhorn acquired earlier failed investments at face 
value;
    4. Capital's excessive concentration with Mr. Wiederhorn resulted 
in a loss of control.
    The second question is why did the union client's invest so much 
money into Capital's private investment program initially and why did 
the money keep flowing in for so long after Wilshire's failure?
    1. Gifts and gratuities provided by my father and Dean Kirkland to 
the firm's union trustees including:

        a. Expensive Dinners & Golf Trips;
        b. Club Memberships;
        c. Lavish parties/transportation/travel, etc.(trustees and 
        families);
        d. Sporting Events (Football/Basketball/Golf);
        e. Very Expensive Fishing/Hunting Trips;
        f. Establishment and funding of Foundations;
        g. Hiring relatives of Union members;
        h. Donations to causes/raffles of trustees/family;
        i. Investments in directed investments benefiting trustees 
        (labor only investments, relatives, friends, etc.);
        j. Loans (trustees and family) and Cash or equivalents;
        k. Employment of trustees post union employment. Big 
        compensation.

    2. Established relationships with service providers associated with 
recommending which investment advisors are selected for management.
    The third question is whether there was any regulatory oversight?
    Due to complaints dating back to the early 1990's, the DOL reviewed 
many of Capital's private investments. No specific issues were found to 
exist with Wilshire, but the DOL did determine that Capital was 
charging excessive fees. This resulted in a $2 million fine. There was 
little detailed follow-through to ensure that the funds Capital used to 
pay this fine were derived from legitimate sources; of which they were 
not. Although the DOL opened another investigation into Capital's 
private investments (including Wilshire) in 1997, the company continued 
to be allowed to operate for almost 3 years until the SEC announced the 
receivership proceedings. All told, the DOL effectively witnessed 
almost 10 years of abuses without taking significant action to close 
the firm.
    Based on my observations, the DOL has a limited understanding of 
private investments and a general lack of accounting skills. This 
results in the DOL having long ``open files'' which makes them largely 
ineffective. In this case, the DOL were largely reactionary as opposed 
to being pro-active.
    2. The SEC began its core investigation in 2000. They first spoke 
to past employees and existing borrowers of Capital. Then they came in 
hard and fast with a team of forensic accountants. They looked at every 
private investment in the portfolio and met with all members of the 
private investment management team at Capital. Within very short order 
they were working towards placing Capital into receivership.
    The last question relates to what recommendations would I make to 
Congress to better protect pension assets:
    First, we need to educate:
    1. Courses and licensing should be required for all parties 
associating with Taft-Hartley regulated funds. No such requirements 
exist. Trustees would particularly benefit.
    2. Courses and licensing should be required for all parties 
investing in privately held loans/investments. Many are ill-prepared to 
properly analyze private investments.
    Second, we need to strengthen regulatory oversight:
    1. The DOL needs to employ highly trained accountants and business 
experts like the SEC who will audit pension investments at least once 
every 2 years, as well as all of the service providers providing 
services to the unions themselves to ensure that no conflicts of 
interest exists.
    2. The DOL needs to implement more strict Taft-Hartley investment 
guideline requirements that set real limits on investment alternatives 
and investment concentration.
    Third, we need to expand the laws regulating Taft-Hartley assets:
    1. Limit receipt of gifts and gratuities by trustees and service 
providers associated with a Trust to no more than $100 per item or 
event and no more than $500 per year. The law should be clear that if a 
trustee or service provider accepts a gift or gratuity over stated 
level, regardless of whether influence can be proven, that it is a 
violation of the law.
    2. Any trustees or service providers desiring to accept gifts or 
gratuities within legal limits should be required to disclose said 
items to the Trust prior to taking receipt.
    3. To help mitigate future pension losses there should be a minimum 
level of E&O insurance coverage required for all investment advisors. 
This minimum should be tied to each manager's total assets under 
management, so as to provide additional coverage, but yet still be cost 
effective for providers.

    The Chairman. Mr. English?
    Mr. English. Good morning, Mr. Chairman. I am pleased to be 
here today to discuss an area of concern to all of us, 
protection of retirement funds, and to share my experience 
prosecuting a fraud against ERISA benefit plans.
    The fraud was perpetrated by Capital Consultants and 
others. As you heard, it affected over 300,000 participants and 
beneficiaries from all 50 States, putting at risk the 
retirement dollars and health insurance of hard-working 
plumbers, laborers, office workers, and other private investors 
and workers.
    I am an attorney with Bullivant Houser Bailey in its 
Portland, Oregon, office. Bullivant represented several of the 
Taft-Hartley plans which were defrauded. I was asked to be lead 
counsel in a plaintiffs' consortium, which ultimately 
represented all potential claimants. This plaintiffs' 
consortium consisted of attorneys from Nevada, Oregon, 
Washington, California, Ohio, and several other States. 
Altogether, there were 97 attorneys representing plaintiffs and 
defendants.
    Capital Consultants had more than 300 clients, including 
ERISA retirement and medical benefit plans and private 
investors. Their losses, as you have heard this morning, were 
estimated at half-a-billion dollars. As a result of the efforts 
of the plaintiffs' consortium, working with the court-appointed 
receiver, we have been able to recover so far approximately 
$350 million for the benefit of the claimants. We created a 
model, which I believe should be replicated, to investigate and 
maximize recovery of losses in this type of case.
    We developed a plan to obtain the greatest net return, 
factoring in time and cost. The plaintiffs' consortium gave a 
complete release to any defendant who agreed to settle and 
created a court-ordered claims bar to protect them from further 
litigation. A summary of the specifics of this recovery plan is 
contained in my written submission.
    During our civil prosecution, we worked cooperatively with 
a task force headed by Assistant U.S. Attorney Lance Caldwell 
which included the FBI, IRS, Office of Labor Racketeering and 
Fraud, OLMS, and EBSA. Our job was to recover assets. Theirs 
was to prosecute wrongdoers. We were urged by our clients to 
cooperate with Mr. Caldwell's team and any government 
investigation fully, no matter where it led.
    In August 2000, I led a small group of attorneys and former 
Federal investigators to gather facts quickly to determine who 
the potential defendants were. I would like to acknowledge the 
presence here today of some members of that team, including my 
partner, Robert Miller, and investigators Joe Gavalas and Norm 
Transit with CTG and Associates. Several other members of the 
consortium have submitted statements, including Mike Farnell, 
another key member of the consortium who is here today, and 
who, I might add, flew all night to get here.
    One month later, based on the information we gathered, in 
September 2000, we filed an 80-page lawsuit which included 
claims for fraud, RICO, breach of fiduciary duty, securities 
violations, and ERISA violations to address a Ponzi scheme 
which had been in existence for several years and apparently 
had been investigated for 3 years by the Department of Labor.
    We made available to all potential plaintiffs the 
information we had gathered in return for their agreement to 
form a consortium that would create an efficient division of 
labor, minimize overlapping of effort, and thereby maximize 
recovery. We rejected a scorched earth approach, which could 
have been financially beneficial to the attorneys but would 
have been disastrous for our clients.
    We then obtained a mandate from U.S. District Judge Garr M. 
King requiring all parties to stay discovery and to enter into 
a speedy mediation procedure. This allowed us to approach the 
resolution of these claims as a business solution as opposed to 
a legalistic fight between lawyers, thereby avoiding the cost 
of trials and appeals. We were then able to utilize the 
mediation services of senior Ninth Circuit Judge Edward Leavy, 
who was brilliant in his ability to move the parties forward 
toward settlement.
    To conclude, the time from our initial investigation to the 
court's approval of the settlements and entry of a claims bar 
to depositing the settlement money in an escrow account took 
under 2 years. Because of the coordination of effort, the legal 
fees for the recovery amounted to under 10 percent of the total 
recovery. To date, approximately $350 million has been 
recovered for distribution to claimants. Under the court's 
distribution plan, this equates to approximately 70 cents on 
the dollar for every dollar invested by a retiree or investor 
at a recovery cost of under 7 cents on a dollar. The success in 
this Oregon formula could be repeated in similar cases 
elsewhere.
    Mr. Chairman, this concludes my prepared statement. I would 
be happy to answer any questions you may have.
    The Chairman. Thank you very much. The summary of your 
successful recovery plan will be shared with the governors, 
too, so that we can follow up on that.
    [The prepared statement of Mr. English follows:]

                Prepared Statement of Stephen F. English

    Mr. Chairman and members of the committee, I am pleased to be here 
today to discuss with you an area of concern to all of us, protection 
of retirement funds.
    I am an attorney in practice in Portland, Oregon with the regional 
law firm of Bullivant Houser Bailey, PC. I have been a trial lawyer on 
both sides of the bar for 32 years. Although much of my experience has 
been as a defense attorney, I have taken the lead role as plaintiffs 
attorney in a number of complex commercial and financial cases.
    I have been asked to provide you with a description of the process 
I worked to develop to investigate the claims against Capital 
Consultants and related entities. As you know, the losses in this 
scandal were estimated in the range of $350,000,000 to $470,000,000. 
Capital Consultants had more than 300 clients, and over 150 of them 
were employee benefit plans. Those plans had more than 300,000 
participants and beneficiaries and they came from nearly every State in 
the country. We built a business model that I think can be replicated 
to investigate and recover losses in this type of case. We were 
successful in putting together litigation settlements in excess of 
$125,000,000 from the time I started working on the case in August of 
2000. Subsequent recoveries are in the $35,000,000 range and the 
Receiver was able to conserve approximately $170,000,000 in assets, all 
for the benefit of the pensioners and others who were defrauded by 
Capital Consultants and the players associated with the fraud.
    In total, the litigators and the Receiver were able to return in 
excess of $330,000,000 at a cost in legal fees, Receiver fees, and 
investigation costs of less than 10 percent. I would like to give you 
an overview of how we handled the litigation and mediation effort in an 
efficient and expedient manner. The key to what we accomplished lies in 
the fact that we developed a plan to engage in settlement negotiations 
that would yield the greatest net return to the clients in exchange for 
a complete release in favor of any defendant that agreed to settle, and 
a mechanism to ensure that they would not be sued by any other claimant 
or sued for contribution by any other potential defendant.
    1. I led a small group of attorneys and investigators to identify 
the scope of the legal and factual problem and obtain a sufficient 
understanding of the problems and potential liability to be able to 
speak knowledgeably and get the potential defendants' attention. We did 
not expend unnecessary resources on any specific individual defendant, 
but rather focused on developing a case against a number of potential 
defendants so as to create a broader base from which recovery could be 
sought. The initial case focused on approximately 10 of the major 
entities responsible for the losses. The case focused on Capital 
Consultants as the investment manager, the borrowers with the greatest 
culpability, and the lawyers and accountants that worked with those 
companies.
    2. We purposely did not engage in an exhaustive scorched earth 
approach at this stage for the simple reason that we did not know 
whether there would be a recovery sufficient to make such efforts 
worthwhile to our clients and because we felt time was of the essence 
in any recovery.
    3. We prepared a lawsuit based on a sufficient amount of 
information to be able to tell our story to the defendants and give 
other claimants an understanding of what we were doing.
    4. We made available to all other potential plaintiffs all of the 
information that we had obtained, as well as giving them full access to 
our investigation. We based this on the condition that they agree to 
cooperate with us in forming a united front so as to maximize recovery 
and minimize overlapping of effort. We gave each group of claimants the 
right to veto any settlement decision submitted to the group, and that 
element proved to be one of the strengths in keeping the group together 
and providing a unified front to the numerous defendants.
    5. We negotiated an agreement among all plaintiffs to work together 
and divide the work in such a way so that all lawyers involved could 
have meaningful participation, but with a minimum of duplication of 
efforts and costs. As a group, we understood and committed that the 
approach would be one which would aim toward a speedy resolution as 
opposed to an exhaustive, scorched earth approach. Such an exhaustive, 
scorched earth approach would be financially beneficial to the 
attorneys, but could be financial disaster to our clients. We then 
sought a mandate from U.S. District Court Judge Garr M. King to require 
defendants to enter into a mediation process which combined a 
sufficient exchange of information so that a businesslike evaluation 
could be made by the defendants of their potential exposure. Again, in 
the interest of moving a resolution forward, we sought and obtained the 
court's approval and guidance so as to freeze or limit the amount of 
time spent on expensive, time consuming discovery tactics that could be 
employed by defendants and plaintiffs in this type of case. Our 
overriding goal in this regard was to approach the resolution as a 
business solution as opposed to a legalistic or legal solution.
    6. As we anticipated, at least a few of the defendants immediately 
saw the value in this. As a part of the resolution we offered these 
defendants, we first gathered authority from all potential plaintiffs 
and obtained the court's authority to act on their behalf. By doing 
this we were able to promise and make good on promises to defendants 
that when they settled with us they resolved all claims by all 
plaintiffs. As a further condition of this approach, we agreed that 
once they resolved claims with us we would protect them from cross-
claims by other defendants. This essentially allowed us to go to a 
defendant and say, settle with us and you can resolve everything. This 
translated into a monetary value for not just the defendants, but their 
insurance carriers, who understood the value of having finality 
obtained quickly and efficiently on a case of this exposure.
    7. Once it became clear that the court not only approved of this 
process, but was fully supportive of it, were able to utilize the 
mediation services of senior status Ninth Circuit Judge Edward Leavy, 
who proved nothing short of brilliant in his ability to move the 
parties forward. The process allowed for several weeks of mediation, 
with each party generally mediating two to three times before 
resolution was obtained satisfactory to both parties.
    8. Once the settlements began, there occurred a ``tipping point'' 
at which it became apparent that no defendant wanted to remain as the 
only holdout. In addition, the fact that many defendants paid less than 
they might have had to pay if they had chosen to go through a trial 
created a sufficient amount of money so that plaintiffs did not have to 
have the maximum possible amount from any individual defendant. Again, 
one of our overriding strategies was that a businesslike approach 
required getting money quickly and at the least possible cost as 
opposed to holding out to squeeze every last dime from entities or 
individuals and risk the cost of trial and appeals.
    9. The individual lawyers for various plaintiffs understood that in 
order to maximize the overall recovery in the most efficient manner 
possible, they had to sacrifice aggressive attempts on their part to 
maximize their personal clients' recovery to the detriment of other 
plaintiffs. In other words, it became apparent to the plaintiffs 
attorneys that by following a strategy that would move the recovery 
process forward in the most beneficial way for the plaintiffs as a 
whole, they were actually acting in the best interest of their 
individual clients.
    10. The case was able to be concluded from initial investigation 
through filing of the lawsuits, completion of the mediation of 
defendants and the court approval of the full settlement and claims bar 
in 22 months. All of the lawyers on the plaintiffs side meaningfully 
participated, but because of the coordination of effort and 
cooperation, the legal fees for the recovery amounted to under 10 
percent of the total recovery. To date, approximately $330,000,000 has 
been recovered for distribution to pensioners and others. Under the 
calculation of losses in the distribution plan approved by the Court, 
this equates to approximately $.70 on the dollar for every dollar paid 
invested in a retirement account or investment account by a retiree or 
investor at a cost of under $.07 on the dollar. We believe this formula 
and its success should not be unique to Oregon.

    The Chairman. Mr. Ray?
    Mr. Ray. Thank you, Mr. Chairman. I am pleased and honored 
to again appear before this distinguished committee. I welcome 
this opportunity to discuss the protection of employee benefit 
plans from fraud. My perspective is that of an employee 
benefits lawyer who has been representing pension plans for 
more than 25 years. Fortunately, none of my client plans were 
investors in Capital Consultants.
    I would like to focus my comments on a few critical points, 
Mr. Chairman. First, we are discussing a dangerous intersection 
between the ethics in the marketplace and fiduciary duty. 
Capital Consultants is an example of a broader problem with the 
investment services community. Pension plans offer investment 
firms an opportunity to generate enormous fees and to make 
investment professionals fabulously wealthy.
    The competition for pension plan clients can be fierce. It 
is not surprising that some investment people ignore or bend 
the rules or intentionally remain ignorant. There is a sense 
that the risk of getting caught is an acceptable business risk 
and that the costs of being caught are manageable costs of 
doing business.
    Consider the financial industry scandals that have been 
making headlines over just the past few years, scandals that 
have cost investors millions of dollars: The mutual fund 
trading abuses and overcharges; fraudulent investment 
recommendations by brokers to attract investment banking 
business; kickbacks or pay-to-play arrangements between the two 
largest insurance brokers in this country and insurance 
companies; and there are others, again, that have involved 
billions of dollars of loss to investors.
    Many of the leading names in the financial services 
community, the cream of the crop of Wall Street, have been 
required to pay restitution and fines in the hundreds of 
millions of dollars. Does it make any difference to them? They 
continue to do business.
    The second point I would like to make is that it is 
unreasonable to expect pension plans to ferret out fraud and 
abuse by investment managers. As I explained in my written 
statement, soundly administered pension plans use an array of 
professionals to develop and oversee their investment programs 
and to manage their investment assets. I might make a note that 
it is the investment people, not the plan fiduciaries, who make 
the money. The typical plan governing fiduciary, like a board 
of trustees, they are typically unpaid volunteers. It is the 
investment people who make the big money off pension plans.
    However, no matter how many professionals a pension plan 
hires to monitor other plan professionals, and no matter how 
much expense a plan incurs to protect itself against fraud, 
there is simply no way that a pension plan could be guaranteed 
that it will not fall victim to investment fraud.
    Deception is the hallmark of fraud. Investment fraud 
typically involves sophisticated schemes involving complex 
financial transactions and secret conspiracies conceived and 
executed by smart people motivated by greed. Look at the 
lengths to which Capital Consultants went to commit and conceal 
its fraud against its client pension plans: Lies about the 
investment managers bona fides; lies about the nature of the 
complex multilevel collateralized note investment; lies about 
the performance or nonperformance of the investment; the 
creation of shell companies to conceal the collapse of the 
investment; secret arrangements with people in the position to 
make decisions.
    Unfortunately, the nature and scope of this fraudulent 
scheme became clear only in hindsight, after investigation by 
the SEC and the Labor Department and extensive and expensive 
private litigation. Capital Consultants managed to defraud some 
very smart professional people, not merely layman trustees.
    Only the government has the investigative authority and 
resources to effectively deter and detect fraud. Only the 
government has the power to compel production of internal 
documents and testimony through subpoenas. In particular, this 
is a responsibility of the Securities and Exchange Commission, 
as the primary regulator of the investment industry. The SEC 
has a program of examinations of investment firms, not merely 
the authority to investigate when a problem arises. The SEC has 
the specialized knowledge and expertise about how investment 
firms operate and are supposed to operate.
    But as recently noted in a speech by outgoing SEC Chairman 
Donaldson, quote, ``There is a mindset that holds that 
significant action is appropriate only in retrospect, only 
after things have gotten so bad that the risk of investment 
harm threatens to become an uncertainty,'' unquote. He went on 
to explain in this May 2005 speech that efforts by the SEC to 
initiate programs that anticipate investment industry abuses 
and stop them before they occur have been actively resisted, 
both within the SEC and by outside forces.
    The committee might want to note in this regard that the 
warnings by Chairman Donaldson and Federal Reserve Chairman 
Greenspan lately about the hedge fund industry. Pension plans, 
and other investors are scrambling now to find higher returns 
than the modest returns being projected for traditional equity 
and fixed-income portfolios. Plans are still trying to deal 
with the consequences of the negative markets in 2000 through 
2002. Hedge funds and other very complex, sophisticated 
investment vehicles are being aggressively marketed to pension 
plans as the path to higher returns. Pension plans and other 
investors are counting on the SEC to protect them.
    The third and last point I would like to make is that there 
is no lack of laws to deal with the fraud committed by Capital 
Consultants. It is a matter of finding out that the fraud is 
taking place. The securities fraud laws, ERISA's fiduciary and 
prohibited transaction standards, criminal laws, most notably 
18 U.S.C. 1954 and 664, and yes, even the Racketeering 
Influenced and Corrupt Organizations law provided ample 
remedies to deal with the Capital Consultants fraud. The issue 
was finding the fraud, and that is where pension plans are 
counting on the SEC to do its job to regulate the investment 
community.
    When I say pension plans, Mr. Chairman, I want to 
emphasize, I am not merely speaking about union trust funds, as 
the chart indicates and prior testimony indicates. There are 
far more corporate plans that are just as susceptible to 
investment fraud and need the protection of the SEC and 
Congress, as well.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Ray follows:]

                   Prepared Statement of James S. Ray

    Chairman Enzi, Ranking Member Kennedy, and members of the 
committee, I am pleased and honored to again appear before this 
distinguished, storied committee. I welcome this opportunity to discuss 
protecting employee pension plans from fraud, and applaud you for 
having the discussion.

Overview

    I bring to your discussion the perspective of an experienced 
employee benefits law practitioner who has represented pension plans as 
well as plan participants and plan sponsors for more than 25 years. I 
have had the honor of serving two, three-year terms on the ERISA 
Advisory Council of the Labor Department, most recently as Chair for 
2002, in both Republican and Democratic administrations. I have also 
held several positions with the American Bar Association, including 
Chair of its Joint Employee Benefits Committee and as a member of the 
governing Council of the Section on Labor and Employment Law. I am a 
Charter Fellow in the College of Labor and Employment Lawyers as well 
as a Charter Fellow of the American College of Employee Benefits 
Counsel, both of which are peer-elected honorary organizations. Of 
course, I am not speaking on behalf of any of these organizations.
    My focus in this discussion is on the relationship between pension 
plans and the investment services industries. That relationship is a 
dangerous intersection between the ethics of the marketplace and 
fiduciary duty to plan participants. The U.S. Supreme Court has made 
the following observation about that intersection:

        ``Many forms of conduct permissible in a workaday world of 
        those acting at arms-length are forbidden to those bound by 
        fiduciary ties. A [fiduciary] is held to something stricter 
        than the morals of the marketplace. Not honesty alone, but the 
        punctilio of an honor the most sensitive, is then the standard 
        of behavior [for fiduciaries].'' Pegram v. Herdrich, 530 U.S. 
        211, 224-25 (2000).

    Unfortunately, the opportunities to make enormous profits and the 
competition for those opportunities have led too many in the investment 
services community to abuse their fiduciary duties to pension plans and 
other investors, and to entice other plan fiduciaries to violate their 
duties. Too often the morals of the marketplace are that the risk of 
being caught wrongdoing is an acceptable business risk, and the 
restitution or penalty imposed if caught is a manageable cost of doing 
business. The words ``everybody does it'' are too often uttered in 
defense of wrongdoing. There is a certain arrogance that comes with the 
investment community's strong influence over the Nation's economy.
    The recent spate of investment community scandals, many involving 
frauds on pension fund investors, suggests that the lessons of earlier 
scandals have not been learned. And, signals from the Securities and 
Exchange Commission (SEC), the Federal Reserve, and media reports 
indicate that more scandals can be expected, particularly among hedge 
funds, as pension funds and other institutional investors search for 
higher investment returns than traditional investments in equities and 
fixed income securities are expected to produce in the foreseeable 
future.
    The Capital Consultants fraud is but one illustration of a broader 
problem of the investment community placing business interests ahead of 
fiduciary duty.
    There needs to be a change in the culture of the investment 
community concerning dealings with employee pension plans. And, that 
cultural change seems possible only if there is greater regulatory 
oversight of investment services providers by the SEC. In this world of 
an ever-increasing variety and complexity of investment vehicles, only 
government has the resources and authority to deter and detect 
sophisticated fraud; pension funds do not.
    Will the SEC meet this challenge? Will Congress have the political 
will to allow the SEC to meet this challenge?

Pension Plans Depend On Investment Community

    Employee pension plans collectively constitute one of the largest 
pools of domestic investment capital, especially if you include 
``401(k) plans'' as pension plans. Pension plan investments are valued 
in the trillions of dollars. Naturally, they receive a lot of attention 
from the investment services industry, including investment managers, 
investment consultants, brokers, banks, insurance companies, mutual 
funds, hedge funds, other collective investment funds, and lots of 
other organizations and individuals. Pension plans are a gold mine of 
investment fees.
    Pension plans depend on the investment services community. The 
typical pension plan engages a collection of investment professionals 
to perform services related to the plan's investments. Private sector 
plans are, as a practical matter, compelled to do so by the Employee 
Retirement Income Security Act (ERISA). ERISA's fiduciary standards of 
conduct require, among many other things, that a plan's investment 
program be prudent in structure and operation. Prudence is really a 
process standard; whether an investment decision is prudent is measured 
by the soundness of the decisionmaking process, not by the future 
success or failure of the decision. Prudent investment decisionmaking 
generally requires specialized knowledge and expertise that few laymen 
possess. Indeed, many newly developed investment vehicles and financial 
instruments have become so complex that few professionals, and even 
fewer regulators, understand them.
    An investment consultant (or consultants) is engaged: to develop 
and monitor the plan's asset allocation; to develop and monitor 
investment guidelines and policies; to recommend investment managers 
and investment vehicles; and to monitor the performance of the 
investment managers and investment vehicles. Generally the investment 
consultant is an advisor to the plan's governing fiduciary (e.g., board 
of trustees in a multiemployer plan setting, corporate officers in a 
single employer plan setting). Nonetheless, the consultant is a 
fiduciary within the meaning of ERISA because the consultant is giving 
investment advice for a fee. In performing its services for the plan, 
the consultant is subject to ERISA's fiduciary standards of conduct and 
prohibited transactions rules.
    An investment management firm (investment manager) generally is 
engaged to assume discretionary, fiduciary responsibility to manage a 
specified portion of the pension plan's investment portfolio (e.g., 
large cap equity, small cap equity, fixed income or balanced account). 
The investment manager decides which specific investments to make, hold 
and sell (e.g., buy or sell a particular company's stock or a 
particular corporate bond). Typically, a plan engages more than one 
investment manager, each with fiduciary responsibility for a portion of 
the plan's portfolio, reflecting the plan's asset allocation decisions 
and the need for investment diversification. Each investment manager is 
an ERISA fiduciary with respect to the plan because it has 
discretionary authority regarding the management of plan assets.
    ERISA strongly encourages the engagement of investment managers 
beyond the need for prudent investment decisionmaking. If a pension 
plan's governing fiduciaries engage an investment manager, ERISA 
generally shields the governing fiduciaries from liability for the 
investment manager's investment decisions. For this statutory shield to 
apply, the investment manager must be registered with the SEC or a 
similar State agency, unless it is a regulated bank or insurance 
company. The investment manager must also acknowledge in writing that 
it is a fiduciary with respect to the pension plan under ERISA.
    The governing fiduciaries continue to have a fiduciary obligation 
to monitor the performance of the investment manager relative to the 
pension plan's investment policies and guidelines as well as relative 
to some established benchmarks, and decide whether to retain or 
discharge the investment manager. This monitoring function, however, is 
generally assigned to the investment consultant who advises the plan's 
governing fiduciaries.
    Investment brokers are engaged by the pension plan's investment 
managers to execute the manager's decisions to buy and sell particular 
securities for the plan's portfolio. The investment manager generally 
selects the broker for each transaction and agrees to pay the broker a 
commission for its trading services. The commission is paid to the 
broker using the pension plan's assets, not the manager's own assets. 
Often, a portion of the commission, or its value, is rebated to the 
investment manager by the broker under so-called ``soft dollar'' 
arrangements. The investment manager personally benefits from these 
soft dollar rebates by, at a minimum, reducing its own business 
overhead costs. To some extent, SEC rules allow investment managers to 
maintain soft dollar arrangements with brokers, despite their 
questionable status under ERISA. (More about this later.) Some pension 
plans try to preempt such soft dollar arrangements by participating in 
so-called commission recapture programs under which one or more 
brokerage firms agree to rebate a portion of the commissions to the 
plan, rather than to the plan's investment managers.
    Increasingly, pension plans are investing (buying units or shares) 
in pooled investment vehicles managed by investment managers, rather 
than engaging the investment manager to manage a separate portfolio for 
the plan. Some investment managers are encouraging this shift, 
asserting that pooled arrangements are most cost efficient (although I 
suspect that the managers have their own motives as well).
    For the governing fiduciaries of the plan, a decision to buy units 
in a pooled investment fund presents a fundamentally different decision 
than a decision to hire an investment manager to manage a separate 
portfolio, viewed from ERISA's perspective. The governing fiduciaries 
are the decisionmakers on the question of whether to invest in the 
pooled fund; that is, whether to buy units in the fund. Once the 
investment is made, the manager of the pooled fund has fiduciary 
responsibility for the management of the fund's assets (including the 
money invested by the pension plan) in accordance with the investment 
fund's governing documents and applicable law. But, the decision to 
make the investment in the fund is the responsibility of the pension 
plan's governing fiduciaries, not the manager of the investment fund. 
(Managers of pooled investment funds typically include such a 
disclaimer in the investment documentation.) Well-advised pension plan 
governing fiduciaries will rely on a qualified investment consultant to 
conduct a prudent, due diligence review of the investment vehicle and 
to advise them on whether the investment is appropriate for the pension 
plan. Few governing fiduciaries of plans are qualified to make such an 
investment decision without professional advice.
    The amount of fees that investment managers earn from pension plan 
investments is enormous. Generally management fees are based on a 
percentage of the market value of the portfolio or fund being managed. 
As the value of the portfolio or fund increases, the manager's fee 
automatically increases. The value of the portfolio may increase 
through investment growth or by the addition of investment capital 
(e.g., new investors). With each new pension plan client, an investment 
management firm typically gains an additional fee base (more assets to 
manage) without much additional work because the firm applies 
essentially the same strategies to all of its clients or to groups of 
clients.
    In contrast to the investment managers and other investment 
professionals, the governing fiduciaries of pension plans are typically 
unpaid volunteers. In a multiemployer plan setting, the governing 
fiduciary is the board of trustees, consisting of labor and management 
representatives in accordance with the Labor Management Relations 
(``Taft-Hartley'') Act. ERISA prohibits the pension plan from 
compensating these trustees for their services to the plan if they are 
(as is usual) full-time employees of the sponsoring union and of 
contributing employers. They can only be reimbursed for their actual 
and reasonable expenses incurred in performing services for the plan. 
In a single employer plan setting, the governing fiduciaries are 
typically employees of the plan sponsor whose plan duties are part of 
their corporate duties.
    In short, pension plans are at the mercy of the investment services 
community.

Investment Services Community Abuses and Corruption

    Conflicts of interest, self-dealing and other abuses are no 
strangers to the investment services community. Indeed, there seems to 
be a continuing stream of major scandals in the community. Some recent 
examples:

     Mutual Fund Abuse Scandal (2003-04): Several large mutual 
funds were found to have permitted favored customers to engage in 
market-timing and late trading abuses to the detriment of other 
investors. In addition, the SEC found that a large percentage of 
brokerage firms were assisting the favored clients to engage in these 
abuses. Several financial institutions were required to make 
restitution and pay fines in the tens and hundreds of millions of 
dollars (e.g., Bank of America--$675 million; Alliance Capital 
Management--$600 million; Massachusetts Financial Services--$350 
million; Canary Capital Partners--$40 million). The SEC belatedly took 
action to prevent these types of abuses. Notably, in a March 2004 
report, the SEC admitted that its review of mutual fund records ``did 
not reveal the covert arrangements that fund executives had with select 
shareholders'' prior to the abuses becoming public.
     Mutual Fund Overcharges (2003): The SEC and NASD found 
that more than 400 securities firms had overcharged investors for sales 
charges on mutual fund investments by $86 million in 2001 and 2002.
     Self-Dealing Investment Research (2002-03): Merrill Lynch 
agreed to pay a $100 million fine and take other actions in response to 
New York Attorney General's complaint that the Merrill Lynch analysts 
were recommending questionable stocks to investors in the hope of 
gaining the investment banking business of the companies whose stock 
they were falsely promoting. Nine other ``Wall Street'' investment 
firms entered into a private litigation settlement under which they 
collectively agreed to pay $1.4 billion.
     Insurance Broker Fraud (2005): Marsh & McLennan Companies, 
the Nation's largest insurance broker, agreed to pay $850 million in 
restitution to settle charges by the New York Attorney General that it 
steered its brokerage clients to insurance companies that paid 
kickbacks to Marsh & McLennan, and that it staged phony bidding among 
insurance companies to conceal the ``pay to play'' kickback scheme from 
clients. Even more recently, AON, the second largest insurance broker, 
agreed to pay $190 million to settle the same charges. Other insurance 
brokerage firms have been implicated as well.

    Not so long ago hedge fund manager Long-Term Capital Management had 
to be saved from collapse with a $3.6 billion bailout, that investment 
firms were peddling inappropriate derivative investments and junk bonds 
to pension plans.
    Today, as pension plans and other institutional investors search 
for higher returns in the face of predictions of low returns in 
traditional equity and fixed income portfolios, the investment 
community is developing and marketing even more complex and exotic 
investment vehicles that are supposed to outperform traditional 
investments. Some of these vehicles are so complex and multilayered 
that they are not well-understood by professionals and regulators, much 
less laymen.
    Hedge funds are being aggressively marketed to pension plans as the 
clear path to higher returns. The extraordinary management fees charged 
by hedge funds (typically 2 percent of assets plus 20 percent of 
capital gains and appreciation) have made hedge fund managers wealthy 
beyond imagination. Yet, dire predictions are being made that the hedge 
fund industry will produce the next major scandal. The SEC has reported 
``an increasing incidence of fraud'' among hedge funds; 51 cases of 
hedge fund theft, fraud and abuse caused a loss of more than $1 billion 
to investors. In its 2003 report on hedge fund growth, the SEC stated: 
``The Commission's inability to examine hedge fund advisers has the 
direct effect of putting the Commission in a `wait and see' posture 
vis-a-vis fraud and other misconduct.'' Federal Reserve Chairman 
Greenspan opined earlier this week that many hedge funds are pursuing 
high risk and complex trading strategies that could result in 
significant losses.
    Yet, the SEC's recent action to require the vast majority of hedge 
funds to register with the SEC for the first time in 2006 was greeted 
with condemnation in the investment community. Indeed, the SEC vote on 
the new requirement was 3-2. In commenting on this controversy in a May 
12, 2005 speech, outgoing SEC Chairman Donaldson made the following 
observations about the difficulty of expanding regulatory oversight of 
the investment community, and the difficulty of deterring and detecting 
fraud:

        ``There is a certain mindset that holds that significant 
        regulatory action is appropriate only in retrospect, or only 
        after things have gotten so bad that the risk of investor harm 
        threatens to become a certainty. We have sought to launch the 
        Commission on a different course, an approach that anticipates 
        problems before they develop, and deals with areas of concern 
        that have perhaps lingered unattended for many years with their 
        pernicious consequences long unnoticed by the public at large . 
        . . .
        ``The controversy generated by these reforms [i.e., hedge fund 
        registration and market structure reforms] both within and 
        without the Commission also illustrates the practical 
        difficulties faced by the Commission when it seeks to take 
        action that is anticipatory in nature, as well as reactive . . 
        . .
        ``At the same time, there has been an increased number of 
        enforcement actions involving hedge funds, and it was difficult 
        to deter this fraud--or to discover it--without a compliance 
        regime and a program of examinations and inspections by our 
        staff . . .
        ``If history is any guide, it is just this sort of 
        [competitive] pressure that can lead otherwise well-intentioned 
        professionals to pursue practices that ultimately result in 
        disaster for the investors that they serve.''

Inherent Conflicts Of Interest Among Investment Firms

    Conflicts of interest are inherent in some of the arrangements 
among investment community members that have come to be accepted 
practice (``everybody does it''). The most obvious of these practices 
is the so-called ``soft dollar'' arrangement. Most investment 
management firms have what are essentially kickback arrangements, 
called ``soft dollar'' arrangements, with the securities broker 
selected by the manager to execute trades for the investment manager's 
client pension plan. Under these arrangements, the investment manager 
pays a commission to the broker for the broker's services (using the 
pension plan's assets), and the broker rebates a portion of the 
commission to the investment manager in some form.
    In other words, in addition to the investment management fee that 
the manager receives directly from the client pension plan, the manager 
receives a rebate of the plan-paid commission from the broker. This is 
big business inasmuch as pension plans, mutual funds and other 
institutional investors pay billions of dollars each year in brokerage 
commissions ($12.7 billion in 2002, half of which was rebated in the 
form of soft dollar goods and services according to the Wall Street 
Journal).
    The Security Act and SEC rules allow investment managers to use 
soft dollar arrangements to obtain from brokers so-called ``research'' 
related products and services (e.g., securities research materials, 
software, Bloomberg terminals, magazine subscriptions); in essence 
allowing the use of commission rebates to offset what would normally be 
business overhead costs. This is called the Section 28(e) soft dollar 
safe harbor rule.
    In a 1998 report on soft dollar practices, the SEC observed that 
soft dollars have been used to benefit the investment managers in ways 
that went well beyond the scope of ``research.'' An SEC survey found 
that 35 percent of the brokers examined provided some clearly non-
research goods, services and other things of value to investment 
managers, including office rent, office equipment and furnishings, 
employee compensation, and personal travel and entertainment. The SEC 
also found that the disclosure requirements for such arrangements were 
widely ignored.
    While both the SEC and the Labor Department have recognized that 
soft dollar arrangements place a pension plan's investment manager in a 
conflict of interest, they have not been prohibited because Section 
28(e) remains on the books. The SEC has a Task Force on Soft Dollars 
considering whether to narrow the scope of the ``research'' for which 
soft dollars can be used under 28(e) and whether to require more 
disclosure to pension plans and other investors about soft dollar 
arrangements.
    From the ERISA perspective, soft dollar arrangements would be 
treated as prohibited transactions, essentially like kickbacks, but for 
ERISA's deference to other Federal law, Section 28(e). So, the Labor 
Department has accept that managers may have soft dollar arrangements. 
However, according to Labor Department guidance, the plan's governing 
fiduciaries must monitor each investment manager's soft dollar 
arrangements to ensure that the manager is not being excessively 
compensated by the plan (considering both the investment management fee 
paid to the manager directly by the plan and the brokerage commissions 
rebated to the manager by the brokers). This is a mission impossible 
for most, if not all, pension plans. Pension plans do not have the 
resources or investigative authority of the SEC or the Labor 
Department.
    Another example of conflicts of interest in the investment 
community are investment consultants that have arrangements with 
investment managers and investment funds to recommend the managers or 
funds to the consultants' clients in exchange for payments or other 
things of value to the consultant (so-called ``pay to play'' 
arrangements). Pension consultants' conflicts of interest was the 
subject of a May 2005 SEC staff report. It reports that it is 
commonplace for investment consulting firms to have arrangements with 
investment managers and investment funds that compromise the 
independence of the investment advice that the consultants give to 
pension plan clients about the investment managers and funds.
    In a joint guidance statement issued on June 1, 2005, the Labor 
Department and the SEC placed responsibility for ferreting out 
consultants' conflicts of interest on the pension plans' governing 
fiduciaries. The statement is entitled: ``Selecting and Monitoring 
Pension Consultants--Tips for Plan Fiduciaries.'' I've been asked by 
clients how the government can expect them to discover such consultant 
conflicts when it took the SEC so long to find them.

Capital Consultants Fraud

    I understand that the committee is particularly interested in the 
fraud perpetrated on various pension plans by Capital Consultants LLC 
in the 1990s, and that other witnesses have recounted the facts and 
circumstances of that matter to the committee.
    To me, the Capital Consultants matter is yet another example of how 
difficult it is to prevent and detect fraud by investment firms. In 
hindsight, it all seems so clear. But, at the time, Capital Consultants 
had the appearance of propriety: a large client base, good performance 
figures, and some good references. Moreover, the collateral notes 
investment pool being marketed by Capital Consultants was a complex 
investment. Some of the pension plans' consultants blessed the plans' 
investment with Capital Consultants, although it is unclear how deeply 
they probed (or were capable of probing) into the complexities of the 
investment and the undisclosed arrangements among the players.
    It was not until after Capital Consultants' collapse--with the 
benefit of aggressive and expensive private litigation and intervention 
by the SEC and Labor Department--that the corrupt machinations among 
Capital Consultants, Wilshire Financial, and various other firms and 
individuals were uncovered. Few, if any, pension plans have the 
wherewithal to engage in such an indepth investigation of sophisticated 
conspiracies and complex financial instruments.
    Much has been made of the fact that Capital Consultants salesman 
Dean Kirkland provided free trips and other valuable gifts to some 
trustees of some pension plans, and that one trustee was paid 
substantial cash kickbacks. Needless to say, this conduct was improper 
in an ERISA context. Kirkland and a trustee who received the cash 
kickbacks were properly convicted of crimes under existing law. There 
is no lack of law prohibiting such misconduct, or governmental 
authority to investigate. Section 1954 of Title 18 of the United States 
Code, under which Kirkland was convicted, makes it a crime for service 
providers (and others) to offer or give a kickback to ERISA plan 
fiduciaries, and makes it a crime for any ERISA plan fiduciary to 
solicit or receive a kickback. In addition, ERISA itself treats such a 
kickback as a prohibited transaction that subjects the giver and the 
recipient to various civil remedies. And, in the context of labor-
management relations, the Taft-Hartley Act (Section 302 of Title 29 of 
the United States Code) generally prohibits employer payments to union 
representatives.
    The Labor Department's Employee Benefits Security Administration 
has broad authority (including subpoena powers) to investigate whether 
such a criminal or civil violation has occurred. In the context of 
multiemployer plans, the Labor Department's Inspector General also has 
criminal investigative authority.
    The fact is that many in the investment community consider ``travel 
and entertainment'' for pension plan clients to be normal marketing; 
the kind of thing that ``everybody does'' because if they don't their 
competitors will. This is how business is conducted in the marketplace. 
I've heard some investment firm representatives say that their firms 
get upset if they don't spend their marketing budgets to get ``face 
time'' with clients. There seems to be little understanding among 
investment firms, or at least their representatives, that some 
marketing practices that might be ``business as usual'' are simply 
unlawful, even criminal, if used in the context of an ERISA-covered 
pension plan. This needs to change, but will only change if the 
investment firms realize that their business interests are better 
served by compliance with ERISA's restrictions on payments to or for 
plan fiduciaries. If investment firm representatives cease offering 
gifts and gratuities to plan fiduciaries, there will be nothing for 
plan fiduciaries to accept.

Conclusion

    In sum, protecting pension plans from fraud requires a commitment 
to greater regulatory oversight of the investment services community. 
It is unrealistic to expect that pension plans can adequately protect 
themselves against sophisticated schemes involving complex financial 
transactions and secret conspiracies conceived and executed by smart 
people who are motivated by unmitigated greed. Only the SEC has the 
authority, expertise and other resources needed to deter and detect 
investment fraud. The question of the day is whether the SEC has the 
will and backing to more aggressively police the investment community. 
Thank you again for this opportunity to participate in the committee's 
discussion of this important issue. I would be pleased to answer your 
questions.

    The Chairman. A very interesting panel, probably more 
specific suggestions than we usually get on any of the action 
that we are contemplating, so I appreciate all the expertise 
that is gathered here. I will ask a few questions to get a 
little bit more information from you. And again, members of the 
committee will be submitting questions in writing so that we 
can add to the record today, too.
    Mr. Grayson, again, I want to thank you for your 
willingness to participate in the hearing today. The 
information and insights that you provided go a long way toward 
assisting in preventing future pension frauds.
    Now, you stated that the Department of Labor had several 
opportunities to uncover the Capital Consultants scheme but 
that it was the SEC that more decisively uncovered this Ponzi-
like scheme and examined the collateralized note program. Can 
you describe the instances in which the Department of Labor or 
other government agencies reviewed the books and records of 
Capital Consultants and your observation about the 
effectiveness of those reviews? I am particularly interested in 
your perspective on the difference in enforcement capability 
between the Department of Labor and the SEC.
    Mr. Grayson. Yes, sir. The Department of Labor reviewed 
Capital's books and records actually consistently over many 
years, the first of which was in 1992 when they opened their 
file, and then the second of which was in 1997, all told, 
almost--over 8 years of ongoing investigations by the 
Department of Labor where they were looking in depth at all of 
Capital's private investments.
    Unfortunately, though, that review over both periods of 
time was not to the point where individual details associated 
with those private investments were really focused on. There 
was not a real forensic accounting analysis done of the private 
investments on either occasion. It was more kind of a general, 
broad approach. They did look at them all, but instead of 
focusing on the more complex transactions, like the Wilshire 
investment, during both cases, it was really more of a focus on 
the more simpler ones, easier to get their hands around, which 
unfortunately, I think, resulted in missed opportunities.
    The SEC, on the other hand, when they came in, they came in 
with a team. I believe there were five forensic accountants 
that came in. They interviewed everybody in our office. They 
looked at every file, every single page, and they basically 
camped at our office that entire time. They were very diligent. 
They talked to clients. They looked at correspondence. They 
pretty much did everything one could ever hope for from a true 
audit. And then they reacted very quickly.
    So I guess the real difference in perspective between the 
two agencies, from my perspective, is that one resulted in 
general conclusions about problems with specific private 
investments but didn't result in any true uncovering of real 
issues and took more of a legal approach, a general, simple 
approach, whereas the other took a very detailed, focused look 
at all of the assets in our management and uncovered wrongdoing 
very quickly and then took immediate corrective action.
    The Chairman. You mentioned forensic accountants coming in. 
Were the others, were the Department of Labor folks accountants 
or----
    Mr. Grayson. They were attorneys, primarily, coming in. 
They lacked an overall business skill set, and in fact, our 
counsel even pointed that out to them on several occasions. To 
understand private investments, it takes an extensive business 
background, accounting background. As you are aware, numbers 
can be adjusted and one has to truly know what the available 
options are and how to understand the true basis for a lot of 
these investments. Fortunately, the SEC had the staff and had 
the capabilities and went in there hard and spent the time. It 
is spending the time that is critical. You can't get by with 
just a couple days on site. You need to really go in and talk 
to everybody.
    The Chairman. Thank you. Could you expand a little bit on 
the nature of the collateralized note program and its 
significance to Capital Consultants in this operation? I am 
also interested in understanding how the private auditors and 
the government investigators can improve their oversight of 
these collateralized note programs.
    Mr. Grayson. The collateralized note program is really just 
a branding title that my father and Capital assigned to a 
subprime lending program, a receivable basis program, which, by 
the way, the receivables at the end of the day were effectively 
straw receivables. So there were obviously deficiencies in the 
program itself.
    But in terms of the program, because it was defined as 
effectively a high-income-producing fixed-income investment, it 
provided a very high rate of return, which was desirable to a 
lot of the Taft-Hartley regulated funds with which Capital was 
marketing. As a result, when Capital would go into client 
presentations for new money, they would be competing against 
other money managers who had publicly traded debt instruments 
as alternatives. The relative comparison is that the 
collateralized note program would provide investment returns 
typically 400 or 500 basis points higher than what the rest of 
the market was available.
    Obviously, that inherently means that there is higher risk, 
collateral potential issues, a variety of other options. But in 
the end, Capital was typically selected over other money 
managers on a regular basis because nobody could compete with 
that product.
    That, as a result, resulted in a very continuing flow of 
funds into the company. They were regular. They were coming in 
monthly in large amounts, millions of dollars, and they would 
come in and those dollars were the source of funds that allowed 
the Wilshire investment and other collateralized notes to be 
kept current, effectively. If the source of those dollars did 
not continue, then what occurred could not have occurred.
    In terms of what regulators could have done, from a 
governmental standpoint, they have authority to come in at any 
time and spend a significant amount, more amount of time. When 
the initial red flags went up, in my opinion, there should have 
been more analysis done. That was actually prior to my arrival 
at the firm. But the analysis should have been more intense.
    Just as an example, that $2 million fine that was imposed 
by the Department of Labor, the source of those funds were 
actually from Wilshire. Wilshire loaned my father the $2 
million, which was then in turn paid to the clients. Then those 
$2 million that were paid to the clients in turn were returned 
to Capital to invest on their behalf, and then that $2 million 
was, in turn, loaned back to Wilshire. So that circular nature 
of funds could have been pretty easily identified by a forensic 
accountant or somebody who went in within a very short period 
of time and the Department of Labor instead just asked for a 
letter from Capital confirming that they were, in fact, 
Capital's own funds. So there is a pretty significant 
difference.
    The Chairman. Thank you.
    Mr. English, in your testimony, you mentioned some other 
people that are here with you, but we don't know who they are. 
Would you mind re-introducing the----
    Mr. English. Absolutely. I would be happy to, Mr. Chairman. 
I mentioned my partner, Bob Miller.
    Mr. Miller. Good morning, Mr. Chairman.
    The Chairman. Good morning.
    Mr. English. And Joe Gavalas and Norm Transit. And I 
reluctantly admit that Mr. Transit is a forensic accountant--
[Laughter.]--although I think the lawyers had something to do 
with this, also.
    The Chairman. Oh, yes.
    Mr. English. Mr. Farnell, Mike Farnell, he is another 
attorney that was a member of the consortium.
    The Chairman. Thank you. It is usually almost impossible 
for accountants to operate without attorneys, but once in a 
while, when there is something good said about them, I do like 
to emphasize that.
    [Laughter.]
    Which I would do for attorneys, too.
    [Laughter.]
    Mr. English. Understood.
    The Chairman. Now, it appears that the consortium of 
attorneys and other professionals who pulled together to deal 
with this matter were unusually successful in rapidly returning 
the trust fund the hundreds of millions of dollars that the 
workers lost in the pension and the benefit funds. In your 
view, why was the consortium so successful at getting back so 
much of the money in this particular case?
    Mr. English. There are several reasons. No. 1, I think we 
quickly got our arms around the facts in the case to create a 
strong understanding of the facts as well as a variety of legal 
theories that, frankly, went beyond the normal ERISA remedies. 
Oregon is blessed with a Securities Act that creates liability 
not just for the issuer of a security, but for those who 
materially aid in a debt, and that was a tool that we were able 
to use as a part of our claim.
    In addition to having a strong case, we had an extremely 
cooperative Federal judge, Judge Garr M. King, who shut down 
discovery before it got rolling. That allowed us to take a more 
business-like approach to gathering information quickly without 
individuals having to go through the typical extremely 
expensive scorched earth discovery process.
    And we were able to share with the other plaintiffs or 
potential plaintiffs all of our information that we had 
gathered. We did this because we thought the most efficient way 
to get this done was to have a united front of attorneys making 
one claim so that a defendant could write one check and have 
all of his claims resolved.
    Typically, this doesn't occur. Typically, resolutions are 
slowed because a defendant not only has to deal with a 
particular plaintiff, but with cost claims by other defendants 
or by claims that could exist for not yet identified 
plaintiffs. We solved those problems through a mechanism that 
allowed recovery and settlement by a defendant to resolve all 
issues at once.
    The Chairman. Thank you.
    Mr. Grayson, from your statement, it sounds as though there 
wasn't any limit under the pension laws on the gifts and 
gratuities that firms can provide to pension fiduciaries. It 
also sounds as though the gifts and gratuities were a major 
part of Capital Consultants' method of conducting business. 
Could you explain to the committee how much was set aside 
annually for gifts and gratuities and describe a little bit 
more about how the firm used those gifts and gratuities to 
conduct business? I am particularly interested in the extent to 
which you believe other firms across the country might be using 
gifts and gratuities, as well.
    Mr. Grayson. Yes, sir. Capital Consultants had an annual 
budget for travel and entertainment of Taft-Hartley regulated 
funds and also other trustees of $500,000. It was an annual T&E 
budget that was exhausted each year.
    The use of gifts and gratuities is very prevalent in this 
industry. It is known as the wine-and-dine industry. There are 
exceptions. You are one of them. But there are exceptions to 
the rule, but it goes on quite often. Unfortunately, it is to 
the point where it is almost expected.
    When I talked about the expensive dinners and the trips 
before, those are all regular events and those are things that 
are experienced not only by ourselves but by our competition. 
From my personal experience, I know that it was going on in 
most of our competitors associated with the trustees. In our 
industry, it is viewed that you have to maintain your 
relationship with trustees, and therefore, wining and dining is 
part of that.
    Others, the general rule that we go by is that there is not 
supposed to be anything taken of value away from a trustee 
following some sort of entertainment. Obviously, Capital 
historically did not follow that rule to the letter, and 
unfortunately, in my personal opinion, I believe that that goes 
on, as well. But that general rule of thumb of not taking away 
anything of value is the kind of guideline that we deal with.
    Of more difficulty in dealing with the current law, the 
current law, as was witnessed in the recent trial associated 
with this case of two trustees, unless it can be proven that 
gifts and gratuities directly influenced their investment 
decisions and behavior, it was determined that they were not 
guilty, and that was the finding of the court. So if there is 
no criminal conduct associated with the receipt of gifts and 
gratuities unless you can prove, and that is very difficult to 
prove, that it influenced decisions, it is going to continue 
that way for quite a while because it is a normal course of 
business.
    Obviously, not everybody does this and there are some very 
good standpoints, people who rest entirely on their performance 
alone, but it is a regular event.
    The Chairman. Thank you. I appreciated your comments and 
your testimony on that, too.
    Mr. English--and I will get to the other two here in a 
minute--do you know what benefit plan service providers think 
about current provisions and practices regarding gifts and 
gratuities within the industry? In your opinion, does Congress 
need to clarify or prescribe additional rules?
    Mr. English. As to the first question, Mr. Chairman, I am 
not a benefit plan service provider myself, but I have some 
experience and have been exposed to them. I think it is 
confusing, at the least. Marketing 101 for business in the 
United States is that one wines and dines one's clients. I am 
sure you are familiar with that from your experience in the 
accounting industry and other industries. Taking a client to 
lunch, taking a client to a game or whatever is considered 
standard operating procedure.
    To have that same kind of conduct be not just a basis for 
civil but criminal liability makes it confusing, and as Mr. 
Barclay Grayson just identified, the definition is one that is 
somewhat confusing. It needs to be clarified. If Congress 
really wants to prohibit any kind of influence, then they 
should have it a broader-based law as opposed to what I 
perceive right now to be a rifle shot.
    The opinion of Judge Brown actually sets that out in some 
detail. She was the judge that articulated some of the problems 
with the current law.
    The Chairman. And we will pay some particular attention to 
the way that she expedited that. I appreciate that.
    Mr. Ray, would you like to comment on that, gifts and 
gratuities.
    Mr. Ray. If I may, Mr. Chairman. This is that intersection 
between market ethics and fiduciary duty that I was talking 
about before. I agree with my colleague, Mr. English, that that 
is the way business is done, and I think in the investment 
community, they don't see the bright line between the way 
business is normally done and when you are dealing with an 
ERISA fiduciary, an ERISA plan. The rules are different. The 
morals of the marketplace aren't enough, as I say in my written 
statement. The U.S. Supreme Court has observed that, as well.
    There has to be a change in culture in the investment 
community. Either through education or other means, they have 
to understand that it is not the right thing to do and they 
have to understand that if they stop doing wrongdoing, they are 
not going to have to worry about losing the business to some 
competitors. There has to be some assurance, a safe harbor, if 
you will, in the investment community as to not assure they are 
going to lose business if they don't provide gifts and 
gratuities.
    Another quick point. Current law prohibits these things. 
There isn't an absence of law, again, Mr. Chairman. They are 
prohibited transactions under ERISA. They are breaches of 
fiduciary duty under ERISA. And they can constitute criminal 
violations of Section 1954.
    Now, with regard to the District Court decision that has 
been referenced by Mr. Grayson, I, frankly, think that the 
District Court was wrong and I think her decision was 
inconsistent with a whole collection of other Court of Appeals 
cases in other Federal courts. It is no, I think, coincidence 
that her opinion fails to mention any of these other 1954 cases 
that have been decided before that have a different standard of 
intent that is required. I think it is, frankly, one District 
Court decision that is wrong. It is not some systematic problem 
with the Federal statute.
    The Chairman. Thank you. I paid particular attention when 
you mentioned this under section of ethics and fiduciary 
responsibility. I read a book by a friend of mine, Amitai 
Etzioni, who is an economics professor at the George Washington 
University. He taught ethics at Harvard Business School in the 
1970s. It is an interesting chapter in his book about how black 
and white the questions had to get before he could get them 
away from the question of how does it affect the bottom line. 
If you think about it, the ones from the 1970s would be the 
corporate managers today.
    I am not particularly picking on the Harvard School of 
Business, but that is the only example that I had of somebody 
that went to teach ethics that early. It was very distressing 
to see what the schools might have been doing at that point in 
time.
    Mr. Endicott, what message would you want to send to the 
Department of Labor, who is responsible for regulating the 
pension fund fiduciaries?
    Mr. Grayson. Well, I think in hindsight, if this would have 
been discovered earlier, a little more attention made to it, it 
would have saved millions and millions of dollars to our 
participants of our trusts. Just the lack of getting to the 
bottom of what was going on and not letting the prior trustees 
know there was an investigation going on really harmed our 
members. If you see something is wrong, you should go after it, 
and the delay in time cost lots of money to our members.
    The Chairman. Is there any particular message you would 
like to send to the pension fund fiduciaries who were, you 
know, making these investment decisions?
    Mr. Grayson. It is just--you have got to look really hard 
at the people's money you are investing. These are just hard-
working folks. They know how to put pipe in the ground and 
build powerhouses and hospitals and schools and that is why we 
hire those professionals, licensed professionals, to look out 
for the best interest of our funds. That should be their prime 
mission.
    The Chairman. Thank you.
    I have some other questions, but I will submit those in 
writing to you. They, again, they get into more specific 
accounting actions and a little bit more detail on some of the 
shortcomings and limitations that each of you may have found as 
you worked on it.
    I really appreciate your outstanding testimony today and 
this bank of expertise that we have. We will try and utilize it 
so that problems like this don't happen in the future and make 
sure that Congress does what it can do, which is not only 
making laws, but also providing some oversight over the 
agencies that are responsible for these sorts of things and 
making sure that coordination happens. Obviously, from an 
accounting standpoint, there are some things in coordination 
that can be done that will help to disclose things a little bit 
earlier.
    I thank you all for being here. The record will stay open 
for another 10 days so that others can submit questions and 
also so that any of you can expand on your testimony, if you 
wish to. Thank you.
    The hearing is adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

Response to Questions of Senators Enzi, Kennedy, Hatch, and Bingaman by 
                             Alan Lebowitz

                              SENATOR ENZI

    Question 1. You testified that EBSA is regularly in contact with 
the SEC regarding investment advisor and related fiduciary enforcement 
matters. Excluding telephone calls and e-mails, how often and at what 
level have EBSA officials met with the SEC during the past 6 months and 
what matters were discussed at those meetings? Have EBSA and the SEC 
formalized how often to meet and what their joint enforcement 
priorities are?
    Answer 1. EBSA works very closely with a number of Federal 
Agencies, including the SEC, IRS, PBGC, the Department of the Treasury, 
DOJ, and OCC on a wide variety of interpretative and enforcement 
issues. For example, the Department and the SEC staff recently jointly 
published ``Selecting and Monitoring Pension Consultants--Tips for Plan 
Fiduciaries,'' following the release of an SEC staff report on 
potential conflicts of interest by pension consultants. In addition, we 
worked very closely with SEC staff in the development of our 
regulations under the Sarbanes-Oxley Act and in the review of their 
regulations. EBSA routinely seeks comment from SEC, IRS, and OCC and 
routinely provides comments to these agencies on matters of mutual 
interest and concern.
    Some Agencies, such as the SEC, IRS, and Federal banking agencies, 
require special procedures in order to share investigative information. 
We find that these procedures provide a workable framework, and we have 
no difficulty in coordinating and sharing investigative information 
with these Agencies. Meetings between the SEC and EBSA are held as 
needed, and there is frequent telephonic communication as well. 
Meetings between EBSA and the SEC are summarized in Appendix 1.

    Question 2. GAO indicated that ``targeting'' remains a ``big 
concern'' and that, while improvement has been made, EBSA needs to be 
more proactive and less reactive. You testified that EBSA does not 
measure success based on the effectiveness of its targeting, but 
instead measures success based on the aggregate results of opened 
investigations. How do you determine which plans to investigate in the 
first place? How is the EBSA targeting program proactive?
    Answer 2. Broadly speaking, case selection is guided by EBSA's 
Strategic Enforcement Plan (StEP), which sets forth our national long-
term investigative priorities and establishes a general framework by 
which EBSA's enforcement resources are focused to achieve the Agency's 
policy and operational objectives as established by the Secretary and 
Assistant Secretary. Short-term enforcement priorities are established 
annually, through the Program Operating Plan (POP) Guidance issued by 
the national office. Preparation of the POP Guidance begins with the 
identification of recent enforcement trends, an analysis of particular 
areas of noncompliance, and a review of current policy considerations. 
In this manner EBSA shifts its enforcement resources to respond quickly 
when new and emerging issues are spotted while staying within the long-
term framework established by the StEP. It is through the POP Guidance 
that EBSA establishes each fiscal year's national enforcement projects, 
provides guidance for choosing regional enforcement projects, 
identifies any other specific policy priorities that will require 
investigative resources, integrates the Agency's GPRA goals into the 
planning process, and provides general guidance with regard to the 
selection of investigations.
    EBSA's Regional Directors have discretion in the use of their 
investigative resources as long as sufficient resources are made 
available to perform necessary investigative functions in connection 
with designated national projects and policy priorities. For fiscal 
year 2005, EBSA has identified the following national enforcement 
projects: Employee Contributions Project (delinquent employee 
contributions); Health Fraud/Multiple Employer Welfare Arrangements; 
Orphan Plans; Rapid ERISA Action Team (bankruptcy issues); and Employee 
Stock Ownership Plans. In addition, regions are encouraged to develop 
and implement regional projects, with national office review and 
approval. Such regional projects focus on plans, investments, service 
providers, and other arrangements that warrant concentrated attention 
in a particular geographic jurisdiction. Through the use of this 
format, which combines flexibility with oversight, EBSA has a proactive 
targeting program.
    Specific cases may be selected based on the analysis of the Form 
5500 Annual Report database, computer targeting, referrals from the 
national office or other Government Agencies, leads from bankruptcy 
trustees and plan service providers, information reported in the media, 
and complaints from participants or other people. The results of this 
review are used to enhance EBSA's targeting program.
    The Voluntary Fiduciary Correction Program (VFCP) is the 
Department's correction program for fiduciary breaches. EBSA 
implemented the VFCP in 2000 and enhanced the program in 2002 and 2005. 
The VFCP enables plan officials and their service providers to self-
identify and correct certain violations of Title I of ERISA. If an 
eligible party documents the acceptable correction of a specified 
transaction in its application to EBSA, EBSA will issue a no-action 
letter. EBSA is proactive in its efforts to reach out to fiduciaries to 
self-identify and correct ERISA violations through VFCP conferences and 
workshops, a comprehensive Web site and general education. In the last 
fiscal year, EBSA verified $264 million in corrections under the VFCP 
involving 436 plans.

    Question 3. What percentage of fidelity bonds complies with ERISA? 
What is the Department's process for assuring compliance? Does EBSA 
either monitor individual ERISA plans to make sure the form of bond is 
correct or monitor the largest insurers to verify their issuance of the 
correct type of bond?
    Answer 3. So far this fiscal year EBSA found that 79 percent of the 
employee benefit plans investigated have fidelity bonds that comply 
with ERISA. For the past 5 fiscal years (current year included) 81.6 
percent of employee benefit plans investigated have fidelity bonds in 
compliance with ERISA.
    In every investigation, EBSA investigators determine plan 
compliance with the fidelity bonding requirements under ERISA section 
412. Section 412(a) of ERISA requires that every fiduciary and every 
person who handles plan assets be covered by a fidelity bond in an 
amount not less than 10 percent of the plan assets handled by such 
person. Per the statute, the amount of the bond is required to be not 
less than $1,000 but no more than $500,000. The surety on the bond must 
be an acceptable surety on Federal bonds as approved by the Secretary 
of the Treasury (listed in U.S. Treasury Circular 570). EBSA 
investigators complete a bonding checklist and/or bonding calculation 
spreadsheet for every investigation. Additionally, investigators cross-
reference the sureties used by the plans with the Treasury's Listing of 
Approved Sureties located on the Treasury Web site.
    EBSA seeks correction of ERISA section 412 violations by inquiring 
whether fiduciaries and other persons that handle plan assets are 
covered by the bond; the bond is for the appropriate dollar amount; the 
bond pays from the first dollar loss (no deductibles are permitted); 
and the bond names the plan or plans as the insured or has a rider or 
separate agreement to make certain that any reimbursement collected 
under the bond will be for the benefit and use of the plan suffering a 
loss.

                            SENATOR KENNEDY

    Question. Barclay Grayson testified that there were stark 
differences between EBSA's investigations of Capital Consultants and 
those of the SEC. Notably, he said that EBSA's personnel lacked the 
necessary accounting skills. What is being done to recruit and retain 
the personnel needed to detect violations?
    Answer. EBSA actively recruits and retains highly qualified 
personnel who have the professional skills necessary to root out the 
sort of fraud that Mr. Grayson perpetrated against the innocent workers 
and families whose retirement plan assets were invested with Capital 
Consultants. EBSA played a central role in the criminal investigation 
that led to Mr. Grayson's conviction and prison sentence. Our 
investigators have expertise in a wide variety of fields including law, 
accounting, banking, securities, and business. We recruit entry-level 
investigators and auditors who have specialized experience in such 
areas as accounting, finance, economics, business, insurance, 
securities, and banking, or who have graduated with advanced degrees. 
For other than entry-level investigative positions, EBSA requires 
specialized experience relevant to conducting complex financial 
investigations, such as past work experience in government, a law firm, 
a pension plan administration firm, or a bank trust department.
    Our Agency has an active training program for its employees. All 
EBSA investigators attend a comprehensive basic training course on the 
fiduciary responsibility provisions of ERISA that also covers civil and 
criminal investigative techniques. EBSA's specialized criminal 
enforcement training is provided to most investigative staff. The 
criminal enforcement course includes guest speakers from the Department 
of Justice, U.S. Probation Office, Federal Law Enforcement Training 
Center (FLETC), local prosecutors and private sector attorneys 
specializing in criminal defense. Individuals without a significant 
accounting background also attend EBSA's Employee Benefit Plan 
Accounting training. These courses are all residential programs of at 
least 2 weeks in length, and offer academic and practical instruction 
led by EBSA staff and guests from government and the employee benefits 
field. In addition, EBSA's Office of Enforcement provides annual field 
office training on topics determined by enforcement priorities, 
regulatory and legal developments, and industry trends. Also, on a 
space available basis, some of our investigators attend courses such as 
Law Enforcement Advanced Interviewing Techniques and Financial Forensic 
Techniques at the FLETC in Glenco, Georgia. EBSA encourages on-board 
staff to acquire additional training, and agency funding has enabled 
individuals to attain the Certified Employee Benefits Specialist and 
Certified Fraud Examiner designations and other credentials as well as 
maintain other professional certifications.
    With respect to accounting skills, we would note that not only do 
we provide training for our accountants and investigators, but we also 
have an aggressive program to improve the skills of the accounting 
profession generally with respect to employee benefit plan audit and 
accounting issues. Since 1988, EBSA has worked closely with the 
American Institute of Certified Public Accountants (AICPA) to update 
the guidance and technical materials available to CPAs performing 
employee benefit plan audits.
    Without question, recruiting and retaining high quality people is a 
challenge for every organization--public and private. We work in an 
area for which there is great demand for experienced people in the 
private sector as well as in government. Although we do experience 
attrition as employees move to positions outside EBSA, we also have had 
success in hiring people from other Federal regulatory agencies and the 
private sector.

                             SENATOR HATCH

    Question. Mr. Lebowitz, with respect to monitoring and enforcement, 
what went wrong in the Capital Consultants case? What lessons has DOL 
learned from this case?
    Answer. Applying the measures that are traditionally used to judge 
the success or failure of an investigation, the CCL case had a very 
positive outcome. In the civil case, the cooperative actions of the 
Department of Labor and the Securities and Exchange Commission resulted 
in the appointment of a receiver and the recovery of approximately $291 
million or 70 percent of the losses suffered by plans and other CCL 
investors. The Department conducted 58 related investigations of the 
actions of trustees of investing plans and filed 19 lawsuits against 
the trustees of 34 plans. These cases resulted in the recovery of an 
additional $9.2 million and called for important injunctive relief such 
as the retirement or resignation of 51 plan trustees and the permanent 
bar of 31 trustees and one investment adviser from further plan 
service. The task force that conducted related criminal investigations, 
which included EBSA, the FBI, IRS, OIG and OLMS, resulted in the 
Justice Department indicting 11 individuals for various crimes. Seven 
of these individuals pleaded guilty, and one was convicted. It is fair, 
however, to ask why the investigation took as long as it did, and what 
could have been done to prevent the fraud from occurring in the first 
place.
    To be successful in an ERISA action such as CCL, the Department 
must prove that the offending party was a fiduciary under the statute's 
functional definition, that the actions taken by the fiduciary were, in 
fact, imprudent (which almost always requires sophisticated financial 
analyses and the use of expert witnesses) or an act of fiduciary self-
dealing or other breach of a fiduciary's obligations under ERISA. 
Finally, we must prove that the violation caused the losses that we 
seek to recover. The scheme constructed by CCL was extraordinarily 
complex and sophisticated. CCL consistently misled its investors about 
the nature of the transactions and existence and magnitude of the 
resulting losses. As Mr. Grayson acknowledged in his written testimony, 
the Wilshire transactions were ``complex'' arrangements designed to 
give ``the false impression that all of the firm's loans were fully 
performing, fully secured, and of limited risk.'' CCL co-opted 
attorneys, accountants, and investment advisers into putting their 
stamps of approval on its Ponzi scheme. EBSA's investigators were able 
to unravel the scheme despite Mr. Grayson's deliberate efforts to hide 
the truth through a complex series of paper transactions, shell 
companies, and false reports. Even with the benefit of hindsight, a 
completed investigation, and the explanatory materials created by the 
Government in connection with that investigation, it is no simple 
matter to grasp all the elements of the fraud in which Mr. Grayson 
participated.
    No shortcuts were available to EBSA to uncover and remedy CCL's 
violations, nor is it likely that additional investigative resources 
would have allowed EBSA to stop the scheme much sooner. EBSA expended 
significant resources on more than 60 CCL-related investigations, 
sorting through the thousands of pages of documents, interviewing 
numerous witnesses, and figuring out exactly what happened. As is our 
practice, EBSA puts the resources on the investigations as they are 
needed, and will continue to strategically deploy its investigative 
resources to address the most egregious problems. The lawsuits and 
recoveries, which followed EBSA's investigation, represent the work of 
many people and organizations, public and private, but the results all 
built upon the foundation laid by EBSA's investigation.
    In our view, schemes like that presented in the CCL case can 
succeed only when they are provided with a veneer of respectability by 
the attorneys, accountants, investment advisers and other professionals 
employed by the perpetrator. The failure of those directly responsible 
for protecting plans, their trustees and their advisers, to understand 
the true nature of CCL's investments or even adhere to their own 
investment guidelines was a necessary ingredient in the success of the 
scheme. As late as 3 months before we and the SEC shut down CCL, 
counsel for several plans was disputing with us that a loss had even 
been experienced.

                            SENATOR BINGAMAN

    Question 1. In responding to my questions, you seemed to imply that 
the majority of those people who provide investment advice to plans are 
not fiduciaries. That is contrary to my understanding of recent case 
law. Could you please elaborate on your answer to clarify your 
position?
    Answer 1. ERISA-covered plans and their fiduciaries rely upon many 
consultants and service providers to assist them in plan administration 
and asset management. Not all of these consultants and service 
providers are fiduciaries. In general, ERISA takes a ``functional'' 
approach to fiduciary status--a person is a fiduciary to the extent he 
engages in certain ``fiduciary'' activities, without regard to title or 
position. Under ERISA, a person acts as a fiduciary when he or she (i) 
exercises discretionary authority or control over the management of a 
plan or exercises any authority or control over the management or 
disposition of its assets, (ii) renders investment advice for a fee or 
other compensation, direct or indirect, with respect to any moneys or 
other property of a plan or has any authority or responsibility to do 
so, or (iii) has discretionary authority or responsibility in the 
administration of a plan.
ERISA  3(21)(A), 29 U.S.C.  1002(21)(A).
    The term ``investment adviser'' is not defined under ERISA. The 
Investment Advisers Act of 1940 defines ``investment adviser'' but only 
for purposes of securities laws.\1\ All ``investment advisers'' under 
the Investment Advisers Act are fiduciaries for purposes of the Federal 
securities laws. Many persons who provide investment services to ERISA 
plans call themselves investment advisers as well as consultants, 
investment monitors or performance monitors. Investment advisers who 
lack authority or control over plan assets are not fiduciaries under 
ERISA unless they render investment advice for a fee or other 
compensation with respect to plan assets, in a manner described in the 
Department's regulations.
---------------------------------------------------------------------------
    \1\ Under the National Securities Markets Improvement Act of 1996 
and SEC rules, investment advisers register with the SEC if they 
provide continuous and regular supervisory or management services to 
securities portfolios totaling at least $25 million, or if they act as 
a pension consultant with respect to assets of plans having an 
aggregate value of at least $50 million. Other investment advisers are 
regulated by State securities administrators.
---------------------------------------------------------------------------
    Under the Department's regulations, a person renders investment 
advice to a plan only if the person gives advice as to the value of 
securities or other property or makes recommendations as to the 
advisability of investing in, purchasing, or selling securities or 
other property, and either (1) has discretionary authority or control 
over purchasing or selling securities or other property for the plan, 
or (2) renders the advice on a regular basis pursuant to a mutual 
agreement or understanding that the advice will serve as a primary 
basis for the plan's investment decisions, and that the advice will be 
individualized to the plan based on the plan's particular needs. The 
courts have consistently accepted these five requirements for finding 
an investment adviser to be an ERISA fiduciary from the regulation's 
promulgation in 1975 to the present. See, e.g., Dudley Supermarket, 
Inc. v. Transamerica Life Ins. & Annuity Co., 302 F.3d 1 (1st Cir. 
2002) (a financial services company was a fiduciary where it was 
compensated as the primary, individualized and routine provider of 
investment advice for the plan); Thomas, Head & Greisen Employees Trust 
v. Buster, 24 F.3d 1114 (9th Cir. 1994), cert. denied, 513 U.S. 1127 
(1995) (a mortgage broker who sold trust deeds to a plan was a 
fiduciary where all five elements of the test were satisfied); 
Schloegel v. Boswell, 994 F.2d 266 (5th Cir.), cert. denied, 510 U.S. 
964 (1993) (insurance broker who advised the plan on insurance 
purchases did not meet the five requirements and therefore was not a 
fiduciary).
    As the SEC noted in a recent staff report on pension consultants, 
many consultants believe that they have structured their arrangements 
with plans so that they are not ERISA fiduciaries. Even if a consultant 
is an SEC-registered investment adviser and, consequently, owes a 
fiduciary duty to its clients under the Advisers Act, the consultant is 
an ERISA fiduciary only if it meets the five requirements set forth 
above. If, for example, the consultant provides advice on an irregular 
basis, or does not provide advice specific to the particular needs of 
the plan, he is not an ERISA fiduciary. The consultant's status in any 
particular case depends on the specific facts and circumstances of that 
case.

    Question 2. In responding to my questions, you stated that the 
Department of Labor has not brought many cases or enforcement actions 
against investment advisers. Could you please provide a brief summary 
of all the cases/actions over the past 10 years or so that have been 
brought against investment advisers, including the results? Also, 
please provide how many cases/actions are currently pending.
    Answer 2. Over the past 10 years, EBSA's civil investigations 
involving investment advisers yielded monetary results totaling 
approximately $1.7 billion, the correction of ERISA reporting and 
disclosure violations, the appointment of independent fiduciaries, as 
well as the imposition of internal controls. EBSA's criminal 
investigations relating to investment advisers advisors led to the 
indictment of 29 individuals. EBSA has 66 currently open criminal and 
civil investigations involving investment advisers. All EBSA cases 
conducted over the past 10 years involving civil litigation and 
criminal prosecution are summarized in Appendix 2.

    Question 3. In responding to my question, you stated that the SEC 
was the primary Agency to monitor the actions of those who provide 
investment advice to plans. What about those who provide investment 
advice but are not registered investment advisors? Do you monitor their 
activities? Does the DOL have the ability to provide adequate 
enforcement if the SEC ceases these activities? Do you believe DOL 
currently has the proper level of staffing to handle oversight of 
investment advisors?
    Answer 3. EBSA investigates ERISA plans, including their 
fiduciaries and service providers, as discussed in the response to 
Question 4 below. The agency investigates the activities of plans' 
investment advisers and consultants, whether or not they are registered 
under the Investment Advisers Act of 1940, if they provide services to 
ERISA plans. ERISA provides for the direct recovery of losses only from 
fiduciaries. If a consultant or adviser fails to meet the test for 
fiduciary status set forth in the response to Question 1 above, the 
Department could seek relief from the consultant only if he ``knowingly 
participated'' in a fiduciary breach, and could obtain ``equitable'' 
relief, including injunctive relief and the disgorgement of fees. Under 
ERISA, the Department could not recover any monetary losses caused by a 
non-fiduciary consultant's misconduct.
    If the SEC were to stop monitoring the actions of registered 
investment advisers, EBSA would continue to investigate their 
activities with respect to ERISA-covered plans.
    We are confident that our existing resources are adequate to 
fulfill our mandate under the law.

    Question 4. Does ERISA provide an adequate remedy to deter the type 
of fraud perpetrated in the Capital Consultants matter? If so, why was 
the action brought, and effectively settled, based on Oregon securities 
law?
    Answer 4. The Department of Labor and the SEC brought the initial 
lawsuits against CCL, Jeffrey Grayson, and Barclay Grayson. The 
Department based its claims on ERISA, and the SEC filed suit based on 
the Federal securities laws. The court appointed a receiver over CCL in 
the Government's litigation, and the majority of the money recovered 
for distribution--well over $180 million--has come from the receiver's 
efforts. Additionally, the Department of Labor and private parties have 
filed lawsuits against the trustees of 34 plans based upon ERISA, 
resulting in more than $27 million in judgments and penalties, and 
injunctive relief, including the removal of plan fiduciaries and the 
imposition of plan reforms.
    Private litigants, including the receiver, also recovered more than 
$100 million from a variety of non-fiduciary defendants, such as 
accountants, attorneys, consultants, and parties to the Wilshire 
transactions based, in substantial part, on State law claims of 
negligence, negligent misrepresentation, fraud, breach of contract, 
fraudulent transfers, and securities laws, as well as other State and 
Federal laws apart from ERISA. ERISA, as interpreted by the Supreme 
Court, does not provide a damage remedy against non-fiduciary 
defendants, even if they knowingly participated in a fiduciary breach. 
At most, ERISA permits the recovery of ``equitable'' relief against 
non-fiduciaries, which may include disgorgement of fees in certain 
cases, but does not include recovery of the damages caused by the non-
fiduciary's misconduct. In the cases at issue, the recoveries available 
from the State law claims were much larger than the amount of the non-
fiduciaries' fees, and the private litigants accordingly pursued those 
claims, which the Department of Labor does not have standing to assert. 
The Department did, however, file an amicus brief in opposition to 
arguments by an accounting firm that the private litigants' State law 
claims were preempted by ERISA.
    ERISA primarily gives the Secretary standing to bring claims for 
violations of its provisions in two remedial sections. First, under 
Section 502(a)(2), participants, plan fiduciaries and the Secretary can 
file suit seeking relief allowed under ERISA Section 409. Section 409 
allows recoveries only against plan fiduciaries, and includes the 
recovery of plan losses, as well as the restoration of profits made by 
a fiduciary through the use of plan assets, and other ``equitable or 
remedial relief'' as the court may deem appropriate including removal 
of a breaching fiduciary. Recently, however, one Circuit Court has 
held, incorrectly in the Department's view, that a loss recovery is not 
available, even against fiduciaries, under Section 502(a)(2), where the 
fiduciary breach harmed only some of the plan's participants and was 
not targeted at the plan as a whole. Milofsky v. American Airlines, 
Inc., 404 F.3d 338 (5th Cir. 2005).
    Second, section 502(a)(5) of ERISA allows the Secretary to sue to 
enjoin any act or practice that violates Title I of ERISA, and also 
allows other appropriate equitable relief which courts have defined as 
the relief that was ``typically'' available in courts of equity. The 
Supreme Court has held, in cases involving non-fiduciaries, that 
``equitable'' relief does not include the recovery of money damages 
(Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002); 
Mertens v. Hewitt Associates, 508 U.S. 248 (1993)), and a number of 
lower courts have extended the Supreme Court's holding to fiduciaries 
as well as non-fiduciaries, holding that no damages remedy is available 
against any defendants under ERISA's authorization for ``equitable'' 
relief. By way of contrast, the State laws at issue in the private 
litigation permitted a much broader range of recoveries and defendants. 
For example, the Oregon securities law provides a loss remedy, not only 
against the seller of a security, but against every person who directly 
or indirectly controlled the seller and every person who participated 
or materially aided the unlawful sale.

   Appendix 1. Summary of Collaboration Between the U.S. Department of
Labor, Employee Benefits Security Administration and the U.S. Securities
                         and Exchange Commission
------------------------------------------------------------------------
                  Date                          Matters discussed
------------------------------------------------------------------------
                               March 2004
------------------------------------------------------------------------
3/3....................................  An EBSA Investigator and
                                          District Supervisor met with
                                          an SEC Enforcement Attorney
                                          and two SEC Examiners to
                                          discuss potential ERISA
                                          violations uncovered during an
                                          SEC investigation.
3/8....................................  An EBSA Investigator met with
                                          two SEC Enforcement Attorneys,
                                          an Assistant SEC Branch Chief,
                                          and an SEC Assistant District
                                          Administrator to discuss
                                          conducting a joint
                                          investigation into the
                                          potential market timing
                                          activity of a particular
                                          investment management company.
3/12...................................  Two EBSA Investigators and two
                                          SEC Compliance Examiners
                                          conducted a joint interview of
                                          a witness in connection with
                                          an enforcement matter.
3/17...................................  The Associate Director of SEC's
                                          Office of Compliance
                                          Inspections and Examinations
                                          provided a 2-hour training
                                          presentation to EBSA managers
                                          and senior investigators on
                                          issues that included: SEC
                                          organization and operation;
                                          methods for identifying
                                          improper trading practices in
                                          mutual funds; and the SEC's
                                          ongoing analysis of pension
                                          consultants.
3/23...................................  EBSA Assistant Secretary met
                                          with officials from the SEC
                                          and other Federal agencies to
                                          discuss investigative
                                          coordination.
------------------------------------------------------------------------
                               April 2004
------------------------------------------------------------------------
4/29...................................  An EBSA Senior Investigator met
                                          with an SEC staff attorney to
                                          discuss the status of their
                                          investigation into an
                                          investment adviser. EBSA
                                          opened an investigation into
                                          the same subject as a result
                                          of media reports. The SEC
                                          granted EBSA access to SEC
                                          files on their pending matter.
------------------------------------------------------------------------
                                May 2004
------------------------------------------------------------------------
5/3....................................  An EBSA Senior Investigator met
                                          and began ongoing
                                          collaboration with an SEC
                                          Senior Attorney. Over the
                                          course of several months, an
                                          EBSA investigator met four
                                          times (5/3, 5/24, 6/29, & 7/
                                          16) to collaborate with the
                                          SEC to set investigative
                                          assignment report findings,
                                          and develop investigative
                                          strategy. On January 21, 2005
                                          the SEC provided EBSA with a
                                          copy of the complaint filed as
                                          a result of their
                                          collaborative effort.
5/17...................................  An EBSA Supervisor, EBSA Senior
                                          Investigator, and EBSA
                                          Investigator met with an SEC
                                          Assistant District
                                          Administrator, an SEC Branch
                                          Chief of Examinations, and an
                                          SEC Branch Chief of
                                          Enforcement to discuss the
                                          status of parallel SEC and
                                          EBSA investigations into the
                                          same company and to arrange
                                          for EBSA access to relevant
                                          SEC files.
5/24...................................  An EBSA Senior Investigator met
                                          and continued ongoing
                                          collaboration with an SEC
                                          Senior Attorney to set
                                          investigative assignment
                                          report findings and develop
                                          investigative strategy. On
                                          January 21, 2005, the SEC
                                          provided EBSA with a copy of
                                          the complaint filed as a
                                          result of their collaborative
                                          effort.
                                June 2004
------------------------------------------------------------------------
6/16...................................  An EBSA Investigator and three
                                          SEC Compliance Examiners
                                          conducted a joint interview of
                                          a witness in connection with
                                          an enforcement matter.
6/21...................................  An EBSA Senior Investigator met
                                          with an SEC Branch Chief to
                                          discuss certain issues in a
                                          prior SEC investigation, as
                                          part of an EBSA investigation.
                                          EBSA obtained documents from
                                          the SEC.
6/25...................................  An EBSA Regional Director, EBSA
                                          Group Supervisor, and two EBSA
                                          Investigators met with an SEC
                                          Associate District
                                          Administrator and an SEC
                                          Branch Chief of Enforcement.
                                          The SEC presented information
                                          to EBSA with respect to
                                          certain cases currently being
                                          pursued by the SEC. As a
                                          result, the SEC's Office of
                                          Economic Analysis offered to
                                          assist the Department of
                                          Labor.
6/29...................................  An EBSA Senior Investigator met
                                          and continued ongoing
                                          collaboration with an SEC
                                          Senior Attorney to set
                                          investigative assignment
                                          report findings and develop
                                          investigative strategy. On
                                          January 21, 2005, the SEC
                                          provided EBSA with a copy of
                                          the complaint filed as a
                                          result of their collaborative
                                          effort.
------------------------------------------------------------------------
                                July 2004
------------------------------------------------------------------------
7/7....................................  An EBSA Group Supervisor, two
                                          EBSA Senior Investigators, and
                                          two EBSA Investigators
                                          attended the 18th Annual Joint
                                          Regulatory Conference held in
                                          Los Angeles. Other
                                          participating regulatory
                                          agencies included: the Pacific
                                          Regional Office of the SEC,
                                          Public Company Account
                                          Oversight Board (PCAOB), NASD,
                                          NYSE, U.S. Attorney's Office
                                          (California, Nevada, Oregon),
                                          and North America Securities
                                          Administrators Association.
                                          State agencies included:
                                          Hawaii Department of Commerce
                                          and Consumer Affairs,
                                          Washington Department of
                                          Financial Institutions, Nevada
                                          Secretary of State, Securities
                                          Division, California
                                          Department of Commerce,
                                          Washington Department of
                                          Financial Institutions,
                                          Arizona Corporation
                                          Commission, Oregon Division of
                                          Finance and Corporate
                                          Securities.
7/9....................................  The Assistant Secretary of EBSA
                                          met with an SEC Commissioner
                                          to discuss agency
                                          coordination.
7/16...................................  An EBSA Senior Investigator met
                                          and continued ongoing
                                          collaboration with an SEC
                                          Senior Attorney to set
                                          investigative assignment
                                          report findings and develop
                                          investigative strategy. On
                                          January 21, 2005, the SEC
                                          provided EBSA with a copy of
                                          the complaint filed as a
                                          result of their collaborative
                                          effort.
7/21...................................  An EBSA Regional Director, an
                                          EBSA Deputy Regional Director,
                                          an EBSA Supervisory
                                          Investigator, an EBSA Acting
                                          Group Supervisor, two EBSA
                                          Senior Investigators, and an
                                          EBSA Investigator met with an
                                          SEC Assistant District
                                          Administrator, and an SEC
                                          Branch Chief, to discuss the
                                          SEC's audit process with
                                          respect to specific mutual
                                          funds and common collective
                                          investment trusts that were
                                          the subject of parallel SEC
                                          and EBSA investigations.
                                          During the meeting, each
                                          agency shared their regulatory
                                          backgrounds and investigative
                                          procedures, specifically with
                                          respect to auditing this
                                          particular entity for market
                                          timing and late trading
                                          issues.
7/22...................................  An EBSA Regional Director and
                                          an EBSA Senior Investigator
                                          addressed the quarterly
                                          meeting of the SEC Enforcement
                                          and the SEC Examinations
                                          sections. The EBSA staff
                                          presented information
                                          regarding EBSA enforcement
                                          matters within the region.
7/26...................................  An EBSA Senior Investigator and
                                          an EBSA Investigator met with
                                          an SEC Attorney and her
                                          assistant to obtain documents
                                          associated with an SEC
                                          investigation as part of an
                                          EBSA investigation into the
                                          retirement plan of the same
                                          company. The discussion
                                          included details of the SEC's
                                          and EBSA's respective
                                          investigations, and yielded
                                          documents obtained by the SEC
                                          during its investigation that
                                          were relevant to EBSA's
                                          investigation.
7/30...................................  The Assistant Secretary of EBSA
                                          met with the SEC Director of
                                          Compliance Inspections and
                                          Examinations and the former
                                          SEC Director of the Office of
                                          Investment Management to
                                          discuss agency coordination.
------------------------------------------------------------------------
                               August 2004
------------------------------------------------------------------------
8/3....................................  The Assistant Secretary of EBSA
                                          met with the SEC Chief
                                          Accountant to discuss Investor
                                          Education.
8/4....................................  A Senior Investigator arranged
                                          a meeting with SEC staff to
                                          discuss the findings of an SEC
                                          investigation of a plan
                                          sponsor who is also the
                                          subject of an EBSA
                                          investigation. The initial
                                          meeting led to a series of
                                          subsequent meetings on October
                                          18, 21, 22, 25, 26, 2004; and
                                          December 1, 2004. During the
                                          subsequent meetings, EBSA was
                                          permitted to review documents
                                          obtained by the SEC pursuant
                                          to its investigation.
8/11...................................  An SEC Assistant District
                                          Administrator for Enforcement
                                          and an SEC Assistant District
                                          Administrator for Examination
                                          addressed an EBSA quarterly
                                          meeting for the Boston region.
                                          The SEC staff presented
                                          information regarding SEC
                                          Enforcement efforts within the
                                          region and changes made in
                                          response to the market timing
                                          cases brought in the fall of
                                          2003.
8/30...................................  An EBSA Senior Investigator
                                          attended a corporate fraud
                                          conference sponsored by the
                                          FBI. During that conference,
                                          the Senior Investigator
                                          established a contact with an
                                          SEC staff attorney regarding a
                                          specific EBSA investigation,
                                          and referred this attorney to
                                          the appropriate regional
                                          office that was conducting
                                          this investigation. The Senior
                                          Investigator also spoke with
                                          another SEC staff attorney
                                          regarding general provisions
                                          of the Sarbanes-Oxley Act.
------------------------------------------------------------------------
                             September 2004
------------------------------------------------------------------------
9/10...................................  Two EBSA Senior Investigators,
                                          two EBSA Investigators, and an
                                          EBSA Computer Specialist met
                                          with an SEC Branch Chief of
                                          Examinations regarding the
                                          sharing of information of
                                          interest to EBSA that was
                                          collected during an SEC ``mini-
                                          sweep'' of mutual funds.
9/15...................................  An EBSA Senior Investigator and
                                          an EBSA Investigator observed
                                          an interview of a witness
                                          conducted by an SEC Staff
                                          Attorney and an SEC Branch
                                          Chief.
9/16...................................  The EBSA Director of
                                          Enforcement and two EBSA Lead
                                          Investigators met with the
                                          SEC's Director of Compliance
                                          Inspections and Examinations,
                                          an SEC Associate Director,
                                          Division of Enforcement, and
                                          an SEC Associate Director,
                                          Office of Compliance
                                          Inspections and Examinations,
                                          to address areas of concern
                                          for EBSA. Among other things,
                                          the meeting covered a GAO
                                          report on proxy voting matters
                                          and enhanced coordination with
                                          the SEC.
9/17...................................  An EBSA Investigator attended
                                          the deposition of a witness to
                                          an SEC enforcement matter. An
                                          SEC Enforcement Attorney and
                                          an SEC Examiner conducted the
                                          deposition. The deposition
                                          involved securities trades
                                          that may have violated ERISA.
9/18...................................  An EBSA Senior Investigator and
                                          an EBSA Investigator met with
                                          an SEC Staff Attorney and
                                          Chief. The SEC updated EBSA
                                          regarding the status of a
                                          particular SEC enforcement
                                          investigation that paralleled
                                          an EBSA enforcement
                                          investigation.
9/22...................................  EBSA Assistant Secretary met
                                          with officials from the SEC
                                          and other Federal agencies to
                                          discuss investigative
                                          coordination.
9/23...................................  The SEC Associate Regional
                                          Director of the Midwest
                                          Regional Office spoke at an
                                          EBSA regional office quarterly
                                          training session.
9/27...................................  An EBSA Senior Investigator
                                          observed witness interviews
                                          conducted jointly by an SEC
                                          Staff Attorney and an EBSA
                                          Investigator. The interviews
                                          were conducted to provide
                                          information simultaneously for
                                          an EBSA enforcement
                                          investigation and its parallel
                                          SEC enforcement investigation.
------------------------------------------------------------------------
                              October 2004
------------------------------------------------------------------------
10/18 and..............................  An EBSA Senior Investigator met
10/21-10/26............................   with SEC staff to discuss the
                                          findings of an SEC
                                          investigation of a plan
                                          sponsor who is also the
                                          subject of an EBSA
                                          investigation. During the
                                          meeting, EBSA was permitted to
                                          review documents obtained by
                                          the SEC pursuant to its
                                          investigation.
------------------------------------------------------------------------
                              November 2004
------------------------------------------------------------------------
11/9...................................  The Assistant Secretary of EBSA
                                          met with the Chairman and
                                          Executive Director of the
                                          SEC's Investor Education Plan
                                          to discuss investor education.
11/16..................................  An EBSA Senior Investigator met
                                          an SEC Senior Enforcement
                                          Investigator and an SEC
                                          Assistant District
                                          Administrator to discuss open
                                          investigations of an
                                          investment adviser. Several
                                          subsequent meetings have
                                          occurred to exchange
                                          information on this matter.
                                          EBSA's investigations were
                                          launched as a result of the
                                          SEC's suggestion that it had
                                          uncovered indications of
                                          potential ERISA violations
                                          during the course of its
                                          investigation.
------------------------------------------------------------------------
                              December 2004
------------------------------------------------------------------------
12/1...................................  An EBSA Senior Investigator and
                                          an SEC Staff Attorney jointly
                                          convened a meeting with the
                                          attorneys for the subject of
                                          parallel SEC and EBSA
                                          enforcement investigations to
                                          discuss various issues.
12/1...................................  An EBSA Senior Investigator met
                                          with SEC staff to discuss the
                                          findings of an SEC
                                          investigation of a plan
                                          sponsor who is also the
                                          subject of an EBSA
                                          investigation. During the
                                          meeting, EBSA was permitted to
                                          review documents obtained by
                                          the SEC pursuant to its
                                          investigation.
------------------------------------------------------------------------
                              January 2005
------------------------------------------------------------------------
1/11...................................  An EBSA Senior Investigator and
                                          an SEC Staff Attorney jointly
                                          convened a meeting with the
                                          attorneys for the subject of
                                          SEC and EBSA enforcement
                                          investigations to discuss
                                          various issues.
1/25...................................  Two EBSA Investigators met with
                                          an SEC Enforcement Attorney
                                          regarding the SEC's
                                          investigation of an investment
                                          adviser. The EBSA
                                          investigators were briefed on
                                          the SEC's case against the
                                          investment adviser and they
                                          requested documents pertaining
                                          to affected employee benefit
                                          plans.
------------------------------------------------------------------------
                              February 2005
------------------------------------------------------------------------
2/4....................................  Two EBSA Senior Investigators
                                          met with an SEC Examiner at
                                          his office to discuss late
                                          trading and market timing
                                          issues with respect to an EBSA
                                          investigation.
2/18...................................  EBSA staff from the Office of
                                          the Chief Accountant met with
                                          the Public Company Account
                                          Oversight Board (PCAOB)
                                          inspection staff to generally
                                          discuss the PCAOB inspection
                                          programs. EBSA's Office of the
                                          Chief Accountant was
                                          implementing a new inspection
                                          program and sought this
                                          meeting to learn from the
                                          PCAOB's experience in
                                          conducting similar
                                          investigations.
------------------------------------------------------------------------
                               March 2005
------------------------------------------------------------------------
3/17...................................  An EBSA Senior Investigator met
                                          with two SEC Staff Attorneys.
                                          The SEC provided EBSA with
                                          access to records from an SEC
                                          investigation of two ERISA-
                                          covered funds.
3/21...................................  An EBSA Senior Investigator met
                                          with an SEC Staff Attorney.
                                          The SEC provided EBSA with
                                          access to records from an SEC
                                          investigation of two ERISA-
                                          covered funds.
3/21...................................  An EBSA Regional Director, an
                                          EBSA Deputy Regional Director,
                                          and EBSA staff members who are
                                          investigating corporate fraud
                                          or market timing cases met
                                          with an SEC Assistant District
                                          Administrator of Enforcement.
                                          The meeting served to
                                          introduce the newly appointed
                                          EBSA Regional Director to the
                                          SEC Assistant District
                                          Administrator of Enforcement.
                                          The meeting reaffirmed EBSA's
                                          interest in the continued
                                          cooperative relationship
                                          between the agencies. Items of
                                          mutual interest discussed
                                          included corporate fraud;
                                          trading practices such as
                                          market timing, late trading
                                          and fee arrangements relating
                                          to mutual funds; hedge funds;
                                          criminal statutes as they
                                          relate to ERISA and the SEC;
                                          and the referral of cases
                                          between the EBSA Regional
                                          Office and the SEC. The SEC
                                          Assistant District
                                          Administrator of Enforcement
                                          indicated that he is forming a
                                          Regulatory Working Group for
                                          Northern California law
                                          enforcement agencies and
                                          industry organizations in the
                                          securities area and invited
                                          the EBSA Regional Office to
                                          participate. The EBSA Regional
                                          Office accepted the invitation
                                          and is participating.
3/31...................................  Several members of EBSA's
                                          Enforcement staff and Office
                                          of Information Technology
                                          staff met with Information
                                          Technology staff at the SEC to
                                          discuss avenues for electronic
                                          sharing of information.
3/31...................................  EBSA Deputy Assistant Secretary
                                          for Program Operations, EBSA
                                          Director of the Office of
                                          Regulations and
                                          Interpretations, EBSA Director
                                          of Enforcement, and an EBSA
                                          Lead Investigator met with the
                                          Director of SEC's Office of
                                          Compliance Inspections and
                                          Examinations and an Associate
                                          Director of the SEC's Office
                                          of Compliance Inspections and
                                          Examinations to discuss the
                                          SEC's upcoming release of
                                          their study of conflicts of
                                          interest involving pension
                                          consultants. The SEC provided
                                          draft copies of the report. As
                                          a result the two agencies
                                          agreed to coordinate the
                                          release report with guidance
                                          for plan fiduciaries in the
                                          selection and oversight of
                                          pension consultants.
------------------------------------------------------------------------
                               April 2005
------------------------------------------------------------------------
4/7....................................  An EBSA Senior Investigator met
                                          with an SEC Examiner to
                                          discuss an EBSA investigation
                                          into a defunct plan sponsor.
                                          EBSA sought SEC views with
                                          respect to certain issues that
                                          had arisen in EBSA's
                                          investigation. The meeting
                                          included a discussion of SEC
                                          disclosure requirements.
4/12...................................  Two EBSA investigators met with
                                          an SEC Branch Chief to examine
                                          documents of interest to EBSA
                                          that were collected by the SEC
                                          during its ``mini-sweep'' of
                                          mutual funds. The conversation
                                          included a general discussion
                                          of the SEC's findings.
4/26...................................  An EBSA investigator visited
                                          SEC offices to review
                                          documents pertaining to an SEC
                                          investigation. The
                                          investigator was onsite from 4/
                                          26 to 4/29. During the course
                                          of the document review, the
                                          Investigator met with an SEC
                                          Branch Chief, an SEC Assistant
                                          Regional Director, and an SEC
                                          Group Supervisor. The
                                          discussions included specific
                                          questions relevant to the
                                          investigation as well as a
                                          general discussion of
                                          information sharing.
4/28...................................  An EBSA Regional Director,
                                          members of his staff who are
                                          investigating corporate fraud
                                          and market timing cases, and
                                          the Regional Special Agent In
                                          Charge of the Department's
                                          Office of Inspector General,
                                          Office of Labor Racketeering
                                          and Fraud Investigations,
                                          attended the Northern
                                          California Securities Fraud
                                          Working Group. EBSA's
                                          attendance was at the
                                          invitation of an SEC Assistant
                                          District Administrator of
                                          Enforcement, who leads the
                                          group. The group consists of
                                          Federal law enforcement
                                          agencies that investigate
                                          corporate fraud cases. The
                                          group meets quarterly to
                                          explore areas of mutual
                                          interests and to identify
                                          cases that may lend themselves
                                          to joint investigations.
4/29...................................  The Chicago, Cincinnati, and
                                          Kansas City offices of EBSA
                                          and SEC hosted a regional
                                          conference to discuss areas of
                                          mutual interest and concern.
                                          Employees of both SEC and EBSA
                                          attended the meeting. An SEC
                                          Examiner led the informal
                                          discussion that sought to
                                          inform each agency about the
                                          nature of the other agency's
                                          investigative and enforcement
                                          activities. The purpose was to
                                          foster an understanding of the
                                          types of issues that might be
                                          referred between the two
                                          agencies and areas appropriate
                                          for joint investigations.
------------------------------------------------------------------------
                                May 2005
------------------------------------------------------------------------
5/9....................................  An EBSA Investigator met with
                                          two SEC Examiners to discuss
                                          cross-trading issues that had
                                          been cited in an SEC
                                          investigation. EBSA was
                                          reviewing the impact of these
                                          issues on the benefit plans
                                          connected to the subject of
                                          the SEC's investigation.
5/9-5/20...............................  An SEC attorney attended EBSA's
                                          Basic Training Course.
5/11...................................  An EBSA Senior Investigator and
                                          EBSA District Supervisor met
                                          with an SEC staff attorney.
                                          The SEC was conducting a civil
                                          investigation that paralleled
                                          an EBSA investigation. The SEC
                                          provided EBSA with an index of
                                          records from their
                                          investigation.
5/26...................................  Assistant Secretary met with
                                          officials from the SEC and
                                          other Federal agencies to
                                          discuss investigative
                                          coordination.
------------------------------------------------------------------------
                                June 2005
------------------------------------------------------------------------
6/9....................................  The Assistant Secretary of EBSA
                                          met with an SEC Commissioner
                                          to discuss agency
                                          coordination.
6/16...................................  An EBSA Regional Director
                                          participated in a panel
                                          discussion at the Securities
                                          and Exchange Commission,
                                          Pacific Region's 19th Annual
                                          Joint Regulatory Conference on
                                          ``Vulnerable Investors:
                                          Current Issues Regarding
                                          Pension Plans, 401(k)s and
                                          IRAs.'' Staff from the SEC and
                                          the California Department of
                                          Corporations were also on the
                                          panel. The EBSA Regional
                                          Director provided a brief
                                          overview of ERISA and
                                          discussed how in regulating
                                          employee benefit plans EBSA
                                          often has concerns and
                                          objectives in common with
                                          securities regulators.
                                          Approximately 120 people
                                          attended this conference of
                                          regulators. Attendees in
                                          addition to the SEC included
                                          representatives from the New
                                          York Stock Exchange, NASD,
                                          CFTC and the U.S. Attorney's
                                          Office for the Central
                                          District of California.
6/16...................................  Two EBSA Investigators attended
                                          the 19th Annual Joint
                                          Regulatory Conference in Los
                                          Angeles. The Securities and
                                          Exchange Commission's Pacific
                                          Region invited EBSA's San
                                          Francisco Regional Office to
                                          attend the general session.
                                          The Conference is a closed,
                                          regulators-only meeting to
                                          discuss common enforcement and
                                          regulatory concerns;
                                          participants typically include
                                          the SEC, State securities
                                          regulators, self-regulatory
                                          organizations, and Federal
                                          white-collar crime agents and
                                          prosecutors. Staff members
                                          from EBSA's San Francisco
                                          Regional Office regularly
                                          attend this conference.
6/22...................................  The EBSA Director of
                                          Enforcement, the EBSA Chief of
                                          the Division of Fiduciary
                                          Interpretations, the EBSA
                                          Chief, Division of Field
                                          Operations, an EBSA Pension
                                          Law Specialist, and an EBSA
                                          Lead Investigator met with the
                                          SEC Associate Director for the
                                          Division of Enforcement and an
                                          SEC Division of Enforcement
                                          Assistant Litigation Counsel.
                                          The purpose of the meeting was
                                          to discuss potential ERISA
                                          issues and concerns arising
                                          from the distribution of
                                          proceeds by Independent
                                          Distribution Consultants
                                          resulting from SEC's
                                          settlements with mutual fund
                                          companies for trading practice
                                          violations including market
                                          timing and late trading.
6/29...................................  EBSA's Chief, Division of
                                          Reporting Compliance, Office
                                          of the Chief Accountant met
                                          with the SEC Chief of Market
                                          Surveillance to share
                                          information regarding EBSA's
                                          blackout notice rule
                                          enforcement program. These
                                          EBSA and SEC entities have an
                                          ongoing relationship whereby
                                          EBSA informs the SEC of any
                                          blackout notice rule cases
                                          involving SEC registrants for
                                          possible enforcement action
                                          under Federal securities laws.
------------------------------------------------------------------------

 Appendix 2. EBSA Investment Adviser Investigations Resulting in Civil 
                   Litigation or Criminal Prosecution

                             BOSTON REGION

Beaumont Nursing Home Pension Plan--Northbridge, MA

    The investigation disclosed that the plan invested over 49 percent 
of its assets in convertible securities rated below investment grade. 
Under the direction of investment adviser Melvin Cutler, the plan 
invested a high percentage of its assets in convertible securities that 
were low investment grade.
    The Department filed a complaint on May 3, 1989. On October 24, 
1996, a consent order was reached resulting in $51,282 restored to the 
plan. This amount was based upon the questionable investments in 
convertible securities.

Blackstone Investment Advisors--Providence, RI

    In the late 1980s and early 1990s George Kilborn, an investment 
adviser with Blackstone Investment Advisors, invested assets on behalf 
of approximately 27 employee benefit plans in investment vehicles 
offered by Security Finance Group. These investment vehicles included 
loan agreements, construction loans, and other real estate investments. 
Security Finance Group filed bankruptcy and the investments became 
virtually worthless. The investigation disclosed the failure of Kilborn 
to properly evaluate the investments prior to investing employee 
benefit plan assets.
    The Department filed a complaint on January 22, 1999. The 
Department recovered $210,000 from Blackstone Investment Advisors on 
behalf of employee benefit plans.

Joseph Strutynski--Fayetteville, NY

    Strutynski held himself out to be a professional financial planner 
and investment adviser who advised a benefit plan participant to roll 
over her account balance into an IRA account. Strutynski deposited the 
rollover into an account controlled by him. The participant never 
received a statement. A guilty plea was entered on January 17, 2003. 
Strutynski was sentenced to 1 month in jail, with court-ordered 
restitution of $42,000.

Shawmut Investment Advisors--Boston, MA

    The investigation was related to a kickback scheme that involved 
broker commission allocation and soft dollar practices. EBSA's 
investigation revealed that Shawmut Investment Advisors (``SIA'') 
allocated brokerage commissions to selected brokers by an SIA salesman 
purportedly because these brokers were helpful to the sales efforts in 
securing clients for SIA. This review further disclosed that the 
alleged research that was received from selected brokers was 
substandard or non-existent. In addition, SIA also used ``Sub-
Advisors'' and ``Interpositioning Brokers'' to direct trades to a 
particular brokerage firm.
    The investigation further revealed that the benefactors of the 
directed trades wired large portions of the commissions to the Cayman 
Islands. From the Cayman Islands, the funds were redirected back to 
certain trustees in the United States.
    The participants of the scheme were indicted on a number of charges 
including Federal racketeering conspiracy, pension fund kickback, and 
money laundering charges arising out of commission kickbacks paid to 
two trustees of Chicago-based labor union pension funds. One investment 
adviser pleaded guilty to an Information on one count of Offer, 
Acceptance or Solicitation to Influence the Operation of an Employee 
Benefit Plan/kickback statute, while a second investment adviser was 
sentenced to 36 months imprisonment, 36 months supervised release, 
asset forfeiture in the amount of $7,433,845, and a special assessment 
of $2,350.

Todd J. LaScola--Providence, RI

    Todd LaScola was the subject of a 55-count indictment returned 
November 17, 2000, charging him with employee benefit plan 
embezzlement, employee benefit plan kickbacks, and fraudulent financial 
transactions that victimized individual investors, family trust funds, 
and pension plans. Forty-two of the counts charged wire fraud 
violations. On February 23, 2001, he pleaded guilty to three counts of 
mail fraud, and one count of embezzlement from an employee benefit 
plan. He was subsequently sentenced to 96 months in prison and ordered 
to pay $8 million in restitution.
    Between 1997 and 1998, LaScola invested approximately $6.3 million 
of a $16 million pension fund belonging to IBEW LU 99 with a real 
estate firm in a manner contrary to his management agreement with the 
plan which forbade him from investing pension money in non-publicly 
traded securities and from investing more than 5 percent of the plan's 
monies in any one investment. In exchange for these investments, 
LaScola allegedly received unlawful commissions of $241,000 from the 
real estate even though he was compensated under a management agreement 
by means of a fixed fee paid him by the plan based on the amount of 
plan assets. When the investments went bad, he took $6 million from 
private investor accounts to repay the union plan.

Investment Committee of IBEW LU 99--Cranston, RI

    EBSA's civil investigation of the Investment Committee of 
International Brotherhood of Electrical Workers Local Union 99 was 
related to the criminal investigation of Todd J. LaScola (above). The 
Department filed a complaint on January 29, 2001. Under the terms of a 
default judgment entered July 24, 2001, the court ordered LaScola and 
his company to repay $1.2 million to the plan.

Melvin Cutler, Investment Manager--Worcester, MA

    This case involved the issue of imprudently investing a significant 
percentage of plan assets in ``junk'' convertible securities. Cutler 
served as an investment manager for a number of pension and profit 
sharing plans. Cutler's investment philosophy was to invest nearly the 
entire assets of the plans in preferred convertible bonds. A 
significant percentage of these bonds were considered ``junk'' bonds by 
Standard & Poor's rating service. The Department settled the case with 
approximately $182,364 in losses being restored to several of the 
affected plans.

                             CHICAGO REGION

Capital Financial Services, Inc. and Colonial Financial Services--
                    Buffalo Grove, IL

    EBSA opened this investigation involving issues of fiduciary 
imprudence associated with client plans' acquisition of three private 
limited partnership investments. The Department filed a complaint in 
Federal District Court in Chicago, Illinois on May 31, 1994. The 
complaint alleged that the defendants realized considerable personal 
gain when they exercised substantial influence over the plans and their 
trustees to cause the plans to invest in the three limited 
partnerships. One individual, Arthur McManus, entered into a consent 
order with the Department whereby he was enjoined from serving as a 
fiduciary, administrator, trustee, or service provider to any employee 
benefit plan for 10 years.

Michael Daher--Englewood, CO

    In 1994, the trustees of the International Longshoremen's 
Association Local Union 1969 caused the plan to invest $1.4 million in 
a joint venture with RODEVCO, a housing development company out of 
Mesquite, Nevada. The investment served as construction financing. The 
loan was secured by a mortgage on the undeveloped land, which was 
appraised at $988,000. The trustees' loans to RODEVCO totaled $3.1 
million. In 1995, the trustees caused the plan to purchase for $975,000 
adjoining land to be developed for condominium housing. Also that year, 
the trustees caused the plan to loan $1.3 million to a brewery in 
Colorado. Of the $6,434,985 in plan assets at year ended 1995, 
$4,391,986 was invested in RODEVCO and brewery loans.
    The trustees alleged that their investment adviser, Mike Daher, 
orchestrated a scheme to defraud the plan of its assets by causing it 
to invest in the RODEVCO development. Mike Daher owned RODEVCO. On 
January 22, 2003, a Federal Trial Court ordered Mr. Daher to restore 
more than $1.6 million to the plan and permanently barred him from 
serving ERISA-covered plans.

Strong Corneliuson Capital Management--Menomonee Falls, WI

    EBSA opened this investigation based on a referral from the SEC. 
This case involved the issue of cross-trading of securities between 
client accounts that were under Strong Corneliuson's discretionary 
control. Strong Corneliuson used plan assets in several of the cross-
trades to purchase assets owned by a limited partnership in which 
Strong Corneliuson's management had investment interests. In addition, 
many of the securities traded were considered to be junk bonds. Most of 
the client accounts involved were ERISA-covered employee benefit plans. 
The case was settled with Strong Corneliuson restoring losses of 
$5,986,378 to the affected client plans.

Dallas Region--Christopher ``Puffer'' Haff--Dallas, TX

    Haff was indicted on April 24, 2001, and entered a guilty plea on 
May 17, 2001. Haff was the owner of Haff Financial Group. He obtained a 
check for $46,699 from the Dallas law firm of McCathern, Mooty and 
Buffington. The check was to be invested on behalf of the law firm's 
pension plan and deposited for investment through Alliance Benefit 
Group with the investments to be held by the Guardian. Instead, he 
endorsed the check and deposited it in an account owned by Haff at a 
related company. He subsequently used all but $1,400 of the funds for 
personal expenses.

                           KANSAS CITY REGION

Arthur G. Stevenson III--St. Louis, MO

    Between January 1996 and March 2002, Stevenson provided investment 
management services to individuals and employee benefit plans. Instead 
of depositing funds he received in bona fide investments, Stevenson 
kept client funds for his own use. As a result of EBSA's joint 
investigation with the FBI and the Postal Inspectors, on June 21, 2002, 
Stevenson pleaded guilty to one count of mail fraud and one count of 
embezzling from an employee benefit plan. On September 20, 2002, 
Stevenson was sentenced to 87 months in prison, ordered to pay 
restitution of over $4 million to over 50 victims and barred from 
service to any employee benefit plan for 13 years.

B.K. Foster--Golden, CO

    EBSA and the FBI conducted a joint investigation of B.K. Foster, an 
investment adviser to an employee benefit plan. Foster pleaded guilty 
to single counts of embezzlement of pension funds and wire fraud. On 
May 26, 2000, he was sentenced to 5 months imprisonment, supervised 
release for 3 years and ordered to make restitution of $2,318,024.

Frank L. Gazzola--Mankato, MN

    From 1999 through 2002, through his investment company, Gazzola 
obtained money from employee benefit plans and other investors by 
promising high rates of return on supposedly secure investments. In 
actuality, Gazzola was operating a $7 million ``Ponzi'' scheme.
    As a result of the EBSA's joint investigation with the FBI and the 
FDIC, Gazzola was indicted on December 1, 2003, on four counts of mail 
fraud, nine counts of bank fraud, four counts of false statements, one 
count of counterfeit security, two counts of theft from pension plans, 
four counts of falsification of pension plan records and two counts of 
bankruptcy fraud. On May 17, 2004, Gazzola pleaded guilty to one count 
of mail fraud, one count of bank fraud, and two counts of theft from 
employee pension plans. Gazzola died prior to sentencing.

Investment Advisors Inc.--Minneapolis, MN

    Investment Advisors, Inc. (IAI) was a registered investment adviser 
to the IAI mutual funds. IAI also entered into Investment Management 
Agreements with ERISA plan clients, including the IAI Pension and 
Profit Sharing Plans for its employees. From 1991 through April 1996, 
IAI caused the employee benefit plans to invest plan assets in IAI 
mutual funds that paid 12b-1 fees to IAI Securities, Inc. (IAIS), a 
registered broker-dealer and affiliate of IAI. On March 21, 1996, the 
shareholders of IAI funds voted to eliminate the 12b-1 fees payable to 
IAIS.
    On July 17, 1998, the Department obtained a consent judgment 
requiring IAI to pay to its in-house plans and those plans containing 
individually managed accounts invested in IAI mutual funds, the sum of 
$376,815.59, which represented the amount of 12b-1 fees paid by IAI 
mutual funds to IAIS plus an amount representing additional earnings 
that would have accrued if the 12b-1 fees had not been paid. In 
addition, IAI represented that it would not cause any employee benefit 
plan to invest in IAI mutual funds that pay 12b-1 fees to IAI, its 
affiliates, subsidiaries, or parties in interest except as permitted by 
statutory exemption granted under ERISA.

Michael W. Heath D/B/A Gfc--Kansas City, MO

    Heath was operating a ``Ponzi'' scheme to defraud investors, 
including employee benefit plans. Heath promised returns of up to 30 
percent on investments made for 30 to 45 days. He instead used the 
investor money for his own business and personal expenses. He also 
falsely represented to investors that his companies were registered to 
sell securities in Missouri or Kansas and claimed he was a registered 
investment adviser even though his only professional registration 
allowed him to sell insurance.
    As a result of a joint investigation with the U.S. Postal 
Inspection Service, the Criminal Investigation Division of the Internal 
Revenue Service, and the Office of the Securities Commissioner for the 
State of Kansas, Heath pleaded guilty to single counts of mail fraud, 
embezzlement of pension funds, and money laundering. The amount of 
embezzlement from pension plans totaled $450,000. Heath was sentenced 
to 35 months in prison and was ordered to pay $1,565,860 in restitution 
to his victims.

Will Hoover--Cherry Creek, CO

    Hoover's investment company was operating a ``Ponzi'' scheme. 
Hoover and his company were alleged to have stolen over $8 million from 
clients including employee benefit plans.
    As a result of EBSA's joint investigation with the Denver District 
Attorney's Office and the Colorado Securities Exchange Commission, on 
June 3, 2004, Hoover was found guilty of 43 felony counts of securities 
fraud and theft. On June 23, 2004, he was sentenced to 100 years in 
jail, ordered to make restitution of $15,388,347 ($226,655 to employee 
benefit plans), and barred from service to any employee benefit plan 
for 13 years.

William H. Kautter--Leawood, KS

    Kautter, a financial adviser, solicited funds from benefit plans by 
selling investments that promised high rates of return on the 
investments. After using his clients' assets for personal purposes, 
Kautter filed for Chapter 7 bankruptcy.
    Kautter was indicted on November 13, 2001, on 3 counts of mail 
fraud, one count of making a false statement, and one count of 
defrauding a financial institution. On May 23, 2002, he was sentenced 
to 12 months and 1 day in prison with 3 years probation on one count of 
mail fraud. The court required Kautter to pay restitution of $626,670--
$452,500 was identified as monies owing to ERISA covered plans.

                           LOS ANGELES REGION

3first Pension Corporation--Orange, CA

    EBSA opened an investigation into 3first, a pension administrator 
that offered investments in junior trust deeds to its clients. The 
clients suffered more than $121 million in losses, including $66.7 
million that was actually invested and an additional $54.8 million in 
interest that purportedly accrued. The losses occurred after losses in 
the underlying investments were hidden from investors, resulting in a 
Ponzi scheme to hide the mounting losses. As a result of the joint 
investigation by EBSA and the FBI, the three principals received 
lengthy jail sentences.

Anthony G. Dipace--Latham, NY

    Dipace, an investment consultant in Albany, New York, was indicted 
on 11 counts of mail fraud for executing a scheme to defraud the Hotel 
Union and Hotel Industry of Hawaii Pension Plan and Trust by lying 
about his credentials in an effort to be hired by the pension plan as 
its investment adviser. Had he been hired, he would have received more 
than $300,000 in annual compensation and would have put plan assets of 
more than $200 million at risk. He was found guilty on February 8, 
2000. He was sentenced to 60 months imprisonment.

Cohen & Baizer--Santa Monica, CA

    Cohen and Baizer served as the investment manager or adviser for 
the company's defined benefit plan, which held $1.1 million in assets 
as of December 1988, and performed a variety of services for several 
other pension plans. EBSA opened this case based on participant 
complaints of unsecured and unpaid loans and on the plan's imprudent 
investment of $400,000 in a $1.1 million note receivable, which was 
never paid. The Department's litigation resulted in $81,598 recovered 
by the plan, the appointment of an independent appraiser, and $163,628 
in distributions to participants.

Wm. Mason & Co., Inc.--Los Angeles, CA

    Wm. Mason & Co. served as an investment manager or adviser for 
ERISA-covered plans and invested in derivatives. The Department filed a 
complaint against William Francis Mason on July 6, 1998, and obtained a 
consent decree 2 days later permanently enjoining Mr. Mason from 
providing services or controlling assets of ERISA covered plans.
                          philadelphia region

Advanced Investment Management--Pittsburgh, PA

    The Philadelphia Regional Office opened its investigation of 
Advanced Investment Management (AIM) based on media reports that AIM, 
an investment manager, was terminated by two municipal employee pension 
funds for alleged investment guideline violations. AIM is now defunct 
and as of July 2003 had approximately 40 clients including 10 ERISA-
covered plans.
    Between January 2001 and June 2002, AIM allegedly violated the risk 
guidelines of its clients. AIM's clients lost more than $415 million. 
The affected clients (including the ERISA covered plans) filed 
individual lawsuits in 2002. Soon thereafter AIM went out of business. 
AIM and its senior officers settled the lawsuits by distributing to the 
plaintiffs a proportionate share of a settlement fund totaling $14.5 
million. In 2003, all litigants executed an omnibus settlement 
agreement/release.
    On April 11, 2005, the Department obtained a consent judgment 
permanently barring Jeff Thomas Allen, AIM's Chairman, President, CEO 
and an investment manager to the ERISA-covered plans, from serving as a 
fiduciary or service provider to any ERISA-covered plan.

LIUNA and Trust Fund Advisors--Washington, DC

    EBSA opened its investigation of Laborers International Union of 
North America (LIUNA) and its service provider Trust Fund Advisors 
(TFA)/ULLICO to determine whether there were potential ERISA violations 
involving two LIUNA pension funds (the Local Union and District Counsel 
Pension Fund and the National Industrial Pension Fund).
    On March 22, 2002, the Department sued Trust Fund Advisors (TFA), 
an SEC-registered investment adviser, and ULLICO for imprudently 
investing more than $10 million in assets of the two Laborers 
International Union pension funds in 120 acres of raw land near Las 
Vegas, NV. The land was bought for the purpose of developing it into 
residential lots, without an accurate appraisal or adequate due 
diligence. The funds suffered losses when the property was sold in 1999 
for less than the money invested by the funds. The Department obtained 
a consent judgment requiring TFA and ULLICO to pay $2.4 million in 
restitution to the two Laborers International Union pension funds and 
civil penalties to the Department.

                          SAN FRANCISCO REGION

Capital Consultants, Inc.--Portland, OR

    On September 21, 2000, the Department filed a lawsuit against 
Capital Consultants and its principals Jeffrey and Barclay Grayson. 
Concurrently, the court entered a consent order that appointed a 
receiver to make an accounting and protect the interests of CCL's ERISA 
plan clients and other investors. Through the consent orders, the SEC 
was able to freeze the defendants' personal assets and EBSA was able to 
enjoin them from doing business with ERISA covered plans.
    CCL has been in receivership since the suit was filed in September 
2000. Settlements totaling more than $101 million have been reached in 
private litigation, resolving claims brought by the court-appointed 
receiver, trustees of ERISA plans and other investors against plan 
fiduciaries and other parties who provided services to or had business 
relationships with CCL.\2\ These settlement amounts were made a part of 
the receivership estate. To date, the receiver has marshaled estate 
assets of more than $189 million in part by collecting on outstanding 
loans and selling CCL's assets. The receiver estimates that the total 
amount of settlements and marshaled assets accumulated in the 
receivership to date is $291 million of which about $193 million was 
already distributed to CCL's private placement clients, including the 
ERISA plans.
---------------------------------------------------------------------------
    \2\ Over $42 million was paid as a result of additional litigation 
by the Department and others against plan fiduciaries and service 
providers. This number is not included in the receivership assets.
---------------------------------------------------------------------------
    The receiver has approximately $76.36 million remaining for 
distribution. Overall, the employee benefit plans recovered well over 
70 percent of their losses through the receivership, and many plans 
have recovered additional losses through settlements of litigation 
resulting in at least $42 million.

Jeff Grayson--Portland, OR

    On April 16, 2002, an Information was filed charging Jeffrey Lloyd 
Grayson with one count of mail fraud in violation and one count of 
assisting in the preparation of a false tax return. The Information 
described an extensive fraud against employee benefit plans beginning 
in about 1994 and continuing through September 2000. On April 23, 2002, 
Jeffrey Grayson pleaded guilty to one count of mail fraud and one count 
of assisting in the preparation of a false tax return. As part of his 
plea, Grayson agreed to cooperate with the U.S. Attorney's Office in 
the continuing criminal investigation of Capital Consultants' borrowers 
and investors. The charges were dismissed due to Grayson's poor health.

Barclay Grayson--Portland, OR

    Barclay Grayson pled guilty to mail fraud, a felony, admitting that 
he engaged in a scheme to defraud pension plans by overstating the 
value of certain investments made by Capital Consultants Inc. He agreed 
to testify against his father, Jeffrey Grayson, and union officials in 
exchange for a deal with Federal prosecutors that would tentatively 
recommend 18 months in prison. Barclay Grayson was sentenced to 24 
months in prison and 3 years probation. The AUSA and the court agreed 
to restitution of $500,000 as negotiated in the civil class action 
suit.

Andrew Wiederhorn and Lawrence Mendelsohn--Portland, OR

    EBSA's criminal investigation of Andrew Wiederhorn and Lawrence 
Mendelsohn, was opened as a spinoff of the Jeffrey and Barclay Grayson 
criminal investigations (above). Andrew Wiederhorn and Lawrence 
Mendelsohn are the primary owners and officers of Wilshire Credit 
Corporation.
    An Information was filed against Lawrence Mendelsohn on November 
20, 2003. On November 24, 2003, he pleaded guilty to one count of 
filing a false tax return. As part of his plea agreement, Lawrence 
Mendelsohn agreed to cooperate with the Government in its continuing 
investigation of CCL.
    On June 4, 2004, Wiederhorn pleaded guilty to paying an illegal 
gratuity to Jeffrey Grayson, and to filing a false tax return. Andrew 
Wiederhorn agreed to pay $2 million in restitution, and pay a $25,000 
fine. He was sentenced to 18 months in prison.

Dean Kirkland--Portland, OR

    This investigation was a spinoff of the criminal investigations of 
Jeffrey and Barclay Grayson, after it was alleged that Dean Kirkland 
knowingly provided false information to employee benefit plan trustees 
in his CCL sales presentations, as well as provided gratuities to plan 
trustees.
    On August 21, 2002, a 41 count Federal indictment was handed down 
against Dean Kirkland. On September 5, 2002, he entered a not guilty 
plea. On September 8, 2003, a 57 Second Superceding Indictment was 
handed down by the grand jury, after the District Court dismissed the 
41 count Superceding Indictment on July 11, 2003. Kirkland was charged 
in the Second Superceding Indictment with 21 counts of violations of 
Offer, acceptance, or solicitation to influence operations of employee 
benefit plan by providing pension plan trustees with hunting and 
fishing trips, sporting event tickets, and other gifts. Dean Kirkland 
is also charged in the Indictment with 13 counts of wire fraud and with 
obstruction of justice.
    On February 10, 2005, Dean Kirkland was sentenced to 24 months in 
Federal prison, ordered to pay restitution in the amount of $15,756.20, 
and fined $5,000. Dean Kirkland is barred for 13 years from serving in 
a fiduciary capacity or consultant to pension and other employee 
benefit plans covered by ERISA. In addition, Kirkland is barred from 
serving as an officer, employee, or representative of any labor 
organization or in any capacity with decisionmaking authority 
concerning labor union funds or assets for 13 years.

        Response to Questions of Senator Hatch by John Endicott

    Question 1. Mr. Endicott, you mentioned that beginning in 1975, 
your Local began to invest its pension funds through Capital 
Consultants, and that by June of 2000, Local 290 had invested more than 
$159 million with that firm. What percentage of the total plan assets 
did this represent?
    Answer 1. By June of 2000, Local 290 had entrusted $159 million of 
its pension and benefit trust funds to Capital Consultants for 
management and investment. These investments through Capital 
Consultants represented about 45 percent of our members' pension and 
benefit trust funds. At the time it was closed, Capital had put 
approximately $85 million in publicly traded investments and $74 
million into private placements. It was the Local's $74 million that 
had been invested in private placements that was lost.

    Question 2. Did Local 290 have an investment advisor to give 
overall advice as to where to invest its pension funds, and how to 
allocate its investments?
    Answer 2. Capital Consultants was a well-known and highly-regarded 
Portland, Oregon investment management firm which was given the 
discretion by the trustees of Local 290 to select investments which fit 
within 290's investment portfolio, subject to the plan's overall 
investment strategy, guidelines, and objectives. Local 290 hired a 
pension consultant, Salomon Smith Barney, a registered investment 
advisor, to monitor the performance of Capital Consultants in order to 
determine whether Capital was doing a competent job in handling these 
investments. Salomon Smith Barney was also hired to give the Trust 
advice as to how to allocate its investments and how to define its 
investment objectives. Local 290 is currently in litigation against 
Salomon Smith Barney over its failure to properly monitor the 
performance of Capital Consultants, among other things.

 Response to Questions of Senators Kennedy and Hatch by Stephen English

                            SENATOR KENNEDY

    Question 1. The DOL and SEC have recently issued ``tips for plan 
fiduciaries'' to address potential conflicts of interest between 
pension consultants and investment advisors. This guidance puts the 
burden on fiduciaries to police complex financial transactions. Do you 
believe this guidance will be effective at task, or is something more 
needed?
    Answer 1. In some instances, additional information offered by the 
SEC and DOL may be helpful to trustees and other fiduciaries. 
Nevertheless, the fact remains that the duties and responsibilities of 
trustees are immense--especially when they have accountability for 
multimillion dollar trust fund assets. As we saw with Capital 
Consultants, it is probably not realistic to expect that most trustees 
could ever effectively police the kinds of complex financial 
transactions and potential conflicts of interest that can be involved 
in today's larger investment portfolios. Even trained diligent experts 
can fail to recognize fraudulent activity that is purposefully 
disguised or hidden from the view.
    By and large, most benefit plan trustees come from the ranks of 
current or former members of their respective trade unions. As such, 
their work experience mainly has been derived from the many years they 
worked as electricians, plumbers, steam fitters, laborers and the like. 
Their prior work experience simply does not arm them with the kinds of 
knowledge and experience they would need to successfully ferret out 
complex financial transactions or the types of conflicts of interest 
that can arise. Apparently--at least in the case of Capital 
Consultants--these activities even eluded the purview of accountants, 
lawyers, plan monitors, and other professional advisors whom the 
trustees had hired to advise them and to oversee their various 
activities. Expecting trustees to perform the level of scrutiny or 
oversight that would be required of them is perhaps ill-advised, and 
may simply shift the Government's oversight burden onto working people 
who are not well prepared to perform those tasks. It is unlikely that 
preparing a ``tips for plan fiduciaries'' could ever do much to remedy 
that situation very effectively.
    Without specific legislative and regulatory action by the 
Government, I do not see the situation improving to the degree that is 
needed. What I believe is required are strengthened criminal sanctions 
for violations of ERISA, including the clarification of prohibitions 
against gifts and gratuities for trustees and plan officials. In 
addition, the minimum fidelity bonds need to be increased to compensate 
for decades of inflation and the huge growth in benefit plan assets. 
Also, insurance must be required for fiduciaries so that the plans' 
funds are better safeguarded from depletion or loss through non-
criminal conduct. All parties-in-interest need to submit annual 
disclosures to the plan administrators regarding any financial dealings 
or their receipt of anything of value relating to their benefit plan 
responsibilities. Finally, conflicts of interest that plan advisors 
have that keep them from performing their jobs solely on behalf of the 
plan's beneficiaries should be identified and eliminated, or if they 
cannot be eliminated, the plan advisors should be required to 
voluntarily resign.

    Question 2. Do you have any thoughts on how the SEC and DOL can 
better coordinate their efforts to enforce existing laws and to 
discover pension financial fraud?
    Answer 2. Simply put, there needs to be more effective laws and/or 
more oversight resources allocated to pension and benefit plan 
protection. There simply are not enough resources currently arrayed by 
the Government to protect the trillions of dollars in pension and 
benefit funds that workers, retirees and their dependants count upon to 
take care of their present and future benefit needs. Experience in the 
Capital Consultants case and others has shown us that these funds are 
ripe for loss through fraud or mismanagement caused by unscrupulous or 
unskilled investment managers, or through the lack of trained oversight 
by plan advisers whose job is to find out about such fraud or 
mismanagement.
    The extent of Federal oversight needs to be increased so that there 
is a real likelihood that wrongdoing will be quickly detected and 
stopped before losses to the funds become massive and jeopardize a 
trust fund's ability to meet its obligations. In addition, criminal 
sanctions need to be strengthened in order to provide a greater 
deterrence to fraud and abuse. Finally, the bonding requirements for 
fiduciaries need to be clarified and strengthened, so that in the event 
of a loss or other event, there is an adequate safety net available to 
protect a plan's participants and beneficiaries.
    In the Capital Consultants case, the SEC demonstrated that it had 
the skills to clearly recognize the extent of the problems that the DOL 
investigator had first uncovered, as well as the will and the 
wherewithal to move against Capital quickly and aggressively. Perhaps 
SEC has some important skill sets and analytic abilities that DOL may 
currently lack because of a shortage of manpower and training. By 
working together with the SEC, I believe the DOL could become an even 
more effective agency at safeguarding workers' pension and benefit 
plans.

                             SENATOR HATCH

    Question. Mr. English, the agreement you were able to negotiate 
with the other plaintiff attorneys seems nothing short of remarkable. 
How were you able to get such a large number of attorneys and their 
clients to put their own self-interest aside in favor of increasing the 
chances for everyone coming out better?
    Answer. The short answer is that we (1) assessed the overall loss 
to Capital Consultant's clients, (2) assessed the culpability of the 
investment manager, its primary borrowers, and the accountants, 
consultants and attorneys advising the manager and the borrowers, (3) 
assessed the financial resources available to each of the parties, and 
(4) set out a realistic estimate of the recovery we could expect from 
each, based on our best estimate of the potential liability of each. We 
discussed this assessment with all of the plaintiffs' lawyers within 
120 days after filing the first Complaint in District Court, and 
discussed probable distribution plans and the range of amounts each 
trust or group of individuals might realize from a distribution based 
on our assessment of the likely range of recovery. We then agreed to 
act unanimously. Any single group of represented plaintiffs could veto 
a settlement decision. Admittedly, the plaintiffs consortium worked 
hard internally to resolve differences that often arose so that we 
could maintain unanimity. However, this united front allowed us to move 
against the defendants with tough but reasonable settlement proposals 
that lead to a terrific result for the clients of Capital Consultants.
    By way of background, it became quickly apparent to many of us that 
the benefit losses incurred by the plans' participants would be massive 
and devastating to participants and to their families. In fact the 
number of individuals affected by the Capital Consultants debacle would 
eventually total some 300,000, with losses of about a half billion 
dollars.
    Early on, I can vividly recall standing in front of some 1,000 
desperate and angry union members whose lifetime accumulation of 
pension and benefit trust funds had been lost. They needed help. We 
realized that it would be vital for us to try to do everything that we 
possibly could to recover and restore as much of their lost money as 
quickly as possible. To best conserve assets, we realized we had to 
work efficiently and cooperatively with the many other attorneys and 
firms who were now involved in the case. Therefore, we developed a plan 
to share the legal work among the various firms, recognizing the skills 
that each firm could bring to the process. Our objective was to avoid 
duplication of efforts and a lengthy and costly discovery process that 
could greatly reduce the benefits funds that would be available.
    We knew that this would not be an easy process, but we were willing 
to do whatever was necessary to make it happen. We understood that we 
had to make sound business decisions and were truly fortunate that so 
many formidable attorneys were willing to set aside their egos and work 
together. We were gratified that a real spirit of cooperation 
eventually emerged among the plaintiffs' attorneys. By operating more 
like businessmen than as typical litigators, we were able to keep the 
recovery effort and the legal costs from spiraling out of control. I 
believe the lessons we learned in handling this case can be instructive 
in similar situations, thereby conserving plan assets for the benefit 
of all of the plan participants.

     Response to Questions of Senators Kennedy and Bingaman by GAO

                            SENATOR KENNEDY

    Question. In your testimony, you discussed the need for EBSA to 
supplement its targeted enforcement strategy with a survey of pension 
plans and that EBSA has yet to perform a more detailed analysis along 
the lines you have recommended. Please tell us what further steps you 
believe the Department needs to take to better identify fraudulent 
transactions and enforce ERISA protections.
    Answer. In our testimony, we acknowledge the Department of Labor's 
efforts to determine the level of noncompliance with ERISA provisions 
among certain health and retirement savings plans. We continue to 
believe that Labor can build upon these efforts to develop a cost-
effective and systematic approach to better assess the level and type 
of ERISA noncompliance for the entire plan universe.
    We have also made a number of recommendations to Labor that we 
believe, if implemented, will enhance Labor's ERISA enforcement 
efforts. For example, we recently reported on steps Labor can take to 
further improve the timeliness and content of Form 5500 reports.\1\ In 
2004, we recommended that the Congress take steps to improve the 
transparency of proxy voting practices by plan fiduciaries. 
Furthermore, we recommended that Labor take appropriate action to more 
regularly assess the level of compliance with proxy voting requirements 
and enhance coordination of enforcement strategies with the Securities 
and Exchange Commission (SEC) in this area.\2\ We continue to believe 
that additional transparency and an enhanced enforcement presence would 
be beneficial in this area.
---------------------------------------------------------------------------
    \1\ See GAO, Private Pensions: Government Actions Could Improve the 
Timeliness and Content of Form 5500 Pension Information, GAO-05-491 
(Washington, DC: June 3, 2005).
    \2\ See GAO, Pension Plans: Additional Transparency and Other 
Actions Needed in Connection with Proxy Voting, GAO-04-749 (Washington, 
DC: August 10, 2004).
---------------------------------------------------------------------------
                            SENATOR BINGAMAN

    Question 1. In responding to my questions, you indicated that you 
had concerns about the lack of oversight of those who provide 
investment advice to plans. Could you please elaborate and provide any 
relevant information that you have compiled in this area? Do you 
believe that DOL has the resources to provide this type of oversight?
    Answer 1. We have previously testified that plan participants may 
need more individualized investment advice and that such advice becomes 
even more important as participation in 401(k) and other defined 
contribution plans increases.\3\ Investment advice that is honest and 
uncompromised by conflicts of interest could help employees better 
understand their future retirement income needs as well as emphasize 
the need for proper diversification. Previously, some legislative 
proposals have been introduced that would address employers' concern 
about fiduciary liability for making investment advice available to 
plan participants and make it easier for fiduciary investment advisors 
to provide investment advice to participants when they also provide 
other services to the participants' plan. We have noted that concerns 
remain that such proposals may not adequately protect plan participants 
from conflicted advice. More recently, the SEC found that potential 
conflicts of interest may affect the objectivity of advice pension 
consultants are providing to their pension plan clients. Labor and SEC 
issued guidance to assist plan fiduciaries in reviewing conflicts of 
interests of pension consultants. Labor should also take appropriate 
enforcement actions to determine to what extent ERISA violations may 
have occurred in the instances the SEC identified and use this 
information to better target enforcement activity.
---------------------------------------------------------------------------
    \3\ Private Pensions: Key Issues to Consider Following the Enron 
Collapse, GAO-02-480T (Washington, DC: February 27, 2002).
---------------------------------------------------------------------------
    To better leverage limited enforcement resources, we believe that 
Labor should coordinate enforcement strategies with the SEC in areas 
where their oversight responsibilities intersect.

    Question 2. If current rules were liberalized allowing investment 
advisers with conflicts of interest to begin to provide advice to plan 
participants in defined contributions, would DOL be able to provide 
adequate oversight of this newer larger class of investment advisers? 
Would such a change in ERISA cause you concern based on DOL's current 
handling of oversight of investment advisers providing advice to 
professional plan managers? Could these concerns be assuaged with a 
significant increase in staff for oversight at DOL?
    Answer 2. If current rules were changed to allow investment 
advisers with conflicts of interest to provide advice to plan 
participants, the Congress may also want to consider changes to ERISA 
to ensure that adequate safeguards are in place to protect 
participants. For example, requiring investment advisers to disclose 
conflicts could be one safeguard, but would not by itself be 
sufficient. Additional safeguards would be needed to ensure that plan 
participants are not negatively affected by advice from investment 
advisers with conflicts of interest. Thus, Congress may want to amend 
ERISA to address limits on Labor's enforcement authority. For example, 
Labor continues to be hindered by restrictive legal requirements in 
assessing monetary penalties against those who knowingly participate in 
a fiduciary breach.
    As we noted above, Labor should coordinate enforcement strategies 
with the SEC in areas where their oversight responsibilities intersect 
such as the oversight of pension consultants and investment advisers.
    Absent information on the level and extent of plans' noncompliance 
with ERISA provisions, it is difficult to determine what effect a 
significant increase in staff at Labor would have on ERISA enforcement. 
Without such information, Labor cannot ensure that it is accurately 
identifying the areas in which it needs to focus to most efficiently 
and effectively allocate its limited resources.

       Response to a Question of Senator Hatch by Barclay Grayson

    Question. Mr. Grayson, do you believe you had the adequate 
knowledge and training about ERISA requirements relating to fiduciary 
responsibilities at the time your father appointed you president of 
Capital Consultants? Do you believe that current law requirements as to 
knowledge and training of investment managers are adequate?
    Answer. The question posed is both insightful and extremely 
relevant to the Capital Consultants case, as well as to the rest of the 
investment advisory community at large. To my knowledge, there are 
absolutely no specific ERISA training requirements of any registered 
investment advisor by either current law requirements or regulatory 
agency requirements. As a registered investment advisor who was selling 
securities or otherwise providing investment advice to clients, I was 
required to obtain a Series 7 and Series 63 securities license by the 
Securities and Exchange Commission. These licenses required extensive 
education and training relative to general National and State 
securities laws. These licenses do not speak specifically to ERISA law 
and there is little, if any, mention of there being any separate laws 
or requirements associated with the management and administration of 
ERISA related funds. Further, at no time during my 5 years at Capital 
was I ever tested on my knowledge of ERISA law, required to attend 
training or continuing education or otherwise learn any laws relative 
to the management of ERISA regulated funds. The answer to your first 
question is therefore that I absolutely do not believe that I had 
adequate knowledge or training about ERISA requirements at the time my 
father appointed me president of Capital Consultants (other than what 
limited information my father told me based on his personal 
interpretation of the law) relating to fiduciary responsibilities 
associated with the management of ERISA regulated funds.
    In terms of your second question, it is absolutely clear to me that 
few salesmen and management personnel in the registered investment 
advisory community have the legal training or knowledge required to 
properly manage and invest ERISA regulated funds. As discussed, no 
training or education of which I am aware, is required either by law or 
regulatory agency in order to manage ERISA regulated funds. As far as I 
am aware, if one works for a registered investment advisor and holds a 
Series 63 and Series 7 license, I am not aware of anything that would 
preclude a sales person from selling to or otherwise managing ERISA 
funds. This results in most sales people only having knowledge of the 
general securities laws as required by the SEC, rather than having an 
understanding of ERISA law, which is entirely unique. I am not 
personally aware of any investment advisors independently requiring 
specific in-house ERISA law training for all sales staff. Obviously, 
there may be firms that require such independent training, but I am 
unaware of such programs based on personal experience.
    I should note that many ERISA attorneys are hesitant to provide 
concrete information relative to ERISA law as so much of that body of 
law is considered to be grey or otherwise untested. Given a general 
lack of clear instruction from the Department of Labor relative to the 
proper management of ERISA regulated funds, most managers tend to 
follow a general rule of acting prudently as required by fiduciary 
standards. However, being a prudent fiduciary is in many cases not 
enough when it comes to managing ERISA regulated funds as some behavior 
that would normally be acceptable, is prohibited when it comes to the 
management of ERISA funds. As an example, in the investment advisory 
industry (and most other industries for that matter), it is common 
course to entertain prospective clients. However, under ERISA law an 
investment advisor is generally prohibited from providing a trustee 
charged with overseeing ERISA regulated funds with anything of value. 
Further, trustees are prohibited from receiving anything of value if 
said entertainment will influence the trustees decision making relative 
to ERISA regulated funds. Prior to Capital being placed into 
receivership, the firm attempted to clarify with its attorneys whether 
entertainment of trustees overseeing ERISA funds was prohibited. This 
question was specifically asked of counsel that specializes in ERISA 
law (and in one case to a past Department of Labor official). Only 
after extensive research did Capital learn exactly what type of 
behavior was prohibited according to ERISA. As it turned out, Capital 
had improperly entertained clients, along with most of the investment 
advisory industry as far as I can tell, for the last 30 years. This is 
but one of several areas in the industry which currently does not 
follow ERISA law primarily as a result of a lack of education and 
training. Given the lack of mandatory training, it took Capital 
extensive efforts to identify said prohibited acts. Capital also 
conducted other improper behavior, but the fact of the matter is that 
the industry as a whole is largely not following current ERISA law in 
several areas given the lack of guidance from the Department of Labor 
and a general lack of mandatory ERISA training and education.
  Response to Questions of Senators Kennedy and Hatch by James S. Ray
                   The Law Offices of James S. Ray,
                           Alexandria, Virginia 22314-3679,
                                                      July 1, 2005.
Hon. Michael B. Enzi,
Chairman,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, D.C. 20510-6300.

Re: Protecting America's Pension Plan From Fraud: Will Your Savings 
        Retire Before You Do?

    Dear Chairman Enzi: Thank you for your letters of June 13 and June 
24, 2005. I am pleased to submit the following responses to the 
questions for the record included with your June 24th letter.

                            SENATOR KENNEDY

    Question 1. The DOL and SEC have recently issued ``tips for plan 
fiduciaries'' to address potential conflicts of interest between 
pension consultants and investment advisers. This guidance puts the 
burden on fiduciaries to police complex financial transactions. Do you 
believe this guidance will be effective at that task, or is something 
more needed?
    Answer 1. The DOL and SEC issued a joint statement entitled 
``Selecting and Monitoring Pension Consultants: Tips For Plan 
Fiduciaries'' on June 1, 2005 in response to the SEC's staff report on 
conflicts of interest between investment consultants and the pension 
plans for which the consultants provide investment advice. This 
guidance was nice. Certainly, a pension plan's governing fiduciaries 
should require their plan's investment consultant(s) to answer the 
conflict of interest questions included in the guidance. Honest 
consultants will provide honest answers.
    But, what if the pension consultant lies? The point is that the 
pension plan's governing fiduciaries won't know that the consultant is 
lying. Plans lack the authority, expertise and resources to ferret out 
fraudulent conduct by investment firms, including their investment 
consultants. The SEC, which regulates pension consultants as investment 
management firms, was unaware of the extent of pension consultants' 
conflicts of interest with investment managers until its staff 
conducted the study that led to the report.
    As stated in my testimony, it is the SEC's responsibility to 
regulate investment firms; not only the investment consultants but also 
the investment management firms that actually make the investment 
decisions. The SEC has the authority to regularly examine the 
operations of each firm to prevent and detect fraud and other 
wrongdoing. The SEC has enforcement powers to quickly compel an 
investment firm to cease and desist from wrongful conduct, or to place 
a firm in receivership. The SEC is expected to have the expertise to 
detect fraud and abuse by investment consultants and managers. The 
sophistication of many of the investment vehicles and schemes being 
marketed to pension plans today is beyond the understanding of the 
plans' governing fiduciaries and, frankly, of many of the plans' 
professional advisers. But for some unexpected problems in the 
financial markets that caused the Capital Consultants' dominos to begin 
falling, the Capital Consultants' fraud might have continued undetected 
by plan fiduciaries and professionals.
    A typical investment firm has many pension plan clients. By 
preventing an investment firm from engaging in or continuing a fraud, 
the SEC can protect multiple pension plans. This is sometimes referred 
to as the hub-and-spokes approach to enforcement.
    In short, the answer to the question is that more and better SEC 
regulation of the investment services community is needed; not merely 
the issuance of nice statements however helpful. The answer is not for 
the SEC to ``privatize'' its enforcement responsibilities by shifting 
the burden to pension plans. Pension plans and their participants and 
beneficiaries are relying on the SEC to police the investment services 
community.

    Question 2. Do you have any thoughts on how the SEC and DOL can 
better coordinate their efforts to enforce existing laws and to 
discover pension financial fraud?
    Answer 2. As noted in answer to the first question, the SEC has 
primary responsibility and authority to regulate the investment 
services community. The SEC needs to do a better regulatory job.
    Moreover, the SEC should share with the DOL information about 
investment firms that the SEC has under investigation for wrongdoing, 
and about findings of wrongdoing. The DOL should be free to advise 
pension plans' governing fiduciaries of an investment consulting or 
investment management firm that has engaged in wrongdoing. It is 
inexcusable if the SEC and/or the DOL knows of wrongdoing by an 
investment firm, but fails to notify pension plans that are or may be 
affected by the wrongdoing. If an agency is not going to protect a 
plan, it should provide the plan's governing fiduciaries with the 
information they need to protect the plan.
    The SEC is unwilling to share enforcement information with pension 
plans. Some years ago, I had occasion to ask the SEC for information 
about an investment manager engaged by one of my client pension plans; 
specifically, I asked whether the SEC knew if the manager had an 
unlawful ``soft dollar'' (kickback) arrangement with brokers used by 
the manager for securities transactions on behalf of the plan. The. SEC 
had conducted a ``sweep'' of investment firms and found that many of 
the firms had ``soft dollar'' arrangements with brokers that exceeded 
the scope of the so-called ``research safe harbor'' permitted by law. 
The SEC refused to respond to my inquiry.
    With regard to the DOL, ERISA Section 504(a)(2) [29 U.S.C.  
1134(a)(2)], provides that:

        ``. . . the Secretary may make available to any person actually 
        affected by any matter which is the subject of an investigation 
        under this section, and to any department or agency of the 
        United States, information concerning any matter which may be 
        the subject of such investigation; except that information 
        obtained by the Secretary pursuant to Section 6103(g) of the 
        Internal Revenue Code of 1954 shall be made available only in 
        accordance with regulations prescribed by the Secretary of the 
        Treasury.''

    This ERISA provision gives the DOL authority to notify the 
governing fiduciaries of pension plans about wrongdoing by investment 
firms of which the DOL becomes aware. My experience has been that the 
DOL is reluctant to exercise this authority and share information.

                             SENATOR HATCH

    Question 1. Mr. Ray, you mentioned in your testimony that 
typically, a plan engages in more than one investment manager, each 
with fiduciary responsibility for a portion of the plan's portfolio, 
and that one of the reasons for this is to increase investment 
diversification. To your knowledge, was Capital Consultants the sole 
investment manager for any of the pension plans that it served? In 
other words, did any pension plan lose a major portion of its portfolio 
because of the Capital Consultants fraud?
    Answer 1. I am not aware of Capital Consultants being the only 
investment manager engaged by any of its client pension plans. Based on 
the reports of the receiver for Capital Consultants, Capital 
Consultants had 301 clients in September 2000 (when it was placed in 
receivership), the average client had $3.4 million under management by 
Capital Consultants, and 50 percent of the clients had less than 
$400,000 in assets under Capital Consultants' management. There were a 
few plans that had much larger investments under management by Capital 
Consultants, and some plans took multi-million dollar losses. 
Fortunately, as described by DOL Deputy Assistant Secretary Lebowitz 
and Stephen English, Esq. in their respective testimony to the 
committee, the efforts of the receiver, the DOL, and the private 
litigation have enabled the pension plans to recover 70 percent or more 
of their losses.

    Question 2. Are there ERISA rules governing the minimum number of 
investment managers a pension plan must use? Would it be permissible 
under ERISA for a pension plan to put all of its investments with one 
investment manager?
    Answer 2. ERISA does not expressly mandate that a pension plan 
engage even a single investment manager. ERISA does expressly encourage 
the governing fiduciaries of a pension plan to engage an investment 
manager by providing a statutory shield against liability for acts or 
omissions of an ``investment manager.'' See ERISA Sections 405(d) and 
3(38) [29 U.S.C.   1105(d), 1002(38)].
    But, the fiduciary standards of conduct, particularly the ``prudent 
man'' standard of ERISA Section 404(a)(1)(B) [29 U.S.C.  
1104(a)(1)(B)], have the effect of requiring governing fiduciaries of a 
plan to engage a qualified investment professional to manage the plan's 
investment if the plan fiduciaries themselves are not qualified to 
manage the investments. Rarely are the governing fiduciaries themselves 
qualified to manage their plan's investments.
    How many investment managers a pension plan engages depends on many 
variables, including the type of plan, the amount of its assets, its 
asset allocation, its liquidity needs, the extent to which it prefers 
passive versus active management, and whether it prefers balanced or 
specialized managers. It is generally a ``facts and circumstances'' 
issue.
    However, in the case of a medium or large size pension plan, it 
would be highly unusual for the plan to engage only one investment 
manager. Prudence, as well as the diversification rule of ERISA Section 
404(a)(1)(C) [29 U.S.C.  1104(a)(1)(C)], would require diversifying 
the plan's portfolio among different types of investments and it is 
highly unlikely that one investment manager would be appropriate to 
manage all types of investments. In this regard, the authoritative 
ERISA Conference Report, states that:

        ``Ordinarily the fiduciary should not invest the whole or an 
        unduly large proportion of the trust property in one type of 
        security or in various types of securities dependent upon the 
        success of one enterprise. . . .'' [H. Rep. No. 1280, 93d Cong, 
        2d Sess. (1974) at 304, reprinted in 1974 U.S.C.C.A.N. 5085].

    Placing all of the assets of a medium or large pension plan under 
the management of one investment manager would be to make the success 
of the plan's investment portfolio ``dependent upon the success of one 
enterprise'': the investment manager.
    I am aware of one case in which this argument, in essence, is being 
advanced, and it happens to be a case in which I am involved. On behalf 
of retirees of the Prudential Insurance Company of America, I, along 
with the law firm of Leiff, Cabraser, Heimann & Bernstein LLP, am in 
litigation against Prudential and its Board of Directors challenging 
the investment of virtually all $8-9 billion of the Prudential 
Employees' Pension Plan in investment products of Prudential that are 
managed by Prudential and its affiliated companies. Senior Prudential 
officers decide how all of the plan's assets are invested; they choose 
all the investment vehicles without independent investigation or 
negotiation over the terms. And, they almost always choose Prudential 
products managed by Prudential managers. Indeed, on several occasions, 
Prudential's officers decided to use the Pension Plan's assets to 
provide ``seed capital'' for new Prudential investment products. The 
Pension Plan pays Prudential millions of dollars each year for managing 
the Plan's investments in Prudential products, at fee rates 
unilaterally set by Prudential without negotiation or independent 
investigation.
    The plaintiff-retirees' lawsuit alleges that Prudential and its 
Directors engaged in massive self-dealing, prohibited transactions and 
breaches of fiduciary duty in violation of ERISA. The appointment of an 
independent fiduciary for the Plan is among the remedies being demanded 
by the retirees. This case went to trial in 2004, and is awaiting 
decision by the trial judge. [Dupree, et al. v. Prudential Insurance 
Company of America, et al., Civil Action No. 99-8337-CIV-JORDAN, 
U.S.D.C. S.D. FL. (Miami Div.)].
    I hope that you and the committee members, and particularly Senator 
Kennedy and Senator Hatch, find these answers to be responsive and 
helpful.
            Respectfully,
                                              James S. Ray.
                                 ______
                                 
                     Statement of Michael J. Esler
                         Esler, Stephens & Buckley,
                                  Attorneys At Law,
                               Portland, Oregon 97204-2021,
                                                      May 25, 2005.

    I have been practicing law in Northwest since 1971, when I 
graduated from the University of Chicago Law School. My practice has 
been focused on business litigation, with a heavy emphasis on 
securities fraud and other business torts. I have spoken on the subject 
to various bar associations and recently spoke at the 25th Annual 
Northwest Securities Institute, a conference of State securities 
regulators from Oregon, Washington, Idaho and British Columbia.
    In the Capital Consultants Litigation, my firm and I prosecuted the 
claims of most of the non-ERISA investors, including those who were 
represented through the receiver. The total group of plaintiffs we 
represented had lost about $100 million. One of our smallest clients 
was the Intertribal Timber Council. However, their experience 
underscores the need for reform in this area.
    The Intertribal Timber Council (``Council'') is a nonprofit 
501(c)(3) organization consisting of over 65 member Tribes and Alaska 
Native Corporations that have timber or other natural resource 
management interests. It operates under the direction of an elected 
Board of Directors consisting of 11 Tribes. The Council was formed in 
1976 to enhance communications with the Bureau of Indian Affairs by 
providing a forum for Tribes to express collective concerns and to be 
more actively involved in the management of Indian forestry services. 
Among its many accomplishments and activities are its annual 
scholarship awards to outstanding students for excellence in Indian 
natural resource management.
    After a strong sales presentation in Fall 1998 by Jeffrey Grayson, 
head of Capital Consultants LLC (``CCL''), the Council changed its 
investment adviser and placed approximately $200,000 of its Scholarship 
Fund with CCL. Grayson told the Council that CCL could get a better 
return on the Scholarship Fund than the Council's existing manager, 
enabling the Council to fund three to four more scholarships a year. At 
the time of this change, CCL and its cohorts were already insolvent and 
deeply mired in the Ponzi scheme that led to its failure. Shortly 
before CCL collapsed in September 2000, the Council had approximately 
$480,000 invested in two accounts with CCL. This $480,000 on deposit 
with CCL had taken 15 to 20 years to accumulate, since the organization 
does not have a major emphasis on donations, even though it is a 
501(c)(3) nonprofit organization. Its revenues come principally from 
member dues, symposium fees and work shop fees. CCL was fully aware 
that the funds in its care were for scholarship purposes.
    On average, some 15 scholarships were awarded annually prior to the 
collapse of CCL. Approximately $22,800 was awarded in 2000. With the 
collapse of CCL, the Council estimated it would have available only 
$15,000 to award in 2001, with far less in 2002, and that would involve 
invading its principal to support the college students already 
dependant on the stipend. Essentially, the collapse of CCL created an 
immediate loss of five to six forestry scholarships to Native American 
high school students and has jeopardized the entire program. As a 
result of the Receiver's efforts and litigation under the Oregon 
securities laws, the Council will recover about 55 percent of its 
losses (which were virtually 100 percent of its CCL investments).
    The partial recovery for the Council has enabled it to go forward 
with a much reduced scholarship program. In large part, that recovery 
was made possible by the Oregon Securities Laws, which, unlike ERISA 
and Federal securities laws, give investors the right to pursue a broad 
range of professionals who participate in this conduct. This included 
professionals who were employed by CCL and the entities with whom CCL 
had invested the Council's funds and who were participating in the 
Ponzi scheme. Had the Council and other CCL investors been limited to 
remedies under the existing Federal securities laws and ERISA, the 
amount recovered for them would have been a small fraction of what has 
been recovered to date, despite the efforts of the Department of Labor 
and the SEC. There is a need for stronger laws to protect people like 
the Council by extending full liability for losses to anyone who 
materially aids or participates with an ERISA fiduciary in a scheme to 
defraud them.
            Yours truly,
                                          Michael J. Esler.
                                 ______
                                 
 What To Do When Your ERISA Fiduciary Screws Up--Lessons Learned From 
                   the Capital Consultants Litigation

I. ERISA MAY PROVIDE ONLY LIMITED REMEDIES TO A PLAINTIFF INJURED BY AN 
                    INVESTMENT ADVISOR'S MISCONDUCT

A. As Noted ERISA Does Provide for Remedies, But, as to Non-ERISA 
                    Fiduciaries, These May be Limited. However, Common 
                    Law and Other Statutory Bases for Recovery May Be 
                    Available

    Most recently in Harris Trust & Savings Bank v. Solomon Smith 
Barney, Inc., 530 US 238 (2000), the Supreme Court made it clear that 
the relief available under ERISA is limited to ``appropriate equitable 
relief.'' ERISA  503(a)(3). Bast v. Prudential Insurance Co. of 
America, 150 F3rd 1003 (9th Cir 1998), as amended. See, also, Toumajian 
v. Frailey, 135 F3rd 648 (9th Cir 1998). In Toumajian, the court 
summarized this confusing area of the law, stating: ``Once again the 
mysteries of the ERISA--a statute intended to provide a system of 
uniformity and simplicity in the complex regulatory field of employee 
benefits--provided added complexity in this action.'' The question 
faced in Toumajian was whether ERISA preempted run-of-the-mill 
professional malpractice claims. (In Toumajian, the issue of limited 
remedies under ERISA is discussed and becomes a part of the bases for 
denying Federal jurisdiction.) See, also, Nieto v. Ecker, 845 F2d 868, 
873 (9th Cir 1998) and Harris Trust, supra, 530 US at 240. The lesson 
here is to avoid ERISA claims or triggering ERISA preemption by careful 
pleading.

B. ERISA May Preempt Other Common Law and Statutory Claims

    Pilot Life Ins. Co. v. Dedeaux, 481 US 41 (1987) (ERISA preempts 
all common law and State law claims that relate to an employee benefit 
plan). A cause of action relates to an employee benefit plan if it has 
a connection with, or reference to, such a plan. New York State 
Conference of BlueCross & BlueShield Plan v. Travelers Insurance Co., 
514 US 645 (1995). The Ninth Circuit has held that a complaint for 
intentional mishandling of plan assets against accountants, actuaries 
and attorneys, including nonfiduciaries, was preempted. Concha v. 
London, 62 F3rd 1493 (9th Cir. 1995) (this case may be distinguishable 
because the entire control and management of the plan was entrusted to 
a CPA). In Rutledge v. Seyfarth, Shaw, Fairweather & Jaroldson, 201 
F3rd 1212 (9th Cir 2000), the Ninth Circuit observed that Federal 
preemption applied to a claim for excessive attorney compensation. 
However, if the case had been for substandard performance, ERISA would 
not have preempted the claims.
    The Supreme Court has stated that courts must address claims of 
preemption starting with the presumption that Congress did not intend 
to supplant State law. Travelers, 514 US at 655. In Arizona State 
Carpenters Pension Trust Fund v. Citibank, 125 F3rd 715 (9th Cir. 
1997), the Ninth Circuit held that ERISA does not preempt State law 
claims for breach of contract, breach of common law fiduciary duty, 
breach of the implied covenant of good faith and fair dealing, 
negligence or common law fraud against a service provider bank that 
aided an investment manager's breaches of fiduciary duty by failing to 
notify the trustees of defaults.
    In Donrs v. KPMG Peat Marwick, 876 F Supp 1116 (CD Cal 1994), the 
court held that ERISA does not preempt common law claims for accounting 
malpractice.
    There is a split of authority on the subject, and this is a highly 
contested area of the law. If there is an ERISA cause of action, then 
preemption may occur.

C. Common Law Remedies Are Probably Better--If Available

    Assuming ERISA does not preempt common law causes of action, like 
breach of fiduciary duty, common negligence, professional negligence, 
negligent misrepresentation and fraud, these claims may provide a 
better source of relief than ERISA or the Securities Act.

     II. THE OREGON SECURITIES LAW PROVIDES BROAD REMEDIES AGAINST 
                    PARTICIPANTS, IF APPLICABLE \1\

---------------------------------------------------------------------------
    \1\ Note, in Central Bank of Denver v. First Interstate Bank, 511 
US 164 (1994), aider and abettor liability under  10b of the 
Securities Act of 1934 was essentially eliminated.
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A. Federal Cases Interpreting Oregon Law Require a Liable Seller in 
                    Order to State a Claim Under the Oregon Securities 
                    Act

    See, e.g., Nesbitt v. McNeal, 896 F2d 380 (9th Cir.) 1990).

B. Oregon Cases State Court Decisions Are Somewhat Ambiguous on the 
                    Subject

    Anderson v. Carden, 146 Or App 675, 683, 934 P2d 562 (1997) (``The 
liability of the nonseller participant under ORS 59.115(3) is 
predicated on the violation of the seller.''); Metaltech Corp. v. Metal 
Teckniques, Inc., 74 Or App 297, 306, 703 P2d, 237 (1985); Towery v. 
Lucas, 128 Or App 555, 562, 876 P2d 814 (1994)(the 1985 amendments 
excluded from coverage offers to sell securities).

C. Investment Advisors Generally Act as the Agent of the Buyer and Not 
                    the Agent of the Seller

    Pool v. Frank, 1990 WL 267360, at 3-5 (D.Or. 1990) (holding that an 
investment advisor acting as agent for its investing clients could not 
be liable under Oregon Securities Law as a seller of securities because 
it was agent for the purchaser); Rolex Employees Retirement Trust v. 
Orgraphics Corp., 1990 WL 45714, at 4 (D.Or. 1991) (``The reference to 
``offers'' in ORS 59.115(1) was expressly deleted from the statute 
during legislative revisions in 1985 . . .'' and ``the language in ORS 
59.115(1) provides no basis for this court to extend liability under 
the statute beyond a person who actually passes title to a security.'')

D. Potential Responses

    Potential responses to these arguments include the following: (i) 
the term ``seller'' is not defined in the statue, and there is no 
reason to interpret it to exclude a person who does the act of selling; 
and, (ii) the investment program offered by the investment advisor 
could, in and of itself, constitute a security. The definition of 
``security'' is very broad and includes: ``Note, stock, treasury stock, 
bond, debenture, evidence of indebtedness, collateral trust 
certificate, investment contract, etc.'' Can the investment program be 
re-cast as a mutual fund or an investment contract? Is the investment 
advisor acting in a duel capacity?

                III. COMMON LAW CLAIMS MAY BE AVAILABLE

A. The Existence of a Special Relationship

    Common law claims are stronger because of the existence of a 
special relationship. Onita Pacific Corp. v. Trustees of Bronson, 315 
Or 149, 843 P2d 890 (1992) and Restatement (2nd) Torts,  552. Compare 
with Conway v. Pacific University, 324 Or 231, 924 P2d 818 (1990). By 
definition, an ERISA fiduciary should be acting for the benefit of the 
plaintiff and a special relationship should exist. Professionals and 
others hired by the ERISA fiduciary may be liable as sub-agents--agents 
of an agent with fiduciary responsibilities.

B. Fiduciary Duties Include Duties of Undivided Loyalty, Full 
                    Disclosure, Fair Dealing, Good Faith, and Due Care

    The failure to exercise reasonable care in selecting investments 
should be connected to losses when those investments flounder to 
satisfy the causation requirement, but this is a common defense. 
Soleberg v. Johnson, 306 Or 484, 760 P2d 867 (1988).

C. Duty of Disclosure

    A duty of disclosure mandates that the investment advisor explains 
risks and advise his client when he believes his client is embarking in 
fool-hearty investments. See attached copies of a recent decision in 
Moak v. Sloy.

D. Establishment of a Duty of Care

    Establishment of a fiduciary duty makes an investment advisor 
responsible for simple negligence. Stuart v. Jefferson Plywood Co., 255 
Or 603, 469 P2d 783 (1970) (a person may be found negligent if he ought 
reasonably to have foreseen that his conduct would expose another to an 
unreasonable risk of harm); and Dodge v. Darrit Const. Co., 146 Or App 
612, 934 P2d 591 (1997), rev denied, 326 Or 530 (1998).

E. Participant Liability is Available

    Participant liability can be established by showing that the 
participant either conspired with, or aided and abetted, the tortious 
conduct of the investment advisor. Granewich v. Harding, 329 Or 47, 985 
P2d 788 (1999) (incorporating Restatement (2nd) of Torts,  876 (1979). 
The elements of conspiracy or aiding and abetting include either: (i) a 
tortious act in concert with another or pursuant to a common design 
with another; (ii) knowledge that the other person's conduct involved a 
breach of duty and substantial assistance; or (iii) substantial 
assistance to the other to accomplish tortious results when, 
independently of the other, the conduct involved a breach of duty to 
the third person. Acting in concert has been defined to mean the 
performance of an action that is ``mutually contrived or planned,'' 
``agreed on,'' ``performed in unison or done together.'' Slegel v. 
Hubbard, 176 Or App 1, 29 P3d 1195 (2001). Acting in concert only 
requires that the tortious conduct be performed together. Sprinkle v. 
Lemley, 243 Or 521, 414 P2d 797 (1966) (each of two doctors operating 
together could be liable for the negligence of the other because they 
acted in concert). An agreement to act together can be implied and 
understood to exist from the conduct itself. Restatement (2nd) of 
Torts,  876, comment a (``Agreement need not be expressed in words and 
may be implied and understood to exist from the conduct itself.'') and 
Slegel, supra, 29 P3rd at 1197 (Court inferred from the conduct of 
defendant and third party that they had agreed to engage in tortious 
conduct); and Granewich, supra, 329 Or at 59 (allocations that give 
rise to an inference to an agreement are sufficient). Passive conduct, 
such as a failure to disclose, can also constitute substantial 
assistance where there is a duty to disclose. Gregory v. Novak, 121 Or 
App 651, 855 P2d 1142 (1993) (``One who makes a representation that is 
misleading because it is in the nature of a `half truth' assumes the 
obligation to make a full and fair disclosure of the whole truth.'')
    [Whereupon, at 11:45 a.m., the committee was adjourned.]