3rd Interim Report

8/3/2019 3rd Interim Report

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ) (UNITED STATES OF AMERICA,

Plaintiff,90 Civ. 5722 (RMB)

-against-

DISTRICT COUNCIL OF NEW YORK CITYAND VICINITY OF THE UNITEDBROTHERHOOD OF CARPENTERS ANDJOINERS OF AMERICA, et aI.,

Defendants.- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - J (

THE THIRD INTERIM REPORT OF THE REVIEW OFFICER

Dennis M. WalshReview OfficerFitzmaurice & Walsh, LLP15 Chester AvenueWhite Plains, New York [email protected]
mailto:[email protected]:[email protected]


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Table of Contents

Introduction 2Part One - The District Council. . 2A. The District Council Election and Related Matters 2

B. The Governance and Administration of the District Council 5C. Key Positions at the District Council.. 6D. Collective Bargaining Agreements, the LMC and "Full Mobility" 7E. Restructuring of Local Unions 9F. Local Union Meetings and Review Officer Forums 10O. Improvements in District Council Operations 11H. The Organized Crime Threat 12I. The "Amalgamated" Union and Solicitation of District Council Members................................................................................................................... 12J. Stipulation and Order Paragraph 5.b Review Matters 13K. Litigation Involving the Review Officer 131. The Local 1456 Two Percent Assessment Inquiry 14M. Operation of the Hotline : 17N. The District Council Trial Committee ; 17O. Costs Associated with the Review Officer and Trial Committee 18P. Journeymen and OWL Statistics 18Q. The District Council Web Site and Newspaper 19R. Monthly Retainer Paid by the District Council to O'Dwyer &Bernstein 20S. Labor Technical College 21T. The Grants Department. 24

Part Two - The Benefit Funds 27A. New Executive Director 27B Organizational Restructuring and Key Staffing Decisions 28C; In-House Counsel/Compliance Function 29D. IT Infrastructure 32E. Email Back-up 34F. Collections 34

1. Historic Handling of Collections 351


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a. Initial Retention of Former Collections Counsel.. 35b. Payment Plans 36c. Follow-through to Collect from DefaultinglDelinquent Companies

....................................................................................................... 37i.Arbitrations 37ii. Court Actions 38iii. Use of a Debt Collection Service ~ 39

2. Review of Pending Matters and Improvements by New CollectionsCounsel 39a. Policy and Procedural Improvements in V &A's Tenure 39

i. Revised Statement of Policy for Collection of EmployerContributions 39ii. Improved Administration of Payment Plans 41

b. Collection Efforts 43G. Basic Facts about the Funds 44

1. The Pension Fund 442. The Welfare (Health Benefits) Fund 453. The Annuity Fund 454. The Apprentice Fund 455. The Vacation Fund 45

H. The Pension Fund 451. Condition of the Pension Fund 45

1 . The Welfare Fund 471. Condition of the Welfare Fund 472. Overall Efforts to Address the Welfare Fund's Condition 473. Specific Cost Control Measures Made To Date 49a. Participation of City Carpenters in the Welfare Fund 49b. Ineligible Dependents 50c. Termination of Welfare Fund Coverage Due to Fraud 50

J . Civil RICO Action 51K. Benefit Funds' Staff Attrition 51L. 395 Hudson Street 52

Conclusion 52

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Men at some time are masters of their fates;Thefault, dear Brutus, is not in our stars,But in ourselves, that we are underlings.

Shakespeare, Julius Caesar, I, ii

INTRODUCTIONI submit this third semi-annual report pursuant to paragraph 5.m of the Stipulation and

Order entered on June 3, 2010, in United States v. District Council, et al., 90 Civ. 5722 (SDNY(RMB) (the "Stipulation and Order"). See Exhibit 1. It endeavors to inform the Court and theparties of the scope and substance of my activities for the past six months and to convey myimpressions of certain aspects of the undertaking.

My responsibilities encompass review, investigative and oversight functions relating tothe New York City District Council of Carpenters (the "District Council" or the "Union") and itsTaft-Hartley fringe benefit funds (the "Benefit Funds" or the "Funds").

I am grateful for the important assistance and ongoing undertakings of the United StatesAttorney for the Southern District of New York, the New York City Police Department, theoffice of the District Attorney of New York County, the Federal Bureau of Investigation, and theUnited States Department of Labor Office of Labor Racketeering.

I also thank the rank and file members of the District Council who continue to provideme with insight and information and who recognize that the future of this Union depends on theirdeep and earnest involvement in its affairs.

PART I: THE DISTRICT COUNCILA. The District Council Election and Related Matters

The process of electing District Council officers is almost complete. Ballots were mailedto over 18,000 members on November 21, 2011, for voting on candidates for Executive

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Secretary-Treasurer, President and Vice President of the Council. Those ballots must bereturned to the American Arbitration Association by December 15, 2011. On that date, 100delegates elected in eight local union elections held in October 2011 will be expected to gather tocast secret ballots for warden, conductor and three trustees. On January 11, 2012, the newofficers of the District Council will be installed and supervision by the United Brotherhood ofCarpenters and Joiners of America (the "UBC") will formally end.

Upon the completion of the comment period, I submitted the Draft Election Rules to theCourt on August 29, 2011. The Final Election Rules, as approved by the Court on August 31,2011 are attached hereto as Exhibit 2.

My office interviewed each of the candidates for District Council office and will shortlycomplete the interviews of all 100 members elected in local union elections as delegates (as wellas the eight members elected by each local to sit on the District Council Executive Committee).The list of candidates approved pursuant to Paragraph 5.k.iv of the Stipulation and Order isattached hereto as Exhibit 3.

Candidates gathered at the District Council on October 26, 2011, to write the essaysrequired by the Election Rules. The essays were posted on the District Council web site and areattached hereto as Exhibit 4.

The mailing of candidate literature to all members (an expense paid by the DistrictCouncil) was accomplished in the first week of November 2011. The literature is posted on theDistrict Council web site and is attached hereto as Exhibit 5.

The Special Election Edition of the Carpenter newsletter containing material submittedby the candidates was mailed to all memberson November 15, 2011. It too is posted on theDistrict Council web site.

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The Election Forum was held at the Javits Convention Center on November 16, 2011.The event was professionally captured on video and the program is available to all persons on theDistrict Council web site.

A small number of members have questioned the cost of the Election Forum. In fact,there was nothing remarkable about the rental and video costs associated with the Forum, whichwere purchased at fair market prices. I view the event as well-conceived, historic and itsrecording on video for presentation to members, particularly retired members -- wherever theymay live -- as invaluable. The rental fee ($14,500) and video production costs ($21,000) come toabout $2 per member for an event that provided a trove of information to them and will servethem not only through December 15th (as they view the event on the District Council web siteprior to returning their mail-in ballot) but thereafter, as winning candidates will be heldaccountable for the promises they made to the members on video. For example, how valuablemight it be two years from now to have the "transparency pledges" previously recorded onvideo?

There is also a precedent in the 1995 election, which provides a useful comparison. Themembers will not be paying many of the substantial costs associated with that election, wherethere was not only a free candidate mailing arid a Special Election Edition of the Carpenter (as inthis election), but five days of in-person voting at the Borough of Manhattan Community College(with a large associated rental, security and insurance fee), 30 voting machines and a team oftechnicians provided by a company that came from Maryland (also with a large fee attached), amail ballot component run by the AAA for members who lived more than 75 miles from the city,and on-site monitoring at all times by the IRQ's staff.

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I am committed not only to saving the Union's money but to insuring that such aprinciple endures. Members should know that since my installation, there has not been afrivolous dollar spent by the District Council (no alcohol, no gourmet dinners, no golf trips toresorts, no banquets, etc.),

Further, the District Council has at least $60 million dollars in reserve between itsOrganizing Department and general accounts and can afford to invest in events like an electionthat will determine the very future ofthe Union. That so few members attended the Javits Centerevent is a deep shame, but one can only hope that they are viewing the video prior to voting andmaking their choices on an informed basis.B. The Governance and Administration of the District Council

The District Council infrastructure has been improved and fortified; Itwill be ready toreceive its new government in January. I have worked with the District Council managers toimplement and improve key functions, policies and procedures.

Fiscal discipline and prudent budgeting has taken firm hold at the District Council (andthe local unions). In significant part, it will be up to the members to insure that these practicesare permanent, Members must take responsibility for .insuring the oversight of electedfiduciaries.

The new Bylaws were officially published pursuant to Paragraph 12.b of the Stipulationand Order on August 5, 2011. See Exhibit 6. They are the product of much good faithdiscussion between my office and counsel for the UBC. The Bylaws reflect compromise incertain areas, which, in my judgment, obviated the need to litigate any particular point ofdisagreement. A statement I released to the members regarding the publishing of the Bylaws is

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attached hereto as Exhibit 7;1 The Bylaws provide for unprecedented transparency andaccountability of employees and officials and an array of functions founded on best businesspractices. They also provide authority to those who will strive to safeguard democraticgovernance.

Each of the delegates elected in October has been given a copy of the Bylaws by mystaff. I implore them, and all members, to study the Bylaws closely and understand what can beaccomplished through adherence to them - and what will be lost under any other circumstance.C. Key Positions at the District Council

In order to help insure good and productive governance and administration at the DistrictCouncil in the future, the Bylaws provide for many key positions, some new, some not: Directorof Operations, Inspector General, Deputy Inspector General, Director of Organizing, Director ofPolitical Action, Chief Accountant, Human Resources Director, Advocate, Chief ComplianceOfficer, and Deputy Compliance Officer. The Bylaws protect persons serving in some of thepositions from arbitrary or unjustified dismissal (e.g., Inspector General and Chief ComplianceOfficer) by requiring my consent and that of the United States Attorney (and upon thecompletion of my.tenure, the consent of the United States Attorney). Though that is the case, itshould not prevent any member from expecting anything less than excellence from any person insuch a position or from questioning their continuing suitability for the position or the ongoingperformance of their duties.

Other positions are not so protected, but any dismissal contemplated by the Union will bescrutinized by my office to determine if such dismissal is inconsistent with the objectives of theStipulation and Order pursuant to Paragraph 5.b.iii.

I have reserved judgment on certain few sections, including the suitability of Section 14(A).6


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D. CollectiveBargaining Agreements, the LMC and "Full Mobility"As of the morning of December 2, 2011, no new collective bargaining agreements have

been posted on the District Council web site. As a result, a vote by the new delegates has not yetbeen scheduled.

Based on my most recent conversations with the District Council's Director ofOperations (which occurred on December 1), I expect the contracts will be founded on two keypropositions: (i) that employers no longer be subject to a "hiring ratio" where they must accept atleast a third of their workers being referred by the Union; with the change to "full mobility,"employers would be free to select any member of the Union to work for them, although theUnion would still appoint a steward; and (ii) that the Labor Management Corporation (the"LMC") be constituted to assist in contract enforcement, and investigate and redress violationsthrough arbitration proceedings, fines, and, where serious violations occur, excluding contractorsfrom the right to utilize full mobility.

On November 11,2011, the District Council provided me with two documents relating tothe establishment, practices and scope of the LMC. An excerpt from the collective bargainingagreements contemplating full mobility entitled "Anti-Corruption Measures and Full Mobility"and the "Rules and Penalties of the Labor Management Corporation" are attached hereto asExhibit 9.

The plan embodied in the documents comports with only some of the points I stated inmy last report, which I reiterate here:

[A]n adjustment of the so-called "50/50" rule .. , must only be implemented upon firmevidence that the District Council -- and employers -- are willing to join together toimplement broad reforms to eliminate all manner of fraud and corruption from theindustry. In order for such a change to be considered, contractors who would seek relieffrom the "50/50" rule should, for example, have to sign on to a "Joint ComplianceProgram" ("JCP") with the District Council. Material provisions could include

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agreement to (1) use electronic scanners to record work hours (and could include arequirement that such costs be shared); (2) use site security cameras linked to the internetto allow [the District Council IG's office], and a counterpart selected by the contractor, toview the site at any time; (3) have random, and off-hour inspections of the work site bythe District Council; (4) require the filing of weekly certifications (by sworn affidavit) bythe employer attesting to the hours worked on a job, the payment of required fringebenefits and the manning of the job in compliance with the Consent Decree and allapplicable court orders; a separate, similar certification could be required from a Unionrepresentative; and (5) refer disputes regarding any of the foregoing to arbitrationconducted by a newly constituted Labor Management Committee composed ofprofessionals of unassailable character empowered to conduct hearings, make findings offact, award money damages and discipline contractors who violate the rules. The ReviewOfficer would retain his jurisdiction for at least the period contemplated by theStipulation and Order.

Results of the JCP after an initial trial period would have to be studied by theReview Officer, the government and other parties. The District Court would then decideif such conditional alteration of the "50/50" rule would materially benefit the membershipand aid in achieving the objectives of the Consent Decree and the Stipulation and Orderand accordingly set the terms of its implementation.

Second Interim Report at 6-7 . I continue to believe that the only prudent approach toimplementation of full mobility, should it be approved by the delegates to the District Council,and ultimately by the Court, is by a phased approach involving a trial period and oversight by myoffice with reporting to the government and the Court.

Whether the LMe will be effective or not cannot be predicted. There are flaws in theway it will be constituted (under the plan submitted) and too much will depend on talented anddedicated persons being hired (and retained) by the LMC (particularly because so few, only eightline investigators, will be available to police a very broad jurisdiction), If retired agents ordetectives are hired who might not be looking to do "a lot of heavy lifting" (as I have heard thephrase used many times by such persons), the LMC will be a failure and it will not decreasecorruption, I am also concerned that (i) the arbitration forum has too many characteristics thatmight be perceived as rushing proceedings and that reflect an aversion to a deliberate, legalisticapproach; and (ii) that the fine and penalty structure will not deter a contractor from underwriting

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fines as a cost of doing business (or indeed from committing toa "bust out" plan and paying thefines knowing that the big score will still be achievable).

I also think it is wise to note the many emotional predictions expressed by members that"full mobility" will reduce employment prospects for many current members of the Union who

willnot be able to deliver the efficient productivity sought by employers in this very competitiveand cost sensitive industry.E. Restructuring of Local Unions

Since my last report, I reviewed the restructuring plan submitted by the UBC on May 27,2011. The plan was posted on the District Council web site and a comment period ran throughJune 10,2011.

The Plan called for the geographic jurisdiction of the work of Locals 2287 and 1456(with 1456 to be dissolved and joined in a new heavy construction local with the members ofLocal Union 1536, also to be dissolved) to be broadly decreased. Further, members of LocalUnion 740 (a small specialty local composed of some 300 millwrights) would have been joinedwith a local based in Syracuse. A new "interior systems" local union was to have beenchartered.

On July 5, 2011, I sent a letter to counsel for the UBC posing some fundamentalquestions about the restructuring plan.

Will the ceding of certain geographical jurisdictions of Local Unions 1456 and 2287 andthe dissolution of Local 740 (and the reassignment of its members to Local 1163 inSyracuse) likely result in a decrease in the amount of fringe benefit contributions madeby employers to the New York City Benefit Funds? Ifso, what is the anticipated amountof such decrease over the first three years and what methods will be used to mitigate suchdecrease?Will the Consent Decree and related orders of the District Court have any force and effectwith regard to dock building, floor covering, millwright and other work and related unionundertakings in the ceded geographical jurisdictions of Local Unions 1456, 2287 and

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740? If not, is this aspect of the restructuring plan a proposed modification of theConsent Decree requiring the consideration and an order of the District Court?

See Exhibit 10.The UBC has since revised its plans and as its counsel has informed the Court, declined

to make any changes in the jurisdiction of the local unions in question. It has dissolved Locals1536 (the "Timbermen") and 1456 (the "Dockbuilders") and placed their members in a new local(Local Union 1556). Locals 740 and 2287 remain intact, and the District Council's two shoplocals were dissolved and their members placed in newly formed Local Union 2790. Further,counsel for the UBC announced at the last status conference before the Court that there are nocurrent plans to charter an interior-systems local. My staff has been active in its review andoversight of the new local unions and it appears that they are fulfilling their administrativeresponsi bili ties.F. Local Union Meetings and Review Officer Forums

I held forums for the meinbers on June 21, August 3, and September 14. Thepredominant issues raised by members in the forums have been "full mobility" and restructuring.Each event has run for at least three hours.

I also held meetings with the advisory committee I formed from the rank and filemembers. The Review Officer Member Advisory Committee e'ROMAC," composed of some60 members) met on July 5, August 2 (subcommittee), August 23, and November 29(subcommittee).

At these events'" and on many other occasions (including the rally and speeches Iobserved alongside many hundreds of members on August 25), I have heard the concerns of the

The foregoing events have all been recorded and are available on the internet, posted by interested and. technically adept members.21

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members regarding full mobility, wages and restructuring. I have also had many discussionswith members regarding the new Bylaws and the future governance of the District Council.

I note that in addition to the forums and the ROMAC, my office continues to have anopen door policy. Any member can go to the District Council during business hoursand expectto be able to see an RO staff investigator. I have also had many meetings with individual rankand file members and groups of members to discuss whatever concerns or observations they mayhave about the Union. My staff continues to receive and respond quickly to calls received at theDistrict Council throughout the day. I receive calls throughout the day onmy office line.

Attendance at many local union meetings has been abysmal. As a telling example, mystaff observed the meeting of Local Union 157 on November 21, 2011. Local 157 has over10,000 members, only 57 of whom attended the meeting. By the time the meeting came to anend, there were fewer than two dozen members remaining." We have observed the downwardtrend in attendance at other important local unions as well. The apathy of so many meinbersserves only to enable those resolute few who will always seek some selfish advantage when noone is paying attention.G. Improvements in District Council Operations

The District Council employs 83 full-time employees (not including full-time temporaryemployees). A salary band and employee review system has been implemented. See Exhibits 11(with personal information redacted) and 12, respectively. The personnel policy has been refinedand revised. See Exhibit 13.

Since its overhaul in April 2011, the new grievance department is responsible forhandling over 1,500 matters and collected over $425,000 in that brief period. Though we31 Note that Local 157 has some 48 delegates to the District Council, many of whom were absent from thelocal union meeting. At least proportionally, one local does much better: Local 740, with fewer than 400 members,routinely draws between 50 and 100 members.

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continue to work with the District Council to improve and document procedures, the grievancedepartment serves its purpose with professionalism, redundant accountability, strict controls anda tracking system. The policies of the grievance function are attached hereto as Exhibit 14.H. The Organized Crime Threat

Organized crime, predominantly through the Genovese family (though other familiescontinue to have interests and "turf') remains active in its efforts to corruptly influence theDistrict Council and particularly some of its local unions. My office spends considerable timeaddressing this threat and I employ a broad range of investigative techniques. My staff and Ihave gathered significant evidence of criminal conduct engaged in by persons affiliated with theGenovese family, some of whom are members of the Union. I and members of my staff meetand confer regularly with law enforcement authorities in this regard. As the investigation isongoing, I am constrained to say nothing further on the subject.I. The "Amalgamated"Union and Solicitation of District Council Members

My office is investigating the suspected involvement of members of local unionsaffiliated with the District Council with a new union attempting to represent workers in thejurisdiction of the District Council. Persons who are not parties to the Consent Decree or the.Stipulation and Order may be importuning members to join this new union and thereby may bein a position to interfere with the implementation of the Consent Decree and the Stipulation andOrder. See Exhibit 1 at ~s 12.g and 12.i. The investigation is ongoing. Information about the"Amalgamated" union, which has been posted on the internet, is attached hereto as Exhibit 15.The contact person named in the posted information is an attorney who has represented and stillcurrently represents multiple members of local unions affiliated with the District CounciL

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J. Stipulation and Order Paragraph 5~bReviewMattersEvery day I receive and review new proposed expenditures, contracts and other "S,b

matters" of the District Council and each local union, See Paragraph S.b of the Stipulation andOrder. Although my staff and I have asked questions about many, with some limited exceptions

.......(because by now most everyone involved "getsit'tj-the expenditures are ultima telyappropriate.We continue to take an active role in working with District Council, and particularly local unionofficials, to improve their operations and foster compliant conduct of fiduciaries.

The executive board of Local 157 has recently come under close review for suspectedviolations of Paragraph 5.b. On November 9, 2011, I issued a Notice of Possible Action("NP A") to the local union president. The NPA states that

The facts and circumstances under review involve suspected violations of (1) ParagraphS.b of the Stipulation and Order entered in this matter on June 3, 2010 (regarding certainrequired notices), arid (2) violation of29 U.S.C. Section 501(a); to wit:(i) from in or about June 29,2011, through October 2011, while serving as President ofLocal 157, you knowingly and willfully failed to provide notice to this office of theexpenditure of local union funds for stipends paid to local union officers and electioncommittee members and (ii) failed to seek required approval from the membership ofLocal 157 for said expenditures, as well as expenditures for election notices mailed to themembers of the local union on or about September 9th and 14thas required by Section54.0 of the Constitution of the United Brotherhood of Carpenters and Joiners ofAmerica.

The matter is pending.K. Litigation Involving the ReviewOfficer

By an order to show cause issued on October 17,2011, certain members whom I declinedto approve to run for District Council office pursuant to Paragraph S.k.iv of the Stipulation andOrder sought injunctive relief from the Court. The Court's decision and order denying theirrequest is attached hereto as Exhibit 16.

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In a letter dated November 17, 2011, three of the members who sought and were deniedinjunctive relief, represented by a different attorney, asked the Court to require a write-in optionon ballots to be cast by members for the positions of EST, President and Vice President. Themembers also sought the release of audio recordings made by this office of their candidate

.....interviews. After reviewing my and thegovemmcnt'sresponses, the Court deniedtherequest,The letters of Angelo Bisceglie, Bridget M. Rohde and Benjamin Torrance, and the Court'sdecision, are attached hereto as Exhibit 17.

In September 2011, I obtained a subpoena from the Court to depose an arbitrator who hadhandled an arbitration between the Benefit Funds and a contractor in 2008, but who had not yetissued an award." I sought to have one question answered regarding the circumstances of thearbitration. The arbitrator moved successfully to quash the subpoena, citing the arbitratorimmunity theory. The Magistrate Judge's decision was issued on October 26, 2011. OnNovember 22, 2011, the arbitrator issued an award in the matter, finding that the Benefit Fundsshould receive $7,036,101.69 plus audit costs from the contractor. See Exhibit 24 (containingselected pages of decision), However, it is 0lIT' understanding that the contracting firm is defunctand its owner without assets having pleaded guilty to federal criminal charges and agreeing topay restitution of $1 million dollars.L. The Local 1456 Two Percent Assessment Inquiry

This summer, after my office received certain information from new members of theexecutive committee of Local Union 1456, I began an investigation into the failure by formerLocal Union 1456 Executive Committee officers to collect, and signatory contractors to remit, a2% assessment on behalf of former Local 1456 members.

41 Delayed arbitration decisions are discussed in greater detail in the Benefit Funds part of this report.14


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The assessment comprises 2% of the hourly gross. wage for each former Local 1456member working under various Collective Bargaining Agreements.

The investigation involved certain employers bound by (i) the Agreement BetweenMembers of the General Contractors Association of New York, Inc. and The District Council of

-CarpentersofNewYorkCityandVicinityforDockbuildersLocal Union No; 1456,July2006-June 30, 2011 ("GCA"), (ii) the Independent New Jersey Dockbuilder Agreement BetweenThe District Council of Carpenters of New York City and Vicinity, AFL-CIO For DockbuildersLocal Union No. 1456, May 1. 2007-April 30, 2012 ("Independent"); (iii) the New JerseyDockbuilder Agreement Between Members of Construction Contractors Labor Employers ofNew Jersey and Associated General Contractors of New Jersey and The District Council ofCarpenters of New York City and Vicinity, AFL-CIOFor Dockbuilders Local Union No. 1456("CeL"), and (iv) the Agreement between TheCement League and The District Council of NewYork City and Vicinity of the United Brotherhood of Carpenters and Joiners of America, AFL-CIO, July 1, 2006-June 30,2011 ("Cement League").

Section 6(d) of the GCA agreement states that "Two percent (2%) assessment of thehourly rate of wage, excluding fringes, [is] to be deducted from Employees under the jurisdictionof the Local Union No.1456 upon signed authorization by Employee and paid by check to LocalUnion 1456 weekly." The Independent and eeL collective bargaining agreements containidentical language. The Cement League agreement contains similar language imposing the sameobligation to collect and remit the 2% assessment to the local.

The 2% assessment funds are deposited in the "Dockbuilder's Relief and ContingentFund" and is "used for the relief of aged, sick or disabled members, for organization purposes, orfor any other purpose the Local Union may decide," including the payment of unemployment

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checks to members. Constitution and By-Laws of Dock builders, Pier Carpenters, Shorers, HouseMovers, Pile Drivers, Tenders and Foundation and Marine Constructors, Article VII, Section 6.

Local 1456 secretaries were left in charge of collecting the 2% assessment, with little.assistance from Executive Board officers. An expensive but outdated software programcomprisedtheonlydatabankofassessedfundscoHectedfrom-thecontractors~Thesecretariesprovided contractors with a Local 1456 assessment form. Contractors were instructed to fill outthe form weekly and return it with a corresponding check in the amount of 2% of members'gross wages. Secretaries deposited the money into a Chase bank account.

The secretaries were unable to identify any collection measures taken by the formerExecutive Board officers against contractors failing to remit the assessment.

To establish a benchmark, my staff compared the Benefit Funds' database showinghourly contributions for members of Local 1456 with the Local 1456 database to determinewhich contractors had not paid the assessment or still owed full payment. The Funds' databaseshows monetary contributions made by contractors to the Funds for members' fringe benefits.For every hour worked, a member receives money for fringe benefits paid by the contractor intothe Fund.

The Local 1456 database shows the number of hours worked and corresponding fundsremitted by contractors to Local 1456 for the 2% assessment. A review of the database revealedthat dozens of contractors failed to remit the requisite funds - money earned by the members andheld by the contractors ~in the period sampled (January 2010 through August 2011).

On September 16,2011, I applied to the Court for 10 subpoenas duces tecum requestingfinancial records from contractors who had apparently not paid the 2% assessment. Thesubpoena was signed on September 19, 2011.

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Analysis of the subpoenaed financial records from the 10 contractors showed that eightfailed to pay the 2% assessment for 2010 and/or 2011 in the aggregate amount of $141,552.Contractors have remitted $53,960 since service of the subpoenas. As of this writing, MaracapConstruction Industries owes $30,944, Central Jersey Builders Incorporated owes $9,057, Sub-

Tech Services, LLPowes $12,&49, Kiewit Constructors Incorporated owes $16,391, and CelticMarine Services Corporation owes $18,349. Two of the contractors, 41G and Creamer Fletcher& Son, were indexed by different names in Local 1456's database (Schiavone Construction andJ. Creamer Fletcher & Son, respectively), and are current in their payments.

Many other contractors have failed to remit assessment monies. Ihave asked the DistrictCouncil to inquire of these contractors and collect any delinquent payments, which are believedto total approximately $1 million.M. Operation of the Hotline

The collected Summary Hotline Reports submitted to the District Council and thegovernment from June through October 2011 are attached hereto as Exhibit 18. Most calls nolonger involve corruption.N. The District Council Trial Conimittee

The Trial Committee run by Chairman Walter Mack and Vice Chairman James Zazzalicontinues to provide a well-run and serious forum for union justice. There have been 67 trialsconducted so far in 2011. A chart showing a statistical breakdown of its activities is attachedhereto as Exhibit 19. In July, I agreed to a minor procedural amendment of the TrialCommittee's procedures, attached hereto as Exhibit 20. Charges brought by the District CouncilInspector General against former District Council Executive Secretary Treasurer Michael Forde

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and others involved in the On-Par scheme are still pending. Many lesser figures in the On Parscheme have been charged by and reached settlement agreements with the Inspector General.O. CostsAssociatedwith the ReviewOfficer and Trial Committee

For all of2011, the average monthly cost to the District Council for the fees and expenses-------------------associatedwithmyundertakingshasbeenapproximately$75,000, which is precisely the median

amount contemplated by Paragraph 8.b.i of the Stipulation and Order, which specifies anexpected range of $65,000 to $85,000 per month. The average monthly fee paid to my finn in2011 for the services of my partner and I is $31,500 (for on average, 242 total billable hours eachmonth at a rate of$130 per hour, far below market rate). Average monthly expenses, includingfor legal and investigative services from Mintz Levin and BOO, are $43,500.

The average cost of the judicial and administrative services provided by the Chairmanand Vice-Chairman of the Trial Committee has been approximately $40,000 per month,comprising fixed payments of $16,000 each to Walter Mack and JamesZazzali and an additionalpayment of $8,000 to Mr. Mack for his administrative -costs as Chairman. Effective thisNovember, each has agreed to a reduction in their monthly fees to $13,500.P. Journeymen and OWL Statistics

The following summarizes recent membership, out-of-work list and dispatch trends:Journeymen in good standing as of 10 /31111Journeymen in good standing as of 4/30/11Reduction in journeymenReduction since 12/3/10

14,27514,7875121,019

Members in arrears 1,600 (rounded)Numbers of persons on "the OWL":Local 157Local 2287Local 1556

4,101219303

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Loca1740 82Local 2790 108Total: 4,813

By comparison, the number of members on the OWL one year ago was 5,500.Dispatch Statistics

............. _ _ . .....................

October 2011 Apri12011 October 2010Apprentices 451 484 458Requests 305 454 482Shapes 342 381 342Denied Requests 46 75 130Pure Dispatches 1,138 1,587 1,001Totals: 2,282 2,981 2,413

The October 2011 dispatch figures include some 66 tradeshow dispatches.The total activity from June through September 2011 follows:September 2011: 2,627August 2011: 2,981July 2011: 2,363June 2011: 2,522

Q. The District Council Web Site and NewspaperAfter expressing my views to District Council officials as to what Iperceived to be the

shortcomings of its web site, the Council has retained professional technical assistance toupgrade and revamp the site. In my view, the web site should provide accurate, timely andhelpful information for all members and for the industry, as well as provide a respectful forum

for discourse. Hard news should also be included. The new administration will have to shepherdthis project to insure that the asset is appropriately utilized and maintained for the best interestsof the members.

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Ihave also expressed similar VIews to District Council officials about the Unionnewspaper, The Carpenter, which has for years been nothing more than a political tool forincumbents filled with too many fluff pieces and photos of incumbent officials. The paper needsto be taken seriously as a conveyor of real news on important industry issues and as a forum fordebateandrespectfulstatementsofopinion;Purther,astronge-ffort--shouldbemadetosignupmembers for electronic distribution of the paper (and interim articles as matters becomenewsworthy) to save on the significant mailing costs.R. Monthly Retainer Paid by the District Council to O'Dwyer & Bernstein

From January 2000 until approximately Fall 2010, the District Counsel was representedby the law firm O'Dwyer &Bernstein ("ODB").

Ihave been provided with two letters sent by ODB to the District Council relative to thefirm's retention. The first is dated January 19, 2000. It is a bare bones engagement letter fromBrian O'Dwyer, Esq. to Mr. Forde, saying, in pertinent part, that the firm "will perform a fullsize [sic] of legal services as requested" and indicating that the firm would bill "on the basis oftime expended on this matter," specifically $250 an hour for lawyers and $100 per hour forparalegals. The letter further provides that the bills will "include a brief description of the workdone and time expended." There is no provision with respect to a retainer of any kind in theengagement letter. See Exhibit 21 .51

The second letter, dated July 24, 2008, is also from Mr. O'Dwyer to Mr. Forde. Mr.O'Dwyer states that he is confirming a conversation with Mr. Forde and that the $250 an hour"composite" rate for attorneys will increase to $300 an hour "in addition to the regular retainer."No further detail is provided about this retainer, not the frequency, not the amount and not how it

51 I have referred to the January 2000 letter as an engagement letter, but I note that while there is a signatureline for the client, I have not been provided with a copy ofthis letter signed by District Council.

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will be utilized. This letter does not have a signature line for the District Council. See Exhibit22.

My staff's review of ODB's invoices to the District Council indicates that from January2008 through March 2009, there was an invoice for a monthly retainer of $20,000. This was onsepaIate.jnyQiceJrQmJhejnyQicewithspecificJimeentriesJoLworkperformedandJhemonthly total legal fees. From March 2009 on, ODS invoiced the District Council for a $10,000monthly retainer, also on a separate invoice from the general invoice.

There does not appear to be an engagement letter reflecting the monthly retainer to OOB,nor have Ieen any other paperwork explaining it. Moreover, it is unclear whether the retainerwas used to offset fees accumulated by the District Council.

Ihave been advised by the District Council that, post-supervision by the UBC, i.e., fromSeptember 2009 on, it appears that the retainer was paid because this was considered to be therelationship between the Council and ODB. Ihave also been advised that the District Council isexploring why this retainer was initially paid and why it was reduced and Iwill further addressthis in my next report.S. Labor Technical College

Over the last few months, my office has reviewed the operations of the District Council'sLabor Technical College (the "College"). Our review included on-site inspection, documentreview and interviewing the College's recently retired Director, 15 full-time teachers, 28 part-time teachers, eight administrative assistants and secretaries, three janitors, eight GrantsDepartment staff members, and the Controller of the Benefit Funds.

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The College is funded by an assessment of 70 cents per hour from the wages of DistrictCouncil members. Despite the fact that this amount fluctuates based on aggregate man hours,the annual budget of the College has been set at $11 million for a number of years.

Full-time teachers are paid approximately $104,900 annually and teach seven hours a. --day:.Duringthesummer;whennoclassesareinsession,fuU -time teachers are expected to repair .

and maintain their classrooms, prepare for the upcoming semester, order and inventory material,and they may teach courses at night, depending on the need.

Part-time teachers are paid $200 to teach a four-hour class.The College conducts day and night classes. The day classes are scheduled classes taught

by full-time teachers to apprentices. Each trade (e.g., Timbermen, Dockbuilders, Millwrights,Cabinet Makers, Floor Coverers, and General Carpentry) has its own curriculum for eachsemester. There are 10-12 different classes taught to apprentices each day from Monday throughThursday. During the 2010 and 20n school years, 1,192 apprentices attended the College.

Night classes are taught only to journeymen. Part-time instructors teach these classes.Of the 28 part-time instructors, 27 are District Council members. (An architect who teachesblueprint reading is not a union member). The College offers 15 to 17 different classes at night.During the summer, the number of night classes decreases as the number of hours worked by theaverage journeyman increases.

Journeymen - night classes are scheduled as needed. The College attempts toaccommodate journeymen needs, such as skills required for particular employment opportunities,by scheduling classes as quickly as possible. Due to space limitations, this is sometimesproblematic. The College's inability to provide these courses on what journeymen believe is atimely basis is one of the chief complaints we heard.

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Martin Daly served as Director of Training from 1996 until November 2011. (EllySpicer has been appointed pro tern Director of Training). Mr. Daly hired teachers during histenure and did so, he advised, on "reputation" alone. Specifically, there was no notice given tothe membership of open positions and he interviewed most candidates one-on-one, that is, withno other College staff present. He recognized future job openings should be filled through anobjective, standardized process, which is the approach that I expect to be taken on a go-forwardbasis under the new Director.

Despite the lack of an appropriate hiring process, my office has found that both full- andpart-time teachers are talented, experienced and motivated (many with at least 20 years'experience intheir field).

We were concerned about a lack of proper financial oversight at the College. AlthoughMr. Daly was involved with the creation of the annual budget, he was unable to provide specificinformation pertaining to any contribution by"the Grants Department to funding the operations ofthe College or to the disposition of any budget surplus at the end ofthe year.

The Benefit Funds Controller, David Jacobsen was also unable to state what portion, ifany, of the College's budget comes from the Grants Department's efforts. Jacobsen said that thebudget of the College was simply a function of the number of man hours reported to the Fundsmultiplied by 70 cents an hour. If there is a budget surplus at the end of the school year, thesurplus is placed in a Bank of New York account (which currently holds almost $11 million).

While the above reflects far less than best practices, we found no evidence of financialimproprieties such as unsupported purchase orders or mismanagement of materials. Betterrecord keeping and financial controls should be utilized as they will provide transparency thatwill help protect against corruption.

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T. The Grants DepartmentStarted in 1994, the Grants Department was established to recruit minority students to

address the disproportionate number of white apprentices enrolled in the College. Grants weresecured from the University of Medicine and Dentistry of New Jersey and other sources'' to teacheconomically disadvantaged, chronically unemployed pre-apprentices basic carpentry, life andmath skills, with the hope they would enroll in the College. This hope was not realized. Weunderstand that in recent years, the persons who received this training did not actually enter theCollege, essentially because of dysfunction in the relationship between the former Director ofTraining, Mr. Daly, and the Grants Department manager, Donald Killinger.

Nonetheless, we have been advised that there is no longer an imbalance between whiteand minority apprentices at the College because more minority students are applying to andbeing accepted by the College than before. According to a recent memorandum authored by Mr.Daly, the College presently consists of approximately 58% minorities and 18% women. SeeExhibit 23.

With its purpose fulfilled, it would appear that there is no longer a need for the GrantsDepartment. Yet it continues to exist. It is managed by Mr. Killinger and recruits individuals bysending flyers to Community Based Organizations ("CBOs"),7 informing them of the next 17-week pre-apprentice program. In tum, the CBOs refer candidates for participation in the pre-apprentice school. - The CBOs are paid $20,000 per year by the Grants Department for thesereferrals.

6 There are four other smaller grants that contribute money to the Grants Department.7 CBOs contributing for 2010-11 are the National Institute of Environmental Health Sciences, New YorkState Department of Labor, Robin Hood Foundation, and NYC Department of Environmental Protection.

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The participants are screened for entry into the pre-apprentice program through testingand interviews by Grants Department staff. One 17-week class is made up of between 25 and 30students. The Grants Department attempts to schedule three 17-week programs each year.

A large part of the Grant Department's historical activity involved planning and directingpre-apprentice classes. A review of the 2011 school calendar revealed a six-month period inwhich no classes were conducted. Grants Department employees were hard pressed to definetheir activities during this six-month period.f Several employees admitted significant "downtime" during this period.

Once enrolled in the pre-apprentice program, students attend various classes originallydesigned to prepare them for enrollment in the College. The Grants Department provides moneyto pre-apprentices for transportation, lunch, and appropriate work clothes.

Upon graduation, the Grants Department attempts to place pre-apprentices into DistrictCouncil apprenticeship programs. However, as Mr. Daly has acknowledged, a difficultrelationship developed between him and Mr. Killinger. Asa result, both the College and theGrants Department have suffered. Despite the Department of Labor's Direct Entry program,which allows graduates of the pre-apprentice program to bypass the lottery system and gainimmediate admittance to the College, Mr. Daly stopped accepting pre-apprentices from theGrants Department. In turn, the Grants Department recognizes that at least some of their pre-apprentices will likely be employed as non-union labor. Although Mr. Killinger said thattraining people for non-union employment was not as "scandalous" as it seems, one cannotescape the conclusion that the end product of this practice defeats the goals of the DistrictCouncil.

Between April and October 20 II, no pre-apprentice classes were offered. There was a similar four-monthperiod when no classes were scheduled in2009.

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Additionally, the Grants Department appears to have hired employees without anystandardized process and based on nepotism. According to several Grants Departmentemployees, an attorney formerly engaged by the Funds used his influence with the Funds toobtain jobs for alumni of a fraternity with which he was associated, including Mr. Killinger.While Mr. Killinger had experience with grants, two others in the department did not.

In 2003, according to Mr. Killinger, he called the attorney, who had mentored him sincecollege, and asked him for assistance in obtaining employment. Soon after, Mr. Killinger wasgranted the only interview for the position of head of the Grants Department. Mr. Killinger washired at $65,000 a year. His current salary is $100,000.

According to Mr. Killinger, the former Executive Director of the Funds directed Mr.Killinger to employ as a District Council employee a clerk from the Out-of-Work-List (andfiancee of On Par steward Brian Carson), after Carson was sentenced to 19 months in federalprison. No position existed at the time. Mr. Killinger was also directed to hire a Funds'employee after the employee could no longer be employed by the Funds. The person in questionhad no experience in grants: The employee has since been terminated.

It is also the case that the Funds are losing money by supporting the Grants Department.Grant funds are used to pay the salaries of most Grants Department employees, but the DistrictCouncil pays for two of the employees. Moreover, grants funds sometimes pay for only aportion of Grants Department employee benefits. Up to 28% of an employee's salary isallocated for his benefits. If 28% of the employee's salary does not cover the full amount neededto pay for their benefits, the Funds pay the balance needed for the benefits.

Mr. Killinger said that it would he possible to reduce his staff and change the focus of thedepartment by using grant monies exclusively for training and education of District Council

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apprentices and journeymen. Otherwise, in my view, the Grants Department would bring nobenefit to the District Council and exist almost exclusively to sustain the employment of its staff.This is an idea that the District Council should explore, as any grant money that could beproperly used to defray necessary expenses would be beneficial.

Finally, I note that for a number of years, the Grants Department staff occupied primespace on the 8th floor of 395 Hudson Street, paying far less than market rates in rent. JosephEpstein, the new Executive Director of the Funds, has relocated the Grants Department to spacewithin the College and plans to refit the eighth floor and lease space at market rates.PART TWO: THE BENEFIT FUNDS91A. New Executive Director

In July 2011, Joseph Epstein was installed as Executive Director of the Benefit Funds.Mr. Epstein is an experienced benefits administrator. He was hired through a competitive searchprocess conducted by the Board of Trustees, with the assistance of outside counsel and aconsulting finn.

Mr. Epstein immediately began meeting with Benefit Funds' employees and assessing theoperation of the Funds. He articulated an open door policy and reinforced that with a memo toFund employees. The Board of Trustees further reinforced his open door policy, and thus theirsupport of Mr. Epstein, with a memo they sent to Fund employees. The Trustees additionallyencouraged employees to reach out to me or members of my team if they had any concerns. SeeExhibit 25.

91 My information regarding the Benefit Funds derives in large part from attendance at meetings of the fullBoard of Trustees, meetings of its committees, additional meetings and telephone conferences from time to time andwritten materials such as Board of Trustees minutes from both before and during my tenure; reports, memorandaand proposals submitted to the Board or its committees; and other documents reviewed by the RO's office. Manyof these documents are internal to the Funds' operations or otherwise sensitive and I have not appended them to thisreport. Should the Court wish to receive any documents not attached as exhibits, I will supply them.

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Mr. Epstein expeditiously made changes such as centralizing purchasing with hisassistant, ensuring that the IT department maintained emails off site while awaiting a back-upserver and transferring certain building security functions from the IT department to buildingsecurity. Additionally, Mr. Epstein instituted employee training on discrimination andharassment issues, utilizing an expert from Kauff, McGuire &Margolis (KMM).

These early efforts sent the appropriate tone from the top and laid the groundwork for asmooth transition from the long tenure ofMr. Epstein's predecessor.B. Organizational Restructuring and Key Staffing Decisions

During his initial months as Executive Director, Mr. Epstein has made manyimprovements to the business model of the Funds. In keeping with my recommendations, Mr.Epstein has implemented a streamlined organizational structure, with the centralization of keyfunctions in the hands of senior staff. Senior staff reports directly to Mr. Epstein. Each of thesenior staff has a defined area of responsibility, with specialized staff directly supervising partsof his portfolio as necessary and appropriate support staff facilitating daily operations. No seniorstaff member heads more than one department. Senior staff members are specifically dedicatedto Human Resources, Benefits, Audit and IT functions among others. See Exhibit 26.

It is particularly noteworthy that the Benefit Funds now have a Human ResourcesDirector. I had pressed for the Funds to create this position given its importance to the day today functioning of any business entity and its efficacy as a hedge against corruption. See FirstInterim Report at 7. Indeed, as stated in the Second Interim Report, the position was to becreated and filled before the Third Interim Report was issued. See Second Interim Report at 23.Mr. Epstein expeditiously accomplished this goal. The new Human Resources Director is RalphChetcuti, who has had a long history serving as a Human Resources, Labor Relations and

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Employee Benefits executive and a wealth of pertinent experience including courses at CornellUniversity ILR and serving as a trustee for other Taft Hartley funds.

Mr. Epstein has also hired a new Benefits Director, Laura Kalick. This is a key positionoverseeing the managers of the various funds. Ms. Kalick is an experienced Benefitsprofessional with a law degree and relevant certifications as a Benefits specialist.

Especially important in light of its deficient IT system, Mr. Epstein has hired a ProjectManager, Jennifer Gordon, who is tasked specifically with addressing the implementation of anupgraded system for the Benefit Funds. Ms. Gordon is an IT consulting professional withrelevant experience with the implementation, integration and re-engineering of business systems.C. In-Honse ConnsellComplianceFunction

The Legal Department of the Benefit Funds has concerned me since my appointment.After marginalization of its in-house counsel a number of years ago, two non-lawyers ran thedepartment until this summer, Since their retention by the Funds in December 2010, KMM, andRaymond McGuire and Elizabeth O'Leary in particular, have provided practical, hands-on andeffective guidance to the Funds and its Board of Trustees with respect to the many issues largeand small that arise. That said, the Funds appear to be at a point in their transition where theyshould rely significantly on in-house counsel, with the assistance of outside counsel whenappropriate.

In-house counsel should handle the Benefit Funds' daily legal work, including serving asthe Funds' primary resource regarding ERISA, the IRS Code, the Pension Protection Act, theAffordable Care Act and other legislation and overseeing the work of outside counsel,collections counsel and vendors. I understand that the Funds are currently contemplating havingin-house counsel also serve the compliance function. By calling upon outside counsel only when

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a matter is too large in scope for in-house counsel to handle together with his or her otherresponsibilities or when a matter calls for legal specialists, significant cost savings will beachieved.l'"

The search for in-house counsel commenced in Fall 2011. The Benefits Funds placed anadvertisem.ent, seeking an attorney with both core capabilities and compliance experience, in theNew York Law Journal, BenefitsLink, New York Times/Monster, IFEBC (InternationalFoundation Education Benefits Compensation) and the Association of Corporate Counselwebsite. See Exhibit 28. To date, there has been a limited response and other attorney searchalternatives are being. explored.

I note the following: I made plain that it was a high priority for the Funds to hire acompliance officer and develop and implement a compliance and ethics program consistent withChapter 8 of the United States Sentencing Guidelines by the time of this report. See First InterimReport at 6; see Second Interim Report at 23-24. I pressed the need for a compliance officer notonly in reports but at Board of Trustees meetings and in conversations with the ExecutiveDirector. I have said that a compliance officer is not optional. See Second Interim Report at 24.Like the HR Director, a compliance officer is another important hedge against corruption.

In late Summer/early Fall, the Benefit Funds endeavored to hire a compliance officer,interviewing a number of potential candidates. A candidate who was both willing to take theposition and appropriate for it was not identified. Understandably, the Funds wish to keep costsin check and, just as understandably, one or more candidates view the compliance officerposition as more than a part-time job.10 / As I noted in the First Interim Report, during the l S-month period ending June 30, 2011, the Benefit Fundsspent approximately $280,000 a month in legal fees. First Interim Report at 7. The combined total attorneys' feesfor September 2011 was approximately $151,000. See Exhibit 27. While this is certainly an improvement, and agreat deal of time has been expended intransitioning and instituting better practices, having in-house counsel wouldbe expected to help achieve greater savings.

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Because practical considerations often derail the best laid plans, I find the prospect of theFunds hiring an in-house counsel with compliance responsibilities to be a satisfactory approach.I do query whether the position would best be filledby hiring an independent consultant who is acompliance professional, with the expectation that he or she would devote more hours at theoutset of his engagement in order to create, implement and train on a compliance programconsistent with Chapter 8 of the U.S. Sentencing.Guidelines. A more modest amount of timecould then be devoted to ensure periodic retraining on, and continuing compliance with, theprogram.

Whether, the Funds hire in-house counsel with compliance responsibilities or anindependent consultant who is a compliance professional, this in no way diminishes myexpectations with respect to how the compliance function must be handled. In hiring for thisposition, the Funds must hire a highly qualified attomeywith the core capabilities as well ascompliance experience. Moreover, this position needs to be filled with alacrity. The attorneywill immediately have to begin developing compliance policies and procedures satisfyingChapter 8 of the Sentencing Guidelines, then train staff on these policies and procedures, so thatthe compliance function is firmly established and functioning effectively before my term expiresa year from now.

In closing on this topic, I note that early in my tenure, when I initially put forward theneed for a compliance officer, former co-counsel for the Funds said such a position was notcalled for. I continued to press. The need for the position next became sidelined a little over ayear ago when there was dissension among the Board of Trustees over the issue of co-counsel.Ultimately, the former Executive Director became interim compliance officer but made noprogress with respect to a Chapter 8 program. I do not believe that there is a continuing

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reluctance to having a compliance officer and attribute the failure to hire one in the last sixmonths to be due to the many professionals transitioning into and out of the Funds. However, Ireiterate that this remains a high priority for me and must be accomplished as soon as possible,certainly well before the next interim report is issued.D. IT Infrastructure

The Benefit Funds IT system continues to be a matter of serious concern. See, M.,Second Interim Report at 24. The system is outdated. The Funds are heavily reliant on anoutside vendor for daily operations, generating considerable expense (apparently ofapproximately $100,000 a month). The vendor's implementation of an upgraded computersystem has proceeded at a snail's pace. There was an issue with certain individual computers"crashing" at about the time when their users left the Funds this summer. So I have becomeincreasingly concerned not only about the efficacy of the IT system but about its integrity.

As noted above, the new Executive Director has hired a ProjectManager to address theseissues, which is an important step in the right direction. In mid September 2011, Ms. Gordonbegan working for the Funds and embarked on a vendor review and analysis in order to advise ..Mr. Epstein and the Board of Trustees on the' steps needed hi order to expeditiously achieve astate of the art IT system. I observed a presentation by Ms. Gordon to the Board of Trustees thatrelied on various sources and reviewed the performance of a current vendor and the capabilitiesof a possible substitute vendor.

By way of background with respect to this issue, but also because it provides a windowinto what has ailed the Benefit Funds, the Funds, with the assistance of a consultant, issued anRFP for vendors to implement an upgraded computer system in 2008. The vendor who waschosen to implement the upgrade was ranked third of five by the consultant, but the Funds

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changed the ranking based on one vendor having worked with the Funds previously and based onthe vendor's location. The consultant, which apparently ultimately changed its recommendationand supported this vendor, nonetheless stated a concern with the "immaturity" of the vendor'sjava platform, "in that it hard] never been employed by any client," as related in Ms. Gordon'spresentation.

At present, the vendor's three-year proposed implementation of the upgraded IT systemhas been underway for over a year and a half and is not on schedule for completion by August2012. In August 2011, a consultant reporting on the progress of the systems upgrade stated:"the slow progress of the implementation is due to [the vendor's] '[pjoor project managementand communication. To date, [the vendor] has not employed a strong or formal projectmanagement methodology, and has allowed the Funds to influence the process and projecttimeline," as related in Ms. Gordon's presentation.

Ms. Gordon has reviewed the responses to the original RFP and has reviewed thecapabilities of additional vendors, ultimately comparing the current vendor and one of theadditional vendors based on pertinent criteria. This additional vendor is reported, inter alia, tohave the "[bjroadest base of experience in the industry," to "[f]ocus solely on Taft-Hartleyfunds," to be the "[ojnly vendor that successfully works at every level of the Taft-Hartleymarket," to have been "[sjuccessfully installing Taft-Hartley systems for 30+ years," to have"[ljittle staff turnover," to "[ujtilizel] secure, stable teclmology to ensure reliability, performanceand investment protection," and to "[o]ffer the most cost effective solution in the industry,"according to Ms. Gordon's presentation.

At the November 17, 2011 Board of Trustees meeting, the Trustees agreed to allow Mr.Epstein to negotiate with the additional vendor.

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E. Email Back-upA related issue involves email back-up. This too has been a cause of concern since my

appointment. During the tenure of the previous Executive Director and co-counsel for the Boardof Trustees, I was repeatedly assured that a no deletion policy had been articulated to Funds'staffand re-confirmed. This was the back-up measure while Funds' staff was seeking bids for anemail server. The proposals received varied. wildly in price ($25,000 to $130,000), did notappear to be based on the same set of requirements and did not including encryption andarchiving or retention features.

It is my understanding from the Benefit Funds that, under the new Executive Director, theFunds' IT Manager has reviewed the Funds requirements and different technologies with two ofthe original bidders and a third specializing in exchange implementations, asked them to submittheir best technical solution based on the Funds' needs arid received three proposals ranging from$80,000 to $90,000. An analysis and recommendation will be presented to the Funds' Board ofTrustees at their December 2011 meeting. I have been advised that, in the interim, all email isbeing backed up to an offsite server and mailboxes are set with a no deletion policy.F. Collections"

As indicated inmy Second Interim Report, in May2011, Virginia & Ambinder (V&A.)was selected through a competitive process by the Benefit Funds' Board of Trustees, with theassistance of their counsel and a consultant. The transition from former collections counselbegan immediately, with V&A becoming fully engaged and dramatically changing theprofessionalism and efficacy of collections practices.11/ T his re po rt o f f in din gs a nd re comm en da tio ns is o ff ere d p ursu an t to m y re sp on sib ilitie s u nd er p ara gra ph5 .h .v o f th e Stip ulation and O rd er, w hich p ro vid es th at "T he R eview O fficer m ust review and assess th e B en efitF un ds' p ro ce du res a nd p olic ie s c on ce rn in g th e c olle ctio n o f emp lo ye r a nd emp lo ye e c on trib utio ns to th e B en efitF un ds p ursu an t to th e a pp lica ble c ollec tiv e b arg ain in g a gre em en ts. T he R ev ie w O ff ic er m ust iss ue a re po rt to th eC ou rt, th e G ov ernme nt, th e D istric t C ou nc il, an d th e B en ef it F un ds se ttin g f orth h is f in din gs a nd re comm en da tio ns."

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1. Historic Handling of CollectionsSignificant problems with the Benefit Funds' previous collection efforts have been

identified. 12 1 These problems weakened every link in the chain of the collections process.Preliminarily, it was often stated by former key Benefit Funds' personnel that the most importantthing was to keep the union members working, even if that meant allowing employer companiesto continue operating without making their required benefit contributions. Implicit in thisphilosophy was the belief that the wage and benefits components of a union member'scompensation were somehow not equally important obligations of the employer company. Atthe very least, this was a problematic approach to ensuring the viability of the Funds and thereceipt of full benefits by union members, retirees and their families.a. Initial Retention of Former Collections Counsel

Preliminarily, the Benefit Funds' relationship with former collections counsel was notappropriately memorialized. I have been provided with only one document arguably functioningas an engagement letter or retainer agreement of former collections counsel by the Funds. Thisdocument, a February 2000 letter, was inadequate in many respects. It was from the law finn tothe former Executive Director of the Funds. Itwas not signed by, nor was there a signature linefor, the former Executive Director of the Funds or the Board of Trustees. It did not list thebilling rates or a range of rates for professionals who-could be working on the matter. It did notprovide billing disbursement and expense policies. It indicated a very broad scope of services tobe provided.

121 Not all of the issues identified with the collections process are identified here and the descriptions of theidentified problems are not meant to be comprehensive. Review of these issues is ongoing.

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Predictably, there were defaults. Some defaults were swift and of breathtakingproportion. We specifically note five-year-Iong payment plans totaling over $1 million enteredby the Funds with two companies in approximately October 2010. Darken ArchitecturalWoodwork Installation was awarded a payment plan to run from approximately October 2010through October 2015 for delinquencies going back several years, as was MetropolitanArchitectural Woodwork Installation, a related company to Darken. Both companies defaultedin early 2011, still owing the bulk of the payment plan amount to the Funds. New collectionscounsel has filed a summons and complaint against Darken, Metropolitan and its principal. SeeExhibit 30.c. Follow-through to Collect from Defaulting/Delinquent Companies

There were other weak links in the collections process besides the payment plans.Following a default (or conceivably a delinquency if the Funds chose not to enter a payment planwith a company), the Funds were faced with the options of going to arbitration with a companyover the delinquencies or filing a civil lawsuit against the company. There was woefullyinsufficient follow-through to collect money owed the Funds.i. Arbitrations

In many instances, the Funds submitted to arbitration. In July 2011, I receivedinformation from the Funds that there were a number of outstanding arbitrations decisions forarbitrations presided over by one of the arbitrators from 2005 through 2011.' See' Exhibit 31(with company names and the arbitrator's name redacted).

Preliminarily, it is worth noting that no one at the Funds was able to locate a contract, norany document reflecting a fee arrangement, between the arbitrator and the Funds. As noted, thiswas not the only instance in which the Funds failed to memorialize appropriately a relationship

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with a professional services firm. Such practiceis fraught with opportunities for abuse from thehiring of the professional through the billing for professional fees. Clearly, the Funds must havecontracts with all professional services providers and the Board of Trustees must be fullyinformed so that it may meaningful consider and decide which relationships to enter.

The information received from the Funds reflected 29 outstanding arbitration decisions,the majority of which involved arbitrations from 2008 through 2011. Some of these mattersinvolved very large delinquency figures. For example, in the Turbo arbitration, with respect towhich a hearing was held in March 2008, the Funds through former outside collections counselsought approximately $6.7 million. See Exhibit 8 (containing selected pages of brief). Even inthe best of circumstances, the Funds would have lost the present value of money ultimatelyawarded for the extended period of time the arbitration decisions were delayed (the Turbodecision was issued on November 22). But these were not the best of circumstances and somecompanies, including Turbo, went out of business before awards were issued. The record doesnot support meaningful follow up by the Funds or former collections counsel to ascertain thestatus of any of these delayed arbitrations ..

As of December 2, 2011, the Funds still were awaiting receipt of three outstandingarbitration decisions.ii. Court Actions

Court actions by the Benefit Funds typically arose in two contexts: to confirm anarbitration award or to enforce a Confession of Judgment. As noted, the issuance of arbitrationsdecisions was much delayed without follow up. There were thus less arbitration awards toconfirm in a timely and meaningful fashion. As also alluded to, original Confessions of

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Judgments were either not obtained or maintained, which would inhibit proceeding in court withmotions for default judgment.iii. Use of a Debt Collection Service

This too was a weak link in the collections process chain. There was a very low recoveryrate - in the neighborhood of 5% - for delinquencies referred to a debt collection service. SeeExhibit 32. The problem was provision of incomplete information to the debt collection serviceand/or lackluster efforts by the debt collection service. There also appears to have been anabsence of follow up by the Funds and former collections counsel.

I note that the Benefit Funds are no longer utilizing this debt collection service.2. Review of Pending Matters and Improvements by NewCollections Counsel

New collections counsel, V&A, has undertaken a comprehensive review of the BenefitFunds outstanding collections matters. This has served the dual purpose of enabling the Funds(1) to institute or revise policies and proceedings to ensurethe best practices on a go-forwardbasis and (2) to handle ongoing matters in the most economically viable way considering costand the potential recovery. Moreover, V&A has been professional, efficient and dogged in itscollection efforts.a. Policy and Procedural Improvements in V&A's Tenurei. Revised Statement of Policy for Collection of Employer Contributions

V&A is in the process of finalizing a revised collection policy for consideration by theBenefit Funds' Board of Trustees. The Delinquency Committee has been kept abreast of therevisions to be proposed. The revisions are the product of the review of outstanding collectionmatters, the problems identified and a proactive approach to ensuring maximum collections inthe most efficient way possible.

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Overall, the new collections policy is clearer and less discretionary than its predecessorand it is now fine-tuned to protecting the Funds' interest and minimizing its expenses. Somenotable changes include:

The inclusion of th e right to require a bond or a cash deposit as security for payment ofemployer contributions (the previous version said that right existed only with respect tonew employers or existing employers that have been delinquent to the Funds); The deletion of reference to a Delinquency Subcommittee, which does not appear to haveexisted, and tothe formerly retained debt collection service as responsible parties in theFunds' collection procedures; The replacement of a limitation on the number of hours per week a participating Principal-Owner needed to contribute with an average minimum number of hours per week; The addition of a provision regarding when contributions are due if the applicablecollective bargaining agreement does not specify a due date; A number of revisions regarding payroll review and audit procedures designed to simplifythe determination of contributions owed and thus save costs, including that an

underpayment may be determined without regard to discrepancies between shop stewardreports and employer's internal payroll records ifit is below $2,500 or 5% of anemployer's total contribution obligation during the audit period, that an employer has topay the cost of a payroll review or audit if the underpayment is at least $10,000 or 2% ofthe employer's total payroll during the period in question, whichever is less, that if anemployer does not cooperate with a payroll review or audit, the Funds may use anestimation method;

The addition of a requirement that interest owed by a delinquent employer shall becalculated at the prime lending rate of Citibank plus 200 basis points rather than anamount periodically determined by the Trustees; inclusion of a provision regarding use ofan increased interest rate for a company's second payment plan and a further increasedinterest rate for a company's third payment plan; the revision of a provision so that interestwill be not be assessed against an employer if its delinquent contributions are received bythe Funds within a seven-day grace period, rather than a 14-day one; and the inclusion of astandardized process for addressing employers who owe interest; and

The deletion of the provision that the Funds director or agent shall approve all settlementrecommendations to be presented to the Delinquency Subcommittee.

The draft Revised Statement of Policy for Collection of Employer Contributions is attached. SeeExhibit 33.

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ii. ImprovedAdministration ofPayment PlansA great detail of attention has been paid to the matter of payment plans by the new

Executive Director (Mr. Epstein), KMM and V&A, with significant improvements to the processbeing achieved and an objective of quantifiable improvements in collection efforts.

Since at least early 2011, I, together with my counsel, have regularly attendedDelinquency Committee meetings, as have the Funds then recently-retained outside counsel,KMM. By Spring 2011, the Funds had subscribed to a computerized database to obtaininformation about judgments and liens on employer companies and their principals. See SecondInterim Report at 27.

Since his retention in Summer 2010, Mr. Epstein has streamlined the organizationalstructure of the Benefit Funds. The Audit Director is the internal Funds staff charged withsupervising payment plans, Staff members who previously supervised the plans are no longerwith the Funds.

During the period after its engagement and before retention of new collections counsel,KMM created or made improvements to a number of payment plan-related documents in order toobtain more pertinent information from employers seeking payment plans, to provide moreparticulars to the Trustees on the Delinquency Committee who consider whether to approvepayment plans and to track the progress of each matter being handled by collections counsel.See id. at 28. As I have noted before, the Delinquency Committee meetings became more robustand fruitful, see id., and that continues to be the case.

My hope was that new counsel specifically dedicated to collections would furtherenhance this process. See id. That has been the case. V&A immediately embarked onthoroughly reviewing the payment plan program and overhauling it to be more effective as a tool

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in the collections process rather than an end in and of itself. See Exhibit 34. Specifically, in aneffort to be fully informed about the reason an employer seeks a payment plan, the extent of thepayment plan actually necessary and the employer's ability (and predilection) to pay, V&A hasdeveloped a questionnaire to be completed by employers seeking payment plans. See Exhibit 35.The Audit Department has the employer complete the questionnaire. Fund staff also runs acomputerized search for public records; See Exhibit 34. Funds staff is required to complete arequest for payment plan form, which is given to V&A. See id. V&A reviews the form andascertains what if any steps must be taken for it to make a fact-based recommendation to theTrustees on the Delinquency Committee. For example, in specific circumstances V&A mayrequire an interview of the employer. See id. V&A provides pertinent information for theDelinquency Committee to consider in assessing whether to permit an employer to have apayment plan. In tum, the Delinquency Committee members ask any additional questions theyhave before determining whether to let the particular employer enter a payment plan and whatterms are acceptable.

V&A has also ensured that the progress of an employer on a payment plan can bemeaningfully tracked allowing early intervention if need be. There is a revised payment planschedule that Funds staff maintains containing pertinent information such as length and totalamount of payment plan, amount actually paid to date and last date payment was made. SeeExhibit 36. V&A also maintains a chart of all-active' collection matters, be they arbitrations,judgment enforcement matters or active litigation. The chart includes information on theattorneys' fees and costs that are being expended on the collections efforts. The DelinquencyCommittee members continue to tweak the chart, alerting counsel to information that they wouldlike to have and formatting that would be helpful in their efforts to digest all of the information.

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This has become a very organic process in which Funds' staff, Benefit Funds' Trustees,particularly those serving on the Delinquency Committee, and collections counsel work tomaximize collections for the Benefit Funds in the most cost effective way possible.b. Collection Efforts

Since coming on board, V&A has been aggressive in its efforts to advance collectionmatters and has provided, in addition to the above-mentioned chart, a comprehensive oralpresentation at each monthly Delinquency Committee meeting as well a s detailed written reporton the status of all active collection matters. V&A has reviewed the files of former collectionscounsel, ascertained the history and status of matters through the files and any supplementalefforts needed, and is proceeding to get the matters on track toward collection.

V&A has identified and ascertained the status of approximately 125 collections matters.It has worked on most of these matters in the approximately six-month period since its retention.This has included settling audits; recommending that the FUnds enter or not enter payment plans;handling arbitrations; moving to confirm numerous arbitration awards issued since the problemof delayed arbitration decisions was identified this summer; moving to obtain judgments;handling judgments received from the former debt collections service; determining alternativeways to proceed when one problem or another has rendered more traditional approachesunfeasible; and advising the Funds when, in its view, the best course was not to spend moremoney but to close a matter.

Listing everything that has been accomplished somehow makes it appear less momentousthan it is. I give one example as an illustration of the types of problems encountered and beingaddressed. Above, 1mentioned the issue of the default by Darken and Metro Architecture onpayments plans for over $1 million that they entered in Fall 2010 and defaulted on in early 2011.

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No apparent efforts were made to enforce the payment plans. Original confessions of judgmentwere not maintained so new collections counsel was unable to have the judgments entered instate court. New collections counsel has thus filed a lawsuit in federal court. See Exhibit 30.

By V&A's account, the Benefit Funds have judgments of $7.4 million and settlements for$1.1 million. So far approximately $450,000 has been recovered. Clearly, there is a long way togo. But there is now an inventory of the collection practices that exist; there is a rigorousprocedure for determining whether to enter a payment plan in the first instance, for pursuingcollections and for tracking collections; and the Trustees supported by professionals are workingto advance the interest of the Benefit Funds.G. Basic Facts about the Fundsl31

1. The Pension FundAccording to a presentation to the Board of Trustees by Independent Fiduciary Services

("IFS") on November 17, 2011, the assets of thePeIision Fund total approximately$1,922,799,000. As set forth in its Annual Funding Notice, there were a total of 29,537participants in the Pension Fund, as of its most recent valuation date, i.e., first day of the fundyear for July 1, 2010 through June 2011. See Exhibit 37 at 2. Of those, 12,169 were activeparticipants, 12,995 were retired or separated from service and receiving benefits and 4,373 wereretired or separated from service and entitled to future benefits. See id.

The asset allocations by percentage can be seen at pages 2~3 of the Annual FundingNotice. The majority of assets are in corporate stocks (29.3%), value of interest incommon/collective trusts (14.57%), real estate (11.63%), partnership/joint ventures (10.36%),U.S. Government securities (9.73%) and corporate debtinstruments (9.13%). See id.

1 3 1 In this section, I am reporting figures as of October 31, 2011 from IFS. Note that the figures from theAnnual Notice for the Pension Fund are for a slightly different time period. .

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2. The Welfare (Health Benefits) FundAccording to a presentation to the Board of Trustees by IFS on November 17,2011, the

assets of the Welfare Fund total approximately $226,418,350, 59.37 percent invested in fixedincome, 13.87 percent invested in Alternative Investments, 10.18 percent invested in U.S. equityand 4.8% invested in international equity, with 11.78 percent in liquid assets.3. The Annuity Fund-

According to a presentation to the Board of Trustees by IFS on November 17,2011, theassets of the Annuity Fund total approximately $1,465,929,001, with 44.9 percent invested inBalanced Funds, 43.1 percent invested in fixed income, 5.7 percent invested in U.S. equity and0.8% invested in international equity.4. The Apprentice Fund

According to a presentation to the Board of Trustees by IFS on November 17, 2011, theassets of the Apprentice Fund are approximately $11,696,481, 100 percent of which is investedin 90-day U.S. treasury bills.5. The Vacation Fund

According to a presentation to the Board of Trustees by IFSon November 17,2011, theassets of the Vacation Fund are approximately $18,407,089, 100 percent of which is

3rd Interim Report

Documents