News for the Hospitality Executive
|By Jeff Shields, South Florida Sun-Sentinel
Knight Ridder/Tribune Business News
Sep. 13, 2002 - The leaders of a union pension fund built the $800 million Westin Diplomat Resort & Spa without any real financial plan, doling out sweetheart deals to unqualified companies with close family connections to a union official, the U.S. Department of Labor alleges in a federal lawsuit filed Thursday in Fort Lauderdale.
In an unusual move, the Labor Department is seeking to remove all five trustees of the Plumbers and Pipefitters National Pension Fund.
It is seeking to hold them personally liable for all losses for "failure to prudently manage and invest their members' pension funds through its involvement in the Diplomat Resort project," said Ann Combs, assistant secretary for the Labor Department's Pension and Welfare Benefits Administration.
"Pension trustees purchased and developed the property without the slightest due diligence to determine the financial viability of the project," Combs said.
The civil suit follows a two-year investigation into the construction of the Diplomat, which opened more than 18 months late and 100 percent over its original budget of $400 million. It is the most expensive hotel project ever built in South Florida, and its problems have generated concerns among union members that their retirement money is being squandered.
Martin Maddaloni, chairman of the pension fund's board of trustees and president of the United Association of Plumbers, Pipefitters, Sprinklerfitters and Steamfitters, whose members own the pension fund, was recovering from lung surgery Thursday and could not be reached for comment. But in a news release, Maddaloni and fellow trustee Thomas Patchell said the Labor Department had no grounds to sue because they had no evidence the Diplomat was a financial failure.
"The Department of Labor has filed an unjustified civil lawsuit based on the flawed notion that the national pension fund's investment in the Diplomat Resort will lose money for the fund," said their statement.
They pointed out that the Labor Department's estimation of loss is based on an appraisal, issued three months before the 998-room hotel opened in January, that the $800 million project was worth $587 million. Maddaloni and Patchell, secretary-treasurer of the union, said the department will not have a final accounting until a new appraisal is done and construction-cost lawsuits are resolved.
"We are confident that when all the final facts and figures are in, the Department of Labor's allegations will prove to be baseless," the union leaders' statement said.
Maddaloni issued a statement to union members on Wednesday saying he would be out for four to six weeks after his surgery. About a third of the United Association's 291,000 members in North America contribute to the $4-billon Plumbers and Pipefitters National Pension Fund.
The lawsuit came as no surprise to retired union official Tommy Preuett, who failed to unseat Maddaloni for the union presidency in August 2001. Preuett's campaign was largely based on the problems the pension fund was having with the Diplomat.
"The only thing I have to say is, I told you so," Preuett said. "As Ricky Ricardo would say to Lucy, `You've got a lot of `splaining to do."'
The complaint says the United Association decided to buy the original storied but dilapidated Diplomat Hotel in September 1997, after listening to a presentation by developer Thomas Driscoll that included "no feasibility studies, economic models, market analyses, construction budgets, designs, or architectural plans."
The United Association bought the property for $40 million, then immediately transferred it to the pension fund for the same price.
Trustees agreed to put up $100 million of the trust fund's assets for redevelopment without telling the Labor Department, whose approval was required for the transfer.
Driscoll's original plan called for a renovation of the existing Diplomat for $277 million, but the pension fund later decided to build a new hotel, conference center, country club, spa and retail complex, and completely refurbish the golf course at an estimated cost of $400 million.
The country club was scheduled to open in January 2000, with completion that summer.
But delays and cost overruns plagued the project from the outset.
Extensive marble and glass were planned for the hotel, and Maddaloni and Patchell took their wives to Italy to personally inspect the marble. The trip was paid for by two contractors, a violation of labor laws, and the two were later forced to repay the expenses for the trip.
The complaint berates the trustees for failing to "evaluate" Driscoll's qualifications. Driscoll, who was paid $1.2 million for his two years on the project, was forced off in December 1999 by a fiduciary hired to oversee the project at the Labor Department's insistence.
"This amount of compensation was excessive and unreasonable in relation to the services actually rendered by Driscoll Development," the suit said. Driscoll could not be reached for comment Thursday.
Driscoll wasn't the only one overpaid and under-qualified, according to the lawsuit. The general contractor hired to oversee the construction, Structure Tone International, although considered a major national construction company, had no experience in managing a project of such magnitude, according to the suit. Nor did B&R Consultants Southeast, the company hired to oversee the concrete work.
Structure Tone was to be paid 5.7 percent of construction costs up to $350 million and 4 percent of costs after that. That means the original budget of $400 million would have netted Structure Tone nearly $22 million. B&R was paid $4.8 million for its work.
What Structure Tone and B&R did possess was "close ties to principals involved in the Diplomat project," the suit says.
Structure Tone's general counsel, David Cahill, is the brother of B&R vice-president Michael "Mickey" Cahill, and both are brothers to James Cahill who, as the United Association international representative in New York, is one of the most powerful officials in the national pipe trades union.
James Cahill came out of United Association Enterprise Association of Steam Fitters, UA Local 638 in Queens, along with Patchell, who has spearheaded the Diplomat project. James Cahill declined comment Thursday night.
B&R Consultants, which was removed from the project along with Driscoll, is currently being sued by the Plumbers and Pipefitters Pension Fund in Broward Circuit Court on a claim it falsely represented its qualifications. The lawsuit was filed at the insistence of the Labor Department and was opposed by Maddaloni and Patchell.
Miami attorney Maurice "Manny" Garcia, who represents B&R in the suit, said there has been no evidence, or even accusations, about the Cahill connections.
"Nobody has suggested in our lawsuit that anything was improper at all in the way my clients got this job," Garcia said.Although the Diplomat struggled to open, it received a boost when Starwood International agreed to run it last year. Maddaloni says the hotel has been a "smashing success," although no statistics have been presented to back that up.
In Thursday's lawsuit, the Labor Department asks that the trustees "restore to the fund all losses occasioned by their breach of fiduciary duties." It does not give a specific figure.
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(c) 2002, South Florida Sun-Sentinel. Distributed by Knight Ridder/Tribune Business News. HOT,