Adding Insult to Injury: Tales of Pension Fraud at U.S. Automakers

June 2009

IN THIS ISSUE

— Fudging the Numbers: Pension Fraud Allegations at GM Months Before Crisis
— Keeping an Eye on the Gatekeepers in Auto Overhaul
— In the next issue

GREETINGS!

Welcome to the June 2009 edition of our newsletter! In this issue, we’ll look at episodes of fraud concerning the pension plans at some of the large U.S. automakers who are currently fighting for their continued existence.

Fudging the Numbers: Pension Fraud Allegations at GM Months Before Crisis

General Motors has announced its bankruptcy at the urging of the federal government. While many commentators have at times maligned the United Auto Workers for the role their compensation packages may have played in revving up the costs at Chrysler L.L.C., the actual management of some of those benefits — particularly pension fund obligations — merits closer scrutiny as automakers “teeter on the brink” or are in bankruptcy.

At General Motors, for instance, recent news has not been positive about the management of retirement benefits. In January of this year, the U.S. Securities and Exchange Commission announced that it had reached a settlement with G.M. after an investigation of more than four years found that the automaker had under-funded its pension plan by $10 billion as early as 2001, and had mis-stated its rate of return from the funds, which in 2003 would have reduced its pre-tax earnings by 20 percent – almost $680 million. Analysis of Form 5500 filings – reports of profit-sharing and pension plans — can be a good starting place for a fraud examiner’s inquiry.

KEEPING AN EYE ON THE GATEKEEPERS IN AUTO OVERHAUL

As the federal government attempts to revive or parcel off Chrysler and GM – two of the most indelible American brands and integral parts of its economy – the “car czar” tapped to liaise between the government and automakers during restructuring efforts is fending off questions about his own involvement in a different type of pension problem.

Steven Rattner, who headed the Quadrangle Group investment firm before accepting the Treasury Department post in late February, is under an ongoing investigation into whether his firm engaged in “pay to play,” giving kickbacks to win investment business from the New York State pension fund. All told, 20 firms are alleged to have made payments of a “finder’s fee” to a “politically connected consultant”: in return for $122 billion worth of investment advisory business. David Logislici, the investment manger of the pension fund, met with a “senior executive” at Quadrangle reportedly identified as Rattner, and Quadrangle later reportedly made payments to Henry Morris, who formerly had been the pension fund’s “top fundraiser.”

Rattner has reportedly cooperated with the ongoing investigation, but it calls into question the integrity of the restructuring overseer – even as the actions taken by those he is now policing also draw scrutiny.

IN THE NEXT ISSUE

In the next issue, we’ll look at differing types of mortgage fraud and assess the likely effectiveness of a new law aimed at curbing such fraud.