INVESTIGATIONS

BUSINESS WEEK / DECEMBER 22, 1997

At 40,the boyish-looking Terence R.McAuliffe is the reigning king of Democratic fund-raising. Says mentor Tony Coelho, a former Democratic lawmaker who gave McAuliffe his first big fund-raising job in 1982: "He's got the best Rolodex in America."

No kidding. As finance chairman for the Clintont/Gore Reelection Committee, McAuliffe pulled in a staggering $43 million in eight months. That made him the front runner to head the Democratic National Committee-a job he turned down. Instead, McAuliffe has turned his attention to his home building, insurance, and marketing businesses.

But McAuliffe is finding that it's not easy putting politics behind him. His name has been linked to the fund-raising scandal that resulted in the disqualification of Teamsters President Ronald Carey.

The U. S. Attorney's Office in Washington is trying to learn more about how McAuliffe earned a lucrative fee in helping Prudential Insurance Co. of America lease a downtown Washington building to the government.Prudential just settled a civil case involving that lease for over $300,000 without admitting any liability.

And Labor Dept. probers are looking at possible conflicts of interest in at least two of McAuliffe's Florida real estate deals that were bankrolled by International Brotherhood of Electrical Workers pension money. Investigators want to know why McAuliffe got what look like very sweet deals.

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

McAuliffe paints the controversies surrounding him as the work of political foes on both sides of the aisle. But sometimes it's hard to tell where his political work ends and his business interests begin. His business partners often are the same Clinton and McAuliffe people he taps for campaign contributions.

For example, Carl H. Lindner Jr., chairman of American Financial Group Inc. and a generous giver to both parties, donated-along with his family and employees-$724,000 to Democrats from 1991 to 1996.

In 1996, he invested in the homebuilding company McAuliffe was purchasing. And top labor officials who control millions in campaign dollars-and with whom McAuliffe is friends-are also his partners in private deals.

Take his relationship with the International Brotherhood of Electrical Workers. In 1991, McAuliffe formed a partnership with a pension fund jointly operated by the IBEW and the National Electrical Contractors Assn., a management trade group.

Such funds are regulated under the Taft-Hartley Act, and contributions come from both unionized electrical workers and from their employers, electrical contractors.

The fund has co-chairmen-one from the union and one from management-and both labor and management employees are beneficiaries. The IBEW fund currently has $6 billion invested in stocks, bonds, and real estate.

In the 1991 deal that McAuliffe packaged and brought to the fund, the fund put up $38.7 million in cash for five apartment complexes and a rundown shopping center near St. Petersburg. McAuliffe got a 50% equity stake, even though the fund put up all the money.

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

Why such a deal? Because the seller was the Resolution Trust Corp.,which had taken control of the properties from Orlando-based American Pioneer Savings Bank.

The RTC had rescued the S&L and placed it in receivership a year earlier-costing taxpayers $500 million. American Pioneer had been owned by Richard A. Swann, father of Dorothy Swann, McAuliffe's wife.

The elder Swann once presided over a $2 billion commercial empire. But it crashed when regulators declared the S&L insolvent. Swann filed for personal bankruptcy on Nov. 21, 1990.

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

McAuliffe's primary IBEW contact was Jack F. Moore, now retired as International Secretary of the union and co-chairman of the jointly managed pension fund.

Moore and McAuliffe, then a young Washington lawyer, have been close since 1988, when both worked to help mutual friend and House Democratic Leader Richard A. Gephardt's run for the Democratic Presidential nomination.

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

The Country Run land itself served as the primary collateral for the loan. But McAuliffe also pledged his half ownership of the St. Pete properties as additional security.

Real estate consultant Marilyn K. Weitzman, president of New York's Weitzman Group Inc. and adviser to the pension fund on some of its real estate transactions, told the fund that the loan involved high risk. But because of McAuliffe's additional collateral, Weitzman told BUSINESS WEEK, she upgraded the investment from "reasonable" to "excellent."

She told the fund it should expect at least a 20% return.

That wasn't even close to what it got. The fund ended up with only a 5.3% annual gain-and a lot of headaches.

For one thing, McAuliffe's additional collateral vaporized by August, 1993, when the fund agreed to buy out all but a small portion of his share in the first deal, the St. Pete partnership.

Pension trustees say they viewed McAuliffe's stake as a bargain: The value of the St. Pete properties had dropped, and McAuliffe was selling at a discount.

Again, no independent investment adviser was consulted. With McAuliffe's collateral diminished, the fund was skating on thinner ice if McAuliffe defaulted on the Country Run property.

And that's what happened just four months after McAuliffe cashed out of the St. Pete properties. "We didn't sell as many [Country Run] lots as we hoped," says McAuliffe. "You have ups and downs in real estate."

Once McAuliffe's Country Run loan was in default, the fund had the right to foreclose and take possession. But the fund never foreclosed, says Grau, because it didn't want to be left holding undeveloped land.

Last October, after more than three years of nonpayment, the fund sold off the Country Run loan in a package with the St. Pete properties.

The buyer? Terry McAuliffe. He and partner Lindner are now building homes on the Country Run lots with their company, American Heritage Homes Inc.

Today, McAuliffe is the second-biggest homebuilder in Orlando.

Meanwhile, the fund's Country Run return wound up being about half what similar loans were earning in that time span, according to the Mortgage Bankers Assn., which tracks commercial mortgage rates.

As for the St. Pete properties, McAuliffe sold them to a real estate investment trust. Trustee Grau says the 6.5% overall return to the fund compares favorably with the 2.3% average return nationally on pension fund real estate investments from '91 to '96.

FUND-RAISING

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

MARKETING

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

HOMEBUILDING

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

INSURANCE

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

INVESTING

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

REAL ESTATE

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

Not so, says Susan Hudson-Wilson, chief executive of Boston-based Property & Portfolio Research Inc., a real estate specialist. "For this strategy-purchasing distressed assets from RTC-this would be an unacceptable return."

She adds that many pension funds followed similar strategies at the time and earned double-digit returns because of the lowball prices being paid for RTC properties.

The IBEW not only financed McAuliffe's ventures, but it also helped boost his stature as a Democratic fund-raiser by contributing $6 million to party candidates from 1991 to 1996.

Starting in 1992, McAuliffe organized a few fund-raisers for the Clinton-Gore ticket. By 1994, however, he was finance chairman for the Democratic National Committee. Moore controlled the IBEW'S political contributions during McAuliffe's rise. Moore did not return phone calls seeking comment.

The Labor Dept.'s inspector general is looking into the IBEW fund's investments. While McAuliffe's dealings with the pension fund may not put him in the best light, any legal repercussions stemming from the Labor Dept. investigation are likely to fall on the fund's trustees and not on him personally.

The Employee Retirement Income Security Act, says a spokesperson for the Labor Dept., contains "sweeping prohibitions against self-dealing and other "insider" actions by plan trustees that result in a party receiving a benefit because of the party's relationship to the pension fund."

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

In a letter signed on Mar. 18, 1993, Prudential agreed to pay McAuliffe $375,000 if the Pension Benefit Guaranty Corp. (PBGC) signed a 15-year, $187 million lease to occupy a downtown Washington office building owned by the insurer.

The U. S. Attorney for the District of Columbia charged that Prudential falsely certified, after it won the lease, that it had not hired anyone to help influence the bidding process, which is illegal under the Competition in Contracting Act.

Prudential paid McAuliffe $375,000, but he says the money was a proper payment for fending off any congressional attempts to stop the deal.

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

As the Prudential matter drags on, McAuliffe isn't out of the woods yet on the Teamsters case, whose central figure, campaign consultant Martin Davis, is a friend of McAuliffe.

Davis has pleaded guilty to masterminding an illegal scheme to raise $1 million for Teamsters President Carey's 1996 reelection.

Davis told McAuliffe he could help raise $1 million for the DNC from the Teamsters, but McAuliffe denies he knew any details of how Davis intended to do this. Davis, in his guilty plea, says his plan was to launder Teamsters donations through the DNC in an effort to hide the source of Carey's money.

McAuliffe says he simply directed Davis to see an aide and never heard any more from him. McAuliffe testfied before a New York grand jury in September, which is also interested in his and Davis' role in helping broker a deal to switch the AFL-CIO'S affinity credit card from one bank to another.

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