North Coast Journal

JUNE 1995 - LEGAL
by Marie Gravelle

Pension insecurities

It took a handful of millworkers to do what environmentalists and corporate critics have been trying to do for a decade: knock Charles Hurwitz off balance.

Business whiz and chief of Maxxam Inc., Hurwitz acquired Pacific Lumber Co. nearly 10 years ago in a hostile takeover. While it hasn't been a smooth decade, he's made record profits off PL's rich old-growth forests.

But now Hurwitz is on the hot seat, facing monetary sanctions and other penalties for actions he allegedly took during the takeover of the company in 1985.

A lesser-known Texas tycoon prior to the takeover, Hurwitz purchased PL for $900 million in 1985 in "a business move that made him a big player" in corporate America, according to attorney Bill Bertain.

The Eureka lawyer, who is called a hero by a number of disgruntled PL employees and former shareholders, has been nipping away at Hurwitz' heels for nearly a decade. Although several lawsuits have been filed, only recently has Bertain and his clients seen any success.

One lawsuit, involving allegations that Hurwitz swindled former PL

shareholders by not paying a fair price for their shares at the time of the takeover, was recently settled. Another alleged Hurwitz ripped off employees by messing with their pension plan. That lawsuit is now moving forward.

In the first case, Hurwitz and Maxxam agreed to settle for a $37 million before the case went to trial last year. In total, the settlement involving Maxxam, junk bondsman Michael Milken and the firm of Drexel Burnham Lambert, Inc., was $150 million - the fourth largest corporate settlement in the nation's history. Maxxam and the others will pay shareholders, including many North Coast residents, about $9 more per share. The first payments are expected this month.

The second issue, the pension plan, hits an emotional chord because it involves older people who count on pensions to survive after retirement. An appellate court recently overturned a dismissal, and the case will go to court soon.

For people on limited incomes after decades of hard work, pension problems can be overwhelming. Their fear and anger has, at times, made it pretty uncomfortable around the close-knit company town of Scotia.

Some PL veterans started grumbling soon after the takeover. They watched as Hurwitz doubled the company's harvest rate. They heard him address employees with his famous Golden Rule: "He who has the gold, rules."

Then they saw him take millions from the company's fat pension plan to make payments on acquisition debt, and replace the plan with an insurance company with a shaky reputation.

Some became "rabble rousers." The town blacksmith, Pete Kayes, lost his job after he attempted to mobilize employees. "It was a tough road," Kayes said. "Everybody was so scared to come to meetings."

Many older workers, like Lester Reynolds, got out. "I got tired of all the b.s.,' Reynolds, 62, said. "I felt like I could fight it 'cause I was older and could retire and do a little something else on the side. There were a lot of younger guys who couldn't do that."

A mechanic who worked for the company 37 years, Reynolds decided to file suit against Hurwitz, hoping he could win some security for his pension.

"Hurwitz didn't do us right," Reynolds said. The retiree kicked in $2,000, as did Kayes. The lawyer Bertain lined up another $6,000. That was enough to get an Oakland law firm, specializing in pension law, involved. A lawsuit was filed six years ago, with plaintiffs asking for guaranteed pension security.

Although a federal judge dismissed the case back in 1993, just last month an appeals court ruled it was dismissed in error. The court made it plain that Hurwitz may be held liable if it is proven that he failed to protect the employees' rights to a solid pension program.

An amendment to federal labor law recorded last year gave the suit more credence. And the U.S. Department of

Labor is working on a similar suit against Hurwitz.

Former employees and the Labor Department allege Hurwitz chose the wrong company to cover employee pension benefits when he chose Executive Life Insurance Co. While it may have been legal to take the pension plan money, it also may have been a breach of duty to put retirees' future holdings in an unstable company like Executive Life.

The fact that Executive Life held a considerable amount of the junk bonds used to purchase PL made the choice even more fishy.

As one critic theorized, "Hurwitz rewarded his friends at Executive Life."

But those suing want more than just security. They're also going after cash. Executive Life's annuity plan cost $2.7 million less than Met Life, another company bidding for the annuity coverage. The former employees are calling this money "ill-gotten gains" because Hurwitz saved that much by opting to go for the lowest bid. That $2.7 million is now close to $6 million with interest.

"If we gain that money between the high and low bid, then that would be enough to get a cost-of-living raise to the retired people," Reynolds said. "That would really look good on our part."

Since the lawsuit was filed, retirees have seen some of their fears come true. Three years after Executive Life took over the program, the heavily indebted insurer went broke. A restructuring plan originally left retirees with only 70 percent of their monthly payments.

"One guy retired off the green chain and his first check was a couple of weeks late," Reynolds said. "Things were touchy."

The lawsuit was already in the works, but it was languishing in the court system. The retirees decided to protest. In early 1991, it wasn't long-haired youngsters who carried signs and protested outside PL's Scotia headquarters. It was grey-haired grandmothers and grandfathers shouting slogans and marching in the street.

"Regular hard-working people decided to picket," said Laurel Maurer, wife of former PL employee John Maurer. The Maurers have been in on the lawsuit against Hurwitz from the start.

When PL officials saw their former employees marching outside, they quickly announced the company would cover the remaining 30 percent. Since then, about 2,000 retirees have begun receiving their full benefits.

"Pacific Lumber Co. was one of the first companies to voluntarily step forward and provide the annuities," noted Scott Lamb, spokesman for Maxxam and its subsidiary, PL.

Aurora Life Assurance Co. now holds the employee retirement plan. While some retirees worry about Aurora's future, too, a company spokeswoman pointed to its "A" rating.

Sandi Sternberg said the company's portfolio is "high quality" and PL's "obligation is modest."

But Aurora basically took over Executive Life when it folded, including Executive's debts. Since regulators stepped in and created Aurora, special protections were put in place for several years. At the end of three years, some of those regulatory protections will be gone. That's when some, like the Maurers, will worry again.

The couple now owns a cabinet business, but keeps in touch with old PL friends.

"After working for 10 years for PL, John got close to these older people," Laurie Maurer said. When they started to get concerned about their pensions following the takeover, the Maurers felt they had to do something.

"I've got about $10,000 vested and I want to see that," John Maurer said. "But our main plea is for pension security so that people don't have to worry."

Maurer and the others ask that Hurwitz purchase a backup annuity, some sort of plan that would pay monthly pensions if Aurora goes under.

While the appeals' court decision was favorable to the plaintiffs, it's not over yet.

"If I had known this was going to involve so many years, maybe I would have gotten cold feet," Reynolds said. "But I"m not a quitter."

In the thick of it since the beginning, Reynolds traveled to Maxxam's Houston headquarters three years ago. The trip was set to take depositions from Hurwitz, who was scrutinized for two days. During their stay, Reynolds' wife got Hurwitz to pose with her husband and attorney for a group photo.

Now, when Reynolds visits his old pals at PL, "I still get patted on the back for getting involved."

While new hires won't be affected by any monetary judgment because they weren't vested in the old pension plan, they may benefit from a future plan if Hurwitz is ordered to guarantee its security.

The plaintiffs and their lawyers say this case, if successful, will change the way companies and their directors look at pension programs. Holding fiduciary duties, a chairman or director has a responsibility that can't be overlooked, they said.

According to the Labor Department's claim against Maxxam, Hurwitz and other executives, the fiduciaries selected Executive Life as "the cheapest, riskiest bidder to the detriment of the participants." That violates federal law, it said.

And the department is asking that Hurwitz and William Leone, another PL/Maxxam executive, be chastised for their alleged failure to perform fiduciary duties. The chastising may be more than monetary. Some have suggested that Hurwitz be barred from acting as a fiduciary, which would preclude him from acting on many boards.

"It would be the only real punitive thing to happen to Hurwitz," said Kayes, who at 50 now works for Redwood Memorial Hospital.

Hurwitz' representative Lamb said any penalties against Hurwitz or Maxxam "are kind of speculative. We continue to believe there was no breach of fiduciary responsibility here."

He added that the attorneys for Maxxam are "disappointed" with the appellate court decision.

"At the time we selected Executive Life, it was rated very highly by two companies that rate insurance companies. There was no reason to think that there would be a problem," Lamb said.

"We will continue to defend our actions vigorously," he added.

Bertain and others disagree about the rating assessment and have submitted copies of company memos questioning Executive Life's stability.

Ultimately the courts will decide. But in the meantime, some PL pensioners say they are still feeling somewhat less than secure.



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