When the U.S. Department of Labor filed a lawsuit against a Chicago-area employee benefit fund early this year, it alleged a litany of improper loans, transfers of fund assets, and unreasonable compensation had siphoned more than $2.8 million from the plan since 2015. But there was far more to the story than what the Labor Department outlined in its complaint.
The United Employee Benefit Fund, the fund targeted in the lawsuit, provides life insurance to about 63 employer-sponsored benefit plans nationwide, according to regulators. The Labor Department started investigating alleged mismanagement and inflated compensation at the fund more than 16 years ago, according to regulatory case summaries released in response to a Freedom of Information Act request by Georgetown University’s Center on Health Insurance Reforms. Some of the same players named in the complaint this year were scrutinized by the Labor Department for violations at the same fund at least as early as 2006, the case summaries show. A decade ago, the Labor Department reached a settlement with the fund relating to nearly 200 improper loans that hadn’t been repaid–only to see millions of dollars allegedly misappropriated from the fund in the years that followed.
The case is part of a broader pattern of regulators struggling to catch up with fraud involving multiple employer welfare arrangements, or MEWAs, according to Labor Department veterans and employee-benefits experts. These plans provide benefits–often health insurance coverage, but also in some cases life insurance, disability coverage or other benefits–to the employees of two or more employers. In 2021, there were over 700 such plans covering roughly 3 million participants ranging from Major League Baseball team employees and Nashville musicians to farmers and construction workers, according to regulatory filings–although that’s likely an undercount because many MEWAs fail to file the required forms, according to regulators.
MEWAs can allow smaller employers to pool their resources and obtain cheaper health insurance and other employee benefits than they might find on their own. But they’ve also been plagued for decades by fraud and insolvencies that can leave piles of unpaid claims, researchers say. Last year, a MEWA providing health coverage to employees of several thousand New Jersey small businesses declared bankruptcy, saying it couldn’t withstand the volume of members’ COVID-related claims.
Concerns about MEWA mismanagement and fraud are growing as litigation and state legislative changes pave the way for broader use of these plans and similar arrangements, employee benefits experts say. The ongoing legal and political battle over the Affordable Care Act has contributed to a recent uptick in scams involving MEWAs, said Robert Wake, general counsel at the Maine Bureau of Insurance and chair of a National Association of Insurance Commissioners working group that helps monitor and coordinate the state and federal regulatory response to sham health plans. “Where there is legal confusion, there is a business opportunity for scammers,” Wake said. Like bootleggers, he said, many MEWAs “try to sell a cheap product, and it’s often toxic.”
In some cases, MEWA operators tap-dance between federal and state regulators, who have joint responsibility for overseeing the arrangements, researchers say. States vary widely in their approach to regulating the plans. In response to questions about the United Employee Benefit Fund, an Illinois Department of Insurance spokesperson said the state does not have a MEWA registration statute, and the department has no record of any regulatory or enforcement action against the fund.
In another sign of the regulatory challenges, the United Employee Benefit Fund in a statement to MarketWatch disputed the Labor Department’s assertion that it is a MEWA, saying the fund is a “Taft-Hartley” trust, which would make it subject to a different regulatory regime. The fund said it “has successfully provided death benefits to union employees who subscribed to its benefits and thereby provided security to working families.” The fund said it disputes the Labor Department’s complaint against the fund and its current trustees, adding that allegations involving those trustees relate to a period when they were advised by service providers and attorneys who are no longer involved with the fund. The fund has filed lawsuits against its former service provider, fund manager, and attorneys, looking to recover over $5 million allegedly “wrongfully dissipated” by those people, the fund said.
The federal agency that oversees employee benefit plans has noted in its recent Congressional budget requests that it has been outgunned by MEWA fraudsters. The agency’s inability to effectively protect participants from fraudulent and mismanaged MEWAs is “an especially stark example” of the impact of its limited budget, the Labor Department’s Employee Benefits Security Administration said in a fiscal year 2023 budget document. The agency lost 89 investigators, or 22 percent of its current investigative staff, in the five years ending with the 2020 fiscal year, and it can’t afford to replace them, the document said. The agency now has less than one investigator for every 12,000 employee benefit plans, according to the document.
The Labor Department’s inspector general said in November that it plans to audit the effectiveness of certain related enforcement efforts, including those involving MEWA sustainability and fraud. The Labor Department said in comments to MarketWatch that it “continues its long-standing efforts to seek out and shut down abusive” MEWAs and proactively identify known fraudulent operators. As its budget declined in real dollars, the EBSA agency responsible had “no option but to downsize,” the Department said, adding that “the impact on the enforcement program has been particularly severe.”
The public remains largely in the dark about the scale and extent of scams and mismanagement in these plans, experts say. Researchers, consumer advocates, and other groups have pushed the Labor Department in recent years to release records on MEWA compliance and enforcement. The Department ultimately released thousands of pages of MEWA investigative files in response to Georgetown’s open-records request. The files included hundreds of cases, many involving repeat players and impacting participants in multiple states, as well as many plans failing to file required forms and regulators struggling to catch up.
Fund assets allegedly diverted into a foreclosed home
Some of the money allegedly siphoned from the United Employee Benefit Fund was poured into a five-bedroom brick home in Wilmette, Ill., according to the fund’s complaint. A real estate listing for the home shows an interior filled with high-end decor: A grand piano in the living room, a crystal chandelier in the dining room, monogrammed towels in the bathroom, a bedroom closet overflowing with clothes. A sign on a rec room wall reads, “McDowell.”
Herbert McDowell III is a former fund trustee and service provider who was instrumental in creating the fund in the early 1990s, according to court filings. Through a series of transactions in 2016 and 2017, fund assets were diverted in an elaborate plan to rescue McDowell’s home from foreclosure, the Labor Department alleged in its complaint filed early this year. Fund officials and McDowell terminated several whole life insurance policies owned by the fund to get the cash surrender value and applied, on behalf of the fund, for a loan on a participant’s policy, funneling the money into transactions that ultimately led to McDowell’s home being purchased by a company owned by a Chicago real estate attorney, the Department alleged. McDowell, who had been evicted from the home with his personal property remaining locked up inside, then moved back into the home as a renter–but he couldn’t afford his rent, the Department alleged. By mid October 2017, the fund had allegedly paid $85,000 in rent on McDowell’s behalf, the Department said.
“‘Where there is legal confusion, there is a business opportunity for scammers’”
Even as the alleged scheme to rescue McDowell’s home was unfolding, the Labor Department was scrutinizing at least two McDowell-affiliated entities, United Preferred Companies and American Workers Master Contract Group, according to the case summaries. The Department decided to take no legal action despite its findings of violations of federal law and failures to take corrective steps, the case summaries show–only to open a fresh investigation into the United Employee Benefit Fund in spring 2018, according to court documents.
The Labor Department said it does not comment on decisions regarding investigations. Nearly $1.4 million was restored to the fund after the Labor Department told the parties it intended to file the 2022 complaint, the department said. Darren VanPuymbrouck, an attorney for McDowell, said that McDowell has denied the Labor Department and fund allegations against him and filed a lawsuit against a former fund attorney L. Steven Platt, alleging that he relied on Platt’s advice in determining that the transactions at issue were legal. Platt directed questions to his attorneys, who did not respond to requests for comment. Platt, who is also a defendant in the lawsuits filed by the…
