The recently departed executive director of the board that oversees the Thrift Savings Plan, a retirement fund for federal employees, is suing the board's new Bush administration appointees alleging they are, for political reasons, trying to undermine a pending fraud lawsuit against a well-connected computer contractor.
The class action lawsuit is all the more controversial because it was filed by Roger Mehle, a longtime Washington lawyer, former Reagan administration official and lifelong Republican who was the longest-serving administrator in the fund's 16-year history.
This lawsuit is a continuation of allegations Mehle has been making for the past year, both while running the fund and after he left in November. Mehle charges that the Bush administration is attempting to halt his 2001 lawsuit against American Management Systems Inc. of Fairfax to recoup payments after AMS allegedly failed to upgrade computer systems.
At the center of the struggle is an important legal question: whether the Federal Retirement Thrift Investment Board, which was intended by Congress to be independent of political influence, can initiate its own lawsuits without consulting the Justice Department, which is customarily the filer of lawsuits on behalf of the executive branch. The legal outcome, now a question for the U.S. Court of Appeals for the District of Columbia, also could have a profound effect on the independence of a federal agency that manages a staggering $100 billion investment fund about 3 million current and former federal employees and beneficiaries.
Mehle's latest lawsuit, filed Jan. 24, adds to the turmoil that recently has swept the obscure but important agency. The new board is searching for an executive director after Mehle's successor quit suddenly in December. The General Accounting Office is investigating the jurisdiction question. And the Labor Department has accused the agency of irregularities in accounting for the AMS contract.
A board spokesman said that "counsel finds the suit [by Mehle] frivolous and it has been referred to the Department of Justice."
Merits of the suit aside, federal officials would be well advised not to consider Mehle frivolous. A former assistant treasury secretary for domestic finance, Mehle successfully represented oil billionaire Gordon Getty in the mid-1980s in a storied battle with Citicorp over the federal auction of National Permanent Bank. That case grabbed front-page headlines when then-D.C. Council member Charlene Drew Jarvis was accused of political interference for lobbying the Federal Savings and Loan Insurance Corp. on behalf of Citicorp at the same time close Jarvis associates were paid consulting fees by Citicorp.
In his latest legal skirmish, Mehle again smells political manipulation -- this time pointing to his own party and alleging interference by Bush appointees and Rep. Tom Davis (R-Va.). Mehle's lawsuit, posted on his law firm's Web site (www.mehlelaw.com), alleges breach of fiduciary duty, a charge that is likely to alarm many of the fund participants, which serves as a kind of 401(k) plan for government workers.
This story begins in 1997, when AMS was hired to modernize the Thrift Savings Plan's record-keeping system in three years for $30 million. The current software, run on an Agriculture Department computer in New Orleans, is so out-moded that it can take weeks for participants to move their investments from one fund to another.
By mid-2001, the upgrade was not done. Mehle blamed AMS, which said Mehle kept changing his mind. AMS has maintained from the beginning it did nothing wrong in its dealings with the Thrift Savings Plan.
With unanimous approval of the five-member thrift investment board, Mehle sued AMS alleging fraud and that AMS failed to deliver on the software and knew all along that it could not deliver. The suit sought $350 million -- $30 million for what AMS was paid, $20 million for expenses and $300 million in punitive damages.
Mehle hired outside counsel, Gibson, Dunn & Crutcher LLP's F. Joseph Warin, Douglas R. Cox and David W.T. Daniels. To date, Gibson, Dunn has been paid more than $1.7 million. If the Justice Department had taken the case, its representation would have cost the board nothing. AMS is represented by Williams & Connolly LLP, with a team led by F. Whitten Peters. Peters declined to comment.
A month after filing suit, the Justice Department rebuked Mehle for failing to refer the case to its civil division. Mehle countered that, under the law, the retirement board and the executive director are to make decisions in the best fiduciary interests only of the participants, while the Justice Department considers the broader interests of the government. The Justice Department countered that only it has independent statutory authority to sue.
As the relationship was falling apart, AMS boosted its lobbying, asking Downey McGrath Group to work Capitol Hill. Davis, whose district includes AMS, made two phone calls to Mehle for AMS.
As chairman of the National Republican Congressional Campaign, Davis is one of his party's major fundraisers. AMS and its workers are active donors, giving at least $300,000 to various political campaigns over the past decade. According to the Center for Responsive Politics, Davis's personal campaign has received since 1996 about $18,000 from AMS employees, such as Paul Brands, who was chief executive when the dispute with Mehle erupted.
Mehle says in his suit he and the board worried that the phone calls from Davis were part of "covert political motivation" on behalf of AMS. (Mehle also notes he was concerned about possible interference by former IRS Commissioner Charles Rosotti, a former AMS chief executive and top company shareholder. But Mehle offers no proof of Rosotti meddling.) Davis, through spokesman David Marin, denied there was anything improper about his phone calls. Davis, who recently became chairman of the House Committee on Government Reform, which oversees the thrift plan, also echoed the position of AMS -- that Mehle is to blame for the cost overruns, not AMS.
"Mr. Davis believes it is clear that Mr. Mehle mismanaged this project," Marin said, "and [Davis] certainly did try to set up a meeting between Mr. Mehle and AMS in the interest of investors and taxpayers. Mr. Mehle declined."
With the Justice Department joining AMS's objection to Mehle's lawsuit, U.S. District Judge James Robertson last fall dismissed Mehle's contract-dispute lawsuit on the jurisdiction question. Mehle appealed, saying the judge was "clearly erroneous," a steep legal hurdle to overcome on appeal.
Mehle's new lawsuit seems geared to prevent the retirement investment board from abandoning the appeal. He is suing Bush's new appointees to the board: New Yorker Andrew Saul, who was recommended for the job by New York Gov. George E. Pataki (R); Alejandro Sanchez, chief executive of the Florida Bankers Association and a former Florida state official; and Gordon Whiting, who since 1996 has been his investment company's representative to the Republican Eagles, an elite group of donors.
At their confirmation hearing Nov. 15, Saul, Sanchez and Whiting were troubled by Mehle's lawsuit. Mehle resigned three days later and the old board replaced him with lawyer James Petrick.
Petrick unexpectedly resigned at the new board's first meeting Dec. 16. In meticulous detail, Mehle's suit alleges that Petrick was wrongly forced out "under extreme duress" because he had supported the AMS suit.
Members of the old board, Don Harrell, James "Bum" Atkins and Scott Lukins, said in interviews that they are reluctant to allege political shenanigans. But they also don't understand the new board's behavior.
Harrell, an executive at pension and mutual fund manager Teachers Insurance and Annuity Association College Retirement Equities Fund, or TIAA-CREF, said he was puzzled that the new board never sought debriefings from old board members. "This initial contact is routine for any new and curious trustees who want to do a fair assessment of current issues," Harrell said. "Who did brief them, the Justice Department?"
Atkins, the previous chairman, said he had an "odd" phone conversation with incoming chairman Saul. Atkins congratulated Saul and Saul "asked me if I thought [AMS] had any money. I said, 'I imagine they do. They are a publicly held company,' " said Atkins, a retired insurance executive now at an investment firm in Little Rock. "And he said, 'Excuse me, the White House is calling, I have to get off.' I haven't heard from him since," Atkins said with a laugh.
Through board spokesman Tom Trabucco, the new board members declined interviews.Outgoing board member Thomas Fink, who was appointed at the recommendation of Sen. Ted Stevens (R-Alaska), had historically been the most skeptical of Mehle and his lawsuit. But at the board's Jan. 21 meeting, Fink cautioned the board against changing direction.
In an interview, Fink said, "We ought to have the right [to sue], but I'm not sure we do have the right." He believes it is important to have an appeals court ruling to answer that question. "Certainly, we still have to protect the independence of the board and the participants," Fink said. "That's the reason we're there."
Staff researcher Alice Crites contributed to this report.
Hearsay looks for fiduciary-duty breaches every other week Washington Business. E-mail your political-manipulation allegations to firstname.lastname@example.org.