Labor Secretary Raymond J. Donovan notified the White House yesterday that a Bronx, N.Y., grand jury has indicted him on charges of grand larceny and fraud in connection with a New York City subway project on which his construction company was a major contractor.
Donovan said last night that he will not resign and that President Reagan has agreed to his request for a leave of absence without pay.
"I am outraged and disgusted by the actions and the obviously partisan timing of the Bronx district attorney," Donovan said in a statement.
"I have not seen the indictment. I can assure you it is not worth the paper it's written on," he said.
"I fully expect to resume my duties just as soon as this injustice has been dealt with," he added.
The leave of absence without pay was worked out in hasty consultations among the secretary, his lawyers and White House aides, including chief of staff James A. Baker III.
Some Reagan political advisers had pressed for the secretary's resignation.
Nine other men, including Ronald Schiavone, president of Donovan's firm, Schiavone Construction Co. of Secaucus, N.J., and William Masselli, a reputed Mafia "soldier," also were accused in the 137-count indictment to be unsealed today, sources said. They are to be arraigned in Bronx Supreme Court.
Theodore Geiser, a Newark attorney for Schiavone Construction, confirmed yesterday that an indictment had been voted involving "alleged false pieces of information." He was sharply critical of the prosecutor, elected Bronx district attorney Mario Merola, a Democrat, in part for bringing the indictment this close to the Nov. 6 general election.
"I can't assess his motivation," Geiser said. "But I can characterize the indictment as nonsense as we will shortly prove, although unhappily, probably not before the election."
Sen. Orrin G. Hatch (R-Utah), chairman of the Senate Labor Committee, which confirmed Donovan, also suggested that the indictment has a political basis, saying it looks like "a politically called grand jury."
Donovan has been dogged throughout his term at Labor by charges that his construction company had dealings with organized crime. Baker and other White House aides have regarded him as a political liability and pressed for his removal.
A special prosecutor, Leon Silverman, investigated and found "insufficient credible evidence" for prosecution of Donovan, and President Reagan has stoutly defended the secretary.
Campaigning in Mississippi yesterday, Reagan said of the latest turn: "I don't have information on it yet. I have complete trust in his integrity. I retain full confidence" in Donovan.
Donovan said in his statement: "My concerns are that my family has to endure this mindless inquisition and that this not reflect negatively upon the president. I have asked the president today to accept my request for a leave of absence without pay, effective immediately, and he has granted my request. I plan to devote all my time and attention to this matter."
Sources said that, in addition to the larceny and fraud indictments, Masselli was indicted on murder charges in connection with the 1978 slaying of another reputed gangster, Salvatore Frascone.
Bronx prosecutors said at court hearings last month that investigation of the homicide over the last year led them to explore financial dealings between Masselli and Schiavone Construction on a $186 million subway tunnel under New York's East River.
Donovan's company, of which he and Ronald Schiavone are principal owners, claimed to have paid about $12 million to a trucking company organized by Masselli as a minority-business enterprise with the job of excavating dirt from the tunnel.
But prosecutors for Merola said they suspected that about $8 million of the alleged payments were based on phony billings and false statements to the New York Transit Authority.
Schiavone Construction and Jopel Contracting, the minority enterprise, were also named in the fraud indictment as corporate defendants, sources said.
Donovan's lawyers reportedly were notified of the indictment yesterday afternoon and were asked to bring Donovan to the Bronx this morning for processing and arraignment.
Donovan had been en route to Houston yesterday on a speech-making trip. He turned around in Atlanta and flew back to Washington, where he met with his lawyers last night.
Dean Burch, a lawyer for Donovan, told White House counsel Fred F. Fielding about the indictment yesterday afternoon, sources said.
Word was relayed to Baker, a long-time adversary of Donovan, who discussed the situation with Reagan as they flew to a Mississippi campaign stop, White House spokesman Larry Speakes said last night in Biloxi, where Reagan stayed overnight.
Baker talked by telephone with Donovan and Burch last night and took Donovan's request for leave without pay to Reagan, who accepted it, Speakes said. He declined to say whether White House officials initiated the request or whether the leave would extend beyond Election Day.
Speakes said Reagan has confidence in Donovan and, referring to Donovan, said, "I know the president has nothing else on his mind at this moment."
Donovan testified before the grand jury last week. He said then, "It is my hope that my appearance today and the presentation of . . . polygraph results from a test he took will put an end once and for all to the baseless allegations that have unfairly plagued me throughout my public life."
The indictment was kept under seal, sources said, at least partly to arrange for Masselli's extradition from Florida, where he has been serving a seven-year federal prison term for hijacking and drug trafficking.
In addition to grand larceny, the fraud indictment includes charges of falsification of business records and filing false statements with the New York Transit Authority, sources said.
Under federal law, minority contractors were supposed to receive 10 percent of work on the tunnel project. Masselli was principal minority contractor on the job. His black partner, Bronx state Sen. Joseph Galiber, was also named in the indictment, according to reliable sources.
Frascone, law enforcement sources have said, was killed after complaining about Masselli's takeover of another trucking company -- headed by a Frascone friend named Louis Nargi -- in the process of establishing himself as a Schiavone subcontractor in 1977 on a subway project in Queens.
Special prosecutor Silverman, appointed under the Ethics in Government Act, said he investigated the relationship between Schiavone Construction and Jopel, including a $1 million arrangement on the 63rd Street tunnel project under the East River that Bronx prosecutors evidently regard as fraudulent.
Under the arrangement, Schiavone Construction and its two general partners on the project were to purchase $1 million in equipment for Jopel to use because Masselli's company could not afford the investment.
Instead of making payments on the equipment, Jopel purportedly agreed to let Schiavone Construction deduct monthly rental charges from amounts paid by the New York City Transit Authority to Jopel as a minority contractor.
Silverman observed in one of his 1982 reports that "the net effect was to increase the amount of work attributable to a minority-business enterprise." He said a two-day search by his office of Jopel records in the possession of federal prosecutors in Manhattan "failed to disclose any documents suggestive of anything other than a straightforward business relationship between Jopel and Schiavone Construction ."
The Justice Department, however, said it was continuing to investigate Jopel's status as a minority-business enterprise. The inquiry had started in 1979 with the FBI's court-authorized electronic surveillance of Masselli's South Bronx warehouse and was alluded to, briefly, at Donovan's Senate confirmation hearings in 1981.
Dealing with allegations that Donovan and his company were "mobbed up" -- allegations dismissed by the FBI as unsound -- then-FBI executive assistant director Francis (Bud) Mullen told the Senate Labor Committee that Schiavone Construction records had been subpoenaed in New York in connection with a racketeering investigation.
"This investigation, in part, concerns the fraudulent establishment of a minority-business enterprise by certain individuals and the use of services of a subcontractor who is an alleged minority-business enterprise by Schiavone Construction Co.," Mullen testified on Jan. 27, 1981. However, he assured the committee, "Neither Mr. Donovan nor Schiavone Construction is the target of the investigation."
Mullen, as he acknowledged in a 1982 interview with The Washington Post and several other publications, consciously withheld the fact that Donovan's name had been mentioned at least once on the Masselli wiretaps.
Silverman, who later had access to all of the tapes, found six conversations in which Donovan's name had come up but said he found "nothing incriminating in any" of them.
Even after Silverman finished, the Justice Department took the position that Masselli, although in federal prison, was still under investigation. The department cited that in response to continuing Senate Labor Committee inquiries about the extent of Schiavone Construction's knowledge of Masselli's operations.
In a letter March 3, 1983, to the committee, for instance, assistant attorney general Robert McConnell said, "The status of the Jopel Construction Co. as a minority-business enterprise was explored" as an outgrowth of the 1979 surveillance.
"The results of this part of the investigation," McConnell declared in the 1983 letter, "were provided to the Office of the United States Attorney for the Southern District of New York, and a prosecutive opinion has not yet been rendered."
McConnell also declared that "the circumstances surrounding the takeover of Mr. Nargi's business by Jopel are still under investigation by the FBI, so comment about that matter would be inappropriate."
Asked whether and when a prosecutive opinion, such as McConnell wrote about, had been rendered, U.S. Attorney Rudolph Giuliani and one of his top assistants, Jane Parver, said last week that they did not know and would have to check.
There does not appear to have been any concentrated FBI investigation of Masselli's takeover of Nargi's trucking business since 1979 and 1980.
According to law enforcement sources, investigators were told at the time that a gangland "sitdown" had resolved the dispute in Masselli's favor in the spring or summer of 1978 but that Nargi's benefactor, Frascone, kept complaining.
Bronx prosecutors obtained access to the Masselli tapes, which reportedly contain references to the Frascone killing, earlier this year after months of bickering with the FBI's New York office.
The tapes, sources have said, also contain references to Masselli's dealing with Schiavone Construction that do not mention Donovan by name and were never disclosed by Silverman.
Silverman made clear at his last news conference that he did not consider it his province to pursue allegations concerning Donovan's company or organized-crime figures unless some clear connection with Donovan was asserted at the outset.
"I am not an ombudsman for the construction industry or for any company in the construction industry or for organized crime," Silverman declared at the time. "My mandate was to investigate the secretary."