Secretary of Labor Raymond J. Donovan pleaded not guilty today to a grand jury 137-count indictment accusing him and nine other men of grand larceny and fraud on a New York subway project.
The felony indictment offered little detail about the alleged wrongdoing of Donovan and the other defendants. But the general charge was that they defrauded the New York City Transit Authority of some $8 million in the construction of a $186 million subway tunnel by Donovan's firm, the Schiavone Construction Co. of Secaucus, N.J.
Prosecutors for Bronx District Attorney Mario Merola's office said the alleged fraud involved Schiavone Construction's billing of the transit authority for more work than was done by a supposed minority-owned construction firm headed by William P. Masselli, a reputed Mafia member. The actual work was also less than the law requires be given to minority-owned firms, the prosecution said.
Pressed to explain the labor secretary's alleged culpability, Merola charged that Donovan "knew" of fraudulent billings that Masselli's company was passing on to the transit authority through Schiavone Construction, where Donovan had been executive vice president.
Merola said at a news conference that Donovan also "had his people sign these false documents" and benefited from transit authority payments that were siphoned off by Schiavone Construction instead of going to Masselli's minority-business enterprise.
"Schiavone got more money than it should have gotten," Merola said. "The people who were defrauded were the minorities of the city of New York and the transit authority."
Each defendant was accused of one count of grand larceny in the second degree, 125 counts, in the first degree, of falsifying buiness records and 11 counts, in the first degree, of filing false reports with the transit authority.
The grand larceny charge carries a maximum penalty of seven years in prison. Each of the other counts carries as many as four years. The two corporations involved could be fined millions of dollars, prosecutors said.
Democratic presidential nominee Walter F. Mondale reacted cautiously to the latest in a string of scandals affecting the Reagan administration, saying that Donovan should be presumed innocent and President Reagan should remove the labor secretary from office only if there is reason to think the charges are true. A number of leading Democratic politicians said that they doubt that Donovan's troubles will have an adverse effect on Reagan's reelection campaign.
The 73-page indictment was voted by a Bronx grand jury Sept. 24, five days before the five-year statute of limitations would have ruled out what Merola described as a crucial count involving $800,000 in false billings that formally launched the scheme. Much of the evidence, prosecutors said, was contained on long-secret FBI tape recordings compiled in 1979 in an investigation code-named Operation Tumcon.
Donovan, who is taking an unpaid leave of absence from Reagan's Cabinet to fight the case, accused Merola of misusing his office.
"I commented yesterday Monday , without having seen the indictment, that it was not worth the paper it was written on," Donovan said in a hectic session outside the courtroom after arraignment. "Now that I've seen it, I realize that I overstated its value."
Merola said the case started out last year with the investigation of a 1978 homicide long listed as unsolved and that led into the business dealings of Masselli, one of the suspects in the murder.
"Nobody is above the law," Merola said in defending the Donovan indictment and his decision to seek it. "You gotta do what you gotta do, and this is what we did."
Masselli headed a trucking company that grew into a multimillion-dollar-a-year business as a subcontractor for Schiavone Construction on a series of New York subway projects, culminating in the digging of the $186 million 63rd Street tunnel beneath the East River.
Masselli and longtime associate Joseph Bugliarelli were also charged in a separate indictment with murder in the Sept. 22, 1978, killing of Mafia member Salvatore Frascone.
Describing the slaying as essential to an understanding of the state's case, Stephen Bookin, head of Merola's homicide bureau, told acting New York Supreme Court Judge Barry Salman that the Frascone killing removed the last big obstacle to Masselli becoming the leading minority subcontractor on New York subway projects for Schiavone Construction.
Reputedly a "soldier" in a rival Mafia family, Frascone had been a key backer of an earlier Schiavone subcontractor, Louis R. Nargi, the court was told. But, Bookin said, Nargi ran into financial problems and began borrowing money from "his friend, William Pellegrino Masselli," until the end of 1976 when he owed Masselli approximately $350,000.
Masselli's money, Bookin said, came from Louis Cirillo, a convicted drug trafficker. And in return for it, Masselli demanded an increasing percentage of Nargi's profits as well as installation of a friend, Patty Simonetti, on the Nargi payroll.
Simonetti is the son-in-law of the late crime boss Vito Genovese. Bookin described him as "a connection with the construction industry in New Jersey."
Bookin said Masselli and a black Bronx state senator, Joseph Galiber, formed Jopel Contracting in the fall of 1976 "in anticipation of the fact that future subway contracts would require minority participation."
One of Jopel's first actions, the prosecutor said, was to take over Nargi's work on a Schiavone subway job in Queens. Bookin said this was done with the Schiavone Construction Co.'s approval.
The resulting dispute, the court was told, led Nargi to appeal to his wife's brother-in-law, Frascone, and arrange for a gangland meeting, or "sitdown," to settle the matter.
Masselli's claims were upheld, Bookin said, but Frascone "would not quietly agree." So in September, 1978, Masselli's Mafia captain in the Genovese crime family, Philip Buono, "told Mr. Masselli that Mr. Frascone would have to be hit."
According to Bronx prosecutors, Masselli enlisted his bodyguard, Michael Orlando, an FBI informer at the time, to kill Frascone. Bookin said Masselli served as the getaway driver after Orlando shot Frascone three times. Bugliarelli was accused of setting up Frascone by pointing to him as he emerged from his place of business in the south Bronx.
Lawyers for Masselli and Bugliarelli were indignant over a grant of immunity from prosecution for Orlando.
"Do I understand that the bodyguard, who was a federal informer since 1976, did the killing?" Murray Richman, the attorney for Bugliarelli, demanded at one point.
"That's what he Bookin said," Bugliarelli interjected.
"A federal agent did the killing?" Richman asked again in an incredulous voice.
Bookin indicated that this was so. He added that after the killing Nargi "walked away" from the business and left Masselli in a commanding position as the Schiavone Co.'s principal minority subcontractor.
Bugliarelli pleaded not guilty to the murder charge. Now serving a federal prison term on other charges, Masselli remained mute, insisting through his lawyer that he should first be permitted to contest the legality of the FBI's 1979 bugging of his south Bronx warehouse. Judge Salman entered a not-guilty plea for him.
The lawyers for Donovan and the other defendants in the fraud indictment avoided spelling out of details in that case by waiving a reading of the charges.
In addition to the labor secretary, the fraud indictment named as defendants Schiavone board chairman Ronald Schiavone, company executives Joseph DiCarolis, Richard C. Callaghan, Morris J. Levin, Albert J. Magrini, Gennaro Liguori and Robert Genuario, as well as Masselli, state Sen. Galiber and the two corporations, Schiavone Construction and Jopel.
At his news conference, Merola said Schiavone executives and Masselli worked together on a scheme to trick the transit authority into thinking that Jopel was getting some $12 million in contract payments on the tunnel job, most of the now-requisite 10 percent for minority businesses, when, in fact, it got $4 million.
This was done, Merola said, by Jopel's pretending to rent equipment from Schiavone, such as $1 million worth of special loaders, when it was actually still Schiavone equipment operated by Schiavone employes. The employes, officials said, found themselves abruptly switched in late September, 1979, to the Jopel payroll while Masselli submited a first-time, backdated bill claiming to have been renting the loaders for months.
Transit authority officials, according to Bronx authorities, had the loaders listed as Schiavone equipment at that time.
Asked how he justified the indictment when special federal prosecutor Leon Silverman found no grounds for one during his 1982 probe of alleged ties between Donovan and organized crime, Merola said: "I suspect we developed a fuller picture than Mr. Silverman."
Silverman said he found "insufficient credible evidence" to warrant Donovan's prosecution for any federal crime. Merola said his office combined "credible evidence" Silverman did find with "credible evidence" from Justice Department prosecutors in Manhattan and Brooklyn and the independent work of his office over the past year.
Bookin said he would seek federal court permission as soon as possible to supply defense counsel with relevant tape recordings from the FBI's 1979 surveillance of Masselli's warehouse. Sources say there are more than a dozen conversations, never disclosed by Silverman, about the fraudulent nature of Masselli's minority-business enterprise and the questionable rental arrangements.