Mrs. Mink. I think it's important for everyone here in the room here to know that the minority members of this subcommittee are very much interested in the hearings and in the discussions that are to take place. We are handicapped very seriously because we are not part of the team in deciding who, when, and why witnesses are being called, and so we are somewhat at a disadvantage.

But our disadvantage should not be misinterpreted as a lack of interest or any desire to in any way impede the legitimate progress of this subcommittee in investigating what happened at the elections of 1996, and if there is any misconduct on the part of the election officers or the IRB or any of the Federal officials who have responsibility for monitoring of the elections. And I want to assure the Chair of our interest and our willingness to participate in that regard.

Since you alluded to the fact that your consultants and other members of your staff have come up with a tentative outline of what further discussions we might have in this subcommittee on the Teamsters, I would like to respectfully request that this information at least, if only tentatively, be shared with us so that we can be part of the hearings and part of the deliberation and make a more demonstrative contribution to these hearings.

Today we are handicapped. We didn't have the testimony. We didn't really know who was coming until yesterday at noon, and I find that this makes it very, very difficult for us to prepare, to call other witnesses. Had I known that the principal individuals, or entity, that was going to be charged with misconduct and abuse of power was the IRB, I would have made every effort to add them to the panel today.

And so, again, Mr. Chairman, I ask that prompt attention be given to our request and the IRB be called promptly so that we may, while this matter is fresh at hand, that they be given an opportunity to answer the charges that have been made today and to respond to further questions and inquiry that we might have. Thank you, Mr. Chairman.

Chairman Hoekstra. Let me do it right now, all right? We welcome your participation in this process and moving beyond the procedural issues that have been focused on for the last couple of months, and so we welcome your participation.

Let me tell you who we want to have and who we believe are essential to testify as we get information from some or all of these groups: the Justice Department, the Labor Department, the IRB, the Election Officer, the Teamsters--that's five. And, you know, especially with the Teamsters, it would help if they did for us what they have not done for Mr. DeRusha or Mr. Simpson, to provide us with the information that we have requested for the subpoenas. But, remember where we're going. We're going to file the taxpayers money on the--for the--that we paid for the election. We're going to file the $600 million to $700 million in members' dues that were paid and that, in this period of time, resulted in the net worth going down to $700,000. We want to find out about the money swaps, the illegal campaign activities.

And I think with Mr. LeFevre's testimony today, it is obvious--and Ms. Mink, you mentioned it as well--that we have to take a look at the pension funds, which is where probably more money than anything else that we're talking about--and this gets to rank and file Teamsters because this is their future, their future retirements, and we want to

take a look at pensions.

So, those are the areas specifically that we are working on gathering information, some of whom--some people who are complying and working with us effectively and efficiently, and others who are trying to do everything they can to obstruct and make sure that we don't get the numbers or the information that we need to be successful.

I'd like to thank this panel for your compelling testimony today, for being here, and helping us as a collective subcommittee perhaps now be focused on what we have been trying to get done for the last three months. This is a very difficult issue. I think you have laid out how difficult it is to work through this morass of people trying to obstruct, by people trying to change the subject and to destroy you personally.

And so it is indicative of the characteristics that the people who have been fighting against you have used in every effort, whether it's a congressional inquiry or whether it's the efforts that you have participated in. Thank you very much.

Mr. LeFevre. Thank you, sir.

Mr. DeRusha. Thank you.

Chairman Hoekstra. We are going to move directly to the second panel, so we'll take just one break, a minute to get Fred up here, and we will start.

We will begin our second panel today. The second panel is a presentation from Mr. Fred Smolen, who is a consultant to the subcommittee for the purposes of the Teamsters investigation. Mr. Smolen is a distinguished forensic auditor who is working with us to identify the current status of the Teamster's finances and the causes for their deterioration.

Mr. Smolen today will testify as a witness to give us a report on initial questions identified by him and findings based solely on his review of the--and let me stress--the very limited--very limited financial information that is available from public disclosure forms filed with the Federal Government. The Chair will recognize Mr. Smolen for an adequate period of time to report thoroughly on his work, to be followed by questioning by the members. Mr. Smolen.

TESTIMONY OF FREDERICK W. SMOLEN, CHIEF FORENSIC AUDITOR, FINANCIAL INVESTIGATIONS & SERVICES, INC.

Mr. Smolen. Mr. Chairman, distinguished members of this House subcommittee, and guests at this hearing, thank you for-

Chairman Hoekstra. Excuse me, Mr. Smolen. Before we do that, we need to swear you in, and you should also be aware that making a false statement to Congress while under oath may be prosecuted under law. Would you please rise?

[Witness sworn.]

Chairman Hoekstra. Let the record reflect that the witness has answered in the affirmative. Mr. Smolen.

Mr. Smolen. Mr. Chairman, distinguished members of this House subcommittee, and guests at this hearing, thank you for this opportunity. To discuss the financial affairs of the International Brotherhood of Teamsters, I must cover not only the Union's finances, but also three key areas: accountability, reporting, and oversight, and whether the organization was effective or ineffective in each of these areas.

The Teamster's Union is in crisis. It is both a financial and managerial crisis, financial crisis because the Teamster's most recent internal accounting statements show it is nearly insolvent. Its net worth, which was more than $156 million on January 1, 1992, dropped to a mere $700,000 on September 30, 1997; managerial crisis because the general president was re-elected in 1996 under a Government-supervised election at a cost to the taxpayers of approximately $20 million. Ron Carey is now removed amid allegations of fraud and misuse of treasury funds related to his re-election. This has brought the Union into a leadership crisis, requiring a new election.

Between 1992 and 1997, the Teamster's net worth declined by an average of $26 million per year, an estimated $100,000 every working day. This is more than rank and file workers receive in a year. Think of it as a loss of $12,500 for every working hour.

This horrendous loss begs answers for three questions. First, where did the money go? Second, where was the oversight by the Department of Justice, the Independent Review Board, and the regulators at the Department of Labor? And, third, are current Teamster officials covering up a systemic and wide-ranging series of fraudulent and illegal financial activities?

I am Frederick W. Smolen, chief forensic auditor of the subcommittee. I'm a certified public accountant and serve the business, financial, and legal community as an advisor, consultant, and expert witness. Based on my profession's standards, in addition to what has been already learned, there appears to be fraudulent financial activities at the Teamsters between 1992 and 1997.

This conclusion is because of domination without controls, of Teamster's management by a small group of individuals, missing documents, refusal by the IBT to provide information, including financial books and records, and, finally, financial analyses reflecting unexpected and significant differences.

For the last 20 years I've investigated business and financial affairs of numerous publicly-held and privately-held entities, including not-for-profit organizations. Many were involved in fraudulent financial activities, faced bankruptcy, or went bankrupt. Since my hiring six weeks ago, I've worked to ensure that you, Mr. Chairman, and the

members of this subcommittee, are presented with relevant information relating to the finances of the Teamsters, and especially those in 1996.

However, our staff has been obstructed in its efforts to provide a comprehensive financial picture to this subcommittee. Documents that would provide information on what has happened to the money are not being produced, and the information that is being produced includes missing documents and conflicting data.

To illustrate this point, in 1994 the Teamster Affiliates Pension Plan was terminated. The produced documents included the audited 1994 financial statements. Missing from these financial statements was the page relevant to the terminated pension plan.

I've provided with you a copy of exhibit number 7, and it comes from the annual reports that were produced. What I have over here is production number H00265 and H00266-

Mr. Scott. Mr. Chairman?

Chairman Hoekstra. Yes.

Mr. Scott. Do we have copies of that?

Chairman Hoekstra. Are there copies of the exhibit?

Go ahead.

Mr. Smolen. --sequential production numbers produced by the Teamsters. It's a narrative discussion in note (g) of the Teamsters Pension Fund on production number 00265, exhibit 7(a). It starts in note (g), the Teamster Affiliates Pension Fund, and it continues. The narrative discussion continues on production number 00266, and it talks about post-retirement benefits.

There's a natural flow of information in these two documents, but yet missing is page number 27, the page dealing with the termination of the pension plan. What you see before you are missing pages in an annual report for materials that were produced by the Teamsters Union.

EXHIBITS USED DURING THE TESTIMONY OF FRED SMOLEN - SEE
APPENDIX J

Mr. Smolen. By another example, the staff was informed by a Teamsters employee that internal operating finance and administrative manuals exist. The IBT subpoena, approved by this subcommittee, was specifically drafted to include such language. The written response was, ``As the IBT has already informed the subcommittee, there are no such manuals." This does not seem credible in an organization with 1,400,000 members

and a payroll in excess of $25 million a year. In fact, a 1997 memo evidences the existence of internal manuals.

By yet another example, Grant Thornton, IBT's independent auditors, initially agreed to a review of their working papers that would have provided information significant to this subcommittee. IBT attorneys instructed Grant Thornton not to produce the materials, even though these audit working papers are the property of the CPA's.

Just this morning I was handed a fax copy of a letter dated March 24, 1998, and it was addressed to the counsel of Grant Thornton, and it states the position of the IBT is as follows: Quote, "The request to Grant Thornton is over-broad and improper."

So my study of the IBT's finances is limited by the lack of cooperation of the present IBT hierarchy. But what I can determine from the available documents and information is a history of inadequate internal controls, absence of appropriate reviews and approvals, inadequate provisions for safeguarding assets, failure to safeguard assets from misappropriation and fraud, willful wrongdoing by senior officials, manipulation and falsification of accounting records, lack of management integrity, and refusal by senior officials to provide relevant records and information to those with delegated authority and responsibility--the Teamsters trustees.

The story of the International Brotherhood of Teamsters reflects the history of the labor movement, and the story dates back to 1903 when representatives of independent local unions formed a labor organization that pooled the resources of individual locals. Through this organization, a foundation was laid for the largest trade union in North America, which now has approximately 1.4 million members and cuts across a variety of trades and industries, including airlines, freight, motion pictures, dairy, construction, trucking, and port facilities.

The recent history of the Teamsters is marked by the 1989 consent decree, resulting from the Department of Justice bringing a civil RICO action. This consent decree related to charges stemming in part from the misuse of Teamster treasury assets. As a consequence of this consent decree, in 1992 new management and a new constitution were put into place. Notwithstanding these events, the financial affairs of the Teamsters have continued to catapult down hill, until they reached where they are today-an organization nearly insolvent. Between January 1, 1992 and September 30, 1997, the net worth of the Teamsters Union has been virtually wiped out. The financial reports that I examined show that in less than six years the Teamster's net worth lost over $155 million.

Exhibit number 8 is a chart which reflects the decline in the net worth, and it shows the rapid decline over the six-year period.

Exhibit number 9 reflects also the decline in the assets of the Teamsters, which went from approximately $179 million at December 31, 1991 to $79 million at September 30, 1997, and it reflects an increase in the liabilities from $22.5 million in 1991 to $78.5 million. Interspersed between those two--the decrease in the assets and the increase in the liabilities--are the decline in the net worth, which is reflected on this red line.