A Walnut Creek, Calif., company allegedly failed to invest $2.28 million in payroll deductions earmarked for the retirement accounts of about 10,000 state Department of Education employees, the DOE said in a lawsuit.

The department is suing Plan Compliance Group and its president, Francis W. "Bill" Reimers, to recover $2,280,194.60 in contributions deducted from employees' paychecks during two September pay periods and given to PCG to invest in tax-sheltered annuities.

The money never made it into the investments, according to the lawsuit, filed in California Superior Court in Contra Costa County.

Reimers did not return three telephone calls yesterday to his Walnut Creek office and a receptionist said he was not available for comment.

In addition to the lawsuit, the matter is the subject of an investigation by the state attorney general's office and the FBI.

Attorney General Mark Bennett, whose office has been cooperating in the lawsuit, said both his office and the Federal Bureau of Investigation are looking into "whether criminal charges are appropriate."

He said the University of Hawai'i, which is claiming $421,000 in losses, also may join the DOE lawsuit.

"We've been discussing that with UH," Bennett said.

Losses could go higher than these first estimates, according to one of the San Francisco attorneys handling the case.

"It could be more, definitely it could be more," said Tracy L. Salisbury, an attorney with Shartsis Friese LLP, the firm retained by the DOE. "The allegation is the money was given to PCG and it never made it to the carriers. The payments were never made and we don't know where it (the money) is."

There also is a question of loss of investment income — anywhere from 5 percent to 10 percent in compounded interest on the investments.

LOSSES COVERED

The DOE immediately covered the losses when they became known, and will continue managing those retirement fund deposits until another third-party administrator can be found, officials said.

"We are deeply concerned at this apparent breach of trust and will work with the attorney general to do everything possible to recover the missing money," said Schools Superintendent Patricia Hamamoto. "We will also do everything possible to ensure that the interests of our employees are protected."

PCG has been retained by the DOE since 2002 to distribute the Tax-Sheltered Annuity Plan contributions made by DOE employees for their retirement.

The DOE employee funds were supposed to be deposited in retirement accounts, but according to the lawsuit, deductions from two September paychecks were "commingled" with assets of PCG and others and with Reimers' personal assets.

"Reimers used PCG as a mere shell, instrument and conduit" through which he conducted business, the lawsuit alleges.

University of Hawai'i director of Human Resources Ed Yuen said there were shortages in employee deductions transferred to retirement accounts on Sept. 15 and on Sept. 20. He did not immediately know how many employees were affected.

The university also covered the payments, so employees would not be affected, and the UH Office of General Counsel subsequently sent a letter to PCG demanding the immediate return of those funds by Nov. 22.

"We never got anything on the 22nd, so I assume the next step will be legal action," Yuen said.

PCG has been retained by UH since 1999 to distribute contributions by employees to certain sheltered retirement accounts.

The lawsuit was filed Dec. 1 and Salisbury said the investigation is continuing.

The DOE also is asking for punitive damages, but Salisbury said a dollar amount has not yet been set. In California, that figure does not have to be set until the case comes to trial.

INSURANCE OPTIONS

According to the lawsuit, PCG was required to carry an insurance policy of $2 million to cover errors and omissions. While the policy would not cover all the damages, if the lawsuit is settled in the DOE's favor, Bennett said his office is going to explore "whatever insurance options there are."

Bennett said insurance policies carried by PCG or the state could potentially cover some losses.

"We have not completed looking into that," Bennett said. "We don't know all the facts yet."

However, if the suit is found in DOE's favor, any insurance money would have to be shared with any other successful complainants.

"The (insurance) company usually determines the total amount of loss and tries to get everyone to agree how it will be split up," Bennett said.

Reach Beverly Creamer at bcreamer@honoluluadvertiser.com.