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Designed to land jobs, union fund now a lure for the FBI

When the FBI raided the headquarters of powerful labor leader John "Johnny Doc" Dougherty and hauled out hundreds of cartons of records, they made sure to grab those of an obscure union subsidy program called "market recovery."

When the FBI raided the headquarters of powerful labor leader John "Johnny Doc" Dougherty and hauled out hundreds of cartons of records, they made sure to grab those of an obscure union subsidy program called "market recovery."

The records did not detail payments to Dougherty's Local 98 electrical workers but rather the reverse: cash from the International Brotherhood of Electrical Workers to the bank accounts of contracting companies themselves.

Of the nearly $900,000 in subsidies Local 98 paid out to contractors in 2015, U.S. Labor Department records show more than $300,000 went to two contractors - Dougherty Electric Inc. and MJK Electric Corp. - whose offices the FBI also raided that day.

For one of the two, Donald "Gus" Dougherty Jr., owner of Dougherty Electric Inc., in South Philadelphia, it must have seemed like deja vu.

Dougherty has already been imprisoned for, among other crimes, defrauding Local 98 of more than a half a million dollars of its "recovery funds."

In the world of construction, market recovery funds are both standard practice and controversial.

For decades, building-trade unions here, not just IBEW Local 98, have spent these funds as a way to gain work for their members by subsidizing labor costs of union contractors, which allows them to lower their bids and beat out non-union contractors for jobs. The hope is that discounting one job will lead to others.

The practice goes by different names - targeting funds, pinpoint funds, wage supplements, job recovery, and so on.

The funds are controversial both because it's not clear if they work and because they hold the potential for abuse.

Contractors and union leaders say the funds have helped them get and safeguard union jobs.

The story of Gus Dougherty and his company provides an example of the way the funds can be abused.

Started in 1994, Dougherty's business is headquartered in the same South Philadelphia neighborhood where John Dougherty grew up. The men are friends, but not relatives.

Dougherty Electric grew and now lays claim to work in some the city's largest projects, including the new 60-story Comcast tower.

From 2002 to 2004, Local 98 awarded Dougherty Electric $672,625 in what the union then called "job recovery fund" money. But instead of the money going to defray Dougherty Electric's expenses for union labor, Gus Dougherty admitted in federal court that he put most of it - $527,625 - in his own bank account.

"He used the money he converted and embezzled to subsidize his lavish lifestyle," a government sentencing memorandum said of Dougherty who pleaded guilty in 2008 to 99 counts of fraud and tax evasion.

For example, one day in April 2002, Dougherty Electric received $40,000 in recovery money from Local 98.

That same day, Gus Dougherty moved $43,045 from the company account to his personal account and then transferred the same amount to Tweeter, the high-end consumer electronics retailer, government documents show.

Dougherty also admitted paying some Local 98 members cash under the table for overtime hours while not making the appropriate payments - $869,599 - to Local 98's benefit plans.

Gus Dougherty pled guilty to undercharging John Dougherty for work on the labor leader's Moyamensing Avenue house. It's against the law for employers to give union leaders "something of value."

John Dougherty was not charged in connection any of these situations.

Even though Gus Dougherty has been to prison and back - his Local 98 case still isn't over. Prosecutors object to the restitution he paid to the union.

"The Court also should consider whether the settlement agreement represents an arms-length transaction between Dougherty and IBEW," prosecutors wrote in a federal court filing in July, three weeks before federal agents raided the union hall and Gus Dougherty's business.

In 2008, Dougherty was ordered to pay $673,070 in restitution to the union and its benefit funds.

In 2011, the union and its benefit funds agreed to accept an immediate payment of $200,000 based, in part, on "the risk of non-payment," the union's lawyer wrote in a court filing.

Meanwhile, since 2011, when Gus Dougherty paid the union $473,070 less than the original judgment, he has received $470,000 in market recovery funds - $170,000 in 2011 and $100,000 a year in 2012, 2014 and 2015.

Gus Dougherty did not return several calls for comment and his lawyer, Eric W. Sitarchuk, declined to comment.

The union issued a statement: "Job Recovery is a well-documented, meticulously monitored program that was approved by Local 98's membership."

"Dougherty Electric and MJK Electric are among many union contractors that have benefitted from the program."

At a Labor Day gathering, John Dougherty said the IBEW sometimes has no choice but to provide market money.

If other unions on a construction site provide market recovery money to contractors, Local 98 has to follow suit, he said.

Dougherty said that if a new line of business opens with the potential for multiple jobs, market recovery money can help make sure it goes union from the start.

Once on the job, "I believe our efficiency, our training and the fact we bring no drama to the job speaks for itself," Doughtery said.

Like Gus Dougherty, most of the contractors who received Local 98 market recovery money declined to comment or didn't return calls.

However, one of the contractors did. Franklin P. Holleran, president of H.B. Frazer Co. in King of Prussia, explained how he uses market recovery money.

His firm, which employs 200 Local 98 electricians, received $39,254 in market recovery money in 2015.

One of Holleran's steady customers was a pharmaceutical firm that decided to hire a non-union electrical contractor to compare costs and quality.

Not wanting to lose the work, Holleran asked Local 98 for market recovery money. He got it.

As a result, H.B. Frazer and the non-union contractor worked side by side on the project.

"The job went smooth as can be, no issues. And we're still working there - on multiple different bids," without market recovery subsidies, Holleran said. The non-union contractor didn't get hired back, he said.

The typical market recovery award, Holleran said, amounts to about 10 percent of the contract cost because unions and union contractors believe the difference between union and non-union labor costs is about 10 to 15 percent.

Once the union has agreed to allow the discount, it makes it available to other union contractors, who may be bidding for the same job.

In the Philadelphia area, Local 98 isn't the biggest spender on market recovery by any measure. In 2015, Steamfitters Local 420, with roughly the same amount of members, spent $1.38 million. The carpenters' union, with four times the membership, spent $9 million over a much larger geographic area.

"We call it crack-cocaine for our contractors. They all want it," lamented John Kane, who leads Plumbers Local 690, which spent $346,000 in market recovery in 2015. General contractors press the sub-contractors to ask the unions for the money.

"It usually goes to the same contractors, because they are the aggressive ones," willing to undertake the risk of going after new business, Kane said.

For obvious reasons, non-union contractors don't like the whole concept.

"It keeps things not very fair," said Joe Perpiglia, chief executive of the Associated Building Contractors of Eastern Pennsylvania, an association of non-union contractors.

"I don't know where the money comes from," he said, "but after awhile, it seems like it will have to be depleted. The unions can't keep on subsidizing jobs."

The money actually comes from the workers themselves.

For example, Local 98 members agreed to pay 3.25 percent of their gross monthly wages for market recovery, according to Local 98's 2015 bylaws.

On a market recovery job, the electricians and other building trades workers still earn their normal hourly wage. The market recovery money goes to the contractor to offset his payroll costs.

MJK Electrical Corp., the other contractor raided Aug. 5 by federal agents, was the largest recipient of Local 98 market recovery funds in 2015 - $270,836 out of nearly $900,000.

From 2012 and 2015, Local 98 paid MJK nearly $1.5 million. Of that, $1.1 million is market recovery money and most of the rest was Local 98 underwriting MJK's work on re-lighting Boathouse Row and other projects.

Local 98 and MJK share a long history.

MJK incorporated in 1994, with Michael J. Jones as the president and George J. Peltz as vice president and treasurer and offices in Philadelphia and Berlin, New Jersey. Peltz has been a longtime contractor and is well-known in the building trades.

With Jones, an African-American, at the helm, the company gained minority contractor status.

During the Democratic convention, MJK handled some work at the Wells Fargo Center, with Peltz the on-site representative. On its website, the company says it handled convention and trade show work at Philadelphia Marriott and the Convention Center.

Neither Peltz nor Jones returned calls for comment. "Neither of them would be interested in talking to the press," said their lawyer, Nicholas R. Montalto.