Time Out for the Defense

Indicted in New York, Donovan takes a leave from the Cabinet

For a member of the President's Cabinet, the situation could hardly have been more humiliating. Secretary of Labor Raymond Donovan walked into a forbidding concrete courthouse in New York City last week to be booked, fingerprinted and photographed like a common criminal. He looked startled when the policeman taking his mug shot remarked dryly, "I suppose I'll see you again." The cameraman was joking, other officers explained. "I don't think he was," replied the grim-faced Secretary. After going through more than two hours of processing, including a computerized check of his fingerprints against those of known fugitives, Donovan was led by detectives to a New York State Supreme Court room jammed with reporters. Arraigned before a state judge, the Secretary had some unusual company: a convicted mobster newly charged with murder, a bookie accused of being an accomplice in the killing, a Democratic state senator and seven dark-suited executives of a construction company that held more than $500 million in government contracts last year.

Donovan and nine assorted co-defendants stood accused of grand larceny, as well as 125 counts of falsifying business documents and eleven counts of filing phony papers with government agencies. The purpose and end result, according to an indictment handed up by a Bronx grand jury, was to defraud the New York City Transit Authority of some $8 million on a $ 186 million subway contract awarded to New Jersey's Schiavone Construction Co. in 1978. At the time, Donovan was executive vice president and one of two controlling stockholders in the firm. He is the first Cabinet member ever to be indicted while still in office.*

The indictment was a bitter blow to Donovan, 54, a seminary graduate who once considered becoming a priest. Instead, he went into the construction business, and became a millionaire building subways, bridges, tunnels and airports in the New York-New Jersey metropolitan area. One of the first business executives in the Northeast to come out strongly for Ronald Reagan during the 1980 Republican primaries, he eventually raised $600,000 for the campaign. Donovan's reward was a Cabinet post. From his earliest days in office, however, he was plagued by accusations, mostly made by gangsters, that he and his company had close ties to organized crime.

Investigations of Donovan by the FBI, the U.S. Attorney's office in New York and Special Prosecutor Leon Silverman produced no indictments. Silverman, while expressing concern over the "disturbing" number of allegations against Donovan, had concluded after two separate probes that there was "insufficient credible evidence" to accuse the Secretary of having broken any federal laws.

Apparently feeling that his long ordeal was about over, Donovan struck a defiant note two weeks ago after a four-hour grilling before a grand jury in The Bronx in New York City. The jurors had been looking into Schiavone's subway work at the request of Bronx District Attorney Mario Merola, a four-term Democrat. Donovan claimed that the jury was doing nothing more than "a rehash" of "the baseless allegations" that Silverman had investigated. It was all "a witch hunt," he said. The Labor Secretary said he had hired independent experts to give him lie-detector tests, and "needless to say, I passed with flying colors." Declared Donovan: "I will not be indicted."

After the indictment was returned, Donovan charged that he was the victim of "a mindless inquisition," adding that he was "disgusted" by the "obviously partisan timing" so close to the November elections. He pleaded not guilty to the charges and took a leave of absence without pay from his Cabinet duties. Most labor union leaders were not sad to see Donovan step aside: in the past three years he has cut the Labor Department's work force from 22,000 to below 18,000 and its budget from $30.1 billion to $25.3 billion. Taking over Donovan's day-to-day duties is Under Secretary Ford B. Ford, 62, a nearly invisible bureaucrat who is expected to stay on the course set by Donovan.

The pugnacious Merola, 62, was a New York City councilman before winning election to the $82,000-a-year D.A.'s job in 1972. He has handled a number of nationally prominent cases, including the 1978 trial of David Berkowitz for the Son of Sam killings. Merola has a reputation for speaking loosely to the press. In 1980, for example, he disclosed that a prominent surgeon was the prime suspect in an attempted murder; as it turned out, the man was never charged. More recently Merola identified an elderly woman as a suspect in a highly publicized child-abuse case only to have her cleared by a grand jury. "The woman did get hurt," he admitted. "We're not perfect."

But even New York Republican leaders doubted that Merola was trying to advance his own career at Donovan's expense. "I just don't see the political motivation," said New York Republican Party Chairman George Clark Jr. "There is no evidence that Merola is seeking higher office. He's the toughest D.A. in the city and a stand-up guy." Indeed, Merola argues persuasively that the indictments had to be handed up now to beat the end of a five-year statute of limitations.

Apart from Donovan's personal predicament, the significance of his indictment may lie in a deeper question: Why did the various federal law enforcement agencies, with access to most of the same evidence that Merola acquired, fail to file charges against the Schiavone firm long ago? The agencies involved say the evidence was not strong enough to prosecute. But other Government sources claim that there was official foot dragging to avoid embarrassing people in high places, both Democrats and Republicans. Among those whose actions are open to question: the Reagan White House, the Justice Department and the FBI'S Washington headquarters and New York office.

The events leading to last week's charges began in 1976 when William Masselli, a soldier in the Genovese Mafia family, seized control of a small construction firm that held subcontracts on large Schiavone projects. The firm was owned by Louis Nargi, who had made the mistake of borrowing some $350,000 from Masselli and from one of the mobster's associates, Louis Cirillo, now in prison on a narcotics conviction. When Nargi failed to repay the money on time, Masselli, who had no construction experience, appropriated Nargi's equipment, hired his workers and muscled the owner aside. This was protested by Salvatore ("Sally Blind") Frascone, a soldier in the rival Bonanno Mob family and an in-law of Nargi's wife.

The intra-Mafia dispute was settled in Masselli's favor in a Bonanno-Genovese "sitdown." But Frascone continued to object, and Masselli ordered him killed, according to last week's indictments. The admitted killer was Mike Orlando, a former grade school teacher who had switched to an exciting and dangerous double vocation: he was Masselli's top bodyguard and an FBI informer. Now a protected federal witness in other cases, Orlando claims he shot Frascone on Sept. 22, 1978, after the victim was fingered for him in The Bronx by Joe ("Bugs") Bugliarelli, a local bookie. The getaway car, Orlando contends, was driven by Masselli. Both Bugliarelli and Masselli were charged last week with the murder. Orlando, the state's key witness, has been granted immunity from prosecution.

According to the D.A.'s office, Masselli moved aggressively to take over the subcontracts from Nargi's old company. U.S. law requires that any contractor receiving a federal public works grant must award 10% of the business to minority-owned companies. Since some 80% of Schiavone's $186 million contract to extend a subway under the East River was federally financed, the Schiavone company needed to find a so-called MBE (Minority Business Enterprise) to do part of the work. Thus Masselli set up the Jo-Pel Contracting and Trucking Co. and claimed that at least 51% of it was owned by Joseph Galiber, a black state senator from The Bronx. Merola's evidence shows that Galiber, while drawing a $700 weekly salary as Jo-Pel's president, had no equity in the company.

The prosecution charges that Masselli and Galiber conspired with top Schiavone executives, including Donovan, to inflate the value of work that Jo-Pel claimed to be doing on the subway project. One tactic, Merola claims, was for Jo-Pel to bill Schiavone more than $90,000 a month for "renting" tunnel-digging equipment that Donovan's company let Jo-Pel use free of charge. Schiavone officials passed these bogus rental bills along to the New York City Transit Authority, which then paid Schiavone. In all, Schiavone collected some $12 million for work it claimed that Jo-Pel had done; in fact, according to Merola, Jo-Pel's effort was worth only some $4 million.

Donovan and six top executives of Schiavone, including its chairman, Ronald Schiavone, 59, were charged with grand larceny in this scheme. Together, Donovan and Schiavone own about 90% of the company's stock. Also charged with fraud were Masselli, 57, and Galiber, 59. The alleged "theft," in Merola's view, was from the Transit Authority and the Federal Government.

The trail of evidence on the alleged scheme had begun in 1978, when the double-dealing Orlando told his FBI contacts in New York about Masselli's Mob connections and his operations. With this information, the New York agents on Jan. 4,1979, got a court order to bug conversations and tap telephones at Masselli's meat-packing warehouse in The Bronx. Over six months this produced 892 tape recordings. The mobsters talked about Jo-Pel, the Frascone murder and Democratic officials in New York City and Albany who, they claimed, were corrupt. Donovan was mentioned in various contexts at least six times. The references to Donovan were mostly casual or vague. At one point, Mobster Masselli claimed to "get along good" with Donovan and other Schiavone executives. This could be idle boasting, but it was the kind of lead investigators usually pursue.

Much of the wiretap information did not get beyond the FBI's New York office, where top officials showed little enthusiasm for pursuing leads on Democratic corruption at a time when a Democratic Administration held power in Washington. Lee Laster, who was in charge of the office, and Kenneth Walton, his deputy, provoked a furor among their subordinates by insisting that Orlando was too tainted to be used as an informant and, further, that Orlando should be prosecuted.

The records of Jo-Pel and Schiavone were subpoenaed by the U.S. Attorney in Manhattan, Republican Robert B. Fiske Jr., with FBI cooperation, but this probe produced no legal action. Fiske's successor, Democrat John S. Martin Jr., obtained guilty pleas from Masselli and Orlando for hijacking and conspiring to manufacture synthetic cocaine. After Ronald Reagan won the 1980 election and announced in December that he wanted Donovan as his Labor Secretary, FBI officials in both New York and Washington seemed to lose interest in the Schiavone evidence.

The fact that Donovan had been cited in the Masselli wiretaps apparently did not even reach the FBI's Washington headquarters promptly. When Edwin Meese, a top Reagan transition adviser, asked FBI Director William Webster in December 1980 whether the FBI had any information linking Donovan to organized crime, Webster responded, "I know of nothing to hold up the nomination at this time." The director wrote a memo saying that the FBI's 59 field offices had run checks on Donovan with no negative findings. In fact, no such national FBI survey had been made.

Reading news accounts of Donovan's nomination, the informer Orlando became angry. He told New York FBI agents that the Schiavone company was "mobbed up" and claimed that Donovan had been "acquainted" with mobsters on both "a business and social basis." This information was relayed to FBI headquarters on Jan. 8 and Jan. 10,1981. So was one comment about Donovan from the Masselli wiretaps. On Jan. 11, all this was passed on to Fred Fielding, a Meese aide who is now White House counsel. But neither Meese, Fielding nor Webster told the Senate Labor and Human Resources Committee about the derogatory information before Donovan's confirmation hearings began on Jan. 12. It was only after that hearing had been concluded that the FBI finally advised the Senators about allegations that Donovan had been linked with mobsters. This caused the committee to res open its hearings. But the FBI still did not mention the Masselli wiretap references to Donovan, apparently to avoid embarrassing Webster, who had so recently given Donovan a clean bill. Donovan was overwhelmingly confirmed on Feb. 3.

After TIME and the Washington Post revealed the existence of the Masselli wiretaps and reported that the FBI had withheld information from the Senate committee, a flurry of investigations began. Special Prosecutor Silverman was appointed. The Senate committee probed the FBI'S mishandling of the case. Meanwhile, the Schiavone company hired its own detectives to find out who was leaking information about Donovan and the company. The private detectives even secretly recorded conversations in offices of the Senate committee's staff.

Company officials are also suing TIME, FORTUNE and two New Jersey newspapers for libel.

Silverman interviewed Orlando but apparently doubted his credibility. Edward McDonald, chief of a federal strike force that had been unable to gain access to the tapes, decided to turn Orlando over to Merola. By then, the Bronx D.A. had secured convictions of two gangsters in the slaying of Masselli's son Nat, who had been cooperating with Silverman. At the 1983 trial, Bronx Assistant District Attorney Martin Fisher claimed that young Masselli had been killed in order "to help and protect" the Schiavone company and Donovan.

Merola's assistant Stephen Bookin obtained a court order for the Masselli tapes early this year, but was stalled for months by the FBI before getting them. In the New York FBI office, Walton admitted barring his agents from talking to Merola's staff. At least one agent was disciplined for giving information to the Bronx investigators anyway. FBI headquarters last week ordered an internal investigation into the way its New York office had handled the Masselli wiretap evidence. Despite the lack of FBI assistance, Bronx Detectives Michael Geary and Lawrence Doherty finally put together the case that the feds had declined to make.

As for Donovan's personal role in any alleged crimes, Merola insisted last week, "Donovan benefited from the skullduggery. He was part of the operation. He knew about specific transactions." The Bronx D.A. will now have the difficult task of proving that to a jury.

Donovan firmly proclaimed his innocence. Declared he: "Merola may have won today's battle by the misuse of his office, but I guarantee you he will not win the war... I fully expect to resume my duties just as soon as this injustice has been dealt with." Whether justice or injustice, dealing with it is likely to take months.

* In the Teapot Dome scandal of 1923, Secretary of the Interior Albert B. Fall and Attorney General Harry M. Daugherty were charged with crimes after leaving office. So were three Nixon Administration officials in the Watergate period: Attorney General John Mitchell, Attorney General Richard Kleindienst and Commerce Secretary Maurice Stans.