(FORTUNE Magazine) – How did the feds get in this mess?

Only a month earlier, their star reformer, International Brotherhood of Teamsters boss Ron Carey--a man whose ascension and reign the government had abetted--scored a stunning victory in the United Parcel Service contract squabble. But there sat Jere Nash, Carey's former campaign manager, weeping in a New York courtroom, trying to explain why he and two fellow aides funneled illegal contributions to Carey from the union's treasury. Nash said he and his cronies broke the law to prevent a 1996 election victory by rival James Hoffa Jr., which they believed would have opened the door to organized crime. "I have successfully resisted ends-justify-the-means thinking before this campaign," said Nash.

It got messier. Just days after Nash's courtroom appearance, the government's overseer of the Teamsters' election, Barbara Zack Quindel, was embroiled in controversy. Quindel, who had invalidated Carey's reelection right after the Teamsters struck a deal with UPS, recused herself from deciding whether Carey could run again in the new election. She stepped aside to avoid any appearance of conflict of interest on her part after revealing that she and her husband had links--through an obscure liberal political party--to the Carey campaign. And now there are signs that the illegal-contribution flap is spreading to the Democratic National Committee and the Clinton-Gore campaign, both of which have benefited under Carey's tenure.

At first blush there doesn't seem a whole lot to get worked up about. As any Teamsters student knows, scandal is the calling card of the nation's most notorious union. Four of the union's past six presidents had been indicted on criminal charges; three of them (including Hoffa's father) went to prison. But this time it was going to be different. Government officials, who have been supervising the Teamsters since 1989, had supported Carey and billed him as a white knight who would clean up the country's most corrupt labor union.

As it turns out, the government and Nash, Carey's former campaign manager, have a lot in common. In their zeal to reform the union--and keep young Hoffa on the outside--the feds did their best to keep Carey in power and his image clean. And for both Nash and the government, that strategy backfired. It isn't entirely clear whether the government acted in concert to cover up for Carey. But the feds at the very least appeared to overlook evidence that Carey was far from the golden boy he was portrayed as. Since his first election in 1991, Carey has been plagued by charges that range from questionable real estate dealings to alleged Mob connections. In most cases he was exonerated by the Independent Review Board, or IRB, a three-member panel created to police the union. The IRB doesn't see it that way. Responding to criticism of a 1994 report clearing Carey of wrongdoing, the IRB's William Webster told FORTUNE: "I never viewed it as a vindication. I viewed it that the charges were not proved." Added the former FBI and CIA chief: "There's been no look-the-other-way attitude on anything." Carey, who has said he's a "victim" in the union's campaign- financing scandal, declined to be interviewed.

To understand how the government got into this bad marriage, go back to 1989. That's when the Teamsters settled a massive civil racketeering suit that accused its leaders of having forged a "devil's pact" with the Mob. The deal, known as a consent decree, was negotiated by the Justice Department and is administered by an 87-year-old federal judge, David Edelstein, in New York. In the past, Teamsters bosses had always been handpicked by a coterie of top brass. To avoid a government-imposed trusteeship, the Teamsters agreed to allow their 1.6 million members to elect their president. The rank and file chose Carey in the first two elections.

And as far as the government was concerned, Carey was just the guy to clean up the union. At least he looked good to the public. In 1978 he was trumpeted in Steven Brill's bestseller The Teamsters as the kind of "fiercely honest" man who should be running the entire brotherhood. When Carey ran for the top spot in 1991, the press coverage was bathed in glorious blue-collar images: the tuna-sandwich, suit-off-the-rack kind of guy who married the girl next door, had five kids, and spent vacations in his Queens backyard. Great stuff. To be fair, Carey has had a hand in cleaning up the union. With prodding from the IRB, he has imposed trusteeships at more than 70 tainted locals. The trouble is, that was only part of the Ron Carey story. Scratch the surface and it becomes clear that Carey had more in common with the old Teamsters bosses than the public was led to believe. As proof, we offer the following sampling of cases where the IRB appeared to bend over backwards to help Carey become the Teflon Teamster.

CHARACTER WITNESS

In recent years the IRB has removed numerous Teamsters leaders for associating with mobsters. But those same rules apparently didn't apply to Carey.

Let's return to 1975, when Carey's only job was as the president of Teamsters Local 804, a UPS outpost in New York that he continues to lead. At the time, Carey testified on behalf of gangster John Conti, a member of the local who was on trial for a Mob-related loan-shark shakedown scheme in which two men's lives were threatened. He stated that he had known Conti for five years and that the defendant enjoyed a reputation in the community as "a peaceful and decent guy, a regular guy." Thanks in part to Carey's testimony, Conti was acquitted, while his two co-defendants were convicted.

Conti is today a "made" soldier of the Lucchese crime family, according to a Senate subcommittee. (In a bizarre interview several years ago with this reporter, Carey said he remembered Conti, but doubted he "ever would have testified" on the man's behalf.) The IRB response? The board cleared Carey after noting that the gangster had not become a "made" member until two years after the trial. The IRB report neglected to mention that mobsters must serve as family "associates" (often for more than a decade) before they are officially inducted. What's more, the consent decree bars Teamsters from knowingly consorting with "any member or associate" of the Mob.

SEE NO EVIL

Another way to lose your union job? In 1992, Missouri's top Teamster, Robert Sansone, was banished by the IRB for conducting an inadequate investigation of an underling who was linked to the Mob in some newspaper articles. Like the Mob-association clause, the Bobby Sansone rule didn't count when it came to Teamsters boss Carey. Consider the case of John Long, Carey's treasurer and right-hand man at Local 804. Back in 1983, Carey's local received a federal subpoena--served directly to Long--seeking all records and phone calls from 1980 through 1982. The subpoena included all records of contacts with Jesse Hyman, who was linked to the Mob in news stories. One article in 1980 had referred to a dead Teamsters official who had been found in the trunk of Hyman's car. Carey dismissed the probe of his local as a trivial matter; under oath, he says Long assured him that "it really wasn't any big deal...and that was the end of it."

In 1987, John Long was indicted for taking kickbacks from Hyman in return for investing the local's money in a Mob-linked pension-fund scheme (his conviction was overturned, but the IRB barred him from the union anyway). Carey received immunity for his testimony in the Long case. He said he had no recollection of the payments, even though they were the local's largest investments--and even though he signed both the checks and the monthly financial reports that reflected them. Long claims that Carey knew about the investments in the early '80s and fabricated minutes of meetings after they were subpoenaed.

Carey has said that Long is lying. The bottom line: Carey had not even conducted a cursory probe into Long's activities on behalf of the union after his right-hand man received a subpoena--and in the face of press accounts that detailed the Mob's involvement in the pension-fund scheme, called Penvest. At the least, Carey was woefully ignorant of what his most important aide was doing behind the scenes. For example, in a 1982 FBI memo obtained by FORTUNE, a Mob informer describes a gathering at a restaurant between several major gangsters and two of Carey's "representatives," including Long. They were allegedly meeting to resolve a jurisdictional dispute involving Carey's local. A second FBI memo, from 1988, mentions a "priority investigation of LCN's [La Cosa Nostra] control of Teamsters Local 804." IRB officials, in their probe of Carey, managed to ignore the Long scandal.

BAD PAPERWORK

After Carey was elected, the myths surrounding the blue-collar hero began to evaporate. Carey had put $6,000 into the race and was supposedly so broke that he galvanized thousands of union volunteers to donate money. Yet within weeks of taking office he purchased a posh beachfront property in the Florida Keys for $340,000. It was also discovered that Carey's father had left his six sons nearly $2 million in stock in UPS, a Teamster employer. Carey said he never disclosed the holdings because he never knew they existed. Even Carey's family-man image took a beating. It was later revealed that Carey had gotten a bank employee to notarize his forgery of his estranged wife's signature in connection with real estate that he had purchased with a girlfriend in the 1980s. In one case a contract signed by Carey identifies him falsely as a "single man." In another case he persuaded two union people to witness his wife's signature, which he forged. Carey gave shifting explanations for his actions, but in the end, his wife came up with an affidavit stating he had permission to sign her name. Even so, this might have toppled an ordinary Teamster. (The IRB once filed a charge against a Florida Teamster for "bringing reproach upon the union" by having lied on a personal loan application.) Here's the IRB justification for not taking action on Carey's tampering: "There was no party financially relying on the [Carey] document."

FRIENDS OF RON

One of Carey's first moves as Teamsters boss was to install William Genoese as the head of a Mob-controlled airport workers' local in New York. Carey's selection was vetoed by IRB honcho Frederick Lacey, now age 77, who declines to be interviewed. In 1992, he called Genoese "unbelievably oblivious" to corruption and cited his lengthy pattern of nepotism and misuse of union funds. What's more, federal witness Alfonso D'Arco, the former boss of the Lucchese family, identified Genoese as an important associate of the clan. "If even a casual look had been taken at Genoese's background, you would have known that this was a terrible mistake," Lacey told this reporter at the time. "And Mr. Carey knew that. He thought he could get away with it." But while Lacey, a former federal judge, was reprimanding Carey on the one hand, the Justice Department was trying to gussy up the Teamsters leader on the other. And Alfonso D'Arco was right in the middle of it.

A confidential FBI memo, dated just weeks before Carey took office, declared that witness D'Arco was linking Carey with the Mob. According to D'Arco, years ago Carey had agreed to honor illegal pickets that D'Arco would discuss with him by telephone. The government was suddenly in a quandary. D'Arco was considered the best and most articulate Mafia turncoat ever to emerge. If he was wrong about Carey, his credibility as a witness in numerous trials would be damaged. And if D'Arco was telling the truth, then the federal oversight of the Teamsters would come under attack. (D'Arco had never met Carey and had linked him to the Mob largely on the basis of what two other mobsters had told him. Then again, D'Arco had never met Genoese either, but his secondhand information was acceptable for the IRB when it booted Genoese from the union.)

By 1993 rumors about Carey's Mob ties were swirling around the union. Judge Edelstein blasted the union boss for actions that "presage tolerance of organized crime" and "suggest a desire ... to cloak corruption in secrecy." Carey, it seemed, didn't do much to discourage those conclusions. For example: The year before, Carey terminated the trustee of Local 239 on New York's Long Island. Whom did he pick as the local's new leader? Patrick Bellantoni, who, according to turncoat D'Arco, was better known to the wiseguys as "Pat Lagano," a protector of Lucchese family interests. The government could have made a decent argument for tossing Carey out of the union. But Hoffa Jr. was gaining support. Perhaps the boss didn't look so bad after all. Suddenly it seemed the relationship between the Teamsters and the IRB was transformed. Carey, who frequently clashed with the IRB after his election, stopped stalling on IRB requests to place tainted locals in trusteeships. He also stopped attacking Lacey in public.

Meanwhile the IRB seemed to be covering for Carey. In September 1993 the Washington Times reported that the IRB was investigating charges that Carey had Mob ties. The IRB immediately wrote to the newspaper, demanding a correction and claiming that it had "absolutely no credible evidence supporting any allegations of improper ties." Two months later the D'Arco FBI memo was revealed by this reporter in Time magazine, prompting Lacey to announce that "the matter is still open."

CALLING OFF THE COPS

In 1992, Michael Moroney, who had spent 17 years investigating labor rackets for the government, teamed up with former top prosecutor Thomas Puccio to serve as the court-appointed trustees of New York's Local 295, which had long been dominated by the Lucchese family. By 1993 it became clear to the trustees that a corrupt sister local (851) was stealing all the business away. But when Moroney and Puccio sought to extend their trusteeship to 851, Carey joined hands with the tainted local to fight them. The Lucchese clan has long dominated 851, as Moroney reminded Carey in a stinging letter. During the fight with Carey, the trustees received FBI approval to meet with D'Arco, the former Lucchese boss. "I spent two days with D'Arco, and he berated me for being conned into believing that Carey was a reformer," says Moroney today. "He said that Carey was always an asset of the Lucchese crime family. Ever since, I've been screaming that Carey is a half-assed racketeer and scoundrel, and I've been vilified for it by the Justice Department."

Armed with D'Arco's claims, Moroney and Puccio met in early 1994 with Charles Ruff, a prominent ex-prosecutor whom Carey had just hired as a Teamsters attorney. The trustees told Ruff that if Carey continued to block their efforts to take over Local 851, they would have to enter evidence in their case that linked Carey to the Mob. Ruff fired off a letter to Lacey, relaying the threat by the two trustees. Lacey, in turn, penned an extraordinary private letter to Puccio, dated April 1994, in the midst of his "investigation" of Carey's alleged Mob ties. Lacey reminded Puccio, "I told you that I thought you and Mr. Moroney ought to have in mind what would happen if you brought Carey down, in that there were 'old guard' Teamsters throughout the country that were hoping Carey would be eliminated as a candidate in 1996.... You indicated that you had not given any thought to that but you would keep it in mind."

Lacey's letter seems to have worked. Puccio capitulated, Moroney was forced to resign, and Ruff has since moved on to become White House counsel. "Instead of treating all these guys [Teamsters officials] as rascals, Lacey embraced Carey and protected him," insists Moroney. "And Ruff got a legitimate investigation of Carey stopped." Ruff calls the allegations "blatant nonsense," while Puccio won't return phone calls. In the wake of the storm, however, an investigator telephoned Puccio and posed as a member of a congressional committee. In the taped conversation, a copy of which was obtained by FORTUNE, Puccio is asked whether Lacey has chosen sides. "Off the record, that's probably right," said Puccio, who added: "I think the Southern District [U.S. Attorney's office] has sort of taken sides. This is what Lacey's group has said.... It's a complex problem."

In July 1994 the IRB published its report, giving Carey a clean bill of health. Judge Edelstein, the Teamsters' overseer, never reprimanded Lacey after his letter was made public a year later.

ENEMIES LIST

The IRB, intentionally or otherwise, would also prove useful in helping Carey get rid of his enemies. One of Carey's harshest critics was Gene Giacumbo, who once served on Carey's international board as a vice president. At the time of his election, Giacumbo renounced a "second" salary of $52,000 at his local, even though he was legally entitled to take it--an act that made him very popular with reformers. But when Giacumbo learned about Carey's alleged Mob ties and posh real estate purchases in 1993, he demanded audits of the union's books. Instead, Giacumbo found himself the target of audits by Carey and the IRB that led to his banishment from the union. His big crime: Taking a duplicative $400 car allowance for a four-month period.

By 1995 the relationship between the IRB and Carey seemed to be downright cozy. A memo from this period recently obtained by FORTUNE reveals that a top Teamsters official created a "To Do List for Judge Webster," the IRB member. The memo is written by Bill Hamilton, the union's government affairs director, who is refusing to cooperate with investigators in the current election-funding scandal. At the time, the Teamsters were hoping to receive $11.6 million in congressional appropriations for the 1996 election. The memo advises Webster to call various lawmakers to explain that "as a member of the IRB, he has special knowledge of the importance" of continuing the government's cleanup effort, as well as "the importance of running a clean election." Webster acknowledges his lobbying activity but says he did it only at the direction of the Justice Department. "I was not taking any kind of instruction from the Teamsters," he says. "I can't be responsible for what people put in notes."

Carey seemed to get even more help. At the Teamsters convention in 1996, Carey was in trouble when most delegates supported Hoffa. Luckily for Carey, the IRB then issued reports recommending that the Teamsters boss impose trusteeships on three major locals (Chicago, Dallas, and Philadelphia) that were friendly to Hoffa. The "tactical timing" of the IRB's actions was questioned in a letter to Attorney General Janet Reno from Representatives Henry Hyde and Peter Hoekstra, who were starting an investigation into the government's oversight of the union. The Philadelphia case involved Local 107, which the IRB accused of organized-crime ties and a "lack of financial controls." But the misuse of funds was largely historical and amounted to less than $3,500. Moreover, the Mob ties of the local's boss were "tenuous at best" or had "already been severed," concluded a Philadelphia judge. "You have to understand that after Carey was defeated at the convention, a campaign of intimidation began that was initiated by the IRB," maintains Hoffa attorney George Geller, who also denies any Hoffa ties to organized crime. "The message was clear: If you supported Hoffa, you had better keep quiet or your local would be turned over to a trustee."

Today, Carey's demise seems inevitable. Before resigning, election officer Quindel announced that "additional information" would force her to reconsider whether to disqualify the boss from the new election scheduled for early 1998. Quindel will now have to pass those tips over to her successor, Kenneth Conboy, a retired judge. Meanwhile, more indictments are expected, perhaps as you read this article, and there is a reasonable suspicion that Carey could be among those named. His three aides have reportedly claimed that Carey was aware of the election scheme.

Even if Carey dodges an indictment, his credibility will be severely damaged. He doesn't recall authorizing the payments at the heart of the current scandal (his secretary says he did). He didn't know that a chunk of the money was being laundered into his campaign (even though Nash, his campaign manager, explained the laundering scheme to the same secretary). He didn't know that Nash was spending half his time working for the Clinton-Gore campaign, where, according to the Wall Street Journal, a memo was prepared in the office of a Clinton-Gore official that spells out a contribution swap scheme between the DNC and the Carey campaign.

None of this seems to rattle the IRB. "It's not time to declare victory, but things have come a long way since the days when a significant percentage of the IBT presidents went to jail," says William Webster. "We haven't seen that lately." No, Judge Webster, but there's still time.