Wall Street Journal, April 5, 2002

Page 1                     

Union Bosses on Insurer's Board
Reaped Profits With Stock Deals


WASHINGTON -- AFL-CIO President John Sweeney denounces "Enron
Economics" that enrich corporate executives at the expense of
ordinary workers. But some of his fellow labor leaders have turned
their board membership at a union-owned insurance company into a
source of personal gain.

Consider how Martin Maddaloni, president of the plumbers union, has
benefited from his role as a director of Ullico Inc. The privately
held company, formerly known as Union Labor Life Insurance Co., was
founded in 1925 to provide low-cost life and health insurance to
blue-collar union members. In the late 1990s, guided by a politically
connected financial adviser, the formerly staid Ullico bet on the
technology boom. It invested in Global Crossing Ltd. As the
telecommunications start-up exploded in value, Ullico's own closely
held shares ballooned, too.

In 2000, Mr. Maddaloni says, he reaped a profit of roughly $184,000
by selling 2,000 of his Ullico shares back to the insurer. He did so
after serving on its board for two years. "I didn't think there was
anything wrong with it," says the 61-year-old union veteran. Ullico's
in-house lawyers had blessed the transaction, he says. "I just took
advantage of the process."

He and other labor leaders could lock in profits because of the
company's method of fixing its stock price annually. A platoon of
union chiefs responsible for serving their members used Ullico as a
means of enriching themselves.

Conflict Question

Their actions are now the subject of a federal grand-jury
investigation here. The probe's focus, according to people familiar
with it: Did certain Ullico repurchases of its stock in 2000 and 2001
illegally confer benefits on some board members at the expense of
their unions, which also invested in the company?

Apart from potential criminal liability, there is the question of
whether union leaders' dealings in Ullico stock created a conflict of
interest that violated civil labor law. The U.S. Department of Labor
is separately investigating that question -- a probe that potentially
could lead to removal of union officials and civil fines.

Internal Ullico documents show that officers and board members cashed
in some 71,000 shares of company stock from January 2000 to September
2001. Like Mr. Maddaloni, they had the opportunity to benefit from
the insurer's practice of fixing its stock price annually -- and
holding the price in place -- even if Ullico's investments were
declining in value. That is in fact what happened when Global
Crossing stock, after skyrocketing initially, wilted last year as the
company spiraled toward bankruptcy court. The Ullico story offers
another example of the vast ripple effects of the epochal telecom

Company proxy statements reviewed by The Wall Street Journal don't
record the precise dates on which directors sold their shares. But
based on the fixed price at which Ullico shares traded during most of
that 21-month period, those transactions may have earned half a dozen
or more sellers hundreds of thousands of dollars each -- a total of
$6.5 million or more in profits. Board members themselves approved
the prices and rules that governed these sales. (As a private
company, Ullico generally isn't required to make public filings with
the Securities and Exchange Commission.)

Stock Sales

Ullico Chairman Robert Georgine, former head of the AFL-CIO's
building-trades division, sold 4,000 shares, the proxy statements
show. William Bernard, another director and former head of the
asbestos-workers union, sold 8,664 shares. Board members Jacob West,
former president of the ironworkers union, and Douglas McCarron,
president of the carpenters union, sold 5,250 and 3,000 shares,

Messrs. Bernard, West and Georgine declined to comment. Through a
spokesman, Mr. McCarron said, "We think the transactions were
conducted properly" and declined to elaborate. A company spokesman
for Washington-based Ullico declined to comment.

Mr. Sweeney, who is also a Ullico board member, said through a
spokesman that he has never sold any company shares. A handful of
other board members say the same thing.

"My interest is to see that workers are given proper [insurance]
coverage," not to profit from board service, says Lenore Miller, a
Ullico director and former president of the retail-workers union. Ms.
Miller says she hasn't touched the token 42 shares she bought years
ago, now valued at about $3,100. If other board members reaped big
profits, she adds, "that is for them to answer for their own

In the universe of privately held companies, the way the Ullico board
fixed the price of its stock and structured stock repurchases "is
absolutely standard-operating procedure," says Robert Willens, an
analyst with Lehman Brothers Holdings Inc. in New York who
specializes in the area. Directors of such companies routinely take
the windfalls those procedures can produce, Mr. Willens says.

But such lucrative paydays for directors raise questions at Ullico,
which wasn't an ordinary commercial company. Its stated mission: to
"answer the needs of unions and their members."

Global Crossing's swift demise has left Ullico without the financial
buffer it had previously enjoyed. That, in part, has led to a
lowering of the company's rating by A.M. Best Co. and other
insurance-rating firms. The reduction could discourage unions from
investing in Ullico and from buying its policies for its members.

The company did make an aftertax profit of $330 million when it sold
part of its Global Crossing stake in 1999 and 2000. But it didn't
sell all of its holdings in the telecom company, holdings that are
now virtually worthless.

Seventy-seven years ago, when the American Federation of Labor
created Ullico, many blue-collar union members couldn't afford basic
life and health insurance, or didn't know where to obtain it. Over
the decades, general-purpose insurance carriers encroached on the
union market. Ullico, which today provides a range of financial
services, competes against big names in the industry such as
Corp. and the union-owned Amalgamated Life Insurance Co., among

Since its founding, Ullico has ensured labor-movement control of the
company by making its stock available for purchase only to unions and
officers and directors of the company. While rank-and-file union
members are technically eligible to buy stock, few if any of them are
thought to own shares. All stock purchases have to be approved by the
32-person board. Unions hold the vast majority of the stock. But the
precise ownership structure isn't public information and couldn't be

Conservative Tradition

For most of its history, Ullico hewed to a conservative investment
strategy and kept its own stock at the fixed price of $25 a share.
There was little trade in the stock. But the company shifted its
approach in 1991, when it hired Michael Steed, first as an outside
financial adviser and later as a senior executive.

Mr. Steed had worked with labor leaders as an official at the
Democratic National Committee. He quickly introduced an aggressive
strategy to modernize Ullico's finances and raise capital to compete
for more business. Ullico raised some $220 million by selling
additional stock to union entities and took a bolder approach toward
investing that capital. Later, the company introduced a new
stock-repurchase plan to replace its long-standing 10% annual
dividend to shareholders.

The company's 32-member board, mostly current and retired union
presidents with little finance expertise, went along with these
proposals. The new strategy paid off quickly.

In 1992, Ullico joined forces with the Carlyle Group, a politically
plugged-in merchant-banking firm in Washington. Carlyle's principals
at the time included David Rubenstein, who had served in the Carter
White House, and Frank Carlucci, former secretary of defense during
the Reagan administration. Ullico and Carlyle bought the aircraft
division of defense contractor LTV Corp., which was then in
bankruptcy-court proceedings.

Ullico used its clout as an investor to force an extension of a
collective-bargaining agreement with LTV workers, according to a
study published by Cornell University Press. The insurer sold its
stake for $14.3 million, nearly tripling its investment two years

But the investment that would alter Ullico's fortunes more
dramatically involved a start-up then known as Atlantic Crossing. The
company sought to lay a broadband cable beneath the ocean to Europe
that could carry high-speed Internet traffic. Later the venture
adopted world-wide ambitions and became Global Crossing.

In the late 1990s, Gary Winnick, the California-based financier who
launched Global Crossing, was looking for early investments in the
company from a variety of politically connected figures. These
included Terry McAuliffe, now Democratic national chairman, who
chipped in $100,000, and former President Bush, who accepted Global
Crossing stock as a speaking fee. In 1997, Ullico agreed to get in on
the ground floor as well, investing $7.6 million in the venture. The
labor investment gave the new company credibility with other
investors and political clout with state and federal regulators.

Ullico and other early Global Crossing investors initially saw
spectacular growth as the company went public in 1998 and rode the
wave of Internet enthusiasm. The stakes of Messrs. McAuliffe and Bush
swelled to more than $10 million apiece.

Ullico, which bought its shares at the "founders" price of about $1,
saw the stock go to $18 at the IPO. Then the stock split, and
eventually it peaked in May 1999, at $64.25. At the peak, Ullico's
Global Crossing stake was worth $2.1 billion -- nearly 10 times the
entire value of the insurance company when it first invested in
Atlantic Crossing about two years earlier, according to a person
familiar with Ullico's finances. Mr. Sweeney, the AFL-CIO chief, took
to praising Ullico's financial success as a model for boosting
labor's muscle.

The stratospheric rise in the Global Crossing investment produced the
opportunity for the labor leaders on Ullico's board to profit
personally. In 1997, the company hired Credit Suisse First Boston to
help set up a plan under which the insurance company would repurchase
its stock from shareholders as a way to allow them to benefit from
Ullico's new investment success, according to Ullico internal
documents. As a part of this plan, Ullico abandoned its old fixed
valuation of $25 a share and began adjusting its share price
annually, as determined by a year-end accountant's review.

The Global Crossing stake quickly drove up the value of Ullico's
stock. In late 1998, with Global Crossing trading at more than $22 a
share, after the split, and the year-end audit by
PricewaterhouseCoopers pointed to a share price of $53.94 for Ullico,
according to Ullico board minutes. Once that adjustment was ratified
by the board in May 1999, it remained in effect until the board acted
again a year later. In keeping with a stock-repurchase schedule it
had set previously, the board offered to have Ullico buy back as much
as $15 million worth of shares from investors seeking an immediate

But as the months went by, an opportunity for an even-bigger payoff
for individual stock holders appeared to lie in buying Ullico shares
rather than selling them. On Dec. 16, 1999, two weeks before the
books would close for Ullico's annual audit, Global Crossing closed
at $52.56 a share.

Confidential Invitation

On Dec. 17, Mr. Georgine, the Ullico chairman and former AFL-CIO
official, sent a confidential written invitation to Ullico senior
officers and directors: the chance to buy as many as 4,000 additional
Ullico shares each at the current price of $53.94. It couldn't be
determined whether any unions received similar invitations.

Given Global Crossing's still-high share price, it looked like the
value of Ullico shares was about to rise substantially, making the
purchase a prelude to near-certain profits. In case colleagues
doubted whether Mr. Georgine considered this a wise investment, he
wrote, "I intend to purchase additional shares at this time."

Sure enough, the Pricewaterhouse audit pointed to an increase in
Ullico's share value to $146, nearly triple its previous level,
according to board minutes. At its May 2000 meeting, the board
ratified that price.

But by the time the board acted, the tech bubble was already
beginning to burst. Global Crossing shares had fallen 45% from their
1999 peak, to less than $35. The drop reflected severe overcapacity
and general weakening among many new telecom companies.

Yet even as Global Crossing continued to slump as 2000 wore on,
Ullico directors approved another stock repurchase. In November 2000,
with Global Crossing having dropped below $25 a share, the board
voted to buy back $30 million in stock from shareholders at $146 a
share -- the value Pricewaterhouse had set nearly a year earlier,
according to board minutes.

In other words, the directors authorized themselves to sell back to
the company millions of dollars of Ullico stock that hadn't yet been
subjected to an imminent, unavoidable reduction in price related to
Global Crossing's accelerating fall.

All shareholders were eligible to participate, according to the
tender offer. But owners of more than 10,000 shares -- mostly the
unions -- faced certain complicated restrictions on how many shares
they could sell. Those with comparatively small stakes -- such as
board members -- were invited to sell all of their shares.

Board members took advantage of the opportunity. By the end of 2000,
the labor leaders -- Messrs. Bernard, West, Georgine, McCarron and
Maddaloni -- had made their stock sales.

In November 2000, Ullico's board even authorized Mr. Georgine to
extend the deadline for selling shares at $146 by five months --
through early May 2001. That meant the new deadline came months after
Pricewaterhouse performed an annual audit that was sure to reduce
Ullico's share value, in keeping with Global Crossing's decline. The
audit did lead to a cut in the share price, to $74, which the board
ratified in May.

Morton Bahr, president of the Communications Workers of America and a
board member, sold all 300 of his shares in early 2001, for a profit
of more than $27,000, a union spokeswoman says. Since then, Mr. Bahr
has become concerned about the propriety of stock trading by Ullico
board members, the spokeswoman adds. (Certain Wall Street Journal
employees, including its reporters, are represented by an affiliate
of the CWA.)

Mr. Sweeney of the AFL-CIO last month wrote a letter to Mr. Georgine,
asking him to set up a formal review of Ullico stock trading that
includes independent legal counsel. "Ullico must live up to the
standards we ask others to meet," he wrote. Mr. Georgine so far
hasn't responded, but several union presidents, including Mr. Bahr,
are supporting the Sweeney request.

Other Ullico board members dismiss concerns about the stock
transactions. "I didn't give it a thought," says Mr. Maddaloni of the
plumbers union. He adds that his union also sold Ullico's stock back
to the company at a gain, providing indirect benefits to
rank-and-file members.

Roy Wyse, a retired United Auto Workers official who says he didn't
trade Ullico stock, dismisses questions about the transactions. "I
don't know if that's any of your business," he says. "Everything
that's happened has been legal and legitimate and aboveboard."

Ullico's chief in-house legal officer, Joseph Carabillo, declined to
comment. He has been subpoenaed by the grand jury now examining the
transactions, according to people familiar with the situation.

The grand-jury investigation grew out of a separate criminal probe of
Mr. West, the former ironworkers president, according to a person
familiar with the inquiries. Mr. West was indicted last year and is
awaiting trial in Washington on charges of embezzling funds from the
union he once headed.

Mr. Steed, the financial adviser, left Ullico's employ in early
December 1999, not long after Global Crossing's share price peaked.
He went to work for a separate investment company run by Global
Crossing's Mr. Winnick. Mr. Steed has since left that job and runs
his own investment firm in Washington. Complaints filed in state and
federal court in Maryland show that he has sued Ullico, alleging its
top officers improperly denied him pension and stock benefits.

Write to Tom Hamburger at
<mailto:tom.hamburger@wsj.com>tom.hamburger@wsj.com and John Harwood
at <mailto:john.harwood@wsj.com>john.harwood@wsj.com

Updated April 5, 2002

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Horacio Grana was a retired member of the Carpenters Local Union 1506 in Los Angeles.
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