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Wall
Street Journal, April 5, 2002
Page 1
Union Bosses on Insurer's Board
Reaped Profits With Stock Deals
By TOM HAMBURGER and JOHN HARWOOD
Staff Reporters of THE WALL STREET JOURNAL
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
collapse.
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,
respectively.
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
morality."
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
<'"http://online.wsj.com/mds/companyresearch-quote.cgi?route=BOEH&template=company-research&ambiguous-purchase-template=company-research-symbol-ambiguity&profile-name=Portfolio1&profile-version=3.0&profile-type=Portfolio&profile-format-action=include&profi>Cigna
Corp. and the union-owned Amalgamated Life
Insurance Co., among
others.
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
determined.
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
earlier.
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
return.
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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