Whatever happened to ULLICO? From 2002 to 2004, it was hard to
avoid the headlines. The Union Labor Life Insurance Company was
organized labor’s version of Enron.
The company’s board members and upper management had made
millions and possibly tens and even hundreds of millions of dollars
from what appeared to be flagrant insider trading, leaving the
company dangerously close to collapse. Worse, the workers whose
assets were tied up in union benefit plans bore the ultimate
cost.
The U.S. Department of Labor, the House of Representatives and
the Senate each launched investigations. The House and Senate
reached damning conclusions, which were a precursor to a
settlement, announced by the U.S. Department of Labor (DOL) in
November. Without admitting formal wrongdoing, ULLICO agreed to pay
$20 million in restitution, back taxes and penalties. Given the
evidence, taking the government’s offer seems like a smart
move.
The Washington, D.C.-based ULLICO is a privately-held company
that was established in 1925 to provide modest-cost life insurance
for union members and their families. In recent decades, ULLICO has
diversified into a full-service financial network, organized
labor’s equivalent of Citigroup or Prudential.
The expansion didn’t go off without a hitch, unfortunately.
During the late '90s, company officials engaged in business
practices that seemed to defy law as well as common sense. The
Department of Labor charged that the firm had failed to disclose
its financial condition to benefit plan investors, a clear
violation of the Employee Retirement Income Security Act
(ERISA).
Most of the $20 million settlement will consist of payments to
replenish a ULLICO annuity plan, “Separate Account J,” better known
as “J for Jobs.” The company had set up the fund 30 years ago to
invest union member benefits in secured mortgages on commercial and
residential developments, with construction to be performed by
workers belonging to AFL-CIO-affiliated unions.
As part of the settlement, ULLICO also agreed to be barred from
accepting compensation without prior approval from independent
fiduciaries.
THE THING THAT originally raised eyebrows was an apparent
sweetheart deal between ULLICO and a telecommunications startup
company, Global Crossing. Founded in 1997, Global Crossing had a
vision to build a worldwide fiber-optic network.
It seemed a good match, politically. ULLICO — that is to say,
American unions — was solidly Democratic. Global Crossing’s
founder and chairman, Gary Winnick, was a top party donor and
fixer. Then-Democratic National Chairman Terry McAuliffe admitted
to the New York Times’ Jeff Gerth late in 1999 that he’d
turned his initial $100,000 investment in Global Crossing stock
into $18 million, and made millions more after the company went
public in 1998.
(As a reward, McAuliffe arranged for Winnick to play golf with
President Bill Clinton. Not long after, Winnick donated a million
dollars to help build the Clinton Presidential Library. McAuliffe,
in fact, operated out of downtown Washington offices owned by
Winnick, who at the time touted himself “the richest man in Los
Angeles.”)
In 1997, ULLICO bought 33 million shares of Global Crossing at a
pre-IPO price of 23 cents a share. That worked out to about $7.6
million. Buying in at ground zero was a steal of a deal. During
1999, Global Crossing’s price would exceed $60 a share.
ULLICO then effectively borrowed against this anticipated
windfall to invest heavily in real estate. The company laid out
$160 million for the construction of its new headquarters and
another $10 million for 120 acres of vacant land outside Las Vegas
for a future residential development that never materialized.
As long as Global Crossing’s stock was rising, ULLICO could reap
the whirlwind. But almost anyone could see that price-to-earnings
ratios — at Global Crossing and in the telecom sector as a whole
— were way out of whack, and headed for a fall.
ULLICO’S TOP BRASS did not have to live with the consequences of
the correction. The 28-member board of directors, which included
AFL-CIO President John Sweeney, already had established some
unorthodox by-laws giving themselves stock buyback rights.
The contingency plan would come in handy. Internet and telecom
stocks went bust during 2000-02. Global Crossing stock became
nearly worthless, falling to below $1 a share, and the company in
January 2002 declared bankruptcy, the fourth-largest in U.S.
history.
At the same time, ULLICO was sustaining heavy operating losses.
But its directors and management, having camouflaged this “perfect
storm” from its ERISA-covered investors, exited via golden
parachutes, realizing $305 million in post-tax capital gains on the
original $7.6 million investment.
Then-ULLICO Chairman and CEO Robert Georgine alone collected an
estimated $20 million in stock profits, bonuses and benefits during
1998-2001. Other senior executives and board members also cashed in
handsomely. Rank-and-file union members who’d put their money in
ULLICO weren’t so lucky.
The House Committee on Financial Services, chaired by John
Boehner, put together an investigation. Its final report, released
in October 2003, stated that the “union leaders who set up these
sweetheart stock transactions may well have violated federal labor
and pension laws.”
Senator Susan Collins, who chaired the Senate Governmental
Affairs Committee, called the scandal “an extraordinary case of
insider trading, corruption and abuse of power.”
ULLICO BRASS WERE defiant. Boehner’s committee had subpoenaed
Robert Georgine, who took the Fifth Amendment, and then resigned
from the board. When the Maryland Insurance Administration sued
ULLICO to enforce a subpoena to demand information on stock
transactions, the company promptly filed a motion to block the
subpoena.
The company did subject itself to an internal investigation
overseen by former Illinois Republican Governor Jim Thompson. But a
special advisory committee to the board, acting at Georgine’s
behest, rejected the advice of the Thompson report that board
members give back $6 million in profits from the sale of Global
Crossing stock.
All the while, the Department of Labor was doing its own
digging. The DOL filed suit in March 2002, charging ULLICO had
violated ERISA requirements in its Las Vegas land deal. Two years
later, the department won a $2.4 million consent judgment against
its basic subsidiary, Union Labor Life Insurance Co., and an
investment consultant, Trust Fund Advisors, forcing them to repay
restitution to a pair of funds run by the Laborers International
Union of North America.
This preliminary action set the stage for the DOL settlement
announced this past November. Though the new agreement has all the
hallmarks of a slap on the wrist, the department appears satisfied
that it’s more than that.
“Self-dealing by pension fiduciaries at the expense of workers’
requirement plans cannot be tolerated,” said Labor Secretary Elaine
Chao. “This $20 million settlement is a loud and clear message to
all plan fiduciaries that they will be held accountable when their
actions are detrimental to workers’ benefit plans.”
ULLICO’s current CEO, Mark Singleton, disagreed about what the
settlement says, calling it instead a “good-faith
disagreement over whether legitimate, reasonable and customary fees
were sufficiently disclosed.” Of course, most good-faith
disagreements do not result in $20 million settlements.
Singleton did, however, emphasize that his company has changed.
“Since 2003,” he said, “we have taken the necessary steps to ensure
a strong financial foundation for ULLICO investors, including
conducting conservative investment and reserving practices,
establishing strong liquidity, and building very high capital
levels.”
It may be true that ULLICO has righted itself. If the settlement
can help remove the legal cloud from this major insurance and
financial-services provider, with some $5.3 billion in total assets
under its control, that’s a good thing.
But the fact remains that some people really did make off like
bandits — and self-righteous bandits at that. When ULLICO’s
troubles became known, the AFL-CIO’s Sweeney pushed for only an
internal investigation. At the same time, he and other labor
officials were demanding full-scale public probes into Enron,
WorldCom, and other scandal-ridden corporations not dependent upon
union largesse.
Hopefully, the settlement can help to remind the company’s
current management that its central simple mission remains the same
as when life insurance was its sole niche. They should serve the
best interests of union members and steer clear of sweetheart deals
for union bosses.
