Let's Make a Deal - The American Spectator | USA News and Politics
Let’s Make a Deal

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.

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