NATIONAL LEGAL AND POLICY CENTER
"Promoting Ethics in Government"
103 West Broad Street, Suite 620
Falls Church, Virginia 22046
703-237-1970, Fax 703-237-2090
Ullico And Global Crossing:
The Tip of the Union Pension Fund Scandal Iceberg
Testimony Before the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises
Committee on Financial Services,
U.S. House of Representatives
Kenneth F. Boehm
National Legal and Policy Center
Falls Church, VA 22046
Mr. Chairman and Members of the Subcommittee, thank you for this opportunity to testify.
My name is Ken Boehm and I serve as Chairman of the National Legal and Policy Center (NLPC). My legal center sponsors the Organized Labor Accountability Project which publishes Union Corruption Update, a fortnightly newsletter summarizing union corruption news and legal cases. Our database of union corruption case information is available on the web at www.nlpc.org and is used by the public, media, elected officials and union members as an authoritative archive of union corruption cases.
The Global Crossing bankruptcy, the fourth largest in U.S. history, has cost investors billions, resulted in over 9,000 people losing their jobs and has set in motion a federal investigation as to questionable accounting practices.
As a result of a series of recent articles in Business Week and The Wall Street Journal, a whole new controversy linked to Global Crossing has arisen. The focus is on Ullico, a privately held insurance company which is owned largely by unions and their pension funds. It was an early major investor in Global Crossing and its directors used the telecom’s volatile stock price history to personally enrich themselves at the expense of the union members and retirees whose pension funds own Ullico. Its board of directors is mostly made up of current or former union presidents and includes AFL-CIO head John Sweeney.
The multi-billion dollar Ullico was one of the original investors in Global Crossing, providing $7.6 million to the company in seed money. Global Crossing chairman Gary Winnick was pleased to get the early money and allowed Ullico directors the opportunity to personally buy the Global Crossing stock at IPO prices. This sweetheart stock investment deal allowed some Ullico directors to make millions off the sale of the stock according to labor officials. (“Global Crossing: Labor’s Questionable Windfall,” by Aaron Bernstein, Business Week, March 14, 2002) The fact that Gary Winnick offered such a lucrative deal to Ullico directors has raised questions as to the integrity of Ullico’s investment decision making with respect to Global Crossing as well as with other Ullico investments of pension funds into deals associated with Winnick during the same time period.
Ullico’s directors also benefitted personally from an arrangement set up in 1997, the same year Ullico made its original investment in Global Crossing, which allowed Ullico to repurchase its stock from shareholders. Departing from a practice of giving Ullico’s stock a fixed value of $25 a share, Ullico began changing its share price annually according to a value determined by an accounting review. Insiders knew in advance of the price change whether the stock would go up or down and set up a system that allowed them to buy or sell to lock in a profit. It was the equivalent of investing in the stock market when you knew for sure which way a given stock would go.
In practice, this scheme allowed directors to make virtually guaranteed insider profits.
Here’s the way Business Week labor reporter Aaron Bernstein describes how Ullico directors personally profited from the arrangement they approved for themselves:
Fall, 1999 Ullico is losing money on its operations but earns $127 million by selling some Global stock. Insiders knew those gains would lift the annual valuation of Ullico’s shares from $54 to about $146 when its books closed on Dec. 31.
December 1999 Ullico offers each director the chance to buy 4,000 Ullico shares at the 1998 valuation of $54. The union pension funds that own almost all of Ullico aren’t given the same offer, or even told about it.
Dec. 2000/Jan. 2001 Ullico buys back 205,000 of its 7.9 million shares at $146. Stockholders with fewer than 10,000 shares are allowed to sell all their holdings, so officers and directors can take full advantage, but the pension funds can’t. Insiders know the decline of Global Crossing’s stock puts the true value of Ullico’s shares closer to $75.
Dec. 2001/Jan. 2002 Ullico buys back an additional 200,000 shares, allowing officers and directors who hadn’t sold before to cash out at $75. Again, insiders know that the further collapse of Global has again cut Ullico’s true value, this time to $44.
March 2002 Ullico’s pension-fund shareholders now own a less valuable company. Its Global profits have gone disproportionately to officers and directors, some of whom are trustees of the union pension funds that lost out on the deal. (“Global Crossing: Labor’s Questionable Windfall,” Aaron Bernstein, Business Week, March 14, 2002) In a follow-up article to the one above, Mr. Bernstein summed up the Ullico controversy by stating, “The labor movement is being roiled by what could be one of its worst scandals in years.”
Just blocks from this hearing room, a federal grand jury has been hearing evidence about the Ullico case. Ullico officials have been subpoenaed to describe how board members bought and sold stock in the privately held Ullico.
The U.S. Attorney’s office originally came across the Ullico case while conducting a criminal investigation of Mr. Jake West, former head of the ironworkers union. Mr. West, a Ullico director since 1990, has been indicted on federal charges that he embezzled funds from his union. He is currently awaiting trial on the embezzlement charges.
Mr. West isn’t the only Ullico director with a questionable background.
Another director (since 1993) is former Laborers Union boss, Arthur Coia. A draft racketeering complaint by the U.S. Department of Justice in 1994 described Coia as influenced by organized crime. An internal memo at the time by the head of the Organized Crime and Racketeering section of the Justice Department referred to him more succinctly as a “mob puppet.” In January, 2000, Arthur Coia pled guilty to fraud for evading Rhode Island taxes on the purchase of a $1 million Ferrari.
Apparently, this guilty plea by one of its directors was not viewed as a problem to overseeing the integrity of billions in union pension funds. The Ullico board allowed Coia to remain on their board. As of today, he has refused to state publicly whether he profited from either the Global Crossing IPO stock deal or the insider Ullico stock deals.
One of the more interesting Ullico directors is Marty Maddaloni, a director since 1998 and President of the United Association of Plumbers and Pipefitters union. Maddaloni also heads one of his union’s pension funds which has been involved in one of the biggest real estate boondoggles in pension fund history. After purchasing the rundown Diplomat Hotel in Hollywood, Florida for $40 million, renovation costs ballooned to $400 million, then $600 million and finally, when the hotel opened two years late, the final cost was in excess of $800 million. An independent appraiser valued the property as being worth $587 million, more than $200 million less than the pension fund paid for the project.
The Hotel Diplomat renovation had numerous other problems. The construction was so mismanaged that walls tilted, floors sloped and pipes leaked. Some of the contractors hired for the job had been banned from New York City construction because of bid rigging.
To make matters worse, Maddaloni has recently written to union locals letting them know that the Department of Labor is nearing the end of its lengthy investigation of the Hotel Diplomat boondoggle and they may take action against the trustees of the pension fund as a result of that investigation.
Things haven’t been much better for Maddaloni on the Ullico front. In a front page story on April 5, 2002, Wall Street Journal reporters Tom Hamburger and John Harwood revealed that Maddaloni had reaped a profit of $184,000 selling Ullico shares back to the company. After describing the process of insider trading, the reporters concluded, “A platoon of union chiefs responsible for serving their members used Ullico as a means of enriching themselves.”
One of the Ullico directors most on the spot over the scandal is Morton Bahr, the longtime head of the Communications Workers of America (CWA) and a Ullico director since 1996. Many of the workers who lost their jobs and their life savings because of the Global Crossing bankruptcy were CWA members.
And the emerging record shows that Bahr was intimately involved in the Ullico-Global Crossing deal from the beginning. Bahr pushed for the Global Crossing deal even though the company was involved in telecommunications but not unionized. Time and again, Bahr used his authority as CWA boss to promote the interests of Gary Winnick’s Global Crossing:
• Bahr supported Global Crossing’s merger with Frontier Communications and opposed the bid for Frontier by Qwest.
• Bahr wrote 14 state governors supporting a takeover of U.S. West by Global Crossing
• Bahr’s support of the Ullico initial major investment in Global Crossing was essential since he represented one of the larger unions involved in Ullico. Apparently the favoritism was not a one-way street. The Wall Street Journal expose of the Ullico scandal revealed that Bahr had personally profited from insider trading of Ullico stock to the tune of $27,000. However, a spokesman for Mr. Bahr assured the reporter that Bahr was “concerned about the propriety of stock trading by Ullico board members.” (“Inside Deal: How Union Bosses Enriched Themselves on an Insurer’s Board,” by Tom Hamburger and John Harwood, The Wall Street Journal, April 5, 2002, page 1)
The revelation was especially embarrassing to Bahr since less than a month earlier he had put out a press release in which he blasted “corporate arrogance” and singled out the “secret dealings and employee abuses of Enron and Global Crossing.” (PR Newswire, March 6, 2002, Communications Workers of America)
Many CWA members, especially in upstate New York, had special reasons to question secret dealings and employee abuses by Global Crossing. And by Morton Bahr. Not only had Bahr pushed hard for the takeover of Frontier by Global, but the Global disaster meant a serious hit to CWA members at Frontier.
National Public Radio (Feb. 12, 2002) reported on the effect of Global Crossing’s shut down on CWA members:
JIM ZARROLI(“All Things Considered” reporter): As with Enron, the company’s[Global Crossing’s] implosion has taken its toll on employee pensions. Linda McGrath is head of Local 1170 of the Communications Workers of America. The local’s members used to work for Frontier Telephone, and had Frontier stock in their 401(k)s.
But McGrath says that when Frontier was bought by Global Crossing a few years ago, the shares were converted to Global Crossing stock. With Global Crossing in bankruptcy, McGrath says, many people have lost a lot of their retirement savings.
Ms. LINDA McGRATH (Communications Workers of America): They’ve given their life to this company. And for Global Crossing to come in here and then within three years take us right down so that we’ve lost everything that they’ve worked 30, 35 years for, they’re devastated.
If any doubt remains that telecommunications workers from Frontier and Global Crossing were truly victimized by the Global Crossing meltdown, consider these comments from blue collar employees of Frontier Communications which was taken over by Global Crossing:
• Zigment Ozarowsky, former Global Crossing Employee: I worked 38 years for the company, and I lost 3,195 shares, which actually amounts to about $200,000.
• Tim Dailor, Global Crossing employee: I lost 8,300 and some odd shares, about $400,000.
• Anthony Alfano, Global Crossing employee: I’ve contributed about probably $150,000. With company match it was probably about $200,000. (“401[CHAOS], by Paul Solman, WGBH, Boston, as broadcast on NewsHour with Jim Lehrer, Feb. 28, 2002)
To add insult to injury, those who lost their life savings and who also had CWA pension funds invested in Ullico now know that the head of their own union was revealed as profiting on insider trading - at their expense. But they can take comfort in the fact that his spokesman says he was really concerned about the propriety of the stock deals.
Union leaders have a fiduciary duty to serve the best interests of their members. This duty is found throughout federal labor law. In reaction to the old-fashioned corruption of sweetheart deals in which management paid labor bosses bribes to betray their union, federal law strictly forbids a whole range of corrupt practices:
• Employers may not contribute to union elections
• Employers may not give union officials money or anything of value
• Union officials have a very strict and very broadly construed fiduciary duty to put their responsibility to their members above their own personal interests, especially their financial interests. Aside from the federal grand jury currently hearing evidence pertaining to possible criminal liability in the Ullico case, the Department of Labor is investigating whether the Ullico stock schemes violated civil labor laws against conflict of interest. If such a conflict of interest occurred, and evidence is mounting that it clearly did, the result could be fines and removal of offenders from union office.
While the excellent investigative articles in Business Week and The Wall Street Journal have done a fine job of detailing the self-enrichment games played with Ullico stock at the expense of union pension funds, the conflicts of interest associated with Gary Winnick’s dealings with the Ullico board were only touched.
Gary Winnick appears to be the last person a group of union bosses would ever want to associate with. At a time when railing against corporate greed is the staple of every union speech, Winnick comes off as a stereotype of a union boss’s arch enemy. He began as an employee of convicted junk-bond king Michael Milken. Frequently described as an egomaniac, he lived a lifestyle that defined excess. His home cost $92 million. He sold in excess of $734 million in Global Crossing stock from the time it went public until it went bankrupt. And one of his top former executives has alleged that some of the especially questionable, if not out right illegal, accounting practices by Global were made to cover his cashing out.
So why would Ullico’s board of union bosses not only invest more than $7 million in seed money with Winnick, but also get involved in a number of other venture capital deals? Certainly, the prospect of being cut in on the lucrative IPO stock offer was an inducement that may have made the Ullico board pour union pension funds into Winnick’s non-union company.
The Ullico board also jumped into deals with Pacific Capital Group (PCG), an investment firm owned by Winnick. Together with PCG, Ullico invested in the high-flying internet company, Value America, another non-union company which quickly went into bankruptcy. And Ullico went in with PCG on Playa Vista, a troubled Los Angeles real estate deal plagued with environmental and regulatory problems. One of Ullico’s top officials, former Democratic National Committee executive director Michael Steed went to Winnick’s PGC as a managing director and went onto the Value America board.
As revelations continue to grow about the Ullico case, the most common reaction appears to be how closely the actions of the Ullico board resemble what union chiefs so often denounce as wrong with corporations. Consider this recent comment by AFL-CIO head John Sweeney:
“Enron exposed what many of us have been saying: the boards of directors that are charged with acting in the interests of investors and the public are riddled with greed, self-dealing and plain selfishness.” Change a few words and you have a perfect description of the Ullico board on which John Sweeney sits. While he has publicly claimed not to have participated in the insider stock schemes, the fact remains that as a director he played a role in letting the schemes continue. Fiduciary duty extends to taking steps to prevent others from violating their fiduciary duties.
It’s difficult to imagine the Ullico board going forward with their self-enriching schemes if the head of the AFL-CIO strongly opposed them. Nor is there any evidence that Mr. Sweeney or any of the other directors took any steps to expose the secret deals. Just the fact that the group of union bosses busily enriching themselves at the expense of their own members chose to keep their deals secret speaks volumes about what they considered the deals to be.
The Ullico case is important because it involves the heads of some of the largest unions in the country improperly, if not illegally, enriching themselves at the expense of union members and retirees.
It’s also important because it illustrates the growing trend of union corruption involving pensions.
Just as the Ullico stock scandal was being exposed, the Department of Labor announced that it was suing Ullico and a subsidiary for imprudently investing $10 million in assets of two Laborers International Union pension funds in a risky Las Vegas land deal. According to the Department of Labor, Ullico failed to properly investigate the large real estate investment and ended up abandoning the project without selling any lots.
A March 25, 2002 BNA Daily Labor Report article based on an interview with Department of Labor Inspector General Gordon S. Heddell provides a good idea of the scope of the problem affecting union pension funds. As of March, there were 357 pending labor racketeering investigations under way by the Inspector General. Of those 39% involved organized crime and of the 357 investigations, 44 percent involve pension and welfare plans.
The IG cited an number of cases in which pensions lost funds because of violations of fiduciary duties by plan trustees, the very issue involved in the Ullico case. The IG went on to state that investigations of this type involve plan assets of more than $1 billion are at risk.
Accompanying my testimony are 25 recent examples of union corruption involving union pension and benefit funds. A review shows that the cases are all recent, large and widespread. The Ullico case shows that the pension corruption goes right to the very top of the labor movement.
The amount of money being stolen from pension and benefit funds is staggering.
In an Oregon case, the Department of Labor estimates that a large number of union funds lost more than $100 million.
In a New York case, an alleged member of the Genovese crime family was recently indicted in connection with the embezzlement of more than $1 million from benefit funds of two locals of the United Brotherhood of Carpenters.
In some cases, only quick action by law enforcement has stopped major pension fund looting as when the F.B.I. uncovered plans in 2000 to move $300 million in union pension fund money into management firms run by the Lucchese crime family.
The first step is to admit that there is a major problem with the integrity of union pension funds. The Ullico case and the epidemic of related corruption provides ample evidence of the scale of the problem.
Second, the public, especially union members whose pension funds own Ullico, have a right to know what Ullico directors did to enrich themselves at the expense of the union members. A Congressional hearing featuring the entire Ullico board being sworn in and asked direct questions would be a good start. If they all chose to take the Fifth Amendment, that act will speak for itself. Certainly, hundreds of thousands of union members short-changed by the Ullico directors are entitled to an accounting.
Third, the laws regarding pension funds are sweeping but contain very serious loopholes. The Department of Labor Inspector General recently pointed to the fact that independent public accountants are not required to report ERISA violations to the Department of Labor. That loophole has no policy justification whatsoever and should be closed.
Fourth, union members are entitled to know the sources of income of top union officials. International union presidents receive large salaries and are expected to give their full time and attention to their duties. Had Ullico directors known they would have to disclose the insider stock profits, they may not have been so quick to enrich themselves. The annual financial disclosure form filed by unions with the Department of Labor, the LM2 form, should be amended to require union leaders to disclose all income by source and amount. A recent House hearing by two subcommittees of the Education and the Workforce Committee co-chaired by Congressmen Norwood of Georgia and Johnson of Texas featured extensive testimony calling for better disclosure of union financial information. The underlying policy is the time-honored belief that “Sunshine is the best disinfectant.
If protecting the integrity of pension funds relied upon by millions of honest, hardworking Americans is not an issue worth addressing, what is?