National Review


Big Labor’s Enron


Self-dealing benefits union bosses at the expense of workers


Joel Mowbray

August 13, 2002


At the same time that AFL-CIO president John Sweeney is telling the public that unions are the best protector of workers amidst the "corporate crime wave sweeping the country," "big labor" may well have a similar problem in-house to cope with.


Today National Right to Work Legal Defense Fund (NRWLDF) attorneys are filing an administrative complaint with the National Labor Relations Board (NLRB) against ULLICO, a financial-services company run by union bosses that primarily invests money from union pension funds.


The suit claims that ULLICO lined the pockets of some of the members of its board of directors — all current or former heads of unions — at the expense of the blue-collar workers whose compulsory fees already line those same pockets.


NRWLDF's complaint is based on facts that were revealed in April by both the Wall Street Journal and Business Week, and it comes as a sitting grand jury is investigating possible shenanigans at ULLICO.


Like so many of the recent corporate-corruption scandals, ULLICO's woes were triggered by the plummeting prices of tech stocks. The demise of Global Crossing — it is now mired in bankruptcy — hit ULLICO extremely hard, as it had invested in an early stage in the telecom favored by wealthy Democrats such as Terry McAuliffe.


ULLICO's original $7 million investment — at the "founders" price of $1 per share — mushroomed in value, reaching a total worth to ULLICO of an eye-popping $2.1 billion when Global Crossing's stock peaked at $64.25 in May 1999. But just three years later, that investment had become worthless as Global Crossing fell victim to cutthroat competition and a bursting tech bubble.


The investment in Global Crossing only occurred because of the morphing of ULLICO from its roots as a life-insurance provider for blue-collar union workers into a financial services company, investing the money of pension funds from unions around the country.


At the start of the 1990's, former Democratic National Committee official Michael Steed took the financial reins at ULLICO, converting the company from stodgy insurance carrier to a savvy financial-services outfit with substantial investments in the previously booming tech sector.


Part of ULLICO's metamorphosis included making ULLICO itself an investment vehicle for various union pension funds, as well as for those sitting on ULLICO's 32-member board of directors. In 1997, ULLICO changed its longstanding policy of offering its privately held shares for a nominal, fixed price of $25 each. At Steed's direction, share prices were adjusted annually — a seemly infinite amount of time in the roller coaster financial world — with new prices decided each May based on an independent audit of the books of the previous calendar year.


Because of its large holding in Global Crossing, ULLICO's own net worth was tied directly to the value of the telecom's once-highflying stock. At the end of 1998, with Global Crossing's stock at $22 per share, slightly higher than its IPO price from earlier that year of $18,PricewaterhouseCoopers determined shares in ULLICO to be worth $53.94 each. ULLICO's board

implemented that price in May of 1999, right as Global Crossing's stock price was surging well past its levels of just five months earlier.


Near the end of 1999, with Global Crossing's stock at a still-lofty $52.56 a share a mere two weeks before ULLICO's books would close, ULLICO's Chairman Robert Georgine wrote a memo to members of the board — a memo that is the genesis of much of ULLICO's current woes.


On December 17, 1999, Georgine, who is also a former AFL-CIO official, extended a confidential invitation to senior ULLICO officers and directors to purchase ULLICO shares at the bargain price of $53.94. It was guaranteed money in the bank to all who bought, because with Global Crossing's stock price in the clouds, the next audit — to be based on the condition of ULLICO's financial portfolio as of two weeks after the date of the memo — was sure to peg ULLICO's value dramatically higher.


To make crystal clear to those reading the memo that he believed it an opportune time to buy more ULLICO shares, Georgine wrote, "I intend to purchase additional shares at this time."


Georgine proved remarkably prescient five months later when the annual Pricewaterhouse audit nearly tripled ULLICO's share price up to $146 in May 2000. But by the time the board ratified the new, higher share price for ULLICO, Global Crossing's fortunes had already started sinking, with the stock price off by 45 percent from its year-earlier peak, down to $35 a share. In other words, with Global Crossing's stock price heading south in a hurry, the $146 stock price for ULLICO was inflated from the moment it became official.


In November of 2000, ULLICO's board voted to buy back $30 million worth of its own shares at $146 a piece — much of which was to be purchased from the very board members voting for the stock-repurchasing plan. ULLICO shareholders were even given five extra months to sell back stock, right up until the next price re-adjustment in May of 2001, when the new price was bound to be far lower than $146.


But not all ULLICO shareholders were treated equally. Those with large holdings of over 10,000 shares, such as union pension funds, were restricted in how much they could sell, but those with relatively smallholdings, such as ULLICO officers and board members, could sell back all their shares. The net result of this disparate treatment is that the self dealing profited board members — some quite handsomely, in fact — but that bounty came at the expense of the pensions of rank-and-file union members.


Sure enough, the collapse of Global Crossing's stock dragged down ULLICO's value, nearly halving the stock price to $74. All those who sold shares between November of 2000 and May of 2001 wound up receiving double what they would have at ULLICO's true value.


Among the union leaders who took advantage of the sweetheart deal were the following ULLICO board members: Morton Bahr, president of the Communications Workers of America; Martin Maddoloni, president of the plumbers union; William Benard, former head of the asbestos workers union; Jacob West, former head of the ironworkers union; and Douglas McCarron, president of the carpenters' union.


The personal profiteering of union bosses coming at the expense of rank-and-file union workers is at the heart of NRWLDF's complaint to the NLRB. The suit charges that ULLICO's special deal to its board members violated the Taft-Hartley Act of 1947 by "enriching union officials to the detriment of ordinary workers," says Stefan Gleason, vice president of NRWLDF.


So far, the White House has been conspicuously silent about the millions of dollars of ill-gotten gains by union bosses through ULLICO, in large part because of its budding friendship with McCarron and his carpenters' union. But the White House might want to reconsider: McCarron's union has donated $2.1 million in campaign cash so far this year, 88 percent to Democrats, including $1 million in soft money to the Democratic Senatorial Campaign Committee in late June.


Sen. Ted Kennedy, chairman of the Senate committee that would be tasked with looking into ULLICO wrongdoing, received $1,000 from ULLICO in 2000. ULLICO's political action committee has handed out $31,500 this year, 94 percent to Democrats.


Don't hold your breath waiting for a "perp walk" for ULLICO officials anytime soon. The NLRB is limited to fining individuals and demanding the ill-gotten gains be returned to the pension funds of union members.


The sitting grand jury, on the other hand, is looking into a broader array of possibly illegal activities, which could result in hard jail time for some — though that's hardly likely. Few familiar with the situation believe that prosecutors will decide to do battle with politically powerful union bosses.


Despite the reluctance of Democrats or the White House to discuss unions' malfeasance in the same breathless way as corporate accountability, there are at least a handful of Republicans in Congress who are targeting "big labor."


Rep. Charlie Norwood (R, Ga.) had the best take on the fox-guarding-the-henhouse problem of ULLICO:


I raise a few chickens on my place back in Georgia. I also have had dogs on that property that I have loved very much. However, I would never start letting my dogs eat my chickens. It would naturally be rough on the chickens, and the dogs would never hunt again.


Now I know my Democratic friends love the support they get from labor leaders. I know they want to feed them any last chance they get. But please don't feed them the savings of hard-working American families.


It's bad for the dog, and murder for the chickens. And friends, that dog's already got feathers on his snout that look a whole lot like pension money.

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