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The ULLICO scandal

- The Washington Times - Saturday, June 21, 2003

Incorruptible labor legends Samuel Gompers and George Meany must be spinning in their graves. After becoming the first president of the American Federation of Labor (AFL) in 1886, Mr. Gompers founded the Union Labor Life Insurance Co. (now the major subsidiary of the ULLICO holding company) in 1925 in order to provide affordable insurance and other financial services to union members. Mr. Meany, who became the first president of the merged AFL-CIO in 1955 and served in that capacity for a quarter-century, worked inexhaustibly to eliminate corruption within the labor movement -- which included expelling the Teamsters from the AFL-CIO in 1957. That same year, the AFL-CIO adopted a rule mandating the expulsion of any union official invoking the Fifth Amendment to avoid scrutiny in a corruption case.

Last week, former ULLICO Chairman and CEO Robert Georgine took the Fifth during a House Education and Workforce Committee hearing. The committee is investigating a massive ULLICO insider-dealing scandal that has engulfed many of organized labor's most powerful bosses, including Morton Bahr (president of the Communications Workers of America), Douglas McCarron (general president of the carpenters) and Martin Maddaloni (president of the plumbers and pipe-fitters). Mr. Georgine himself headed the AFL-CIO's Building and Construction Trades Department from 1974-2000.

It was during the end of his tenure at the AFL-CIO that Mr. Georgine enticed numerous of his ULLICO board colleagues and officers into a secretive surefire get-rich-quick scheme that eventually netted the self-dealers nearly $14 million in profits.

The ULLICO scandal can be traced to its early investment in Global Crossing, the same once-high-flying-now-bankrupt telecom that turned a $100,000 investment by Democratic National Committee Chairman Terry McAuliffe into a $18 million pot of gold. Like Mr. McAuliffe, the labor leaders cashed in their Global Crossing-related profits before the firm went over the cliff, taking $50 billion worth of other shareholders' investments with it.

In February 1997, the privately owned ULLICO invested $7.5 million in the predecessor firm of Global Crossing, which went public in September 1998. By 1999, ULLICO's investment in Global Crossing was worth well over $1 billion, and it became the driving force behind ULLICO's share price, which was adjusted annually to reflect its net worth. With Global Crossing's stock price soaring throughout 1998 and 1999, ULLICO's share price would be adjusted accordingly, a process that occurred each May based on ULLICO's book value on Dec. 31.

In 1998 and 1999, Mr. Georgine secretly offered directors and officers exclusive opportunities to purchase a total of 8,000 shares of ULLICO stock before the annual adjustment of its stock price was made. (Union pension funds, which held the vast majority of ULLICO's stock, were virtually shut out of the surefire get-rich-quick scheme.) In a Dec. 17, 1999 confidential memo, for example, Mr. Georgine offered the union directors and officers the opportunity to purchase 4,000 shares of ULLICO stock at $54 per share. Global Crossing closed at $52.56 (nearly two-and-a-half times its year-earlier price of $22.50) on Dec. 16, 1999, the day before Mr. Georgine wrote his confidential memo. Thus, it was a certainty that ULLICO's share price would soar when it was reassessed two weeks later. As it happened, the ULLICO shares purchased for $54 jumped in value to $146 after the annual share-price adjustment.

In March 2000, however, Global Crossing's stock price began to fall. By December 2000, it had plummeted below $15 a share. Global Crossing's collapse would adversely affect ULLICO's share price in a very big way. (But, not to worry if you were a ULLICO officer or director.) During December 2000 and January 2001, ULLICO repurchased more than 200,000 shares from its union-boss directors and officers at $146 per share. Shares purchased by the bosses a year earlier at $54 were redeemed at $146, yielding a profit of nearly $100 per share, even though Global Crossing's share price had plunged, necessitating a huge markdown in ULLICO's share price. Mr. Georgine netted a pre-tax profit of $840,000, while Mr. McCarron collected $420,000. Mr. Maddaloni reportedly pocketed nearly $250,000.

AFL-CIO President John Sweeney was a member of ULLICO's board, but he did not participate in the self-dealing. As the scandal progressed in recent months, Mr. Sweeney played an important role, with mixed success, in pressuring directors and officers to return their ill-gotten gains. But where was he when the skullduggery was taking place? As a board member, he almost certainly had to know about Mr. Georgine's scheme long before it became public during the spring last year.

Why didn't Mr. Sweeney blow the whistle on this corruption? After all, it was Mr. Sweeney who declared: "Enron exposed what many of us have been saying: The boards of directors that are charged with acting in the interest of investors and the public are riddled with greed, self-dealing and plain selfishness." As Damon Silvers, the counsel to ULLICO's new chairman and an associate general counsel of the AFL-CIO, told the House Committee on Education and the Workforce, "Our company was the victim of serious misconduct during the period from 1998 to 2002." Where was ULLICO board member John Sweeney from 1998 through the better part of 2002 as his fellow board members were looting his company at the expense of union pension funds? Some answers would be welcome.