Whatever happened to the ULLICO scandal? Readers of this publication might have asked themselves that question more than once over the past few years. The answer: It’s been taken to a new level. On Friday, November 16, the U.S. Department of Labor (DOL) announced a settlement with the union-backed ULLICO Inc., concluding a lengthy investigation into how certain company officers managed to get so wealthy while the company was racking up large operating losses. Without formally admitting wrongdoing, ULLICO agreed to pay $20 million in restitution, back taxes and penalties by way of a one-time charge against earnings. In the face of highly incriminating evidence, taking the government’s offer seems like a good move.
ULLICO is a privately-held Washington, D.C.-based holding company established in 1925. It’s an acronym for Union Labor Life Insurance Company, reflecting its longtime core activity of providing low-cost life insurance for union members and their families. AFL founder Samuel Gompers, who died the previous year, was the driving force behind the idea. In recent decades ULLICO has evolved into a full-service financial network, organized labor’s equivalent of Prudential or Citigroup. The problem was that during the late Nineties and early this decade, management and the board of directors got greedy. In the process, they raised red flags everywhere. Federal officials were among those who took notice. DOL in 2002 charged ULLICO with failing to provide full disclosure to its investors, all of whom are union benefit-plan sponsors covered by the Employee Retirement Income Security Act (ERISA). ULLICO, said the department, kept pension plan investors in the dark about outsized officer compensation packages and company losses.
Most of the $20 million settlement – $16.7 million to be exact – will consist of payments to replenish a ULLICO annuity benefit plan, “Separate Account J,” also known as “J for Jobs.” The company had set up the plan 30 years ago to invest union benefits in secured mortgages on commercial and residential developments built with labor affiliated with the AFL-CIO’s Building & Construction Trades Department. Restitution will be allocated according to plan investments made since January 1, 1999. The remaining $3.3 million will consist of taxes and penalties. ULLICO also agreed to be barred from accepting compensation without prior approval from independent plan fiduciaries.
Union Corruption Update followed the ULLICO debacle as it unfolded. In addition, National Legal and Policy Center Chairman Kenneth Boehm testified in May 2002 before a subcommittee of the House Committee on Financial Services as to its nature and implications. Boehm provided details about an apparent insider-trading sweetheart deal between ULLICO and a telecommunications startup firm, Global Crossing, founded and chaired by Bill Clinton friend Gary Winnick. ULLICO in 1997 bought 33 million shares of Global Crossing stock at a pre-IPO price of 23 cents a share. That worked out to around $7.6 million. ULLICO knew this would be a hot stock. Global Crossing by 1999 was trading at more than $60 a share.
ULLICO management and board members, anticipating the party wouldn’t last, had a contingency plan. The 28-member board of directors, which included AFL-CIO President John Sweeney, already had established some unorthodox by-laws that gave them rights to a large-scale stock buyback. With a seemingly no-lose proposition in place, the company invested heavily in real estate, most notably $160 million for its new luxury headquarters and another $10 million for 120 acres of vacant land outside Las Vegas for a future residential development that never materialized.
The party ended during the early phase of the Internet-telecom bust of 2000-02. Global Crossing stock became nearly worthless, and the company declared bankruptcy in January 2002, while ULLICO sustained high operating losses. But ULLICO management and directors, having camouflaged this “perfect storm” from pension investors, exited early in golden parachutes, realizing a more than $300 million post-tax capital gain on its original $7.6 million investment. Then-ULLICO Chairman and CEO Robert Georgine alone had 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 into ULLICO weren’t so lucky.
The incongruity couldn’t be hidden from public view. As 2002 progressed, the floodgates of bad publicity opened wide. The Wall Street Journal noted, “A platoon of union chiefs responsible for serving their members used ULLICO as a means of enriching themselves.” The House Committee on Financial Services, chaired by John Boehner, R-Ohio, put together an investigation. Its final report, released in October 2003, stated: “Our Committee’s investigation has concluded that the union leaders who set up these sweetheart stock transactions may well have violated federal labor and pension laws.” The Senate Governmental Affairs Committee, chaired by Susan Collins, R-Maine, conducted its own probe. In June 2004, at the report’s release, Sen. Collins called the case “an extraordinary case of insider trading, corruption and abuse of power,” concluding that ULLICO insiders received a net profit of $10.6 million, depriving other shareholders of this gain.
These were some damning conclusions, and it wasn’t as if investigators got much help from ULLICO officials. Boehner’s committee in the spring of 2003 had subpoenaed Robert Georgine, who took the Fifth Amendment and resigned from the board. Several months earlier, in December 2002, the Maryland Insurance Administration sued ULLICO to enforce a subpoena demanding information on the stock transactions, but the company filed a motion to block the subpoena. ULLICO, to its credit, subjected itself to an internal investigation overseen by former Illinois Republican Governor James 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. Management wasn’t happy that the panel had concluded that certain ULLICO executives and board members likely breached their fiduciary duties and violated state security laws.
Meanwhile, the Department of Labor filed suit in March 2002, charging ULLICO had violated ERISA in its Las Vegas land deal. Two years later, DOL won a $2.4 million consent judgment against its subsidiary, Union Labor Life Insurance Co. and investment manager Trust Fund Advisors, forcing them to repay restitution to a pair of Laborers International Union of North American pension funds, plus civil penalties to DOL. This preliminary action set the stage for the settlement announced last month. Though the recent agreement bears the hallmarks of a slap on the wrist, the Department of Labor is satisfied. “Self-dealing by pension fiduciaries at the expense of workers’ retirement 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.”
Current ULLICO Chief Executive Officer Mark Singleton disagrees. “This settlement is about a good-faith disagreement over whether legitimate, reasonable and customary fees were sufficiently disclosed,” he said. “We think they were; the department disagreed.” He summarized recent reforms that his company instituted: “Since 2003, 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.”
With or without these steps, the lesson of this saga remains: Public accountability applies to all types of institutions. On this matter, union leaders seem to have a selective indignation. When the ULLICO scandal first broke, the AFL-CIO’s Sweeney wanted only an internal investigation. This was ironic, given that he and other labor officials were demanding full-scale public probes into Enron, WorldCom and other scandal-ridden corporations not dependent upon union largesse. ULLICO is a major financial-services operation, with some $5.3 billion in total assets under control. But if the company has gone well beyond offering life insurance, it still must serve the interests of its union investors, that is to say, rank-and-file members. Hopefully, the settlement will serve as a reminder of that. (U.S. Department of Labor, 11/16/07; CFO.com, 11/16/07; PRNewswire, 11/16/07; BestWire, 11/19/07; other sources).