A nondescript insurance company in a desolate section of Washington is the epicenter of a legal battle that is bitterly dividing organized labor, with some leaders accusing others of enriching themselves with questionable stock deals at the expense of several unions and their pension funds.
Critics liken the uproar over union-owned-and-operated Ullico Inc. to the Enron and WorldCom corporate scandals. Some union officials fear the controversy will damage the labor movement's clout and image, and AFL-CIO Executive Council members will debate whether to demand more disclosures from Ullico when they meet this week in Florida.
Ullico, founded 77 years ago to help unionized workers buy burial insurance, is being investigated by state and federal authorities probing whether its officers and directors violated their fiduciary obligations to shareholders -- primarily unions and union pension funds. The inquiries come as the labor movement faces a generally hostile Republican White House and Congress, and a sluggish economy that weakens the bargaining hand of workers.
The crisis was triggered by Ullico's initially profitable investment in Global Crossing, whose financial collapse caused Ullico stock values to plummet in late 2000. Before that happened, however, Ullico agreed to buy back the shares of several officers and directors at hefty prices, saving them hundreds of thousands of dollars.
That is where critics say the company's leaders crossed the line. They are angry at the Ullico board's refusal to release the findings of an internal investigation.
"We need to know the facts," said United Auto Workers President Ron Gettelfinger, who has sued Ullico to force disclosure of key documents. "If we've learned anything from Enron and other corporate scandals that have unfolded during the past year, it's that shareholders must be vigilant in demanding transparency, openness and accountability from corporate officers and directors."
The sharpest complaints have come from the labor movement's reform wing. Harry Kelber wrote in the Labor Educator: "The misdeeds at Ullico represent probably the worst labor scandal in decades. Virtually all of the union presidents on the company's board hold seats on the 54-member AFL-CIO Executive Council, the group that makes decisions affecting 13 million union members and their families. Their greedy, insensitive behavior is not that far removed from Enron executives, whom unions have been denouncing with righteous wrath."
Ullico stock differs from publicly traded stocks in two important ways, both central to the controversy. It can be owned only by union officials, members, labor organizations and their benefit funds. And the stock's value changes only once a year, when company directors set a new share price on the advice of auditors.
This arrangement made it easy for Ullico officers and directors to predict when the stock price would rise or fall, so they could buy or sell shares virtually risk-free, critics say. From 1998 to early 2000, for example, board members voted to grant themselves exclusive rights to buy company stock at highly advantageous prices and then sell it before prices fell sharply.
After a nine-month silence, Robert A. Georgine, Ullico's chief executive officer and former president of the AFL-CIO's Building and Construction Trades Department, is defending the transactions in letters to shareholders and labor leaders. When he took over in 1991, he said, Ullico was on the verge of bankruptcy, and "without the leadership of Ullico's board of directors over the last decade, the company would not have survived." Since 1991, Georgine said, the company experienced 11 years of profitability, paid off corporate debt, favorably resolved a federal tax dispute and "paid out more than $235 million to its union and trust fund investors."
Georgine, who reportedly made about $6 million from the stock sales in question, wrote to shareholders: "It was appropriate to provide [officers and directors] an opportunity to invest personal funds in the company in recognition of their wisdom and guidance over the years." In his letter to labor leaders, he wrote: "We did -- and do -- believe those transactions, which were part of a program to return millions of dollars to Ullico's shareholders, were entirely legal."
He blamed much of the criticism on "anti-union bias." In fact, some of his severest critics are top labor officials. Georgine's letters did not address the most controversial board decision: allowing members to sell shares back to the company at a high price when most knew the value would soon fall.
At the insistence of AFL-CIO President John J. Sweeney and some of his allies on the Ullico board, the law firm Winston & Strawn conducted an inquiry into the stock transactions. The firm's report called for the return of all profits from the stock deals, according to sources. A majority of Ullico's board refused to release the report, prompting Sweeney and two others to resign last December.
The Ullico controversy has left organized labor's critics on the left and right fuming, and several union leaders have joined Sweeney in demanding the release of the Winston & Strawn findings.
The company's creation in 1925 was much quieter. Labor leaders decided to create their own insurance company "out of a need to provide workers with simple insurance policies to cover burial expenses," according to a Ullico-written history.
As big labor became big business, Ullico expanded into new markets: retirement annuities in 1932, group health and life insurance in 1942, management of pension and retirement plans in 1947, managed care in 1984, creation of the Trust Fund Advisors Inc. in 1990 to manage pension trust portfolios, and the Real Estate Equity Fund in 2001. By 2001, the private corporation had $3.7 billion in assets, $12.7 million in net income, $20.6 billion in life insurance in force and $5.9 billion in union pension funds and other third-party assets under management.
In 1998, when Ullico stock was valued at $28.70 a share, officers and directors were offered the chance to buy 4,000 shares. The same thing happened in 1999, when the share price was set at $54. Ullico had invested heavily in Global Crossing, a company whose value was soaring and consequently pushing up Ullico's stock value. In early 2000, the directors raised the Ullico share price to $146, where it remained for that year.
The stock began to look less attractive, however, as Global Crossing started a decline that would end in bankruptcy. On Nov. 3, 2000, Ullico's board members directed the company to offer to buy back shares at the $146 price, even though Global Crossing's declining value was certain to lower Ullico's stock price at the next valuation.
The repurchase program was limited to 10,000 shares for each board member. That was enough to cover special stock offerings in 1998 and 1999 that had been limited to directors, but it amounted to only small portion of the larger holdings of many unions and trust funds.
In May 2001, the Ullico stock price was reduced to $75 a share. That meant every share the company had repurchased at $146 a few months earlier had lost nearly half its value -- a financial setback absorbed by all parties still holding substantial numbers of shares.
Georgine was able to sell nearly 21,000 shares at $146 each. He qualified for the 10,000-share repurchase offer, and he could exercise other options and sell stock acquired earlier under compensation agreements with Ullico.
Reports filed at the Department of Labor show Ullico making payments for stock repurchases of $1.6 million to William G. Bernard, former president of the Asbestos Workers; $109,530 to James La Sala, president of the Amalgamated Transit Union; $296,080 to Martin J. Maddaloni, president of the Plumbers' union; and $1.35 million to Jacob F. West, former president of the Ironworkers' union.
Ullico is under investigation by a federal grand jury, the Labor Department, the Securities and Exchange Commission and the Maryland insurance commissioner. Last week, the Labor Department disclosed that it has demanded a copy of the Winston & Strawn investigation, plus documents related to Georgine's compensation, stock transactions and loans to pay for Ullico stock.