Labor Chieftans' Secret Stock Deal
Just when it seemed as if the corporate crime wave was over, the messy stock scandal involving union-owned insurer ULLICO Inc. and bankrupt telecom Global Crossing Ltd. is about to burst into the open again. At the worst, indictments will be handed down against union bosses. At the least, the reputation of the U.S. labor movement will be sullied. And the scandal could complicate the Bush Administration's efforts to cultivate friendly unions.
Labor leaders are battling each other over how to handle the new imbroglio, which centers on ULLICO, parent of Union Labor Life Insurance Co. Some of the two dozen union leaders who sit on the insurer's board reaped hundreds of thousands of dollars by buying and selling privately traded shares in ULLICO, which earned some $335 million from a $7.6 million investment in Global Crossing before its initial public offering. Started in 1997 by Gary Winnick, Global had a market cap of more than $20 billion at its 1999 peak. It filed for Chapter 11 in January, and its stock--once as high as 64--now trades for pennies.
When news of the union leaders' gains emerged last spring, embarrassed AFL-CIO President John J. Sweeney--who is a ULLICO director--insisted that the insurer conduct an internal investigation. Directors agreed to hire former Illinois Governor James R. Thompson, whose 70-page report is scheduled to be presented to them at a Nov. 20 meeting. But Sweeney and ULLICO CEO Robert A. Georgine have exchanged heated letters over the company's efforts to keep a lid on the report. At a Sept. 11 gathering, ULLICO directors agreed that they could read the report but not take home copies--or even make notes. ULLICO shareholders--i.e., the union pension funds--won't even get a peek.
Georgine's goal, say lawyers and others involved, is to maintain attorney-client privilege over the report and prevent it from reaching the U.S. Attorney for the District of Columbia, who subpoenaed several ULLICO officials last spring and, BusinessWeek has learned, recently requested interviews with ULLICO directors. "The grand jury went to look at ULLICO, and it just keeps going on and on," says Channing D. Phillips, a spokesman for the U.S. Attorney's office.
Indeed, lawyers for some union leaders say they're expecting indictments of numerous ULLICO board members. Thompson's report could speed the process since it's likely to lay out details of the stock transactions that raise troubling legal questions, according to those familiar with his questioning of ULLICO directors. Both Sweeney and ULLICO officials declined comment, though some lawyers and union officials involved say they see no legal problems.
Even if no charges are filed, the episode is likely to damage labor. Besides stoking rank-and-file anger, the gory details of union leaders enriching themselves through pension-fund investments could undermine AFL-CIO efforts to capitalize on corporate scandals and force shareholder reforms.
That's a key reason why Sweeney, who made no profits from ULLICO stock, is taking a hard line. Indeed, AFL-CIO officials have talked privately of union leaders returning their ULLICO profits--an outcome that is now more likely since United Brotherhood of Carpenters President Douglas J. McCarron said on Oct. 29 that he will do just that.
Sweeney, however, is constrained in how far he can go. Many union leaders on ULLICO's board--half of whom are retired--so far seem to be siding with Georgine. In addition, many are from building-trade unions, an AFL-CIO faction Georgine headed for many years. If they got together with allies such as Teamsters President James P. Hoffa, the construction unions could muster enough votes to replace Sweeney as AFL-CIO president. "Sweeney should worry about the building-trades unions. They're not on his side here," warns one official sympathetic to Georgine.
One positive side effect for Sweeney: The scandal could damage McCarron, who stood to make as much as $400,000 from his ULLICO shares. McCarron has been a thorn in Sweeney's side since he yanked the Carpenters out of the AFL-CIO last year. McCarron also has upset the AFL's political strategy by cozying up to the White House. If McCarron is tarnished, he can make less trouble for Sweeney--and Bush's ability to divide labor will be diminished.
One critical issue Thompson is likely to address goes to the heart of the ULLICO directors' legal defense. They argue--and outside legal experts largely agree--that they didn't breach their fiduciary duties to the pension funds by reaping more profits from ULLICO stock than the funds did. That's because the funds hire qualified professional asset managers, called QPAMs, to make investment decisions, including those involving ULLICO shares. So QPAMs, not labor leaders, have direct fiduciary responsibility to the funds.
Union leaders also point out that the stock plan was devised by Credit Suisse First Boston and blessed by lawyers. "We received assurances of the legality of the stock-repurchase program from ULLICO's legal counsel, investment advisors, accountants, and auditors," McCarron wrote in an Oct. 29 letter to Georgine.
Problem is, ULLICO took some key actions outside of that program. On Dec. 17, 1999, for example, Georgine sent a letter to his directors offering each of them the right to purchase 4,000 ULLICO shares at $53.94 a share. He did so even though ULLICO knew its shares would be reassessed at $146 two weeks later, to reflect the company's investment in the then-booming Global Crossing.
The grand jury has been told that the QPAMs had no knowledge of this offer, BusinessWeek has learned. Nor were the QPAMs given a similar opportunity to buy cheap shares for the pension funds on whose behalf they act. If Thompson's report isn't covered by attorney-client privilege, it could help the U.S. Attorney to learn who knew what when Georgine's letter was sent out. Union leaders "have no QPAM defense on the letter," says one insider.
Georgine also may want to bury the report by Thompson, who has interviewed more than 50 people and examined some 50,000 documents, because of what it's likely to say about his own stock deals. At the end of 1999, Georgine owned 52,868 shares of ULLICO, according to the company's proxy. But he bought many of them with an interest-free loan from ULLICO, say those with knowledge of the transaction. So he stood to make millions off his shares. It's not clear if this raises legal problems, but even his supporters concede that he's likely to take heat from the labor movement if word gets out. Georgine also could have a difficult time returning such a large sum, as McCarron has offered to do. "McCarron's action puts disgorgement squarely on the table, which is where this is headed," says one union leader's lawyer.
If ULLICO directors do decide to return their stock profits, it may help to insulate them from the grand jury. After all, it would be tougher to convict anyone of improperly taking money they voluntarily gave back. Of course, disgorgement would also be a public admission that they shouldn't have taken the money in the first place. Either way, labor's image will be tarnished.
By Aaron Bernstein, with Paula Dwyer, in Washington
— With assistance by Paula Dwyer