It's Looking Uglier at ULLICO

New grand jury subpoenas and probes roil the insurer

It looks like the world is about to come crashing down on Robert A. Georgine, the chief executive of scandal-wracked insurer ULLICO Inc. In early April, the union-owned insurance company finally released a devastating report its directors had commissioned from former Illinois Governor James R. Thompson. Blocked for months by Georgine, it found that he and other ULLICO officers committed numerous possible legal and ethical violations when they and other board members bought and sold ULLICO stock at the expense of the union pension funds that own the bulk of the private company.

Now, Georgine and others may face criminal charges, BusinessWeek has learned. Soon after Thompson's report came out, a Washington (D.C.) grand jury that has been looking into the stock transactions for the past year issued subpoenas for ULLICO board members, the company's lawyers confirm. Indeed, although Thompson's report says it found no criminal violations, the findings read like a brief for the prosecutors, say criminal lawyers who have read it.

"If the government wants an indictment, they would be perfectly capable of getting one based on these facts," says one veteran criminal lawyer who has defended labor leaders. Responds Thomas C. Green, a top criminal lawyer who represents both ULLICO and Georgine: "I don't believe anyone acted with criminal intent. I find it highly ordinary that [the prosecutors] would undertake an investigation" and issue subpoenas after getting Thompson's report.

Now that others looking into the stock sales have Thompson's report in hand, Georgine finds himself fighting on many more fronts. Several House and Senate committees are vying to get information from ULLICO. The Labor Dept. is investigating possible violations of federal labor law. The Maryland Insurance Administration, which regulates ULLICO, is examining its fitness to sell insurance. PricewaterhouseCoopers (PWC), ULLICO's auditor, is due any day to issue its 2002 audit, which ULLICO expects to question its ability to operate as a going concern.

Several union presidents are also maneuvering to oust Georgine, the longtime head of the AFL-CIO's Building & Construction Trades Dept. But a group including Carpenters' President Douglas J. McCarron and the heads of the laborers', electrical workers', and operating engineers' unions recently told Georgine to resign or they will mount a proxy fight to remove him at the annual meeting in May. If that happens, the voting will be done not by friendly board members but by the union pension funds that control most of ULLICO's stock. ULLICO's board, which is comprised mostly of building-trade union leaders whom Georgine has known for years, has steadfastly stood behind him and even voted to decline his resignation offer in March.

Georgine, meanwhile, was booed at an early April political conference of nearly 1,000 building-trade leaders in Washington. "If there's a proxy fight, absolutely we'll support" ousting Georgine, says Ron Gettelfinger, president of the United Auto Workers, a ULLICO shareholder. "If we're going to be critical of corporations like Enron, then union leaders must be held to the same ethical standards."

As the damage spreads, it could sweep up a bevy of big-name advisory firms, too. PWC, for example, has audited ULLICO's books throughout much of the period in question. Credit Suisse First Boston (CSR ) helped to develop the stock repurchase plans. Lawyers from Arnold & Porter, which has represented ULLICO and Georgine for many years, were involved in many aspects of the stock transactions, too. All three firms declined to comment.

Thompson's report alone is enough to bring more embarrassment to organized labor. It found that 20 directors and officers, who collectively owned 2% of ULLICO, together made $13.7 million by buying and selling its stock, which ballooned after a $7.6 million early investment in Global Crossing Ltd. turned into a $335 million windfall. Problem is, their gains came at the expense of their unions' pension funds. Although they own the other 98% of the company, they were allowed to take only $28 million in stock profits among them.

The Thompson report lays much of the blame on Georgine. It said he "engaged in a concerted effort to withhold executive compensation information from the board," including details of his own stock profits and other pay totaling more than $12.6 million since 1998; didn't inform his board that the stock offers to directors would come at the expense of the pension funds; and told the funds that the stock was an excellent long-term investment even while he was secretly selling his own shares. Green says these were "routine transactions" and that nothing "untoward" happened.

Despite such damning findings, Thompson's report concluded, with no explanation, that "no evidence of criminal intent has been discovered." The ex-governor's team of lawyers and advisers, which interviewed 40 people over several months, also missed several relevant facts. For example, the report doesn't mention the $11.6 million Georgine stands to make from a special retirement plan ULLICO set up for him, insiders say. Nor, despite detailed analysis of Georgine's compensation, does the report mention the multiple salaries he took from at least one of ULLICO's 24 subsidiaries. In 2000 and 2001, Georgine made a total of $49,000 from his position as CEO of Ulico Indemnity Co., according to a PWC audit obtained by BusinessWeek.

In addition, Thompson, who received campaign donations from Georgine while he was governor, didn't examine the fiduciary responsibilities directors hold to their unions' pension and general funds under federal labor law. ULLICO's lawyers told Thompson that he wasn't authorized to do so, the report says.

Still, Thompson found that Georgine and other top ULLICO officers may have violated their fiduciary duties to shareholders under the state law of Maryland, where the company is incorporated. His report also largely validates board members who claimed to have no idea that the stock transactions would disadvantage their pension funds. In retrospect, several directors say, they believe that Georgine may have urged them to buy shares to provide cover for his own much larger purchases.

Nonetheless, a majority of directors have stuck defiantly behind Georgine. Just before they agreed to release Thompson's report, a special ULLICO board committee headed by former Labor Secretary John T. Dunlop, a longtime friend Georgine brought on the board after the scandal erupted last year, issued an extraordinary response. It concluded that Thompson had "uncovered no illegality" and that it therefore "would be profoundly unfair and immoral to punish or make scapegoats" of officers or board members by making them return the profits in question. This conclusion prompted the resignation of hotel workers president John W. Wilhelm, who had been pushing for the money to be returned. (He and other members of the special committee made no money from stock sales.) Dunlop didn't return calls.

While Georgine is under fire on many fronts, his biggest worry may be the grand jury, which subpoenaed more documents from ULLICO shortly before Green met with prosecutors. With labor unions already weakened in organizing and politics, this is one distraction they don't need.

Corrections and Clarifications Thomas C. Green disputes our reference to him as representing ULLICO CEO Robert A. Georgine. Green says he represents only the company.

By Aaron Bernstein in Washington

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