Wall Street Journal
REVIEW & OUTLOOK
Wall Street Journal Editorial Page
AFL-CIO chief John Sweeney is having a high old time with business scandals, condemning "corporate greed" and capitalist "thieves." Yet his acute moral antennae have somehow missed the shenanigans at Union Labor Life Insurance Co., or Ullico, a labor-owned insurance company that looks like Big Labor's Enron.
Last week the National Right to Work Legal Defense Foundation asked the National Labor Relations Board to investigate if Ullico's board members -- all top union officials -- profited at the expense of rank-and-file union members in a dubious stock-selling scheme. A federal grand jury and the Labor Department are also probing those stock transactions.
Ullico was founded in 1925 as a way to provide low-cost life and health insurance to union members. The insurer is privately held, and to ensure labor control it allows only unions, as well as officers and directors, to buy its stock. For years a share of Ullico was fixed at $25.
In the go-go 1990s, however, Ullico decided to join the pursuit of stock-market riches. In 1997 the company invested $7.6 million in a modest little venture known as Global Crossing. By May of 1999, when Global Crossing's stock peaked, Ullico's stake was worth $2.1 billion -- almost 10 times what all of Ullico was worth when it first invested.
As Ullico's investment grew, it decided to cut its stockholders in on the windfall. It abandoned its old fixed valuation of $25 a share and began adjusting its share price annually, as determined by a year-end accountant's review. The board would ratify the new price, and then Ullico would repurchase shares to allow investors to realize gains. And so in May of 1999, the Ullico board ratified a share price of $53.94, and went ahead with a plan to buy back as much as $15 million worth of shares from investors.
But here's where things get Enron-esque. In December of 1999 Ullico's chairman, Robert Georgine, sent a confidential letter to the company's senior officers and directors offering to let them buy as many as 4,000 Ullico shares at the $53.94 price. But two weeks later, a year-end audit pointed to a higher price of $146, which the board ratified in May 2000. Those insiders were in effect ratifying nearly a tripling in value of their own Ullico investments.
By then, however, the telecom bubble had begun to burst. By November 2000, Ullico's investment had fallen dramatically (Global Crossing's shares had dropped below $25 from a high of $64.25), but the Ullico directors authorized another stock buyback -- and at the same $146 price.
That buyback was technically open to all shareholders. But it was crafted so that large shareholders -- mainly the unions -- faced restrictions on how much they could sell. Meanwhile, those with small holdings – officers and directors -- were allowed to sell back all of their shares. And the board agreed to extend the sell deadline by five months. As a result of prices and buyback rules that they themselves had set, a handful of directors made a windfall estimated at $6.5 million.
These weren't just any old union members, either. Among those who sold back shares were Martin Maddaloni, president of the plumbers union; William Bernard, former head of the asbestos-workers; Jacob West, former ironworkers' chief; carpenters' president Douglas McCarron; and Morton Bahr, president of Communications Workers of America.
So at the same time that the value of Ullico was falling like a rock, these insiders made out like, well, Andrew Fastow. These union bigshots insist they've done nothing wrong, but that's what Enron executives also say. "These leaders have damaged millions of workers' pension funds which were entrusted to and invested in Ullico," says National Legal and Policy Center President Ken Boehm. Mr. Georgine and Ullico decline comment.
Mr. Sweeney has said that he himself did not sell any shares, and he publicly called on Mr. Georgine to appoint an outside investigator. (Former Illinois Republican Governor James Thompson is leading the probe). But what Mr. Sweeney hasn't done is turn his moral indignation loose on his labor peers as he has so often against corporations.
As long as we're talking about blind eyes, we might also mention the quiet in Congress. Perhaps it's a coincidence that Ullico is a big political donor, especially to Democrats, and that Ted Kennedy, who runs the Senate labor committee, was also an Ullico donee his last re-election. More alarming is the fact that Iowa Democrat Tom Harkin is insisting on language in an appropriations bill that would block greater public disclosure by unions. In the wake of the Ullico fiasco, that's a scandal in its own right.
We look forward to the result of the Labor and Thompson probes, especially given that 10 of the current Ullico board members also sit on the AFL-CIO's executive council. If it turns out there was corporate abuse, no doubt Mr. Sweeney will deal appropriately with the "thieves."