The New York Times
Stock Dealing at Union-Owned Insurer Creates a Schism
By STEVEN GREENHOUSE
April 8, 2003
The nation's labor leaders are split into two feuding camps over how to respond to the stock trading under investigation at Ullico, the beleaguered union-owned insurance company, and to the company's deepening financial crisis.
Some, led by John J. Sweeney, the A.F.L.-C.I.O. president, are pressing Ullico directors who made more than $6 million trading the insurer's stock to surrender their profits. With the trades a subject of three federal investigations, these labor leaders say giving up those profits to the company would be a step toward ending a profound embarrassment to the labor movement and restoring confidence in Ullico, which some directors say may not survive without major changes.
But those in the other camp, led by Martin J. Maddaloni, president of the plumbers' union, and including other officials in the building trades unions, say there is no need for such "disgorgement." They maintain that the directors who made large trading profits did nothing wrong and acted no differently from directors on many corporate boards.
In the deal at issue, many company directors bought Ullico stock in November 1999 at a price set by the board, knowing that the board would soon most likely reset the share price far higher. A year later 17 of those directors, half of what was then the entire board, sold the stock back to the company at nearly three times the purchase price, knowing that the board was likely to reset the stock price far lower. All the 17 sellers were current or former union officials.
An investigative report by James R. Thompson, a special counsel retained by the board, found that the directors had enriched themselves at the expense of other shareholders, mainly unions and their pension funds, which had not been granted the same trading opportunities. Mr. Thompson, former governor of Illinois, found that a forceful argument could be made that Ullico's chairman and chief executive, Robert A. Georgine, had violated his duties to the company by engineering the transactions.
"All this has seriously undermined the labor movement," said Charles Craver, a professor of labor law at George Washington University. "It's bad enough when we see these shenanigans at Enron or WorldCom, but when union officials get involved in anything that has an appearance of impropriety and it looks as if they're benefiting like capitalists, workers begin to question whose side they're on."
Like Mr. Sweeney, the presidents of the laborers' union, the operating engineers and the hotel and restaurant employees have called on Ullico's directors to return their trading profits. They point to the decision by Douglas J. McCarron, president of the carpenters' union, to return more than $200,000 he made.
"I think disgorgement by everyone would be a step in the right direction," said the laborers' president, Terence O'Sullivan, a Ullico director who did not engage in the trading. "All this has been a distraction. It's time to focus the board's time and attention on ensuring the future success of Ullico on behalf of the men and women of organized labor."
Ullico was founded in 1925 to provide affordable life insurance to blue-collar union members. Its value soared in the late 1990's after its $7.6 million investment in Global Crossing, a telecommunications company, had skyrocketed to more than $1 billion. But by 2000, Global Crossing shares had begun a nosedive, cutting Ullico's value and fostering its financial crisis.
Some Ullico directors say privately that it is time for Mr. Georgine to step down. They maintain that if the current management remains, it will be hard for Ullico to obtain the $50 million in new investment that he says it needs.
Many labor leaders say they were shocked to learn how much Mr. Georgine, former president of the A.F.L.-C.I.O.'s building trades department, had earned at Ullico. Mr. Thompson calculated that Mr. Georgine, who made $6 million in Ullico stock trades separate from the arrangement on which the federal inquiries are focused, received $10.7 million from 1999 to 2001, including the proceeds of those trades. Two directors said that in addition, the board had established an $11 million deferred compensation plan for him. Further, Mr. Georgine had Ullico buy a corporate jet that board members say costs $3 million a year to operate.
At a board meeting on March 28, several directors said, Mr. Georgine proposed returning his trading profits but met resistance from members who understood that this would increase pressure on them to return their own.
Thomas C. Green, a lawyer for Ullico, defends the stock trades, saying they were consistent with what directors do at other companies.
"Considering the success of Ullico's portfolio, the compensation for Mr. Georgine and other officers is not just compatible with what exists in other areas of our commercial society, it's less than what's comparable," Mr. Green said. "There's no fundamental unfairness here. No one was disadvantaged in some classic notion of someone taking advantage."
Several union officials critical of Mr. Georgine say that after Mr. Thompson's report was issued to the board last fall, the chairman and other directors received bad advice from Ullico's outside lawyers, a circumstance that, these officials say, helped cause the controversy to fester. According to these officials, Ullico's lawyers urged the directors to dig in, telling them that Mr. Thompson was wrong to have concluded that they had breached their fiduciary duties. The lawyers also told the board that Mr. Thompson had found no violations of law.
In a highly unusual statement last Friday, Mr. Thompson accused Ullico and its lawyers of making defamatory statements on one hand, in describing his inquiry as inadequate, while on the other misrepresenting its findings to mount a public defense. Far from the assertion that his investigation found no violations of law, he said, he actually found compelling evidence of state securities law violations.