At the same time, however, ULLICO CEO Robert A. Georgine, a long-time AFL-CIO official, used the Global investment as a profit-making opportunity for himself and other ULLICO board members, most of whom are current or former union presidents.
He did so in two ways. First, he extended to his directors an offer from Winnick to get in on Global Crossing on the ground floor, say several directors, letting them buy shares at the IPO price. That's no different from the way many investors made windfall profits during the IPO boom -- benefitting from their close ties to newly formed companies. Labor officials say some directors made millions off their sales, although no director contacted by BusinessWeek would disclose his or her gains.
LOADED UP IN ADVANCE. The second strategy raises some red flags. According to insiders and ULLICO documents, ULLICO gave its directors the opportunity to buy and sell ULLICO's stock in such a way as to benefit themselves but not their unions. In particular, they knew to load up on ULLICO stock in advance of its yearly valuation, which would reflect the Global Crossing gains. Institutional shareholders, mostly union pension funds, were not offered the same trading opportunities, according to AFL-CIO officials and other involved (see table below).
All together, some of ULLICO's directors and officers reaped millions of dollars from the insurer's Global Crossing gains over the past two years, with Georgine receiving by far the biggest chunk, according to ULLICO documents and insiders. Not all directors took the opportunity, including AFL-CIO President John Sweeney, who owned only a few hundred ULLICO shares.
The U.S. Attorney's office in Washington, D.C., is now investigating these moves. The office had already been looking into corruption charges at the Ironworkers union involving its former president, Jacob F. West, who's also a ULLICO director. The U.S. Attorney got wind of the ULLICO scheme when trying to determine the source of some of West's money, insiders say.
FIDUCIARY BREACH? The grand jury in the case recently subpoened three ULLICO executives, as well as officials from Wall Street firms that advise the union pension funds that own ULLICO stock. Some of those subpoened say the Justice Dept., which is being assisted by the Labor Dept. and the FBI, is now deciding whether to expand the investigation to include ULLICO.
A key issue, say those involved, is whether the labor leaders who took part breached their fiduciary responsiblities by profiting from ULLICO at the expense of their unions. "If people got greedy, they should be treated just like the Enron officials who did the same thing," fumes one union president with detailed knowledge of the case. "How can we criticize them if we're doing the same crap?"
"The AFL-CIO is taking these matters seriously, and we are actively looking into them," says the federation's associate general counsel Damon Silvers. ULLICO declined comment.
DUAL ROLE. The chance for Georgine and others to reap a profit arose because of the peculiar nature of ULLICO, the parent company of Union Labor Life Insurance Co. It was founded by unions in 1927 to sell life insurance to union members. Its ownership is restricted to unions, and its leadership comes primarily from the labor movement.
Georgine, for example, headed the AFL-CIO's Building & Construction Trades Dept. for 26 years, until he retired in 2000. For the prior decade, he also served as ULLICO's CEO. The very concept of a labor-owned insurer has been periodically criticized by some labor leaders, who disapprove of unions helping to sell their members whole life insurance that may not be necessary.
Georgine himself has been the subject of controversy, too, often viewed by critics as a big spender who loved the job's perks. The Building Trades used a jet for many years during his tenure, and ULLICO has another one for his use, insiders say.
PENNIES A SHARE. Still, there's no question that ULLICO made a smart move in 1997, when its investment in a Los Angeles construction project led to a relationship with Winnick. Soon ULLICO became one of the original investors in Global Crossing, getting the equivalent of 33 million shares at pennies each. When Global went public in 1998, and its stock began to soar, ULLICO came into a windfall.
When Global's stock peaked at just over $62 a share in 1999, ULLICO was sitting on more than $1 billion in potential profits. This was particularly fortunate, since ULLICO's basic insurance businesses were losing money. That year, ULLICO earned $127 million aftertax from the sale of Global shares, allowing it to turn a $46 million loss on its ongoing operations into a $59 million profit, says A.M. Best Inc. analyst Joseph Zazzera. Overall, the insurer sold about half its Global stock since 1999, earning an aftertax total of about $335 million, says Zazzera.
But these gains took awhile to show up in ULLICO's stock price. Because the company is private, its shares don't trade on the open market. Instead, ULLICO sets their price every Dec. 31, based on the book value of the company in the prior year. So ULLICO shareholders knew in the fall of 1999 that its shares would be worth about $146 on Dec. 31 of that year, say AFL-CIO officials and other insiders. "You could tell what would happen to ULLICO based on Global's stock performance," says an adviser to a union pension fund that owns ULLICO shares.
CASHED OUT. In the fall of 1999, ULLICO offered to sell each director 4,000 shares at the 1998 price of $54. The union pension and general funds that own the bulk of ULLICO's stock were not given the same offer, or even told about it, labor officials and other insiders say. Georgine himself went from holding 8,800 shares in 1998 to 52,800 in 1999, according to ULLICO's proxy and other financial statements, although the statements don't make clear why he was able to acquire more than the 4,000 quota.
In 2000, some two dozen of ULLICO's directors and officers again took advantage of the company's lagging stock-valuation system to cash out. In advance of the annual price adjustment on Dec. 31, ULLICO offered to repurchase shares, as it had annually since 1997. The tender, at $146, was limited to $30 million, or 205,000 shares out of a total of 7.9 million outstanding. All shareholders were allowed to sell a prorated amount, based on the amount of ULLICO's stock they held. However, a clause in the repurchase program allowed shareholders with fewer than 10,000 shares -- mostly the directors -- to sell as much as they wanted.
The result: Georgine and the other directors, knowing the price would be cut to $75, sold much of their holdings at $146, insiders say, while the pension funds with larger stakes were restricted in their sales. As a result, ULLICO officers and directors sold about 54,000 of their 100,000 shares back to the company in December, 2000, the company's proxies show. Insiders say they sold more at the same $146 in January, 2001. The final figures won't be out until the 2001 proxy is sent to shareholders at the end of March.
IS IT ILLEGAL? ULLICO gave directors another chance to take gains by repurchasing an additional 200,000 shares the next year, in December, 2001, and January, 2002. As in the earlier sale, directors took advantage of the lag in the adjustment of ULLICO stock. This time, the continued collapse of Global Crossing stock would push the value of ULLICO shares to $44 in the annual price-setting on Dec. 31, 2001, but the repurchase price was still $75.
Overall, those directors who participated did well. Since most had purchased at the $54 price or less, they stood to make at least $368,000 each if they had bought and sold the full 4,000 allotment at $146.
While the stock program allowed ULLICO directors to take advantage of Global's runup, it's not clear if the grand jury will find anything illegal about it. Insiders point out that the repurchase rules had been set in 1997, long before anyone knew what a windfall Global would provide.
A POSSIBLE OUT. However, union leaders on ULLICO's board may face problems regarding fiduciary responsibilities they may bear for their union's pension and general funds. By voting to allow themselves to cash in all their own shares, they would have profited at the expense of their unions, whose repurchases they limited. By taking a disproportionate share of the Global Crossing profits, union leaders benefitted from gains that arguably belonged to their members, say several labor leaders and other officials involved. Even those who took little or nothing may have a problem if they merely approved the moves, insiders say.
They may have an out, according to sources. Most don't actually decide how to vote their ULLICO proxies, but rather hire Wall Street firms to act as trust-fund advisers, including ASB Capital Management, Columbia Partners, and J&W Seligman. "The directors shouldn't get into trouble, because we have the authority to make decisions on behalf of the pension fund," says an official at one of these firms.
Still, because virtually all of ULLICO's capital comes from union members, questions of ethics, at the very least, could arise. ULLICO's union leaders acted just as many executives and directors of other corporations do, cutting themselves better deals than other shareholders. In this case, though, the other shareholders are the members who elected these officials to their union posts in the first place.
The Labor-Global Crossing ConnectionSome two dozen labor leaders sit on the board of ULLICO Inc., a private life insurer owned by unions. Some personally profited when ULLICO earned $335 million from its investment in Global Crossing. Here's how:
1997 ULLICO invests $7.6 million in Global Crossing for a 7.7% stake.
Fall, 1999 ULLICO is losing money on its operations but earns $127 million by selling some Global stock. Insiders knew those gains would lift the annual valuation of ULLICO's shares from $54 to about $146 when its books closed on Dec. 31.
December, 1999 ULLICO offers each director the chance to buy 4,000 ULLICO shares at the 1998 valuation of $54. The union pension funds that own almost all of ULLICO aren't given the same offer, or even told about it.
Dec., 2000/Jan., 2001 ULLICO buys back 205,000 of its 7.9 million shares at $146. Stockholders with fewer than 10,000 shares are allowed to sell all their holdings, so officers and directors can take full advantage, but the pension funds can't. Insiders know that the decline of Global Crossing's stock puts the true value of ULLICO's shares closer to $75.
Dec., 2001/Jan. 2002 ULLICO buys back an additional 200,000 shares, allowing officers and directors who hadn't sold before to cash out at $75. Again, insiders know that the further collapse of Global has again cut ULLICO's true value, this time to $44.
March, 2002 Ullico's pension-fund shareholders now own a less valuable company. Its Global profits have gone disproportionately to officers and directors, some of whom are trustees of the union pension funds that lost out on the deal.
Data: BusinessWeek By Aaron Bernstein in Washington