[PEN-L:29426] "Big Labor?s Enron"

[Ben Day <day@xxxxxxxxxxxxxx>]

August 13, 2002, 8:45 a.m.
Big Labor?s Enron
by Joel Mowbray for National Review Online


At the same time that AFL-CIO president John Sweeney is telling the public 
that unions are the best protector of workers amidst the "corporate crime 
wave sweeping the country," "big labor" may well have a similar problem 
in-house to cope with.

Today National Right to Work Legal Defense Fund (NRWLDF) attorneys are 
filing an administrative complaint with the National Labor Relations Board 
(NLRB) against ULLICO, a financial-services company run by union bosses 
that primarily invests money from union pension funds.

The suit claims that ULLICO lined the pockets of some of the members of its 
board of directors ? all current or former heads of unions ? at the expense 
of the blue-collar workers whose compulsory fees already line those same 
pockets.

NRWLDF's complaint is based on facts that were revealed in April by both 
the Wall Street Journal and Business Week, and it comes as a sitting grand 
jury is investigating possible shenanigans at ULLICO.

Like so many of the recent corporate-corruption scandals, ULLICO's woes 
were triggered by the plummeting prices of tech stocks. The demise of 
Global Crossing ? it is now mired in bankruptcy ? hit ULLICO extremely 
hard, as it had invested in an early stage in the telecom favored by 
wealthy Democrats such as Terry McAuliffe.

ULLICO's original $7 million investment ? at the "founders" price of $1 per 
share ? mushroomed in value, reaching a total worth to ULLICO of an 
eye-popping $2.1 billion when Global Crossing's stock peaked at $64.25 in 
May 1999. But just three years later, that investment had become worthless 
as Global Crossing fell victim to cutthroat competition and a bursting tech 
bubble.

The investment in Global Crossing only occurred because of the morphing of 
ULLICO from its roots as a life-insurance provider for blue-collar union 
workers into a financial-services company, investing the money of pension 
funds from unions around the country.

At the start of the 1990's, former Democratic National Committee official 
Michael Steed took the financial reins at ULLICO, converting the company 
from stodgy insurance carrier to a savvy financial-services outfit with 
substantial investments in the previously booming tech sector.

Part of ULLICO's metamorphosis included making ULLICO itself an investment 
vehicle for various union pension funds, as well as for those sitting on 
ULLICO's 32-member board of directors. In 1997, ULLICO changed its 
longstanding policy of offering its privately held shares for a nominal, 
fixed price of $25 each. At Steed's direction, share prices were adjusted 
annually ? a seemly infinite amount of time in the roller-coaster financial 
world ? with new prices decided each May based on an independent audit of 
the books of the previous calendar year.

Because of its large holding in Global Crossing, ULLICO's own net worth was 
tied directly to the value of the telecom's once-highflying stock. At the 
end of 1998, with Global Crossing's stock at $22 per share, slightly higher 
than its IPO price from earlier that year of $18, PricewaterhouseCoopers 
determined shares in ULLICO to be worth $53.94 each. ULLICO's board 
implemented that price in May of 1999, right as Global Crossing's stock 
price was surging well past its levels of just five months earlier.

Near the end of 1999, with Global Crossing's stock at a still-lofty $52.56 
a share a mere two weeks before ULLICO's books would close, ULLICO's 
Chairman Robert Georgine wrote a memo to members of the board ? a memo that 
is the genesis of much of ULLICO's current woes.

On December 17, 1999, Georgine, who is also a former AFL-CIO official, 
extended a confidential invitation to senior ULLICO officers and directors 
to purchase ULLICO shares at the bargain price of $53.94. It was guaranteed 
money in the bank to all who bought, because with Global Crossing's stock 
price in the clouds, the next audit ? to be based on the condition of 
ULLICO's financial portfolio as of two weeks after the date of the memo ? 
was sure to peg ULLICO's value dramatically higher.

To make crystal clear to those reading the memo that he believed it an 
opportune time to buy more ULLICO shares, Georgine wrote, "I intend to 
purchase additional shares at this time."

Georgine proved remarkably prescient five months later when the annual 
Pricewaterhouse audit nearly tripled ULLICO's share price up to $146 in May 
2000. But by the time the board ratified the new, higher share price for 
ULLICO, Global Crossing's fortunes had already started sinking, with the 
stock price off by 45 percent from its year-earlier peak, down to $35 a 
share. In other words, with Global Crossing's stock price heading south in 
a hurry, the $146 stock price for ULLICO was inflated from the moment it 
became official.

In November of 2000, ULLICO's board voted to buy back $30 million worth of 
its own shares at $146 a piece ? much of which was to be purchased from the 
very board members voting for the stock-repurchasing plan. ULLICO 
shareholders were even given five extra months to sell back stock, right up 
until the next price re-adjustment in May of 2001, when the new price was 
bound to be far lower than $146.

But not all ULLICO shareholders were treated equally. Those with large 
holdings of over 10,000 shares, such as union pension funds, were 
restricted in how much they could sell, but those with relatively 
smallholdings, such as ULLICO officers and board members, could sell back 
all their shares. The net result of this disparate treatment is that the 
self-dealing profited board members ? some quite handsomely, in fact ? but 
that bounty came at the expense of the pensions of rank-and-file union members.

Sure enough, the collapse of Global Crossing's stock dragged down ULLICO's 
value, nearly halving the stock price to $74. All those who sold shares 
between November of 2000 and May of 2001 wound up receiving double what 
they would have at ULLICO's true value.

Among the union leaders who took advantage of the sweetheart deal were the 
following ULLICO board members: Morton Bahr, president of the 
Communications Workers of America; Martin Maddoloni, president of the 
plumbers union; William Benard, former head of the asbestos workers union; 
Jacob West, former head of the ironworkers union; and Douglas McCarron, 
president of the carpenters' union.

The personal profiteering of union bosses coming at the expense of 
rank-and-file union workers is at the heart of NRWLDF's complaint to the 
NLRB. The suit charges that ULLICO's special deal to its board members 
violated the Taft-Hartley Act of 1947 by "enriching union officials to the 
detriment of ordinary workers," says Stefan Gleason, vice president of NRWLDF.

So far, the White House has been conspicuously silent about the millions of 
dollars of ill-gotten gains by union bosses through ULLICO, in large part 
because of its budding friendship with McCarron and his carpenters' union. 
But the White House might want to reconsider: McCarron's union has donated 
$2.1 million in campaign cash so far this year, 88 percent to Democrats, 
including $1 million in soft money to the Democratic Senatorial Campaign 
Committee in late June.

Sen. Ted Kennedy, chairman of the Senate committee that would be tasked 
with looking into ULLICO wrongdoing, received $1,000 from ULLICO in 2000. 
ULLICO's political action committee has handed out $31,500 this year, 94 
percent to Democrats.

Don't hold your breath waiting for a "perp walk" for ULLICO officials 
anytime soon. The NLRB is limited to fining individuals and demanding the 
ill-gotten gains be returned to the pension funds of union members.

The sitting grand jury, on the other hand, is looking into a broader array 
of possibly illegal activities, which could result in hard jail time for 
some ? though that's hardly likely. Few familiar with the situation believe 
that prosecutors will decide to do battle with politically powerful union 
bosses.

Despite the reluctance of Democrats or the White House to discuss unions' 
malfeasance in the same breathless way as corporate accountability, there 
are at least a handful of Republicans in Congress who are targeting "big 
labor."

Rep. Charlie Norwood (R, Ga.) had the best take on the 
fox-guarding-the-henhouse problem of ULLICO:

"I raise a few chickens on my place back in Georgia. I also have had dogs 
on that property that I have loved very much. However, I would never start 
letting my dogs eat my chickens. It would naturally be rough on the 
chickens, and the dogs would never hunt again.

Now I know my Democratic friends love the support they get from labor 
leaders. I know they want to feed them any last chance they get. But please 
don't feed them the savings of hard-working American families.

It's bad for the dog, and murder for the chickens. And friends, that dog's 
already got feathers on his snout that look a whole lot like pension money."