Commentary: A Black Eye for Labor
In scoring fat gains, union officials may have shortchanged the rank and file
Business Week April 8 2002
The labor movement is being roiled by what could be one of its worst scandals in years. The controversy involves millions of dollars of profit taken by a dozen union leaders from selling stock of a labor-owned insurance company called ULLICO Inc. The gains came from a windfall the insurer earned from early investments in Global Crossing Holdings Ltd. The union officials got a disproportionate share of the profits, allegedly shortchanging their own unions, which own the bulk of ULLICO.
The profit-taking has attracted the interest of a Washington grand jury, which has subpoenaed ULLICO officials and
others. It's not clear if there were illegal acts by the 30-plus union officials on ULLICO's board, including AFL-CIO
President John J. Sweeney and the heads of about 12 unions--among them the carpenters' Douglas J. McCarron, the football players' Eugene Upshaw, and the hotel workers' John W. Wilhelm. While some, including Sweeney and Wilhelm, took no profits, most voted for the scheme, ULLICO documents show.
If labor's leaders don't try to clean up the mess, the entire labor movement could be tarnished. Already, critics inside labor are pushing Sweeney and the other union presidents to kick out those responsible for setting up the complex stock plan. Their prime target: ULLICO CEO Robert A. Georgine, a former top AFL-CIO official for 26 years, who stood to make
by far the most out of the transactions. Some are also insisting that the union leaders return much of their profit to the company. "Let's see them repay the money they ripped off," snaps one labor official who wasn't involved. "Unions shouldn't be doing this stuff, even if it was legal." ULLICO declined to comment, while Upshaw and Wilhelm didn't return phone calls.
To his credit, Sweeney knows labor's credibility as a critic of corporate greed is on the line. He has demanded a probe by an outsider, citing as a model the one William C. Powers, dean of the University of Texas law school, undertook at Enron Corp. On Mar. 21, Sweeney wrote to Georgine insisting on this after Georgine balked. One name floated: former Labor Secretary John T. Dunlop.
Labor must move fast to avoid big damage. If it doesn't, conservative groups could point fingers at unions as labor mounts campaigns in the fall congressional elections. Employers, too, could use the charges to campaign against unions in organizing drives at companies such as Honda Motor and Wal-Mart Stores Inc. Already, the mess has undercut the AFL-CIO's clout. It was gearing up to push for corporate-governance reforms and had launched a campaign with the machinists' union to pressure Lockheed Martin Corp. not to renominate Enron director Frank Savage to its own board. The day the federation started getting media calls on ULLICO, though, AFL-CIO Secretary-Treasurer Richard L. Trumka pulled the plug, leaving machinists to lead the battle on their own. "He didn't want us to look like hypocrites," says one union official involved.
The chance for Georgine and others to profit arose because of the peculiar nature of ULLICO, the parent of Union Labor Life Insurance Co. The company, which sells insurance to union members, invested $7.6 million in seed money in Global Crossing in 1997. ULLICO sold about half its Global shares for a $335 million aftertax profit. But ULLICO is private, so its shares don't trade publicly. Instead, the company sets the price for the upcoming year every Dec. 31, based on its prior year's book value.
ULLICO directors gained handsomely from this procedure. On Dec. 17, 1999, Georgine offered to sell 4,000 shares to each of them at $54 apiece, the 1998 book value--even though ULLICO already knew its Global Crossing profits had lifted its stock value to $146. The union pension and general funds that own most of ULLICO's shares weren't given the same offer, or even told about it, officials say. Georgine himself went from holding 8,868 shares in 1998 to 52,868 in 1999, according to ULLICO's proxies.
In 2000, ULLICO directors again took advantage of the lagging stock-valuation system to cash out. Before the Dec. 31 price adjustment that year, ULLICO offered to repurchase shares, as it had done annually since 1997. The tender, at $146, was limited to 205,000 shares out of 7.9 million outstanding. All shareholders could sell a prorated amount based on their total holding. Yet those with fewer than 10,000 shares--mostly the directors--could sell all their stock.
The result: Georgine and other directors, knowing the price would be cut to $75, were able to sell at $146, while the
pension funds with much larger stakes were restricted in how much they could sell. Overall, ULLICO's directors sold 73,000 of their 120,000 shares, AFL-CIO officials say, giving them combined profits of at least $6.7 million.
It's not clear if the grand jury will find anything illegal about all this. One question is whether ULLICO's union directors breached fiduciary responsibilities to their union's pension and general funds. Even those who took little or nothing could have a problem if they merely approved the moves, insiders say. Still, unions hire Wall Street firms to manage their ULLICO holdings, which may insulate labor leaders from liability, legal experts say.
Liable or not, ULLICO directors have damaged their credibility as union leaders. Nearly all of the insurer's capital comes from union members, which means these labor leaders have shortchanged the very people who voted them into office--at least politically.
Bernstein covers labor from Washington. |
