[Senate Hearing 108-150]
[From the U.S. Government Publishing Office]
S. Hrg. 108-150
SELF-DEALING AND BREACH OF DUTY: A REVIEW OF THE ULLICO MATTER
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HEARING
before the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 19, 2003
__________
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COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Deleware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael D. Bopp, Staff Director and Counsel
David A. Kass, Chief Investigative Counsel
Jason A. Foster, Senior Counsel
James R. McKay, Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Laurie Rubenstein, Minority Chief Counsel
Cynthia Gooen Lesser, Minority Counsel
Amy B. Newhouse, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Collins.............................................. 1
Senator Levin................................................ 4
Senator Fitzgerald........................................... 7
Senator Carper............................................... 27
Prepared statement:
Senator Lautenberg........................................... 41
WITNESSES
Thursday, June 19, 2003
Hon. James R. Thompson, Former Governor, State of Illinois,
Chairman, Winston & Strawn..................................... 8
Terence O'Sullivan, Chairman of the Board and Chief Executive
Officer, ULLICO, Inc........................................... 29
Alphabetical List of Witnesses
O'Sullivan, Terence:
Testimony.................................................... 29
Prepared statement........................................... 76
Thompson, Hon. James R.:
Testimony.................................................... 8
Prepared statement........................................... 45
Appendix
Chart entitled ``Total Repurchases of Stock from Directors/
Officers Outside of 2000 Formal Repurchas Program''............ 42
Chart entitled ``Total Stock Repurchases at $146.04''............ 43
Chart entitled ``Funds Robert Georgine has been asked to return
or are under investigation by ULLICO's new management''........ 44
Article from Business Week, dated May 27, 2003, submitted by
Senator Levin.................................................. 91
Letter from Donald J. Kaniewski, Legislative and Political
Assistant to the Chairman, ULLICO Inc., dated July 7, 2003..... 93
Letter from Damon A. Silvers, Council to the Chairman, ULLICO,
dated July 7, 2003............................................. 94
Letter to Richard Trumka, Chairman, Corporate Governance
Committee, ULLICO Inc. from James R. Thompson, dated July 1,
2003........................................................... 96
Letter from Robert A. Georgine, Chairman, President and CEO,
ULLICO Inc. to Terence M. O'Sullivan, President, Laborers'
International Union of North America, dated May 8, 2003,
submitted by Senator Collins................................... 98
Letter from Randall J. Turk, Baker Botts, L.L.P., to Senator
Collins, dated June 17, 2003................................... 100
Post-hearing Questions and Responses for the Record from Mr.
Thompson....................................................... 101
Post-hearing Questions and Responses for the Record from Mr.
O'Sullivan..................................................... 102
SELF-DEALING AND BREACH OF DUTY: A REVIEW OF THE ULLICO MATTER
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THURSDAY, JUNE 19, 2003
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:06 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Susan M.
Collins, Chairman of the Committee, presiding.
Present: Senators Collins, Fitzgerald, Levin, and Carper.
OPENING STATEMENT OF SENATOR COLLINS
Chairman Collins. The Committee will come to order.
Today the Committee on Governmental Affairs will examine
questionable stock transactions at ULLICO, Incorporated. ULLICO
is the parent company of the Union Labor Life Insurance
Company, which was founded in 1925 to serve the needs of
working men and women by providing affordable health insurance
to workers who traditionally had been unable to find such
insurance.
Seventy-five years later, many of ULLICO's directors and
senior officers forgot their mission. Instead of serving union
workers, they served themselves a multimillion dollar helping
of the company's assets, assets that belonged to the
shareholders.
ULLICO's officers and directors took advantage of their
positions to enrich themselves at the expense of the company's
primary shareholders, unions, and union pension funds.
ULLICO is not a household word. The names Enron and
WorldCom are better known, in large part because of the size
and the scope of the damage done by the leaders of these
corporations. The wrongs committed at ULLICO total in the
millions, not the billions. But in many ways the wrongdoings at
Enron, WorldCom, and ULLICO are, in fact, similar. They involve
the same betrayal of trust, the same breech of duty, and the
same profiteering by executives.
That is why this Committee has actively investigated Enron
and WorldCom, and that is why we are here today.
ULLICO's fortunes and misfortunes were closely tied to
those of Global Crossing. In 1997, ULLICO invested $7.6 million
to get in on the ground floor of what eventually became Global
Crossing. Shortly after this investment was made, ULLICO
changed the way it valued its stock. Rather than maintaining a
fixed share price, as it had in the past, the company decided
that it would change its share price once a year.
In August 1998 Global Crossing went public and almost
immediately its share price began to have a dramatic impact on
ULLICO's value. In May 1998 ULLICO's stock was valued at about
$28 per share. By May 1999 the ULLICO stock had nearly doubled
to $54 per share. In May 2000 the share price was $146 or
nearly triple what it had been just 2 years prior.
Then the wheels began to come off. During the year that
ULLICO's stock was set at $146, Global Crossing stock price
dropped steadily. By the end of 2000 it was clear that ULLICO's
stock price would be substantially lower in 2001.
Many of ULLICO's senior executives and officers and
directors manipulated these circumstances to enrich themselves.
In 1998 and 1999, after the Global Crossing initial public
offering, the chairman of ULLICO, Robert Georgine, provided
ULLICO directors and senior officers with three exclusive
opportunities to purchase ULLICO stock. Directors and senior
officers were each able to purchase up to 8,000 shares at the
annually set stock price. These offers were not extended to
other shareholders and they were not approved by the board of
directors.
Directors and officers purchasing stock were taking little
or no risk, as it was clear that ULLICO's stock value would be
higher the next year. In fact, the December 1999 stock offer
was such a sure thing that three officers, Robert Georgine,
Joseph Carabillo, and John Grelle, each personally borrowed
more than $200,000 to buy the stock.
Sweetheart deals for directors and officers that were not
extended to the workers they represent and serve are troubling
enough. But where the ULLICO matter becomes most unsettling is
the way in which many of the directors and officers were able
to sell their shares in ULLICO after Global Crossing's price
started to plummet but before the losses were reflected in
ULLICO's stock price.
In November 2002 the company approved a $30 million
repurchase program at $146 per share. By that time, Global
Crossing stock had dropped significantly and it was clear that
many of ULLICO's shareholders would be eager to sell their
stock in order to realize their gains before ULLICO's value was
lowered the following year.
Despite these circumstances, the company approved a
repurchase program with rules that severely limited repurchases
from large institutional shareholders. The company repurchased
only 2.2 percent of shares offered by large shareholders such
as unions and pension funds. On the other hand, it made
unlimited repurchases from shareholders with 10,000 shares or
less, notably most of the company's directors and officers.
Adding insult to injury, Chairman Georgine also exercised a
so-called discretionary authority to repurchase stock.
Historically, this power has been used only to provide
liquidity to the estates of shareholders who had died, and to
shareholders who had resigned from the company or who were
experiencing financial distress. In 2000 however, this
authority was used to provide substantial financial benefits to
company insiders.
In fact, in a staff interview, ULLICO's former executive
vice president referred to the discretionary repurchases as the
director and officer repurchase program. That title is
certainly accurate. A majority of all of ULLICO's discretionary
repurchases at the $146 share price were made from officers and
directors. The chart that we have up shows the percentages.\1\
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\1\ The chart entitled ``Total Repurchases of Stock from Directors/
Officers Outside of 2000 Formal Repurchase Program,'' referred to by
Senator Collins appears in the Appendix on page 42.
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In all, the company spent $44.6 million repurchasing shares
at the $146 share price. Thirty-one percent of those funds were
spent on repurchasing shares from officers and directors, even
though they accounted for less than 2 percent of the company's
stock.
A careful review of the facts shows that ULLICO's officers
knew exactly what they were doing. Transactions were timed and
structured in such a way as to minimize the risk to insiders
and to maximize their returns with no apparent regard for the
effect on the pension plans and union members who were the
primary owners of the company.
One factor suggesting that the participants were aware of
the wrongful nature of their actions is that many of the
transactions were conducted secretly. As Governor Thompson's
thorough report stated, ``these directors received preferential
treatment over other shareholders and such preferential
treatment was never disclosed''.
Another troubling aspect of the ULLICO matter is that the
company's board of directors, in some cases, was directly
involved and benefited personally, and in other cases
apparently sat by and let all of this happen. The passive and
complicit role of ULLICO's board is all the more noteworthy
because many of ULLICO's directors served as presidents of
unions that have been critical of excessive corporate
compensation.
What happened at ULLICO was wrong. Governor James Thompson,
our first witness today, has investigated this matter and
prepared a detailed report. He will share his findings and
recommendations with us today.
Moreover, it is my understanding that a Federal grand jury,
the Department of Labor, the State of Maryland, and the
Securities and Exchange Commission are all investigating these
ULLICO transactions.
I invited Robert Georgine and ULLICO's former chief legal
officer, Joseph Carabillo, to come before us today to answer
questions but they have refused to testify voluntarily. In a
letter the Committee received on Tuesday, which I will submit
for the record without objection, Mr. Georgine's lawyer
explained that Mr. Georgine would invoke his Fifth Amendment
rights if the Committee were to subpoena him.\2\
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\2\ The letter referred to from Randall J. Turk, Baker Botts,
L.L.P., appears in the Appendix on page 100.
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To its credit, new leadership at ULLICO has ushered in long
overdue reforms. After investigations of ULLICO stock
transactions were initiated by a grand jury, the U.S. Labor
Department, the SEC, the State of Maryland, and this Committee,
a new slate of directors was elected to the board and began to
undertake the necessary reforms. Chairman Georgine resigned
under pressure and Terence O'Sullivan, whom we will hear from
today, was appointed as CEO and chairman of the board. I am
pleased to note that the new board has voted to adopt all of
the Thompson report's recommendations.
These are indeed promising developments but it should not
take the spotlight of a Senate investigation or grand jury
subpoenas for a company to clean up its act. I look forward to
hearing what changes Mr. O'Sullivan will be making to ensure
that this scandal never occurs again and that ULLICO does not
revert to its old ways when the spotlight shines its beam
elsewhere.
I look forward to hearing from our witnesses today and I
would now like to call on Senator Levin for his opening
remarks.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Thank you, Madam Chairman, and thank you for
the manner in which you are carrying on this investigation and
hearing, as always in a very fair and very thorough way and I
commend you for it.
This hearing today continues a tradition of the
Governmental Affairs Committee of taking a close look at
specific examples of corporate misconduct to learn not only
what happened but what can and should be done to prevent
similar conduct in the future.
For many years, ULLICO was a relatively small, privately
held life insurance company serving a special community, the
community of unions and union pension funds, investing the
savings of working Americans. ULLICO had been successful in
meeting its customer and stockholder needs for decades when in
the 1990's it expanded its capital base from $8 million to $240
million and increased its outstanding shares from less than
500,000 to more than 10 million.
ULLICO also expanded into new lines of business,
transforming itself from a life insurance company into a
diversified financial group. ULLICO also hired an investments
expert and began investing millions of dollars in startup high-
tech companies.
One of these investments in a small high-tech company,
later known as Global Crossing, suddenly took off in the stock
market and turned a $7 million investment by ULLICO into an
after-tax profit of more than $300 million. That money
represented a windfall for ULLICO and its stockholders.
At the same time the Global Crossing investment began to
take off, ULLICO executives apparently caught the bug infecting
too many other U.S. corporations during the 1990's, paying huge
compensation to its executives. I remember holding a hearing in
a Governmental Affairs Subcommittee back in 1991 examining the
issue of runaway executive pay at U.S. corporations and I have
been following the issue ever since.
According to the Congressional Research Service, in the
early 1990's, CEO pay at large U.S. public companies was about
100 times larger than average worker pay and averaged $2
million. By 1999, CEO pay exceeded average worker pay by more
than 500 times and averaged $12 million.
And by the way, J.P. Morgan said that a chief executive's
pay should not exceed average worker pay by more than 20 times.
While ULLICO may have been a piker in comparison to the
executive compensation paid at some other U.S. companies--and
read today's Washington Post to get the full flavor of that--it
nonetheless swam in the same direction. When the 1990's
started, ULLICO's top executives were paid base salaries and an
annual bonus. Ten years later, ULLICO's top officers were the
recipients of a slew of compensation benefits.
For example, before he left the company, ULLICO's CEO was
the recipient of not only a base salary and annual bonus, but a
second annual cash bonus ranging from $100,000 to $700,000,
40,000 shares of ULLICO stock worth millions of dollars paid
for by a company loan to be forgiven after 5 years, a $5
million split-dollar life insurance policy whose $350,000
annual cost was picked up by the company, deferred compensation
benefits that allowed him to delay paying taxes on income
placed in the program, two separate executive retirement plans,
and the use of a corporate jet with annual operating costs of
$3.5 million dollars.
In addition to that mind-boggling array of benefits,
ULLICO's officers and directors were given special
opportunities in 1998, as our chairman has pointed out, to buy
ULLICO stock at a time when its value was steadily increasing
due to the company's successful investment in Global Crossing.
Using discretionary and formal stock offers and repurchase
programs over 3 years, from 1998 to 2001, ULLICO's top 4
officers and 20 of its 32 directors used ULLICO stock sales to
make over $13 million in profit. While other ULLICO
stockholders also benefited from the stock's increased value,
those ULLICO officers and investors disproportionately
benefited by taking advantage of stock opportunities that were
not advertised or made generally available to other
shareholders. Those ULLICO officers and directors owned less
than 2 percent of the outstanding shares but managed to reap
more than 30 percent of the stock profits created by the Global
Crossing investment.
During the escalation of executive pay at the company,
ULLICO's board of directors appeared to have exercised little
meaningful oversight of either the stock awards or overall
compensation provided to ULLICO management. Directors on the
compensation committee appeared to have simply gone along with
the compensation benefits suggested by management and other
directors followed the lead of the compensation committee.
After conducting a special investigation into what
happened, the Thompson report concluded that there was no
evidence of criminal misconduct and insufficient evidence of
securities laws violations, but certain ULLICO officers and
directors ``did not satisfy''--to use the Thompson report
words--``their fiduciary duties to the company'' and engaged
in--again to use their words--``self-interested transactions.''
The report found that these officers and directors had received
``preferential treatment over other ULLICO shareholders'' and
were allowed to obtain and sell ULLICO shares that ``carried
little or no investment risk'', approved officer and director
stock programs despite ``conflicts of interest and substantial
involvement,'' and failed to disclose to the board and
shareholders the extent of officer and director stock
transactions, compensation benefits, and preferential
treatment.
The Thompson report recommended that suspect officer and
director stock profits be returned to the company and other
steps be taken to recover improper compensation, strengthen
corporate governance, and prevent similar misconduct in the
future.
The facts also indicate that, while executive pay was
climbing at ULLICO, company performance outside of the Global
Crossing investment was headed in the other direction. A number
of management decisions hurt the company's bottom line. By 2002
ULLICO was in trouble, experiencing operating losses due to
high costs, non-performing investments, and unprofitable
business lines. Company profits had disappeared. The company's
stock price was falling and the company's insurance ratings
have been downgraded.
Yet executive pay stayed high.
There are similarities and differences to Enron in this
matter. Like Enron, fiduciary duties were breached at ULLICO.
Unlike Enron, the books were apparently not cooked, the company
was not driven into bankruptcy, employee pensions and
stockholder savings were not destroyed. In the year 2001, when
ULLICO's CEO received more than $5.3 million dollars, the
largest amount he was paid in any year at the company, Enron's
CEO took home more than $140 million.
As our Chairman has pointed out, there has been an
impressive recent change at ULLICO. The company has taken
dramatic steps to clean up its own act. When word got out about
possible misconduct by ULLICO management, several board members
representing the labor movement demanded a special
investigation. The Thompson report resulted, which we will be
hearing about today.
When ULLICO management and some board members resisted
releasing this report to the public, other board members
demanded disclosure. And when their demand was rejected, they
resigned from the board in protest, increasing pressure on the
company. When management and some board members resisted
implementing all of the Thompson report recommendations,
including the recommendation to return suspect stock profits,
other board members were able to rally ULLICO stockholders to
oust those who were fighting reform.
Today, all four senior officers at ULLICO have been
replaced. Five weeks ago new management took over, including a
new CEO, Terence O'Sullivan, whom we will hear from today. A
host of changes have followed.
For example, the new management ended the special stock
plans for officers and directors and banned company loans to
executives. It sent letters to the former officers and a number
of directors demanding the return of all suspect stock profits.
The company froze the deferred compensation and retirement
accounts set up for ULLICO's officers pending a review of the
programs.
New rules requiring full disclosure of executive pay to
company stockholders are under development. The company
discontinued use of the corporate jet and initiated plans to
sell a luxury office building under construction.
It has hired a turnaround expert to revamp company
operations and began taking steps to strengthen the
independence, oversight and financial expertise of the ULLICO
board.
So a hopeful chapter at ULLICO is unfolding as the company
implements fundamental management, executive pay, and corporate
governance reforms. Hopefully this self-cleansing effort will
save the company and begin to rebuild investor confidence.
In the Sarbanes-Oxley Act we adopted important corporate
reforms including a new accounting oversight board, stronger
criminal penalties for securities fraud, and requirements for
more independent and capable audit committees. But that law
targets publicly traded companies. Whether the same or similar
disclosure, oversight, and corporate governance requirements
imposed on public companies are appropriate for private
companies like ULLICO with a limited number of shareholders
raises complex issues.
Some private companies are so large and have such an
important impact on their industry and communities that public
policy requires Congress to at least take a careful look at
that possibility.
Again, I thank you, Madam Chairman, for convening this
hearing and look forward to the testimony of our two witnesses.
Chairman Collins. Thank you, Senator Levin. I would now
like to turn to Senator Fitzgerald, who obviously knows our
first witness very well, for any comments that he might want to
make about our distinguished witness.
OPENING STATEMENT BY SENATOR FITZGERALD
Senator Fitzgerald. Thank you very much, Madam Chairman. I
want to welcome Governor Thompson to this platform.
I just want to say a few words about Governor Thompson. He
has had a very distinguished career in my State. He first made
a name for himself as a corruption busting U.S. Attorney back
in the early 1970's. He went on to be governor of our State for
14 years, and is now chairman of the law firm of Winston and
Strawn, one of the most prestigious firms in our city and
indeed in the country. Governor Thompson really has had a
fabulous career. He was very well qualified to do this report.
I think that the only issue that arises after reading the
report is that there is not much more investigating for us to
do. I think the facts are pretty well established. We know what
happened and when, and Governor Thompson can talk more about
that.
The question arises in my mind, as Senator Levin said, are
there any legislative changes we should make to our securities
laws with respect to privately held corporations? The Sarbanes-
Oxley Act that we passed last year dealt with publicly traded
corporations. In the case of ULLICO, I am concerned that though
it was a privately held corporation, the shareholders of it
were, in effect, union pension funds and unions.
So far, more than just a handful of people were affected by
the transgressions of the management at the company. And I am
wondering if Governor Thompson might have any recommendations
along the lines of protections we might be able to add to our
securities laws for privately held corporations.
And with that, I would like to welcome Governor Thompson to
Washington once more.
Chairman Collins. Thank you, Senator Fitzgerald. You
essentially introduced our witness. I will just add a couple of
points.
Governor Thompson, I believe, served for 14 years as the
chief executive of Illinois and I think that is a record that
still stands in Illinois for continuous service by a governor,
so I wanted to bring that out.
Senator Fitzgerald. Can I add that he was a Republican,
too, and that is not easy to do in Illinois.
Chairman Collins. This is true. He has twice been named by
the National Law Journal as one of the Nation's 100 most
influential lawyers. Given his background in law enforcement, I
cannot think of anyone who was better qualified to prepare the
investigative report on the ULLICO transactions.
So Governor, we are very pleased and honored to have you
here with us and you may proceed with your presentation.
STATEMENT OF HON. JAMES R. THOMPSON,\1\ FORMER GOVERNOR, STATE
OF ILLINOIS, CHAIRMAN, WINSTON AND STRAWN
Mr. Thompson. Thank you, Madam Chairman, Senators.
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\1\ The prepared statement of Mr. Thompson appears in the Appendix
on page 45.
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It is an honor for me to appear before this Committee
today, and an appearance I have looked forward to. The work of
this Committee is well-known and well thought of throughout the
country. To the extent that I can add to your body of knowledge
and be of help in developing your recommendation for
legislation, I would be pleased to do that.
I would like to say at the outset that most all of the
credit for the investigation, the unearthing of the facts with
regard to ULLICO, and the recommendations of the report ought
to go to the very able lawyers at Winston and Strawn who did
the spadework, assembled the information, wrote the report, and
otherwise I think did exemplary work. So to the extent that you
have been complimentary about the report, I would like to pass
those complements right to the Winston and Strawn attorneys
sitting behind me.
We have prepared a PowerPoint presentation that I will go
through as quickly as I can so we can answer your questions
that you may have after the presentation. The facts are
sometimes complex and lengthy and we thought this was going to
be the best device to elucidate it not only for the Committee,
but for others who are interested in knowing the facts. So with
your permission, I will go through that now.
The first slide is an examination of our mandate. As you
know, the first press reports came I believe in the Wall Street
Journal, a big two-page article in early 2002. And in response
to that article and other articles which followed, the board of
ULLICO retained me as special counsel to investigate and make
recommendations to them.
First, on the issue of ULLICO's purchases and issuances of
stock since 1997.
Second, on the interaction between ULLICO and the initial
public offering of Global Crossing.
And third, the broad mandate to look into other matters
that we thought appropriate.
In 1925, the Union Labor Life Insurance Company was formed
and the share price of the capital stock, as it was denominated
then, was fixed at $25, investment limited to unions and
members of unions. By 1987, ULLICO was formed and for a period
of 5 years, from 1987 to 1992, ULLICO rewarded its stockholders
pretty handsomely. Even though the share price was unchanged
from year to year and fixed, the dividends were exemplary, I
believe, 10 percent stock dividends and a 9 percent cash
dividend in most years, quite a decent return on a $25
investment.
In 1992, the board issued convertible preferred
certificates that paid an 8 percent cash dividend and a 4
percent conversion fee, and union pension funds were allowed to
become authorized shareholders.
In the period between 1992 and 1997, preferred certificates
were converted to Class A voting or Class B non-voting stock.
In 1997, the management of ULLICO put forth a proposal to
repurchase stock. In the words of Chairman Georgine, the
purpose of the stock repurchase program first announced in 1997
was to provide liquidity to our larger shareholders. The larger
shareholders, of course, would have been the unions and the
union pension funds, and liquidity meant that there was a
desire to see those unions and pension funds reap the reward of
their prior investment in ULLICO.
So the $25 fixed share price was replaced by a changing
share price set once a year in May based upon the year-end
audited financial statements of the year before.
In this first proposed repurchase of stock program there
was a 10,000 share proration threshold set. That is to say the
shareholders holding less than 10,000 shares could be
liquidated and over 10,000 shareholders, principally the unions
and the pension funds, would have to take a proration depending
on the number of shares to be tendered in response to a
repurchase offer and the number of dollars available to fund
the repurchase program. The intent was to repurchase $180
million over 11 years with the first tranche of $30 million in
1997. And this applied only to Class A and Class B stock.
Of course, the book value of the ULLICO shares were
determined simply by taking stockholders equity at the year end
and dividing that by the outstanding shares in the company,
which included capital, Class A and Class B shares. And as I
said, it was set just once a year.
The 10,000 share proration threshold suggested in 1997
program simply meant that if a tender offer was oversubscribed,
those shareholders holding 10,000 shares or more were prorated
and those holding less than 10,000 shares, principally officers
and directors, were not prorated if they tendered all of their
shares
The only rationale that has ever been offered to us for
this differing treatment is a tax rationale. And that is to say
that those tendering their shares presumably could avoid
ordinary income tax application and receive capital gains tax
application to the proceeds of their share liquidation. But of
course, as we know, both unions and pension funds are tax-
exempt. This means that the larger shareholders, the over the
10,000 proration level, had no tax advantage and the tax
advantage would have flowed to the directors and the officers
or the insiders.
It was also offered, inferentially at least, as a rationale
that this threshold would eliminate small shareholders. But of
course, the later-repeated offers of shares to insiders had the
effect of keeping smaller shareholders going rather than
eliminating them.
In 1997 the executive committee of ULLICO managed to do a
wondrous thing. They invested $7.6 million in Nautilus, LLC,
the predecessor of Global Crossing. That company, Global
Crossing, went public in August 1998. To date, ULLICO's pre-tax
Global Crossing gains totaled almost $500 million on the $7.6
million investment, or about a 64-fold return on investment. By
anybody's standards, in public or private companies in the
corporate and non-corporate world, that was an extraordinary
investment with an extraordinary return.
Beginning in 1998 the Global Crossing investment became a
larger and larger portion of shareholder equity in ULLICO. As
Senator Levin has said in his opening remarks, ULLICO's other
investment decisions were not quite so rewarding and some of
their lines of insurance businesses began to suffer. And so the
Global Crossing investment became a larger and larger share of
stockholder equity. And by December 31, 1999 it totaled almost
85 percent of total shareholder equity in ULLICO, thus
materially impacting the book value and the stock price.
ULLICO's book value stock price increased significantly,
reaching as high as $146 at one point, but lagged behind Global
Crossing's market price which was also on the rise. And so the
increased ULLICO book value resulted in increased proration
when the company decided to repurchase shares. The only ones to
benefit, of course, from the proration threshold were the under
10,000 shareholders who were principally officers and
directors.
The next chart shows the stock repurchase program timeline.
In 1997, $30 million at a price of $27. In 1998, a $15 million
program at a price of $28. May 1999, a $15 million program,
share price rose to $53.
In May 2000 there was what they call an extraordinary stock
repurchase program. It was tied to the price of Global Crossing
stock, a trigger price. Global Crossing stock never reached
that price in that year and so the May 2000 purchase
extraordinary program was abandoned and the company waited
until November of that year to put forth a smaller program of
$30 million available for repurchase. The share price of ULLICO
now climbed to $146.
And as you can see, the proration of the larger
shareholders was extreme. They could sell only 2.2 percent of
their shares. And the same thing is true for 2001, a much
smaller program, $15 million, share price still high, $74,
larger shareholders could get back only 2.7 percent of the
stock that they offered.
Obviously, the Global Crossing investment was an
extraordinary one. It brought great material gains to the
company. It significantly increased shareholder equity and it
was entirely appropriate to reward management under whose
administration this had occurred in some fashion, in terms of
compensation. And so the company set up what they called a
Global Crossing program of incentives for management to reward
this extraordinary investment. This was apart from the normal
compensation of salary plus bonus, and it was aimed
specifically to recognize the management responsible for the
Global Crossing investment decision with extraordinary gains.
By 2001, the end of the 4-year period, five officers
received about $5.6 million as a bonus. So they were, in fact,
by this singular program compensated for their wisdom in
investing in Global Crossing.
Quite apart from that, the chairman eventually gave senior
officers and directors the chance to buy stock in ULLICO. July
29, 1998 2,000 shares were offered to each officer and director
participating at $28. Later that year, in October, another
2,000 shares at $28. And in December of the following year,
4,000 shares at $53. No other persons were given the
opportunity to purchase stock in this fashion, only directors
and officers. And a number of directors responded.
Chairman Georgine offered a rationale for this tightly
restricted share program available only to officers and
directors. He said they did it because management and the board
of directors should have their interests in line with the
stockholders.
Now that is a commonplace rationale for stock programs at
corporations large and small, public and private. Oftentimes,
when people join the board of publicly traded companies, they
are offered the opportunity to buy shares in the company or
they are given options in the company as part of their
compensation in an effort to get them to put on a shareholder's
hat as well as a director's hat. In fact, some publicly traded
companies have a requirement that boards of directors attain a
certain level of ownership in the company in line with that
stated purpose. And so chairman Georgine's rationale for the
share purchase program is not inconsistent with what you see in
other parts of the corporate world.
The question, as it later turned out, was whether that
rationale happened to apply given the subsequent events.
And he said, officers and directors in conducting their
everyday business should have the interests of the stockholders
foremost in their mind. That certainly is a truism in the
corporate world. In fact, it is a requirement of State and
Federal law. But in this case, as we will see, it was not to
be.
There has been a running question in this whole affair
about whether in fact these offers to allow directors and
officers to purchase shares in the company were a form of
compensation. Some directors think so, some did not think so.
The offers of shares were approved by the compensation
committee, though we believe the compensation committee of
ULLICO had no authority to do that.
The offers came in anticipation of increased ULLICO stock
price because of Global Crossing. The 1999 offer had been
approved in May of that year but was actually made or offered
just before year-end when everybody knew that the next year's
price of ULLICO stock was going to be higher.
Interestingly enough, and quite apart from what ordinarily
will happen in the corporate world, there were no restrictions
placed on the sale of that stock. There was no vesting period.
There was no requirement that the stock be held for a period of
time. All these normal devices that companies would employ to
make sure that their stated rationale of aligning shareholders
and directors would continue for at least some reasonable
period of time and would preclude the notion that directors
were making short-term management or supervisory decisions in
hopes of influencing the share price. That did not happen here.
And in 2002, the outside auditors reversed their prior
position and concluded that these share purchase officers were
indeed compensation because there was little or no investment
risk.
If that is how they are viewed, that is compensation, at
least as far as the officers are concerned, in addition to the
normal salary and bonus and the Global incentive program that
had been established.
Another leg of the compensation stool at ULLICO, which we
include in this report and presentation to give you the flavor
and context of all that went on there, came in July 1998,
allowing senior officers to defer up to 25 percent of their
base salary and up to 100 percent of their bonuses.
Again, this is not an uncommon phenomenon in the corporate
world. It has at least temporary tax advantages and allows
compensation or a portion of compensation to grow tax-deferred.
It is not surprising to find that in a number of companies. The
plan, in this case, allowed the executives, again commonly, to
pick the target of their investments.
But what happened here was extraordinary. Because the share
price of ULLICO was fixed once a year and could have been
forecast well in advance of the fixing of the share price,
almost 5 months before, this is not the normal deferred comp, I
think I will invest my deferred comp in a stock whose value is
determined by the market and moves up and down every day.
So what happened was that the people who had the ability to
fix the share price invested their deferred comp in that stock,
ULLICO stock, kept it there until the price reached an all-time
high and then immediately shifted it out as they saw the value
of the shares starting to decline.
Now if you were investing part of your compensation in a
tracking stock program at a company, you might change your mind
about where you want your investment to go as you watch the
market. The difference here is that the market was the result
of the actions of the officers themselves and they held the
key. The public market did not hold the key.
Between 1999 and 2001, Mr. Georgine made $4 million from
this deferred comp program and three other senior officers made
between $320,000 and $605,000.
Quite apart from these occasional stock repurchase programs
authorized by ULLICO, the chairman of ULLICO had for a
longtime, including Mr. Georgine's predecessor, been able to
repurchase shares outside of a formal repurchase program known
as the Chairman's Discretionary Share Repurchase Program.
Historically, and under Mr. Georgine's predecessor, this
program was used to help retiring directors, retiring officers,
the estates of deceased directors and officers gain liquidity.
If shareholders were in financial trouble they could come to
the chairman and gain liquidity. But you will recall that the
share price was then fixed at $25, and had been $25 for a
number of years.
At one point, Mr. Georgine, in referring to this program,
said we do not advertise this discretionary program and we do
not encourage it. But the evidence shows that it was used to
allow officers and directors to sell shares outside of the
formal repurchase programs at the discretion of the chairman
with no standards set up by the board, with no standards
articulated by the chairman, and in fact with his quite frank
statement that we do not advertise this program.
At the May 11, 2000 board meeting the highest price ever
for ULLICO stock was adopted, $146.04,\1\ a threefold increase
from the 1999 price the year before. This was deemed an
extraordinary program. The object was to purchase up to 20
percent of outstanding stock. But as I have said before, it did
contain a trigger clause that Global Crossing stock had to be
$43 a share before the program could be implemented. Global
Crossing never reach that level after the announcement of the
program.
---------------------------------------------------------------------------
\1\ Chart entitled ``Total Stock Repurchases at $146.04,'' appears
in the Appendix on page 43.
---------------------------------------------------------------------------
Shareholders holding fewer than 100 shares had to have all
of their shares repurchased. Now this is a big change. The
prior proration threshold had been 10,000 shares in 1997. In
this extraordinary program in 2000, it is changed for some
reason that we have not yet been able to determine to 100
shares. If they had stayed with the 100 shares and if the
program had gone ahead, then obviously larger shareholders like
unions and pension funds would have been able to sell more of
their shares. They would not have been as seriously prorated.
And this 100 share proration threshold did indeed have a
fairness opinion from an investment banker.
After the announcement of this extraordinary program,
during the summer and fall of 2000, the Global Crossing share
price continued to drop. Of course, the ULLICO share price at
$146 was static. During that period of time, the summer and
fall of 2000, the chairman redeemed $4.6 million of shares from
insiders under his discretionary repurchase program. This was
while larger shareholders could not gain liquidity because the
trigger price of Global Crossing stock had not been met.
So in the fall of 2000, since it would be futile to assume
that liquidity could be gained by anybody under the May 2000
proposal because of the failure of the trigger price to be met,
the board in November 2000 replaced the extraordinary program,
which was never implemented, with a new $30 million program at
the $146 per share stock price.
The terms of the plan and the high stock price made extreme
proration inevitable. The threshold somehow mysteriously went
back to 10,000 shares. That made 20 directors eligible for
complete liquidity, tendering all of their shares. There was
some question raised about whether the chairman had in fact
acted properly in his use of the Chairman's Discretionary
Repurchase Program so the board purported to ratify all past
actions of the chairman in that program. And of course, there
was no trigger price.
In the tender offer documents for this November 2000
program, there were some interesting statements. The company
has not been advised that any of its directors and executive
officers presently intend to tender any shares personally owned
by them pursuant to the offer. Although of course, in the
months preceding the chairman had been redeeming shares under
the discretionary program. The company believes ULLICO stock to
be an excellent investment opportunity for investors seeking
long-term growth of capital, although of course senior officers
and directors were in effect cashing out.
There was no disclosure in the tender offer documents of
the discretionary repurchases by the chairman from officers and
directors. There was never any clear disclosure of the impact
of the proration provisions and the subsequent benefit to
insiders. And there was no clear discussion of the fact that
ULLICO's book value stock price lagged behind Global Crossing's
market price.
In response to this offer of November 2000, shareholders
tendered more than $1 billion worth of stock to be purchased in
a program that had a limitation of $30 million. $1 billion
offered, $30 million available. Extreme proration of larger
shareholders resulted so that they could redeem only 2.2
percent of their shares while insiders, officers and directors,
were able to redeem all of their shares and no director or
officer was prorated.
The chart that the chairman had placed on the easel before
is repeated in the book. As of May 2000 directors and officers
constituted less than 2 percent of all outstanding share
holdings but in the repurchases, both formal and discretionary,
gained 31 percent of the profit.
In December 1999, ULLICO and Georgine entered into a stock
purchase and credit agreement, yet one more leg of the
compensation stool, I believe, at ULLICO for senior people.
They loaned Georgine $2.2 million to purchase 40,000 shares of
Class A stock at $54, then provided that the loan would be
forgiven ratably over the next 5 years as long as he continued
to be employed. By May 2000, when they reset the price at $146
a share, that 40,000 share bonus program at a cost of $2.2
million was worth $5.8 million.
There were some issues concerning this agreement with
Georgine. The board never approved either the stock issuance or
the loan. It was purportedly approved by the compensation
committee but the company's bylaws prohibited the compensation
committee from issuing stock. The compensation committee, at
least arguably, lacked the authority to make the loan to
Georgine.
Layered on top of that was an agreement that allowed
Georgine to sell a portion of the shares he received under the
40,000 share bonus back to ULLICO each year. So while the loan
is being ratably forgiven over here, he has got the option to
sell back over here, and the $2.2 million cost to him is now
worth almost $6 million.
Then, in the fall of 2000, the compensation committee
approved an addendum to his employment agreement to allow him
to sell back the other ULLICO shares that he held at any time
without any restriction. The so-called cash out option.
The slide on the total executive compensation pre-tax for
the five senior officers of ULLICO year by year from 1996 to
2001, which includes salary, deferred comp, bonuses, and stock
profits has Chairman Georgine going, from a low of $650,000 in
the year 1997 to a high of $5.3 million in 2000 and then the
others follow, Steed, Grelle, Luce and general counsel
Carabillo.
Not included in this chart are any retirement plan dollars
for the worth of the split-value life insurance.
These are the laws that we looked at after ascertaining
these facts. We looked at the law of Maryland, where ULLICO was
incorporated, to see what their standard was for fiduciary
duties of officers and directors. We looked at the Federal
securities laws. We looked at the State securities laws of
States in which these tender offers officially reached across
the country, probably all 50. And we looked at the criminal
laws.
Maryland statutory law on the duties of directors is
similar to that to be found in almost every State in the Nation
and that is that directors must act in the best interests of
their company and must act with due care and must act in good
faith. Sort of reminiscent of Chairman Georgine's statements at
one time that it was the duty of directors and officers to act
in the interests of the shareholders, or shareholders come
first.
When directors are involved, the law in each of the States
has come to recognize what is called a business judgment rule.
And that is simply that directors are presumed to have acted in
accordance with their fiduciary duty. But that is simply a
presumption which can be overcome by evidence to the contrary.
And it has some standards built around it in the laws.
We cannot tell you, it is unclear, whether officers of
Maryland companies are entitled to this presumption, as well.
But if they were, that could be overcome by evidence to the
contrary.
We looked at the Federal securities laws that we thought
might be applicable. Section 10(b) of the Exchange Act, SEC
rule 10(b)(5) which prohibits fraudulent schemes, untrue
statements of material fact and material omissions concerning
the sale of securities, because enough questions had been
raised about the tender offers and the repurchases of stock to
implicate perhaps the Federal securities laws, Section 14(e) of
the Exchange Act which prohibits untrue statements of material
fact and material omissions in tender offers.
The standard under the Federal securities laws for proof of
violation is that it must be committed with severe
recklessness. Not proved beyond a reasonable doubt but
nonetheless a very high standard.
Then we looked at State securities laws, or blue sky laws,
which prohibit inaccurate or misleading tender offer
disclosures. And in many States, the standard drops from that
required by the Federal securities laws, extreme recklessness,
down to negligence, plain, simple, ordinary, common, everyday
garden-variety negligence.
We looked at potential criminal liability. Of course, to
find criminal liability, prosecutors must demonstrate beyond a
reasonable doubt that the defendant acted with a specific
intent to defraud, a very high standard. If this were a civil
lawsuit affair, a plaintiff in the civil lawsuit could base a
claim on severe recklessness, Federal securities law violation,
or negligence, State securities law violation.
Some have raised the question as to whether or not we
looked at ERISA or labor management obligations of directors
because of their union or pension fund decisions. We did not.
That was a deliberate decision, I think taken for a good
reason.
First, there was, despite the broad language of the last
part of our mandate that said we could look at anything we
wanted to look at, thought that there was enough there, as it
turned out, focusing on fiduciary duty, criminal, Federal
securities and State securities, and recognizing as we went
along before the investigation was concluded that there was a
very serious, very troubling situation at ULLICO.
We thought that to delve into LMRDA or ERISA matters would
have prolonged this investigation and ultimate report to the
board beyond any reasonable measure because once you start
looking at ERISA, I think it becomes kind of a slippery slope.
You can look at the ERISA implications of ULLICO pension funds,
but since a number of officers--as the Chairman said in her
opening statement--also sat on pension funds of other unions,
there would have been no real rationale between distinguishing
between one pension fund or another.
We thought it was more important to find these facts out,
the basic facts, and to get a report out to the board than to
engage in a prolonged investigation of the discrete subject
matter that is ERISA that might or might not have value at the
end. And so we stayed outside of that.
It is fair to say that the business purpose of the stock
offers were unclear. If the purpose was to align shareholder,
director and officer interests obviously that purpose was not
achieved by the way the program was designed and implemented.
If the purpose was compensation, as Senator Levin
indicated, the compensation of ULLICO officers was already
pretty rich. The approval of the stock offers involved what we
believe to be an excessive and perhaps impermissible delegation
of authority by the board to either the compensation committee
or Georgine, although there is some lawyer's dispute about
that. The Sidley and Austin report, I believe, disputes that.
Georgine may have exceeded his general authority to issue
stock by issuing stock to insiders. Certainly, the terms and
the timing of the stock offers minimized, if not entirely
eliminated, investment risk.
And if this were to be compensation, it was probably
inappropriate compensation, given all the other methods of
compensation employed.
We have, to this day, not found a meaningful basis for the
10,000 share threshold in the formal repurchase programs other
than to benefit--I mean, the implication in this is the way
that insiders would be benefited. And we believe the board
ratified the discretionary program in November 2000 without
enough disclosure of material information regarding
discretionary purposes.
These programs resulted in self-interested transactions
that disproportionately benefited insiders at the expense of
larger shareholders, despite the chairman's stated purpose of
aligning those interests. And we believe that the details and
effect of the November 2000 repurchase program were not
adequately considered by the board or disclosed to
shareholders.
Serious questions exist regarding whether the directors and
officers who participated in the repurchase programs acted
either in good faith or with due care in a manner that they
could reasonably believe was in the best interests of ULLICO.
And we cannot say with any degree of certainty that they would
be protected by the business judgment rule. And in any event,
it is not clear that the business judgment rule would be
available to officers, as opposed to directors.
No outside counsel or professional was specifically asked
to evaluate fiduciary duty issues. In fact, the report
discloses that at least one lawyer from Arnold and Porter
raised the issue of whether or not the 10,000 share proration
threshold in the November 2000 was discriminatory and benefited
insiders. It did not change. The general counsel of the company
denied receiving that caution. And obviously we are in no
position to say who is telling the truth.
Chairman Collins. Governor, I know you are coming to some
of the most interesting parts of the report, on your remedial
recommendations and the rest of your analysis. I am going to
ask you to proceed a little more rapidly because we are
expecting votes and I want you to be able to get----
Mr. Thompson. Madam Chairman, I can easily stop here. I
know the Committee is familiar with the report and the slides,
and I would be happy to go from this point into your questions.
Chairman Collins. Why don't you just quickly run through
any remaining points that you would like to make for us. Thank
you, and I apologize.
Mr. Thompson. I will edit myself.
Chairman Collins. I apologize for hurrying you. It is only
because of the votes that will be coming.
Mr. Thompson. Votes come first.
The next several pages are simply conclusions that should
be obvious by now. Let us go to the possible defenses to the
violation of the laws, because I think that this is important.
We were not able to conclude that Federal securities laws
were violated here because we were not able to conclude that a
plaintiff or a prosecutor could meet the standard of severe
recklessness. We also believe that causation and reliance,
which are requirements of the Federal securities laws
violations, are at least an open question.
Now, I will also say that a reasonable person could make
the contrary argument. But if you are asking us for our
opinion, and we include three former Federal prosecutors on
this team, we do not believe that the Federal securities laws
were violated, although as I say others could come to an
opposite conclusion.
Similarly, when you look at the issue of criminal intent,
which would require a specific criminal intent proved beyond a
reasonable doubt, here too we think that a reasonable person
could make the contrary argument. And so I put myself in a
position of a former prosecutor looking at this case like I
looked at thousands of cases during the course of three
different prosecutorial careers. And I simply came to the
conclusion that if a reasonable person could say the criminal
law was violated and a reasonable person could say that it was
not violated, that a prosecutor would have a difficult time
reaching the standard of proof beyond a reasonable doubt. And
so we did not conclude that criminal laws were violated.
We think that under a negligence standard of many States'
blue sky laws, State securities laws, that a credible case
could be made that they were violated. But without question the
bottom line, we strongly believe, and said so in the report, is
that directors and officers here who participated in these
transactions violated their fiduciary duty to ULLICO and its
shareholders.
And so we made a series of recommendations involving the
return of stock profits and examination of some of the
compensation profits by the new board with a fresh look, and a
whole long series of corporate governance reform
recommendations.
And I am pleased to say that after an initial period of
resistance by the old board, who first wanted us to make only
an oral report. And I said absolutely not. I am not spending 6
months investigating a very complex set of transactions to come
in and give this board an oral report. Then they wanted to keep
the report confidential. Of course, I was bound by that
judgment. I had no way to release the report, so we never did
and never talked about it. It eventually leaked, as you might
suspect it would.
Then the old board refused to accept the recommendations of
the report. I briefed a special committee of the old board,
which then voted to reject our recommendations. And that is
when the American labor movement stood up and said enough is
enough. A number of directors on the board, men like Sweeney,
Wilhelm, and O'Sullivan, said this is the end, we are changing
this place. And they have. They have put together quite a
distinguished new board, I believe, with outsiders beyond the
union movement. An old Congressional colleague, Abe Mikva, an
old friend of mine from Chicago and a man of extraordinary
repute, Ravitch from New York, and others.
And that new board has voted to adopt all of the
recommendations of the Thompson report and has a committee to
study some of the compensation questions that we thought should
be re-examined.
So my belief is, as both the Chairman and the Ranking
Member have said in their opening statements, that ULLICO
today, under its new administration, is to be commended for
standing up and doing what a lot of companies have continued to
drag their feet on.
So I am pleased that is at least one result of our ULLICO
investigation.
And I thank the Committee very much for their allowing me
to make this report, and for your kind and lengthy attention.
Chairman Collins. I want to thank you, Governor, for your
very thorough presentation and helping the Committee understand
the findings of your investigation, as well as the
recommendations.
The Committee staff interviewed some of the former ULLICO
officers and directors and talked to them about their
participation in 1998 and 1999 stock offers. Some of the
officers claimed that they were taking risk and said they had
to purchase the stock with their own money and that essentially
they got lucky, that they were not manipulating the stock
purchase and repurchase rules.
Do you think that the officers and directors who purchased
stock in 1998 and 1999 were just lucky? Were they taking on any
sort of serious risk? Or essentially were they in a position to
know what the stock price was going to be or likely to be?
Mr. Thompson. I think the issue of whether they, in fact,
had to purchase this stock with their own money is of little
relevance because that is the common experience in
corporations. Occasionally a corporation will loan officers
money to make stock purchases, to get them invested in the
company. But the days when that was more freely done are over,
and now corporate loans to officers for the purchase of stock
are disfavored and looked upon with some suspicion.
But passing that issue, my belief is that there was little
or no risk. And second, that they were in a position to know
and control the increasing share price. So I would not agree
with their conclusions.
Chairman Collins. I want to talk to you about the role of
the board prior to your report and then the response after.
As I read through your report I was struck by how much
control the board of directors ceded to management,
particularly to the president and CEO, Georgine. It seems to be
a common pattern that we saw in the extensive hearings that
Senator Levin and I conducted, Senator Levin was the Chair, of
the Enron scandal that we saw, again the board essentially
rubber stamping decisions made by the CEO.
Do you agree that is what happened in this case, and that
the board simply did not exercise enough independent oversight
of management?
Mr. Thompson. Generally, yes, I agree with that conclusion.
I would add that board attendance by members was sporadic and
not what would be expected at a publicly traded corporation.
Meetings were infrequent.
But I also think a reading of this record leads you to the
inescapable conclusion that management told the board as little
as they had to tell them. So I think there were those three
dynamics at work here.
Chairman Collins. Is there also a dynamic at work that some
of the board members did not want to know because they were
benefiting from the transactions that were proposed by Mr.
Georgine? So in a sense, the incentives were to not ask
questions?
Mr. Thompson. I guess I cannot come to the conclusion that
they did not want to know because I would have to inquire into
their minds. But certainly their ratification or acquiescence,
however you want to characterize it, of management's proposals
and decisions obviously benefited them enormously as insiders,
the designs of the programs. And so whether it was culpability
or whether it was inattention or whether it was not
understanding the impact of what they were doing, for example,
in adopting the 10,000 share proration threshold, it is hard
for me to say. It may have been any or all of those.
Chairman Collins. After you submitted your report to the
ULLICO board, it is my understanding that the company hired
other sets of lawyers to prepare rebuttals to your report. Is
that accurate?
Mr. Thompson. That is accurate.
Chairman Collins. Did it surprise you that the board, which
after all commissioned you to get to the bottom of this, had as
a response hiring other people to refute your findings?
Mr. Thompson. I think perhaps initially I was surprised,
simply because your own pride of authorship would lead you to
the conclusion that the board would immediately adopt all of
your recommendations and say thank you very much. But on
reflection, given what we discovered and how we have
characterized it, I was not ultimately surprised.
Chairman Collins. Did the board actually vote to reject
your recommendations?
Mr. Thompson. I cannot recall whether the board itself
voted to reject them or whether they simply took no action. But
the special committee they later formed did vote to reject
them.
Chairman Collins. The old ULLICO board had essentially 5\1/
2\ months to act upon your recommendations before they were
ousted and the new reform board came in. Are you aware of any
actions that the board took during that time to try to follow
one of your primary recommendations, which was to seek the
return of the ill-gotten gains that Mr. Georgine and Mr.
Carabillo had secured as a result of the stock transactions?
Was any action taken to your knowledge?
Mr. Thompson. No, I am not aware of any such action.
Chairman Collins. So it is only recently, when the new
board came in, that there has been any attempt to secure the
return of that money?
Mr. Thompson. That is correct.
Chairman Collins. I would like to turn to the issue of Mr.
Georgine's compensation. I have a chart that I would like to
have put up.\1\
---------------------------------------------------------------------------
\1\ Chart entitled ``Funds Robert Georgine has been asked to return
or are under investigation by ULLICO's new management,'' appears in the
Appendix on page 44.
---------------------------------------------------------------------------
It seems to me that Mr. Georgine earned a great deal of
money from the company between 1998 and 2001. In addition to
his annual salary of $650,000 and bonuses totaling $800,000,
neither of which I should emphasize are under investigation,
Mr. Georgine received almost $2.6 million in profits from stock
transactions, $4 million in profits from his deferred comp
program, and he is now claiming that he is entitled to $2
million in severance pay, and $6.3 million in a supplemental
retirement account.
This also does not take into account the loan that you
discussed, which has been forgiven in part.
Therefore excluding the loan, excluding his base salary,
excluding his base bonus, there is almost $15 million that Mr.
Georgine has been asked to return or is under investigation by
ULLICO's new management, as well as other parties.
Now I realize that you were not engaged to review
compensation issues but you did have some comments in your
report and I would be interested in your judgment about whether
the board was fully aware of the extent of the money, whether
you call it direct compensation or not, that Mr. Georgine was
receiving.
Mr. Thompson. Madam Chairman, I would doubt that the board
ever really focused on the totality of the Georgine or other
senior officer compensation. As you say, I am not a
compensation expert and it was not within my mandate to opine
on compensation, other than to explore it and give this whole
thing a context because of the issue of whether the share sales
were part of compensation or not.
It is pretty clear that Mr. Georgine, for that 3-year
period, was pretty well rewarded. Now on the one hand, if you
are the chairman of a company, the CEO of a company that makes
an extraordinary investment and there is a great shareholder
return, you are entitled to some credit. Whether it was your
specific decision or not, you are the boss. It is like
politics, if the economy is good the incumbent gets the credit.
If the economy is bad, the incumbent gets the blame. That is
just the rules of the territory.
But I would have to say that the total compensation during
this 3-year period gives me pause, in part because of what the
Ranking Member said in his opening statement. With all the
focus on the Global Crossing investment and the rich rewards
that were brought to the company, to have it end up that Global
Crossing was 85 percent of shareholder equity at one point,
with all of the other investment decisions which presumably
management okayed going south, and lines of businesses going
south, you would think that compensation decisions would at
least reflect the troubled parts of the company as well as the
accumulation of shareholder equity. And that does not seem to
have been the case.
Chairman Collins. In addition, as your statement pointed
out, there was already compensation or a reward, if you will,
for the Global Crossing investment through the Global Incentive
Program; is that correct?
Mr. Thompson. That is correct.
Chairman Collins. Senator Levin.
Senator Levin. Thank you, Madam Chairman.
Just on the compensation issue for a brief moment, I know
that was not the direction that you had to look at the
compensation issues, in terms of whether they were appropriate
but rather whether they were proper. And so I want to get into
this pay for performance question with you.
Did you consider, in your recommendations, urging the
compensation committee to link pay and performance, unlike what
happened here where pay and performance were not linked?
Mr. Thompson. I believe our recommendations to the board,
which have now been accepted or are under study by the new
board, did put some pretty defined and stricter parameters on
the issue of compensation and asked that they look at it with
the eye towards rewarding performance rather than rewarding
just showing up.
Senator Levin. Your report concluded, as you just said in
the last few minutes, indicated that there was insufficient
evidence to establish a Federal securities law violation.
Mr. Thompson. In our opinion, yes.
Senator Levin. In your opinion. Even though we had their
officers setting up discretionary grant programs that allowed
officers and directors to obtain stock that was not available
to other stockholders, and at a time that it was known that the
official price of that stock was lower than its value, and that
obtaining the stock would provide an essentially risk-free
profit to the person obtaining it, and although we had a CEO
handing out stock under an alleged discretionary program that
the board did not know about and which it only ratified after
the fact.
I accept your findings and the reason for your findings, by
the way. I think you laid them out very carefully and
thoughtfully here from a prosecutorial point of view.
My question is should we consider changes in the law, in
your judgment, to make those actions which I just identified
and you identified in your report violations of securities
laws?
Mr. Thompson. I think that, going to the first part of your
question, one of the reasons that we did not conclude that
there were violations of Federal securities laws was that we
were troubled by the difficulty of proving causation and
reliance which is a standard, and by the issue of severe
recklessness which is a standard.
But passing that in our conclusion, I think it is worth a
legislative effort, certainly a legislative study, to determine
whether or not the Federal securities laws should be broadened
to include the things that you have talked about without being
able to give you a conclusion now, since I have not obviously
studied that subject.
In the same way, I think I would give the same response to
a question posed by the Chairman in her opening statement about
whether or not the law should require more from private
companies. I think that, too, is worth legislative study and
perhaps a legislative effort.
Senator Levin. I would assume, Madam Chairman, that this
record and that the findings of the Thompson inquiry then would
be referred to the appropriate committee that has jurisdiction
over these laws to see whether or not, in fact, our securities
laws should be tightened to address more specifically actions
here which seem to me so totally inappropriate. And yet, under
current standards, for perfectly legitimate reasons that
Governor Thompson has told us, do not constitute violations.
So perhaps when we are done we could make reference to the
Banking Committee, I believe it would be, for that
consideration as well as for this public/private issue which a
number of us have raised.
Chairman Collins. I would anticipate, as with all of our
oversight hearings, that we would refer any significant
findings either to Federal agencies or to Congressional
committees.
Senator Collins. I would also perhaps, I hope
appropriately, welcome from Governor Thompson any further
thoughts that he has on that issue to be shared with us so we
could forward them that way.
Mr. Thompson. I will.
Senator Levin. Governor, the number of corporate governance
recommendations in your report are based on current standards
at the stock exchange and at NASDAQ. For instance, you
recommended a majority of the ULLICO board of directors be
independent, recommend treating former or current union
presidents or pension fund trustees as inside directors who
lack this independence.
That raises some interesting questions to me, if I am
reading the recommendation correctly. Unions and union pension
funds are the primary stockholders of ULLICO, and it seems to
me that most private companies want their shareholders on the
board. As a matter of fact, that is usually the purpose of most
privately held companies is to have their shareholders be on
the board and you really make decisions and to link directly
the operations of the company to their shareholder interests.
The SEC is now considering a proposal, as a matter of fact,
to require public companies to allow large shareholders, at
least large shareholders, to be able to nominate directors.
So we have, on the one hand, the desirability of linking
the interest of shareholders to the company's management and
direction more directly. As you pointed out in your testimony,
some companies even require their directors to own stock in the
company.
So where is the disconnect here, if there is any?
Mr. Thompson. I will have to say in all candor that this
was a subject that we debated within our team at length, and I
am not sure we are all of one mind on this issue.
I think for me the bottom line is that the most important--
and I recognize the strength of what you say about interested
shareholders and the representation of large shareholders on
the board. I see it in my own experience every day. And
obviously a director who owns shares has an interest of some
sort that most often is thought of as a healthy interest if the
right sort of restrictions are placed around those
shareholdings so that you are not making 30-day decisions on
behalf of the company.
I think I would perhaps come down, more importantly, on the
side of requiring that a clear majority of the directors on the
board be independent by any standard and then dealing with the
sort of interested director issue by full disclosure of the
interest and a forbearance from voting on something when there
is a true and obvious conflict. I think that would perhaps be
satisfactory in the great majority of cases.
Senator Levin. These pension funds want to protect those
pension funds. They want to be there.
Mr. Thompson. Absolutely.
Senator Levin. It is not a conflict, they are protecting
their funds and the future of their funds that put together
this corporation, private corporation just for that purpose.
Mr. Thompson. Correct.
Senator Levin. And I am not sure I see the conflict. It
seems to me it is the very purpose of the company.
Mr. Thompson. I am not saying that there is necessarily a
conflict in that context. All I am saying is that I think for
good corporate governance a majority of the board ought to be
independent of any sort of outside interests and transparency
and disclosure can probably handle the rest.
Senator Levin. One of Georgine's compensation aspects, or
part of it, was a retirement trust called a rabbi trust
apparently, which protects his pay if the company were to
declare bankruptcy. Apparently these arrangements are common,
these so-called rabbi trusts.
Mr. Thompson. Yes.
Senator Levin. On the other hand, they are troubling to me,
at least at first glance, because they permit executives to
retain the high-level of their pay right into retirement
despite the faltering or the failure of a company.
Did the employees of ULLICO have the same protections for
their retirement benefits, for instance?
Mr. Thompson. They did not.
Senator Levin. Is it something that you looked into as
being inconsistent for the executives to have protections for
their retirement? And this is common, by the way. This is not
something unique to ULLICO. But it is something which troubles
me and I want to just ask you, because you are in a field here
which in a sense is broader and has lessons for us beyond
ULLICO. Is that not a troubling aspect?
Mr. Thompson. Yes, and at least one highly ranked corporate
executive in the several months has lost his position over the
differential between how his pension was to be treated and the
workers' pensions were to be treated, American Airlines where
the workers were being asked to make sacrifices while the board
quietly made arrangements for the protection of the leaders'
pensions.
This was not part of our mandate, so we did not look at it
with that eye, but I think you are quite correct. It is a
troubling issue especially in today's economy, where workers
are being asked to make sacrifices or to participate in plans
to save the company to a far greater degree than they ever have
before in my experience and disparities either the difference
between the treatment of the managerial pensions and the
workers' pensions or the disparity that you have noted in the
difference between managerial compensation and worker
compensation increasing from I think you said 100 times to 500
times become troubling.
So that is why I think we ought never--and certainly the
Congress ought never to close its eyes to issues raised that
perhaps were not as troubling in prior times but may be
troubling now and in the future.
Senator Levin. Thank you. Thank you, Madam Chairman.
Chairman Collins. Senator Fitzgerald.
Senator Fitzgerald. Thank you, Madam Chairman. Governor
Thompson, thank you very much for the report. I think it was
very good, very thorough, and very well balanced.
Are you aware of any civil lawsuits that has been filed
against the directors or officers?
Mr. Thompson. I do not know about the directors. Several
civil lawsuits been filed against the company by unions or
union locals who feel aggrieved.
Senator Fitzgerald. Shareholders?
Mr. Thompson. Shareholders, yes. At least two or three, I
think. Those are pending and I am sure Mr. O'Sullivan, in his
testimony, can elaborate on that.
Senator Fitzgerald. That explains why the board might not
have liked your report because I assume that report could be
used as evidence in lawsuits, although you do not conclude that
there is definitively any violation of civil laws.
Mr. Thompson. I think frankly that those who hold contrary
opinions to those that we reached on either the violation of
Federal, civil, or criminal laws or State securities laws will
proceed full pace with their investigations or considerations
without regard to our legal conclusions. I think basically the
old board and the old management did not like our report
because it said you violated your fiduciary duty and you ought
to give the money back. I think that is why they did not like
the report.
Senator Fitzgerald. As I said at the outset, I think the
issue here for us is what changes in the law should we
consider. I am troubled that because this is a privately held
corporation, some of the disciplines we have imposed
statutorily on publicly traded corporations do not apply to
them. The company is incorporated under Maryland law. I see
that Sidley and Austin, in its rebuttal to your report, notes
that under Maryland law officers of a Maryland corporation owe
no statutory duties.
One of the thoughts that I have is--boards of companies or
incorporators of companies decide which States' laws to
incorporate under, which causes boards to look around for the
corporate law that is most favorable not to the shareholders
necessarily but to protecting the board from legal liability.
And so naturally, they are going to choose corporate laws of
States that imposed the fewest duties on them.
Do you think it might make sense for Congress to amend
Federal securities laws to give shareholders the right to
determine the State of incorporation? The reason I raise this
is because I think when directors or officers are in charge of
deciding which State they are going to incorporate under, there
is a race to the bottom, and States start to compete to have
the most liberal corporate laws. I see the Senator from
Delaware perking up.
Senator Carper. I sure am glad I came to this hearing.
Senator Fitzgerald. Not to impugn the laws of the State of
Delaware--Delaware has an additional advantage in that there is
a very well developed body of case law that explains exactly
what that State's corporate laws mean.
But what would you think about if we gave shareholders the
right to determine the State of incorporation?
Mr. Thompson. Senator, with all respect, I do not think
that issue is that large. It would be very difficult, I think,
to find a way to involve shareholders other than the initial
incorporators in a corporation decision without the requiring
that once an incorporation decision is made that future
generations of shareholders can go back and change it to
another State.
Frankly I think--and I am not saying this simply because
Senator Carper has entered the room, Delaware is obviously the
preference of most companies, at least most publicly traded
companies, and that has been true for a long time. And I do not
believe that is going to change.
And they, of course, have developed in Delaware a very
stringent body of corporate governance law that gets, as I read
the press, more stringent everyday.
I have not, at least in my experience, Senator, I have not
noticed a rush to the least regulatory State. You might find a
greater rush to a lesser taxing State than you would to a State
with lesser structures on corporate governance.
And I am not sure I would agree with the conclusion--I know
with all respect to my colleagues in the profession at Sidley
and Austin, I do not agree with many of their rebuttal
conclusions. We employed a neutral expert on Maryland corporate
law, Dean Sergeant, who is with us today. And I do not think he
believes that there is a significant difference between
Maryland corporate law and the duties it imposes on officers
and directors and the laws of most other States.
Senator Fitzgerald. Do you have any ideas on what we might
do to protect shareholders of privately held corporations? I
suppose the reason we have not been concerned about the
privately held corporations, as your report reflects if they
have under 500 shareholders, is that they are covered by the
statutes that apply to publicly traded corporations.
I suppose most privately held corporations are just mom and
pop operations, maybe family held, maybe your local dry cleaner
or automobile dealership, and while there may be some insider
dealing, but they are probably brothers and sisters and aunts
and uncles and we are just not going to get in the middle of
that.
But this is a privately held corporation that is quite big,
over $1 billion market value at one time or capitalization book
value. Although they had under 500 shareholders, those
shareholders, in turn, represented thousands, or tens of
thousands of people.
Do you have any ideas on what we might be able to do to
bolster the protections for shareholders in such corporations?
Mr. Thompson. Senator, off the top of my head, I do not and
I would hesitate to tread in this area without some more
deliberate study. But I would be pleased to go back and, with
my staff, discuss this issue. And if we come up with things
that are viable, to bring them to the attention of this
Committee.
The principal difference today, of course, between public
and private corporations is in reporting obligations under
Federal law. And in fact, oftentimes there is a desire of a
company to go from private to public but the cost
considerations of becoming a publicly traded company, in terms
of reporting and oversight, are sometimes significant for what
you call the smaller companies.
Senator Fitzgerald. Consider a tender offer though. If a
publicly traded company were to do a repurchase of shares, I
would imagine the SEC would approve the tender offer terms?
Mr. Thompson. Absolutely.
Senator Fitzgerald. In this case, you just have insiders
with nobody supervising them deciding the terms of the tender
offer. The insiders came up with a policy that was
discriminatory to the larger shareholders and beneficial for
the inside managers.
Did they retain an outside counsel to help them with their
tender offer program?
Mr. Thompson. Yes, there were a number of law firms
advising ULLICO, quite large, quite reputable firms. But the
pattern, I think, that we saw was that they kept the lawyers
and their legal advice sort of what I would call
compartmentalized. They did not ask their law firms for too
much information or too much advice on the broad topic of
fairness or things of that mature, or ask them specific
questions and then come back with specific answers.
Senator Fitzgerald. You mentioned that Arnold and Porter
raised questions about whether fiduciary duties rising under
Maryland corporate laws had been violated, and they just
brushed it off. Do you know if Arnold and Porter was the law
firm that was asked to advise on the tender offer?
Mr. Thompson. I do not recall who did the tender offer. We
can certainly get that answer for you out of our files and get
back to you.
The reference that I made was to an assertion by a partner
at Arnold and Porter that he had told the company, told
management, that in his view the November 2000 share purchase
offer 10,000 threshold was unfair or discriminatory. Carabillo,
whom the Arnold and Porter lawyer said was given the advice,
denied that any conversation like that took place. There is
nothing in writing, so it is disputed.
Senator Fitzgerald. Do you know if the bylaws of the
corporation provided for director and officer indemnification?
Mr. Thompson. I do not know that. It would be unusual if it
did not.
Senator Fitzgerald. My guess is that it probably did.
Mr. Thompson. I do not know of many corporations today that
would go without D&O.
Senator Fitzgerald. One final point regarding Credit Suisse
First Boston. They did the fairness opinion on May 11, 2000,
for the shareholders. Were they hired by the shareholders? Or,
who hired Credit Suisse First Boston to do the fairness opinion
as to the price at which their shares were going to be
purchased?
Mr. Thompson. The company.
Senator Fitzgerald. So they were retained by the company to
do the fairness opinion for the people whose shares the company
was buying.
Mr. Thompson. Right.
Senator Fitzgerald. OK. Thank you very much, Governor.
Mr. Thompson. Thank you, Senator.
Chairman Collins. Thank you, Senator. Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thanks, Madam Chairman.
Governor, good to see you. I think the last time we spent
some time together was about 4 years ago and I recall being in
your old home.
Mr. Thompson. Right, in the kitchen of the executive
mansion in Springfield, Illinois.
Senator Carper. That is right. Governor Ryan had invited my
family and me, we were coming to the end of a National
Governors Association meeting in St. Louis and with my wife and
two boys we had gone to Springfield to visit the Lincoln sites
and to see a little bit of your State and ended up being house
guests of the Ryans that evening. And you and I, and I think
your daughter were there, as well.
Mr. Thompson. That is correct.
Senator Carper. It is a really neat Governor's house, a
huge place, almost as big as the White House, I think. I do not
know who built that place, but they did a nice job.
Mr. Thompson. It is the third oldest continuously occupied
governor's mansion in the Nation. It is the largest and it is
the largest because during former Governor Ogilvie's time the
place was literally falling down and they had to decide whether
to restore it or to tear it down. And they decided to restore
it because it was a quite beautiful mid-19th Century structure.
While they were restoring it, they just simply doubled its size
and matched the architecture on the outside so that unless you
know the history of the house you cannot tell where the old
house and new house began.
Senator Carper. I remember remarking to my wife on our way
back to Delaware when we left, that the governor's mansion in
Illinois has more bathrooms than we had rooms at the governor's
house in Delaware by far.
But they had taken the third floor of the governor's house
and the Ryan's had turned it into like a playroom for their
grandchildren.
Mr. Thompson. The attic, yes.
Senator Carper. And our kids, at the time, were about 9 and
10 years old and I thought we would never get them in the car
to leave, to go back.
Mr. Thompson. I have to take credit for putting the pinball
machines and the exercise equipment and things of that sort up
there.
Senator Carper. We still talk about it.
How did you get drawn into this imbroglio with ULLICO?
Mr. Thompson. I was recommended to the board as a special
counsel to investigate the issue of share purchases and
repurchases but officers and directors and the company's good
fortune that came about as a result of their Global Crossing
investment.
Senator Carper. Just briefly, I am bouncing back and forth
between about three hearings today, but just briefly for what a
Senator who serves on this Committee needs to know, what did
you find that I should be especially aware of?
Mr. Thompson. We found that at ULLICO, the stock purchase
and repurchase programs were conceived and implemented in such
a fashion as to benefit what we call the insiders, the officers
and directors, who were allowed to purchase shares without
risk, to resell them to the company without restriction both
within the context of formal programs and informal programs,
and that they violated their fiduciary duties under Maryland
law, the State of their incorporation.
We came to no conclusion that they had violated Federal
securities or Federal criminal laws, although as I noted
earlier in my testimony, a reasonable person could make the
contrary argument.
Senator Carper. I understand there has been a change in the
leadership of the company?
Mr. Thompson. That is correct.
Senator Carper. And of the board itself, and I think that
occurred in May?
Mr. Thompson. May 8, the new board was elected and new
officers were elected, and they have been vigorous since their
election in both accepting the recommendations of our report
and implementing the recommendations of our report and
demanding the return of the unjustified profits gained by the
insiders on their stock sales.
Senator Carper. Do I understand that before May 8 that a
special committee of the board chose to accept some of your
recommendations but not all?
Mr. Thompson. No, they voted to reject our recommendations,
the special committee of the old board, yes.
Senator Carper. The newly constituted board has accepted
and acted on all of your recommendations?
Mr. Thompson. Yes, sir, or is the process of acting on all
of them.
Senator Carper. What is there for us to do here in the
Senate, with regards to lessons learned?
Mr. Thompson. I think what there may be for you to do, and
this I think will require further study by staff and others
whom you may wish to refer the matter to, is whether in fact
there ought to be greater obligations imposed by Federal law on
the actions of private companies. Now that poses all sorts of
challenges, of courses, as we recognized here this morning. But
that certainly is an open issue for debate.
And I think there is some tangential efforts off of that
study that could go forward with regard to the issue of
compensation and properly structured programs, director
independence.
This shows that there is sort of a hidden side, I think, to
the corporate world that the private companies occupy. And it
may or may not be appropriately treated today by Federal law.
Senator Carper. A member of my staff was good enough to
prepare a briefing paper and I just want to read a sentence or
two from it and ask you to say is that a fair statement, is it
a fair representation of the truth as you know it.
While the actions of ULLICO's directors were certainly
reprehensible, they may ultimately be guilty of no more than
engaging in deceptive practices and gross mismanagement. And
they go on to say unlike Enron and other high-profile scandals
however, Governor Thompson will report that he found no
evidence of criminal intent by ULLICO's officers. Is that a
fair statement?
Mr. Thompson. That is a fair statement.
Senator Carper. Thank you very much. Thank you, Madam
Chairman.
Chairman Collins. Thank you.
I want to thank you, Governor, for your testimony this
morning, for the amount of time you have spent on this issue
with me and with my staff. We very much appreciate your
contributions.
Mr. Thompson. Thank you very much, Madam Chairman and
Members of the Committee. It was a privilege.
Chairman Collins. I would now like to hear from our second
and final witness today, Terence M. O'Sullivan, the General
President of the Laborers International Union of North America
and, for purposes of this hearing, he is testifying in his
capacity as the new chairman of the board and CEO of ULLICO.
He assumed this position in May. He and a new slate of
directors have pledged to make significant changes at ULLICO,
and we welcome you here today, Mr. O'Sullivan. You can proceed
with your statement.
STATEMENT OF TERENCE O'SULLIVAN,\1\ CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER, ULLICO, INC
Mr. O'Sullivan. Thank you, Chairman Collins.
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\1\ The prepared statement of Mr. O'Sullivan appears in the
Appendix on page 76.
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Good morning, Chairman Collins, Senator Levin, and other
members of the Committee. By name is Terry O'Sullivan and since
May 8, I have served as Chairman and CEO of ULLICO, Inc.
In fact, I would guess that few corporate chairman and CEOs
have had the honor of appearing before your Committee after
being on the job for only 45 days.
I am also privileged to have served as General President of
Laborers International Union of North America since the
beginning of 2000. I appear today on behalf of ULLICO. However,
there are differences of opinion on the board on some of the
matters under discussion here and my views are not necessarily
those of all directors.
I will report to the Committee on the scope and nature of
my involvement with ULLICO over the past 3 years. I was first
elected to the board of ULLICO at the annual shareholders
meeting in May 2000. The first board meeting I attended was in
November 2000. As it happens, that was the meeting at which the
board adopted the 2000 stock repurchase plan that served as the
vehicle for many of the stock transactions Governor Thompson
has described for the Committee.
Directors had no prior notice of the modifications to the
stock repurchase program that were going to be proposed at that
meeting. There was no disclosure at that meeting of the 1998
and 1999 stock offerings to directors and officers. There was
no disclosure of the significant changes in the rules of the
repurchase program from those approved in May 2000, including
the increase from 100 shares to 10,000 shares of those stock
tenders that would be excused from proration. There was no
disclosure of the way the decline in the price of Global
Crossing stock affected the price of the ULLICO stock that was
being repurchased. Finally, there was no disclosure of the way
the 10,000 share proration rule would benefit insiders.
I voted with the majority at that meeting, a decision I now
regret. I can only say that because of the lack of disclosure
of the salient facts, my vote was uninformed. My conduct after
that meeting shows that I would have voted differently had I
been fully advised.
For the next 15 months I was unaware that anything was
wrong at ULLICO other than the decline in business performance.
When press reports of insider transactions first appeared in
March 2002, I and many other labor leaders learned for the
first time of the true nature of the stock repurchase program.
In light of the serious nature of the matters being
reported there was broad support, including my own, for AFL-CIO
President John Sweeney's call for an independent investigation.
Jim Thompson, former Governor of Illinois, was ultimately
chosen by ULLICO's board and agreed to serve as independent
counsel to the company to investigate these matters.
I received a copy of Governor Thompson's report in November
2002. It was only then that I understood that when the company
offered stock to directors and officers on December 17, 1999 it
was offering them a sure thing that other stockholders were
being denied. It was only then I understood the discretionary
repurchase program had become a multimillion dollar benefit
limited to certain insiders. Further, it was only then that I
understood the impact of excusing shareholders with less than
10,000 shares from proration, how it guaranteed that most of
the money would go to a few officers and directors.
The board met in December 2002 and decided to appoint the
special committee to review the report and make recommendations
to the board. Because I have never owned or sold ULLICO stock,
I was one of eight directors asked to serve on the special
committee.
I am no lawyer and make no claim of legal expertise. I am a
trade unionist. Everything I have I owe to the working men and
women of the Laborers International Union of North America. The
conclusions to which I came with respect to Governor Thompson's
report grew out of my duty to the union I serve, to ULLICO so
long as I serve on the board, and to the pension funds my
members are counting on.
After I heard Governor Thompson and read his report, I
became convinced that these stock repurchase deals were bad for
my union, bad for my union's pension funds, and bad for ULLICO
and its shareholders.
The special committee considered Governor Thompson's
recommendations in two parts. We unanimously adopted his
governance recommendations with minor modifications.
Unfortunately, we were divided on whether to accept his
remedial recommendations. Hotel Employees and Restaurant
Employees President John Wilhelm and I found ourselves in the
minority as those who felt that directors and officers should
be required to return profits from the stock repurchase
program.
President Wilhelm resigned after the special committee
rejected our position. At various points in time AFL-CIO
President Sweeney, Executive Vice President Linda Chavez-
Thompson, Operating Engineers President Frank Handley,
Carpenters President Doug McCarron, and NFL Players President
Gene Upshaw also resigned. However, I continued to work with
all of them and other trade union leaders to address the ULLICO
crisis.
At this point, I feared for the company's survival after
the board had rejected Governor Thompson's remedial
recommendations. The labor community had lost confidence in
management. The company's financial situation was and remains
challenged. But I believe that ULLICO is too important to the
labor movement as a whole and to my union, the Laborers
International Union, to be allowed to fail.
I, therefore, chose to stay on the board but with a broad
group of concerned union leaders, began to organize a reform
slate of directors to run for the board at the upcoming annual
shareholders meeting.
Our slate included former Federal Circuit Court Judge Abner
Mikva, former U.S. Secretary of Labor Alexis Herman, and former
Chairman of the New York State Urban Development Corporation,
Richard Ravitch, as well as 11 prominent elected union leaders
drawn from among the company's major shareholders.
With the assistance of our shareholders, the AFL-CIO, the
Building Trades Department, the International Brotherhood of
Electrical Workers and numerous unions and their pension funds
and their QPAMS, we were able to secure the backing of more
than 70 percent of the shareholders.
On May 8, a little more than a month ago, our slate was
accepted by the former management and unanimously elected at
the annual shareholders meeting. Immediately prior to that
meeting, Bob Georgine resigned from all of his ULLICO offices.
In the Board of Directors meeting that followed on the same
day, I was elected Chairman and Chief Executive Officer. I
serve in those positions without compensation.
All members of former management who were deeply involved
in the stock repurchase program have now been replaced. In
addition to my election as Chairman and CEO, ULLICO has now
retained an Acting President Edward Grebow, a professional with
extensive experience in fixing troubled businesses.
The former chief legal officer and chief financial officer
have also left the company.
On May 9, the company asked the trustees of ULLICO's
management's rabbi trusts to make no payments to anyone pending
a board investigation of those trusts. Since then, we have also
stopped payment on a series of executive compensation plans
including a deferred compensation plan and contributions on an
executive split-dollar insurance policy.
The new board met again on May 13, less than a week after
its first meeting. At that time, we reconsidered and adopted
all of Governor Thompson's remedial recommendations. Those
recommendations include a recommendation that we demand the
return of $5.6 million in stock profits from directors and
officers participating in the stock repurchase program. At the
same time, the board also authorized an inquiry into the role
of outside service providers in the stock repurchase program.
On May 13, the board also approved the appointments of a
number of committees. Among these was a committee chaired by
Judge Mikva which is charged with the task of reviewing the
remaining stock transactions as well as past executive
compensation and past attorney and other service provider
conduct.
We have now sent demand letters to all those whom the board
has asked to repay money. If arrangements for returning the
profits are not made within 30 days the board has voted to take
whatever steps are necessary to effect the removal from any
position within ULLICO.
The board awaits the recommendation of Judge Mikva and his
committee on what further steps may be necessary to accomplish
return of the money.
All currently active union presidents have either returned
or pledged the return of their stock repurchase profits.
All in all, we are pleased with our record over the last 5
weeks. We must do more in the weeks and months to come but we
think we have set a standard for how boards should deal with
wrongdoing and its consequences. We are seeking to make our
company whole.
The Committee may be aware that there are a number of U.S.
Attorney and regulatory investigations of the matters at issue
here. We have and will continue to cooperate fully with those
investigators.
Let me conclude by saying this, the good news at ULLICO is
that our directors and shareholders and the labor movement has
on a whole stood their ground, fought and won, and the company
is now acting to obtain the return of unwarranted gains.
Our fight to do the right thing at ULLICO feels like it is
making a difference. The company has not failed. No one has
lost a pension or other benefit as a result of what has
occurred. ULLICO employees have a defined benefit pension plan
which is properly diversified and in no danger of defaulting on
its obligations.
There will be sacrifices in the months ahead at ULLICO. The
company faces a range of challenging business issues that
extend beyond the stock repurchase program. But what sacrifices
there must be to put ULLICO back on track will be shared and
shared fairly.
I and my colleagues on the board and in the management team
are totally committed to carrying our efforts through to a
successful conclusion. The working people who are both our
ultimate owners and our customers deserve no less.
I would be happy to answer any of your questions and thank
you for the opportunity to be here today.
Chairman Collins. Thank you, Mr. O'Sullivan, for your
testimony.
Let me begin by telling you that I have a great deal of
confidence in you personally and I commend you for the steps
that you have taken. You mentioned in your testimony that on
May 13 the new ULLICO board voted to adopt all of the remedial
recommendations of the Thompson report; is that correct?
Mr. O'Sullivan. That is a correct, Chairman Collins.
Chairman Collins. That is in contrast to the special
committee which voted to reject some of the recommendations?
Mr. O'Sullivan. Yes, the special committee voted, it was
unanimous in our support for Governor Thompson's corporate
governance recommendations. The vote for his remedial
recommendations were six against and three for, actually. But
there was a difference in two of us completely embraced
Governor Thompson's remedial recommendations. There was one
board member, who while he supported it, urged that we
encourage those officers and directors that participated in the
2000 stock repurchase program to return their profits.
Chairman Collins. I am pleased, obviously, that the new
board has voted to adopted all of the remedial recommendations,
as well, but I am concerned to learn that vote was not
unanimous. In fact, it was not close to unanimous. It is my
understanding that the new board voted 14 to 8 to adopt the
remedial recommendations; is that accurate?
Mr. O'Sullivan. That is accurate, Madam Chairman.
Chairman Collins. We have asked your counsel for the names
of the directors who voted against accepting the remedial
recommendations and we have not yet received that information.
Do you have that information today?
Mr. O'Sullivan. I do not have the information today. The
minutes from the meeting on May 13 are in draft form. It will
be approved at a board meeting we have on June 25. We want to
ensure their accuracy, since the vote was close, as you said,
at 14 to 8, that we have recorded each of the director's vote
appropriately.
Chairman Collins. Would you share those minutes with the
Committee, or the names of the eight directors who voted
against accepting?
Mr. O'Sullivan. Yes, we will.
Chairman Collins. Thank you.
The first recommendation was that the 18 directors and
officers return profits made from stock purchased in 1998 and
1999. It is my understanding that the profits from those stock
sales totaled $5.6 million. Do you know how much has been
voluntarily returned to date?
Mr. O'Sullivan. The amount we will get you. There have been
four active presidents that had either returned or committed to
returning the proceeds from those stock transactions.
Chairman Collins. It is my understanding that less than
$700,000 has been returned this point; is that correct?
Mr. O'Sullivan. I would say that is a fair number.
Chairman Collins. What actions will you take if the
directors and officers fail to return the money? It is my
understanding there are five directors still on ULLICO's board
which, according to the Thompson report, should return their
profits.
Mr. O'Sullivan. As I testified, the active presidents that
continue to sit on the board have committed to return the stock
profits.
Our plan of action is two-fold. First, as I testified, we
sent the letters out on June 16. We approved it May 13 at our
board meeting. The reason for the delay between May 13 and June
16 was tax considerations. We hired outside tax professionals
before we sent those letters out. The letters are now out. The
18 directors in question have 30 days to return their profits.
We have also turned this issue over to Judge Mikva's
committee as to our other options if the proceeds from the
stock transactions are not returned, as to what other legal
options and other options that we have to pursue.
Chairman Collins. When Mr. Georgine resigned or was forced
out from ULLICO, it is my understanding that he sent you a
letter in which he claimed he was entitled to a $2 million
severance payment.\1\ My information is that he told you that
he wanted the $2 million to count as his repayment of profits
made in his stock deals, but also as a return of profits on
behalf of six specific directors of the company. And five of
those six directors that were singled out in Mr. Georgine's
letter as the recipients of his largess are still sitting on
the board of directors.
---------------------------------------------------------------------------
\1\ The letter from Mr. Georgine, to Terrence M. O'Sullivan, dated
May 8, 2003, referred to appears in the Appendix on page 98.
---------------------------------------------------------------------------
Do you know why Mr. Georgine is trying to bail out
directors who are still sitting on the board out of his
severance pay?
Mr. O'Sullivan. Chairman Collins, I did, in fact, receive
Bob Georgine's resignation letter, as you said. I did not have
any conversations with Mr. Georgine as to how he chose that
group of directors that he wanted his golden parachute or
severance package to cover.
I will say that on June 13 as well, not only with the
demand letter for the return of the stock profits, another
letter was sent to Mr. Georgine regarding his resignation. If
you will bear with me, there is one paragraph that if I could,
for the record, read. It is addressed to Mr. Georgine from me
as Chairman and Chief Executive Officer.
``Dear Mr. Georgine, we received your letter dated May 8,
2003 in which you advise the company of your decision to
resign.
``I am writing to inform you that as of this date, ULLICO
does not agree with certain representations or
characterizations set forth in your May 8 letter concerning the
events that proceeded your resignation. We are continuing to
review this matter and will provide you with a more complete
response in the near future.''
Chairman Collins. I am sure you can understand, Mr.
O'Sullivan, that I cannot help but wonder if any of the
directors singled out by Mr. Georgine to be the recipients of
some of his severance pay are the same directors who voted
against accepting the remedial recommendations that required
the repayment. That is why I had hoped before this hearing that
we would receive from ULLICO the names of the directors who
voted no.
Mr. O'Sullivan. As I said, Chairman Collins, and I
apologize for not having the information today, but to make
sure that we are completely accurate, we wanted to get those
draft minutes approved. Once they are we will provide you with
that information.
Chairman Collins. Governor Thompson informed us that after
he concluded his investigation and presented his report that
ULLICO hired another outside law firm, Sidley Austin Brown and
Wood, to prepare a counter-report refuting his findings and
recommendations.
Do you believe that it was a prudent use of company funds,
after hiring a prestigious law firm headed by Governor Thompson
to do a fair evaluation of what happened, to then go and hire
another law firm to try to counter what was found?
Mr. O'Sullivan. Whether it was prudent or not, I found it
interesting. They were hired by the company not with the
approval of the board. I should have stated before----
Chairman Collins. Excuse me, can I clarify? The board did
not approve the hiring of the second firm?
Mr. O'Sullivan. Not to my knowledge, it was hired by the
company.
What I found odd is, knowing Governor Thompson and his
reputation and his work, I should have also said when I started
that I believe not only ULLICO but the American labor movement
was well served with his investigation, with his
professionalism in the way that he has handled this whole
matter. And I think that because of his investigation, it
flushed out a lot of things that have allowed us to not only
change management at ULLICO, but to provide us with an
opportunity to move ULLICO forward.
Chairman Collins. Senator Levin.
Senator Levin. Thank you.
On that one comment of yours, you say that second firm
which was hired to review the Thompson report was hired by the
company. You meant by the management?
Mr. O'Sullivan. Yes, Senator.
Senator Levin. As far as you know, not by the board?
Mr. O'Sullivan. As far as I know, not by the board.
Senator Levin. I want to, first of all, commend you for
what you have done, and organized labor for what it has done
here in cleaning up this problem. It is not easy to take on
your own. Too many corporate boards refuse to take on their
own.
I want to just read this regarding some excerpts from a
Business Week column of May 27 \1\ because I think it is
important not just to give you the recognition that is
appropriate for cleaning up the situation here. But also, it
seems to me, it gives you an opportunity to speak with even
greater strength on corporate reforms which we need. Ironically
enough, having gone through this situation, you are now in a
position where you can put that to good use not just to clean
up the ULLICO situation but to help those of us that are trying
to reform some of the corporate abuses in this world, to give
us your experience and to speak with strength because you were
able to take on a board which is made up of friends,
colleagues, and former associates. And that is not so easy. I
want to read just a couple of paragraphs.
---------------------------------------------------------------------------
\1\ Article from Business Week, dated May 27, 2003, submitted by
Senator Levin, appears in the Appendix on page 91.
---------------------------------------------------------------------------
This is from the Business Week of May 27: ``When it comes
to good governance, corporate America can learn a useful lesson
from the labor movement. For more than a year, the AFL-CIO has
been plagued by a stock scandal at ULLICO, labor-owned insurer.
The company's former chief executive and more than a dozen of
his 28 directors, most union leaders, pocketed millions of
dollars by selling ULLICO stock at the expense of the union
pension funds that own most of the company.
``What is notable is that after months of internecine
battles, AFL-CIO President John Sweeney and other labor leaders
who sat on ULLICO's board moved decisively to clean up the
mess. They ousted CEO Robert Georgine and put directors on
notice that they will have to pay back the profits that they
made. That could amount to at least $6 million.
``These actions stand as a model for other large companies.
It is painfully clear today that corporate boards rarely
fulfill their designated role as watchdogs over the CEO.
Complacent directors allowed apparently illegal abuses to occur
at a string of companies from Enron to Tyco International. Many
other directors do little to rein in executive excesses.''
And then jumping down in the article:
``Yet Sweeney and a few other such as Laborers Union
President Terence O'Sullivan, who has since been named ULLICO's
new CEO, defied the institutional taboos and took on their
chums. `We still have boards that are hand-picked by the CEO
for the most part and those directors do not usually stand up
to the CEO,' says University of Delaware Management Professor
Charles Elson. `Directors need to have the guts to make change.
That is the lesson from ULLICO.' ''
We have had a number of hearings in this Committee and the
Permanent Subcommittee on Investigations, a Subcommittee of
this Committee, looking into the failures of board of directors
to take on management and to carry out their fiduciary duties.
And we are going to need all the help we can get in getting
some additional legislation passed relative to the
responsibilities of directors and how to hold them accountable.
For instance, right now the SEC does not have the authority
to impose administrative fines on boards of directors who
violate regulations of the SEC. They can impose administrative
fines on the stockbrokers that violate the regulations but they
cannot impose those fines on the boards of directors or on
auditors. We are trying to change that. As a matter of fact, we
passed an amendment here in the Senate, that I introduced,
which would give the SEC that authority. We cannot get it out
of the House yet. We hope it comes out of conference but we are
not sure.
It seems to me the labor movement, having gone through
first-hand and personal, up close and personal here, a problem
such as you had at ULLICO, can really speak with authority. I
know the labor movement wishes it had not had that experience.
But it can be put to good use.
I would urge you to do that. In addition to all of the work
that you are doing, which you have taken on as its new CEO,
that you also help us to take that experience and to put it to
good use in terms of corporate governance generally. That would
be a real gift to this country. And I would hope that you would
be able to do that, in addition to your other responsibilities.
Mr. O'Sullivan. Senator Levin, thank you. And I would be
remiss, Chairman Collins, if I did not thank you and Senator
Levin for your confidence in your comments.
I think that while my name shows up in the press quite
often, or has, it is the American labor movement that deserves
the credit because there, in fact, were not a few. There were
more than many who, once Governor Thompson's report was
released, and those findings disturbed us greatly, led to the
events of May 8 and the new management team at ULLICO.
So I accept your comments. As you said, Senator, I think it
is reflective of organized labor's commitment to good corporate
governance, to transparency at every level. And when you are
going to point fingers at others, you need to make sure that
you have sound corporate governance yourself. I feel confident,
completely confident, that the new corporate governance that we
have adopted at ULLICO, and the fine-tuning that we will do in
the months and years to come, ULLICO will serve as the model
for all corporations when it comes to corporate governance.
I would also say that as a large privately held company, we
support Sarbanes-Oxley. As we develop our corporate governance,
we are taking Sarbanes-Oxley into consideration for complete
transparency. And as you said, Senator, we would look forward
to working with this Committee and corporate America in how we
better police corporate behavior.
Senator Levin. I hope that you will include in that the
whole issue of executive compensation.
Mr. O'Sullivan. Without a doubt.
Senator Levin. It has now grown at the larger companies to
the point where the CEO is making 500 times the average worker.
It was 100 times, which was excessive, but 100 times the
average worker in 1990 or 1991.
It has gone totally out of kilter here. And it is not easy
to get a handle on this issue, by the way, because you cannot
legislate it very easily or appropriately even directly.
But we are going to need the labor movement, it seems to
me, to help us in this. And we are going to need you at ULLICO,
when you look into this issue, to correct the situation where
your former CEO has a base salary of $650,000, an annual bonus
$500,000 in 2001, a second cash bonus that ranged from $100,000
to $700,000 each year, a stock award of 40,000 shares paid for
by a company loan over 5 years, deferred compensation plans
that allowed him to invest in what were called deemed ULLICO
stock which netted him $4 million more, a split-life labor
insurance policy, a company jet, and so forth.
I know you are going to be looking into all of that, but I
really hope that you will set a really good standard in terms
of corporate pay and correcting what is such excess to me, such
shocking excess for a CEO whose corporate responsibilities,
fiduciary responsibility, are to people who are in his labor
movement. These are workers. These are pensioners. And we had
someone here who was making this kind of executive pay?
This, by the way, is peanuts compared to some of the
corporations that you read about in today's Washington Post.
But nonetheless, they are mighty large peanuts. And they are
too big, it seems to me. And I hope that in addition to all of
the other governance issues that you are going to have to look
at--and I know you are not getting paid at all. You indicated
you are serving without pay, which I did not even know about.
It does not surprise me, knowing what your commitment is and
what the labor movement's commitment is to cleaning up this
problem.
But keep an eye on this corporate pay issue. Set a standard
for the rest of the corporate world on what a board should do
and what a compensation committee should do relative to
corporate pay. Because it is really the only hope we have since
legislation is very difficult and very dubious in this area.
Mr. O'Sullivan. I hope that me not getting paid is not a
reflection on my ability but we could not agree more. On behalf
of ULLICO, and I think on this issue I can speak on behalf of
the AFL-CIO, we would look forward to working with this
Committee and this Congress to address executive compensation.
We clearly plan on addressing the issue of executive
compensation within ULLICO as we hire new senior management and
new officers for the company.
I might also add that while I am chairman and chief
executive officer of the company today, it is not my intention
to continue to be the chief executive officer. As I said in my
testimony, I am a labor representative. I am not an insurance
executive. And we do plan on hiring a seasoned financial
services executive to run the company on a day-to-day basis.
Chairman Collins. Mr. O'Sullivan, first let me thank
Senator Levin for this comments. I have just one final question
for you, and it concerns Mr. Carabillo.
As you know, we had invited Mr. Carabillo, along with Mr.
Georgine, whom I consider to be the two central figures in
these stock transactions, to testify today. Both of them refuse
to come voluntarily and, in the case of Mr. Georgine, his
lawyer informed us that if he were subpoenaed he would have
invoked his Fifth Amendment rights.\1\
---------------------------------------------------------------------------
\1\ The letter from Randall J. Turk, dated June 17, 2003, referred
to appears in the Appendix on page 100.
---------------------------------------------------------------------------
It is my understanding that Mr. Carabillo was supposed to
have resigned from ULLICO in March but that upon taking control
of the company in May, you discovered that he was still on the
payroll even though he had not shown up at work for some time.
And that if he had been on the payroll for just one more week
he would have been eligible for a lucrative early retirement
program.
I know that you have since taken action to terminate him
from the payroll, but have you learned how this happened?
Mr. O'Sullivan. I have not. That matter has been turned
over to Judge Mikva's committee to ascertain as to what role he
played, what monies he received from the time that he left
ULLICO until the time that we discovered that he was still on
the payroll.
Chairman Collins. And it was a surprise to you that he was
still on the payroll?
Mr. O'Sullivan. A complete and total surprise. And that is
why once it came to our attention we immediately addressed the
situation and then terminated his employment with the company.
Chairman Collins. I thank you for your testimony.
Senator Levin. Madam Chairman, I just thought of one
additional question, and that has to do with the options which
are going to be provided by Judge Mikva as to how to go after
the money which the Thompson report suggests should be
returned. Will he be making recommendations in addition to
giving options?
Mr. O'Sullivan. That committee will be making
recommendations to the full Board of Directors.
Senator Levin. Would you be willing to share those
recommendations with this Committee?
Mr. O'Sullivan. Yes, we would.
Senator Levin. On the executive trust issue, so-called
rabbi trusts, that is a very troubling problem for me. It
bothers me greatly that executives would protect their
retirements with these kind of trusts to protect themselves
from any bankruptcy or the company going south, whereas the
workers do not have that protection. I know, of all groups, the
labor movement would have a similar concern.
Do you know offhand how many rabbi trusts ULLICO
established for executives? Do we have numbers on that? And are
they all frozen?
Mr. O'Sullivan. I do not know the number. I know that there
was one for Mr. Georgine. They all have been frozen. They were
frozen when we came in as a new board and then handed over to
Judge Mikva's committee for consideration. In many instances we
had not even seen the documents that established those trusts.
We have those now. Those are being reviewed by the committee.
I would also, certainly not to correct Governor Thompson,
but on the protection of the employees pension fund, there was
a question about that before. That is a separate pension fund
that covers the rest of the employees, rabbi trust aside. That
is a fund governed and overseen by ERISA.
As I testified before, the matters at hand, while they have
had a financial impact on shareholders, the pension fund of
ULLICO is healthy and there is no concern about the employees
of ULLICO not being able to secure their retirement benefits
when they leave the company.
Senator Levin. Thank you.
Chairman Collins. Mr. O'Sullivan, I want to wish you well.
I think you have a big job ahead of you. It will be interesting
to see how many more unpleasant surprises you discover as you
delve more deeply into ULLICO's operations.
We look forward to receiving from you the information that
both Senator Levin and I had requested.
And I want to thank you for testifying and for undertaking
the reforms that you have put in place.
I want to thank all of our witnesses today. The lessons of
Enron, WorldCom, and ULLICO should be applied to all
corporations. Whether a company is large or small, or publicly
or privately held, shareholders should be treated fairly and
executives must fulfill their ethical and legal obligations.
There still remains much to learn about what happened at
ULLICO as well as at the other corporations who have been
involved in questionable transactions. We need to restore the
faith of shareholders in American corporations. That remains a
work in progress.
This hearing record will remain open for 15 days for the
submission of additional materials.
Again, I thank our witnesses and the hearing is now
adjourned.
[Whereupon, at 12:34 p.m., the Committee adjourned.]
A P P E N D I X
----------
PREPARED STATEMENT OF SENATOR LAUTENBERG
Madam Chairman, some ULLICO officers and directors made money
selling ULLICO stock on favorable terms that weren't available to the
company's other shareholders. That was wrong; Governor Thompson was
called in to investigate; ULLICO's management team has been replaced.
Wall Street Journal reporters and editorial page writers have
likened what happened at ULLICO to the Enron, Tyco, ImClone, WorldCom
and other corporate scandals that have rocked our economy and led to
massive job losses.
Nothing could be farther from the truth. I am not condoning the
ULLICO stock transactions in question. But to compare ULLICO to Enron
is ludicrous for several reasons.
First and foremost, Governor Thompson found no evidence that
ULLICO's directors and officers acted with ``criminal intent'' or
``severe recklessness.''
ULLICO is a private corporation; therefore, it is not generally
subject to Federal regulations.
Many of those who profited from the transactions have returned the
money.
The new Chairman, Terry O'Sullivan--who is serving without
compensation--and the new Board have cleaned house and are implementing
Governor Thompson's recommendations expeditiously.
ULLICO is not bankrupt. Union pension funds have not lost money
investing in ULLICO stock. Union members have not lost their jobs or
their retirement savings or their pensions. Shareholders have not lost
billions of dollars.
If anything, we ought to be looking at what is happening at ULLICO
as an example of how to reform corporate America.
It's sad that the Wall Street Journal and other like-minded groups
who don't care about ordinary working men and women are on a vendetta
to discredit labor unions and labor leaders at every opportunity. And
it's sad that a few people have given them an opening. But, as I said,
to liken ULLICO to Enron, to tar and feather all labor leaders, is
preposterous. The fact remains that trade unionism has been and
continues to be one of the great reform movements in our Nation's
history. Our society is more prosperous and more just because of the
labor movement.
Thank you, Mr. Chairman. I look forward to hearing from our
witnesses.
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