THE SMITH CENTER

for Private Enterprise Studies

Union Scandal Update

by

Charles W. Baird

In my September 2002 column on this site, I discussed the then-developing ULLICO scandal. I observed that the scandals involving serious misbehavior at Enron, WorldCom, Adelphia, Global Crossing and Tyco, have resulted in appropriate public outrage at dishonesty and malfeasance in those corporations. At the same time they have resulted in very inappropriate bashing of all corporations by labor unions and other anti-market interest groups who have called for much greater government supervision of corporations. Yet, those who rejoice over the opportunities those corporate scandals created to spread anti-market sentiments, are rather blind when it comes to union scandals that are at least as egregious. A case in point is the ULLICO scandal that came to light last summer. There have been some important developments since September.

First, let me remind you of what this is all about. Union Labor Life Insurance Company (ULLICO) was founded in 1925 in order to supply low cost life insurance to union workers. It is a privately held corporation which for many years maintained a fixed administered price of $25 per share of its stock. Only unions, union officers and directors, and union members are allowed to become stockholders. In the 1990s ULLICO invested $7.6 million in Global Crossing, whose market value soared, reaching its peak in May 1999. The actual market value of ULLICO stock, as opposed to its fixed administered price, increased along with the value of Global Crossing shares. To share these gains with its stockholders, ULLICO offered to buy back shares at a new administered price of $53.94.

In December1999 ULLICO's chairman, Robert Georgine, sent a confidential memo to the top officers and directors of the company, who were leaders of their respective unions, offering to sell each of them 4000 shares at the $53.94 price. Soon thereafter the ULLICO board raised the administered price to $146 per share, thus permitting themselves to sell the stock they had just purchased for $53.94 back to ULLICO for $146. This buyback offer continued even after the shares of Global Crossing started to tumble. The officers and directors enjoyed total gains originally estimated at $6.5 million.

Technically, all holders of ULLICO stock, including unions and rank-and-file workers were permitted to sell stock back to ULLICO at the $146 price, but the rules of the buyback restricted the amount that large stockholders (mainly the various unions) could sell. Rank-and-file union members held shares mainly through their individual unions' pension funds. Individual stockholders directly holding fewer shares than the unions ­ mainly the officers and directors of ULLICO ­ were permitted to sell all they had. They were the main beneficiaries of the $146 buyback. Unions, and therefore their rank-and-file members, were left holding shares of ULLICO whose actual value, following the collapse of Global Crossing, was rapidly falling. As in Enron, corporate officers and directors in ULLICO benefited while rank-and-file pension funds lost millions. The parallel is exact, but public outrage at the ULLICO scandal is missing. Perhaps this is because, with the exception of The Wall Street Journal, the press has almost totally ignored the ULLICO story.

The ULLICO story has attracted some law enforcement attention. The National Right to Work Legal Defense Foundation has filed unfair labor practice charges with the National Labor Relations Board against ULLICO, and a federal grand jury has been convened to investigate the affair.

John Sweeney, president of the AFL-CIO, who was then on the ULLICO board, successfully put pressure on ULLICO president Georgine to appoint former Illinois Governor James Thompson as an independent investigator of the scandal. According to The Wall Street Journal, the Thompson report estimated the perpetrators' total profit to be $14 million and called for those who gained to compensate the losers. As of this writing Georgine has refused to make the Thompson report public, and in protest of this secrecy John Sweeney resigned from the ULLICO board.

Every corporation has to file annual reports with the Securities and Exchange Commission (SEC) regarding its revenues and expenditures. The intent of the law is to protect stockholders from corrupt corporate executives. Similarly, the 1959 Landrum-Griffin Act requires each union to file an annual financial report (called the LM-2) on their revenues and expenditures with the Department of Labor (DOL). The intent of the law is to protect rank-and-file union members from corrupt union leaders. But the LM-2 reporting requirements are very loose. They haven't changed in 40 years, and the DOL has never done a good job of inspecting and auditing them. Moreover, unlike SEC requirements on corporate reports, LM-2 reports do not have to be independently audited before they are submitted. As a result, union reports are generally perceived as unreliable especially with regard to the extent to which union resources are used for political purposes. For example, one union recently reported $62 million on a line labeled "grants to unions." The SEC would never tolerate such obfuscation. The DOL always has.

Congress is complicit in this double standard. In response to the current scandals Congress enacted the Public Company Accounting Reform and Investor Protection Act which strengthens the reporting requirements of corporations, but it does nothing to strengthen the reporting requirements of unions. In fact, an attempt to add a Union Accountability Amendment to the proposed legislation was voted down by fifty-five senators. Their moral outrage is very selective. It never applies to the unions which give substantial monetary and in-kind political support for their reelections.

However, in December last year the DOL promulgated new, more stringent LM-2 disclosure requirements. The unions promptly announced that they would try to block the implementation of the proposed new rules. As of this writing the DOL is seeking public commentary. Even if the proposed new rules are finally implemented, the financial reporting requirements on corporations will continue to be much more stringent than those on unions. For example, the proposed rules would cover only the wealthiest 22% of unions, and there still would be no requirement of independent audits.

I have frequently commented in these columns on many double standards in American union law that favor unions over employers and individual workers. Here again, the best remedy would be to repeal the National Labor Relations Acts and all of its amendments. In a regime of truly voluntary unionism the principal check on union corruption would be workers exercising their exit options. LM-2 reports would provide the information workers wanted or the offending unions would perish.