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June 02, 2004

SEN. COLLINS’ COMMITTEE RELEASES NEW STAFF REPORT ON ULLICO INSIDER STOCK DEALS
4 ULLICO Directors Invoked Fifth Amendment Rights Instead of Answering Committee Questions

WASHINGTON, D.C. -- Following a 13-month investigation, Senate Governmental Affairs Committee Chairman Susan Collins (R-ME) today released a comprehensive majority staff report on ULLICO Inc. -- a union-owned financial services company -- that detailed a pattern of self-dealing, insider transactions, and other financial abuses. The report includes new information about how the management of ULLICO and its Board of Directors enabled wrongdoings to occur.

“This was an extraordinary case of insider dealing, corruption, and abuse of power. The ULLICO Board of Directors and management utterly failed in their responsibilities to their shareholders. The company betrayed the trust of the unions and pensioners that owned ULLICO, which makes it all the more unacceptable,” said Senator Collins, who chaired a Committee hearing on ULLICO in June 2003.

Key findings of the report include the following:

-- Although ULLICO was a corporation directed by leaders of organized labor, company management structured stock transactions largely for the benefit of insiders rather than the union members whose unions and pension funds were the company’s primary shareholders.

-- ULLICO insiders arranged for themselves exclusive opportunities to purchase company stock at artificially low prices.

-- Despite the company’s faltering performance, ULLICO senior management received increased bonuses and benefits. Management concealed the true levels of executive compensation from the board of directors and the shareholders, attempting to maintain secrecy and avoid criticism that their pay was disproportionate to company performance.

-- The lack of oversight by the board of directors enabled Chairman and CEO Robert Georgine to spend company funds irresponsibly or for the benefit of himself and his relatives. Examples include $380,000 in unsecured loans for his nephew, Patrick Mertz, relatives on the payroll, and a $3.7 million lease for a corporate jet.

-- As he departed from ULLICO, Georgine attempted to give money to six sitting directors. Committee staff attempted to interview all six board members about this incident. However, four of them invoked their Fifth Amendment right against self-incrimination rather than answer questions from the Committee staff about the attempted gift or any other ULLICO-related subject. Each director who took the Fifth Amendment also refused ULLICO’s request to return his profits.

-- The self-dealing at ULLICO had an additional cost to the company. ULLICO spent nearly $14 million on legal, consulting, and lobbying fees to deal with the multiple investigations spawned by the stock transactions.

-- ULLICO did not adequately deal with its problems until public pressure and scrutiny by investigators led to the ouster of Georgine and the election of a slate of reform-oriented directors.

“It shouldn’t have taken the spotlight of a Senate hearing or grand jury investigation for ULLICO to clean up its act,” said Senator Collins. “But at least there are some lessons to be learned from the investigation.

“First, boards of directors cannot take their responsibilities lightly. At ULLICO, significant power was concentrated in the chairman and CEO. The Board not only failed to oversee management, some directors were complicit in the abuses. A more aggressive Board would have stopped these abuses. It is very troubling these abuses went on for so long.

“Second, there was an atmosphere of secrecy at ULLICO, which allowed many of these abuses to go unchecked. This atmosphere changed once the company came under public scrutiny. It took a long time for this to occur, but now the new management has stated that it is committed to increased public disclosure.

“We’ll be keeping an eye on ULLICO’s continuing reform efforts,” Senator Collins concluded.

The Committee will transmit copies of its report to the Justice Department, the Labor Department, the Securities and Exchange Commission, and the State of Maryland regulators for possible enforcement actions.

The major findings of the report are attached. The full report is available online.

FINDINGS

Although ULLICO was a corporation directed by leaders of organized labor, company management structured stock transactions largely for the benefit of insiders rather than the union members whose unions and pension funds were the company’s primary shareholders.

-- ULLICO invested $7.6 million in Global Crossing and realized an after-tax gain of about $305 million. These gains temporarily masked operating losses in ULLICO’s core businesses and created the false impression that management was running the company successfully. Senior executives used this illusion of success to justify unwarranted increases in their compensation and benefits.

-- ULLICO insiders exploited the temporary windfall from the Global Crossing investment to enrich themselves by orchestrating manipulative transactions in ULLICO stock. ULLICO insiders received from company funds a net profit of $10.6 million in stock transactions, which deprived other shareholders of those gains. Additionally, the resulting scandal spawned numerous state and federal investigations. ULLICO spent nearly $14 million on lawyers, lobbyists, and consultants in response to those investigations.

Despite the company’s faltering performance, ULLICO senior management received increased bonuses and benefits. Management concealed the true levels of executive compensation from the Board and the shareholders, attempting to maintain secrecy and avoid criticism that their pay was disproportionate to company performance.

-- In addition to his base salary of $650,000 per year, Chairman and CEO Robert Georgine claimed approximately $20 million in stock profits, bonuses, and benefits between 1998 and 2001. Four other senior ULLICO executives received more than $9 million in stock profits, bonuses, and benefits over the same time period.

-- ULLICO’s Chief Legal Officer Joseph Carabillo said that Robert Georgine instructed him never to disclose information about executive compensation unless legally required to do so. Documents confirm that ULLICO’s management paid outside lawyers to advise them on how to avoid disclosing compensation information to the Board of Directors.

-- Former directors expressed shock when informed that ULLICO executives were so highly compensated. So closely held was information about Georgine’s compensation, that Executive Vice President James Luce said he was unaware that Georgine had received a $2.2 million stock purchase credit agreement until he read a vaguely worded disclosure in ULLICO’s 2002 Annual Report, two-and-a-half years later.

ULLICO’s Board allowed the company’s Chairman and CEO, Robert Georgine, to abuse his authority and use the power of his position improperly.

-- ULLICO’s Board of Directors was large. It consisted of 28 current and former labor leaders and was authorized to be as large as 32 members. Its meetings were infrequent, and attendance was poor. The Board tended to defer to Chairman Georgine’s judgment or delegate authority to small committees over which he exerted heavy influence. This allowed Georgine to spend company funds irresponsibly or for the benefit of himself and his relatives.

-- Georgine employed at least four of his relatives at ULLICO: his daughter, two sons-in-law, and a nephew. Georgine arranged for his nephew, Patrick J. Mertz, to receive $380,000 in unsecured loans from ULLICO, none of which was ever repaid. Georgine did not inform the Board or seek its approval of these transactions. The loans were ostensibly working capital for a business selling ULLICO insurance products. However, documents indicate that some of the money was used to open a brokerage account and engage in short-term trading of stocks. Questions remain about how much of the money was actually used for legitimate business expenses.

-- While ULLICO’s core businesses were struggling under Georgine’s leadership, ULLICO self-financed the construction of a new luxury headquarters building for $160 million and leased a corporate jet for $3.7 million per year. Flight logs list Georgine as the primary passenger on the jet approximately twice a week for two-and-a-half years, to destinations including Italy, Switzerland, and Fiji.

ULLICO insiders arranged for themselves exclusive opportunities to purchase company stock at artificially low prices.

-- ULLICO’s annually-fixed stock price combined with the extraordinary growth of its investment in Global Crossing to create a situation where merely observing Global Crossing’s market price in December provided a reliable indication of what ULLICO’s price would be the following May. Thus, ULLICO insiders were able to virtually guarantee profits from transactions in ULLICO stock by manipulating the timing of their own opportunities to buy and sell.

-- On three occasions in 1998 and 1999, Chairman and CEO Robert Georgine allowed officers and directors to purchase ULLICO stock at prices that were obviously below its true market value, given the growth of Global Crossing. Georgine did not provide the vast majority of ULLICO’s shareholders, primarily labor unions and pension plans, a similar opportunity to purchase undervalued ULLICO stock.

-- ULLICO insiders were so confident that they would profit from their purchases that some of them borrowed large amounts of money to buy ULLICO stock. Three senior executives borrowed about $215,000 each from Mellon Bank in December 1999 in order to purchase ULLICO stock. Two of them had never borrowed money to buy stock before.

ULLICO insiders arranged for themselves special opportunities to sell their stock back to the company at artificially high prices.

-- Most shareholders could only sell their shares by participating in ULLICO’s annual formal repurchase program, under which ULLICO insiders received favorable treatment.

-- Georgine also allowed officers and directors to sell their ULLICO stock back to the company under his “discretionary authority.” Robert Georgine and Chief Legal Officer Joseph Carabillo arranged for discretionary repurchases for themselves and other insiders without regard to the limits previously placed on this authority. The repurchases were not disclosed to nor approved by the full Board of Directors. Nor did management disclose the repurchases to other shareholders or inform them that they too could request repurchases merely for the purpose of realizing profits.

-- Joseph Carabillo appears to have encouraged some of the discretionary repurchases. Carabillo is alleged to have circulated a form to certain ULLICO insiders allowing them to submit shares for discretionary repurchases. In fact, ULLICO Executive Vice President James Luce referred to this exclusive opportunity as the “Director and Officer Repurchase Program.” This further suggests that insiders understood the discretionary repurchases were only being offered to officers and directors.

-- In addition to profits realized through discretionary repurchases, ULLICO insiders made substantial profits through the formal repurchases of ULLICO stock. In 2000, when ULLICO stock was at its highest price, insiders received a disproportionate share of the limited funds made available for repurchase. Most of the officers and directors held fewer than 10,000 shares, and each year, ULLICO adopted a rule ensuring that those with fewer than 10,000 shares could sell all of their stock back to the company while other shareholders, such as labor unions and pension plans, could sell only a small portion of their shares back to the company. The 10,000 share threshold operated to protect the liquidity of officers and directors when ULLICO’s stock became overvalued.

ULLICO did not adequately deal with its problems until after public pressure and scrutiny by investigators led to the ouster of Robert Georgine and the election of a slate of reform-oriented directors.

-- Only after public reports of a grand jury investigation surfaced did ULLICO’s management seek the appointment of an outside special counsel. The Board hired former Illinois Governor James Thompson, Chairman of the Winston & Strawn law firm. Thompson and his firm conducted a thorough inquiry and produced a valuable final report. The Thompson Report recommended ULLICO ask that those who participated in the suspect transactions return their profits, but the company rejected that recommendation and set out to defend the actions of its officers and directors.

-- ULLICO spent almost $14 million on legal, consulting, and lobbying fees to deal with the multiple investigations spawned by the stock transactions. The company spent more than $2 million on the Thompson investigation. Then they spent twice as much, more than $4 million, on representation of individuals investigated by Thompson and to hire another firm, Sidley Austin Brown & Wood, to represent the company and to review and critique the Thompson Report. One lobbyist friend of Robert Georgine’s billed ULLICO for nearly 650 hours of work at $500 per hour, yet the company could not locate a single letter, memo, or note, other than billing records, reflecting the work performed. ULLICO’s new management has committed to investigate the services provided by Sidley and a number of other firms to see whether these professionals faithfully served the company’s interests, as opposed to its former management’s interests.

-- ULLICO’s Board appointed a Special Committee of directors to consider the Thompson Report. The Special Committee rejected the primary recommendation of the Thompson Report, that ULLICO seek a return of the ill-gotten gains from the stock transactions. Early drafts and notes from the Special Committee report suggest that some Special Committee members took a hostile view of the Thompson investigation.

-- In May 2003, shareholders elected a new board of directors who installed Terence O’Sullivan as the new Chairman and CEO. O’Sullivan had been a dissenting member of the Special Committee. Under O’Sullivan’s leadership, ULLICO’s new Board quickly adopted all of the Thompson Report’s recommendations, sent demand letters seeking repayment of the illicit profits, and suspended all representational activities of Sidley Austin Brown & Wood. Under O’Sullivan, ULLICO also fired Joseph Carabillo for cause, froze all retirement and deferred compensation accounts, and appointed former Federal Judge Abner Mikva to head a new special committee of directors to examine matters of impropriety even beyond those detailed in the Thompson Report. ULLICO has sued a number of former officers and directors over disputed claims to compensation, benefits, and profits from the improper stock transactions.

-- Although the new Board adopted all the recommendations of the Thompson Report, the vote was far from unanimous. While the resolution passed with the approval of 14 directors, eight directors opposed it. Among them were several who had participated in the stock transactions and who had recently been the intended beneficiaries of an attempted gift from Robert Georgine.

As he departed from ULLICO, Robert Georgine attempted to give money to six sitting directors. Committee staff attempted to speak to all six board members. However, four of them invoked their Fifth Amendment right against self-incrimination rather than answer questions about the attempted gift or any other ULLICO-related subject.

-- In Robert Georgine’s resignation letter, he claimed he was entitled to $2 million in severance pay. He offered to forego the payment and asked that the money be used to repay stock profits for six sitting ULLICO directors. With this attempted gift, Georgine may have been trying to influence these six directors to vote in Georgine’s interest on matters coming before the Board. ULLICO’s new management disputed that he was entitled to the severance.

-- Five of the six directors named in Georgine’s letter voted against returning any stock profits. Committee staff sought the testimony of all six directors named in Georgine’s resignation letter, but only two agreed to cooperate: James LaSala and James McNulty. The other four (William G. Bernard, Marvin J. Boede, Billy J. Casstevens and Joseph F. Maloney) refused requests for voluntary interviews and asserted their Fifth Amendment rights against self-incrimination rather than participate in sworn depositions.

-- Each director who pled the Fifth Amendment also refused ULLICO’s request to return his profits. Three of them resigned from the Board around the same time Committee staff sought their testimony, and the fourth, Casstevens, was removed from the Board by a vote of the shareholders.

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Printable Version

Related File(s)
()	Majority Staff Report on Self-Dealing and Breach of Duty at ULLICO, Inc.

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Committee on Homeland Security and Governmental Affairs
340 Dirksen Senate Office Building
Washington, D.C. 20510