It is a financial scandal that rivals any Enron. This is the opinion not only of the conservative Wall Street Journal but also of the labour movement’s reform wing. Some 20 directors and officers of the union insurance company allegedly raked in about $13.7m (E12m) at the expenses of thousands of pension funds that are jointly managed by unions and that are Ullico’s shareholders. Their misdeeds have prompted major investigations by the US Congress, the Justice and Labor Departments, the Securities and Exchange Commission, a federal grand jury and the Maryland Insurance Administration. They also have opened the debate about corporate governance in the unions and in the pension funds they sponsor.
“We have already set up new corporate governance procedures that make impossible to repeat what happened with our previous board of directors,” points out Ullico’s spokesperson Jim Kennedy. “Besides, we have changed our chairman and the other board members involved in the problem and we have asked them to give back the illicit profits”.
Nonetheless, the scandal is far from over and some union members are asking for more transparency about the way the jointly managed trust fund market works. Ullico boast itself as “one of the largest, most sophisticated financial services companies dedicated to serving” that market. These services include group and individual life and health insurance, property and casualty insurance, investment products and investment advice, which are all aimed at union members or union institutions. In fact Ullico was founded by labour leaders in 1925 “out of a need to provide workers with simple insurance policies to cover burial expenses”, according to an Ullico-written history. Step by step the insurance company has expanded into new markets and now it is a big group with $4.4bn in assets and $6.4bn in union pension funds and other third-party assets under management.

The pension funds that are Ullico’s shareholders and clients are multi-employer plans to which more than one employer contributes in accordance with one or more collective bargaining agreements. Contributions to support such plans are negotiated at the initiative of a labour union or group of labour unions representing the workers of a number of companies, usually in a given geographic area or in a given industry, such as the construction, coal-mining, trucking, garment. Workers in these industries are generally not employed by any one company long enough to earn a benefit under a plan sponsored by that company. Multi-employer plans are a solution: there is one for carpenters, one for electricians, one for ironworkers and so on. They are named “jointly trusted” because at least half of the board of trustees must represent the employees and so it is made of union officers, while half is made of employers’ representatives.
All these plans are defined benefit (DB) and they may be Ullico’s clients in several ways. To implement their investment strategy, for example, they can use Trust Fund Advisors (TFA), which is an SEC-registered investment advisor and offers four distinct equity investment styles – growth, value, small cap, international – and a broad-market fixed-income style, all provided through strategic alliances with portfolio managers. A lot of union sponsored pension plans invest directly in a product named “J for Jobs”, an open-end mortgage account managed by another Ullico’s company, the Union Labor Life Insurance Company. According to Ullico’s website, “J for Jobs” is “a portfolio of high-quality mortgages secured by income-producing properties”, which are required to be new or extensively renovated and “exclusively union built”. “J for Jobs” currently invests more than $2bn on behalf of 180 pension funds offering a yield competitive with a traditional fixed-income investment (9.38% over the last five years compared to Lehman Brothers Bond Index’s 7.55%). At the same time it creates jobs for unionised contractors.
Most “jointly trusted” funds are also Ullico’s shareholders: together with union institutions they own 98% of the company stocks (2% is owned by individual union officers); each of them can have up to 9% of voting shares. But Ullico is not publicly traded: its stock’s value changes only once a year, when company directors set a new share price on the advice of auditors. This is how the old chairman, Robert Georgine, and the other board members took advantage of the system. In 1999 he knew that Ullico’s finances were booming, thanks to its investments in high-tech stocks like Global Crossing; so in December he and his colleagues bought each as many as 4,000 shares at the current Ullico price of $53. The year-end audit suggested a new price of $146, which the board ratified in May 2000. But with Global Crossing and the other high-tech stocks crashing, Ullico’s portfolio was plummeting as well: in November 2000 Georgine and the board authorised Ullico to buy back shares at $146, the same shares they had purchased in 1999 at $53. The buyback was crafted so that only “small” investors could participate, excluding Ullico’s primary shareholders, union pension funds. The same mechanism worked for other Ullico’s stocks owned by Georgine because of his annual bonus and retirement plan.
Now Ullico has a totally new management and a much leaner structure, after cutting some unprofitable subsidiary companies. “The Senate seems to be pretty satisfied with what we have done to resolve the problems”, comments Kennedy. But the investigations are going on.