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SELF-DEALING AND BREACH OF DUTY: A REVIEW

OF THE ULLICO MATTER

HEARING

BEFORE THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JUNE 19, 2003

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

PETER G. FITZGERALD, Illinois 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

RICHARD J. DURBIN, Illinois 

THOMAS R. CARPER, Deleware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

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 

(III)

C O N T E N T S 

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

(1)

SELF-DEALING AND BREACH OF DUTY: A 

REVIEW OF THE ULLICO MATTER 

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. 

2

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 repur- chase 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 socalled 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 

3

1The 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. 2The letter referred to from Randall J. Turk, Baker Botts, L.L.P., appears in the Appendix 

on page 100. 

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

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

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 

4

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 nonetheVerDate 0ct 09 2002 14:52 Oct 23, 2003 Jkt 088930 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\88930.TXT SAFFAIRS PsN: PHOGAN
5

less 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. 

6

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. 

7

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. 

8

1The prepared statement of Mr. Thompson appears in the Appendix on page 45. 

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. 

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 

9

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 

10

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 noncorporate 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, reach- ing 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. 

11

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 yearend 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 manageVerDate 0ct 09 2002 14:52 Oct 23, 2003 Jkt 088930 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 C:\DOCS\88930.TXT SAFFAIRS PsN: PHOGAN
12

ment 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 

13

1 Chart entitled ‘‘Total Stock Repurchases at $146.04,’’ appears in the Appendix on page 43. 

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. 

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. 

14

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 ten- dered 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. 

15

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 

16

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 

17

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 offiVerDate 0ct 09 2002 14:52 Oct 23, 2003 Jkt 088930 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\88930.TXT SAFFAIRS PsN: PHOGAN
18

cers 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, 

19

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, 

20

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. 

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 51⁄2

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 illgotten 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

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 chairVerDate 0ct 09 2002 14:52 Oct 23, 2003 Jkt 088930 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\88930.TXT SAFFAIRS PsN: PHOGAN
21

man 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. 

22

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. 

23

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 retireVerDate 0ct 09 2002 14:52 Oct 23, 2003 Jkt 088930 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\88930.TXT SAFFAIRS PsN: PHOGAN
24

ment? 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 

25

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 

26

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 

27

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 IlliVerDate 0ct 09 2002 14:52 Oct 23, 2003 Jkt 088930 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 C:\DOCS\88930.TXT SAFFAIRS PsN: PHOGAN
28

nois 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? 

29

1The prepared statement of Mr. O’Sullivan appears in the Appendix on page 76. 

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. 

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. 

30

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 

31

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 

32

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 employVerDate 0ct 09 2002 14:52 Oct 23, 2003 Jkt 088930 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 C:\DOCS\88930.TXT SAFFAIRS PsN: PHOGAN
33

ees 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. 

34

1The letter from Mr. Georgine, to Terrence M. O’Sullivan, dated May 8, 2003, referred to appears in the Appendix on page 98. 

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. 

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. 

35

‘‘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. 

36

1 Article from Business Week, dated May 27, 2003, submitted by Senator Levin, appears in 

the Appendix on page 91. 

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. 

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 

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37

ulations 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 firsthand 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 

38

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 

39

1The letter from Randall J. Turk, dated June 17, 2003, referred to appears in the Appendix 

on page 100. 

us that if he were subpoenaed he would have invoked his Fifth 

Amendment rights.1

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. 

40

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.] 

(41)

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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