[Senate Hearing 108-150]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-150

     SELF-DEALING AND BREACH OF DUTY: A REVIEW OF THE ULLICO MATTER

=======================================================================


                                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




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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Deleware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas
              Michael D. Bopp, Staff Director and Counsel
               David A. Kass, Chief Investigative Counsel
                    Jason A. Foster, Senior Counsel
                        James R. McKay, Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
               Laurie Rubenstein, Minority Chief Counsel
                 Cynthia Gooen Lesser, Minority Counsel
                      Amy B. Newhouse, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins..............................................     1
    Senator Levin................................................     4
    Senator Fitzgerald...........................................     7
    Senator Carper...............................................    27
Prepared statement:
    Senator Lautenberg...........................................    41

                               WITNESSES
                        Thursday, June 19, 2003

Hon. James R. Thompson, Former Governor, State of Illinois, 
  Chairman, Winston & Strawn.....................................     8
Terence O'Sullivan, Chairman of the Board and Chief Executive 
  Officer, ULLICO, Inc...........................................    29

                     Alphabetical List of Witnesses

O'Sullivan, Terence:
    Testimony....................................................    29
    Prepared statement...........................................    76
Thompson, Hon. James R.:
    Testimony....................................................     8
    Prepared statement...........................................    45

                                Appendix

Chart entitled ``Total Repurchases of Stock from Directors/
  Officers Outside of 2000 Formal Repurchas Program''............    42
Chart entitled ``Total Stock Repurchases at $146.04''............    43
Chart entitled ``Funds Robert Georgine has been asked to return 
  or are under investigation by ULLICO's new management''........    44
Article from Business Week, dated May 27, 2003, submitted by 
  Senator Levin..................................................    91
Letter from Donald J. Kaniewski, Legislative and Political 
  Assistant to the Chairman, ULLICO Inc., dated July 7, 2003.....    93
Letter from Damon A. Silvers, Council to the Chairman, ULLICO, 
  dated July 7, 2003.............................................    94
Letter to Richard Trumka, Chairman, Corporate Governance 
  Committee, ULLICO Inc. from James R. Thompson, dated July 1, 
  2003...........................................................    96
Letter from Robert A. Georgine, Chairman, President and CEO, 
  ULLICO Inc. to Terence M. O'Sullivan, President, Laborers' 
  International Union of North America, dated May 8, 2003, 
  submitted by Senator Collins...................................    98
Letter from Randall J. Turk, Baker Botts, L.L.P., to Senator 
  Collins, dated June 17, 2003...................................   100
Post-hearing Questions and Responses for the Record from Mr. 
  Thompson.......................................................   101
Post-hearing Questions and Responses for the Record from Mr. 
  O'Sullivan.....................................................   102

 
     SELF-DEALING AND BREACH OF DUTY: A REVIEW OF THE ULLICO MATTER

                              ----------                              


                        THURSDAY, JUNE 19, 2003

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:06 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Committee, presiding.
    Present: Senators Collins, Fitzgerald, Levin, and Carper.

              OPENING STATEMENT OF SENATOR COLLINS

    Chairman Collins. The Committee will come to order.
    Today the Committee on Governmental Affairs will examine 
questionable stock transactions at ULLICO, Incorporated. ULLICO 
is the parent company of the Union Labor Life Insurance 
Company, which was founded in 1925 to serve the needs of 
working men and women by providing affordable health insurance 
to workers who traditionally had been unable to find such 
insurance.
    Seventy-five years later, many of ULLICO's directors and 
senior officers forgot their mission. Instead of serving union 
workers, they served themselves a multimillion dollar helping 
of the company's assets, assets that belonged to the 
shareholders.
    ULLICO's officers and directors took advantage of their 
positions to enrich themselves at the expense of the company's 
primary shareholders, unions, and union pension funds.
    ULLICO is not a household word. The names Enron and 
WorldCom are better known, in large part because of the size 
and the scope of the damage done by the leaders of these 
corporations. The wrongs committed at ULLICO total in the 
millions, not the billions. But in many ways the wrongdoings at 
Enron, WorldCom, and ULLICO are, in fact, similar. They involve 
the same betrayal of trust, the same breech of duty, and the 
same profiteering by executives.
    That is why this Committee has actively investigated Enron 
and WorldCom, and that is why we are here today.
    ULLICO's fortunes and misfortunes were closely tied to 
those of Global Crossing. In 1997, ULLICO invested $7.6 million 
to get in on the ground floor of what eventually became Global 
Crossing. Shortly after this investment was made, ULLICO 
changed the way it valued its stock. Rather than maintaining a 
fixed share price, as it had in the past, the company decided 
that it would change its share price once a year.
    In August 1998 Global Crossing went public and almost 
immediately its share price began to have a dramatic impact on 
ULLICO's value. In May 1998 ULLICO's stock was valued at about 
$28 per share. By May 1999 the ULLICO stock had nearly doubled 
to $54 per share. In May 2000 the share price was $146 or 
nearly triple what it had been just 2 years prior.
    Then the wheels began to come off. During the year that 
ULLICO's stock was set at $146, Global Crossing stock price 
dropped steadily. By the end of 2000 it was clear that ULLICO's 
stock price would be substantially lower in 2001.
    Many of ULLICO's senior executives and officers and 
directors manipulated these circumstances to enrich themselves. 
In 1998 and 1999, after the Global Crossing initial public 
offering, the chairman of ULLICO, Robert Georgine, provided 
ULLICO directors and senior officers with three exclusive 
opportunities to purchase ULLICO stock. Directors and senior 
officers were each able to purchase up to 8,000 shares at the 
annually set stock price. These offers were not extended to 
other shareholders and they were not approved by the board of 
directors.
    Directors and officers purchasing stock were taking little 
or no risk, as it was clear that ULLICO's stock value would be 
higher the next year. In fact, the December 1999 stock offer 
was such a sure thing that three officers, Robert Georgine, 
Joseph Carabillo, and John Grelle, each personally borrowed 
more than $200,000 to buy the stock.
    Sweetheart deals for directors and officers that were not 
extended to the workers they represent and serve are troubling 
enough. But where the ULLICO matter becomes most unsettling is 
the way in which many of the directors and officers were able 
to sell their shares in ULLICO after Global Crossing's price 
started to plummet but before the losses were reflected in 
ULLICO's stock price.
    In November 2002 the company approved a $30 million 
repurchase program at $146 per share. By that time, Global 
Crossing stock had dropped significantly and it was clear that 
many of ULLICO's shareholders would be eager to sell their 
stock in order to realize their gains before ULLICO's value was 
lowered the following year.
    Despite these circumstances, the company approved a 
repurchase program with rules that severely limited repurchases 
from large institutional shareholders. The company repurchased 
only 2.2 percent of shares offered by large shareholders such 
as unions and pension funds. On the other hand, it made 
unlimited repurchases from shareholders with 10,000 shares or 
less, notably most of the company's directors and officers.
    Adding insult to injury, Chairman Georgine also exercised a 
so-called discretionary authority to repurchase stock. 
Historically, this power has been used only to provide 
liquidity to the estates of shareholders who had died, and to 
shareholders who had resigned from the company or who were 
experiencing financial distress. In 2000 however, this 
authority was used to provide substantial financial benefits to 
company insiders.
    In fact, in a staff interview, ULLICO's former executive 
vice president referred to the discretionary repurchases as the 
director and officer repurchase program. That title is 
certainly accurate. A majority of all of ULLICO's discretionary 
repurchases at the $146 share price were made from officers and 
directors. The chart that we have up shows the percentages.\1\
---------------------------------------------------------------------------
    \1\ The chart entitled ``Total Repurchases of Stock from Directors/
Officers Outside of 2000 Formal Repurchase Program,'' referred to by 
Senator Collins appears in the Appendix on page 42.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \2\ The letter referred to from Randall J. Turk, Baker Botts, 
L.L.P., appears in the Appendix on page 100.
---------------------------------------------------------------------------
    To its credit, new leadership at ULLICO has ushered in long 
overdue reforms. After investigations of ULLICO stock 
transactions were initiated by a grand jury, the U.S. Labor 
Department, the SEC, the State of Maryland, and this Committee, 
a new slate of directors was elected to the board and began to 
undertake the necessary reforms. Chairman Georgine resigned 
under pressure and Terence O'Sullivan, whom we will hear from 
today, was appointed as CEO and chairman of the board. I am 
pleased to note that the new board has voted to adopt all of 
the Thompson report's recommendations.
    These are indeed promising developments but it should not 
take the spotlight of a Senate investigation or grand jury 
subpoenas for a company to clean up its act. I look forward to 
hearing what changes Mr. O'Sullivan will be making to ensure 
that this scandal never occurs again and that ULLICO does not 
revert to its old ways when the spotlight shines its beam 
elsewhere.
    I look forward to hearing from our witnesses today and I 
would now like to call on Senator Levin for his opening 
remarks.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you, Madam Chairman, and thank you for 
the manner in which you are carrying on this investigation and 
hearing, as always in a very fair and very thorough way and I 
commend you for it.
    This hearing today continues a tradition of the 
Governmental Affairs Committee of taking a close look at 
specific examples of corporate misconduct to learn not only 
what happened but what can and should be done to prevent 
similar conduct in the future.
    For many years, ULLICO was a relatively small, privately 
held life insurance company serving a special community, the 
community of unions and union pension funds, investing the 
savings of working Americans. ULLICO had been successful in 
meeting its customer and stockholder needs for decades when in 
the 1990's it expanded its capital base from $8 million to $240 
million and increased its outstanding shares from less than 
500,000 to more than 10 million.
    ULLICO also expanded into new lines of business, 
transforming itself from a life insurance company into a 
diversified financial group. ULLICO also hired an investments 
expert and began investing millions of dollars in startup high-
tech companies.
    One of these investments in a small high-tech company, 
later known as Global Crossing, suddenly took off in the stock 
market and turned a $7 million investment by ULLICO into an 
after-tax profit of more than $300 million. That money 
represented a windfall for ULLICO and its stockholders.
    At the same time the Global Crossing investment began to 
take off, ULLICO executives apparently caught the bug infecting 
too many other U.S. corporations during the 1990's, paying huge 
compensation to its executives. I remember holding a hearing in 
a Governmental Affairs Subcommittee back in 1991 examining the 
issue of runaway executive pay at U.S. corporations and I have 
been following the issue ever since.
    According to the Congressional Research Service, in the 
early 1990's, CEO pay at large U.S. public companies was about 
100 times larger than average worker pay and averaged $2 
million. By 1999, CEO pay exceeded average worker pay by more 
than 500 times and averaged $12 million.
    And by the way, J.P. Morgan said that a chief executive's 
pay should not exceed average worker pay by more than 20 times.
    While ULLICO may have been a piker in comparison to the 
executive compensation paid at some other U.S. companies--and 
read today's Washington Post to get the full flavor of that--it 
nonetheless swam in the same direction. When the 1990's 
started, ULLICO's top executives were paid base salaries and an 
annual bonus. Ten years later, ULLICO's top officers were the 
recipients of a slew of compensation benefits.
    For example, before he left the company, ULLICO's CEO was 
the recipient of not only a base salary and annual bonus, but a 
second annual cash bonus ranging from $100,000 to $700,000, 
40,000 shares of ULLICO stock worth millions of dollars paid 
for by a company loan to be forgiven after 5 years, a $5 
million split-dollar life insurance policy whose $350,000 
annual cost was picked up by the company, deferred compensation 
benefits that allowed him to delay paying taxes on income 
placed in the program, two separate executive retirement plans, 
and the use of a corporate jet with annual operating costs of 
$3.5 million dollars.
    In addition to that mind-boggling array of benefits, 
ULLICO's officers and directors were given special 
opportunities in 1998, as our chairman has pointed out, to buy 
ULLICO stock at a time when its value was steadily increasing 
due to the company's successful investment in Global Crossing. 
Using discretionary and formal stock offers and repurchase 
programs over 3 years, from 1998 to 2001, ULLICO's top 4 
officers and 20 of its 32 directors used ULLICO stock sales to 
make over $13 million in profit. While other ULLICO 
stockholders also benefited from the stock's increased value, 
those ULLICO officers and investors disproportionately 
benefited by taking advantage of stock opportunities that were 
not advertised or made generally available to other 
shareholders. Those ULLICO officers and directors owned less 
than 2 percent of the outstanding shares but managed to reap 
more than 30 percent of the stock profits created by the Global 
Crossing investment.
    During the escalation of executive pay at the company, 
ULLICO's board of directors appeared to have exercised little 
meaningful oversight of either the stock awards or overall 
compensation provided to ULLICO management. Directors on the 
compensation committee appeared to have simply gone along with 
the compensation benefits suggested by management and other 
directors followed the lead of the compensation committee.
    After conducting a special investigation into what 
happened, the Thompson report concluded that there was no 
evidence of criminal misconduct and insufficient evidence of 
securities laws violations, but certain ULLICO officers and 
directors ``did not satisfy''--to use the Thompson report 
words--``their fiduciary duties to the company'' and engaged 
in--again to use their words--``self-interested transactions.'' 
The report found that these officers and directors had received 
``preferential treatment over other ULLICO shareholders'' and 
were allowed to obtain and sell ULLICO shares that ``carried 
little or no investment risk'', approved officer and director 
stock programs despite ``conflicts of interest and substantial 
involvement,'' and failed to disclose to the board and 
shareholders the extent of officer and director stock 
transactions, compensation benefits, and preferential 
treatment.
    The Thompson report recommended that suspect officer and 
director stock profits be returned to the company and other 
steps be taken to recover improper compensation, strengthen 
corporate governance, and prevent similar misconduct in the 
future.
    The facts also indicate that, while executive pay was 
climbing at ULLICO, company performance outside of the Global 
Crossing investment was headed in the other direction. A number 
of management decisions hurt the company's bottom line. By 2002 
ULLICO was in trouble, experiencing operating losses due to 
high costs, non-performing investments, and unprofitable 
business lines. Company profits had disappeared. The company's 
stock price was falling and the company's insurance ratings 
have been downgraded.
    Yet executive pay stayed high.
    There are similarities and differences to Enron in this 
matter. Like Enron, fiduciary duties were breached at ULLICO. 
Unlike Enron, the books were apparently not cooked, the company 
was not driven into bankruptcy, employee pensions and 
stockholder savings were not destroyed. In the year 2001, when 
ULLICO's CEO received more than $5.3 million dollars, the 
largest amount he was paid in any year at the company, Enron's 
CEO took home more than $140 million.
    As our Chairman has pointed out, there has been an 
impressive recent change at ULLICO. The company has taken 
dramatic steps to clean up its own act. When word got out about 
possible misconduct by ULLICO management, several board members 
representing the labor movement demanded a special 
investigation. The Thompson report resulted, which we will be 
hearing about today.
    When ULLICO management and some board members resisted 
releasing this report to the public, other board members 
demanded disclosure. And when their demand was rejected, they 
resigned from the board in protest, increasing pressure on the 
company. When management and some board members resisted 
implementing all of the Thompson report recommendations, 
including the recommendation to return suspect stock profits, 
other board members were able to rally ULLICO stockholders to 
oust those who were fighting reform.
    Today, all four senior officers at ULLICO have been 
replaced. Five weeks ago new management took over, including a 
new CEO, Terence O'Sullivan, whom we will hear from today. A 
host of changes have followed.
    For example, the new management ended the special stock 
plans for officers and directors and banned company loans to 
executives. It sent letters to the former officers and a number 
of directors demanding the return of all suspect stock profits. 
The company froze the deferred compensation and retirement 
accounts set up for ULLICO's officers pending a review of the 
programs.
    New rules requiring full disclosure of executive pay to 
company stockholders are under development. The company 
discontinued use of the corporate jet and initiated plans to 
sell a luxury office building under construction.
    It has hired a turnaround expert to revamp company 
operations and began taking steps to strengthen the 
independence, oversight and financial expertise of the ULLICO 
board.
    So a hopeful chapter at ULLICO is unfolding as the company 
implements fundamental management, executive pay, and corporate 
governance reforms. Hopefully this self-cleansing effort will 
save the company and begin to rebuild investor confidence.
    In the Sarbanes-Oxley Act we adopted important corporate 
reforms including a new accounting oversight board, stronger 
criminal penalties for securities fraud, and requirements for 
more independent and capable audit committees. But that law 
targets publicly traded companies. Whether the same or similar 
disclosure, oversight, and corporate governance requirements 
imposed on public companies are appropriate for private 
companies like ULLICO with a limited number of shareholders 
raises complex issues.
    Some private companies are so large and have such an 
important impact on their industry and communities that public 
policy requires Congress to at least take a careful look at 
that possibility.
    Again, I thank you, Madam Chairman, for convening this 
hearing and look forward to the testimony of our two witnesses.
    Chairman Collins. Thank you, Senator Levin. I would now 
like to turn to Senator Fitzgerald, who obviously knows our 
first witness very well, for any comments that he might want to 
make about our distinguished witness.

            OPENING STATEMENT BY SENATOR FITZGERALD

    Senator Fitzgerald. Thank you very much, Madam Chairman. I 
want to welcome Governor Thompson to this platform.
    I just want to say a few words about Governor Thompson. He 
has had a very distinguished career in my State. He first made 
a name for himself as a corruption busting U.S. Attorney back 
in the early 1970's. He went on to be governor of our State for 
14 years, and is now chairman of the law firm of Winston and 
Strawn, one of the most prestigious firms in our city and 
indeed in the country. Governor Thompson really has had a 
fabulous career. He was very well qualified to do this report.
    I think that the only issue that arises after reading the 
report is that there is not much more investigating for us to 
do. I think the facts are pretty well established. We know what 
happened and when, and Governor Thompson can talk more about 
that.
    The question arises in my mind, as Senator Levin said, are 
there any legislative changes we should make to our securities 
laws with respect to privately held corporations? The Sarbanes-
Oxley Act that we passed last year dealt with publicly traded 
corporations. In the case of ULLICO, I am concerned that though 
it was a privately held corporation, the shareholders of it 
were, in effect, union pension funds and unions.
    So far, more than just a handful of people were affected by 
the transgressions of the management at the company. And I am 
wondering if Governor Thompson might have any recommendations 
along the lines of protections we might be able to add to our 
securities laws for privately held corporations.
    And with that, I would like to welcome Governor Thompson to 
Washington once more.
    Chairman Collins. Thank you, Senator Fitzgerald. You 
essentially introduced our witness. I will just add a couple of 
points.
    Governor Thompson, I believe, served for 14 years as the 
chief executive of Illinois and I think that is a record that 
still stands in Illinois for continuous service by a governor, 
so I wanted to bring that out.
    Senator Fitzgerald. Can I add that he was a Republican, 
too, and that is not easy to do in Illinois.
    Chairman Collins. This is true. He has twice been named by 
the National Law Journal as one of the Nation's 100 most 
influential lawyers. Given his background in law enforcement, I 
cannot think of anyone who was better qualified to prepare the 
investigative report on the ULLICO transactions.
    So Governor, we are very pleased and honored to have you 
here with us and you may proceed with your presentation.

STATEMENT OF HON. JAMES R. THOMPSON,\1\ FORMER GOVERNOR, STATE 
           OF ILLINOIS, CHAIRMAN, WINSTON AND STRAWN

    Mr. Thompson. Thank you, Madam Chairman, Senators.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Thompson appears in the Appendix 
on page 45.
---------------------------------------------------------------------------
    It is an honor for me to appear before this Committee 
today, and an appearance I have looked forward to. The work of 
this Committee is well-known and well thought of throughout the 
country. To the extent that I can add to your body of knowledge 
and be of help in developing your recommendation for 
legislation, I would be pleased to do that.
    I would like to say at the outset that most all of the 
credit for the investigation, the unearthing of the facts with 
regard to ULLICO, and the recommendations of the report ought 
to go to the very able lawyers at Winston and Strawn who did 
the spadework, assembled the information, wrote the report, and 
otherwise I think did exemplary work. So to the extent that you 
have been complimentary about the report, I would like to pass 
those complements right to the Winston and Strawn attorneys 
sitting behind me.
    We have prepared a PowerPoint presentation that I will go 
through as quickly as I can so we can answer your questions 
that you may have after the presentation. The facts are 
sometimes complex and lengthy and we thought this was going to 
be the best device to elucidate it not only for the Committee, 
but for others who are interested in knowing the facts. So with 
your permission, I will go through that now.
    The first slide is an examination of our mandate. As you 
know, the first press reports came I believe in the Wall Street 
Journal, a big two-page article in early 2002. And in response 
to that article and other articles which followed, the board of 
ULLICO retained me as special counsel to investigate and make 
recommendations to them.
    First, on the issue of ULLICO's purchases and issuances of 
stock since 1997.
    Second, on the interaction between ULLICO and the initial 
public offering of Global Crossing.
    And third, the broad mandate to look into other matters 
that we thought appropriate.
    In 1925, the Union Labor Life Insurance Company was formed 
and the share price of the capital stock, as it was denominated 
then, was fixed at $25, investment limited to unions and 
members of unions. By 1987, ULLICO was formed and for a period 
of 5 years, from 1987 to 1992, ULLICO rewarded its stockholders 
pretty handsomely. Even though the share price was unchanged 
from year to year and fixed, the dividends were exemplary, I 
believe, 10 percent stock dividends and a 9 percent cash 
dividend in most years, quite a decent return on a $25 
investment.
    In 1992, the board issued convertible preferred 
certificates that paid an 8 percent cash dividend and a 4 
percent conversion fee, and union pension funds were allowed to 
become authorized shareholders.
    In the period between 1992 and 1997, preferred certificates 
were converted to Class A voting or Class B non-voting stock.
    In 1997, the management of ULLICO put forth a proposal to 
repurchase stock. In the words of Chairman Georgine, the 
purpose of the stock repurchase program first announced in 1997 
was to provide liquidity to our larger shareholders. The larger 
shareholders, of course, would have been the unions and the 
union pension funds, and liquidity meant that there was a 
desire to see those unions and pension funds reap the reward of 
their prior investment in ULLICO.
    So the $25 fixed share price was replaced by a changing 
share price set once a year in May based upon the year-end 
audited financial statements of the year before.
    In this first proposed repurchase of stock program there 
was a 10,000 share proration threshold set. That is to say the 
shareholders holding less than 10,000 shares could be 
liquidated and over 10,000 shareholders, principally the unions 
and the pension funds, would have to take a proration depending 
on the number of shares to be tendered in response to a 
repurchase offer and the number of dollars available to fund 
the repurchase program. The intent was to repurchase $180 
million over 11 years with the first tranche of $30 million in 
1997. And this applied only to Class A and Class B stock.
    Of course, the book value of the ULLICO shares were 
determined simply by taking stockholders equity at the year end 
and dividing that by the outstanding shares in the company, 
which included capital, Class A and Class B shares. And as I 
said, it was set just once a year.
    The 10,000 share proration threshold suggested in 1997 
program simply meant that if a tender offer was oversubscribed, 
those shareholders holding 10,000 shares or more were prorated 
and those holding less than 10,000 shares, principally officers 
and directors, were not prorated if they tendered all of their 
shares
    The only rationale that has ever been offered to us for 
this differing treatment is a tax rationale. And that is to say 
that those tendering their shares presumably could avoid 
ordinary income tax application and receive capital gains tax 
application to the proceeds of their share liquidation. But of 
course, as we know, both unions and pension funds are tax-
exempt. This means that the larger shareholders, the over the 
10,000 proration level, had no tax advantage and the tax 
advantage would have flowed to the directors and the officers 
or the insiders.
    It was also offered, inferentially at least, as a rationale 
that this threshold would eliminate small shareholders. But of 
course, the later-repeated offers of shares to insiders had the 
effect of keeping smaller shareholders going rather than 
eliminating them.
    In 1997 the executive committee of ULLICO managed to do a 
wondrous thing. They invested $7.6 million in Nautilus, LLC, 
the predecessor of Global Crossing. That company, Global 
Crossing, went public in August 1998. To date, ULLICO's pre-tax 
Global Crossing gains totaled almost $500 million on the $7.6 
million investment, or about a 64-fold return on investment. By 
anybody's standards, in public or private companies in the 
corporate and non-corporate world, that was an extraordinary 
investment with an extraordinary return.
    Beginning in 1998 the Global Crossing investment became a 
larger and larger portion of shareholder equity in ULLICO. As 
Senator Levin has said in his opening remarks, ULLICO's other 
investment decisions were not quite so rewarding and some of 
their lines of insurance businesses began to suffer. And so the 
Global Crossing investment became a larger and larger share of 
stockholder equity. And by December 31, 1999 it totaled almost 
85 percent of total shareholder equity in ULLICO, thus 
materially impacting the book value and the stock price.
    ULLICO's book value stock price increased significantly, 
reaching as high as $146 at one point, but lagged behind Global 
Crossing's market price which was also on the rise. And so the 
increased ULLICO book value resulted in increased proration 
when the company decided to repurchase shares. The only ones to 
benefit, of course, from the proration threshold were the under 
10,000 shareholders who were principally officers and 
directors.
    The next chart shows the stock repurchase program timeline. 
In 1997, $30 million at a price of $27. In 1998, a $15 million 
program at a price of $28. May 1999, a $15 million program, 
share price rose to $53.
    In May 2000 there was what they call an extraordinary stock 
repurchase program. It was tied to the price of Global Crossing 
stock, a trigger price. Global Crossing stock never reached 
that price in that year and so the May 2000 purchase 
extraordinary program was abandoned and the company waited 
until November of that year to put forth a smaller program of 
$30 million available for repurchase. The share price of ULLICO 
now climbed to $146.
    And as you can see, the proration of the larger 
shareholders was extreme. They could sell only 2.2 percent of 
their shares. And the same thing is true for 2001, a much 
smaller program, $15 million, share price still high, $74, 
larger shareholders could get back only 2.7 percent of the 
stock that they offered.
    Obviously, the Global Crossing investment was an 
extraordinary one. It brought great material gains to the 
company. It significantly increased shareholder equity and it 
was entirely appropriate to reward management under whose 
administration this had occurred in some fashion, in terms of 
compensation. And so the company set up what they called a 
Global Crossing program of incentives for management to reward 
this extraordinary investment. This was apart from the normal 
compensation of salary plus bonus, and it was aimed 
specifically to recognize the management responsible for the 
Global Crossing investment decision with extraordinary gains.
    By 2001, the end of the 4-year period, five officers 
received about $5.6 million as a bonus. So they were, in fact, 
by this singular program compensated for their wisdom in 
investing in Global Crossing.
    Quite apart from that, the chairman eventually gave senior 
officers and directors the chance to buy stock in ULLICO. July 
29, 1998 2,000 shares were offered to each officer and director 
participating at $28. Later that year, in October, another 
2,000 shares at $28. And in December of the following year, 
4,000 shares at $53. No other persons were given the 
opportunity to purchase stock in this fashion, only directors 
and officers. And a number of directors responded.
    Chairman Georgine offered a rationale for this tightly 
restricted share program available only to officers and 
directors. He said they did it because management and the board 
of directors should have their interests in line with the 
stockholders.
    Now that is a commonplace rationale for stock programs at 
corporations large and small, public and private. Oftentimes, 
when people join the board of publicly traded companies, they 
are offered the opportunity to buy shares in the company or 
they are given options in the company as part of their 
compensation in an effort to get them to put on a shareholder's 
hat as well as a director's hat. In fact, some publicly traded 
companies have a requirement that boards of directors attain a 
certain level of ownership in the company in line with that 
stated purpose. And so chairman Georgine's rationale for the 
share purchase program is not inconsistent with what you see in 
other parts of the corporate world.
    The question, as it later turned out, was whether that 
rationale happened to apply given the subsequent events.
    And he said, officers and directors in conducting their 
everyday business should have the interests of the stockholders 
foremost in their mind. That certainly is a truism in the 
corporate world. In fact, it is a requirement of State and 
Federal law. But in this case, as we will see, it was not to 
be.
    There has been a running question in this whole affair 
about whether in fact these offers to allow directors and 
officers to purchase shares in the company were a form of 
compensation. Some directors think so, some did not think so. 
The offers of shares were approved by the compensation 
committee, though we believe the compensation committee of 
ULLICO had no authority to do that.
    The offers came in anticipation of increased ULLICO stock 
price because of Global Crossing. The 1999 offer had been 
approved in May of that year but was actually made or offered 
just before year-end when everybody knew that the next year's 
price of ULLICO stock was going to be higher.
    Interestingly enough, and quite apart from what ordinarily 
will happen in the corporate world, there were no restrictions 
placed on the sale of that stock. There was no vesting period. 
There was no requirement that the stock be held for a period of 
time. All these normal devices that companies would employ to 
make sure that their stated rationale of aligning shareholders 
and directors would continue for at least some reasonable 
period of time and would preclude the notion that directors 
were making short-term management or supervisory decisions in 
hopes of influencing the share price. That did not happen here.
    And in 2002, the outside auditors reversed their prior 
position and concluded that these share purchase officers were 
indeed compensation because there was little or no investment 
risk.
    If that is how they are viewed, that is compensation, at 
least as far as the officers are concerned, in addition to the 
normal salary and bonus and the Global incentive program that 
had been established.
    Another leg of the compensation stool at ULLICO, which we 
include in this report and presentation to give you the flavor 
and context of all that went on there, came in July 1998, 
allowing senior officers to defer up to 25 percent of their 
base salary and up to 100 percent of their bonuses.
    Again, this is not an uncommon phenomenon in the corporate 
world. It has at least temporary tax advantages and allows 
compensation or a portion of compensation to grow tax-deferred. 
It is not surprising to find that in a number of companies. The 
plan, in this case, allowed the executives, again commonly, to 
pick the target of their investments.
    But what happened here was extraordinary. Because the share 
price of ULLICO was fixed once a year and could have been 
forecast well in advance of the fixing of the share price, 
almost 5 months before, this is not the normal deferred comp, I 
think I will invest my deferred comp in a stock whose value is 
determined by the market and moves up and down every day.
    So what happened was that the people who had the ability to 
fix the share price invested their deferred comp in that stock, 
ULLICO stock, kept it there until the price reached an all-time 
high and then immediately shifted it out as they saw the value 
of the shares starting to decline.
    Now if you were investing part of your compensation in a 
tracking stock program at a company, you might change your mind 
about where you want your investment to go as you watch the 
market. The difference here is that the market was the result 
of the actions of the officers themselves and they held the 
key. The public market did not hold the key.
    Between 1999 and 2001, Mr. Georgine made $4 million from 
this deferred comp program and three other senior officers made 
between $320,000 and $605,000.
    Quite apart from these occasional stock repurchase programs 
authorized by ULLICO, the chairman of ULLICO had for a 
longtime, including Mr. Georgine's predecessor, been able to 
repurchase shares outside of a formal repurchase program known 
as the Chairman's Discretionary Share Repurchase Program. 
Historically, and under Mr. Georgine's predecessor, this 
program was used to help retiring directors, retiring officers, 
the estates of deceased directors and officers gain liquidity. 
If shareholders were in financial trouble they could come to 
the chairman and gain liquidity. But you will recall that the 
share price was then fixed at $25, and had been $25 for a 
number of years.
    At one point, Mr. Georgine, in referring to this program, 
said we do not advertise this discretionary program and we do 
not encourage it. But the evidence shows that it was used to 
allow officers and directors to sell shares outside of the 
formal repurchase programs at the discretion of the chairman 
with no standards set up by the board, with no standards 
articulated by the chairman, and in fact with his quite frank 
statement that we do not advertise this program.
    At the May 11, 2000 board meeting the highest price ever 
for ULLICO stock was adopted, $146.04,\1\ a threefold increase 
from the 1999 price the year before. This was deemed an 
extraordinary program. The object was to purchase up to 20 
percent of outstanding stock. But as I have said before, it did 
contain a trigger clause that Global Crossing stock had to be 
$43 a share before the program could be implemented. Global 
Crossing never reach that level after the announcement of the 
program.
---------------------------------------------------------------------------
    \1\ Chart entitled ``Total Stock Repurchases at $146.04,'' appears 
in the Appendix on page 43.
---------------------------------------------------------------------------
    Shareholders holding fewer than 100 shares had to have all 
of their shares repurchased. Now this is a big change. The 
prior proration threshold had been 10,000 shares in 1997. In 
this extraordinary program in 2000, it is changed for some 
reason that we have not yet been able to determine to 100 
shares. If they had stayed with the 100 shares and if the 
program had gone ahead, then obviously larger shareholders like 
unions and pension funds would have been able to sell more of 
their shares. They would not have been as seriously prorated.
    And this 100 share proration threshold did indeed have a 
fairness opinion from an investment banker.
    After the announcement of this extraordinary program, 
during the summer and fall of 2000, the Global Crossing share 
price continued to drop. Of course, the ULLICO share price at 
$146 was static. During that period of time, the summer and 
fall of 2000, the chairman redeemed $4.6 million of shares from 
insiders under his discretionary repurchase program. This was 
while larger shareholders could not gain liquidity because the 
trigger price of Global Crossing stock had not been met.
    So in the fall of 2000, since it would be futile to assume 
that liquidity could be gained by anybody under the May 2000 
proposal because of the failure of the trigger price to be met, 
the board in November 2000 replaced the extraordinary program, 
which was never implemented, with a new $30 million program at 
the $146 per share stock price.
    The terms of the plan and the high stock price made extreme 
proration inevitable. The threshold somehow mysteriously went 
back to 10,000 shares. That made 20 directors eligible for 
complete liquidity, tendering all of their shares. There was 
some question raised about whether the chairman had in fact 
acted properly in his use of the Chairman's Discretionary 
Repurchase Program so the board purported to ratify all past 
actions of the chairman in that program. And of course, there 
was no trigger price.
    In the tender offer documents for this November 2000 
program, there were some interesting statements. The company 
has not been advised that any of its directors and executive 
officers presently intend to tender any shares personally owned 
by them pursuant to the offer. Although of course, in the 
months preceding the chairman had been redeeming shares under 
the discretionary program. The company believes ULLICO stock to 
be an excellent investment opportunity for investors seeking 
long-term growth of capital, although of course senior officers 
and directors were in effect cashing out.
    There was no disclosure in the tender offer documents of 
the discretionary repurchases by the chairman from officers and 
directors. There was never any clear disclosure of the impact 
of the proration provisions and the subsequent benefit to 
insiders. And there was no clear discussion of the fact that 
ULLICO's book value stock price lagged behind Global Crossing's 
market price.
    In response to this offer of November 2000, shareholders 
tendered more than $1 billion worth of stock to be purchased in 
a program that had a limitation of $30 million. $1 billion 
offered, $30 million available. Extreme proration of larger 
shareholders resulted so that they could redeem only 2.2 
percent of their shares while insiders, officers and directors, 
were able to redeem all of their shares and no director or 
officer was prorated.
    The chart that the chairman had placed on the easel before 
is repeated in the book. As of May 2000 directors and officers 
constituted less than 2 percent of all outstanding share 
holdings but in the repurchases, both formal and discretionary, 
gained 31 percent of the profit.
    In December 1999, ULLICO and Georgine entered into a stock 
purchase and credit agreement, yet one more leg of the 
compensation stool, I believe, at ULLICO for senior people. 
They loaned Georgine $2.2 million to purchase 40,000 shares of 
Class A stock at $54, then provided that the loan would be 
forgiven ratably over the next 5 years as long as he continued 
to be employed. By May 2000, when they reset the price at $146 
a share, that 40,000 share bonus program at a cost of $2.2 
million was worth $5.8 million.
    There were some issues concerning this agreement with 
Georgine. The board never approved either the stock issuance or 
the loan. It was purportedly approved by the compensation 
committee but the company's bylaws prohibited the compensation 
committee from issuing stock. The compensation committee, at 
least arguably, lacked the authority to make the loan to 
Georgine.
    Layered on top of that was an agreement that allowed 
Georgine to sell a portion of the shares he received under the 
40,000 share bonus back to ULLICO each year. So while the loan 
is being ratably forgiven over here, he has got the option to 
sell back over here, and the $2.2 million cost to him is now 
worth almost $6 million.
    Then, in the fall of 2000, the compensation committee 
approved an addendum to his employment agreement to allow him 
to sell back the other ULLICO shares that he held at any time 
without any restriction. The so-called cash out option.
    The slide on the total executive compensation pre-tax for 
the five senior officers of ULLICO year by year from 1996 to 
2001, which includes salary, deferred comp, bonuses, and stock 
profits has Chairman Georgine going, from a low of $650,000 in 
the year 1997 to a high of $5.3 million in 2000 and then the 
others follow, Steed, Grelle, Luce and general counsel 
Carabillo.
    Not included in this chart are any retirement plan dollars 
for the worth of the split-value life insurance.
    These are the laws that we looked at after ascertaining 
these facts. We looked at the law of Maryland, where ULLICO was 
incorporated, to see what their standard was for fiduciary 
duties of officers and directors. We looked at the Federal 
securities laws. We looked at the State securities laws of 
States in which these tender offers officially reached across 
the country, probably all 50. And we looked at the criminal 
laws.
    Maryland statutory law on the duties of directors is 
similar to that to be found in almost every State in the Nation 
and that is that directors must act in the best interests of 
their company and must act with due care and must act in good 
faith. Sort of reminiscent of Chairman Georgine's statements at 
one time that it was the duty of directors and officers to act 
in the interests of the shareholders, or shareholders come 
first.
    When directors are involved, the law in each of the States 
has come to recognize what is called a business judgment rule. 
And that is simply that directors are presumed to have acted in 
accordance with their fiduciary duty. But that is simply a 
presumption which can be overcome by evidence to the contrary. 
And it has some standards built around it in the laws.
    We cannot tell you, it is unclear, whether officers of 
Maryland companies are entitled to this presumption, as well. 
But if they were, that could be overcome by evidence to the 
contrary.
    We looked at the Federal securities laws that we thought 
might be applicable. Section 10(b) of the Exchange Act, SEC 
rule 10(b)(5) which prohibits fraudulent schemes, untrue 
statements of material fact and material omissions concerning 
the sale of securities, because enough questions had been 
raised about the tender offers and the repurchases of stock to 
implicate perhaps the Federal securities laws, Section 14(e) of 
the Exchange Act which prohibits untrue statements of material 
fact and material omissions in tender offers.
    The standard under the Federal securities laws for proof of 
violation is that it must be committed with severe 
recklessness. Not proved beyond a reasonable doubt but 
nonetheless a very high standard.
    Then we looked at State securities laws, or blue sky laws, 
which prohibit inaccurate or misleading tender offer 
disclosures. And in many States, the standard drops from that 
required by the Federal securities laws, extreme recklessness, 
down to negligence, plain, simple, ordinary, common, everyday 
garden-variety negligence.
    We looked at potential criminal liability. Of course, to 
find criminal liability, prosecutors must demonstrate beyond a 
reasonable doubt that the defendant acted with a specific 
intent to defraud, a very high standard. If this were a civil 
lawsuit affair, a plaintiff in the civil lawsuit could base a 
claim on severe recklessness, Federal securities law violation, 
or negligence, State securities law violation.
    Some have raised the question as to whether or not we 
looked at ERISA or labor management obligations of directors 
because of their union or pension fund decisions. We did not. 
That was a deliberate decision, I think taken for a good 
reason.
    First, there was, despite the broad language of the last 
part of our mandate that said we could look at anything we 
wanted to look at, thought that there was enough there, as it 
turned out, focusing on fiduciary duty, criminal, Federal 
securities and State securities, and recognizing as we went 
along before the investigation was concluded that there was a 
very serious, very troubling situation at ULLICO.
    We thought that to delve into LMRDA or ERISA matters would 
have prolonged this investigation and ultimate report to the 
board beyond any reasonable measure because once you start 
looking at ERISA, I think it becomes kind of a slippery slope. 
You can look at the ERISA implications of ULLICO pension funds, 
but since a number of officers--as the Chairman said in her 
opening statement--also sat on pension funds of other unions, 
there would have been no real rationale between distinguishing 
between one pension fund or another.
    We thought it was more important to find these facts out, 
the basic facts, and to get a report out to the board than to 
engage in a prolonged investigation of the discrete subject 
matter that is ERISA that might or might not have value at the 
end. And so we stayed outside of that.
    It is fair to say that the business purpose of the stock 
offers were unclear. If the purpose was to align shareholder, 
director and officer interests obviously that purpose was not 
achieved by the way the program was designed and implemented.
    If the purpose was compensation, as Senator Levin 
indicated, the compensation of ULLICO officers was already 
pretty rich. The approval of the stock offers involved what we 
believe to be an excessive and perhaps impermissible delegation 
of authority by the board to either the compensation committee 
or Georgine, although there is some lawyer's dispute about 
that. The Sidley and Austin report, I believe, disputes that.
    Georgine may have exceeded his general authority to issue 
stock by issuing stock to insiders. Certainly, the terms and 
the timing of the stock offers minimized, if not entirely 
eliminated, investment risk.
    And if this were to be compensation, it was probably 
inappropriate compensation, given all the other methods of 
compensation employed.
    We have, to this day, not found a meaningful basis for the 
10,000 share threshold in the formal repurchase programs other 
than to benefit--I mean, the implication in this is the way 
that insiders would be benefited. And we believe the board 
ratified the discretionary program in November 2000 without 
enough disclosure of material information regarding 
discretionary purposes.
    These programs resulted in self-interested transactions 
that disproportionately benefited insiders at the expense of 
larger shareholders, despite the chairman's stated purpose of 
aligning those interests. And we believe that the details and 
effect of the November 2000 repurchase program were not 
adequately considered by the board or disclosed to 
shareholders.
    Serious questions exist regarding whether the directors and 
officers who participated in the repurchase programs acted 
either in good faith or with due care in a manner that they 
could reasonably believe was in the best interests of ULLICO. 
And we cannot say with any degree of certainty that they would 
be protected by the business judgment rule. And in any event, 
it is not clear that the business judgment rule would be 
available to officers, as opposed to directors.
    No outside counsel or professional was specifically asked 
to evaluate fiduciary duty issues. In fact, the report 
discloses that at least one lawyer from Arnold and Porter 
raised the issue of whether or not the 10,000 share proration 
threshold in the November 2000 was discriminatory and benefited 
insiders. It did not change. The general counsel of the company 
denied receiving that caution. And obviously we are in no 
position to say who is telling the truth.
    Chairman Collins. Governor, I know you are coming to some 
of the most interesting parts of the report, on your remedial 
recommendations and the rest of your analysis. I am going to 
ask you to proceed a little more rapidly because we are 
expecting votes and I want you to be able to get----
    Mr. Thompson. Madam Chairman, I can easily stop here. I 
know the Committee is familiar with the report and the slides, 
and I would be happy to go from this point into your questions.
    Chairman Collins. Why don't you just quickly run through 
any remaining points that you would like to make for us. Thank 
you, and I apologize.
    Mr. Thompson. I will edit myself.
    Chairman Collins. I apologize for hurrying you. It is only 
because of the votes that will be coming.
    Mr. Thompson. Votes come first.
    The next several pages are simply conclusions that should 
be obvious by now. Let us go to the possible defenses to the 
violation of the laws, because I think that this is important.
    We were not able to conclude that Federal securities laws 
were violated here because we were not able to conclude that a 
plaintiff or a prosecutor could meet the standard of severe 
recklessness. We also believe that causation and reliance, 
which are requirements of the Federal securities laws 
violations, are at least an open question.
    Now, I will also say that a reasonable person could make 
the contrary argument. But if you are asking us for our 
opinion, and we include three former Federal prosecutors on 
this team, we do not believe that the Federal securities laws 
were violated, although as I say others could come to an 
opposite conclusion.
    Similarly, when you look at the issue of criminal intent, 
which would require a specific criminal intent proved beyond a 
reasonable doubt, here too we think that a reasonable person 
could make the contrary argument. And so I put myself in a 
position of a former prosecutor looking at this case like I 
looked at thousands of cases during the course of three 
different prosecutorial careers. And I simply came to the 
conclusion that if a reasonable person could say the criminal 
law was violated and a reasonable person could say that it was 
not violated, that a prosecutor would have a difficult time 
reaching the standard of proof beyond a reasonable doubt. And 
so we did not conclude that criminal laws were violated.
    We think that under a negligence standard of many States' 
blue sky laws, State securities laws, that a credible case 
could be made that they were violated. But without question the 
bottom line, we strongly believe, and said so in the report, is 
that directors and officers here who participated in these 
transactions violated their fiduciary duty to ULLICO and its 
shareholders.
    And so we made a series of recommendations involving the 
return of stock profits and examination of some of the 
compensation profits by the new board with a fresh look, and a 
whole long series of corporate governance reform 
recommendations.
    And I am pleased to say that after an initial period of 
resistance by the old board, who first wanted us to make only 
an oral report. And I said absolutely not. I am not spending 6 
months investigating a very complex set of transactions to come 
in and give this board an oral report. Then they wanted to keep 
the report confidential. Of course, I was bound by that 
judgment. I had no way to release the report, so we never did 
and never talked about it. It eventually leaked, as you might 
suspect it would.
    Then the old board refused to accept the recommendations of 
the report. I briefed a special committee of the old board, 
which then voted to reject our recommendations. And that is 
when the American labor movement stood up and said enough is 
enough. A number of directors on the board, men like Sweeney, 
Wilhelm, and O'Sullivan, said this is the end, we are changing 
this place. And they have. They have put together quite a 
distinguished new board, I believe, with outsiders beyond the 
union movement. An old Congressional colleague, Abe Mikva, an 
old friend of mine from Chicago and a man of extraordinary 
repute, Ravitch from New York, and others.
    And that new board has voted to adopt all of the 
recommendations of the Thompson report and has a committee to 
study some of the compensation questions that we thought should 
be re-examined.
    So my belief is, as both the Chairman and the Ranking 
Member have said in their opening statements, that ULLICO 
today, under its new administration, is to be commended for 
standing up and doing what a lot of companies have continued to 
drag their feet on.
    So I am pleased that is at least one result of our ULLICO 
investigation.
    And I thank the Committee very much for their allowing me 
to make this report, and for your kind and lengthy attention.
    Chairman Collins. I want to thank you, Governor, for your 
very thorough presentation and helping the Committee understand 
the findings of your investigation, as well as the 
recommendations.
    The Committee staff interviewed some of the former ULLICO 
officers and directors and talked to them about their 
participation in 1998 and 1999 stock offers. Some of the 
officers claimed that they were taking risk and said they had 
to purchase the stock with their own money and that essentially 
they got lucky, that they were not manipulating the stock 
purchase and repurchase rules.
    Do you think that the officers and directors who purchased 
stock in 1998 and 1999 were just lucky? Were they taking on any 
sort of serious risk? Or essentially were they in a position to 
know what the stock price was going to be or likely to be?
    Mr. Thompson. I think the issue of whether they, in fact, 
had to purchase this stock with their own money is of little 
relevance because that is the common experience in 
corporations. Occasionally a corporation will loan officers 
money to make stock purchases, to get them invested in the 
company. But the days when that was more freely done are over, 
and now corporate loans to officers for the purchase of stock 
are disfavored and looked upon with some suspicion.
    But passing that issue, my belief is that there was little 
or no risk. And second, that they were in a position to know 
and control the increasing share price. So I would not agree 
with their conclusions.
    Chairman Collins. I want to talk to you about the role of 
the board prior to your report and then the response after.
    As I read through your report I was struck by how much 
control the board of directors ceded to management, 
particularly to the president and CEO, Georgine. It seems to be 
a common pattern that we saw in the extensive hearings that 
Senator Levin and I conducted, Senator Levin was the Chair, of 
the Enron scandal that we saw, again the board essentially 
rubber stamping decisions made by the CEO.
    Do you agree that is what happened in this case, and that 
the board simply did not exercise enough independent oversight 
of management?
    Mr. Thompson. Generally, yes, I agree with that conclusion. 
I would add that board attendance by members was sporadic and 
not what would be expected at a publicly traded corporation. 
Meetings were infrequent.
    But I also think a reading of this record leads you to the 
inescapable conclusion that management told the board as little 
as they had to tell them. So I think there were those three 
dynamics at work here.
    Chairman Collins. Is there also a dynamic at work that some 
of the board members did not want to know because they were 
benefiting from the transactions that were proposed by Mr. 
Georgine? So in a sense, the incentives were to not ask 
questions?
    Mr. Thompson. I guess I cannot come to the conclusion that 
they did not want to know because I would have to inquire into 
their minds. But certainly their ratification or acquiescence, 
however you want to characterize it, of management's proposals 
and decisions obviously benefited them enormously as insiders, 
the designs of the programs. And so whether it was culpability 
or whether it was inattention or whether it was not 
understanding the impact of what they were doing, for example, 
in adopting the 10,000 share proration threshold, it is hard 
for me to say. It may have been any or all of those.
    Chairman Collins. After you submitted your report to the 
ULLICO board, it is my understanding that the company hired 
other sets of lawyers to prepare rebuttals to your report. Is 
that accurate?
    Mr. Thompson. That is accurate.
    Chairman Collins. Did it surprise you that the board, which 
after all commissioned you to get to the bottom of this, had as 
a response hiring other people to refute your findings?
    Mr. Thompson. I think perhaps initially I was surprised, 
simply because your own pride of authorship would lead you to 
the conclusion that the board would immediately adopt all of 
your recommendations and say thank you very much. But on 
reflection, given what we discovered and how we have 
characterized it, I was not ultimately surprised.
    Chairman Collins. Did the board actually vote to reject 
your recommendations?
    Mr. Thompson. I cannot recall whether the board itself 
voted to reject them or whether they simply took no action. But 
the special committee they later formed did vote to reject 
them.
    Chairman Collins. The old ULLICO board had essentially 5\1/
2\ months to act upon your recommendations before they were 
ousted and the new reform board came in. Are you aware of any 
actions that the board took during that time to try to follow 
one of your primary recommendations, which was to seek the 
return of the ill-gotten gains that Mr. Georgine and Mr. 
Carabillo had secured as a result of the stock transactions? 
Was any action taken to your knowledge?
    Mr. Thompson. No, I am not aware of any such action.
    Chairman Collins. So it is only recently, when the new 
board came in, that there has been any attempt to secure the 
return of that money?
    Mr. Thompson. That is correct.
    Chairman Collins. I would like to turn to the issue of Mr. 
Georgine's compensation. I have a chart that I would like to 
have put up.\1\
---------------------------------------------------------------------------
    \1\ Chart entitled ``Funds Robert Georgine has been asked to return 
or are under investigation by ULLICO's new management,'' appears in the 
Appendix on page 44.
---------------------------------------------------------------------------
    It seems to me that Mr. Georgine earned a great deal of 
money from the company between 1998 and 2001. In addition to 
his annual salary of $650,000 and bonuses totaling $800,000, 
neither of which I should emphasize are under investigation, 
Mr. Georgine received almost $2.6 million in profits from stock 
transactions, $4 million in profits from his deferred comp 
program, and he is now claiming that he is entitled to $2 
million in severance pay, and $6.3 million in a supplemental 
retirement account.
    This also does not take into account the loan that you 
discussed, which has been forgiven in part.
    Therefore excluding the loan, excluding his base salary, 
excluding his base bonus, there is almost $15 million that Mr. 
Georgine has been asked to return or is under investigation by 
ULLICO's new management, as well as other parties.
    Now I realize that you were not engaged to review 
compensation issues but you did have some comments in your 
report and I would be interested in your judgment about whether 
the board was fully aware of the extent of the money, whether 
you call it direct compensation or not, that Mr. Georgine was 
receiving.
    Mr. Thompson. Madam Chairman, I would doubt that the board 
ever really focused on the totality of the Georgine or other 
senior officer compensation. As you say, I am not a 
compensation expert and it was not within my mandate to opine 
on compensation, other than to explore it and give this whole 
thing a context because of the issue of whether the share sales 
were part of compensation or not.
    It is pretty clear that Mr. Georgine, for that 3-year 
period, was pretty well rewarded. Now on the one hand, if you 
are the chairman of a company, the CEO of a company that makes 
an extraordinary investment and there is a great shareholder 
return, you are entitled to some credit. Whether it was your 
specific decision or not, you are the boss. It is like 
politics, if the economy is good the incumbent gets the credit. 
If the economy is bad, the incumbent gets the blame. That is 
just the rules of the territory.
    But I would have to say that the total compensation during 
this 3-year period gives me pause, in part because of what the 
Ranking Member said in his opening statement. With all the 
focus on the Global Crossing investment and the rich rewards 
that were brought to the company, to have it end up that Global 
Crossing was 85 percent of shareholder equity at one point, 
with all of the other investment decisions which presumably 
management okayed going south, and lines of businesses going 
south, you would think that compensation decisions would at 
least reflect the troubled parts of the company as well as the 
accumulation of shareholder equity. And that does not seem to 
have been the case.
    Chairman Collins. In addition, as your statement pointed 
out, there was already compensation or a reward, if you will, 
for the Global Crossing investment through the Global Incentive 
Program; is that correct?
    Mr. Thompson. That is correct.
    Chairman Collins. Senator Levin.
    Senator Levin. Thank you, Madam Chairman.
    Just on the compensation issue for a brief moment, I know 
that was not the direction that you had to look at the 
compensation issues, in terms of whether they were appropriate 
but rather whether they were proper. And so I want to get into 
this pay for performance question with you.
    Did you consider, in your recommendations, urging the 
compensation committee to link pay and performance, unlike what 
happened here where pay and performance were not linked?
    Mr. Thompson. I believe our recommendations to the board, 
which have now been accepted or are under study by the new 
board, did put some pretty defined and stricter parameters on 
the issue of compensation and asked that they look at it with 
the eye towards rewarding performance rather than rewarding 
just showing up.
    Senator Levin. Your report concluded, as you just said in 
the last few minutes, indicated that there was insufficient 
evidence to establish a Federal securities law violation.
    Mr. Thompson. In our opinion, yes.
    Senator Levin. In your opinion. Even though we had their 
officers setting up discretionary grant programs that allowed 
officers and directors to obtain stock that was not available 
to other stockholders, and at a time that it was known that the 
official price of that stock was lower than its value, and that 
obtaining the stock would provide an essentially risk-free 
profit to the person obtaining it, and although we had a CEO 
handing out stock under an alleged discretionary program that 
the board did not know about and which it only ratified after 
the fact.
    I accept your findings and the reason for your findings, by 
the way. I think you laid them out very carefully and 
thoughtfully here from a prosecutorial point of view.
    My question is should we consider changes in the law, in 
your judgment, to make those actions which I just identified 
and you identified in your report violations of securities 
laws?
    Mr. Thompson. I think that, going to the first part of your 
question, one of the reasons that we did not conclude that 
there were violations of Federal securities laws was that we 
were troubled by the difficulty of proving causation and 
reliance which is a standard, and by the issue of severe 
recklessness which is a standard.
    But passing that in our conclusion, I think it is worth a 
legislative effort, certainly a legislative study, to determine 
whether or not the Federal securities laws should be broadened 
to include the things that you have talked about without being 
able to give you a conclusion now, since I have not obviously 
studied that subject.
    In the same way, I think I would give the same response to 
a question posed by the Chairman in her opening statement about 
whether or not the law should require more from private 
companies. I think that, too, is worth legislative study and 
perhaps a legislative effort.
    Senator Levin. I would assume, Madam Chairman, that this 
record and that the findings of the Thompson inquiry then would 
be referred to the appropriate committee that has jurisdiction 
over these laws to see whether or not, in fact, our securities 
laws should be tightened to address more specifically actions 
here which seem to me so totally inappropriate. And yet, under 
current standards, for perfectly legitimate reasons that 
Governor Thompson has told us, do not constitute violations.
    So perhaps when we are done we could make reference to the 
Banking Committee, I believe it would be, for that 
consideration as well as for this public/private issue which a 
number of us have raised.
    Chairman Collins. I would anticipate, as with all of our 
oversight hearings, that we would refer any significant 
findings either to Federal agencies or to Congressional 
committees.
    Senator Collins. I would also perhaps, I hope 
appropriately, welcome from Governor Thompson any further 
thoughts that he has on that issue to be shared with us so we 
could forward them that way.
    Mr. Thompson. I will.
    Senator Levin. Governor, the number of corporate governance 
recommendations in your report are based on current standards 
at the stock exchange and at NASDAQ. For instance, you 
recommended a majority of the ULLICO board of directors be 
independent, recommend treating former or current union 
presidents or pension fund trustees as inside directors who 
lack this independence.
    That raises some interesting questions to me, if I am 
reading the recommendation correctly. Unions and union pension 
funds are the primary stockholders of ULLICO, and it seems to 
me that most private companies want their shareholders on the 
board. As a matter of fact, that is usually the purpose of most 
privately held companies is to have their shareholders be on 
the board and you really make decisions and to link directly 
the operations of the company to their shareholder interests.
    The SEC is now considering a proposal, as a matter of fact, 
to require public companies to allow large shareholders, at 
least large shareholders, to be able to nominate directors.
    So we have, on the one hand, the desirability of linking 
the interest of shareholders to the company's management and 
direction more directly. As you pointed out in your testimony, 
some companies even require their directors to own stock in the 
company.
    So where is the disconnect here, if there is any?
    Mr. Thompson. I will have to say in all candor that this 
was a subject that we debated within our team at length, and I 
am not sure we are all of one mind on this issue.
    I think for me the bottom line is that the most important--
and I recognize the strength of what you say about interested 
shareholders and the representation of large shareholders on 
the board. I see it in my own experience every day. And 
obviously a director who owns shares has an interest of some 
sort that most often is thought of as a healthy interest if the 
right sort of restrictions are placed around those 
shareholdings so that you are not making 30-day decisions on 
behalf of the company.
    I think I would perhaps come down, more importantly, on the 
side of requiring that a clear majority of the directors on the 
board be independent by any standard and then dealing with the 
sort of interested director issue by full disclosure of the 
interest and a forbearance from voting on something when there 
is a true and obvious conflict. I think that would perhaps be 
satisfactory in the great majority of cases.
    Senator Levin. These pension funds want to protect those 
pension funds. They want to be there.
    Mr. Thompson. Absolutely.
    Senator Levin. It is not a conflict, they are protecting 
their funds and the future of their funds that put together 
this corporation, private corporation just for that purpose.
    Mr. Thompson. Correct.
    Senator Levin. And I am not sure I see the conflict. It 
seems to me it is the very purpose of the company.
    Mr. Thompson. I am not saying that there is necessarily a 
conflict in that context. All I am saying is that I think for 
good corporate governance a majority of the board ought to be 
independent of any sort of outside interests and transparency 
and disclosure can probably handle the rest.
    Senator Levin. One of Georgine's compensation aspects, or 
part of it, was a retirement trust called a rabbi trust 
apparently, which protects his pay if the company were to 
declare bankruptcy. Apparently these arrangements are common, 
these so-called rabbi trusts.
    Mr. Thompson. Yes.
    Senator Levin. On the other hand, they are troubling to me, 
at least at first glance, because they permit executives to 
retain the high-level of their pay right into retirement 
despite the faltering or the failure of a company.
    Did the employees of ULLICO have the same protections for 
their retirement benefits, for instance?
    Mr. Thompson. They did not.
    Senator Levin. Is it something that you looked into as 
being inconsistent for the executives to have protections for 
their retirement? And this is common, by the way. This is not 
something unique to ULLICO. But it is something which troubles 
me and I want to just ask you, because you are in a field here 
which in a sense is broader and has lessons for us beyond 
ULLICO. Is that not a troubling aspect?
    Mr. Thompson. Yes, and at least one highly ranked corporate 
executive in the several months has lost his position over the 
differential between how his pension was to be treated and the 
workers' pensions were to be treated, American Airlines where 
the workers were being asked to make sacrifices while the board 
quietly made arrangements for the protection of the leaders' 
pensions.
    This was not part of our mandate, so we did not look at it 
with that eye, but I think you are quite correct. It is a 
troubling issue especially in today's economy, where workers 
are being asked to make sacrifices or to participate in plans 
to save the company to a far greater degree than they ever have 
before in my experience and disparities either the difference 
between the treatment of the managerial pensions and the 
workers' pensions or the disparity that you have noted in the 
difference between managerial compensation and worker 
compensation increasing from I think you said 100 times to 500 
times become troubling.
    So that is why I think we ought never--and certainly the 
Congress ought never to close its eyes to issues raised that 
perhaps were not as troubling in prior times but may be 
troubling now and in the future.
    Senator Levin. Thank you. Thank you, Madam Chairman.
    Chairman Collins. Senator Fitzgerald.
    Senator Fitzgerald. Thank you, Madam Chairman. Governor 
Thompson, thank you very much for the report. I think it was 
very good, very thorough, and very well balanced.
    Are you aware of any civil lawsuits that has been filed 
against the directors or officers?
    Mr. Thompson. I do not know about the directors. Several 
civil lawsuits been filed against the company by unions or 
union locals who feel aggrieved.
    Senator Fitzgerald. Shareholders?
    Mr. Thompson. Shareholders, yes. At least two or three, I 
think. Those are pending and I am sure Mr. O'Sullivan, in his 
testimony, can elaborate on that.
    Senator Fitzgerald. That explains why the board might not 
have liked your report because I assume that report could be 
used as evidence in lawsuits, although you do not conclude that 
there is definitively any violation of civil laws.
    Mr. Thompson. I think frankly that those who hold contrary 
opinions to those that we reached on either the violation of 
Federal, civil, or criminal laws or State securities laws will 
proceed full pace with their investigations or considerations 
without regard to our legal conclusions. I think basically the 
old board and the old management did not like our report 
because it said you violated your fiduciary duty and you ought 
to give the money back. I think that is why they did not like 
the report.
    Senator Fitzgerald. As I said at the outset, I think the 
issue here for us is what changes in the law should we 
consider. I am troubled that because this is a privately held 
corporation, some of the disciplines we have imposed 
statutorily on publicly traded corporations do not apply to 
them. The company is incorporated under Maryland law. I see 
that Sidley and Austin, in its rebuttal to your report, notes 
that under Maryland law officers of a Maryland corporation owe 
no statutory duties.
    One of the thoughts that I have is--boards of companies or 
incorporators of companies decide which States' laws to 
incorporate under, which causes boards to look around for the 
corporate law that is most favorable not to the shareholders 
necessarily but to protecting the board from legal liability. 
And so naturally, they are going to choose corporate laws of 
States that imposed the fewest duties on them.
    Do you think it might make sense for Congress to amend 
Federal securities laws to give shareholders the right to 
determine the State of incorporation? The reason I raise this 
is because I think when directors or officers are in charge of 
deciding which State they are going to incorporate under, there 
is a race to the bottom, and States start to compete to have 
the most liberal corporate laws. I see the Senator from 
Delaware perking up.
    Senator Carper. I sure am glad I came to this hearing.
    Senator Fitzgerald. Not to impugn the laws of the State of 
Delaware--Delaware has an additional advantage in that there is 
a very well developed body of case law that explains exactly 
what that State's corporate laws mean.
    But what would you think about if we gave shareholders the 
right to determine the State of incorporation?
    Mr. Thompson. Senator, with all respect, I do not think 
that issue is that large. It would be very difficult, I think, 
to find a way to involve shareholders other than the initial 
incorporators in a corporation decision without the requiring 
that once an incorporation decision is made that future 
generations of shareholders can go back and change it to 
another State.
    Frankly I think--and I am not saying this simply because 
Senator Carper has entered the room, Delaware is obviously the 
preference of most companies, at least most publicly traded 
companies, and that has been true for a long time. And I do not 
believe that is going to change.
    And they, of course, have developed in Delaware a very 
stringent body of corporate governance law that gets, as I read 
the press, more stringent everyday.
    I have not, at least in my experience, Senator, I have not 
noticed a rush to the least regulatory State. You might find a 
greater rush to a lesser taxing State than you would to a State 
with lesser structures on corporate governance.
    And I am not sure I would agree with the conclusion--I know 
with all respect to my colleagues in the profession at Sidley 
and Austin, I do not agree with many of their rebuttal 
conclusions. We employed a neutral expert on Maryland corporate 
law, Dean Sergeant, who is with us today. And I do not think he 
believes that there is a significant difference between 
Maryland corporate law and the duties it imposes on officers 
and directors and the laws of most other States.
    Senator Fitzgerald. Do you have any ideas on what we might 
do to protect shareholders of privately held corporations? I 
suppose the reason we have not been concerned about the 
privately held corporations, as your report reflects if they 
have under 500 shareholders, is that they are covered by the 
statutes that apply to publicly traded corporations.
    I suppose most privately held corporations are just mom and 
pop operations, maybe family held, maybe your local dry cleaner 
or automobile dealership, and while there may be some insider 
dealing, but they are probably brothers and sisters and aunts 
and uncles and we are just not going to get in the middle of 
that.
    But this is a privately held corporation that is quite big, 
over $1 billion market value at one time or capitalization book 
value. Although they had under 500 shareholders, those 
shareholders, in turn, represented thousands, or tens of 
thousands of people.
    Do you have any ideas on what we might be able to do to 
bolster the protections for shareholders in such corporations?
    Mr. Thompson. Senator, off the top of my head, I do not and 
I would hesitate to tread in this area without some more 
deliberate study. But I would be pleased to go back and, with 
my staff, discuss this issue. And if we come up with things 
that are viable, to bring them to the attention of this 
Committee.
    The principal difference today, of course, between public 
and private corporations is in reporting obligations under 
Federal law. And in fact, oftentimes there is a desire of a 
company to go from private to public but the cost 
considerations of becoming a publicly traded company, in terms 
of reporting and oversight, are sometimes significant for what 
you call the smaller companies.
    Senator Fitzgerald. Consider a tender offer though. If a 
publicly traded company were to do a repurchase of shares, I 
would imagine the SEC would approve the tender offer terms?
    Mr. Thompson. Absolutely.
    Senator Fitzgerald. In this case, you just have insiders 
with nobody supervising them deciding the terms of the tender 
offer. The insiders came up with a policy that was 
discriminatory to the larger shareholders and beneficial for 
the inside managers.
    Did they retain an outside counsel to help them with their 
tender offer program?
    Mr. Thompson. Yes, there were a number of law firms 
advising ULLICO, quite large, quite reputable firms. But the 
pattern, I think, that we saw was that they kept the lawyers 
and their legal advice sort of what I would call 
compartmentalized. They did not ask their law firms for too 
much information or too much advice on the broad topic of 
fairness or things of that mature, or ask them specific 
questions and then come back with specific answers.
    Senator Fitzgerald. You mentioned that Arnold and Porter 
raised questions about whether fiduciary duties rising under 
Maryland corporate laws had been violated, and they just 
brushed it off. Do you know if Arnold and Porter was the law 
firm that was asked to advise on the tender offer?
    Mr. Thompson. I do not recall who did the tender offer. We 
can certainly get that answer for you out of our files and get 
back to you.
    The reference that I made was to an assertion by a partner 
at Arnold and Porter that he had told the company, told 
management, that in his view the November 2000 share purchase 
offer 10,000 threshold was unfair or discriminatory. Carabillo, 
whom the Arnold and Porter lawyer said was given the advice, 
denied that any conversation like that took place. There is 
nothing in writing, so it is disputed.
    Senator Fitzgerald. Do you know if the bylaws of the 
corporation provided for director and officer indemnification?
    Mr. Thompson. I do not know that. It would be unusual if it 
did not.
    Senator Fitzgerald. My guess is that it probably did.
    Mr. Thompson. I do not know of many corporations today that 
would go without D&O.
    Senator Fitzgerald. One final point regarding Credit Suisse 
First Boston. They did the fairness opinion on May 11, 2000, 
for the shareholders. Were they hired by the shareholders? Or, 
who hired Credit Suisse First Boston to do the fairness opinion 
as to the price at which their shares were going to be 
purchased?
    Mr. Thompson. The company.
    Senator Fitzgerald. So they were retained by the company to 
do the fairness opinion for the people whose shares the company 
was buying.
    Mr. Thompson. Right.
    Senator Fitzgerald. OK. Thank you very much, Governor.
    Mr. Thompson. Thank you, Senator.
    Chairman Collins. Thank you, Senator. Senator Carper.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thanks, Madam Chairman.
    Governor, good to see you. I think the last time we spent 
some time together was about 4 years ago and I recall being in 
your old home.
    Mr. Thompson. Right, in the kitchen of the executive 
mansion in Springfield, Illinois.
    Senator Carper. That is right. Governor Ryan had invited my 
family and me, we were coming to the end of a National 
Governors Association meeting in St. Louis and with my wife and 
two boys we had gone to Springfield to visit the Lincoln sites 
and to see a little bit of your State and ended up being house 
guests of the Ryans that evening. And you and I, and I think 
your daughter were there, as well.
    Mr. Thompson. That is correct.
    Senator Carper. It is a really neat Governor's house, a 
huge place, almost as big as the White House, I think. I do not 
know who built that place, but they did a nice job.
    Mr. Thompson. It is the third oldest continuously occupied 
governor's mansion in the Nation. It is the largest and it is 
the largest because during former Governor Ogilvie's time the 
place was literally falling down and they had to decide whether 
to restore it or to tear it down. And they decided to restore 
it because it was a quite beautiful mid-19th Century structure. 
While they were restoring it, they just simply doubled its size 
and matched the architecture on the outside so that unless you 
know the history of the house you cannot tell where the old 
house and new house began.
    Senator Carper. I remember remarking to my wife on our way 
back to Delaware when we left, that the governor's mansion in 
Illinois has more bathrooms than we had rooms at the governor's 
house in Delaware by far.
    But they had taken the third floor of the governor's house 
and the Ryan's had turned it into like a playroom for their 
grandchildren.
    Mr. Thompson. The attic, yes.
    Senator Carper. And our kids, at the time, were about 9 and 
10 years old and I thought we would never get them in the car 
to leave, to go back.
    Mr. Thompson. I have to take credit for putting the pinball 
machines and the exercise equipment and things of that sort up 
there.
    Senator Carper. We still talk about it.
    How did you get drawn into this imbroglio with ULLICO?
    Mr. Thompson. I was recommended to the board as a special 
counsel to investigate the issue of share purchases and 
repurchases but officers and directors and the company's good 
fortune that came about as a result of their Global Crossing 
investment.
    Senator Carper. Just briefly, I am bouncing back and forth 
between about three hearings today, but just briefly for what a 
Senator who serves on this Committee needs to know, what did 
you find that I should be especially aware of?
    Mr. Thompson. We found that at ULLICO, the stock purchase 
and repurchase programs were conceived and implemented in such 
a fashion as to benefit what we call the insiders, the officers 
and directors, who were allowed to purchase shares without 
risk, to resell them to the company without restriction both 
within the context of formal programs and informal programs, 
and that they violated their fiduciary duties under Maryland 
law, the State of their incorporation.
    We came to no conclusion that they had violated Federal 
securities or Federal criminal laws, although as I noted 
earlier in my testimony, a reasonable person could make the 
contrary argument.
    Senator Carper. I understand there has been a change in the 
leadership of the company?
    Mr. Thompson. That is correct.
    Senator Carper. And of the board itself, and I think that 
occurred in May?
    Mr. Thompson. May 8, the new board was elected and new 
officers were elected, and they have been vigorous since their 
election in both accepting the recommendations of our report 
and implementing the recommendations of our report and 
demanding the return of the unjustified profits gained by the 
insiders on their stock sales.
    Senator Carper. Do I understand that before May 8 that a 
special committee of the board chose to accept some of your 
recommendations but not all?
    Mr. Thompson. No, they voted to reject our recommendations, 
the special committee of the old board, yes.
    Senator Carper. The newly constituted board has accepted 
and acted on all of your recommendations?
    Mr. Thompson. Yes, sir, or is the process of acting on all 
of them.
    Senator Carper. What is there for us to do here in the 
Senate, with regards to lessons learned?
    Mr. Thompson. I think what there may be for you to do, and 
this I think will require further study by staff and others 
whom you may wish to refer the matter to, is whether in fact 
there ought to be greater obligations imposed by Federal law on 
the actions of private companies. Now that poses all sorts of 
challenges, of courses, as we recognized here this morning. But 
that certainly is an open issue for debate.
    And I think there is some tangential efforts off of that 
study that could go forward with regard to the issue of 
compensation and properly structured programs, director 
independence.
    This shows that there is sort of a hidden side, I think, to 
the corporate world that the private companies occupy. And it 
may or may not be appropriately treated today by Federal law.
    Senator Carper. A member of my staff was good enough to 
prepare a briefing paper and I just want to read a sentence or 
two from it and ask you to say is that a fair statement, is it 
a fair representation of the truth as you know it.
    While the actions of ULLICO's directors were certainly 
reprehensible, they may ultimately be guilty of no more than 
engaging in deceptive practices and gross mismanagement. And 
they go on to say unlike Enron and other high-profile scandals 
however, Governor Thompson will report that he found no 
evidence of criminal intent by ULLICO's officers. Is that a 
fair statement?
    Mr. Thompson. That is a fair statement.
    Senator Carper. Thank you very much. Thank you, Madam 
Chairman.
    Chairman Collins. Thank you.
    I want to thank you, Governor, for your testimony this 
morning, for the amount of time you have spent on this issue 
with me and with my staff. We very much appreciate your 
contributions.
    Mr. Thompson. Thank you very much, Madam Chairman and 
Members of the Committee. It was a privilege.
    Chairman Collins. I would now like to hear from our second 
and final witness today, Terence M. O'Sullivan, the General 
President of the Laborers International Union of North America 
and, for purposes of this hearing, he is testifying in his 
capacity as the new chairman of the board and CEO of ULLICO.
    He assumed this position in May. He and a new slate of 
directors have pledged to make significant changes at ULLICO, 
and we welcome you here today, Mr. O'Sullivan. You can proceed 
with your statement.

 STATEMENT OF TERENCE O'SULLIVAN,\1\ CHAIRMAN OF THE BOARD AND 
              CHIEF EXECUTIVE OFFICER, ULLICO, INC

    Mr. O'Sullivan. Thank you, Chairman Collins.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. O'Sullivan appears in the 
Appendix on page 76.
---------------------------------------------------------------------------
    Good morning, Chairman Collins, Senator Levin, and other 
members of the Committee. By name is Terry O'Sullivan and since 
May 8, I have served as Chairman and CEO of ULLICO, Inc.
    In fact, I would guess that few corporate chairman and CEOs 
have had the honor of appearing before your Committee after 
being on the job for only 45 days.
    I am also privileged to have served as General President of 
Laborers International Union of North America since the 
beginning of 2000. I appear today on behalf of ULLICO. However, 
there are differences of opinion on the board on some of the 
matters under discussion here and my views are not necessarily 
those of all directors.
    I will report to the Committee on the scope and nature of 
my involvement with ULLICO over the past 3 years. I was first 
elected to the board of ULLICO at the annual shareholders 
meeting in May 2000. The first board meeting I attended was in 
November 2000. As it happens, that was the meeting at which the 
board adopted the 2000 stock repurchase plan that served as the 
vehicle for many of the stock transactions Governor Thompson 
has described for the Committee.
    Directors had no prior notice of the modifications to the 
stock repurchase program that were going to be proposed at that 
meeting. There was no disclosure at that meeting of the 1998 
and 1999 stock offerings to directors and officers. There was 
no disclosure of the significant changes in the rules of the 
repurchase program from those approved in May 2000, including 
the increase from 100 shares to 10,000 shares of those stock 
tenders that would be excused from proration. There was no 
disclosure of the way the decline in the price of Global 
Crossing stock affected the price of the ULLICO stock that was 
being repurchased. Finally, there was no disclosure of the way 
the 10,000 share proration rule would benefit insiders.
    I voted with the majority at that meeting, a decision I now 
regret. I can only say that because of the lack of disclosure 
of the salient facts, my vote was uninformed. My conduct after 
that meeting shows that I would have voted differently had I 
been fully advised.
    For the next 15 months I was unaware that anything was 
wrong at ULLICO other than the decline in business performance. 
When press reports of insider transactions first appeared in 
March 2002, I and many other labor leaders learned for the 
first time of the true nature of the stock repurchase program.
    In light of the serious nature of the matters being 
reported there was broad support, including my own, for AFL-CIO 
President John Sweeney's call for an independent investigation. 
Jim Thompson, former Governor of Illinois, was ultimately 
chosen by ULLICO's board and agreed to serve as independent 
counsel to the company to investigate these matters.
    I received a copy of Governor Thompson's report in November 
2002. It was only then that I understood that when the company 
offered stock to directors and officers on December 17, 1999 it 
was offering them a sure thing that other stockholders were 
being denied. It was only then I understood the discretionary 
repurchase program had become a multimillion dollar benefit 
limited to certain insiders. Further, it was only then that I 
understood the impact of excusing shareholders with less than 
10,000 shares from proration, how it guaranteed that most of 
the money would go to a few officers and directors.
    The board met in December 2002 and decided to appoint the 
special committee to review the report and make recommendations 
to the board. Because I have never owned or sold ULLICO stock, 
I was one of eight directors asked to serve on the special 
committee.
    I am no lawyer and make no claim of legal expertise. I am a 
trade unionist. Everything I have I owe to the working men and 
women of the Laborers International Union of North America. The 
conclusions to which I came with respect to Governor Thompson's 
report grew out of my duty to the union I serve, to ULLICO so 
long as I serve on the board, and to the pension funds my 
members are counting on.
    After I heard Governor Thompson and read his report, I 
became convinced that these stock repurchase deals were bad for 
my union, bad for my union's pension funds, and bad for ULLICO 
and its shareholders.
    The special committee considered Governor Thompson's 
recommendations in two parts. We unanimously adopted his 
governance recommendations with minor modifications. 
Unfortunately, we were divided on whether to accept his 
remedial recommendations. Hotel Employees and Restaurant 
Employees President John Wilhelm and I found ourselves in the 
minority as those who felt that directors and officers should 
be required to return profits from the stock repurchase 
program.
    President Wilhelm resigned after the special committee 
rejected our position. At various points in time AFL-CIO 
President Sweeney, Executive Vice President Linda Chavez-
Thompson, Operating Engineers President Frank Handley, 
Carpenters President Doug McCarron, and NFL Players President 
Gene Upshaw also resigned. However, I continued to work with 
all of them and other trade union leaders to address the ULLICO 
crisis.
    At this point, I feared for the company's survival after 
the board had rejected Governor Thompson's remedial 
recommendations. The labor community had lost confidence in 
management. The company's financial situation was and remains 
challenged. But I believe that ULLICO is too important to the 
labor movement as a whole and to my union, the Laborers 
International Union, to be allowed to fail.
    I, therefore, chose to stay on the board but with a broad 
group of concerned union leaders, began to organize a reform 
slate of directors to run for the board at the upcoming annual 
shareholders meeting.
    Our slate included former Federal Circuit Court Judge Abner 
Mikva, former U.S. Secretary of Labor Alexis Herman, and former 
Chairman of the New York State Urban Development Corporation, 
Richard Ravitch, as well as 11 prominent elected union leaders 
drawn from among the company's major shareholders.
    With the assistance of our shareholders, the AFL-CIO, the 
Building Trades Department, the International Brotherhood of 
Electrical Workers and numerous unions and their pension funds 
and their QPAMS, we were able to secure the backing of more 
than 70 percent of the shareholders.
    On May 8, a little more than a month ago, our slate was 
accepted by the former management and unanimously elected at 
the annual shareholders meeting. Immediately prior to that 
meeting, Bob Georgine resigned from all of his ULLICO offices. 
In the Board of Directors meeting that followed on the same 
day, I was elected Chairman and Chief Executive Officer. I 
serve in those positions without compensation.
    All members of former management who were deeply involved 
in the stock repurchase program have now been replaced. In 
addition to my election as Chairman and CEO, ULLICO has now 
retained an Acting President Edward Grebow, a professional with 
extensive experience in fixing troubled businesses.
    The former chief legal officer and chief financial officer 
have also left the company.
    On May 9, the company asked the trustees of ULLICO's 
management's rabbi trusts to make no payments to anyone pending 
a board investigation of those trusts. Since then, we have also 
stopped payment on a series of executive compensation plans 
including a deferred compensation plan and contributions on an 
executive split-dollar insurance policy.
    The new board met again on May 13, less than a week after 
its first meeting. At that time, we reconsidered and adopted 
all of Governor Thompson's remedial recommendations. Those 
recommendations include a recommendation that we demand the 
return of $5.6 million in stock profits from directors and 
officers participating in the stock repurchase program. At the 
same time, the board also authorized an inquiry into the role 
of outside service providers in the stock repurchase program.
    On May 13, the board also approved the appointments of a 
number of committees. Among these was a committee chaired by 
Judge Mikva which is charged with the task of reviewing the 
remaining stock transactions as well as past executive 
compensation and past attorney and other service provider 
conduct.
    We have now sent demand letters to all those whom the board 
has asked to repay money. If arrangements for returning the 
profits are not made within 30 days the board has voted to take 
whatever steps are necessary to effect the removal from any 
position within ULLICO.
    The board awaits the recommendation of Judge Mikva and his 
committee on what further steps may be necessary to accomplish 
return of the money.
    All currently active union presidents have either returned 
or pledged the return of their stock repurchase profits.
    All in all, we are pleased with our record over the last 5 
weeks. We must do more in the weeks and months to come but we 
think we have set a standard for how boards should deal with 
wrongdoing and its consequences. We are seeking to make our 
company whole.
    The Committee may be aware that there are a number of U.S. 
Attorney and regulatory investigations of the matters at issue 
here. We have and will continue to cooperate fully with those 
investigators.
    Let me conclude by saying this, the good news at ULLICO is 
that our directors and shareholders and the labor movement has 
on a whole stood their ground, fought and won, and the company 
is now acting to obtain the return of unwarranted gains.
    Our fight to do the right thing at ULLICO feels like it is 
making a difference. The company has not failed. No one has 
lost a pension or other benefit as a result of what has 
occurred. ULLICO employees have a defined benefit pension plan 
which is properly diversified and in no danger of defaulting on 
its obligations.
    There will be sacrifices in the months ahead at ULLICO. The 
company faces a range of challenging business issues that 
extend beyond the stock repurchase program. But what sacrifices 
there must be to put ULLICO back on track will be shared and 
shared fairly.
    I and my colleagues on the board and in the management team 
are totally committed to carrying our efforts through to a 
successful conclusion. The working people who are both our 
ultimate owners and our customers deserve no less.
    I would be happy to answer any of your questions and thank 
you for the opportunity to be here today.
    Chairman Collins. Thank you, Mr. O'Sullivan, for your 
testimony.
    Let me begin by telling you that I have a great deal of 
confidence in you personally and I commend you for the steps 
that you have taken. You mentioned in your testimony that on 
May 13 the new ULLICO board voted to adopt all of the remedial 
recommendations of the Thompson report; is that correct?
    Mr. O'Sullivan. That is a correct, Chairman Collins.
    Chairman Collins. That is in contrast to the special 
committee which voted to reject some of the recommendations?
    Mr. O'Sullivan. Yes, the special committee voted, it was 
unanimous in our support for Governor Thompson's corporate 
governance recommendations. The vote for his remedial 
recommendations were six against and three for, actually. But 
there was a difference in two of us completely embraced 
Governor Thompson's remedial recommendations. There was one 
board member, who while he supported it, urged that we 
encourage those officers and directors that participated in the 
2000 stock repurchase program to return their profits.
    Chairman Collins. I am pleased, obviously, that the new 
board has voted to adopted all of the remedial recommendations, 
as well, but I am concerned to learn that vote was not 
unanimous. In fact, it was not close to unanimous. It is my 
understanding that the new board voted 14 to 8 to adopt the 
remedial recommendations; is that accurate?
    Mr. O'Sullivan. That is accurate, Madam Chairman.
    Chairman Collins. We have asked your counsel for the names 
of the directors who voted against accepting the remedial 
recommendations and we have not yet received that information. 
Do you have that information today?
    Mr. O'Sullivan. I do not have the information today. The 
minutes from the meeting on May 13 are in draft form. It will 
be approved at a board meeting we have on June 25. We want to 
ensure their accuracy, since the vote was close, as you said, 
at 14 to 8, that we have recorded each of the director's vote 
appropriately.
    Chairman Collins. Would you share those minutes with the 
Committee, or the names of the eight directors who voted 
against accepting?
    Mr. O'Sullivan. Yes, we will.
    Chairman Collins. Thank you.
    The first recommendation was that the 18 directors and 
officers return profits made from stock purchased in 1998 and 
1999. It is my understanding that the profits from those stock 
sales totaled $5.6 million. Do you know how much has been 
voluntarily returned to date?
    Mr. O'Sullivan. The amount we will get you. There have been 
four active presidents that had either returned or committed to 
returning the proceeds from those stock transactions.
    Chairman Collins. It is my understanding that less than 
$700,000 has been returned this point; is that correct?
    Mr. O'Sullivan. I would say that is a fair number.
    Chairman Collins. What actions will you take if the 
directors and officers fail to return the money? It is my 
understanding there are five directors still on ULLICO's board 
which, according to the Thompson report, should return their 
profits.
    Mr. O'Sullivan. As I testified, the active presidents that 
continue to sit on the board have committed to return the stock 
profits.
    Our plan of action is two-fold. First, as I testified, we 
sent the letters out on June 16. We approved it May 13 at our 
board meeting. The reason for the delay between May 13 and June 
16 was tax considerations. We hired outside tax professionals 
before we sent those letters out. The letters are now out. The 
18 directors in question have 30 days to return their profits.
    We have also turned this issue over to Judge Mikva's 
committee as to our other options if the proceeds from the 
stock transactions are not returned, as to what other legal 
options and other options that we have to pursue.
    Chairman Collins. When Mr. Georgine resigned or was forced 
out from ULLICO, it is my understanding that he sent you a 
letter in which he claimed he was entitled to a $2 million 
severance payment.\1\ My information is that he told you that 
he wanted the $2 million to count as his repayment of profits 
made in his stock deals, but also as a return of profits on 
behalf of six specific directors of the company. And five of 
those six directors that were singled out in Mr. Georgine's 
letter as the recipients of his largess are still sitting on 
the board of directors.
---------------------------------------------------------------------------
    \1\ The letter from Mr. Georgine, to Terrence M. O'Sullivan, dated 
May 8, 2003, referred to appears in the Appendix on page 98.
---------------------------------------------------------------------------
    Do you know why Mr. Georgine is trying to bail out 
directors who are still sitting on the board out of his 
severance pay?
    Mr. O'Sullivan. Chairman Collins, I did, in fact, receive 
Bob Georgine's resignation letter, as you said. I did not have 
any conversations with Mr. Georgine as to how he chose that 
group of directors that he wanted his golden parachute or 
severance package to cover.
    I will say that on June 13 as well, not only with the 
demand letter for the return of the stock profits, another 
letter was sent to Mr. Georgine regarding his resignation. If 
you will bear with me, there is one paragraph that if I could, 
for the record, read. It is addressed to Mr. Georgine from me 
as Chairman and Chief Executive Officer.
    ``Dear Mr. Georgine, we received your letter dated May 8, 
2003 in which you advise the company of your decision to 
resign.
    ``I am writing to inform you that as of this date, ULLICO 
does not agree with certain representations or 
characterizations set forth in your May 8 letter concerning the 
events that proceeded your resignation. We are continuing to 
review this matter and will provide you with a more complete 
response in the near future.''
    Chairman Collins. I am sure you can understand, Mr. 
O'Sullivan, that I cannot help but wonder if any of the 
directors singled out by Mr. Georgine to be the recipients of 
some of his severance pay are the same directors who voted 
against accepting the remedial recommendations that required 
the repayment. That is why I had hoped before this hearing that 
we would receive from ULLICO the names of the directors who 
voted no.
    Mr. O'Sullivan. As I said, Chairman Collins, and I 
apologize for not having the information today, but to make 
sure that we are completely accurate, we wanted to get those 
draft minutes approved. Once they are we will provide you with 
that information.
    Chairman Collins. Governor Thompson informed us that after 
he concluded his investigation and presented his report that 
ULLICO hired another outside law firm, Sidley Austin Brown and 
Wood, to prepare a counter-report refuting his findings and 
recommendations.
    Do you believe that it was a prudent use of company funds, 
after hiring a prestigious law firm headed by Governor Thompson 
to do a fair evaluation of what happened, to then go and hire 
another law firm to try to counter what was found?
    Mr. O'Sullivan. Whether it was prudent or not, I found it 
interesting. They were hired by the company not with the 
approval of the board. I should have stated before----
    Chairman Collins. Excuse me, can I clarify? The board did 
not approve the hiring of the second firm?
    Mr. O'Sullivan. Not to my knowledge, it was hired by the 
company.
    What I found odd is, knowing Governor Thompson and his 
reputation and his work, I should have also said when I started 
that I believe not only ULLICO but the American labor movement 
was well served with his investigation, with his 
professionalism in the way that he has handled this whole 
matter. And I think that because of his investigation, it 
flushed out a lot of things that have allowed us to not only 
change management at ULLICO, but to provide us with an 
opportunity to move ULLICO forward.
    Chairman Collins. Senator Levin.
    Senator Levin. Thank you.
    On that one comment of yours, you say that second firm 
which was hired to review the Thompson report was hired by the 
company. You meant by the management?
    Mr. O'Sullivan. Yes, Senator.
    Senator Levin. As far as you know, not by the board?
    Mr. O'Sullivan. As far as I know, not by the board.
    Senator Levin. I want to, first of all, commend you for 
what you have done, and organized labor for what it has done 
here in cleaning up this problem. It is not easy to take on 
your own. Too many corporate boards refuse to take on their 
own.
    I want to just read this regarding some excerpts from a 
Business Week column of May 27 \1\ because I think it is 
important not just to give you the recognition that is 
appropriate for cleaning up the situation here. But also, it 
seems to me, it gives you an opportunity to speak with even 
greater strength on corporate reforms which we need. Ironically 
enough, having gone through this situation, you are now in a 
position where you can put that to good use not just to clean 
up the ULLICO situation but to help those of us that are trying 
to reform some of the corporate abuses in this world, to give 
us your experience and to speak with strength because you were 
able to take on a board which is made up of friends, 
colleagues, and former associates. And that is not so easy. I 
want to read just a couple of paragraphs.
---------------------------------------------------------------------------
    \1\ Article from Business Week, dated May 27, 2003, submitted by 
Senator Levin, appears in the Appendix on page 91.
---------------------------------------------------------------------------
    This is from the Business Week of May 27: ``When it comes 
to good governance, corporate America can learn a useful lesson 
from the labor movement. For more than a year, the AFL-CIO has 
been plagued by a stock scandal at ULLICO, labor-owned insurer. 
The company's former chief executive and more than a dozen of 
his 28 directors, most union leaders, pocketed millions of 
dollars by selling ULLICO stock at the expense of the union 
pension funds that own most of the company.
    ``What is notable is that after months of internecine 
battles, AFL-CIO President John Sweeney and other labor leaders 
who sat on ULLICO's board moved decisively to clean up the 
mess. They ousted CEO Robert Georgine and put directors on 
notice that they will have to pay back the profits that they 
made. That could amount to at least $6 million.
    ``These actions stand as a model for other large companies. 
It is painfully clear today that corporate boards rarely 
fulfill their designated role as watchdogs over the CEO. 
Complacent directors allowed apparently illegal abuses to occur 
at a string of companies from Enron to Tyco International. Many 
other directors do little to rein in executive excesses.''
    And then jumping down in the article:
    ``Yet Sweeney and a few other such as Laborers Union 
President Terence O'Sullivan, who has since been named ULLICO's 
new CEO, defied the institutional taboos and took on their 
chums. `We still have boards that are hand-picked by the CEO 
for the most part and those directors do not usually stand up 
to the CEO,' says University of Delaware Management Professor 
Charles Elson. `Directors need to have the guts to make change. 
That is the lesson from ULLICO.' ''
    We have had a number of hearings in this Committee and the 
Permanent Subcommittee on Investigations, a Subcommittee of 
this Committee, looking into the failures of board of directors 
to take on management and to carry out their fiduciary duties. 
And we are going to need all the help we can get in getting 
some additional legislation passed relative to the 
responsibilities of directors and how to hold them accountable.
    For instance, right now the SEC does not have the authority 
to impose administrative fines on boards of directors who 
violate regulations of the SEC. They can impose administrative 
fines on the stockbrokers that violate the regulations but they 
cannot impose those fines on the boards of directors or on 
auditors. We are trying to change that. As a matter of fact, we 
passed an amendment here in the Senate, that I introduced, 
which would give the SEC that authority. We cannot get it out 
of the House yet. We hope it comes out of conference but we are 
not sure.
    It seems to me the labor movement, having gone through 
first-hand and personal, up close and personal here, a problem 
such as you had at ULLICO, can really speak with authority. I 
know the labor movement wishes it had not had that experience. 
But it can be put to good use.
    I would urge you to do that. In addition to all of the work 
that you are doing, which you have taken on as its new CEO, 
that you also help us to take that experience and to put it to 
good use in terms of corporate governance generally. That would 
be a real gift to this country. And I would hope that you would 
be able to do that, in addition to your other responsibilities.
    Mr. O'Sullivan. Senator Levin, thank you. And I would be 
remiss, Chairman Collins, if I did not thank you and Senator 
Levin for your confidence in your comments.
    I think that while my name shows up in the press quite 
often, or has, it is the American labor movement that deserves 
the credit because there, in fact, were not a few. There were 
more than many who, once Governor Thompson's report was 
released, and those findings disturbed us greatly, led to the 
events of May 8 and the new management team at ULLICO.
    So I accept your comments. As you said, Senator, I think it 
is reflective of organized labor's commitment to good corporate 
governance, to transparency at every level. And when you are 
going to point fingers at others, you need to make sure that 
you have sound corporate governance yourself. I feel confident, 
completely confident, that the new corporate governance that we 
have adopted at ULLICO, and the fine-tuning that we will do in 
the months and years to come, ULLICO will serve as the model 
for all corporations when it comes to corporate governance.
    I would also say that as a large privately held company, we 
support Sarbanes-Oxley. As we develop our corporate governance, 
we are taking Sarbanes-Oxley into consideration for complete 
transparency. And as you said, Senator, we would look forward 
to working with this Committee and corporate America in how we 
better police corporate behavior.
    Senator Levin. I hope that you will include in that the 
whole issue of executive compensation.
    Mr. O'Sullivan. Without a doubt.
    Senator Levin. It has now grown at the larger companies to 
the point where the CEO is making 500 times the average worker. 
It was 100 times, which was excessive, but 100 times the 
average worker in 1990 or 1991.
    It has gone totally out of kilter here. And it is not easy 
to get a handle on this issue, by the way, because you cannot 
legislate it very easily or appropriately even directly.
    But we are going to need the labor movement, it seems to 
me, to help us in this. And we are going to need you at ULLICO, 
when you look into this issue, to correct the situation where 
your former CEO has a base salary of $650,000, an annual bonus 
$500,000 in 2001, a second cash bonus that ranged from $100,000 
to $700,000 each year, a stock award of 40,000 shares paid for 
by a company loan over 5 years, deferred compensation plans 
that allowed him to invest in what were called deemed ULLICO 
stock which netted him $4 million more, a split-life labor 
insurance policy, a company jet, and so forth.
    I know you are going to be looking into all of that, but I 
really hope that you will set a really good standard in terms 
of corporate pay and correcting what is such excess to me, such 
shocking excess for a CEO whose corporate responsibilities, 
fiduciary responsibility, are to people who are in his labor 
movement. These are workers. These are pensioners. And we had 
someone here who was making this kind of executive pay?
    This, by the way, is peanuts compared to some of the 
corporations that you read about in today's Washington Post. 
But nonetheless, they are mighty large peanuts. And they are 
too big, it seems to me. And I hope that in addition to all of 
the other governance issues that you are going to have to look 
at--and I know you are not getting paid at all. You indicated 
you are serving without pay, which I did not even know about. 
It does not surprise me, knowing what your commitment is and 
what the labor movement's commitment is to cleaning up this 
problem.
    But keep an eye on this corporate pay issue. Set a standard 
for the rest of the corporate world on what a board should do 
and what a compensation committee should do relative to 
corporate pay. Because it is really the only hope we have since 
legislation is very difficult and very dubious in this area.
    Mr. O'Sullivan. I hope that me not getting paid is not a 
reflection on my ability but we could not agree more. On behalf 
of ULLICO, and I think on this issue I can speak on behalf of 
the AFL-CIO, we would look forward to working with this 
Committee and this Congress to address executive compensation.
    We clearly plan on addressing the issue of executive 
compensation within ULLICO as we hire new senior management and 
new officers for the company.
    I might also add that while I am chairman and chief 
executive officer of the company today, it is not my intention 
to continue to be the chief executive officer. As I said in my 
testimony, I am a labor representative. I am not an insurance 
executive. And we do plan on hiring a seasoned financial 
services executive to run the company on a day-to-day basis.
    Chairman Collins. Mr. O'Sullivan, first let me thank 
Senator Levin for this comments. I have just one final question 
for you, and it concerns Mr. Carabillo.
    As you know, we had invited Mr. Carabillo, along with Mr. 
Georgine, whom I consider to be the two central figures in 
these stock transactions, to testify today. Both of them refuse 
to come voluntarily and, in the case of Mr. Georgine, his 
lawyer informed us that if he were subpoenaed he would have 
invoked his Fifth Amendment rights.\1\
---------------------------------------------------------------------------
    \1\ The letter from Randall J. Turk, dated June 17, 2003, referred 
to appears in the Appendix on page 100.
---------------------------------------------------------------------------
    It is my understanding that Mr. Carabillo was supposed to 
have resigned from ULLICO in March but that upon taking control 
of the company in May, you discovered that he was still on the 
payroll even though he had not shown up at work for some time. 
And that if he had been on the payroll for just one more week 
he would have been eligible for a lucrative early retirement 
program.
    I know that you have since taken action to terminate him 
from the payroll, but have you learned how this happened?
    Mr. O'Sullivan. I have not. That matter has been turned 
over to Judge Mikva's committee to ascertain as to what role he 
played, what monies he received from the time that he left 
ULLICO until the time that we discovered that he was still on 
the payroll.
    Chairman Collins. And it was a surprise to you that he was 
still on the payroll?
    Mr. O'Sullivan. A complete and total surprise. And that is 
why once it came to our attention we immediately addressed the 
situation and then terminated his employment with the company.
    Chairman Collins. I thank you for your testimony.
    Senator Levin. Madam Chairman, I just thought of one 
additional question, and that has to do with the options which 
are going to be provided by Judge Mikva as to how to go after 
the money which the Thompson report suggests should be 
returned. Will he be making recommendations in addition to 
giving options?
    Mr. O'Sullivan. That committee will be making 
recommendations to the full Board of Directors.
    Senator Levin. Would you be willing to share those 
recommendations with this Committee?
    Mr. O'Sullivan. Yes, we would.
    Senator Levin. On the executive trust issue, so-called 
rabbi trusts, that is a very troubling problem for me. It 
bothers me greatly that executives would protect their 
retirements with these kind of trusts to protect themselves 
from any bankruptcy or the company going south, whereas the 
workers do not have that protection. I know, of all groups, the 
labor movement would have a similar concern.
    Do you know offhand how many rabbi trusts ULLICO 
established for executives? Do we have numbers on that? And are 
they all frozen?
    Mr. O'Sullivan. I do not know the number. I know that there 
was one for Mr. Georgine. They all have been frozen. They were 
frozen when we came in as a new board and then handed over to 
Judge Mikva's committee for consideration. In many instances we 
had not even seen the documents that established those trusts. 
We have those now. Those are being reviewed by the committee.
    I would also, certainly not to correct Governor Thompson, 
but on the protection of the employees pension fund, there was 
a question about that before. That is a separate pension fund 
that covers the rest of the employees, rabbi trust aside. That 
is a fund governed and overseen by ERISA.
    As I testified before, the matters at hand, while they have 
had a financial impact on shareholders, the pension fund of 
ULLICO is healthy and there is no concern about the employees 
of ULLICO not being able to secure their retirement benefits 
when they leave the company.
    Senator Levin. Thank you.
    Chairman Collins. Mr. O'Sullivan, I want to wish you well. 
I think you have a big job ahead of you. It will be interesting 
to see how many more unpleasant surprises you discover as you 
delve more deeply into ULLICO's operations.
    We look forward to receiving from you the information that 
both Senator Levin and I had requested.
    And I want to thank you for testifying and for undertaking 
the reforms that you have put in place.
    I want to thank all of our witnesses today. The lessons of 
Enron, WorldCom, and ULLICO should be applied to all 
corporations. Whether a company is large or small, or publicly 
or privately held, shareholders should be treated fairly and 
executives must fulfill their ethical and legal obligations.
    There still remains much to learn about what happened at 
ULLICO as well as at the other corporations who have been 
involved in questionable transactions. We need to restore the 
faith of shareholders in American corporations. That remains a 
work in progress.
    This hearing record will remain open for 15 days for the 
submission of additional materials.
    Again, I thank our witnesses and the hearing is now 
adjourned.
    [Whereupon, at 12:34 p.m., the Committee adjourned.]


                            A P P E N D I X

                              ----------                              


                PREPARED STATEMENT OF SENATOR LAUTENBERG
    Madam Chairman, some ULLICO officers and directors made money 
selling ULLICO stock on favorable terms that weren't available to the 
company's other shareholders. That was wrong; Governor Thompson was 
called in to investigate; ULLICO's management team has been replaced.
    Wall Street Journal reporters and editorial page writers have 
likened what happened at ULLICO to the Enron, Tyco, ImClone, WorldCom 
and other corporate scandals that have rocked our economy and led to 
massive job losses.
    Nothing could be farther from the truth. I am not condoning the 
ULLICO stock transactions in question. But to compare ULLICO to Enron 
is ludicrous for several reasons.
    First and foremost, Governor Thompson found no evidence that 
ULLICO's directors and officers acted with ``criminal intent'' or 
``severe recklessness.''
    ULLICO is a private corporation; therefore, it is not generally 
subject to Federal regulations.
    Many of those who profited from the transactions have returned the 
money.
    The new Chairman, Terry O'Sullivan--who is serving without 
compensation--and the new Board have cleaned house and are implementing 
Governor Thompson's recommendations expeditiously.
    ULLICO is not bankrupt. Union pension funds have not lost money 
investing in ULLICO stock. Union members have not lost their jobs or 
their retirement savings or their pensions. Shareholders have not lost 
billions of dollars.
    If anything, we ought to be looking at what is happening at ULLICO 
as an example of how to reform corporate America.
    It's sad that the Wall Street Journal and other like-minded groups 
who don't care about ordinary working men and women are on a vendetta 
to discredit labor unions and labor leaders at every opportunity. And 
it's sad that a few people have given them an opening. But, as I said, 
to liken ULLICO to Enron, to tar and feather all labor leaders, is 
preposterous. The fact remains that trade unionism has been and 
continues to be one of the great reform movements in our Nation's 
history. Our society is more prosperous and more just because of the 
labor movement.
    Thank you, Mr. Chairman. I look forward to hearing from our 
witnesses.

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