Testimony of Terence M. O’Sullivan, Chairman & CEO of ULLICO Inc.
Senate Governmental Affairs Committee
United States Senate
June 19, 2003
Good morning Chairman Collins, Senator Levin, and members of the Committee. My name is Terry O’Sullivan, and since May 8th I have served as Chairman and CEO of ULLICO Inc. In fact, I would guess that few corporate chairmen 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 the General President of the 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 three 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 pro ration. There was no disclosure of the way the decline in the price of Global Crossing stock effected the price of the ULLICO stock that was being repurchased. Finally, there was no disclosure of the way the 10,000 share pro ration 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 a 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 that I understood that the discretionary repurchase program had become a multi-million 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 pro ration, 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 that I serve, to ULLICO so long as I serve on its 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 Handley, Carpenters President McCarron and NFL Players President Gene Upshaw also resigned. However, I continue 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 believed that ULLICO was 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 eleven 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% 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 CEO. 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 manager with extensive experience in fixing troubled businesses. The former Chief Legal Officer and Chief Financial Officer have also left the company.
On May 9th the company asked the trustees of ULLICO 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 life 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 the Governor Thompson’s remedial recommendations. Those recommendations included 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 13th the board also approved the appointments of a number of committees. Among these was a subcommittee 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 their 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 five weeks. We must do more in the weeks 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 as 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 testing 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.