Page CONTENTS Page A. ULLICO's Investment in Global Crossing B. The Stock Offers to Officers and Directors C. The Repurchases from Officers and Directors D. Deferred Compensation and Other Benefits for Executives E. The Investigation and Report by Governor James Thompson F. ULLICO's Response to the Thompson Investigation I. ULLICO'S CORPORATE CULTURE UNDER THE MANAGEMENT OF A. Execessive Reliance on the Windfall Profits from Global Crossing 2. The "Top Hat" Nonqualified Deferred Compensation Plan IV. THE INVESTIGATION AND REPORT BY GOVERNOR JAMES A. The Initiation of the Thompson Investigation B. ULLICO's Management of the Thompson Investigation 1. Attempts to Limit Dissemination of the Thompson Report 2. ULLICO's Hiring of Lawyers to Defend Against the Thompson In- Page IV. THE INVESTIGATION AND REPORT BY GOVERNOR JAMES 3. Substantive Limits on the Thompson Investigation C. The Findings of the Thompson Investigation 1. Maryland Law 2. Federal Securities Law a. Disclosure Issues: Misrepresentations and Omissions 3. ERISA 4. LMRDA 66 67 67 70 71 75 78 79 5. Criminal Law 6. Recommendations of the Thompson Report 79 81 V. ULLICO'S RESPONSE TO THE THOMPSON INVESTIGATION A. The ULLICO Special Committee's Consideration of the Thompson Report B. O'Sullivan Takeover and Changes at ULLICO C. Georgine's Attempt to Influence the Board After his Departure D. ULLICO's Efforts to Recover Funds Obtained Improperly CONCLUSION 82 82 88 91 94 97 Chart entitled "ULLICO's Share Price vs. Global Crossing's Share Price" 99 EXHIBITS 100 SELF-DEALING AND BREACH OF DUTY AT ULLICO, INC. FINDINGS Although ULLICO was a corporation directed by leaders of organized labor, company management structured stock transactions largely for the benefit of insiders rather than the union members whose unions and pension funds were the company's primary shareholders. ULLICO invested $7.6 million in Global Crossing and realized an after-tax gain Despite the company's faltering performance, ULLICO senior management received increased bonuses and benefits. Management concealed the true levels of executive compensation from the Board and the shareholders, attempting to maintain secrecy and avoid criticism that their pay was disproportionate to company performance. · In addition to his base salary of $650,000 per year, Chairman and CEO Robert Georgine claimed approximately $20 million in stock profits, bonuses, and benefits between 1998 and 2001. Four other senior ULLICO executives received more than $9 million in stock profits, bonuses, and benefits over the same time period. · ULLICO's Chief Legal Officer Joseph Carabillo said that Robert Georgine instructed him never to disclose information about executive compensation unless legally required to do so. Documents confirm that ULLICO's management paid outside lawyers to advise them on how to avoid disclosing compensation information to the Board of Directors. Former directors expressed shock when informed that ULLICO executives were so highly compensated. So closely held was information about Georgine's compensation, that Executive Vice President James Luce said he was unaware that Georgine had received a $2.2 million stock purchase credit agreement until ULLICO's Board allowed the company's Chairman and CEO, Robert Georgine, to abuse his authority and use the power of his position improperly. • ULLICO's Board of Directors was large. It consisted of 28 current and former labor leaders and was authorized to be as large as 32 members. Its meetings were infrequent, and attendance was poor. The Board tended to defer to Chairman Georgine's judgment or delegate authority to small committees over which he exerted heavy influence. This allowed Georgine to spend company funds irresponsibly or for the benefit of himself and his relatives. • Georgine employed at least four of his relatives at ULLICO: his daughter, two sons-in-law, and a nephew. Georgine arranged for his nephew, Patrick J. Mertz, to receive $380,000 in unsecured loans from ULLICO, none of which was ever repaid. Georgine did not inform the Board or seek its approval of these transactions. The loans were ostensibly working capital for a business selling ULLICO insurance products. However, documents indicate that some of the money was used to open a brokerage account and engage in short-term trading of stocks. Questions remain about how much of the money was actually used for legitimate business expenses. While ULLICO's core businesses were struggling under Georgine's leadership, ULLICO self-financed the construction of a new luxury headquarters building for $160 million and leased a corporate jet for $3.7 million per year. Flight logs list Georgine as the primary passenger on the jet approximately twice a week for twoand-a-half years, to destinations including Italy, Switzerland, and Fiji. ULLICO insiders arranged for themselves exclusive opportunities to purchase company stock at artificially low prices. ULLICO's annually-fixed stock price combined with the extraordinary growth of its investment in Global Crossing to create a situation where merely observing Global Crossing's market price in December provided a reliable indication of what ULLICO's price would be the following May. Thus, ULLICO insiders were able to virtually guarantee profits from transactions in ULLICO stock by manipulating the timing of their own opportunities to buy and sell. On three occasions in 1998 and 1999, Chairman and CEO Robert Georgine allowed officers and directors to purchase ULLICO stock at prices that were obviously below its true market value, given the growth of Global Crossing. Georgine did not provide the vast majority of ULLICO's shareholders, primarily labor unions and pension plans, a similar opportunity to purchase undervalued ULLICO insiders were so confident that they would profit from their purchases that some of them borrowed large amounts of money to buy ULLICO stock. Three senior executives borrowed about $215,000 each from Mellon Bank in December 1999 in order to purchase ULLICO stock. Two of them had never borrowed money to buy stock before. ULLICO insiders arranged for themselves special opportunities to sell their stock back to the company at artificially high prices. • Most shareholders could only sell their shares by participating in ULLICO's annual formal repurchase program, under which ULLICO insiders received favorable treatment. Georgine also allowed officers and directors to sell their ULLICO stock back to the company under his "discretionary authority." Robert Georgine and Chief Legal Officer Joseph Carabillo arranged for discretionary repurchases for themselves and other insiders without regard to the limits previously placed on this authority. The repurchases were not disclosed to nor approved by the full Board of Directors. Nor did management disclose the repurchases to other shareholders or inform them that they too could request repurchases merely for the purpose of realizing profits. • Joseph Carabillo appears to have encouraged some of the discretionary repurchases. Carabillo is alleged to have circulated a form to certain ULLICO insiders allowing them to submit shares for discretionary repurchases. In fact, ULLICO Executive Vice President James Luce referred to this exclusive opportunity as the “Director and Officer Repurchase Program." This further suggests that insiders understood the discretionary repurchases were only being offered to officers and directors. In addition to profits realized through discretionary repurchases, ULLICO insiders made substantial profits through the formal repurchases of ULLICO stock. In 2000, when ULLICO stock was at its highest price, insiders received a disproportionate share of the limited funds made available for repurchase. Most of the officers and directors held fewer than 10,000 shares, and each year, ULLICO adopted a rule ensuring that those with fewer than 10,000 shares could sell all of their stock back to the company while other shareholders, such as labor unions and pension plans, could sell only a small portion of their shares back to the company. The 10,000 share threshold operated to protect the liquidity of officers and directors when ULLICO's stock became overvalued. ULLICO did not adequately deal with its problems until after public pressure and scrutiny by investigators led to the ouster of Robert Georgine and the election of a slate of reform-oriented directors. Only after public reports of a grand jury investigation surfaced did ULLICO's |