THE SMITH CENTER

for Private Enterprise Studies

Equality Before the Law: Enron and Unions

by

Charles W. Baird

The scandals involving alleged serious misbehavior at Enron, WorldCom, Adelphia, Global Crossing and Tyco, have resulted in appropriate public outrage. It appears that creative and unethical accounting practices kept real costs and debts off the books of these corporations and inflated their stock prices. When fantasy gave way to reality, thousands of innocent people lost most of their life savings, while, at the same time, many of the corporate executives responsible for the apparent fraud escaped with very golden parachutes. This sad tale has been grasped by the enemies of private enterprise and free markets as an opportunity to denigrate the vocation of business and commerce in general. People in business, they would have us believe, are all consumed with greed, and their gains are made at the expense of the rest of us. These self-appointed guardians of civic virtue assert that the only remedy is to make businesses socially responsible by greatly increasing the quantity and scope of government regulation and oversight to which they are subject.

In 1962 Milton Friedman asserted that "In [a free-market] economy there is one and only one social responsibility of business ­ to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception and fraud." He is right, and most businesses, including corporations, do play by the rules. In doing so, they serve their own interests only by serving the interests of their voluntary exchange partners ­ i.e., their customers, suppliers, employees, and investors. Michael Novak, the prominent lay Catholic theologian, calls business within the rules of voluntary exchange a "calling" with the same moral significance as a calling to ministry. Ken Lay and the other scoundrels in the current scandals seem to have betrayed this calling, and they should be held legally and morally accountable for their misdeeds. But it is not just to cite their transgressions as grounds for condemning all who have answered the call to make a living by serving others through business.

Business bashers have not only misrepresented the magnitude of the problem, they have also failed to hold unions to the same ethical standards they apply to businesses. Every corporation has to file annual reports with the Securities and Exchange Commission (SEC) regarding its revenues and expenditures. The intent of the law is to protect stockholders from corrupt corporate executives. Similarly, the 1959 Landrum-Griffin Act requires unions to file annual financial reports on their revenues and expenditures with the Department of Labor (DOL). The intent of the law is to protect rank-and-file union members from corrupt union leaders. The DOL has never done a good job of inspecting and auditing the unions' reports, and unlike SEC requirements on corporate reports, they do not have to be independently audited. As a result union reports are generally perceived as unreliable especially with regard to the extent to which union resources are used for political purposes. Moreover, the loose reporting requirements have encouraged other types of fraud. There have been approximately 600 indictments, and 525 convictions, for fraudulent uses of union funds by union leaders in the last four years. This is just as big a scandal as Enron, but it is completely ignored.

Congress is complicit in this double standard. In response to the current scandals Congress is considering the Public Company Accounting Reform and Investor Protection Act (S. 2673) which would strengthen the reporting requirements of corporations, but it does nothing to strengthen the reporting requirements of unions. In fact, an attempt to add a Union Accountability Amendment to the proposed legislation was voted down by fifty-five senators. Their moral outrage is very selective. It never applies to the unions which give substantial monetary and in-kind political support for their reelections.

Like the alleged scoundrels at Enron, some union leaders have apparently enriched themselves at the expense of rank-and-file union members through stock market operations. Yet, neither the press (with the exception of The Wall Street Journal) nor politicians have paid any attention to this scandal.

Union Labor Life Insurance Company (ULLICO) was founded in 1925 in order to supply low cost life insurance to union workers. It is a privately held corporation which for many years maintained a fixed price of $25 per share of its stock. Only unions, union officers and directors, and union members are allowed to become stockholders. In the 1990s ULLICO invested $7.6 million in Global Crossing, whose market value, as we all recall, soared. Thus the actual market value of ULLICO stock, as opposed to its fixed administered price, increased. To share these gains with its stockholders, ULLICO offered to buy back shares at a new administered price of $53.94.

In December1999 ULLICO's chairman, Robert Georgine, sent a confidential memo to the top officers and directors of the company, who were leaders of their respective unions, offering to sell each of them 4000 shares at the $53.94 price. Soon thereafter the ULLICO board raised the administered price to $146 per share, thus permitting themselves to sell the stock they had just purchased for $53.94 back to ULLICO for $146. This buyback offer continued even after the shares of Global Crossing started to tumble. In the end, the officers and directors enjoyed total gains of approximately $6.5 million.

Technically, all holders of ULLICO stock, including unions and rank-and-file workers were permitted to sell stock back to ULLICO at the $146 price, but the rules of the buyback restricted the amount that large stockholders (mainly the various unions) could sell. Those with smaller, but still significant, shares ­ mainly the officers and directors of ULLICO ­ were permitted to sell all they had. They were the main beneficiaries of the $146 buyback. Unions, and therefore their rank-and-file members, were left holding shares of ULLICO whose actual value, following the collapse of Global Crossing, was rapidly falling.

Now, here as in Enron, it may be the case that no actual laws have been broken. However, as in Enron, this seems to be a case of an elite few benefiting at the expense of ordinary workers and their families. Where is the outrage? John Sweeney, president of the AFL-CIO, and the journalists and politicians in his thrall blather on about corporate corruption. Is it too much to ask that they be consistent and aim at least some of their self-righteous indignation at the union bosses who apparently have gained obscene profits at the expense of others through ULLICO? If the United States stands for equal protection of the laws for all individuals and enterprises, unions deserve the same intense legal and moral scrutiny that businesses now receive.