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Greenfield took part in another transaction at the bank January 27. He and Louis Ostrer and a third man McEnroe did not know asked him to cash a $150,000 check from the Executive Life Insurance Company. The check was payable to the Cy R. Snyder Agency and had already been endorsed, McEnroe said. Greenfield then countersigned for it for the Modern Agency, Inc., McEnroe said.67
McEnroe said the bank didn't have sufficient cash on hand so he gave them what he could-$60,000 in bills, some of them as large as $100 denominations. McEnroe said Ostrer and Greenfield "promptly stuffed [the cash) into their pockets."
Next, McEnroe said, Ostrer asked for three cashier's checks for $25,000 each to be drawn, one made out to Greenfield, one to Dina Gelman, the third to Henry Brown.68 The remaining $15,000 was deposited in the Modern Agency's account, McEnroe said.
Thus, Michael McEnroe explained how it was that Louis Ostrer got Henry Brown to cash a $25,000 check payable to Henry Brown.
Sometime after the January 27 encounter McEnroe read a magazine article about cargo thefts at the John F. Kennedy International Airport. The article portrayed Local 295, Louis Ostrer and Anthony (Hickey) DiLorenzo in a not very favorable light.
McEnroe said he brought the article to the attention of the bank president, John DePalma, who ordered that Greenfield's Modern Agency account and his
personal account be closed out.69 On February 22, McEnroe told Greenfield that his accounts were to be closed. “Greenfield did not object,” McEnroe said, “nor did he seem too upset ..."
THIRD YEAR ADVANCES ARE RETURNED
The Trans World Life Insurance Company paid advance commissions of $75,000 to Mrs. Gelman for the start of the third year of insurance under the Local 295 plan. Payment was made by a $50,000 check January 14, 1972 and a $25,000 check January 27, 1972.76
On April 24, 1972, Joseph J. Warren, president of Trans World, asked Mrs. Gelman to return the money because the severance fund trustees had not yet ratified the additional coverage." Mrs. Gelman returned the money.72
67 Check No. 6946, dated January 25, 1971, drawn on the account of the Executive Life Insurance Company of New York, payable to Cy R. Snyder Agency, in the amount of $150,000. (See Appendix XXIII.)
08 Cashier's chock No. 103-001916, dated January 27, 1971, drawn by Michael McEnroe, payable to S. Greenfield, in the amount of $25,000; cashier's check No. 103-001917, dated January 37, 1971, drawn by Michael McEnroe, payable to D. Gelman, in the amount of $25,000; and Check No. 103-001918, dated January 27, 1971, drawn by Michael McEnroe, payable to H. Brown. (See Appendix XXIV.)
69 Separate Kings Lafayette Bank statements closing out the account of the Modern Agency, Inc., care of Seymour Greenfield; and the personal account of Seymour Greenfield, both closings dated February 22, 1971. (See Appendix XXV.)
70 Check No. 23345, dated January 14, 1972, drawn on the account of Trans World Life Insurance Company, payable to Dina Gelman Agency, in the amount of $50,000; and Check No. 23709, dated January 27, 1972, drawn on the account of Trans World Life, payable to Dina Gelman Agency, in the amount of $25,000. (See Appendix XXVI.)
71 Letter of April 24, 1972 from Joseph J. Warren to Dina Gelman. (See Appendix XXVII.) 72 Check No. 124, dated April 26, 1972, drawn on the account of Dina Gelman Agency, payable to Trans World Life, in the amount of $25,000: and Check No. 135, dated April 26, 1972, drawn on the account of Dina Gelman, payable to Trans World Life, in the amount of $50,000. (See Appendix XXVIII.)
VI. EVALUATIONS OF THE SEVERANCE PAY-INSURANCE PLAN
SUBCOMMITTEE ASKS ACTUARIES TO EXAMINE FUND
In May of 1971, at the request of the Senate Permanent Subcommittee on Investigations, three insurance experts examined the procedures and policies of the Local 295 severance trust fund and its life insurance benefit.
The insurance experts were Lawrence M. Hyman, supervising examiner of the State of New York Insurance Department; George Perla, senior examiner of the Department; and Herbert L. Feay, Assistant Director of the United States General Accounting Office.
On June 30, 1971, the conclusions of these men were given to the Investigations Subcommittee.73 The three insurance experts were critical of the life insurance features of the severance fund.
They said the insurance coverage aspects of the fund were incomplete in describing procedures and benefits. 4
They said the agent writing the coverage would benefit excessively from the high commission rates of the fund. They said that one of the agent's commissions—the persistency bonus-was probably illegal in the State of New York.75
The three insurance experts estimated that agent commissions would total $1 million in the first three years of the plan. They contrasted the million dollar commission fee of the Ostrer system with the $75,250 commissions due on a comparable group plan set up in accordance with the Code of Ethical Practices of the National Association of Insurance Commissioners.76
The insurance experts were also critical of the insurance for being designed "without regard to the individual needs of each member. People's insurance requirements change as their lives change, they said, and their insurance coverage should be responsive to new situations. But instead of responding to worker's needs, the insurance experts said, the Ostrer policy, was structured according to the "apparent desire to pay the maximum amount possible as life insurance premiums on which the agent will collect commissions."' 77
NEW YORK INSURANCE DEPARTMENT EXAMINES FUND
On September 8, 1972, the State of New York Insurance Department completed a study entitled "Report on Examination of the Local 295 Severance Trust Fund.” The report was forwarded to the Subcommittee on October 18, 1972.78
** Letter of June 30, 1971 from Lawrence M. Hyman and George Perla to Robert E. Dunne, transmitting the report of the actuaries on the Local 295 Severance Trust Fund to the Senate Permanent Subcomınittee on Investigations. (See Footnote 39.)
14 Thid. 16 Toid. 76 tuid. 77 Toid.
** New York State Insurance Department Report on Local 295 Severance Trust Fund. (See footnote 55.)
Prepared by Department examiner Murray Zaroff, the report was critical of the severance trust fund, particularly its life insurance provisions.
Excessive commissions to the agent were sharply questioned as the report asserted:
The scale of payments to the insurance agent is unconscionably high and in the gross contravention of the Code of Ethical Practices.79
The report added:
If commission has been made payable not at the unbelievably high rates currently in effect but at the range of rates contemplated in the Code of Ethical Practices, the savings in commissions would have been of great financial benefit to the trust fund. Such savings could have been passed on (to) the fund in the form of lower premiums or the contracts could have been rewritten on a participating basis so the fund could receive the savings as dividends. 80
New York's Insurance Department charged that Louis Ostrer had deliberately misled the severance trust fund trustees and termed "seriously questionable" the use of ordinary whole life insurance instead of implementing a group plan.81
Fringe Programs, Inc., the administrator of the severance fund, came under fire for the excessively high fees it charged. The New York State Insurance Department noted that Fringe was paid first year administrator's fees of $86,877. This figure was contrasted with an avowal made by Louis Ostrer January 21, 1971 in a meeting of the trustees that annual administrator's fees would be 94 cents per member per month-or $15,000.82
It was further asserted that, as of July 1, 1972, overall administrative charges—$124,077—were four and one-half times higher than those of the average fund of similar size. 83
The Insurance Department report cited another item in the overall cost of managing the fund—the legal fees—which seemed to be too high. The severance fund had paid $18,000 to two lawyers-Haskell Wolf and Herbert Simon-and the report observed that the “fund's high administrative costs” could be reduced by $9,000 by retaining only one attorney, rather than two.84
Finally, the Insurance Department referred to its own previous announcement-of December 22, 1967—when it revoked Louis Ostrer's license as an insurance agent. The Department asserted that Ostrer had, in fact, solicited the insurance arrangement with Local 295 at a time when he was not licensed as an agent by the State of New York. 85
THE GAO STUDIES FUND The Senate Permanent Subcommittee on Investigations on December 28, 1971 asked the United States General Accounting Office (GAO) to examine the severance pay-life insurance plan of Local 295. The GAO submitted its report to the Subcommittee May 21, 1973. 86
Like the New York State Insurance Department report, the GAO study was critical of the high commission rates and the decision to have individual policies rather than a comprehensive group plan.
The GAO said the use of individual policies rather than the less expensive group plan-cost the fund an additional $790,000 in commissions over what a group plan commission fee would have been.
The GAO analyzed the fund's finances from December 1, 1970 through November 30, 1972 and found that the fund had receipts totalling $3,304,336 for this two-year period. During the same period, $2,156,171 was spent, resulting in a net cash balance of $1,148,165.
The major source of cash for the fund was employer contributions. They came to $2,966,220. The largest use of this cash was to buy insurance. Premiums cost $1,531,234.
Of the money spent on insurance, $1,014,571 was paid to the Executive Life Insurance Company of New York. The Trans World Life Insurance Company of New York received $516,663.
Of the $1,531,234 of the fund's money that was spent on life insurance about $800,000 was for commissions that were paid to Dina Gelman, Cy Reeves Snyder and Seymour Greenfield or their respective businesses, the Dina Gelman Agency, the Cy R. Snyder Agency, the Modern Agency and the Viscount Agency.
GAO estimated that the commission costs would have been $10,000—not $800,000—if the coverage had been group rather than individual whole life.
The GAO said the life insurance coverage itself was “much more costly" than other insurance programs of similar size. Administrative costs were found to be "considerably greater than those charged in other benefit plans in New York.8
GAO pointed out that Local 295 members already had a life insurance program under their Group Welfare Fund. "It would seem," the GAO reported, "that, if additional insurance coverage were considered desirable, it would have been more logical to provide it through the Group Welfare Fund.” 88
The GAO said that other insurance programs would have given Local 295 members better protection at cheaper costs. In short, the GAO said, “The plan was not formulated or administered in the best interests of the members." 89
The GAO also studied the issue of funding. Was the severance fund properly funded? GAO's answer was, no, it was not properly funded, The severance trust, because of its huge life insurance liabilities and excessive administrative costs, never did live up to its first requirement—that is, to have adequate resources to pay back to workers at severance all the employer contributions made on their behalf plus interest earned on the contributions. 90
The GAO said:
A test commonly used for determining soundness of an employee benefit plan (such as the Local 295 plan) is simply to determine whether the plan will be able to pay benefits provided under its terms. 91
But the Local 295 severance plan could not pass this test, GAO found, concluding:
It (the fund) could not have been expected to be able to pay such benefits immediately because its earnings would not have been sufficient to offset expenditures made for insurance premiums, administrative expenses and benefit payments.82
This last GAO finding-on funding and the financial soundness of the plan-was also noted by Subcommittee investigators as they sought to evaluate the Louis Ostrer concept of severance pay and life insurance.
A CRITIQUE OF THE OSTRER CONCEPT Subcommittee investigators found incomplete records of what Louis Ostrer actually said as he briefed union officials and management on his severance pay plan and the life insurance coverage.
But available records and interviews conducted with persons who heard Ostrer's briefings indicate that Ostrer gave the impression that the insurance protection would be “free.” That is to say, the fund could buy the insurance yet still be able to guarantee the return of every dollar contributed by management on behalf of every member.
This claim by Ostrer was misleading. Initially, the severance fund was not able to guarantee severance payments for all its members for nearly one-half its revenues were spent on life insurance protection. The GAO estimated that it would be 15 to 20 years before the fund would have been 100 percent funded.
In promoting his concept of severance pay plans, Ostrer was relying on a principle that bankers, money managers and insurance men know very well. That principle has to do with the incremental value of compounded interest on a large fund of money, particularly onelike this severance fund-which has a steady, fixed guaranteed income. In its most approximate terms, a set amount of money will double, even though not added to, in about 10 years at a reasonably obtainable rate of interest.
Compound interest allows insurance companies to collect low monthly premiums during a man's life span and pay out many thousands of dollars upon his death. Beneficiaries, in fact, may receive more than the total amount collected from the deceased but the insurance company will still show a profit.
In insurance, then, as in banking, what makes the venture profitable is the interest and particularly the compounding of interest.
Louis Ostrer knew this principle well. Using even conservative actuarial considerations and cautious interest projections, the cost of the Ostrer insurance program could be paid back to the severance fund in a period of time. Ostrer claimed seven years. GAO said 15 to 20 years.
Ostrer's system counted on money coming from the weekly employer contributions being supplemented by (1) forfeitures from partially vested newer employees who leave before they have the full five years of employment needed to qualify;(2) the interest earned on that half of the severance fund not used to buy life insurance; (3) paying out death claims over a 10-year period or paying the claim in one lump sum minus a substantial discount; and (4) the cash surrender value of the insurance policies as they begin to mature and which are, in the Ostrer plan, the property of the trustees, not the insured truckers.
OSTRER MISLED LOCAL 295 MEMBERS
The life insurance program, purchased at high prices with high commissions and managed with high administrative costs, rendered the severance fund technically bankrupt the day it began. At that moment, the fund's assets were 50 percent of its liabilities.