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. 87

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. 92

Ibid. 83 Ibid.

89 Ibid. so Ibid. 1 Ibid.

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 membersfor 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.

A severance pay plan, by definition, must at all times be fully funded. Ostrer obscured that fact by encouraging his audiences to confuse severance pay with pension plans. The two are not comparable.

A severance pay plan has no "past service obligation." It is-as asserted in the Local 295 contract and in other similar arrangementsa fund obligated to pay the entire amount contributed by management to each employee upon severance. It is similar to the keeping of a separate bank account for every member.

On the other hand, a pension plan often does not reach full funding for many years because it assumes obligations which extend back in time before its creation and relies on the fact that most participants will not be vested or retire for many years. Therefore, the Ostrer severance system-as portrayed by Louis Ostrer-compared favorably with pension funds; his fund was to be fully paid up in some

10 years.

But severance funds are not pension funds. If, for example, the trustees of a comparable welfare benefit such as health care are to expend $500,000 for medical expenses for the membership for the year, funds available should be approximately $500,000.

What Ostrer promised, in reality, was to achieve a return of the money he planned to lavish on excessively costly life insurance. He was promising to pay back to the truck drivers in 10 years what was theirs from the beginning. Louis Osterer's proud claim that it would be fully funded in a decade had a hollow ring.

LETTERS ARE NOT ANSWERED

It was the Subcommittee's hope that persons involved in the creation and management of the Local 295 severance trust fund would contribute their own views in this staff study. Consequently, the staff asked Louis Ostrer and Harry Davidoff to give final interviews at which time the most serious questions about the fund could be raised and Ostrer and Davidoff would have a chance to give their side of the severance fund story.

Certified letters from Subcommittee Chief Counsel Howard J. Feldman were sent March 30, 1973 requesting these meetings. Neither of the letters was answered.93

THE BELMONT STOCK CASE

Louis C. Ostrer and John (Johnny Dio) Dioguardi were engaged in questionable stock transactions at the approximate same time that the Local 295 severance fund-life insurance program was being implemented.

Ostrer and Dioguardi were charged in a 40-count indictment May 27, 1971 in which it was asserted that they had violated federal securities laws and federal mail and wire fraud statutes. Seven other persons were also charged.

On January 26, 1973, a jury found Ostrer guilty on 11 counts and Dioguardi guilty on four counts (361 F. Supp 954). On April 12, 1973, Judge David N. Edelstein of the United States District Court for the Southern District of New York sentenced John Dioguardi to nine

Separate letters each dated March 30, 1973 from Howard J. Feldman to Harry Davidoff and Louis Ostrer. (See Appendix XXIX.)

years' imprisonment and a $30,000 fine and Ostrer to three years' imprisonment and a $55,000 fine.

On January 4, 1974, the convictions of Dioguardi and Ostrer were sustained by the United States Court of Appeals, Second Circuit. Ostrer still remains free pending further appeal of his conviction. Dioguardi is presently incarcerated at the Federal penitentiary at Lewisburg, Pa.

Details of the scheme of Ostrer and Dioguardi in the Belmont stock case are reported in the opinion of the United States Court of Appeals, Second Circuit in U.S. v. Dioguardi (492 F. 2d (1974)). Evidence in the case revealed a plan to manipulate the price of the stock of the Belmont Franchising Corporation, a substantially worthless over-the-counter security; the book value of the stock was almost negligible. Belmont's assets were essentially paper holdings in other concerns. The stock had been traded for only a short time for at most a few dollars a share.

In January of 1970, Michael Hellerman, who pleaded guilty and testified for the government, began steps to drive up the price of Belmont stock, first to $5 or $6 a share and then to nearly $50 a share. At that time, two alleged stock manipulators, Anthony Soldano and Fred Goodman, together with Hellerman, began to buy virtually all of the 28,720 known publicly tradeable shares of Belmont.

Goodman and Soldano executed their purchases ostensibly through the open market, using brokers who quoted prices for Belmont through the National Quotation Bureau's pink sheets for over-the-counter securities. These purchases created the appearance of an active public market in the stock.

By early March of 1970, Goodman and Soldano allegedly had caused the market price of Belmont as quoted in the pink sheets to reach $15 a share. They did this primarily through directions to their brokers, who traded small quantities of the stock among themselves. In the meantime, Goodman and Soldano had acquired, they believed, control of all the outstanding stock.

At this point Hellerman's role became more important. According to his testimony, he already had an understanding with John Dioguardi that "whatever I did in the future. . . he would have 25 percent." It had also been agreed between Hellerman, on one side, and Goodman and Soldano on the other that once the price of Belmont stock reached $15 Hellerman and his associates would purchase all the stock at the $15 level, with a $5 per share kickback, prior to further manipulation upwards.

In confirming this arrangement with Goodman and Soldano, Hellerman took Soldano to Dioguardi's office "to make sure it was on the record."

According to Hellerman, it was at this time in early March that he brought Ostrer into the scheme, although the two had only known each other a short time. Ostrer agreed to commit himself to buy 14,000 shares of Belmont at $15 a share, for a total of $210,000, with the understanding that he would split any future profits with Hellerman, that Hellerman would guarantee him against loss and that a loan of the purchase money would be arranged so that he would not have to "lay out a quarter" of the $210,000.

Purchase orders in Ostrer's name or in his behalf were to be made through various New York Stock Exchange firms.

Ostrer then placed orders in his own name and in the name of his sister, Mrs. Dina Gelman, for 14,000 shares of Belmont. However, most exchange firms which Ostrer approached refused to accept his orders and he was forced to place relatively large block orders through firms where brokers were already in league with Hellerman.

Meanwhile, Hellerman made arrangements with other persons to purchase the remaining 14,000 shares of Belmont. These persons were able to pay the selling brokers at the $15 a share price. But Ostrer was unable to raise the $210,000 needed to "hold up" his end of the deal. This development left his brokers unpaid. According to Hellerman, he then obtained a loan for Ostrer through Dioguardi. These funds, totalling $60,000, came from Anthony (Hickey) DiLorenzo, at an interest rate of 11⁄2 percent a week. DiLorenzo also demanded and received $24,000 from Hellerman. In addition Hellerman also advanced Ostrer $52,500 and Ostrer obtained the balance he needed from other

sources.

From the end of March through late April of 1970, Hellerman directed purchases and sales of Belmont stock at ever-increasing prices among the individuals and brokers he controlled. He kept Dioguardi, Ostrer and DiLorenzo informed as the price rose. He also arranged for Ostrer to sell off enough stock, through a nominee, to repay the $60,000 loan from DiLorenzo-with a $1,700 profit left over which he split with Ostrer.

By the end of April of 1970, Hellerman had received about $140,000 in kickbacks from Goodman and Soldano. He gave $30,000 to Dioguardi and invested $9,000 more in a business in which Johnny Dio had an interest.

In early May of 1970, the scheme failed. The president of Belmont, through a broker unknown to the manipulators, began to sell heavily his own "investment" stock in the corporation. The market was unable to absorb the sales. Hellerman was unwilling to buy the stock and could not find other purchasers. The market for Belmont collapsed, leaving Ostrer and others with large quantities of unsold stock. Ostrer then tried to hold Hellerman responsible for his losses. Hellerman became worried because Dioguardi took Ostrer's side. Dioguardi arbitrated the dispute to some extent and arranged for partial compensation to Ostrer in the sum of $25,000.

At the trial, Dioguardi called no witnesses. He based his defense primarily on cross-examination going to the lack of credibility of the government's major witnesses, all of whom were accomplices. Ostrer did not testify but he did call two witnesses whose testimony indicated that Ostrer had been a "victim" of Hellerman's manipulations.