(d) Administrative fees Fringe Programs, Inc. was paid a total of $148,198 for administration of the Local 295 STF through November 30, 1972. A total of six checks were paid to Fringe as follows: In addition, Fringe was paid a subsequent amount of $10,718.92 on January 16, 1973 for services rendered December, 1972-January 1973. This is probably the last payment to Fringe as it was terminated as administrator of the fund by the Trustees as of January 31, 1973. (e) Rent The Local 295 STF paid a total of $6,196.00 for rent to the landlord of the building at 179-30 149th Avenue, the 146th Drive Property Corporation which in turn is owned by the Local 295 Employees Group Welfare Fund. A total of 15 checks were paid, the monthly rent being $359.80. The rent for the building is allocated among the five tenants of the building on a square footage basis. These five tenants are Local 295, Local 295 Group Welfare, Local 295 Pension Fund, Local 295 Severance Trust Fund, and Local 851. The Severance Trust Fund actually began paying rent in April, 1971, as it was only then that the above allocation was made. (f) Legal The Severance Trust Fund has hired two attorneys, one representing the union trustees, Herbert Simon, and one representing the management trustees, Haskell Wolf. It pays each of them $750 a month. Through November 30, 1972 it has disbursed $18.017.50 to Herbert Simon (20 checks) and $18,000 to Haskell Wolf (20 checks). The extra $17.50 paid to Simon was for expenses incurred in serving a subpoena. (g) Audit fees The STF's accountants, Finklestein, Goldstein and Rick were paid a total of $12,900 through November 30, 1972 (16 checks). They were paid $450 a month through April, 1972, at which time their retainer was increased to $750 a month. (h) Wages A total of $15,990 was paid in gross wages to the one bookkeeper the fund employs. Until July 1, 1972 Pat Barnett was the bookkeeper and she received $12,075 in wages ($9,540.30 in net salary paid in 69 weekly checks). She was succeeded by Marilyn Franchi whose gross salary totaled $1,575 paid over a nine week period through September 1, 1972 ($1,198.80 in net salary paid in nine weekly checks). From September 4, 1972 until October 4, 1972, the STF did not employ a bookkeeper. However, an employee of the Local 295 Group Welfare and Pension Fund, Diane Norton, worked her lunch hours and evenings to keep the STF records in order. She was subsequently reimbursed for these services by being paid a gross salary of $1,050 (net salary $725.40) on October 26, 1972. On October 4, 1972, Roslyn Henry was hired as bookkeeper for the STF. She remains at present in this position. Through November 30, 1972 her gross salary was $1,290 ($1,045.42 in net salary paid in nine checks for nine weeks employment). (i) Trustees' meetings stenographer Arnold Levy, stenographer for the Local 295 STF Board of Trustees Meetings, was paid $4,780.25 for recording and transcribing the minutes of 16 Trustees meetings. This amount was paid in sixteen checks, one after each meeting. The union trustees' attorney for the STF informed us that there was no contract with Arnold Levy. Rather, the Fund pays Levy for his services provided his bills are considered normal and reasonable in his profession. Yet this criteria has resulted in the fund paying Levy $140 for 10 copies of 56 pages of minutes, while for the next meeting the fund paid $325 for 10 copies of 65 pages of minutes. Inter-County Savings Bank.. Cohoes Savings Bank.. Cash balance The Local 295 STF had cash totalling $1,148,165 at November 30, 1972. The following is a schedule of the cash items as of this date: Checking account (Chemical Bank) Savings account: $148, 165 10,000 Roosevelt Savings Bank.. Erie County Savings Bank. The Dime Savings Bank of Williamsburg. Rochester Savings Bank.. Monroe Savings Bank.. 20, 000 20,000 20,000 20,000 20,000 Albany Savings Bank 20, 000 City and County Savings Bank.. 20, 000 Home Savings Bank.. 20, 000 The Western New York Savings Bank. 20,000 The Seaman's Bank for Saving--. 20, 000 20, 000 20, 000 250,000 150, 000 100, 000 100, 000 400, 000 750,000 1, 148, 165 Total___. Certificates of deposit: Banco Popular. Chemical Bank. Bank of Tokyo.. Dollar Savings Bank....... Total. Grand total_____ The $150,000 certificate of deposit (CD) issued by Banco Popular on April 28, 1972 was sent by the bank to the STF on May 1, 1972. Shortly thereafter, the custodian claims to have misplaced the CD. At this time the STF notified Banco Popular who assured them that they would honor the CD on its maturity date (April 23, 1973) by paying the proceeds only to STF. We have not been able to obtain any written confirmation of this statement. A Banco Popular official told us that the CD is negotiable and that, should someone acquire it with the rights of a holder in due course, the bank might be forced to pay that person. The possibility that such a situation may occur casts considerable doubt on the value of the verbal assurance given to the STF. The board of Trustees of the STF has not been informed of the loss of the CD. All the remaining certificates of deposit and savings account books are merely kept in a draw of a file cabinet which is locked at night. Severance Benefits Paid During the two year period ending 11/30/72, the STF disbursed $175,767 in severance benefits to 272 members. According to the STF accountant and in accordance with the fund's existing rules and regulations, an employee upon severance receives as his benefit, the amount actually contributed by his employer. Should the employer be deficit in his contribution the benefits realized by the employee are adjusted accordingly. In order to determine whether the severence benefits paid were computed in accordance with the rules and regulations of the fund, we reviewed severance benefits paid to a random number of separated employees. In addition, we reviewed the severance benefits paid to certain deceased employees. The discrepancy noted consisted of overpayments in some of the cases examined. In total the overpayments did not exceed $750. Life Insurance Benefits Paid As at March 1, 1973 one death claim remained unsettled as a result of a dispute concerning the legal beneficiary. As regards those claims that had been paid our tests revealed that the fund was paying the proper amounts to beneficiaries, using correct commutation rates, and maintaining adequate documentation concerning these claims. The only exception noted resulted from the fund's failure to obtain a signed acknowledgement of a widow accepting the lump sum amount in lieu of payment over a five year period. Addendum Subsequent to the period under review, the Board of Trustees of the Local 295 Severance Trust Fund elected to terminate the individual whole life policies they had purchased during the first 2 years of their 3 year contract. The face value of these individual policies was determined by the members age at the time he became a member of the Fund, with the younger members receiving much greater coverage than the older members. For this type of coverage the STF had paid $1,531,234 during this 2 year period, with $1,029,457 of this amount being disbursed during the year which ended November 30, 1972. After re-evaluation of the type of insurance coverage which had been provided, the Board of Trustees substituted group term insurance with constant coverage of $30,000 for each member, regardless of age. The yearly premium cost under this new coverage is to be $240,428 and is almost $790,000 less than what was die bursed in the form of premiums for the preceding year. APPENDIX IV STATE OF CALIFORNIA OTTO FORST, being duly sworn, deposes and says: First, that I make this affidavit at the request of Robert Dunne, Assistant Counsel of the United States Senate Committee on Government Operations, Permanent Subcommittee on Investigations, after a series of conferences. Harry 0. Miller, Esq., General Counsel of First Executive Corporation and Executive Life Insurance Company of New York, has been given the opportunity of reviewing this affidavit prior to my signature of it. I understand that this affidavit may be used in lieu of my testimony in an executive session or public hearing of the Subcommittee. I have been given a copy of the current rules and resolutions. I understand that the Subcommittee's inquiry is concerned with the propriety of the insurance aspects of labor/management severance plans involving Louis Ostrer. Second, I am Chairman of the Board of First Executive Corporation, a California corporation which is a holding company for several insurance companies, one of which is Executive Life Insurance Company of New York. Third, First Executive Corporation owns approximately 94 percent of the outstanding shares of common stock of Executive Life Insurance Company of New York. Fourth, I personally and/or members of my family own or control less than 5 percent of the outstanding shares of First Executive Corporation. Fifth, Louis Ostrer's name was known in the insurance industry, and he had the reputation of being an excellent producer. For a number of years--possibly six or seven or eight--I had been attempting to get him to write business through the subsidiary companies of First Executive Corporation. I would drop in to see him at his offices in New York City from time to time. He possibly wrote one small case, as he was a licensed agent with our company in 1967. The small commissions still payable on this case are not being paid because of the revocation of his license. His attempt to designate another payee was rejected by the company. We rejected several proposed cases he brought to us because they appeared to be bad medical risks. Since I was unsuccessful in getting any substantial volume of business, I stopped seeing him sometime before September 31, 1968. Sixth, on December 31, 1968, First Executive Corporation acquired 74 percent of the outstanding stock of Citizens Life Insurance Company of New York, and on January 1, 1969, the name of Citizens Life Insurance Company of New York was changed to Executive Life Insurance Company of New York. Two of Ostrer's associates, Cy Reeves Snyder and Seymour Greenfield, had written business for Citizens Life Insurance Company of New York before the acquisition, and Cy Reeves Snyder continued writing a small volume of business with Executive Life Insurance Company of New York. Seventh, I do not recall seeing Louis Ostrer between December 31, 1968 and March 25, 1970, when Ostrer appeared at my office in Beverly Hills, California, and described to me the concept of labor/management severance funds. Mr. Ostrer described the concept to me, and emphasized the advantages over pension plans currently being offered to union employees. He was particularly enthusiastic about the appeal of the early vesting and the cash option to younger union members, and the social desirability of making the benefits easily portable. He described how most qualified retirement plans locked employees in and interfered with job mobility, and then failed to deliver benefits for a substantial percentage at retirement because of the lack of portability and reasonable vesting. He was certain that his severance plan concept, which he had already had approved by the Internal Revenue Service as a qualified retirement program under Section 401 of the Internal Revenue Code, would revolutionize benefit practices under collective bargaining. I am not sure whether he spoke specifically of Teamsters' Local 295, but he did speak in terms of hundreds of millions of dollars of face value insurance. I know he spoke of a group of Pan American employees at that time. He told me he had already written severance plans with a number of insurance companies including Manhattan Life Insurance Company, Beneficial National Life Insurance Company, and Transworld Life Insurance Company. Mr. Ostrer said that he had designed the severance plans, and was acting as consultant to a number of trusts. He told me that as consultant, the trustees would accept his advice as to the insurance agent to be selected. He wanted my assurance that the company would pay commissions on substantially the same basis as Transworld Life Insurance Company paid for its severance insurance programs. He showed me his agreement with Transworld Life Insurance Company, and I advised him that if the arrangement were lawful we would be willing to pay the commissions at that level. I understood that the policies applied for would be on a guaranteed issue basis, and that Executive Life Insurance Company of New York would not be able to do individual risk selection. We reached an agreement then, in principle, that Executive Life Insurance Company of New York would advance the entire first year's premium to the writing agent upon production of any such severance fund case. Until six (6) weeks ago, that was the only appearance Louis Ostrer ever made at our California offices, to the best of my recollection. Eighth, I was in New York City on October 21 and 22, 1970, and again on November 17 and 18, 1970, and saw Ostrer on both occasions. I am absolutely certain that by the November trip we were speaking specifically of Teamsters' Local 295, and specifically of a severance fund contribution by management of $15.00 the first year, $30.00 the second year, and $40.00 the third year, slightly less than half of which was to be available for the purchase of life insurance. Ninth, I agreed then to advance the first year's commissions in cash as soon as the case was written. I had expected that the first year's premium would be received in one lump sum, but as it developed, the premiums were to be paid to the company in monthly installments. Consequently, I agreed to loan the writing agent an amount equal to the first year's commissions by taking back a series of promissory notes which were non-interest bearing, and which were repayable over the next four (4) years. Tenth, I understood from my general association with people in the industry that Ostrer had had some difficulty with Canada Life Assurance Company. Ostrer sloughed off the importance of this, but we did discuss the fact that he was the consultant of the fund and had no current New York license, and that the insurance would have to be written through the agent and/or broker designated by the trustees. He indicated that the trustees would accept his advice as to the agent. I understand that it is customary for a consultant and administrator to be consulted concerning appointment of an insurance agent. Additionally, Ostrer had produced data to me showing that he had similar arrangements with Foundation Life Insurance Company of America, Beneficial National Life Insurance Company, Transworld Life Insurance Company of New York, and Manhattan Life Insurance Company. The New York Insurance Department routinely allows first-year sales compensation of up to 96 percent, and we were only paying 50 percent. The severance program of Local 295 was split funded with only onehalf of the contribution applied to the purchase of insurance. This meant that first year sales compensation was approximately 25 percent of first year contributions. It is customary in the industry to split fund qualified retirement plans where individual life insurance policies are going to be used to fund part of the benefits. Eleventh, I want to make it clear that as far as this company was concerned, Louis Ostrer controlled the placing of the severance fund business with us. He had designed the plan and the trustees would rely upon him for advice as to which insurance company should be selected, and it was my policy to take those steps which he proposed in order to accomplish the writing of the case. I do not recall meeting either Dina Gelman or Cy Reeves Snyder before they were selected as writing agents. This is not unusual. In response to your specific question, I do not believe that the company in any way violated any law of the State of New York, and a number of reputable New York insurers obviously came to the same conclusion as attested to by the fact that they wrote identical programs before Executive Life Insurance Company of New York was selected as the carrier for Local 295's severance program. Twelfth, the actual case was originally written through an agent, Cy Reeves Snyder. I have never met Mr. Snyder in my life. Some weeks or months later, the paperwork on the obtaining of a general agent's license in New York for Ostrer's sister, Dina Gelman, were completed, and all of the promissory notes, guarantees, commission agreements and other papers connected with the case, which were originally written under Cy Reeves Snyder, were routinely transferred to Dina Gelman and her agency. At the same time that commissions were assigned to Dina Gelman, she assumed the promissory notes evidencing the loans which had originally been made to Cy Reeves Snyder. Thirteenth, although many of the documents in connection with the Local 295 severance program were executed on behalf of the company by Norbert F. Lochner, its basic negotiations were carried on by me, and the legal documents were drafted by Harry O. Miller. Mr. Lochner executed documents confirming agreements which I had made, and, I believe, relying on the advice of Harry O. Miller. Fourteenth, in about the middle of 1971, we made a determination, based on our experience in this case, that from an actuarial point of view, it was a bad case from the company's point of view. Death claims were considerably higher than anticipated. We informed Ostrer that if the company was to take on the second year's business-which was equal in premium dollars to the first year's businessthere would either have to be a reduction in the face value of the insurance written approximating 15% for the same premium, or else a renegotiation of the commission rate which in substance would amount to dropping the persistency bonus. Ostrer complained that he was not in a position to reduce the face amount of the policy for the second year, and refused to take a reduction in the commissions payable to the agent, since other companies were willing to take the business at the old premium rate, and at the old commission level. Consequently, we were no longer interested in writing the second year increment. Notwithstanding, at his request, we prepared a letter to the trustees asking for a $50,000.00 advance in premiums for this second year. This letter was dictated in substance by Ostrer. At the time the letter was sent, there appeared to be a possibility that commission levels could be renegotiated. Fifteenth, between the time that the letter referred to in the preceding paragraph was written, and the time that the decision was made as to who the carrier would be, the actuaries of Executive Life Insurance Company of New York were in contact with Manhattan Life Insurance Company, Transworld Life Insurance Company of New York, and Beneficial National Life Insurance Company. Executive Life Insurance Company of New York pooled all raw data as to premium, claims, and commissions for all cases, and reached a determination that the severance programs were not profitable for us. The companies cannot make money unless there is a tremendous improvement in the mortality rate, which does not seem likely. I understand that the second year's insurance was written through Transworld Life Insurance Company of New York, who advanced 90 percent of the first year's premiums to the writing agent. Sixteenth, the only other time that Ostrer was in our California offices was March 31, 1972. He stated he had just arrived from Las Vegas and had a very large severance fund case involving the culinary workers there, which would involve some $2,000,000.00 per year in premiums. He asked for $100,000.00 advance to the writing agent, Seymour Greenfield, against future commissions, although the case had not been written. I refused. Seventeenth, the type of insurance written is actually known in the trade as "group ordinary life," and the premiums paid are routine for this type of insurance. The New York Insurance Department has advised the trustees of Local 295 that the commissions paid in connection with their severance program exceed the commission rate in the NAIC Code of conventional practices. The New York Department concedes that the NAIC Code of conventional practices does not have the force of law in New York. In addition, we are convinced that the commission rates set in the Code were meant to apply to group term insurance. No substantial amount of group term |