[At this point Senator Percy withdrew from the hearing room.] [The letter of authorization follows:]

U.S. SENATE,

COMMITTEE ON GOVERNMENTAL AFFAIRS,

SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
Washington, D.C.

Pusuant to Rule 5 of the Rules of Procedure of the Senate Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, permission is hereby granted for the Chairman, or any member of the Subcommittee as designated by the Chairman, to conduct hearing in open session, without a quorum of two members for the administration of oaths and taking testimony in connection with the Labor Union Insurance Investigation on Monday, October 10, 1977.

HENRY M. JACKSON,

Chairman. CHARLES H. PERCY, Ranking Minority Member.

Mr. GRAY. At the same time, we were to monitor the progress of the joint task force investigation, and the subcommittee held public hearings in mid-July of this year on the progress of that investigation.

As part of its work on labor-management problems, the subcommittee, in June 1976, issued a staff study of the severance pay-life insurance plan of Teamsters Local 295, Kennedy Airport in New York City. That study dealt with a highly questionable life insurance plan that was promoted and sold to the Local 295 Severance Trust Fund by one Louis C. Ostrer and his associates, through their relationships with the union trustees.

The effect of that plan was to extract high insurance premiums and excessive commissions from the severance pay trust fund through the sale of individual whole-life policies to union members. Following the issuance of that staff study, and at the direction of Senator Nunn, the then-acting chairman, the staff continued its investigation of the activities of Ostrer and his associates. In March of this year the subcommittee held a public hearing and released a supplemental staff study of union severance pay-life insurance plans which showed that the same type of plan had been sold to 11 other union trust funds in 6 States and that commissions amounting to as much as 90 percent of the first year premiums had been paid to the plan's promoters.

During the course of our investigation into the activities of Ostrer and his associates, it was found that another group, headed by a man named Joseph Hauser, had begun to do insurance business in Florida with some of the same union trust funds and individuals as had the Oster group. Our investigations of the activities of this new group constitute the subject matter for the hearings beginning this morning. The purpose of my testimony is to provide an overview of the Hauser group's operations and to outline the hearings which will take place over the coming days. There are some similarities between the operations of the Ostrer and Hauser groups, notably in the use of influence with labor leaders to sell high-premium whole-life or permanent type insurance to union groups, rather than the more conventional and less costly group-term life. However. Hauser's operation was much larger, more sophisticated and infinitely more complex than Ostrer's.

The Ostrer group sold only one product. individual whole-life insurance policies, to a specialized type of fund, severance pav trust funds. The Hanser group dealt with the union's general health and welfare funds. If they could not sell a fund whole-life insurance, they

would sell them group-term life, as well as health, accident, and c ability insurance.

While the Ostrer group was largely dependent for income on co missions from the insurance companies with whom they had placed t insurance they sold, the Hauser group acquired and ran the insura companies themselves. Unlike Ostrer, the Hauser group had access and use of the full premium payments from the business they gen ated, including the reserves for future claims. As a result, they we able to convert large amounts of these union premium moneys to the own use in a variety of ways.

As claims mounted against the premiums which had been divert to other uses, a portion of the premiums from newly acquired lab union business would be used to pay claims against old business. ] other words, new business had to be generated constantly to bring: new premium dollars to replace reserves for claims which had bee diverted to other uses. This kind of operation is sometimes called "Ponzi scheme," or never-ending chain.

The staff's investigation shows that when the Hauser group ha pretty well exhausted the labor union business available to them i States where their insurance companies were licensed to do business they entered into a type of reinsurance agreement, known in the in surance business as a "fronting" agreement, with companies licensed in other States. The Hauser group would then sell insurance to labo union trust funds in those States, using the policies of the fronting company, but all, or most, of the risks would be reinsured into one o the Hauser-controlled companies, and most of the premiums would also be passed on to the Hauser company. And so the chain continued.

Our investigations show that during the 3 years of its existence, the Hauser operation enjoyed phenomenal success in securing insurance business from labor union trust funds.

As a result, during the period 1973-76, the Hauser-affiliated insurance companies collected over $39 million in insurance premiums from 20 labor union trust funds in 8 States, Arizona, Florida, Georgia, Hawaii, Illinois, Indiana, Massachusetts, and Rhode Island. According to information obtained during the course of our investigations, some $25.637,000 had been paid out in claims against these premiums, although the total is undoubtedly somewhat higher by now. This leaves over $13 million or approximately one-third of the total premiums unaccounted for.

Mr. Chairman, we have prepared a schedule showing the union trust funds involved, the periods the insurance was in force, and the premiums and claims paid for each. I ask that this schedule be included in the record as an exhibit. This exhibit is also reflected on the chart in the front of the room.

I would also like to ask that the canceled premium checks and other documents upon which this schedule and chart are based be considered a part of the exhibit, but due to their bulk, that they be retained in the committee files and available for public inspection rather than being printed in the hearing record.

Senator NUNN. Without objection, that will be made a part of the record.

[The chart and supporting documents were marked "Exhibit No. 1A and 1B" for reference. Exhibit 1B may be found in the files of the subcommittee; exhibit 1A follows:]

EXHIBIT NO. 1A

Dates insurance in force

December 1976.

March 1977.

As I just commented, Mr. Chairman, due to the enormous number of claims checks and other transactions involved and the nonavailability of many records, we have not attempted to verify the accuracy and validity of the claims figures, nor have we been able to trace every dollar of the remaining $13 million in premium payments. However, on the basis of the bank accounts and other records which we have been able to obtain and analyze, we have identified approximately $11,700,000 in diversions and questionable expenditures by Hauser and his associates from the union premium moneys paid into Hausercontrolled insurance companies by labor union trust funds.

Senator NUNN. The $11,700,000 that you have termed diversions and questionable expenditures, what is that in terms of percentage of the overall premium dollars?

Mr. GRAY. It would be 30 percent.

We have prepared a series of schedules, Mr. Chairman, showing these transactions, these diversions, questionable payments which I would like to include in the record as an exhibit. Again I ask that all of the canceled checks and other supporting documents from which these schedules were prepared be retained in the subcommittee's files and be available for public inspection. I believe everyone has copies of these schedules. As you can see, they are very voluminous, but they do show each of the individual transactions that is involved in making up this $11,700,000.

Senator NUNN. Will you tell us what that chart is about?

Mr. GRAY. Yes. The chart is simply a listing by State of the various trust funds that did place their business with the Hauser companies and it is broken down, the premiums paid by years, the claims paid by years, the dates that the insurance was in force when it was effective, when it was terminated, and there are some comments there indicating the dates at which the information was obtained.

The purpose here is to simply show, and I will come back to this later, the amount of premiums that were paid and the claims that came back. We have not attempted to break down the particular coverages that were included. In most cases it was a package-type arrangement with some form of life insurance, accident, and health insurance involved. The Florida unions in particular, were sold some whole life insurance policies of the type associated with Mr. Ostrer. But this is where the figures of $39 million in premiums and $25 million in claims were derived from. In terms of premiums this is based on the actual canceled checks. In the case of claims, the information was obtained from the trust funds because of the large volume of transactions, we were not able to verify each and every claim for payment. Senator NUNN. Thank you. Without objection.

[The series of schedules referred to were marked "Exhibit Nos. 2A through 2H" for reference and follow. The supporting documents were marked "Exhibit No. 21" for reference and may be found in the files of the subcommittee.]