[Marxism] Flimflam convertible bond in GM-UAW VEBA for workers' health care

Charlie charles1848 at sbcglobal.net
Wed Oct 3 20:15:09 MDT 2007

This memo reveals that GM is "funding" a chunk of the healthcare VEBA 
with a convertible bond based on its stock, making workers' health care 
dependent on the profits of GM, contrary to UAW assurances. --Charles 



To: Jerry Tucker, Paul Schrade and Warren Davis, UAW IEB (Retired)
From: Stephen Diamond, School of Law, Santa Clara University
Date: October 2, 2007
RE: Legal Implications of Proposed GM/UAW VEBA

In response to your request, this memorandum provides an initial 
assessment of certain legal implications of the proposal to finance a 
new $30 billion Voluntary Employee Beneficiary Association (“VEBA”) with 
a $4.3725 billion convertible note to be sold by General Motors 
Corporation (the “Convertible Note” or “Note”) to the VEBA. Please note 
that this assessment is based on currently available public information 
and is thus limited in its scope by the content of that information.


The argument by top United Auto Workers officials and General Motors 
(“GM”) that the permanent transfer of GM’s longstanding and carefully 
negotiated health care obligations from GM to the VEBA will create a 
financially secure and independent union-controlled entity is inaccurate 
and misleading. Despite appearances, the plight of GM’s unionized 
workforce – including current, retired and future employees -remains 
tightly linked to the fortunes of GM itself. Neither GM nor top United 
Auto Workers (“UAW”) officials have made clear this basic fact about the 
VEBA and the Convertible Note. I also conclude that the ratification 
vote/investment decision to be made this week by UAW member/investors is 
part of the distribution and sale of a security potentially in violation 
of federal and state securities laws by both GM and top UAW officials.

I. Top UAW Officials inaccurately claim VEBA is secure and protects UAW 

As currently understood, the UAW and GM have tentatively agreed – 
pending the vote by the union member/investors – to establish the VEBA 
to take over the health care liabilities of GM. The VEBA will be 
established by the UAW and will take the form of a legally independent 
trust. The UAW will appoint the trustees who will manage the day-to-day 
operations of the VEBA. Initially, GM will provide cash, certain other 
assets and the Convertible Note to fund the VEBA in consideration of the 
willingness of the UAW to assume GM’s health care obligations on a going 
forward basis. The VEBA, in turn, will be obligated to manage those 
financial assets in such a manner that it has sufficient funds to meet 
the health care obligations it assumes. GM will no longer have those 
obligations, or liabilities, on its books and thus will, in theory, gain 
a lower cost of capital enabling it to make profitable investments to 
benefit employees and shareholders.

The success of this transfer of the health care obligations to the VEBA 
depends on the safety of the funding provided to the trust. In a press 
release on its website dated September 28, 2007, top UAW officials 
stated that, under the VEBA, health care for retirees “was secure in the 
near and long-term future.” UAW International President Ron Gettelfinger 
is quoted in the release as saying: “Our retirees will be protected 
under this VEBA.” Similarly, in its “Message to UAW GM Retirees” (the 
“Message”) which has been widely distributed in the media and to the 
current UAW membership, top UAW officials stated that they and GM have 
“establish[ed] a funding mechanism that will protect your retiree 
medical benefits through the establishment” of the VEBA (emphasis in 
original). The Message further states, “even if GM were to someday file 
for bankruptcy, the money in the VEBA would be secure.”

However, such broad conclusions are unwarranted based on my analysis of 
the actual funding provided to the VEBA. That funding is based heavily 
on the sale to the VEBA of the Convertible Note. The face value of the 
Convertible Note will be $4.4 billion representing approximately 15% of 
the assets to be placed in the VEBA. There are three major areas of 
concern that should be explained to the UAW member/investors in advance 
of their decision – via the ratification vote – to approve the sale to 
the VEBA of the Convertible Note. These concerns are equivalent to risk 
factors that the securities laws require be disclosed to all potential 
purchasers of a security by anyone who helps the process by which such 
securities are sold to investors. Neither GM nor top UAW officials have 
disclosed these risks publicly during the campaign to secure approval 
for the transaction by the UAW member/investors.

1) Value of Convertible Note tied to value of GM stock

First, like any derivative instrument, the Convertible Note “derives” 
its fundamental value from the so-called “underlying,” the common stock 
into which it can be converted. But notice that this creates a set of 
perverse incentives: the UAW appointed trustees managing the VEBA will 
be inclined to support potentially risky policies aimed at increasing 
the stock price of GM in order to maximize the value of the bond. Just 
as the recipients of stock options in the “dot-com” and Enron era were 
willing to take wild chances with company resources, the trustees could 
back shortsighted gambles by GM management to increase the value of the 
Note or any shares of GM stock they have purchased by converting a 
portion of the Note. These could include aggressive cost cutting 
measures or the sale of the entire company to a private equity fund that 
leads to widespread layoffs or other radical restructuring measures. 
These are precisely the steps likely to be opposed by the UAW membership.

2) Convertible Note is illiquid and faces other severe restrictions

Second, the ability to value the Note is limited by its illiquidity and 
the Note is subject to other severe restrictions. Thus, although the UAW 
member/investors have been told the Convertible Note is “worth” $4.3725 
billion and thus given the impression that the VEBA will be financially 
secure, this may be an unwarranted conclusion. There is no readily 
available secondary market for a security of such magnitude and so no 
easy means of tracking its value. Even if the Note is converted into 
common stock it cannot easily be resold. A Memorandum of Understanding 
on Post-Retirement Medical Care dated September 26, 2007 between the UAW 
and GM (the “MOU”) is being widely circulated by top UAW officials and 
GM describing the changes in health care obligations. Appended to the 
MOU is a summary term sheet for the Convertible Note (the “Term Sheet”). 
According to the Term Sheet, GM places a two-year “lock-up” on the 
ability of the VEBA to sell the Convertible Note or any stock into which 
the Note is converted prior to January 1, 2010.

Even then, finding a buyer for such a large block of stock could be 
difficult. Although GM promises to provide the registration statement 
that such a resale would require under federal securities laws, GM has 
placed severe limits on the volume and timing of sales of stock by the 
VEBA. GM retains the option to delay any such sales unilaterally by up 
to six months. And even if the VEBA converts the Convertible Note into 
shares of GM stock it will not be allowed to join with other investors 
to impact a shareholder vote through a proxy contest. Thus the VEBA will 
become a truly passive investor, giving up important rights that other 
GM shareholders retain.

3) Convertible Note and VEBA subject to fall in value in case of GM 

Finally, the UAW leadership’s promise that the VEBA will be secure in 
case GM declares bankruptcy ignores the impact of bankruptcy on the Note 
itself, which will make up approximately 15% of value of the VEBA’s 
assets. The Convertible Note’s value would decline significantly in case 
of bankruptcy just as the value of GM stock declines. In addition, it 
would have a low priority relative to other creditors and thus would be 
in danger of not being repaid at all. The Term Sheet states that the 
Convertible Note “will rank equally with all [of GM’s] other unsecured 
and unsubordinated debt.” According to the May 24, 2007 prospectus for 
other equally ranked unsecured debt to be issued by GM, “in the event of 
[GM’s] insolvency, bankruptcy, liquidation, reorganization, dissolution 
or winding up, [GM] may not have sufficient assets to pay amounts due on 
any or all [such debt] then outstanding.” Since the Convertible Note has 
identical ranking to this other debt, it is very likely that GM and top 
UAW officials would issue a similar warning to the UAW member/investors 
– if they had provided the disclosure required by the federal securities 

In addition, if GM does declare bankruptcy it would likely secure 
additional so-called “debtor in possession” financing from major banks. 
During the Delphi bankruptcy process, for example, major Wall Street 
investment banks such as JP Morgan lent Delphi – allegedly “bankrupt” – 
billions of dollars. Although other investors in Delphi stock and bonds 
had invested longer and earlier with the company, the JP Morgan 
investment stood ahead in line of those investors because of their 
willingness to lend to the company during the bankruptcy process. This 
is a very common tactic in today’s financial environment. Convertible 
bonds usually rank low in priority behind other debt instruments of a 
company and if new money were to be lent by Wall Street that new money 
could easily stand ahead of the Convertible Note held by the VEBA.

In conclusion, the argument that the VEBA is financially secure is 
unwarranted by an assessment of the financial assets that are to be used 
to establish the VEBA.

II. GM and Top UAW Officials May be Violating Securities Laws

As noted at the outset, my conclusion is that General Motors (“GM”) and 
the top officials of the United Auto Workers (the “UAW”) may be 
currently violating federal and state securities laws. These laws 
mandate civil and criminal penalties where such violations occur. It may 
be appropriate to consider legal action to enjoin the current 
ratification vote until these potential securities violations are 
investigated fully and, if necessary, remedied. Such an injunction may 
be particularly crucial in light of the significance of the ratification 
vote to the decision to issue the Convertible Note as set forth below.

These potential securities law violations include the following:

1) Top UAW officials and GM have not provided UAW members adequate 
information to assess the risks associated with the VEBA and, in 
particular, the risks that the union may incur because of the financial 
structure of the VEBA.

Federal securities laws mandate that potential purchasers of a security 
– such as the Convertible Note -be provided adequate disclosure about 
the risks of that security in advance of the decision to purchase the 
security. The membership vote that begins on Wednesday will be an 
attempt to ratify the decision by GM and top UAW officials to sell to 
the VEBA the Convertible Note. According to the MOU, ratification by the 
union membership is a “condition precedent” to the establishment of the 
VEBA and sale of the Convertible Bond to the VEBA. Thus, the failure to 
provide adequate disclosure about the implications of this purchase to 
the UAW member/investors now, in advance of the ratification vote, could 
be a violation of federal securities laws by both GM and top UAW officials.

2) The absence of full disclosure about the risks associated with the 
Convertible Note means the MOU is potentially misleading to the UAW 

The UAW and GM have circulated widely to the union member/investors the 
MOU that sets forth the details of the proposal to shift health care 
obligations from GM to the UAW if ratified by the membership. Neither 
the MOU nor the Term Sheet includes any of the risk factors associated 
with this securities offering. However, Federal and state securities 
laws deem the circulation of such misleading written material illegal 
“gun-jumping.” Anti-gun-jumping laws are aimed at protecting investors – 
such as the membership of the UAW who are being asked to decide whether 
the VEBA should buy the Convertible Note from GM – from making such a 
significant investment decision without adequate disclosure about the 
risks associated with the investment. The Term Sheet is based on a 
similar term sheet for other GM securities for which a prospectus dated 
May 24, 2007, has been made available to possible investors. That May 
24, 2007 prospectus contains six pages of single spaced text setting 
forth sixteen separate risks associated with the securities to be issued 
under that prospectus. No such disclosure has been provided to the UAW 
member/investors who are about to decide whether the VEBA should 
purchase the Convertible Note.

3) Top UAW Officials may be deemed sellers or underwriters of securities 
under federal law It should be noted that under federal securities laws, 
the issuer of a security – in this case, GM -is not the only person 
obligated to provide investors with full and adequate disclosure about a 
financial instrument offered for sale. Anyone who is deemed to be a 
“seller” of that security is also so obligated. The federal courts and 
the SEC interpret the term “seller” broadly. In a leading case in 1988 
the U.S. Supreme Court stated, “liability…extends [to a] person who 
successfully solicits the purchase [of a security], motivated at least 
in part by a desire to serve his own financial interests or those of the 
securities owner.” (Pinter v. Dahl, 486 U.S. 622)

In addition, the obligation to provide disclosure can fall on anyone 
found to be an “underwriter” of the sale of securities. The SEC and the 
federal courts also interpret this term broadly. Thus, it can include a 
wide range of persons associated with the effort to secure the 
distribution of the security from the actual issuer to investors. In a 
case that is still followed today, the federal courts decided in 1941 
that individuals who engage in steps necessary to the distribution of a 
security are obligated to provide adequate disclosure. (SEC v. Chinese 
Consolidated Benevolent Association, 120 F. 2d 738 (1941), cert. denied, 
314 U. S. 618)

In conclusion, top UAW officials are campaigning to secure ratification 
of the decision to establish the VEBA including the sale to the VEBA of 
the Convertible Note. Such efforts could be viewed as a sale and/or 
distribution of a security. Because the current information made 
available to the UAW member/investors by the union’s top officials is 
not adequate, if the SEC or a federal court deemed top UAW officials to 
be engaged in the sale and/or distribution of a security, I believe they 
would be doing so in violation of federal securities laws.

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