WSJ -- Eliot Spitzer / lying, cheatin' insurance companies / maybe the "great" Warren Buffett is about to have his "goose cooked"
October 15, 2004
Spitzer Charges Bid Rigging In Insurance
Top Broker, Major Firms Named in Legal Actions; 'Trust Me: This Is Day One'
By THEO FRANCIS
Staff Reporter of THE WALL STREET JOURNAL
Marsh & McLennan Cos., the world's biggest insurance broker, cheated corporate clients by rigging bids and collecting huge fees from major insurance companies for throwing business their way, according to allegations made by New York Attorney General Eliot Spitzer.
Mr. Spitzer's charges came in a civil suit and in plea-bargain deals on criminal charges against two insurance executives.
The civil complaint filed by Mr. Spitzer against Marsh in state supreme court in Manhattan names insurance companies American International Group Inc., Ace Ltd., Hartford Financial Services Group Inc. and Munich-American Risk Partners as participants with Marsh in paying improper fees and bid rigging.
Two AIG executives each pleaded guilty to a first-degree felony count of a "scheme to defraud." The probe could extend to top executives at AIG -- the largest U.S. commercial insurer, with more than $81 billion in annual revenue -- and elsewhere.
Mr. Spitzer's allegations depict the insurance industry as plagued with corruption and signal a much wider probe than was previously known, shedding new light on the issue of bid rigging and touching on almost all forms of insurance.
"The insurance industry needs to take a long, hard look at itself," Mr. Spitzer said. "If the practices identified in our suit are as widespread as they appear to be, then the industry's fundamental business model needs major corrective action and reform."
He made clear that other insurers and insurance brokers could face criminal and civil charges: "Trust me, this is day one," he said.
Marsh and the four insurers all said they are cooperating with Mr. Spitzer's office. The news of the legal actions caused major insurance-industry stocks to drop sharply.
Marsh shares closed at $34.85, down $11.28, or 24%, in composite trading on the New York Stock Exchange, while AIG closed at $60, down $6.99, off 10%. Both companies are based in New York. Many other insurance stocks were down 5% to 6%.
The announcements bring to a head Mr. Spitzer's months-long investigation into the practices of insurance brokers. The inquiry was disclosed by major insurance brokers this spring, and it raised questions about the fairness of an industry that reaches deep into every part of the business world and the pocketbooks of consumers. Mr. Spitzer said unsuspecting insurance buyers, who believed that brokers were looking out first for their clients' interests, included large and midsize corporations, municipal governments, school districts and some individuals.
Mr. Spitzer has become a huge and controversial force in shaking up the way the U.S. financial-services sector does business, and often embarrassing regulators like the Securities and Exchange Commission in the process. His probe into the insurance industry follows high-profile inquiries into conflicts of interest tainting the research of Wall Street analysts and into special trading privileges enjoyed by selected big mutual-fund investors.
The probes all have in common that they soiled the reputations of some of the country's best-known and largest corporations. While the facts differed in each one, the scandals share a common element: alleged wrongdoing that had been commonplace for years, often with regulators looking the other way.
Insurers are regulated by individual states, and the state-by-state oversight may have helped pave the way for the problems Mr. Spitzer cites, some critics say. Different standards can apply in different states, and even states that, like New York, have sought to force increased disclosure of fees and commissions can have trouble enforcing such requirements. For years insurers have resisted federal regulation, though in recent years some parts of the industry have been warming to the concept.
In general, insurance brokers serve as middlemen, matching buyers and sellers, and Marsh long has been the leader in the business. For their part, the insurers linked to its alleged wrongdoing are some of the leaders in selling property-casualty coverage to businesses around the world. Premiums paid last year just in the U.S. totaled $176 billion.
In essence, Mr. Spitzer maintains that Marsh steered business toward certain insurers at designated prices, while simultaneously soliciting other fake bids to create the illusion of competitive bidding for its clients' business. Mr. Spitzer maintained that Marsh would designate one insurer to win a particular client's business. Marsh then would solicit "B" bids, or artificially high fake bids, from other insurers to give the appearance of real bidding. Marsh did this even as it claimed in public statements that its "guiding principle" was to consider its client's best interests, he alleged.
At the heart of the inquiry are fees that many insurance brokers receive from insurance companies over and above their ordinary commissions. They are paid, most commonly, for steering volume business an insurer's way. Insurance companies call the fees "contingent commissions" or "market service agreements." A growing chorus of critics, including some policyholders who have sued over the practice in state courts in recent years, have used another term: "kickback."
While controversy has swirled over contingent commissions before, prompting some lawsuits, Mr. Spitzer's bid-rigging allegations are new. If true, they could lead to a new wave of corporate and class-action litigation.
The fee arrangements date back several decades. Many industry executives say it was no big secret among insiders that such pacts were in place to boost revenue at both the insurance brokers and the insurance companies that agreed to them. Controversy over them first flared up in the late 1990s, when New York insurance regulators raised concern, saying the payments ought to be disclosed. That controversy died down when the big brokers agreed to provide information on the arrangements -- if asked by clients.
The brokers say their practices are above-board and appropriate, and that they now disclose the payments adequately. But critics say the practices remain poorly disclosed and are a conflict of interest for brokers acting on policyholders' behalf.
Mr. Spitzer said Marsh "very possibly" could face criminal charges for the conduct described in the civil complaint. In investigating the firm, he said his office was "misled at the very highest levels of that company." He also said, "The leadership of that company is not a leadership I will talk to; it is not a leadership I will negotiate with."
Marsh said in a statement that it has been cooperating with Mr. Spitzer's office. "We are committed to getting all the facts, determining any incidence of improper behavior, and dealing appropriately with any wrongdoing. Marsh is committed to serving its clients to the highest professional and ethical standards."
Hartford, Munich-American, Ace and AIG said they are cooperating with Mr. Spitzer's office. "The Hartford does not condone bid-rigging or any other illegal activity," a spokeswoman for the Hartford, Conn.-based insurer added. Munich-American is based in Princeton, N.J.
AIG said it had sought guidance from New York insurance regulators about its contingent-commission pacts in 2002, "before this investigation began," and again last fall, but it didn't reveal what advice it received, if any. It said the two guilty pleas of its employees "saddened" it, because "we hold ourselves to the highest ethical standards. Any breach of those standards is unacceptable."
AIG executives Jean-Baptist Tateossian, manager of AIG's national accounts unit, and Karen Radke, an AIG senior vice president, each pleaded guilty to a first-degree felony count of a "scheme to defraud." They were accused of allowing Marsh to control the insurance market and "to protect incumbent insurance carriers when their business was up for renewal."
"On numerous occasions," Ms. Radke and Mr. Tateossian both supplied fake quotes to provide the illusion of competitive bidding for Marsh clients, "knowing that another insurance carrier would nonetheless win the bid."
Mr. Spitzer's allegations indirectly touch three members of what might be called the first family of insurance. The chairman and chief executive of AIG is Maurice R. "Hank" Greenberg, while his eldest son, Jeffrey W. Greenberg, a former AIG executive, is chairman and CEO at Marsh. Another son, Evan Greenberg, is president of Bermuda-based Ace. A person familiar with the probe said there is no indication that the family relationships played a role in any of the transactions being investigated. No members of the family have been named in the investigation.
Marsh received $800 million in revenue from the contingent commissions last year, the equivalent of more than half its $1.5 billion in income, Mr. Spitzer said. He called the comparison valid because, he said, Marsh performs few services in return for those payments, making them highly profitable.
Mr. Spitzer's complaint cites internal communications in which employees of Marsh and insurance companies openly discuss actions that were aimed at maximizing Marsh's revenue and insurance companies' revenues. For example, one senior Marsh executive sent a message to colleagues saying: "We need to place our business in 2004 with those [insurance companies] that have superior financials, broad coverage and pay us the most."
Another executive noted that the size of contingent commissions will determine "who [we] are steering business to and who we are steering business from."
Mr. Spitzer said that evidence uncovered in the probe suggests that illegal and improper practices extend to "virtually every major insurance broker" and through every line of insurance, including personal auto coverage, health insurance, life insurance and employee benefits. He declined to elaborate.
Marsh has named Michael G. Cherkasky, chief executive of the company's risk and insurance-services unit, Marsh Kroll, to head an internal investigation of Mr. Spitzer's allegations and related issues. Mr. Cherkasky will be joined by Bob Fiske and Carey Dunne, attorneys with law firm Davis Polk, and will ultimately report his findings to the chief executive, Jeffrey Greenberg, and the board's independent directors.
Yesterday evening, Marsh's independent directors issued a statement that in part affirmed its "full confidence in the company's leadership" and promised to "take all appropriate action" once the company's internal review is complete.
The two next-biggest U.S. brokers, Chicago-based Aon Corp. and New York-based Willis Group Holdings Ltd., also receive contingent commissions and have received subpoenas from Mr. Spitzer's office. Those companies weren't implicated in bid-rigging yesterday, but Mr. Spitzer left the door open for litigation against other brokers later.
Write to Theo Francis at theo.francis@wsj.com
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