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Risky Business Subpoena on Bid-Rigging Fallout for a Family Dynasty By MONICA LANGLEY and THEO FRANCIS On a Friday afternoon last month, the nation's largest
insurance companies were served with subpoenas from the By the next week, several of the biggest insurers told the
attorney general's office they had paid kickbacks for having business steered
to them and had submitted sham bids to mislead customers. Their panicked
responses revealed evidence of a broad scheme of collusion and price-fixing
within the $1.1 trillion insurance industry.
Mr. Spitzer's office last week charged that Marsh &
McLennan Cos., the world's largest insurance
broker, with as much as 20% of the market, played the part of the corrupt
contractor. In a civil complaint filed Thursday in a The charges followed a frantic two weeks in which major
insurance companies, including American International Group Inc., Ace
Ltd. and Hartford Financial Services Group Inc., scrambled to present
evidence to Mr. Spitzer of how they worked with Marsh to cheat customers. By
helping the attorney general build his case, the insurers were hoping to get
credit for cooperation and reduce their eventual punishment. The result: a
probe that might have dragged on for months rapidly accelerated. Mr. Spitzer has secured guilty pleas from two midlevel m The broad nature of the bid-rigging allegations raises the
possibility that the scandal could engulf other major players and lead to an
overhaul of the insurance business. Marsh, AIG and Ace have suspended the
practice of "contingent commissions," in which an insurer pays a
broker in exchange for steering business its way. Next on the hot seat: Aon
Corp., the second-largest Aon said in a statement last week
that soliciting fictitious quotes, bid-rigging and accepting payments from
insurers in exchange for not shopping business around "would violate Aon policies." Aon said
"to the best of our knowledge, our employees have not engaged" in
those practices. Aon also said it is cooperating with
Mr. Spitzer's office. However, the head of the investment protection unit in
Mr. Spitzer's office, David D. Brown IV, accused Aon
of "dragging its feet as much as it can." Mr. Spitzer's inquiry is widening. He plans to examine whether
life and health insurers engaged in bid-rigging, according to people familiar
with the matter. On Friday, two companies reported receiving fresh subpoenas
from the attorney general: life insurer MetLife Inc. and National
Financial Partners Corp., a broker to wealthy individuals and smaller
companies. Both companies had received subpoenas earlier in the probe. A
MetLife spokesman declined to comment. National Financial Partners said it
isn't aware of its employees asking insurers to provide fictitious or
inflated quotes to clients.
Insurance stocks have plummeted and their market value has
collectively fallen by tens of billions of dollars. Marsh stock has fallen by
more than one-third; the company lost a total of $9 billion in market
capitalization last Thursday and Friday. For now, the hottest seat in the industry is occupied by Mr. Greenberg is part of an insurance dynasty that has been
shaken by Mr. Spitzer's charges. His brother runs Ace and his father runs AIG
-- and both insurers were among the first to name Twice in the past year, Mr. Spitzer has found problems at
Marsh units. Last fall, its Putnam Investments unit became the first
mutual-fund company charged in that industry's trading scandal for allowing
favored customers to buy and sell shares in ways that cheated other
investors. Putnam settled charges against it for $110 million. And earlier
this year, the firm's Mercer Human Resource Consulting unit admitted to
giving the New York Stock Exchange's board inaccurate or incomplete
information about the pay of former stock exchange Chairman Dick Grasso. 'Pay to Play' At the heart of the insurance scandal are allegations of
bid-rigging and "pay to play" deals. Businesses seeking insurance
often hire a broker such as Marsh, which in turn solicits bids from several
insurers. Marsh is alleged to have sought artificially high bids from some
insurance companies so it could guarantee that the bid of a preferred insurer
on a given deal would appear cheapest and would win the business at hand.
Such machinations violate
It was the industry's use of contingent commissions that
initially triggered Mr. Spitzer's investigation. In April, the attorney
general issued subpoenas about the fees, which a growing number of
policyholders and others have criticized as a kind of kickback. Within a few months, hundreds of boxes of documents crowded
the 23rd floor of the lower On Thursday, Sept. 9, Mr. Brown, riding the train back to Early the next week, an excited law student presented to Mr.
Brown another apparent example of bid-rigging. On Sept. 17, a wave of
subpoenas went out under the state law prohibiting fraud and under the
Donnelly Act, That's when the insurance industry went into a tizzy. The
companies had retained outside lawyers with white-collar-crime expertise. For
example, Marsh hired Davis Polk & Wardwell, a
law firm whose team includes Carey Dunne, a Among the first calls to the attorney general was one from
AIG, headed by Maurice R. "Hank" Greenberg, whose eldest son is Ace and AIG jockeyed to be the first to meet with the attorney
general. "They were racing to be the first to acknowledge the
bid-rigging," says one official. "They wanted to appear most
cooperative to get the best treatment." The insurance executives took Mr. Spitzer seriously because of
his track record: His investigations of Wall Street brokerages' research
practices and of the mutual-fund industry had exposed widespread and longstanding
malfeasance. Both led to huge fines and an industry overhaul. On Oct. 1, Mr. Spitzer's lawyers met in the morning with AIG
and in the afternoon with Ace. Both insurers disclosed instances of alleged
price-fixing by Marsh. Hanging over the room was the knowledge that companies
headed by a father and a son were providing evidence that could damage
another son. It wasn't until last Tuesday that Marsh -- the central player
in the alleged price-fixing scheme -- came in to address the bid-rigging
charges. Marsh's general counsel, William Rosoff,
said he knew of no wrongdoing, according to a person at the meeting. Mr. Rosoff said Mr. Spitzer's subpoenas were hurting Marsh's
business, and then asked the attorney general to describe what his
investigation had found, this person says. The attorney general refused. "You've had every
opportunity to figure this out for yourself," he told Mr. Rosoff, says this person. "You've had clear
indications for the last six months." Marsh declined to comment on Mr. Spitzer's allegations or its
meetings with the attorney general's office. "I can only say that we
take the allegations very seriously. Our company doesn't stand for the sorts
of things that are alleged," Around the same time, Mr. Spitzer's office told two mid-level
AIG m With the pleas settled, the attorney general filed the
complaint on Thursday. At the news conference afterward, he lambasted Marsh's
m On Friday, AIG's Hank Greenberg held a conference call with
research State Insurance Superintendent Gregory V. Serio
said in an interview that instead of giving a quick answer to AIG, his
department decided to find out more about commission practices. He said his
department has sought information from hundreds of insurers and brokers, and
its investigation is continuing. The various probes highlight a weakness in the industry's
regulation. Insurance is the only financial-services industry without a
federal regulator, and the patchwork of state insurance regulators has long
been viewed as weak. When Hank Greenberg was asked on the conference call which
broker's contingent-fee arrangements he had raised with the insurance
department, he said simply, "Marsh." It was a dramatic moment
because it meant he had fingered his son's company. At an AIG m Within the industry, two burning questions are how high in the
m AIG's Mr. Greenberg says his firm's internal probe, prompted
by the subpoena the firm received in September from Mr. Spitzer's office, so
far has found no link to senior m Private lawsuits also are multiplying. Marsh, Aon and fellow broker Willis Group Holdings Inc.
face a civil-racketeering suit filed in August by a policyholder, Opticare Healthy Systems Inc., Insurance executives are wondering if Marsh, which has
promoted its strong service and commitment to clients, can maintain its
dominance in the insurance-brokerage business. At Marsh, contingent
commissions are a hefty chunk of revenue on top of the basic fees it receives
for acting as a middleman to bring together buyers and sellers of insurance.
The buyer usually pays the broker's basic fees, which can be either a flat
sum or a percentage of the insurance premium. Mr. Spitzer says contingent commissions totaled $800 million
of Marsh's $11.5 billion in revenue last year. (Marsh had 2003 net income of
$1.5 billion.) The fees are so profitable that Prudential Securities
insurance Preferred Carriers Marsh has maintained that it took care to prevent
contingent-fee pacts from influencing its brokers' recommendations. But Mr.
Spitzer's complaint identifies repeated instances in which m In April 2001, an unnamed Marsh m Beginning in about 2001, the complaint alleges, the effort to
place business with preferred insurers had taken a big step: to bid-rigging.
The complaint cites "a cast of the world's largest insurance
companies" as participants. It worked this way, according to the complaint: Marsh brokers
would call underwriters at insurers including AIG and Ace for "B"
quotes -- bids that wouldn't be good enough to win the business in question.
In these cases, the underwriters knew that Marsh wanted another insurer to
win the business. Why participate? The insurance companies knew Marsh would
protect their bids on other occasions, the complaint says. As one Marsh m In December 2002, Patricia Abrams, the Ace employee who
pleaded guilty to a misdemeanor Friday, worsened the insurer's bid to provide
excess casualty insurance to manufacturer
" Sometimes, Marsh asked for what one insurer called
"drive-bys" -- insurance-company personnel making a presentation at
a meeting with a client to bolster a fake bid, according to the complaint. In
2001, Marsh asked Munich American Risk Partners, a unit of reinsurance giant Having received several such requests, the lawsuit says, a
Munich American regional m In several instances, AIG ended up with business it wasn't
supposed to get, when the "A" bidder backed out at the last minute,
according to the complaint. AIG hadn't completed the underwriting in those
cases and had to "back fill" -- that is, prepare the necessary In one case, an assistant vice president of underwriting at CNA
Financial Corp. balked at providing a fake bid for insurance to cover
workers' compensation and general liability for a $900 million project to
renovate and build 70 schools in In the absence of a bid from the CNA underwriter, Marsh
"falsely submitted a bid under CNA's name,"
the complaint says. A spokesman for CNA declined to comment. Mr. Spitzer has made clear he expects his probe to reach to
employee benefits, life insurance and home and auto insurance.
"Virtually every line of insurance has been implicated," he said
last week. For instance, last week's complaint alleges that Marsh had
negotiated a $1 million "no shopping" agreement, under which the
company would have recommended to its top individual clients who had personal
insurance through \*Chubb Corp. that they renew those policies. The
complaint said that pact, never consummated, would have been "a paid
abdication of Marsh's duty to its clients." Chubb said it is cooperating fully with the attorney general
and isn't aware of any impending charges. Chubb also said it believes that
neither the company nor its employees "violated any law or regulation
governing compensation of insurance brokers and independent agents." Write to Monica Langley at monica.langley@wsj.com8
and Theo Francis at theo.francis@wsj.com9 |
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"It's the same kind of cartel-like
behavior carried out by organized crime," Attorney General Eliot Spitzer
privately told his top officials, according to people who heard the remarks.
"It's like the Mafia's 'Cement Club,' " added Peter Pope,
deputy attorney general in charge of the criminal division, at the same
meeting. Mr. Pope was referring to construction projects in which a corrupt
contractor rotated cement companies into jobs based on kickbacks.![[Top Players]](Chubb_files/image010.gif)
"Our investigation is reaching into
many corners of the insurance industry to determine how corrupt its business
practices are," said Mr. Spitzer in an interview.