SUPREME
COURT OF THE STATE OF
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THE PEOPLE
OF THE STATE OF
by ELIOT SPITZER,
Attorney General of
the State
of
Plaintiff,
: COMPLAINT
-against- :
Index No.
:
MARSH & McLENNAN COMPANIES, INC.
AND MARSH
INC., :
Defendants.
:
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1.
Plaintiff, the People of the State of
General of
the State of
defendants,
alleges upon information and belief, that:
PARTIES
2. This
action is brought by the Attorney General on behalf of the People of
the State
of
Business
Law, § 63(12) of the Executive Law, and the common law of the State of
3.
Defendant Marsh & McLennan Companies, Inc. ("MMC") is a
corporation
with its principal place of business in
4.
Defendant Marsh Inc. (together with MMC, "Marsh") is a
corporation
and is a wholly owned subsidiary of MMC, with its principal place of business
in
1Bracketed
citations refer to documents attached as exhibits hereto.
2
PRELIMINARY
STATEMENT
5. Marsh is
the largest provider of insurance brokerage and consulting
services in
the world. It holds itself out to its clients as a trusted expert in the
placement
of insurance policies. Businesses and individuals who need insurance retain
Marsh to
help them
design an insurance plan and negotiate with insurance companies to get the best
mix of
coverage,
service, financial security and price.
6.
According to Marsh, "Our guiding principle is to consider our client’s
best
interest in
all placements." It boasts, "We are our clients’ advocates, and we
represent them in
negotiations.
We don’t represent the [insurance companies]." [
7. The
facts show otherwise. Since at least the late 1990s, Marsh has
designed
and executed a business plan under which insurance companies have agreed to pay
Marsh more
than a billion dollars in so-called "contingent commissions" to steer
them business
and shield
them from competition. Styled as payments for nebulous "services,"
the agreements
to pay
these commissions were called "placement service agreements,"
("PSAs") and, most
recently,
"market services agreements" ("MSAs"), by Marsh.
8. Whatever
the agreements were named, they created an improper incentive
for Marsh.
As one Marsh executive told his subordinates, the size of the contingent
commission
payments to
Marsh determines "who [we] are steering business to and who we are
steering
business
from." [
company
president seeking to expand her firm’s sales, a Marsh executive did not advise
her to
provide a
better product to Marsh’s clients; instead, he told her that she would need to
enter into
3
a
contingent commission agreement paying Marsh an amount that was "above
market."
9. At
times, Marsh’s plans to maximize the profits it received from
contingent
commission agreements went even further: it designated winners. Marsh solicited
--
and
obtained -- fictitious high quotes from insurance companies in order to deceive
its clients
into
believing that true competition had taken place. It promised to protect
insurance companies
from
competition, and did so. And it threatened to hurt the business of those who
thought of
truly
competing for particular pieces of business.
10. This
business plan was phenomenally profitable. For example, it has been
reported
that in 2003 alone, approximately $800 million of Marsh’s earnings were
attributable to
contingent
commission payments. That year, Marsh overall reported approximately $1.5
billion
in net
income. Marsh, however, has never disclosed to its shareholders how contingent
commissions
constitute the lifeblood of its business.
Officer of
Marsh, has stated: "We don’t break out contingent commissions. That is not
separately
enumerated because it is part of our business model . . . ." [
Conference
Call Transcript]
11. The
losers in all of this, of course, are Marsh’s clients and the marketplace
for
insurance, which Marsh has corrupted by distorting and elevating the price of
insurance for
every
policyholder. Other victims here are Marsh’s own shareholders, who have never
been told
that
hundreds of millions of dollars of Marsh’s profits derive from illegal
activities.
JURISDICTION
12. The
State of
of those
who reside or transact business within its borders. The State also has an
interest in
4
assuring the
presence of an honest marketplace in which economic activity is conducted in a
competitive
manner, without fraud, deception or collusion, for the benefit of marketplace
participants.
In addition, the State has an interest in ensuring that the marketplace for the
trading
of
securities functions fairly with respect to all who participate or consider
participating in it.
The State
also has an interest in upholding the rule of law generally. Marsh’s conduct
injured
these
interests.
13. Thus,
the State of
capacities,
as parens patriae, and pursuant to Executive Law § 63(12), General
Business Law §§
340 et
seq. (the Donnelly Act) and General Business Law §§ 352 et seq. (the
Martin Act). The
State sues
to redress injury to the State, and to its general economy and residents, as
well as on
behalf of:
(1) persons who purchased insurance brokerage services from Marsh; and (2)
persons
who
purchased, sold or held shares of Marsh during the period in which the cited acts
occurred.
The State
seeks disgorgement, restitution, damages including punitive damages, costs, and
equitable
relief with respect to defendants’ fraudulent, anti-competitive and otherwise
unlawful
conduct.
FACTUAL
ALLEGATIONS
A. The structure
of the insurance industry
14. There
are basically three types of entities in the insurance market. First,
there are
clients: companies and individuals seeking to purchase insurance for their
businesses,
employees
or themselves. Second, there are brokers and independent agents (collectively
"brokers"),
hired by clients to advise them as to needed coverage and to find insurance
5
companies
offering that coverage. Brokers represent the client, obtain price quotes,
present the
quotes to
the client, and make recommendations to the client that include factors other
than price,
such as
differences in coverage, an insurance company’s financial security, or an
insurance
company’s
reputation for service or claims payment. Third, there are insurance companies.
They submit
quotes to the brokers and, if selected by the client, enter into a contract to
provide
insurance
for that client’s risk.
15. In this
structure, the client makes two types of payments: (1) it pays its
broker an
advisory fee or a commission for locating the best insurer, and (2) it pays the
chosen
insurance
company premiums for the coverage itself. When the client pays a commission
this is
usually
accomplished in one check to the broker, with the broker deducting the
commission and
forwarding
the premium to the insurance company. Sometimes clients -- particularly large
commercial
clients -- break out the broker’s fee and pay it directly to the broker.
16. In
addition to the first commission payment described above, brokers
sometimes receive
another kind of payment, as well, but not one from the clients. These are
called
contingent commissions and come from insurance companies pursuant to
arrangements
generally
known as contingent commission agreements. The precise terms of these agreements
vary, but
they commonly require the insurance company to pay the broker based on one or
more
of the
following: (1) how much business the broker’s clients place with the insurance
company;
(2) how
many of the broker’s clients renew policies with the insurance company; and (3)
the
profitability
of the business placed by the broker.
17. In the
late 1990s, Marsh began to call these agreements "Placement
Service
Agreements" or "PSAs." After recent public scrutiny, it has
renamed them "Market
6
Services
Agreements" or "MSAs," contending that they do not reflect
payment for "a specific
transaction
or placement" but relate instead to the "services we provide" to
insurance companies.
Unbeknownst
to Marsh’s clients, these "services" include steering business to
complicit and
profiting
insurance companies by, among other things, rigging bids and fixing prices.
B. Marsh
falsely tells its clients that it is their "advocate" and that its
"guiding
principle" is "our client’s best interest."
18. Marsh’s
insurance brokerage business alone has approximately 42,000
employees
in 410 offices located in over 100 countries. Marsh cites its size and
sophistication as
a primary
reason to hire the company. Marsh holds itself out as a trusted advisor that
can help its
clients
assess their insurance needs and locate the best available insurance. At least
in
performing
this function, Marsh acts as an agent and fiduciary for its clients.
19. Marsh
emphasizes that it works for its client, not for the insurance
companies.
For example, in a document created to assist employees in responding to client
questions,
Marsh has written: "Our guiding principle is to consider our client’s best
interest in
all
placements. We are our clients’ advocates and we represent them in negotiations.
We don’t
represent
the [insurance companies]." [
figures
prominently in Marsh’s marketing materials. For example, in Marsh’s
"Response to
RFP"
for the
bid
manipulation was plainly evident -- Marsh provided a graphic titled,
"Client Loyalty
Pyramid."
The document states that its "approach to client service begins with
establishing
credibility
and trust. . . ." Marsh also refers to itself in these materials as
"trusted
business partner" and "not simply an insurance agent." [Response
to RFP for
7
20. In
fact, a central part of Marsh’s business plan is to promote the interests
of
insurance companies with whom they have contingent commission agreements. When
Marsh
steers
business to the favored insurance companies, those insurance companies, in
turn, pay
Marsh
higher fees. When Marsh helps favored insurance companies retain their existing
business at
renewal time, those insurance companies pay Marsh higher fees. When Marsh
steers
more
profitable business (policies with low claims ratios) to favored insurance
companies, those
insurance
companies pay Marsh higher fees. And when the clients pay higher premiums,
volume
and
profitability rise -- again increasing Marsh’s fees.
21. So
Marsh does not, as it contends, always "consider their client’s best
interest."
Nor is Marsh truly its clients’ disinterested "advocate." To the
contrary, Marsh
primarily
represents its own interests and those of its favored insurance companies. Both
the
insurance
companies and Marsh profit because of their common interest, a common interest
created by
the contingent commission agreement.
22. Marsh
further instructs its employees to describe the company as an
advisor and
honest conduit for information, but one that leaves the final decision to the
client:
"In
fact, Clients are the only ones who have the authority to make the decisions on
the terms and
conditions
of a program and the [insurance companies] selected to handle the program. . .
. In all
cases,
clients make the final decision on the [insurance company] chosen to handle
their
business."
[
23. In many
instances, however, the client is making a misinformed "final
decision"
on insurance coverage. As set forth below, Marsh has repeatedly provided
clients with
8
false and
inflated quotes. It frequently designates a winner, and then solicits inflated
bids from
other
insurance companies, who provide such bids, knowing that later they themselves
will have
a turn to
get business without meaningful competition. A choice made by a client under
these
circumstances
has been made under false pretenses created by both Marsh and the complicit
insurance
companies.
24.
Apparently aware of the patent conflict of interest posed by an agent
taking
payments from vendors (the insurance companies) seeking to sell a service to
its master
(the
client), Marsh asserts that it has erected an information barrier to prevent
contingent
commission
agreements from influencing its recommendations: "Our Client Executives
and
advisory
staff is [sic] unaware of our specific [contingent commission agreements], thereby
further
removing their ability to have these arrangements influence their
recommendations."
[
25. As set
forth below, the information barrier that Marsh describes simply
does not
exist. To the contrary, steering business to contingent commission-paying
insurance
companies
is fundamental to Marsh’s business plan.
C.
Marsh’s "disclosure" of its contingent commission agreements is false
and
misleading.
26. While
Marsh has disclosed the existence of contingent commission
agreements
since at least 1998, it has consistently concealed their true nature. Marsh
describes
contingent
commission agreements (recently renamed "MSAs") to its clients and
the public as
follows:
Market
Services Agreements (MSAs) are agreements that cover payment
for the
value brokers provide to insurance carriers and are based primarily
9
on premium
volume or growth. Brokers principally provide insurers with
distribution
networks, which facilitate the delivery of business, and are
also
uniquely positioned to provide insurers with intellectual capital,
product
development, technology, and other administrative and
information
services. These capabilities make the overall marketplace
more
efficient and competitive, which, in turn, benefits Marsh’s clients.
["Market
Service Agreements" at www.msa.marsh.com]
These
"services" are illusory. The "distribution" Marsh cites is
not a "service" but rather a
necessary
concomitant of Marsh going to the market on behalf of its clients, something
that
Marsh is
duty bound to do as its clients’ agent and fiduciary -- and for which Marsh is
compensated
by legitimate fees and commissions from the client. The fact that Marsh’s
clients
ultimately
buy from the insurers creates no additional "service" by Marsh to the
insurers. Nor do
the other
vague "services" mentioned (such as "intellectual capital")
justify any of the $800
million
that Marsh received last year in contingent commissions.
27. In
fact, the "service" that Marsh provides pursuant to its contingent
commission
agreements is to steer business to the insurance carriers. As explained below,
contingent
commissions have an enormous impact on where Marsh places business on behalf of
its
clients. Yet Marsh’s disclosure is silent as to the actual purpose and effect
of its contingent
commission
agreements.
28. Marsh’s
disclosure to investors is no better. Marsh has never revealed to
the
investing public the true nature of contingent commissions or the huge role
they play in
Marsh’s
earnings. This is illustrated by CEO Greenberg’s answer to a question about the
role of
contingent
commissions in Marsh’s earnings:
We don’t
break out contingent commissions. That is not separately
enumerated
because it is part of our business model and so I can’t really
help you
there.
10
When asked
about the impact on Marsh of a possible "drastic change" in how it
receives
contingent
commissions, Mr. Greenberg said:
We think
that the most important issue and I have said this before is that
we provide
services for which we expect to be compensated and there are
various
ways that one can be compensated. The way in which we handle it
today is
[contingent commissions] but if we found that we needed to
change the
method of compensation, we would do so. The principal being
that we are
going to be compensated for our services. [
Analyst
Conference Call Transcript]
D.
Marsh’s business plan has been to increase its contingent
commission
income by steering clients to favored insurance
companies.
29.
According to Marsh’s public filings, in 2003 it had profits of over $1.5
billion.
Marsh does not disclose how much of that amount was generated through fees paid
by
clients and
how much was generated by insurance company contingent commission payments. A
Marsh
official has stated to this office that, in 2003, contingent fees paid by
insurance companies
amounted to
approximately $800 million. These payments, for which there is little or no
overhead,
are extremely profitable.
30. The
enormous size of these profits is not happenstance, but the result of
careful
planning. Marsh reconfigured its brokerage business, centralizing power in a
group based
in
were to
sell more vigorously to clients, lists based not on price or service, but on
the amount of
money the
insurance companies would pay Marsh. It rewarded those employees who sold
clients
more
insurance from these complicit insurance companies, and it chastised those who
did not.
31. By way
of brief background, during the 1980s and 1990s, the insurance
11
brokerage
industry underwent a period of consolidation. Through acquisition and internal
growth,
Marsh became one of the world’s dominant insurance brokers. Until the late
1990s, each
of Marsh’s
numerous branch offices throughout the
contingent
commission agreements with insurance carriers.
32.
Beginning in the late 1990s, Marsh centralized its organization and
assumed
greater control over both business placement and contingent commission
agreements.
Marsh
created an office in
oversaw
policy placement decisions in Marsh’s major business lines. These included
Excess
Casualty,
Healthcare, FinPro (Financial Products) and Middle Market (businesses paying
less
than one
million dollars in annual insurance premiums). Global Broking (also known as
MMGB
and MGB)
was given authority over all of Marsh’s contingent commission agreements and
began
to replace
smaller local and regional contingent agreements with large national ones,
called
Placement
Service Agreements, or "PSAs."
33. In
addition, Marsh began internally rating the insurance companies based
on how much
they paid Marsh pursuant to their contingent commission agreements. In February
2002, a
Marsh Global Broking m
colleagues
with a list of the insurance companies that were paying Marsh pursuant to
contingent
commission
agreements. He cautioned, however, that "Some [contingent commission
agreements]
are better than others," and said that soon Marsh would formally
"tier" the insurance
companies.
Then, he said, "I will give you clear direction on who [we] are steering
business to
and who we
are steering business from." [
34. A
"tiering report" was later circulated to Global Broking executives,
12
listing
insurance companies as belonging to tiers depending on how advantageous their
contingent
commission agreement was to Marsh. The instructions to the m
the list
included a direction that they were to "monitor premium placements"
to assure that Marsh
obtained
"maximum concentration with Tier A & B" insurance companies,
those with contingent
commission
agreements most favorable to Marsh. [
email, a
Global Broking executive was even more direct: "We need to place our
business in 2004
with those
that have superior financials, broad coverage and pay us the most." [Marsh-NY
17328]
(emphasis added)
35. Marsh
executives have issued directions about specific companies as well.
For
example, in April 2001, a Global Broking m
move from
an incumbent [insurance company]" to a company that had just extended its
contingent
commission agreement. She warned, however, "You must make sure that you
are not
moving
business from key [contingent commission companies]." Highlighting the
incentive
represented
by her directive, she concluded, "This could mean a fantastic increase in
our
revenue."
[
36. The
benefit of the steering system to the paying insurance companies was
clear. In
July 2000, an executive in Marsh Global Broking wrote to four of her collegues
to
discuss
"BUSINESS DEVELOPMENT STRATEGIES" with a particular
"preferred" insurance
company
that had signed a contingent commission agreement with Marsh. In describing
what
Marsh had
done for that company, she wrote, "They have gotten the ‘lions [sic]
share’ of our
Enviornmental
business PLUS they get an unfair ‘competitive advantage[’] as our prefferred
[sic]
13
[insurance
company]."
37. Marsh
has been explicit with insurance companies about how contingent
commission
agreements more favorable to Marsh would result in Marsh selling more of their
policies.
For example, a Global Broking executive recounted in an email dated November 7,
2003 how he
told the president of a major insurance company, ACE USA, that she could meet
her firm’s
sales goals by agreeing to a fatter contingent commission agreement: "I
made it clear
that if ACE
wants us to meet significant premium growth targets then ACE will have to pay
‘above market’
for such [a] stretch. . . ." [
used
sticks. The notes of one insurance company executive record that Marsh
threatened to
"kill"
the company if it did not "get to [the] right number" on the
contingent commission
agreement.
[AIG 12142]
38. Marsh
has recognized and rewarded employees who "moved" clients to
insurance
companies with contingent commission agreements. For example, in February 2003,
a
Marsh senior
vice president in the Global Broking Healthcare group nominated a subordinate
to
become a
vice president. On the nomination form, under the heading "Financial
Success," he
noted that
the nominee had increased Marsh’s revenue "by moving" a renewing client
to an
insurance
company with a contingent commission agreement. He concluded:
"Neighborhood
Health
Partnership Estimated Revenue - $390,000." [
performance
review, similarly noted that the nominee "was responsible for the renewal
of a large
HMO in
insurance
company] - increased revenue from $120,000 to $360,000 (estimated)."
[Marsh-NY
32780] A
2003 self appraisal form by that same nominee -- now a vice president --
stated:
14
"Renewed
large account with [contingent commission insurance company] to demonstrate our
willingness
to continue our relationship. Moved a number of accounts to [contingent
commission
agreement carriers] for the sole reason to demonstrate partnership."
[Marsh-NY
62406]
Other employees were similarly praised in performance evaluations for
increasing
Marsh’s
contingent commission income from insurance companies "by achieving
budgeted
tiering
goals." [
39. In the
same vein, Marsh employees have been criticized for bucking the
system.
Initially, when Marsh began signing national contingent commission agreements,
Global
Broking not
only negotiated all of the agreements but also kept all of the revenue. Many of
Marsh’s
local and regional offices, which had previously had their own contingent
commission
agreements
with insurance carriers, resented the loss of revenue to the central Global
Broking
office and
refused to have Global Broking pass on all of their placements. Eventually,
Global
Broking
initiated a "revenue repatriation" program under which some of Global
Broking’s
national
contingent commissions were shared with local and regional offices. In June
2003, the
head of
Global Broking’s Excess Casualty group wrote to an employee in Marsh’s
to chastise
her for placing insurance directly with a carrier on behalf of a client, thus
denying a
contingent
commission to Global Broking: "The GB repatriation dollars are no small
component
of your
office’s budget. You have lowered that amount with this placement. You may want
to
consider
this in the future." [
40. Marsh
rewards to employees for steering -- and its admonitions to
employees
who failed to steer -- put the lie to Marsh’s statement that a barrier prevents
Global
Broking
from influencing placement decisions.
15
41. Marsh
also has entered into contingent commission agreements that create
incentives
to favor the incumbent carrier when a policy came up for renewal. At the time
of a
renewal,
Marsh’s clients expect it to give unbiased advice on whether to stay with the
incumbent
or sign
with a new carrier. Meanwhile incumbent insurance companies have paid Marsh to
recommend their
own renewals. For example, a 2003 contingent commission agreement with
AIG Risk M
premiums if
its clients renewed with AIG at a rate of 85% or higher. If the renewal rate
was 90%
or higher,
Marsh received 2% of the renewal premium, and if the rate was 95% or higher,
Marsh
received
3%. [
a $1
million "no shopping" agreement whereby Marsh would have recommended
to its top
individual
clients who had bought personal insurance policies from Chubb that they renew
those
policies --
a paid abdication of Marsh’s duty to its clients. [CHUBB-28368]
42. Marsh’s
steering harms its clients in at least two ways. First, Marsh
specializes
in complex insurance placements where all things are rarely equal, and where
subjective
judgment calls have to be made among competitors with varying coverages, financial
security
and price. A client relies on Marsh to make these calls strictly based on the
client’s best
interest,
without the corrupting influence of incentive payments. Clients who have been
steered
have not
received the service they paid for. Second, insurance carriers pass the cost of
contingent
commissions
directly on to the clients in the form of higher premiums.
Partners
("
schedule of
higher prices for Marsh clients because of the contingent commissions it pays.
Effectively,
Marsh is secretly raising the price of insurance for its clients and putting at
least
16
some of the
increase in its own pocket.
E.
Numerous large insurance companies have participated in a bidrigging
scheme
with Marsh.
43. A cast
of the world’s largest insurance companies have participated in
Marsh’s
steering scheme. They have paid hundreds of millions of dollars for Marsh to
steer
business
their way. At times, the insurance companies have gone much further, colluding
with
Marsh to
rig bids and submit false quotes to unwitting clients throughout
the
1. AIG
44.
American International Group ("AIG") is a publicly traded company
with
approximately
86,000 employees and over $81 billion in annual revenues. Among its insurance
lines is
excess insurance which covers losses over and above the amounts covered by the
insured’s
primary insurance policies. Beginning in or around 2001 until at least the summer
of
2004, Marsh
Global Broking’s Excess Casualty Group and AIG’s American Home Excess
Casualty
division (AIG’s principal provider of commercial umbrella or excess liability
and
excess
worker’s compensations insurance) engaged in systematic bid manipulation.
45. When
AIG was the incumbent carrier and a policy was up for renewal,
Marsh
solicited what was called an "A Quote" from AIG, whereby Marsh
provided AIG with a
target
premium and the policy terms for the quote. If AIG agreed to quote the target
provided by
Marsh, AIG
kept the business, regardless of whether it could have quoted more favorable
terms
or premium.
46. In
situations where another carrier was the incumbent, Marsh asked AIG
17
for what
was variously referred to as a "backup quote," "protective
quote" or "B Quote," telling
AIG that it
would not get the business. In many instances, Marsh provided AIG with a target
premium and
the policy terms for these quotes. In these cases, it was understood that the target
premium set
by Marsh was higher than the quote provided by the incumbent, and that AIG
should not
bid below the Marsh-supplied target. For example, in October 2003, an
underwriter at
AIG
described a particular quote that he had provided thusly: "This was not a
real opportunity.
Incumbent
Zurich did what they needed to do at renewal. We were just there in case they
defaulted.
Broker . . . said Zurich came in around $750K & wanted us to quote around
$900K."
[Undated
AIG email] Even when AIG could have quoted a premium lower than the target, it
rarely did
so. Instead, AIG provided a quote consistent with the target premium set by
Marsh,
thereby
throwing the bid.
47. In
other instances, Marsh asked AIG to provide B Quotes where AIG was
not
supposed to get the business, but Marsh did not set a particular premium
target. In these
instances,
AIG looked at the expiring policy terms and premium and provided a quote high
enough to
ensure that (1) the quote would not be a winner, and (2) in the rare case where
AIG did
get the
business, it would make a comfortable profit.
48. In B
Quote situations, AIG did not do a complete underwriting
In those
few situations when AIG inadvertently won B Quote business (because the
incumbent
was not
able or willing to meet Marsh’s target), AIG personnel would "back
fill" the
underwriting
work on the file -- that is, prepare the necessary
49.
Finally, Marsh came to AIG for a "C Quote" when there was no
incumbent
carrier to
protect.
18
understood
that there was the possibility of real competition.
50. The
"A, B, C" quote system was strictly enforced by Marsh through
William
Gilman, Executive Director of Marketing at Marsh Global Broking and a M
Director.
Gilman refused to allow AIG to put in competitive quotes in B Quote situations,
and,
on more
than one occasion, warned that AIG would lose its entire book of business with
Marsh if
it did not
provide B Quotes. Gilman likewise advised AIG of the benefits of the system. As
he
put it:
Marsh "protected AIG’s ass" when it was the incumbent carrier, and it
expected AIG to
help Marsh
"protect" other incumbents by providing B Quotes.
2. ACE
51. ACE
Ltd. is a Bermuda corporation that trades on the New York Stock
Exchange.
ACE USA ("ACE") is part of a group of subsidiaries that forms the ACE
Insurance
North
America business division of ACE Ltd. In 2002, ACE decided to enter the excess
casualty
market by
creating a separate division, called the Casualty Risk Department. ACE signed a
contingent
commission agreement in order to gain access to the business Marsh controlled.
ACE
also
repeatedly provided the same type of B Quotes that AIG provided.
52. The B
Quotes given to Marsh were often in amounts requested by Marsh,
even though
a lower quote would have been justified by an underwriting
President
of Casualty Risk summarized:
Marsh is
consistently asking us to provide what they refer to as "B"
quotes for
a risk. They openly acknowledge we will not bind these
"B"
quotes in the layers we are be [sic] asked to quote but that they
‘will work
us into the program’ at another attachment point. So for
example if
we are asked for a "B" quote for a lead umbrella then
they
provide us with pricing targets for that "B" quote. It has been
inferred
that the ‘pricing targets’ provided are designed to ensure
19
underwriters
‘do not do anything stupid’ as respects pricing. [ACEINA-
01909]
In this
same email, the Casualty Risk president wrote that he "support[ed]"
Marsh’s business
model,
which he described as "unique."
53. An
example of the operation of this system is evident in the bidding for the
excess
casualty insurance business of
manufacture
and sale of home products, office products, golf products, and distilled
spirits and
wine. On
December 17, 2002, an ACE assistant vice president of underwriting sent a fax
to Greg
Doherty, a
senior vice president in Marsh Global Broking’s Excess Casualty division,
quoting an
annual
premium of $990,000 for the policy. [ACE-INA-005754] Later that day, ACE
revised its
bid upward
to $1,100,000. On the fax cover sheet with the revised bid, ACE’s assistant
vice
president
wrote: "Per our conversation attached is revised confirmation.
remain
unchanged." [ACE-INA-005755-6]. An email the next day from the assistant
vice
president
to an ACE vice president of underwriting explained the revision as follows:
"Original
quote
$990,000 . . . . We were more competitive than AIG in price and terms. MMGB
requested
we increase
premium to $1.1M to be less competitive, so AIG does not loose [sic] the
business. .
. ."
[ACE-INA-005757]
54. This arrangement
inured not only to Marsh’s benefit, but also to ACE’s.
As Doherty
wrote in a June 20, 2003 email to the same ACE vice president: "Currently,
we have
about $6M
in new business [with ACE] which is the best in Marsh Global Broking so I do
not
want to
hear that you are not doing ‘B’ quotes or we will not bind anything."
[ACE-INA-
005781]
20
55. The
bidding process for excess casualty insurance for Brambles, USA, a
manufacturer
of commercial industrial pallets and containers (among other products), further
demonstrates
the bid-rigging scheme. In June of 2003, ACE learned that Brambles was unhappy
with the
incumbent carrier. Despite this, Marsh asked ACE to refrain from submitting a
competitive
bid because Marsh wanted the incumbent, AIG, to keep the business. An ACE vice
president
of underwriting wrote to the ACE President of Risk and Casualty:
Our rating
has a risk at $890,000 and I advised MMGB NY that we could
get to
$850,000 if needed. Doherty gave me a song & dance that game
plan is for
AIG at $850,000 and to not commit our ability in writing.
[ACE-INA-005786]
56. ACE
continued to provide Marsh with inflated quotes into 2004.
3.
Hartford
57. Marsh
did not limit its bid rigging practices to its large corporate clients.
It also
engaged in such conduct with The Hartford Financial Services Group
("Hartford") -- a
provider of
life group benefits, auto, home ownership and business insurance -- with
respect to
Marsh’s
"Middle Market" and small business clients.
58. Middle
Market insurance provides coverage for companies where the
annual
premium ranges from tens of thousands of dollars to around $1 million. Hartford
became
a
"partner market" -- meaning it agreed to pay contingent commissions
-- with Marsh’s so-called
Advantage
America program in July 2003. The Advantage America program was developed by
Marsh to
fold its small commercial property/casualty business into its Middle Market
group.
With annual
premiums in the range of $25,000 to $200,000 dollars, this program provided
coverage to
small businesses. Marsh centralized all of this small business insurance
placement in
21
an office
in Lake Mary, Florida, near Tampa.
59.
Hartford was given the advantage of office space in Marsh’s Lake Mary
facilities.
On numerous occasions during 2003 and 2004, Marsh employees asked the two
Hartford
underwriters assigned to this facility, either in person or by telephone, to
provide an
inflated
quote or "indication" (non-binding proposed price) for insurance
coverage for a small
business.
Typically, Hartford’s underwriters were told to price the quote or indication
25%
above a
particular number, and that by doing so Hartford need not worry that it would
get the
business.
Hartford colluded in the scheme.
60. Marsh
did not restrict its bid rigging in the Middle Market to small
businesses.
Marsh’s Los Angeles area Global Broking office handled larger Middle Market
risks
with annual
premiums reaching $1 million. The Marsh Los Angeles office is in the same
office
building as
Hartford’s. Starting as far back as 2000, Marsh employees, on virtually a daily
basis,
asked
Hartford for inflated quotes or indications in a manner similar to the process
described
above for
the Florida facility. In Los Angeles, however, Marsh often provided Hartford with
a
spreadsheet
showing the accounts for which it wanted Hartford to provide a losing quote or
indication,
along with other insurers’ quotes. It instructed Hartford to quote some
percentage,
typically
25%, above the other insurers’quotes on the spreadsheet to ensure that Hartford
would
not get the
business. These were referred to as "Throwaway Quotes." Hartford
provided the
inflated
quotes.
61. On even
larger risks in Southern California, those of over $1 million of
annual
premium, Marsh similarly asked for inflated quotes or indications, also
providing
spreadsheets
containing other insurers’ quotes to Hartford. Hartford provided these quotes
as
22
well.
Hartford provided these quotes and indications because Marsh was its biggest
broker, and
it felt
that Marsh would limit its business opportunities if it refused.
4.
Munich-American Risk Partners
62. As of
2001, Munich had entered into separate contingent commission
agreements
with Marsh’s Excess Casualty, Property, FINPRO (Financial Products) and Health
Spectrum
Groups. Munich adjusted its rates to pass the costs of these agreements on to
its
clients.
When pricing Marsh business, Munich determined the base premium for the policy,
added a
percentage to reflect the expected contingent commission and sent the quote to
Marsh.
63. In
2000, Munich disclosed the existence of its contingent commission
agreement
with Marsh to a significant client to explain the contingent commissions that
were
being
passed on to the client. Marsh was furious, and chastised Munich. A senior
vice-president
at Munich,
apologized to Marsh in an email: "We acknowledge that this was
inappropriate
behavior .
. . ." He told Marsh that Munich would: "do the necessary to
eliminate all
documentation,
electronic or otherwise, that references or otherwise alludes to the
[contingent
commissions].
I apologize for the consternation that this has caused within the Marsh
organization."
[MARP 1226]
64.
Throughout 2001 and early 2002, the Marsh Global Broking Excess
Casualty
Group repeatedly requested that Munich provide "favors" designed to
assist Marsh in
its bid
rigging process. The panoply of market-manipulative "favors" that
Marsh requested from
Munich
included:
• Requests
to submit "false quotes" to allow Marsh to manipulate market
pricing and
present other carriers’ quotes in a more favorable light [MARP
596];
23
• A request
on a particular account that Munich either decline the risk
altogether
or submit a quote higher than the incumbent quote [December
18, 2001
email from a Marsh senior vice president to a Munich regional
m
• Requests
that Munich not bid on a renewal because Marsh owed the
incumbent a
favor and didn’t want Munich to come in with a lower quote
[December
6, 2001 email from Marsh senior vice president to a Munich
regional m
• A request
for an artificially inflated initial quote so that Marsh could look
good to the
client when it "negotiated" the quote down [MARP 637].
65.
Throughout 2001, Marsh also asked Munich to act as "back-up or wait in
the
wings" at several client presentations. [MARP 581, 562] That is, Marsh
asked Munich to
attend
presentations for prospective clients with whom Munich was already out of the
running.
One Munich
regional m
562] For
example, in 2001 Marsh sent Munich an email request explaining that it
"needed to
introduce
competition" at a prospective client presentation and needed Munich to
send a "live
body."
[MARP 2198, 2199] Frustrated with Marsh’s continuous requests for "live
bodies," one
Munich
regional m
MEETINGS
JUST FOR THE SAKE OF BEING A ‘BODY.’ WHILE YOU MAY NEED ‘A
LIVE BODY,’
WE NEED A ‘LIVE OPPORTUNITY.’" [MARP 2198]
66. These
business practices were known to Munich m
preparing
for an April 2001 meeting with Marsh, a senior vice-president solicited
reactions from
his
regional m
He then cut
and pasted the m
for
discussion. Complaints and reactions from the Munich regional m
24
I am not
some Goody Two Shoes who believes that truth is absolute but I
do feel I
have a pretty strict ethical code about being truthful and honest
with
people. And when I told [sic] I have to say certain things I know to
be untrue
to people I respect and have known for a long time, it is not what
I feel I
should be asked to do of [sic] what this company stands for. Yet it
has already
happened several times and I have either had to dodge the
client and
broker on the issue, which won’t always work, or risk making
GB [Global
Broking] angry by telling a carefully edited version of the
truth,
which was more than they wanted out but less than satisfying to the
client or
broker. [MARP 560]
This idea
of "throwing the quote" by quoting artificially high numbers in
some
predetermined arrangement for us to lose is repugnant to me, not so
much
because I hate to lose, but because it is basically dishonest. And I
basically
agree with the comments of others that it comes awfully close to
collusion
or price fixing. [MARP 560]
WHAT ARE
THE RULES ON PRICING - ARE WE TO QUOTE OUR
NUMBERS OR
WHAT MGB [MARSH GLOBAL BROKING] WANTS
US TO QUOTE
- HOW DOES THEIR INTERNAL PREFERRED
MARKET
THING WORK? [MARP 562]
F. The
Greenville County School Project
67. Marsh’s
involvement with the Greenville, South Carolina Public School
District
illustrates how Marsh both abused its fiduciary role in an attempt to secure a
contingent
commission
agreement with an insurance company and rigged the bidding process.
68. In the
1990's, Greenville County, South Carolina experienced
unanticipated
student growth beyond the capacity of then existing facilities for the 62,000
school
children in
the district. In addition, many of the existing schools needed extensive
renovations.
The school
district, through a non-profit corporation named BEST (Building Equity Sooner
for
construction
of fifty-five school facilities (the "Greenville project"). BEST
hired Institutional
Resources,
LLC, as the program m
25
responsibilities,
Institutional Resources had to procure insurance coverage for the project.
69. Lacking
expertise in insurance, Institutional Resources hired Marsh after
conducting
a search and evaluating broker proposals. In Marsh’s application materials
provided
to
Institutional Resources, it pledged its loyalty to its clients, going so far as
to include a section
devoted to
Marsh’s role as a "trusted business advisor." [Response to RFP for
Greenville County
School
District] For its role in the Greenville project, Marsh was to be paid
approximately $1.5
million.
70. During
the bidding process, there were two serious bidders who competed
for the
business: Zurich North America ("Zurich") and ACE. Unbeknownst to
Greenville,
however,
while this bidding process was ongoing Marsh held out the Greenville project as
a
"carrot"
in its effort to entice Zurich to sign a contingent commission agreement. In a
December
12, 2002
email, Joan Schneider, a Marsh Global Broking executive, explained to Zurich:
[Y]ou are
currently in the running on Greenville Country [sic]
School
System (FIX cost near 3MM) .... neck and neck with ACE
who we have
a PSA with ....... Will bind most likely after the first
of the year
...... where are we on the [contingent commission]
agreement
..... Left messages but haven’t heard from you ...... hint
hint.
[Marsh-NY 14619-20]
71. Between
the December 12, 2002 email and the award of the contract on
January 3,
2003, the contingent commission negotiations progressed and the project was
awarded
to Zurich.
made clear
its view of the linkage:
[p]er our
conversation today, (sorry to call you during your
vacation)
the good news is that we are binding Greenville County
School with
you today!!!!!! We worked hard to get this to you and
as we
discussed expect it to be part of the [contingent commission]
26
agreement.
On your return Monday, I hope you and your regional
folks can
get this ironed out ....... this is a great start to the New
Year and
would like to keep it going. [Id.]
72. As part
of its vigorous effort to steer the Greenville contract to Zurich,
Marsh
sought a false bid from a competing insurer and then, despite that insurer’s
refusal,
submitted a
wholly fictitious bid on that insurer’s behalf. On December 16, 2002, Glenn R.
Bosshardt,
the Global Broking vice-president assigned to the project and Joan Schneider’s
subordinate,
contacted an assistant vice-president of underwriting at CNA, an individual
with
whom he had
previously worked and who had already told Bosshardt that CNA had no interest
in
bidding on
the Greenville project. In an email Bosshardt stated:
[P]er my
voicemail, we need to show a CNA proposal. I will
outline
below the leading programs (ACE & Zurich). I want to
present a
CNA program that is reasonably competitive, but will not
be a
winner. [Marsh-NY 89930] (emphasis added)
Bosshardt
proceeded to reveal the ACE and Zurich quotes on the project and then proposed
numbers
that CNA should quote in order to lose the bid but still appear to have been
competitive.
Resources
as a legitimate competing bid. [Marsh-NY 89630-31]
73.
Notably, Marsh -- at a time when the prospect for a contingent commission
agreement
with Zurich remained real -- advised Institutional Resources that Zurich was a
superior
company and should be awarded the bid. Marsh did not disclose to Institutional
Resources
either that it was seeking a contingent commission agreement from Zurich, or
that it
had falsely
submitted a bid under CNA’s name. Institutional Resources followed Marsh’s
recommendation
and awarded the project to Zurich.
27
74. Even though
Zurich and Marsh never entered into the [contingent
commission]
agreement, in his 2003 performance review, Bosshardt was praised for having
"assist[ed]
in the implementation of MMGB’s excess liability strategy to maximize
contingent
commission
revenue." [2003 Balance Scorecard]
CONCLUSION
75. Marsh’s
conduct had the purpose or effect, or the tendency or capacity,
unreasonably
to restrain trade and to injure competition and purchasers, both in New York
and in
interstate
commerce, by, among other things:
(a)
Limiting the number of insurers competing to sell insurance to persons
seeking
such insurance;
(b)
(c) Using
inflated bids, prices and other terms of sale with respect to insurance to
mask the
absence of free and open competition by insurers for the sale of such
insurance.
76. In
consequence, competition in the sale of insurance from or in New York
State and
elsewhere was substantially reduced and otherwise unlawfully restrained.
77. In
addition, defendants, by failing to disclose material information about
their
business conduct and activities to purchasers, sellers and holders of Marsh
stock, committed
a fraud.
78.
Finally, defendants’ actions as set forth above were gross, wanton and
wilful;
were aimed at the public generally; and involved a high degree of moral
culpability.
28
FIRST
CAUSE OF ACTION
(Fraudulent
business practice – Executive Law §63(12))
79. The
acts and practices alleged herein constitute conduct proscribed by §
63(12) of
the Executive Law, in that defendants engaged in repeated fraudulent or illegal
acts or
otherwise
demonstrated persistent fraud or illegality in the carrying on, conducting on
transaction
or a
business.
SECOND
CAUSE OF ACTION
(Antitrust
- Gen. Bus. Law §340 et seq.)
80.
Beginning at least in or about 2001 and continuing through in or about
2004,
Marsh, together with AIG, ACE, Hartford and others conspired unreasonably to
restrain
trade and
commerce in violation of the Donnelly Act, Gen. Bus. L. § 340 et seq.,
by, among other
things: (1)
providing persons seeking to purchase primary insurance with collusive,
fictitious or
otherwise
non-competitive bids or other terms of sale; (2) allocating the opportunity to
sell, and
the sale
of, insurance to clients; and (3) creating a scheme to pay Marsh to implement
the
unlawful
conspiracy.
81. As a
result of this conspiracy, clients purchased insurance at prices higher
than they
would have paid, and on terms less favorable than would have been available, in
a
competitive
market.
82. Marsh’s
acts are a per se violation of the Donnelly Act.
Marsh’s
acts violate the Donnelly Act under a rule of reason
83. Various
persons, not named as defendants, participated as co-conspirators
in the violations
alleged, and performed acts and made statements in furtherance of that
conspiracy.
29
THIRD
CAUSE OF ACTION
(Securities
Fraud - Gen. Bus Law §352-c)
84. The
acts and practices of the defendants alleged herein violated Article 23-
A of the
General Business Law, in that they involved the use or employment of a fraud,
deception,
concealment, suppression, or false pretense, engaged in to induce or promote
the
issuance,
distribution, exchange, sale, negotiation or purchase within or from this state
of
securities.
FOURTH
CAUSE OF ACTION
(Securities
- Gen. Bus. Law §352-c)
85. The
acts and practices of the defendants alleged herein violated Article 23-
A of the
General Business Law, in that defendants engaged in an artifice, agreement,
device or
scheme to
obtain money, profit or property by a means prohibited by § 352-c of the
General
Business
Law.
FIFTH
CAUSE OF ACTION
(Unjust
Enrichment)
86. By
engaging in the acts and conduct described above, defendants unjustly
enriched
themselves and deprived their clients and the investing public of a fair market
place.
30
SIXTH
CAUSE OF ACTION
(Common Law
Fraud)
87. The
acts and practices of Marsh alleged herein constitute actual and/or
constructive
fraud under the common law of the State of New York.
WHEREFORE,
plaintiff demands judgment against the defendants as follows:
A.
Enjoining and restraining Marsh, its affiliates, assignees, subsidiaries,
successors
and transferees, their officers, directors, partners, agents and employees, and
all other
persons
acting or claiming to act on their behalf or in concert with them, from
engaging in any
conduct,
conspiracy, contract, agreement, arrangement or combination, and from adopting
or
following
any practice, plan, program, scheme, artifice or device similar to, or having a
purpose
and effect
similar to, the conduct complained of above.
B.
Directing that Marsh, pursuant to Articles 22 and 23-A of the General
Business
Law, § 63(12) of the Executive Law and the common law of the State of New York,
disgorge
all profits obtained, including fees collected, and pay all restitution, and
damages
caused,
directly or indirectly by the fraudulent and deceptive acts complained of
herein;
C.
Directing that Marsh pay plaintiff's costs, including attorneys’ fees as
provided by
law;
D. Awarding
punitive damages against Marsh;
E.
Directing such other equitable relief as may be necessary to redress
Marsh’s
violations of New York law; and
31
F. Granting
such other and further relief as may be just and proper.
Dated: New York,
New York
October 14,
2004
ELIOT
SPITZER
Attorney
General of the State of New York
Attorney
for Plaintiff
120
Broadway, 23rd Floor
New York,
New York 10271
(212)
416-8198
By:
________________________________
David D.
Brown, IV
Assistant
Attorney General
Of Counsel:
Maria
Filipakis
Matthew J.
Gaul
Melvin L.
Goldberg
Assistant
Attorneys General