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Fraud and Immorality In The Insurance Industry
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October 19, 2004 |
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ACE Executive Noted
Request
E-Mail at Insurer Suggests
Knowledge of Possible Fraud Well Before Spitzer Action
By MONICA LANGLEY Nearly a year before New York Attorney General Eliot Spitzer accused insurers of fraudulent practices, two top U.S. executives at ACE Ltd. knew the big insurance company's underwriters were being pressured by a broker to engage in what prosecutors now say was a bid-rigging scheme. In an e-mail exchange last Nov. 3, Geoffrey Gregory, president of ACE's casualty-risk unit, warned ACE USA's president and chief executive officer, Susan Rivera, that the way bids were being arranged "could potentially be construed as simply creating the appearance of competition." But rather than put a stop to the phony bids, ACE began referring to them by an unrevealing in-house euphemism: "indication" bids, according to a person with knowledge of the investigation. Mr. Spitzer, who had since April been investigating controversial fees in the insurance business, last week revealed a larger agenda, charging that Marsh & McLennan Cos., the world's biggest insurance broker, cheated corporate clients by rigging bids. ACE, which hasn't been charged in the matter, was one of several insurance companies that scrambled in the past two weeks to present evidence to Mr. Spitzer of how they worked with Marsh to cheat customers -- in an effort to perhaps reduce any eventual penalties.
The Nov. 3 e-mail is the first indication that the alleged bid-rigging scheme was known at a high level of a major insurance company. And it raises the odds that charges could be levied against ACE or individuals. The correspondence suggests that Mr. Gregory and Ms. Rivera, to whom he reports, knew that their employees were submitting sham bids and misleading corporate customers in their dealings with Marsh. The ACE e-mail was reviewed by The Wall Street Journal. Ms. Rivera, 39 years old, and Mr. Gregory, 48, declined to comment, according to a spokesman. Yesterday, ACE said it had no comment on the e-mail or the company's practices following the bid-rigging discussion. In an open letter to employees on Sunday, Evan Greenberg, ACE Ltd.'s president and CEO, called Mr. Spitzer's allegations "deeply concerning." If an internal investigation uncovers lapses, "they will be fixed -- quickly and permanently," he wrote. ACE Ltd., among the most prominent Bermuda insurers, has grown to become the 24th-biggest property-casualty insurer in the U.S., and writes more than $5 billion in net premiums a year world-wide, according to insurance data company A.M. Best Co. The bid rigging worked this way, according to the complaint filed by Mr. Spitzer. Marsh brokers decided in advance which insurer would get a client's business and at what price, and then called underwriters at other insurers for "B" quotes -- higher bids that couldn't win but would give the appearance of a competitive bidding process. B-quote insurers knew their turn would come another time. "Marsh is consistently asking us to provide what they refer to as 'B' quotes," ACE's Mr. Gregory wrote to Ms. Rivera in the e-mail. He said he was worried that "our actions on 'B' quotes could potentially be construed as simply creating the appearance of competition. ... In my opinion ACE cannot be seen as aiding [Marsh] in providing quotations for 'competitive appearance purposes' only."
Even after discussing the bid-rigging scheme, however, "ACE continued to provide Marsh with inflated quotes into 2004," according to the attorney general's complaint, filed Thursday in a New York state court. What ACE did, according to a person familiar with the investigation, was change the terminology of the scheme, but keep it largely intact. ACE underwriters began using the term "indication" bid -- rather than the problematic "B" quote -- according to the person. (It isn't clear whether Mr. Gregory or Ms. Rivera was aware of the changed language.) Such machinations between Marsh and insurers would violate New York State antitrust laws and the broker's duty to act in the best interest of its clients, according to Mr. Spitzer. By helping the attorney general build his case, Bermuda-based ACE and the other insurers were hoping to get credit for cooperation and reduce their eventual punishment. But ACE's cooperation is seen by investigators as less than complete, according to a person familiar with the investigation. ACE declined to comment on all aspects of Mr. Spitzer's investigation. On Friday, the attorney general's office secured a guilty plea from an ACE employee who worked in the unit now overseen by Ms. Rivera. The employee, Patricia Abrams, pleaded guilty to a misdemeanor, and is cooperating with investigators. In December 2002, Ms. Abrams raised an ACE bid to provide excess casualty insurance to manufacturer Fortune Brands Inc., boosting the cost to $1.1 million from $990,000, according to the attorney general's suit against Marsh and a person familiar with the investigation. Ms. Abrams said in an e-mail to a higher-up the following day that Marsh "requested we increase premium to $1.1M to be less competitive, so AIG does not loose [sic] the business," according to the complaint. AIG refers to American International Group Inc., the world's largest commercial insurer. An attorney for Ms. Abrams, who has been suspended from her job, declined to comment. "Fortune Brands works hard to keep insurance costs and all expenses as low as possible, so we're obviously concerned," said a spokesman for the Lincolnshire, Ill., maker of Jim Beam whiskey and Titleist golf balls. Any involvement by Ms. Rivera, a rising star in the insurance industry, would raise questions about whether the knowledge of bid rigging went even higher within ACE's organization. Ms. Rivera was named in 2002 president of all of ACE's U.S.-based commercial retail insurance operations. When the executive took over, she said her goal would be to bring ACE "to the next level" among leading insurers. Ms. Rivera came to ACE from AIG, where she began her career after college as a low-level actuarial assistant in 1987. She quickly rose through the ranks, becoming the president of American Home, a property-casualty unit of AIG, in 1999. AIG, led by Maurice Greenberg, is among the insurance companies that told the attorney general's office in recent weeks that they had paid kickbacks for having business steered to them and had submitted sham bids to mislead customers. Activities involving ACE appeared several times in last week's complaint against Marsh, which is run by Jeffrey Greenberg, the son of AIG's CEO and the brother of ACE's CEO. In mid-2003, an ACE vice president told Marsh it would bid as low as $850,000 for coverage sought by manufacturer Brambles USA, the U.S. division of a British-Australian service company, the complaint says. But the underwriter explained in an e-mail to one of his bosses that ACE's suggested low price wasn't welcomed. According to the e-mail, a senior vice president in a division of Marsh's brokerage "gave me a song and dance that game plan is for AIG at $850,000 and to not commit our ability in writing." Brambles says it is content that it got a decent deal. A Brambles official says the company had told Marsh to keep it with the incumbent AIG if it could get a "demonstrably better deal," which Brambles believes it got from AIG at $850,000. Write to Monica Langley at monica.langley@wsj.com9
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| Copyright 2004 Dow Jones & Company, Inc. All Rights Reserved |
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January 14, 2005 |
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Marsh Can Do
By IAN MCDONALD
Marsh & McLennan Cos. has offered to pay $600 million to settle insurance bid-rigging allegations leveled by New York state's attorney general, Eliot Spitzer, but his office has sought $750 million and a public statement of contrition as part of a pact that is expected to be made final this month, people familiar with the matter say. Negotiations between state officials and representatives of the New York financial-services company have moved forward quickly in recent days and a pact could be struck as soon as next week. It was previously known that a settlement could be more than $500 million. But the people privy to the talks say Marsh & McLennan has bristled at the potential statement of contrition for alleged wrongdoings at Marsh Inc., the company's insurance-brokerage unit and the world's biggest middleman between insurers and corporate buyers. Marsh contends such a statement could leave individuals or the company vulnerable in expected litigation from shareholders and other states' regulators. ![[Eliot Spitzer]](../images/images/Spitzer_Eliot-GE22910252004230612.gif)
The talks are expected to resume in earnest next week, the people said. Mr. Spitzer and Marsh Chief Executive Michael G. Cherkasky, formerly head of Marsh Kroll, the firm's investigative unit, and Mr. Spitzer's boss in the Manhattan district attorney's office at one time, both are expected to return from business trips today. Mr. Cherkasky had pushed for a quick settlement last year and now is eager to put the matter to bed by month's end. He has visited and called the attorney general's offices several times to help speed the process. The 134-year-old firm has been reeling since Mr. Spitzer on Oct. 14 filed his civil fraud lawsuit, alleging that the Marsh brokerage firm cheated corporate clients by rigging bids for insurance contracts and steering business to insurers who paid Marsh hundreds of millions annually in "contingent commissions." Mr. Spitzer likened these commissions, which totaled $845 million of Marsh's total 2003 revenue of $11.6 billion, to kickbacks. Since the lawsuit was filed, Marsh has replaced nearly all of its senior management, sworn off the lucrative contingent commissions, pared all but one management representative from its board and laid off 3,000 employees. Its shares, which fell more than 40% immediately after the filing, remain down 34% on the New York Stock Exchange. ![[image]](../images/images/Cherkasky_MichaelG-GF16210282004225105.gif)
Beyond monetary restitution, Mr. Spitzer wants the pact to include the formalization of various reforms of Marsh's business practices, many of them already put in place by Mr. Cherkasky, according to the people. Those include the hiring of the firm's first chief compliance officer. One concern for Marsh on this front is whether the codification is so rigid it would leave Marsh at a competitive disadvantage. Marsh has been girding for a steep settlement, with hundreds of millions of dollars of cash on hand and $232 million specially set aside late last year to help cover costs. Still, Marsh has indicated in negotiations that the larger a settlement, the greater the likelihood of more staff cuts, and that it potentially faces settlements with other states' regulators. Settling on the pact's dollar figure also is complicated by the difficulty of discerning whether or by how much a client overpaid. Their insurance packages are often so complex that comparisons of legitimate bids are difficult to start with.
Public apologies have been included in past settlements inked by Mr. Spitzer. Last May, for instance, Richard Strong, then-head of Strong mutual funds, issued a two-paragraph statement telling shareholders he was "deeply sorry" for his behavior tied to improper trading by him personally in the funds. Mr. Spitzer and his staff have been methodically drafting the Marsh settlement because it likely will become a template for settlements with other firms in his broadening probe of the insurance industry, according to the people familiar with the matter. They also have continued to sift through mounds of material subpoenaed from insurers and insurance brokers to ensure they have identified all the wrongdoing there was to be found. ![[Impact Chart]](../images/images/MI-AD741_Heard01132005194729.gif)
Marsh has suspended or dismissed at least nine employees and mostly is done with its own investigation. Last week, Robert Stearns, a veteran Marsh broker, became the first Marsh employee to plead guilty to criminal charges for his role in the alleged scheme. Five other individuals, all former employees of insurers, have pleaded guilty to criminal charges and are cooperating with Mr. Spitzer's probe. As of late October, Marsh had about $700 million in cash in hand, and in December, it signed pacts with 22 banks for $3 billion in financing. While rival brokerage firms have lured some top producers from Marsh, recent surveys by industry and Wall Street analysts indicate that the majority of Marsh clients are taking a wait-and-see attitude before pulling any business. But in negotiations, Marsh has raised concerns about the loss of revenue the firm is facing and the potential for client and broker defections. The firm hopes to recoup some of the foregone contingent commissions with a still-undisclosed new "business model." Meanwhile, the firm has a 43-year streak of consecutive annual dividend increases on the line, among the longest on record. Marsh's board has deferred a decision on the firm's first-quarter dividend. The status of the dividend, the outline of the new business model and potential layoff decisions are expected to be influenced by the size and timing of a settlement with Mr. Spitzer. Write to Ian McDonald at ian.mcdonald@wsj.com4
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| Copyright 2005 Dow Jones & Company, Inc. All Rights Reserved |
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| This
copy is for your personal, non-commercial use only. Distribution and
use of this material are governed by our |
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