liot Spitzer, the New York state attorney general, yesterday accused the world's largest insurance broker of cheating customers by rigging prices and steering business to insurers in exchange for millions of dollars in kickbacks.
The lawsuit brought by Mr. Spitzer against the broker, Marsh Inc., a unit of the Marsh & McLennan Companies, contends that Marsh conducted sham bidding to mislead customers into thinking that they were getting the best price for the coverage they needed. The lawsuit cites several examples of customers - including Fortune Brands, which sells Titleist golf balls and Jim Beam spirits, and the school district of Greenville, S.C. - that were misled that way.
In addition to the lawsuit, two executives of the American International Group, one of the world's largest insurance companies, pleaded guilty to criminal charges of rigging bids with Marsh.
While Mr. Spitzer's target yesterday was Marsh, he made clear that he was taking aim at a widespread practice in the insurance industry. "This investigation is broad and deep and it is disappointing,'' he said.
Mr. Spitzer suggested that he had also come across indications of wrongdoing in the sale of many kinds of personal insurance, including coverage on cars, homes and health insurance. "Virtually every line of insurance is implicated,'' he said.
The lawsuit names American International, or A.I.G., and three other insurers, as participants in the bid rigging and steering: the Hartford, a unit of Hartford Financial Services; Ace Ltd., which is based in Bermuda but is a major player in the American insurance market; and Munich American Risk Partners, a unit of Munich Re with offices in Princeton, N.J.
"There will be numerous criminal and civil cases,'' Mr. Spitzer promised.
Insurance is now the new financial battleground for Mr. Spitzer after recent crackdowns against conflicts of interest involving Wall Street analysts and abuses in trading mutual funds. The latest investigation has opened a rare window into a huge business of corporate middlemen. The role of insurance brokers is to get the proper insurance coverage at the best possible price for clients ranging from the giants of corporate America to regional businesses and mom-and-pop operations across the country. They receive commissions from the clients for arranging the coverage.
But decades ago, the brokers also began collecting fees from the other side of the deal, the insurers. Those fees were for steering a certain volume of business to an insurer or for arranging a particularly profitable form of coverage. Marsh reaped $800 million from these fees in 2003, the lawsuit says.
The investigation also threatens to embroil the insurance industry's remarkable family dynasty. Jeffrey Greenberg, 53, is chief executive of Marsh, while his brother Evan, 49, is chief executive of Ace.
Over several decades, the patriarch of the family, Maurice R. Greenberg, has converted A.I.G. from a small internationally oriented insurance company to one of the wealthiest and most powerful in the world. He had dreamed that he would eventually be succeeded by one of his sons.
But both Jeffrey and Evan left A.I.G. to strike out on their own after Mr. Greenberg, who is now 79 years old, showed no sign of intending to retire.
In a news conference yesterday, Mr. Spitzer was sharply critical of Jeffrey Greenberg, saying that he and other top executives of Marsh had initially misled his investigators. Mr. Spitzer said he did not try to negotiate a settlement with Marsh before filing the lawsuit.
"The leadership of that company is not a leadership I will talk with,'' an obviously angry Mr. Spitzer said. "It is not a leadership I will negotiate with.''
Through a spokeswoman, Jeffrey Greenberg declined a request for an interview. In a statement, the parent company, Marsh & McLennan Companies, said: "We take very seriously the allegations made by Attorney General Spitzer.''
Shares of Marsh and A.I.G. and other insurers tumbled yesterday, dragging down the stock market. Marsh's stock price plunged 24 percent, or $11.28, to $34.85. Shares of A.I.G. fell 10 percent, or $6.99, to $60. The sell-off in A.I.G. accounted for nearly half the decline yesterday in the Dow Jones industrial average and was the steepest drop in the stock since the 1987 market crash. Hartford shares fell 6 percent, to $58.40, and Ace shares fell 9.5 percent, to $36.47.
Marsh's other, smaller businesses have also come under regulatory scrutiny in the last two years. In April, its Putnam Investments mutual fund unit paid $110 million to settle allegations that lax oversight allowed some fund mangers to benefit from insider information. And the Securities and Exchange Commission has been looking into possible conflicts among pension consultants, including the Mercer Inc. unit of Marsh.
Late yesterday, Marsh's board said in a statement that an independent review of the company's brokerage business was under way. The internal investigation is being carried out by Michael G. Cherkasky, the chief executive of Marsh Kroll, an investigative subsidiary, a company executive said.
Mr. Cherkasky, a former prosecutor in the Manhattan district attorney's office, will report to Mr. Greenberg and the 10 independent directors on Marsh & McLennan's 16-member board.
The investigation into insurance brokers began in April after Mr. Spitzer received a phone call and a letter from two different people - neither of whom he identified yesterday - suggesting that the brokers were caught up in a conflict of interest. The Washington Legal Foundation, a nonprofit research organization, was also active in bringing the situation to the attention of investigators earlier this year.
Mr. Spitzer then sought information from Marsh, Aon, which is the second largest broker, and Willis Group Holdings, the third largest, and many smaller brokers. Yesterday, Mr. Spitzer said he had also demanded information from many insurance companies at the same time.
After the first reports of an investigation, Marsh and the other big brokers said they had made a practice of informing clients that they received fees from the insurance companies. Those payments, as Aon put it then in a press release, were "a longstanding and common practice within the insurance industry.'' Many industry executives said they felt that as long as the payments from the insurance companies were disclosed to clients there could be no conflict of interest.
But yesterday, Mr. Spitzer contended that the brokers failed to disclose how the dealings between themselves and the insurance companies really worked. Often, he said, a result was higher profits for the brokers and the insurance companies and higher insurance costs for the customers.
In support of his lawsuit, Mr. Spitzer filed with the court a half-inch-thick bound volume of e-mail, insurance forms, internal memos and the transcript of a recent conference call led by Mr. Greenberg.
The suit says that at times the brokers and insurers carried out elaborate farces to fool clients into believing that several bids were being competitively submitted for their business when in fact Marsh determined in advance which company would get the sale, with other companies agreeing to provide false bids.
In one example, the lawsuit cites efforts to get insurance coverage for a project to replace more than 50 school buildings in Greenville, S.C. Two insurance companies expressed interest in the business. But, according to the lawsuit, Marsh executives steered the deal toward Zurich North America in hopes of developing a special fee arrangement. When the other company, Ace, dropped out of the bidding, the lawsuit said, a Marsh executive encouraged a third company, CNA, in Chicago, to submit what would be a losing bid to make the transaction appear to involve competition. CNA refused, but, the lawsuit said, Marsh submitted a CNA bid anyway. Zurich, the only real bidder, won the business.
The lawsuit does not make clear whether the schools project suffered financially, but it said that the project manager was never told that one of the bids was false. In the end, the lawsuit said, Marsh failed to get special fees in the deal from Zurich. A call to the school district was not returned.
Mr. Spitzer said that Marsh reaped some $800 million in fees from insurers, sometimes referred to as contingency fees or placement service agreements, in 2003.
Mr. Spitzer said the two A.I.G. executives who pleaded guilty, Karen Radke and Jean-Baptist Tateossian, were cooperating with investigators.
A.I.G. said in a statement that it was "saddened by the news'' that two of its executives had pleaded guilty "because we hold ourselves to the highest ethical standards."
Lawyers for the two executives did not return phone calls seeking comment.
A.I.G. said in its statement that it had requested guidance from the New York State Department of Insurance on its dealings with brokers, suggesting that the department had raised no objection. The company said it took Mr. Spitzer's charges seriously.
A.I.G., as well as Hartford and Ace, all said they were cooperating with the investigation. There was no response to a phone message seeking comment from a spokeswoman for Munich American Risk Partners.
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