Top insurance broker is sued over payoffs

Spitzer alleges cheating by Marsh & McLennan

Other big firms probed

2 AIG executives plead guilty to criminal charges

October 15, 2004|By NEW YORK TIMES NEWS SERVICE

Eliot Spitzer, the New York state attorney general, accused the world's largest insurance broker yesterday of cheating customers by rigging prices and steering business to insurers in exchange for millions of dollars in kickbacks

The lawsuit brought by Spitzer against the broker, Marsh Inc., a unit of Marsh & McLennan Cos. Inc., contends that Marsh conducted sham bidding to mislead the customer into thinking that it was getting the best price for the coverage it needed.

The lawsuit cites several examples of customers, including Fortune Brands, which sells Titleist golf balls and Jim Beam bourbon, and the school district of Greenville, S.C., who were misled that way.

Spitzer said that Marsh reaped some $800 million in fees from insurers, sometimes referred to as contingency fees or placement service agreements, in 2003.

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.

Spitzer said the two AIG executives who pleaded guilty, Karen Radke and Jean-Baptist Tateossian, were cooperating with investigators.

While his 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.

Spitzer suggested that he had 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 AIG, 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 RiskPartners, a unit of Munich Re with offices in Princeton, N.J.

"There will be numerous criminal and civil cases," Spitzer promised.

Insurance is the new financial battleground for 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, from 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 W. Greenberg, 53, is chief executive of Marsh, and his brother Evan, 49, is chief executive of Ace.

Over several decades, the patriarch of the family, Maurice R. Greenberg, has converted AIG 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 left AIG to strike out on their own after Greenberg, who is now 79 years old, showed no sign of retiring.

In a news conference yesterday, Spitzer was sharply critical of Jeffrey Greenberg, saying that he and other top executives of Marsh had initially misled his investigators. 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 Spitzer said. "It is not a leadership I will negotiate with."

Jeffrey Greenberg declined a request for an interview through a spokeswoman. In a statement, the parent company, Marsh & McLennan Cos., said, "We take very seriously the allegations made by Attorney General Spitzer."

Shares of Marsh and AIG and other insurers tumbled yesterday, dragging down the stock market. Marsh's stock price plunged 24 percent, or $11.28, to $34.58. Shares of AIG fell 10 percent, or $6.99, to $60.

The sell-off in AIG accounted for nearly half the decline in the Dow Jones industrial average yesterday and was the steepest drop in the stock in 17 years. Hartford shares fell 6 percent to $58.40, and Ace shares fell 9.5 percent to $36.47.

Marsh's other, smaller businesses also have come under regulatory scrutiny in the past 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 Marsh's Mercer Inc.

Late yesterday, Marsh's board said that an independent review of the company's brokerage business was under way.

AIG 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."

AIG, as well as the Hartford and Ace, said they were cooperating with the investigation.

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