Spitzer Sues Marsh & McLennan|
October 14 2004
New York Attorney General Eliot Spitzer sued insurance giants Marsh & McLennan, American International Group and several others Thursday, alleging policy brokers have been taking payoffs from insurance companies to steer corporate clients their way rather than get the best prices, as they are required.
Two insurance company executives were expected to plead guilty to participating in the illegal conduct and are expected to testify in future cases, Spitzer said in announcing the broader investigation into whether brokers and companies violated fraud and antitrust laws and regulations. He did not give details on their identity or employer.
The victims were mostly large corporations who were deceived into buying property and casualty coverage that may have cost more, but also included small and mid-size businesses, municipal governments, school districts and individuals, Spitzer said.
Spitzer announced the civil suit against Marsh & McLennan Cos. of New York, the nation's leading insurance brokerage firm, accusing it of steering clients to insurers for lucrative payoffs under long-standing agreement. The firm collected $800 million in so-called contingent commissions in 2003 alone, investigators said. Spitzer also accuses the company of soliciting rigged bids for insurance contracts.
Some of the nation's largest insurance companies including New York-based American International Group Inc., ACE Insurance Company of North America based in Philadelphia, The Hartford and Munich American Risk Partners are accused in Spitzer's suit of steering contracts and bid rigging. He said other insurance companies are being investigated.
Shares in the companies fell sharply on the news, with Marsh losing more than 18 percent in afternoon trading.
Spitzer bases part of his insurance industry probe on internal e-mails and memos, in which he said insurance executives openly discussed actions that were aimed at maximizing Marsh's revenue and insurance companies' revenues, without regard to clients' interests.
One Marsh executive said in a memo that the amount of commissions would determine "who (we) are steering business to and who we are steering business from," according to Spitzer.
In some cases, Spitzer said, companies provided false and inflated quotes to help another in the scheme win a bid, with the idea that a subsequent bid would be steered to them.
A 2001 internal memo from a regional manager at Munich to a senior vice president said: "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."
A spokesman for Marsh declined comment.
"The Hartford is cooperating fully with the New York attorney general's investigation," said company spokeswoman Cynthia Michener. "The Hartford does not condone bid rigging or any other illegal activity."
The other insurance companies named in Spitzer's suit had no immediate comment.
"If the practices identified in our suit are as widespread as they appear to be, then the industry's fundamental business model needs major corrective action and reform," said Spitzer, who has forced Wall Street to adopt measures against conflicts of interest among stock analysts.
Shares of Marsh fell $8.44 to $37.69 on the New York Stock Exchange. AIG shares fell $6.99, or more than 10 percent, to $60; ACE shares lost $3.76, or more than 9 percent, to $36.55; Hartford shares fell $3.96, or more than 6 percent, to $58.22m all on the NYSE.
Munich is a subsidiary of Germany's Munich Re and is not publicly traded in the United States; the news was released after trading in Germany had ended.
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