N.A.S.D. Fines Prudential $20 Million

The New York Times
July 9, 1999

Receiving yet another sanction for misleading customers for more than a decade, the Prudential Insurance Company of America was fined $20 million yesterday by the National Association of Securities Dealers, the highest fine ever imposed by the association.

Barry R. Goldsmith, the head of enforcement for the N.A.S.D., said investigators found that Prudential, one of the largest insurers in the country, had committed "serious violations of securities law and our rules" in the sale of variable life insurance policies, which are a combination of life insurance and investments similar to mutual funds. Officials of the association said they thought the highest previous fine had been $5.6 million.

Prudential had already paid more than $70 million in fines to state insurance regulators for widespread deception of customers. It also paid $1 million to Federal authorities for allowing the destruction of sales documents, and it has set aside $2.6 billion for restitution to policyholders nationwide. No other insurer has faced such heavy sanctions.

The sale of Prudential's hallmark product, life insurance, has slumped under the repeated pillorying of its reputation. Earlier, Prudential paid $1.5 billion in a settlement with Federal and state regulators over improper sales of limited partnerships through its subsidiary, Prudential Securities.

Robert DeFillippo, a spokesman for Prudential, said he knew of no further pending investigations of the company as it revamps with expectations of making its first public offering of stock, probably in about 18 months. "We see this as one of the final steps in a very long process to put the problems of the past behind us," Mr. DeFillippo said.

Mr. DeFillippo said it had never been company policy to mislead customers, but he acknowledged that safeguards against such abuses "were not adequate." He said steps had been taken to prevent customers from being cheated.

In concluding a two-year investigation of Prudential, the N.A.S.D. issued a stronger and more detailed criticism of the company and its management than had state insurance regulators and it reported uncovering violations that other investigators had not addressed.

In its settlement with the association, Prudential did not admit or deny wrongdoing.

While insurance regulators said that senior managers at Prudential knew about widespread deceptive sales practices among its agents at least by 1992, the association said that the Prudential board was given a report on the improprieties a full decade earlier.

Mr. DeFillippo acknowledged that the board had received the report in 1982.

The association said that both Prudential agents and their supervisors failed to obtain licenses required for the sale of securities, failed to submit sales literature to the association for review and either failed to take disciplinary actions against sales representatives or filed incomplete or inaccurate reports.

Moreover, the N.A.S.D. investigators said, Prudential agents singled out older people, many of them retired, who "did not know what they were purchasing." Sometimes, the investigators said, Prudential agents falsely told customers they were buying savings and retirement plans rather than insurance.

The N.A.S.D. reiterated the finding of insurance regulators that the heart of the problem for Prudential was that its agents told customers they could exchange old policies for new ones with better benefits at little or no extra cost. In some cases, the association said, customers were told their premiums would eventually vanish, leaving them with no further expenses. In fact, costs rose. Many policies lapsed when higher premiums were not paid and customers lost their coverage and everything they had invested in their policies.

At one point, the association's report said. the Prudential subsidiary that was responsible for variable life insurance, "operated in an environment where sales production was emphasized over other considerations." State regulators had suggested that such an ethos permeated Prudential.

Analysts said they saw the association's action as a setback for Prudential in its attempt to break free of its troubled past. "This really is impeding their progress in trying to put this behind them," said Michael L. Albanese, a senior analyst at A. M. Best & Company, the rating agency.

Patrick Finnegan, a senior analyst at Moody's Investors Service Inc., another rating agency, said, "The bad news is that the bad news continues."

"In our opinion," he said, "we believe they've addressed what this fine relates to."

Noting Prudential's plans to go public, Mr. Finnegan said: "This is not the kind of news or posture that reflects well with investors. I think what they really need to point to is the fact that this is history; it ended in 1995. And since then new management has much tighter reins around the manner in which they sell and deliver insurance."

Mr. DeFillippo said that of the 10.7 million policies sold between 1983 and 1995, holders of 1.2 million policies had filed for claims in the settlement of a class-action suit that Prudential estimates could cost up to $2.6 billion. He said that 2.85 million of the policies had combined insurance and securities. The association said it found securities violations in connection with the sale of more than 200,000 of the combination policies.

Mr. DeFillippo said the number cited by N.A.S.D. had been provided by Prudential after those policyholders requested compensation in the class-action settlement.

While many policyholders reported no problems with their policies, some opposing lawyers and former Prudential employees say the number of claims may not reflect the full scope of improprieties at the company. The critics say the procedures for compensation are complex, the rewards are relatively slight and at least some customers may well have decided not to bother.

Officials of the N.A.S.D. said the $5.6 million fine had been imposed earlier this week on Monroe Parker Securities Inc. of Purchase, N.Y., for violations in the sale of securities. The company was also expelled from the securities business.

Copyright © 1999 The New York Times Company

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