You are here
Harmony to bid for Gold Fields, jeopardizing Gold Fields'' merger with Iamgold
"Conspiracies rarely exist."
-- Dennis Gartman
in The Gartman Letter,
September 14, 2004
* * *
Marsh & McLennan Accused of
Price Fixing and Collusion
By Thor Valdmanis, Adam Shell and Elliot Blair Smith
USA Today
Friday, October 15, 2004
http://www.usatoday.com/money/industries/insurance/2004-10-15-spitzer-
insurance_x.htm
The nation's biggest insurers are mired in a brewing
scandal that many executives fear could shake the
industry to its core.
After months of complaints from industry watchdogs,
New York Attorney General Eliot Spitzer launched
the first salvo against alleged conflicts of interest
Thursday, charging the insurance brokerage arm of
Marsh & McLennan (MMC) with price fixing and
collusion.
A damning civil suit accuses Marsh of steering clients
to favored insurers and working with major insurers to
rig the bidding process for property-casualty insurance
coverage. The lawsuit says the victims ranged from
large companies to school districts to individuals.
In addition to the civil complaint, Spitzer announced
two guilty pleas on criminal charges against two
executives at American International Group (AIG).
They are cooperating with the investigation, which
could ensnare other insurance giants and executives.
"This investigation is catching like wildfire. These
charges radiate out to other insurance companies
and brokerages," Spitzer said in an interview. "The
entire business model of this industry seems to be
predicated on the type of egregious behavior
outlined in our complaint."
Some of the nation's largest insurance companies
are accused in Spitzer's suit of steering contracts
and bid rigging, including AIG, ACE, The Hartford,
and Munich American Risk Partners. Other insurance
companies are being investigated in a scheme that
Spitzer said raises everyone's insurance premiums.
Wall Street reacted harshly Thursday, wiping out
more than $26 billion in market value of the four
companies traded in the USA. Munich is a
subsidiary of Germany's Munich Re. Marsh and
others named in the complaint said they are
cooperating with Spitzer.
Some industry analysts were quick to point out a
family connection to Spitzer's probe. Business
legend Maurice "Hank" Greenberg runs AIG, while
his sons Jeff and Evan are CEOs at Marsh &
McLennan and ACE, respectively. Spitzer said he
has no evidence of any family ties to the scandal.
Most industry watchers expect Spitzer's investigation
to trigger sweeping reform as well as massive
lawsuits.
Plaintiffs lawyer John Stoia, who brought civil
lawsuits against Marsh & McLennan, Aon and the
Willis Group in California and New York -- alleging
many of the same unfair practices prior to the New
York attorney general's complaint -- said in a
statement that the companies had falsely
"represented themselves as honest brokers offering
their customers the best coverage from many
insurers at the lowest cost, (but) they steered them
instead to a few companies that gave them
kickbacks and other payoffs."
Spitzer said his six-month investigation was sparked
by an anonymous letter and the Washington Legal
Foundation, a conservative public policy think tank
that in February urged regulators in New York and
California to probe so-called contingent commissions.
The industry trade group, the Council of Insurance
Agents & Brokers, responded by saying it believed
the arrangements, which are at the heart of the
Spitzer allegations of kickbacks and conflicts of
interest, were being adequately disclosed.
Last month, Marsh disclosed some contingent
commission-related data and its code of conduct.
At the time, Marsh CFO Sandra Wijnberg said,
"What we found is that the bigger clients already
were pretty knowledgeable, and they haven't been
particularly agitated about this."
That did little to satisfy Spitzer, who noted that
Marsh collected $800 million in contingent
commissions in 2003 alone, more than half of its
$1.5 billion net income. Spitzer said that when
he first contacted Marsh executives, they said,
"Don't waste your time."
Some critics say the ambitious New York attorney
general, who is eyeing the state governor's mansion,
may be overreaching.
Steve Smith, a partner at law firm Bryan Cave, has
represented Marsh & McLennan in professional liability
cases. "Many of the allegations in the complaint are
not very specific," Smith says. "The A.G. will have to
come forward with evidence to support his case."
But other industry veterans say the lawsuit is
warranted. "Spitzer's right on this one," says former
AIG executive Marc Vivori. "They were not acting in
the best interests of their clients. At a minimum, they
had an obligation to disclose any contingent
commission arrangement with their clients."
In May, Advisen, an insurance industry research
company, found that 69 percent of the 330 risk
managers it canvassed in an anonymous survey
considered contingent commission arrangements
a conflict of interest. And 82 percent said broker
disclosure of contingent commissions "was less
than fully adequate."
Advisen Executive Vice President Dave Bradford,
who conducted the survey, said, "Whatever the
outcome of the New York case, the enormous
pressure this is going to exude on the industry
is going to force it to abandon the contingent
commission business or restructure it in a
significant way."
Bradford adds, "My feeling is this is the first domino.
The other state attorneys general and insurance
commissioners are pretty likely to follow suit."
Unlike the securities industry, the insurance
industry is not federally regulated.
Whether the arrangements constitute a conflict of
interest is a question that may have to be litigated.
But insurers may be legally vulnerable if they have
not disclosed the arrangements. In 1998, the New
York State Insurance Department issued a policy
letter requiring that all compensation between
brokers and insurers be disclosed to buyers
"prior to the purchase so as to enable (them) to
understand the costs of the coverage and the
motivation of their broker in placing the business."
In that same letter, the department said undisclosed
compensation "is sufficient to create the perception
that brokers are conflicted in their loyalties."
In the Advisen survey, 56 percent responded that
their broker didn't disclose the agreements.
Thursday's dramatic action is Spitzer's latest
crackdown on unethical and criminal behavior in the
power corridors of Corporate America, after tackling
tainted Wall Street research and fraud in the mutual
fund industry.
"It makes you wonder what the other attorney
generals and industry regulators are doing to earn
their paychecks," says Columbia University law
professor John Coffee. "Spitzer has had an
extraordinary rate of success in uncovering
smoking guns."
Spitzer said the victims in this latest scandal were
mostly large corporations, but also included small
and midsize businesses, municipal governments,
school districts, and individuals who were deceived
into buying property and casualty coverage that may
have cost more than it should have.
For Marsh, the allegations are potentially disastrous.
All three of its major businesses are now tainted by
scandal. The company's Putnam mutual fund arm
was charged last year in Spitzer's mutual fund
crackdown. Its Mercer consulting unit was criticized
for executive compensation work that helped to justify
the $140 million salary of former New York Stock
Exchange chairman Richard Grasso.
"We believe that the continuing stream of negative
news continues to serve as an overhang for (Marsh
& McLennan)," J.P. Morgan insurance industry
analyst David Sheusi wrote in a recent report.
"Each of its business segments is under significant
accounting, regulatory and legal scrutiny."
Thursday's news sent Marsh shares tumbling 24
percent, which wiped out $5.9 billion in market
value.
Although AIG shares fell only 10 percent, that
erased $18.2 billion in market value because of its
many shares outstanding. AIG is in a tricky
position. Karen Radke, 42, a senior vice president
of an AIG division, and co-worker Jean-Baptist
Tateossian pleaded guilty Thursday to felony
charges of scheming to defraud in state Supreme
Court in Manhattan. They face up to four years in
prison, but their sentence will depend on how much
more they cooperate, Spitzer said.
Spitzer relied on internal e-mail and memos, in which,
he said, insurance executives openly discussed
actions that were aimed at maximizing Marsh's
revenue and insurance companies' revenue, without
regard to clients, who ranged from distilled-spirits
maker Fortune Brands to a public school district in
Greenville County, S.C.
Marsh stressed to insurance companies that it would
more aggressively sell the policies of those companies
who paid the biggest contingent commissions, the
complaint states. Marsh employees who "moved"
clients to insurers who paid big commissions were
also "rewarded" with pay increases, Spitzer says.
In February 2002, one managing director at Marsh
informed nine co-workers that "some (contingent
commission agreements) are better than others."
He added, "I will give you clear direction on who
(we) are steering business to and ... who we are
steering business from."
Bid manipulation also appears to be widespread.
In his complaint, Spitzer outlined this scheme involving
AIG: When a policy with incumbent carrier AIG was
up for renewal, Marsh took the following steps to
assure that AIG would win back the business. First,
Marsh provided AIG with a "target premium and the
policy terms" for the quote. If AIG agreed to the quote,
it got to keep the business, regardless of whether it
could have quoted a lower premium. But for the
deceit to succeed, Marsh had to let other carriers
know what the winning quote was and ask them to
submit a so-called backup quote, or "B Quote," that
was higher, thus putting them out of contention for
the business. Spitzer said the cooperation was
nothing more than an "entrance fee" for future
business.
In December 2002, the lawsuit says, ACE quoted
$990,000 for the excess casualty business of Fortune
Brands. But the insurer later revised its bid higher to
$1.1 million. An e-mail from an ACE assistant vice
president to ACE's vice president of underwriting
explained the revision this way: "Original quote
$990,000. ... We were more competitive than AIG
in price and terms. MMGB (Marsh McLennan Global
Broking) requested we increase the premium to
$1.1M to be less competitive, so AIG does not
lose the business," the complaint alleges.
Clients who were allegedly abused are not amused.
"We're already investigating the matter," said
Fortune Brands Vice President C. Clarkson Hine.
----------------------------------------------------
To subscribe to GATA's dispatches, send an e-mail to:
gata-subscribe@yahoogroups.com
To unsubscribe, send an e-mail to:
gata-unsubscribe@yahoogroups.com
----------------------------------------------------
RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kuik.com/KH/KH.html
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com/
Subscription site:
http://www.lemetropolecafe.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
3033 East 1st Ave., Suite 403
Denver, Colorado 80206
www.USAGold.com
Michael Kosares, Proprietor
US (800) 869-5115
Canada 1-800-294-9462
European Union 00-800-2760-2760
Australia 0011-800-2760-2760
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
----------------------------------------------------
HOW TO HELP GATA
If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.
By check:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA
By credit card (MasterCard, Visa, and
Discover) over the Internet:
http://www.gata.org/creditcard.html
By GoldMoney:
http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L
Donors of $750 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled "GATA."
GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.
