N.Y. deputy superintendent says stakes higher, players bigger in finite re scandal
With the anniversary of Eliot Spitzer’s lawsuit against Marsh & McLennan Companies approaching, liability experts at a recent conference described revelations of broker bid-rigging activities as relatively minor events in the history of financial services scandals. However, one regulator warned of greater fallout ahead from ongoing probes into finite reinsurance.
The bid-rigging schemes came to light Oct. 14 last year–the day the New York attorney general’s office filed its complaint against MMC. Eventually, the top-three brokers–Marsh, Aon and Willis–swore off contingency fees as a result.
While the scandal was still fresh in the minds of those at an educational session last month sponsored by the Minneapolis-based Professional Liability Underwriting Society, broker and insurer wrongdoing need to be put into historical context compared with far worse scandals that have rocked the financial services world, speakers at the gathering said.
However, the allegations remain damaging in that they undermine the industry’s integrity and credibility, and shock waves will still reverberate from the second phase of the industry probes, warned Audrey Samers, deputy superintendent and general counsel for the New York Insurance Department. Phase two exposes the potential misuse of finite reinsurance to boost insurer financial results artificially.
During the PLUS meeting, a defense lawyer charged that regulatory levies against brokers tied to the bid-rigging probe were simply “revenue-raising” moves by government entities.
Samers refuted the charge–noting the levies took the form of policyholder restitution funds rather than the payment of fines. She also pointed out that larger monetary stakes and higher-level executives are involved in current investigations into finite reinsurance transactions than those targeted in the broker scandals.
Stephen Marcellino, a partner with the law firm Wilson, Elser, Moskowitz, Edelman & Dicker in New York, led off the session telling professional liability brokers and underwriters to keep the brokerage probes in “perspective.”
He said that junk bond trader Michael Milken paid an individual fine of $400 million “in 1988 dollars” to settle securities fraud charges, while MMC’s restitution fund related to its involvement in bid-rigging was $850 million for the entire firm.
Recalling names like Ivan Boesky and Charles Keating, who were involved in insider trading and savings and loan scandals in the 1980s, other panelists agreed.
Stephen Sills, chief executive of Darwin Professional Underwriters in Farmington, Conn., said: “I think it’s actually insulting” to the insurance business to make such comparisons, referring in particular to the collapse of banks in the 1980s–”banks that were looted, with millions of loans made to bogus organizations, some of which were represented on the boards of those institutions.”
He also noted that even while members of boards were arrested in those prior scandals, individuals being charged in insurance scandals “are overwhelmingly middle-management people.”
Marvin Picholz, a partner for the Picholz law firm, agreed. “I don’t think this ranks up with the…S&Ls or what went on with Worldcom,” said Picholz, a defense lawyer who represented Douglas Faneuil, a former assistant to Martha Stewart’s broker, who testified against Stewart. “Those were rank lootings…as opposed to a course of dealing that traditionally has been viewed as acceptable,” he said, referring to the practice of receiving contingent commissions.
Noting that he previously held positions with the Securities and Exchange Commission, Picholz continued, “If I were back in government, I’d be embarrassed to announce that I’m fining an institution $150 million, $400 million or $1.5 billion,” while admitting that no one “in senior management” could be found that had any responsibility, “so we went and got the guy who was the third-level manager.”
Then he suggested that regulators imposing “those kinds of fines” without findings of bad conduct at senior levels might simply be engaged in revenue-raising measures at entities involved.
Samers countered, noting that recent probes of finite re deals that have followed the broker investigations involve much bigger dollar impacts to the industry.
“Fundamentally, what we settled for with Marsh, Aon and Willis was returning money to policyholders. It clearly was not a revenue-raising measure,” since no money is going to the state, she said.
She added that findings of wrongdoing in investigations of finite re transactions (which are distinguished from traditional reinsurance deals by various types of limitations on the amount of risk transferred), including the investigation of American International Group, “are clearly at the senior management level.”
“They’re not middle managers,” she said, adding “failures–across the board–at the corporate board level” currently are being unearthed in finite re probes.
Operating In The New Environment
During the session, there were also discussions about definitions of fraud, contingent commission disclosures and whether carriers are obligated to monitor broker transparency. While the consensus was that there was no legal requirement for monitoring, Picholz advised that carriers should not assume that brokers have made full disclosure to clients.
“If you put yourself in a position where your defense is going to be, ‘Well, I assumed,’ you’re going to be in serious trouble, he said, recommending that insurers have procedures that ask brokers to tell the carriers about disclosure policies, and even to request copies of broker policies for their files as well as annual representations that the policies are being implemented.
Samers agreed that there’s no obligation for insurers to police disclosures. “But in many of the complaints out there, you had insurers entering arrangements with brokers or agents that clearly they knew, if disclosed, would not cut it,” she said.
“My personal view, and not that of the department, is that it would be a good thing at the end of the day, if insurance companies printed on your [declarations] page the percentage that you’re paying in commissions,” she added.
Later, an audience participant questioned why brokers should be obligated to reveal their income any more than clothing manufacturers or retailers are obligated to reveal their cut on the sale of a dress.
“I’ve heard that question so many times, [and] it’s such a disservice to the insurance industry,” she said, noting that most people argue that car salesmen don’t disclose commissions. “Brokers are out there saying, ‘I’m going to get you the best deal. I’m working with you. I have a relationship with you,’” she said, adding no one thinks a car salesman has his or her best interests at heart. “You guys sell trust and integrity,” she said, drawing applause from attendees.
Panelists seemed to agree that following the instructions of a client was key to judging whether broker activities were problematic and akin to bid-rigging, but there are still many unresolved situations, Sills suggested. “If a risk manager says, ‘The CFO wants to see other quotes, but I don’t want them to be real serious quotes,’ is that bid-rigging?” he asked.