New York Attorney General Eliot Spitzer sued Marsh & McLennan Cos. and arrested two American International Group Inc. executives Thursday in his first prosecution of the insurance industry.
According to Mr. Spitzer, Marsh & McLennan, the world's largest insurance brokerage, took "lucrative payoffs" for steering unsuspecting clients to certain insurers. He also said AIG, Hartford Financial Services Group Inc., Ace Ltd., and Munich Re participated in "steering and bid rigging."
Shares of insurers plunged; by late afternoon AIG's stock had fallen as much as 12%.
The allegations mark the third part of Mr. Spitzer's assault on corruption in financial services. Since June 2003 he and other regulators have imposed about $3 billion of fines for improper mutual fund trading. And last year he wrested $1.4 billion of settlements from securities firms that he said were issuing biased stock research.
"Where is the ethical compass of this industry?" Mr. Spitzer asked at a press conference Thursday. He wants Marsh & McLennan to return all profits obtained through "deceptive acts," halt such practices, and pay unspecified punitive damages, according to the suit.
Mr. Spitzer, who began probing conflicts of interest in insurance six months ago, said the AIG executives, whom he did not identify, pleaded guilty and were expected to testify in future cases. The corruption has tainted "virtually every line of insurance," he said.
Insurers pay brokers fees based on the amount and profitability of business they bring in - an arrangement brokers have said clients are aware of. Marsh & McLennan received $800 million of fees last year, Mr. Spitzer said.
Marsh & McLennan said, "We are committed to getting all the facts, determining any incidence of improper behavior, and dealing appropriately with any wrongdoing. This is our highest priority."
Mr. Spitzer said he will not negotiate with its current management, and he urged its board to "look long and hard" at the leadership.
He has subpoenaed Aon Corp., Willis Group Holdings Ltd., Hub International Ltd., Chubb Corp., and others and said that "numerous civil and criminal cases" are to come. The investigation became public in April, after the Washington Legal Foundation, an advocacy group and law firm, had said earlier in the year that it was concerned that fees from insurers were compromising brokers' "fiduciary duty to represent the best interests of their clients."
Joe Norton, an American International spokesman, said it had not seen Mr. Spitzer's complaint but that it would cooperate. John Herbkersman, an Ace spokesman, said he had not yet seen the complaint and could not respond. Rainer Kueppers, a Munich Re spokesman, would not comment.
Cynthia Michener, a Hartford spokeswoman, said, "The Hartford does not condone bid rigging or any other illegal activity. Our corporate policy is very clear."
