Marsh & McLennan, an international insurance brokerage and professional services company, was charged with fraud in 2004 by Eliot L. Spitzer, the attorney general of New York. Confronted by pages of testimony affirming its illegal actions, the company settled out of court, paying a fine of $850 million.
As attorney general for New York State since 1999, Eliot Spitzer had acquired the nickname Caped Crusader because of his relentless pursuit of white-collar crime. In 2004, his attention turned to insurance giant Marsh & McLennan (MMC) after learning that the company had been condoning inflated bids and taking commissions for steering clients toward specific companies. In other words, it had been price-fixing. Following six months of investigation, Spitzer filed a civil complaint against the company. Media attention and a resultant drop in the price of the company’s stock led MMC to fire its chief executive officer. The company also announced it would no longer accept commissions and paid $850 million into a fund to compensate policyholders.
Spitzer’s action against MMC was yet another target for the attorney general, who had been waging war against corporate giants that heretofore had been protected by the concept “that’s how business is done.” Spitzer challenged out-of-state power plants whose emissions were polluting the skies over New York; he went after several big Wall Street investment firms, including Merrill Lynch. His actions against former New York Stock Exchange chairman Dick Grasso and other investigations into hedge funds and after-closing trading established him as a force working for consumer rights and made his name known nationally. In 2002, Time
New York State attorney general Eliot Spitzer displays a copy of e-mails from the insurance brokerage firm Marsh & McLennan during a news conference in New York on October 14, 2004. Spitzer announced that he was suing the firm because of widespread corruption and fraud.
As the son of wealthy real-estate developer Bernard Spitzer and Anne Goldhaber Spitzer, a literature professor, Eliot was brought up in a life of privilege. He graduated from Princeton in 1981 and Harvard Law in 1984; he married Silda Wall, a fellow law-school student, in 1987. His parents instilled a strong sense of social responsibility and, following some years practicing corporate law, Spitzer ran for attorney general of New York. Following a failed attempt in 1994, he tried again in 1998 and defeated his opponent by a narrow margin.
Spitzer’s crusade against MMC began with an anonymous tip. On March 30, 2004, David D. Brown, IV, in charge of the attorney general’s Investment Protection Bureau, opened an envelope containing a two-page, single-spaced typed letter addressed to New York Attorney General Eliot Spitzer and signed “Concerned.” The letter stated that MMC, the world’s largest insurance broker, had taken two payments: first, it received commissions from its customers, those businesses it represented seeking insurance; second, it took undisclosed payments from the insurance companies that wrote the policies. Brown thought the second payment looked like a kickback and faxed the letter to Spitzer. To ascertain the truth of the allegations, Spitzer asked Brown to subpoena the company’s representatives. The subpoena was sent out three days later, and within a week William L. Rosoff, general counsel for MMC, was in the attorney general’s office. Rosoff downplayed the situation and stated that although the company did take a commission, there was no harm since the customers were still getting the best deal. Spitzer was not convinced, and in April, his team began interviewing other insurance brokers and insurance companies and subpoenaed their e-mails.
Spitzer’s office hired law students to go through the boxes of e-mails, and by early summer the e-mails suggested the brokers were steering business to particular insurers, not to aid the client but to earn bonuses negotiated by the insurers. On September 9, Craig Winters, a second-year law student, found an e-mail from an MMC executive with specific details concerning a faked bid for the Greenville County, South Carolina, school district: The insurer, California Association of Non-Profits, was asked to bid deliberately high to guarantee that another company, Zurich, would get the bid. The false quotes were a pretext that the bid process had been competitive.
In the course of Spitzer’s investigation, two executives from American International Group (AIG), an insurance carrier, testified how the fraud worked; they testified in exchange for a lighter sentence. When a given policy was up for renewal, MMC took the following steps to assure AIG would get the business: First, MMC 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. Second, MMC let other carriers know what the winning quote was and asked them to submit backup quotes, or B quotes, that were higher, thus eliminating them from contention for the business.
With evidence of bid-rigging by MMC, in business since 1902, Spitzer and his lawyers met with the firm’s lawyers on October 12. Rosoff denied any wrongdoing and failed to understand Spitzer’s investigation. Rosoff went on to state that Spitzer did not understand how things worked in the insurance business.
Two days later, on October 14, Spitzer held a press conference. He announced that he had filed a civil complaint in the New York State Supreme Court against MMC, AIG, and other brokers for security fraud and bid-rigging. In addition, Spitzer cited the commissions, called contingent commissions or market service agreements, paid to MMC for steering volume business toward a specific insurer. In 2003, the contingent commissions amounted to $800 million, the equivalent of more than one-half of the company’s $1.5 billion yearly income. Spitzer’s office had prepared a thirty-one-page complaint and almost one hundred pages of exhibits, and he warned he would be treating the company as a criminal enterprise unless MMC’s top leadership stepped down. Initially, MMC planned to fight, but, following the public reaction to Spitzer’s charges, saw its stock lose 48 percent of its value in four trading days. After eleven days, MMC chief executive officer Jeffrey W. Greenberg stepped down. The next day the company announced it would stop accepting commissions from insurers.
Michael G. Cherkasky, whom Spitzer had once worked for, was installed as MMC’s chief executive officer on October 25. Spitzer followed by dropping all criminal charges against the company. On January 31, 2005, MMC agreed to pay $850 million to settle the civil suit.
Following Spitzer’s charges against MMC, the company discontinued its policy of charging commissions and fired a number of executives. Eight former MMC executives were charged with felonies for bid-rigging and price-fixing. Other companies that were also indicted by Spitzer scrambled to straighten out their business practices. Spitzer’s investigation prompted similar actions by state insurance regulators and attorneys general (the insurance industry is not federally regulated). A review of business practices in the insurance industry was extended to the United Kingdom and other countries in Europe, broadening the investigation by Spitzer and his team.
In addition to inspiring a more ethical way of doing business in the insurance agency, the action against MMC confirmed the general public’s view of Spitzer as their hero, fighting for the little guy against the corporate giants. His popularity led to his decision to run for governor of New York in 2006, and he won in a landslide. His first year as governor was filled with conflict and controversy, however, and in 2008, after for so long being the voice of morals and ethics in business, Spitzer was implicated in a Federal Bureau of Investigation prostitution sting. He resigned as governor on March 12.
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Coolidge, Carrie, and Neil Weinberg. “Pulling the Plug on Marsh.” Forbes, November 15, 2004. Detailed coverage of Spitzer’s lawsuit against Marsh & McLennan and the suit’s impact on the insurance industry. -
Elkind, Peter, and Joan Levinstein. “Spitzer’s Crusade.” Fortune, November 15, 2004. Focuses on Spitzer’s legal work and how he carries out his campaigns against those businesses conducting unethical practices. -
Fishman, Steve. “Inside Eliot’s Army.” New York, January 10, 2005. A step-by-step account of Spitzer’s investigation of Marsh & McLennan. -
MacDonald, Scott B., and Jane E. Hughes. Separating Fools from Their Money: A History of American Financial Scandals. New Brunswick, N.J.: Rutgers University Press, 2007. Detailed history of American financial scandals and their main players, including Eliot Spitzer, whose work is the focus of an entire chapter. -
Masters, Brooke A. Spoiling for a Fight: The Rise of Eliot Spitzer. New York: Times Books, 2006. Discusses Spitzer’s biggest career successes, focusing on his efforts to crack down on financial fraud. -
Vickers, Marcia. “The Secret World of Marsh Mac.” BusinessWeek, November 1, 2004. This cover story examines Spitzer’s legal work against Marsh & McLennan and how the company’s management and its attitude contributed to its problems.
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