[Mb-civic] NYTimes.com Article: The Latest Financial Services Scandal

[michael at intrafi.com]

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The Latest Financial Services Scandal

October 20, 2004
 


 

A nation numbed by corporate scandals that ranged from
Enron to Wall Street now has another likely cesspool of
corruption to deal with. Eliot Spitzer, New York State's
attorney general, has filed a lawsuit accusing the nation's
largest insurance broker of cheating its customers by
rigging prices, soliciting false bids to give the
impression of competition when none existed and taking
millions of dollars in kickbacks for steering business to
favored insurance companies. With major banks, brokerage
houses and mutual funds already forced to pay huge fines or
restitution when caught in deceitful transactions by Mr.
Spitzer in recent years, it makes one wonder whether there
is any segment of the financial services industry that is
free of rampant corruption. 

The prime target of Mr. Spitzer's civil suit is the
brokerage firm Marsh Inc., a unit of the Marsh and McLennan
Companies. Marsh acts as an intermediary to get insurance
coverage for large corporate clients and also for some
school districts and mom-and-pop operations. In theory, it
is supposed to find the best possible policies for its
clients, based on price, coverage and service. But in
practice, Mr. Spitzer's investigation discovered, Marsh
often awarded its clients' business to whichever insurer
offered the biggest kickback. 

Marsh is accused of a particularly noxious maneuver:
soliciting fake overpriced bids to make each favored
company's bid look good by comparison. Just as internal
e-mail notes revealed in the past that brokers were touting
stocks that they acknowledged were junk, internal
communications in this latest scandal show that companies
knowingly inflated their bids to lose a competition in the
expectation of benefiting from rigged bidding the next time
around. 

No matter what verdict is ultimately rendered in this
particular suit, there seems little doubt that Mr. Spitzer
has identified a conflict of interest that needs to be
eliminated. Brokers are paid commissions by their clients
for finding the best policies, and they also get various
payments from the insurance companies that are awarded the
business. Although these payments have been known to some
extent in the business world and become standard practice,
the insurance industry is now scrambling to eliminate them
to quiet the growing furor. 

The industry may bridle at Mr. Spitzer's depiction of the
fees as payoffs, but any company that relied on brokers to
get the best policy is now aware that the conflicts of
interest run much deeper than anyone realized. Mr. Spitzer
deserves our thanks for spotlighting abuses that had been
tolerated for too long by insurance commissioners and the
industry itself. 

http://www.nytimes.com/2004/10/20/opinion/20wed2.html?ex=1099289228&ei=1&en=ccafc64b25f691cb


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