Spitzer's latest crusade against corporate corruption stems from his investigation of fraud and anti-competitive practices in the insurance industry. Evidence revealed in Thursday's lawsuit, against Marsh Inc. and Marsh & McLennan Companies Inc., also implicates other major insurance carriers.
"The insurance industry needs to take a long, hard look at itself," said Spitzer. "If the practices identified in our suit are as widespread as they appear to be, then the industry's fundamental business model needs major corrective action and reform."
"There is simply no responsible argument for a system that rigs bids, stifles competition and cheats customers," he added.
The civil complaint filed in State Supreme Court in Manhattan alleges that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions.
These payments – known as "contingent commissions" – were characterised as compensation for "market services" but were, in fact, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies.
Industry representatives defend this long-standing practice as acceptable and even beneficial to clients, but the Attorney General's office says it has uncovered "extensive evidence showing that it distorts and corrupts the insurance marketplace and cheats insurance customers."
In addition to steering business to its insurance company partners, Spitzer contends that Marsh, at times, solicited fake bids, which deceived its customers into thinking that true competition had taken place. Marsh did this even as it claimed in public statements that its "guiding principle" was to always consider its client's best interests.
Spitzer's complaint against the company cites internal communications in which executives openly discuss actions that were aimed at maximizing Marsh's revenue and insurance companies' revenues without regard to clients' interests.
Spitzer's complaint gives examples. One senior Marsh executive allegedly sent a message to colleagues saying: "We need to place our business in 2004 with those [insurance companies] that have superior financials, broad coverage and pay us the most."
Another executive apparently noted that the size of contingent commissions will determine "who [we] are steering business to and who we are steering business from."
Major insurance companies – ACE, AIG, The Hartford and Munich American Risk Partners – are named in the complaint as participants in steering and bid rigging. Other insurance companies, including the second-largest US broker, Aon, are still under investigation. Aon issued a statement last week saying that "to the best of our knowledge, our employees have not engaged" in the improper or unlawful practices cited by Spitzer.
Two executives pleaded guilty to participating in the illegal conduct and are expected to testify in future cases.
According to the complaint, Marsh collected approximately $800 million in contingent commissions in 2003. Spitzer's civil complaint seeks an end to the steering and bid rigging, disgorgement of improper payments, restitution and punitive damages.
The immediate victims of the illegal practices were Marsh's customers – mainly large corporations seeking property and casualty coverage, but also small and mid-size businesses, municipal governments, school districts and some individuals.
However, insurance stocks also suffered from Thursday's announcement. Sptizer is perhaps as well known for his ability to court publicity for his accusations of financial malpractice as he is for any consequent legal actions themselves. Marsh stocks fell by more than one third, its market capitalisation dropping $9 billion, on Thursday and Friday, according to The Wall Street Journal. Other insurers also suffered in market trading.