Scandal hits Marsh & McLennan again

Posted: Friday, October 22, 2004

NEW YORK (AP) This is a trifecta that no one in corporate America should want to hit.

Marsh & McLennan Cos. is at the center of the giant scandal in the insurance business, with its brokers accused of cheating clients by rigging bids and taking payoffs from insurance companies to steer clients their way rather than get the best prices for policies.

What's more troubling is the fact that this isn't the only probe this company has faced in recent years. Its two other core units its mutual fund business as well as its consulting arm also have come under investigation for wrongdoing.

Given all this bad news, it's not surprising that its investors are fleeing, and its clients may not be far behind. Some wonder if this company will ever be able to regain their trust.

''With so much negative publicity and such an overhang of regulatory action, no one wants to go near a company when something like this happens,'' said Bill Lerach, an attorney representing shareholders in a class-action lawsuit against Marsh & McLennan.

Marsh & McLennan's stock has plunged more than 46 percent since Oct. 14 when New York Attorney General Eliot Spitzer accused the company's insurance brokerage unit in a lawsuit of participating in a scheme to rig bids.

The company is also accused of collecting huge fees from major insurance companies in exchange for business. Those fees also known as contingent commissions are over and above the ordinary commissions that brokers receive from insurance companies. Marsh & McLennan later said the practice would be suspended at Marsh Inc., its risk and insurance services subsidiary.

The New York-based company received $845 million in fees from contingent commissions last year, about half of its income. With fees that large being wiped out, analysts all over Wall Street are reducing their earnings forecasts for the coming years.

This mess comes on the heels of other troubles at Marsh & McLennan. Its Putnam mutual-fund business was a major figure last year in the scandal over improper trading at fund companies. In April, Putnam agreed to pay $110 million to settle federal and state allegations.

Putnam's assets under management reached as high as $277 billion before the scandal, but dwindled to $209 billion by the end of September, according to company data.

Also under scrutiny is its Mercer consulting arm, which is being investigated by the Securities and Exchange Commission for potential conflicts of interest at its pension-consulting division.

In a separate case, that unit settled with Spitzer earlier this year for its role in advising the New York Stock Exchange when its ex-chairman, Richard Grasso, secured a $187 million pay package. Mercer, which admitted when it settled that it had provided information to the board that was inaccurate and incomplete, agreed to return the fees it charged the NYSE in 2003, totaling $440,275.

With all this to consider, many shareholders aren't sticking around. Individually, these troubles could have had a stinging effect, but probably would not have shattered its business. But looked at collectively, management involvement and oversight has to be called into question.

That's something that Spitzer touched on last week in announcing his lawsuit. He blasted Marsh & McLennan's ''highest'' executives for misleading investigators in the insurance case and said he would not work on a settlement with the company.

''The leadership of that company is not a leadership I will talk to and not a leadership I will negotiate with,'' Spitzer said.

And even though Marsh & McLennan's chairman and CEO Jeffrey Greenberg has vowed to take strong and immediate action in cleaning up his company in the wake of the latest allegations, his attempts may be coming a little too late. The company declined further comment.

''Prior to last year, March & McLennan had been viewed as one of the best managed companies in the insurance industry,'' said Matthew Roswell, an analyst at the investment firm Legg Mason. ''With the issues at Putnam over the last year, this reputation took a hit ... (the new) allegations, by being so company specific, raise additional concern regarding management.''

It's not only investors weighing these issues. Its clients must, too. It turns out that this service-oriented business may not have been serving its clients as they should. In addition, this people-oriented company now has to scramble to recoup its lost revenues, and should it start letting workers go to cut its costs, that could ultimately hurt is client relationships.

These are the worst of times for Marsh & McLennan. The biggest unknown is if things can ever improve.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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