AIG, Genworth and others subpoenaed by SEC and DOJ on bid rigging.

I'm always amazed how these major stories that investigate big rigging, collusion and broker corruption get swept out of the mainstream media because it just so happens to occur in a small, obscure niche of the insurance industry.

All this week, SEC and DOJ lawyers and enforcement staff have been serving subpoenas to some of the biggest names in the insurance business in what I predict will grow to be a very large and ugly case of bid rigging, kick backs and steering in the GIC business done within the Municipal bond markets nationwide.

You can read all about these actions by clicking any of the links listed below.

The first is the most comprehensive article on the AIG, Genworth and XL cases, reported by Bloomberg.

The second is a brief summary in the NY Times discussing the general aspects of how they are investigating the companies.

The third gives more detail into other speciality brokers and markets as reported by MarketWatch.

Why bother to blog on this? Simple. I honestly believe we are maybe only a few months away from a similar tidal wave hitting the structured settlement industry and some rocks being flipped over by state agencies, federal investigators or sharp eyed trial lawyers in a couple of areas.

1. Soft money and steering of annuity business to certain markets. If you read the business press at all, you'll have no doubt seen story after story of how the SEC, NASD and State AG's are cracking down on the long practiced, but rarely discussed issue of "marketing assistance" from life markets to speciality brokers in order to increase the amount of business written with the life company, regardless of whether that company had the best pricing or not. All you need to do is go look at the Group Annuity settlements that Hartford Insurance Group entered into with the states of CT and NY over this practice to realize this is very much on the radar screen of regulators. We all know this happens in the settlement brokerage community on a regular basis and the lack standards will soon catch the eye of regulators in our business. My prior post on it here on the Settlement Channel is available for reading as well.

2. The extraction of money from firms in a pay to play scheme. The BISYS investigation currently under way in which the SEC is again going after some of the biggest names in the brokerage, mutual fund and insurance world to expose a kick back scheme in which BISYS was required to pay money under the table in the form of "marketing expenses" in order to maintain their position as the company of choice for lucrative services such as producing annual statements, reports and other work. Read more about it by clicking here. In short, BISYS was having to pay up to 27 different mutual fund families millions in soft dollars in order to keep their biggest clients happy, and this was just accepted as "how business is done" given the amount of money at hand.

3. The election of Eliot Spitzer as Govenor of NY and the recapture of the US House and US Senate by the Democratic Party. If you work in the structured settlement industry and you want to read some chilling testimony to United States Senate by Eliot Spitzer last year, click on this link and read the first page.  I'll loosely quote his opening statement to the Senate committee, "Over the last year my office looked into the market practices of insurance brokers. Insurance brokers sell insurance to businesses and individuals seeking to purchase insurance and they hold strict fiduciary duties to serve the best interests of their clients. We were very concerned that insurance brokers were subject to conflicts of interest due to the receipt of contingent commissions and other hidden payments from certain insurance companies for steering client business to preferred insurers. Our investigation found that wide spread evidence that brokers were receiving hidden payments, essentially kickbacks, from insurance companies." Now, why type all that out for you? If you work in the structured settlement industry you know exactly why i'm typing it out. My point is, Mr. Spitzer just cruised to the leadership of the most powerful state in the US due to his reputation of crusading against corrupt white collar practices and protecting consumers. Do you really think other politically ambitious types in others states have failed to notice this, and won't take a page out of his play book? Or that the new House and Senate leadership aren't going to be receptive to listening to complaints about questionable activity in the financial and insurance business?

 In short, if you are in the settlement business in any capacity i'd suggest you do a complete and comprehensive review of your business practices, make a point of documenting the pricing on every annuity contract that you write to confirm at a later date you got the best deal for your client and begin to think of yourself as someone who has a fiduciary duty to both your client and the claimant to provide the best price and the best company on each and every case, and be able to prove you did so at a later date.

You may agree, disagree, cast stones at the messengers but the fact is our industry is about to be lined up in the cross hairs and you better be ready for it. Don't say you weren't warned.


Posted on November 18, 2006 .