Eliot Spitzers downfall, lessons learned?

On this weeks Speaking of Settlements I'll be discussing the topic that is all over the news and the internet, the stunning fall from grace and humiliation of Eliot Spitzer this week. Perhaps no other industry felt the sting of Eliot " The prosecutors" whip over the last six year more then the insurance and securities industry. His pursuit of Hank Greenberg at AIG was relentless and brutal, leading to the removal of the long time head of the nations most powerful property casualty company, but other companies also felt the laser focus of the crusading AG from NY, among them Marsh McCellean, Hartford Insurance and Mass Mutual Life. To say that the insurance industry is gloating over his stunning self destruction as a result of his meeting at the Mayfair Hotel with the self admited drug abusing hooker, Ashley Alexandar Dupre would be an understatement of Olympian proportions. spitzer.jpg

However, as regards the structured settlement industry, which is dominated by firms such as AIG, Allstate, Met Life and other notables, what have we learned, and what can we learn, both collectively and individually from the AG/Governors rise and fall?

1. That practices such as "commission sharing" or "rebating" are going to be exposed in this new world we live in and that the practitioner are going to be exposed and possibly prosecuted. I don't think it is a coincidence that virtually every single commission sharing, or commission reduction program in the settlement industry vanished during the 8 years that Eliot Spitzer was AG of NY. The risk reward ratio of that practice got to be a bit too risky for the companies that played that game.

2. That behind the scenes deals such as " approved brokers " or " approved markets " are going to be viewed as potential steering schemes or collusion. I expect that most approved market lists that aren't based 100% on capital size requirements or ratings will vanish in the next year or two as the issue of steering business is firmly on the radar of FINRA and state Attorney Generals.The practice of mutual funds buying "shelf space" or priority with broker dealers has come to a screeching halt and I expect our industry's version of the same practice to meet a similar fate.

3. That middle of the night additions to the federal register via ear mark deals that preclude plaintiff brokers from working on Department of Justice cases or Vaccine Injury Program cases will get a great deal of scrutiny under the new Congress, regardless of who the President might be. The continued shameful practice of exclusion of plaintiff brokers from doing work for the Federal government specifically because they represent injured parties will probably get some considerable Congressional sunshine according to what i'm hearing. This topic is firmly in front of the trial lawyer groups at the moment and I'd expect some changes or modifications in this policy in the next 24 months.

4. That some of the alternative products that compete with structured settlements are going to also face greater scrutiny as the internet makes sharing of information and data common place. The one common factor of all these changes is that practices that once flew below the radar are now being brought into the day light and reviewed as to the propriety or legality of that practice. Let me stress that I'm not in any way implying that some of the products or services that compete with structures are being done illegally, but that the marketing of most of our products in this arena seem to fly below the eyes of regulators and trial lawyers at times. As FINRA moves aggressively to include the sale of annuity products under it's supervision, you can expect trust company products, life settlements and other vehicles to start to get the same scrutiny that securities brokers and products are use to receiving. As a guy who has a foot in both worlds I remain amazed at how lax the supervision of our sales practices and product claims are to this vulnerable market of plaintiffs as compared to the incredibly strict supervision I receive on the sales and marketing of securities. We, as an industry, need to look at all products, life insurance, annuities, trust vehicles, factoring sales, etc, and start to clean up our house and provide full disclosure of compensation, sales arrangements and documents before it is forced upon us.

5. That transparency is the key. Look at what is happening in the asbestos cases, Dickie Scruggs, Bill Lerrach, Mel Weiss, silicosis, Phen Fen, breast implants, etc. Every major legal case on the above referenced matters related in some fashion to hidden deals or lack of transparency. Our industry has a vehicle, the 468b settlement trust, that provides for 100% transparency as to payments, transactions, protects clients rights, etc., but it still is relegated to the back water because it threatens defense interests ability to write structures. Our industry MUST work cooperatively on the use of 468b trusts so that plaintiffs rights are protected but that brokers of all persuasions can be compensated for services rendered. Again, maybe some of us don't want our compensation deals disclosed because we have done so little to receive so much compensation on a case, but thats the new reality we will be facing soon so elevate your professional practice now so you can justify your compensation to a court, trustee, trial lawyer, regulator or client later.

Again, the watch word as we look at Eliot's fall from grace is that we should not do in private that which we would fear being made public. As the author book of Numbers 32:23 so eloquently put it thousands of years ago, " be sure your sin will find you out."


Posted on March 13, 2008 and filed under Speaking of Settlements.