As Bid-Rigging Probe Grows, So Do Lawsuits

Michael Ha

NU Online News Service, Nov. 4, 1:05 p.m. EST?As the scandal surrounding allegations of brokerage bid-riggingpractices expands, so does the list of class-action lawsuits filedagainst the biggest names in the insurance industry.[@@]

It's been three weeks since the New York Attorney General EliotSpitzer filed a civil suit against Marsh & McLennan CompaniesInc., and already there have been scores of class actions filed,targeting not only Marsh but also U.S.I. Holdings, Aon Corporation,American International Group Inc., ACE Ltd., and The HartfordFinancial Services Group, to name a few.

Even those companies currently not in Mr. Spitzer'sinvestigative crosshairs are not safe from such lawsuits, if it canbe determined that they have paid contingent commissions andparticipated in the so-called Placement Service Agreements,according to one insurance-law expert.

According to Fred Isquith, attorney at the New York-based WolfHaldenstein Adler Freeman & Herz LLP, all these cases havestrong merit, assuming the facts bear them out. "These cases havemerit, absolutely. They're good cases," Mr. Isquith argued.

These lawsuits, representing shareholders of companies that hadparticipated in insurer-broker contingency fee arrangements, raisea number of similar issues: They allege that the company inquestion was paying "illegal and concealed contingentcommissions."

The actions claim that the hidden payments resulted in "grosslyoverstated" reported revenue and income, and that the company issubject to enormous fines and penalties totaling potentiallyhundreds of millions of dollars. The lawsuits also charge thatthese companies "violated federal securities laws" by makingmaterially false or misleading public statements.

One of the latest companies that has been targeted in suchcomplaints is Axis Capital Holdings, which was named in twolawsuits seeking class-action status filed late last month.

Axis representatives declined to comment, and the two law firmsthat have filed the lawsuits, Lerach Coughlin Stoia Geller Rudman& Robbins LLP and Schatz & Nobel P.C., did not return callsseeking comment.

But in Axis' case, there is one additional factor that maycomplicate the allegation of illegal business activities: Thecompany is 9.7-percent owned by Marsh & McLennan, throughdirect stock ownership and a private-equity partnership calledTrident II that is managed by Marsh's MMC Capital unit.

Axis also receives a significant amount of business fromMarsh?in its registration statement July 2003, Axis had disclosedthat about 40 percent of its business comes from Marsh.

"I think all these cases involve a major, industrywide problem.It wouldn't surprise me at all if this was beginning of ademonstration of major corruption within much of the insuranceindustry," Mr. Isquith said.

He also speculated that companies such as Axis that hadparticularly close financial ties to Marsh & McLennan could beespecially vulnerable to litigation, even if they have not beencited in New York attorney general's civil suit.

"Let's assume that Marsh owns a piece of Axis, and then Marshdirects business to Axis because, after all, Marsh is going to geta piece of the profitability back from its ownership and inaddition, also get to have Axis pay extra commissions into Marsh.So you tell me whether [Marsh's ownership] is a relevant factor,"said Mr. Isquith.

"Paying contingency fees involves a business model that is notonly ethically questionable and possible illegal, but alsounsustainable," Mr. Isquith said, "because as we can see, once thiscame out in the light of day and people began to focus on it, theyrealized the kinds of conflicts of interest these companies wereengaged in."