MMC settles Spitzer charges for $850 million

NEW YORK—Marsh & McLennan Cos. Inc. has agreed to pay $850 million to its brokerage clients to settle New York Attorney General Eliot Spitzer's fraud and bid-rigging charges against the company, and has issued a formal apology to its clients.

Meanwhile, MMC has also disbanded its Global Broking unit, which centralized insurance placements in the broker's New York office and which Mr. Spitzer cited as the epicenter of the bid-rigging scandal.

MMC announced Monday morning that it will establish an $850 million fund to compensate U.S. policyholder clients that used brokerage unit Marsh Inc. to place coverage incepting between Jan. 1, 2001, and Dec. 31, 2004, on which Marsh collected contingent commissions or overrides.

Those clients will receive a pro rata share of the fund based on the premiums they paid and on an estimate of Marsh revenue from market service agreements with insurers from 2001 through 2004, MMC said. MMC will send clients a statement showing their placements and their share of the settlement fund, and will ask them to opt into the agreement, said MMC President and Chief Executive Officer Michael G. Cherkasky. Clients will not have to show harm or wrongdoing to collect from the fund, which will pay restitution to clients in all 50 states.

Mr. Cherkasky said he could provide no per-client restitution estimate, but said clients based in California would collect the largest share of the fund at about $131 million. New York-based clients follow with a total of about $94 million in payments, while Pennsylvania clients will collect $58 million, Texas clients $55 million and Illinois clients $45 million, he said in a conference call.None of settlement money is considered a fine or penalty, and none will be paid to regulatory or law enforcement officials in New York or any other state, Mr. Cherkasky said. "For us, it was just so important that it go back to our clients," he said.

The agreement settles only Mr. Spitzer's lawsuit and similar charges leveled by the New York Insurance Department. While insurance regulators and attorneys general in several other states continue to investigate MMC, Mr. Cherkasky expressed hope that today's settlement will also resolve issues in other states.

"We are very hopeful that they will see what we've done, take note of it and that we will be able to move forward quickly," he said.

MMC neither admitted nor denied wrongdoing in the settlement deal, but Marsh nevertheless apologized to clients and others in a document attached to the settlement agreement.

"Marsh Inc. would like to take this opportunity to apologize for the conduct that led to" Mr. Spitzer's lawsuit and the New York Insurance Department charges, the statement read. "The recent admissions by former employees of Marsh and other companies have made it clear that certain Marsh employees unlawfully deceived their customers. Such conduct is shameful, at odds with Marsh's stated policies and contrary to the values of Marsh's tens of thousands of other employees."

"We deeply regret that certain of our people failed to live up to our history of dedicated client service," Mr. Cherkasky added in a statement. "We humbly ask our existing and future clients for the opportunity to continue demonstrating our longstanding commitment to providing value and service."

Asked about the apparent inconsistency between the company's apology and its refusal to admit wrongdoing, Mr. Cherkasky explained that individual employees—rather than the corporate entities—were responsible for the alleged illegality. He also noted that MMC and Marsh remain defendants in shareholder and other litigation stemming from the scandal, and suggested that the corporations for this reason would not concede wrongdoing.

As part of its deal with Mr. Spitzer, MMC also formalized several changes it had already made in its business practices. The broker agreed, for example, to cease collecting contingent commissions, to provide clients with full disclosure of its compensation and to give clients all quotes and terms received from insurers. Marsh will also be subject to annual examination by New York regulators for the next five years.

Mr. Cherkasky separately reported that Marsh has disbanded its Global Broking unit. Beginning in the 1990s, Marsh centralized insurance placement duties and contingent commission negotiations in the unit, removing the function from local Marsh brokers across the country. Mr. Spitzer's lawsuit charged that the growing clout of the unit allowed the alleged client steering and price fixing to occur.

Global Broking employees have been shifted to other Marsh operations, according to Mr. Cherkasky, who said "we have a more decentralized model" now.

MMC will establish its $850 million client restitution fund over four years, with two payments of $255 million in June 2005 and 2006 and two payments of $170 million in June 2007 and 2008.

Along with a $232 million reserve the broker set up late last year, MMC will take a $618 million pretax charge against fourth quarter 2004 earnings to fund the settlement. The settlement bars MMC from trying to recover any part of its restitution payments from its own professional liability or other insurers.The broker will be able to cover some part of the settlement, though, from contingent commissions owed by insurers before Marsh agreed to halt the practice last year, an amount the broker put at $230 million. Marsh will be asking insurers "in strong terms" to make those payments, though to date the collections have amounted to only about $25 million, Mr. Cherkasky said.

Mr. Spitzer accused MMC and Marsh last year of funneling business to insurers paying it the highest contingent commissions and rigging bids to favor incumbent insurers. The broker dismissed several employees in the wake of the scandal, and one Marsh senior vp has pleaded guilty to a felony charge related to the alleged schemes.

"To its credit, Marsh is not disputing the problems identified in our original complaint," Mr. Spitzer said in a statement. "Instead, the company has embraced restitution and reform as a way of making a clean break from the practices that misled and harmed its clients in the past."