1980s Audits Exposed Fraud, Ex-Prudential Auditor Says

A former senior auditor for Prudential Insurance Co. has told investigators that audits beginning in the early 1980s turned up widespread evidence of fraud in the sale of life insurance, and that he personally warned the company’s top management only to be ignored, transferred out of auditing and financially penalized, according to documents and sources close to investigations of the company.

Florida investigators issued a subpoena to Prudential on Oct. 1, based on sworn testimony from John W. Cressman, 45, the former director of auditing in Prudential’s North Central Home Office in Minneapolis. The subpoena demands records of audits Cressman conducted and of a detailed presentation he allegedly made to top executives at the company’s headquarters in Newark, N.J., in December 1986.

If true, Cressman’s allegations are significant because the company has strongly denied that its top management was aware of any systemic wrongdoing by Prudential’s sales force at least until 1992. And Elizabeth Randall, the insurance commissioner in Prudential’s home state of New Jersey, who led a multi-state investigation of the company, said in July that the probe turned up no evidence of wrongdoing by senior executives, although it criticized management for being lax.

The disclosure comes as the Florida insurance department and attorney general’s office are trying to head off a proposed settlement between Prudential and millions of its customers nationwide. The state contends that the settlement is based on an incomplete investigation of the company, the nation’s biggest insurer.

Florida Treasurer Bill Nelson said the settlement makes it too difficult for customers to obtain compensation. And at least six other states, including California, also are considering opposing the settlement. Prudential says the settlement, which calls for payment of at least $410 million to fraud victims, is fair.

“We will comply with the subpoena,” Prudential spokesman Robert DeFillippo said. But he declined to answer when asked if the company may have discarded or destroyed any of the material requested by Florida. He said the company has begun an internal review of the issues raised in the subpoena, and said the company in the 1980s had taken steps to punish agents and compensate customers in response to audit findings.

The investigations have centered on evidence that Prudential’s sales force engaged in “churning”--an illegal practice to generate commissions by pressuring customers, many of them elderly, to trade in or borrow against existing life insurance policies to buy new ones in transactions of no benefit to them. The firm also falsely promised customers that they wouldn’t have to pay premiums on the new policies.

Cressman resigned from the company in 1993 to serve as deputy director of administration in the White House, and is now assistant to the chief financial officer of the Department of Housing and Urban Development. Both Cressman and his attorney declined to comment when reached by The Times. He is said to have contacted investigators after reading the task force’s report and becoming concerned that its findings weren’t entirely accurate.

According to the Florida subpoena, Cressman, then one of three national audit directors for Prudential, in 1982 began a series of audits of Prudential sales offices, including in Cedar Rapids, Iowa; Milwaukee; and Mount Clemons, Mich. The audits dealt “with the alleged improper sale of life insurance financed by values in other policies, and the misleading of Prudential customers,” the subpoena states.

Sources said Cressman has told Florida and New Jersey investigators since July that he found widespread evidence of churning in those audits, which he said were reported to senior management. He said he also visited other Prudential regional headquarters around the country and found that the auditing systems were inadequate. So he devised a new computer-based system that could rapidly detect churning.

According to the subpoena, in December 1986, Cressman met in Newark with senior executives, including Pelligrino P. Porraro, then a Prudential senior vice president in charge of life insurance sales offices, and Milan Johnson, who was the company’s chief auditor.

According to documents and sources, Cressman warned the executives that churning was taking place on a large scale and urged them to adopt his audit system nationwide. He also strongly recommended that the responsibility for eliminating churning be taken away from sales managers, whose main duty was selling insurance.

Cressman is said to have told investigators that he later learned that his recommendations were ignored. Instead, he was swiftly transferred out of auditing and away from any responsibility for the company’s U.S. operations. He was given a job dealing with Prudential’s Canadian operations. He contended that his annual bonuses were sharply reduced and that he was denied promotions, finally prompting him to leave in 1993.

Porraro, who retired in 1990, said in a telephone interview that he has no recollection of the Newark meeting and barely recalls Cressman. Johnson couldn’t immediately be located for comment over the weekend. DeFillippo said the company would have no comment on Cressman’s claim that he was punished until it completes its internal review.

A series of subpoenas also show that Florida is investigating multiple alleged instances of destruction of documents by Prudential that may have been relevant to the state investigations. Prudential has acknowledged some destruction of documents.

Kathleen Bird, spokeswoman for the New Jersey insurance department, said the department is looking into Cressman’s allegations, but she declined to comment on them.