Prudential Execs Told Not to Report Complaints

Prudential Insurance Co., already under fire for the alleged widespread destruction of documents, confirmed Wednesday that it ordered all of its compliance executives around the country just a few weeks ago to stop reporting to regulators certain large categories of complaints filed against its life insurance agents.

After a leaked copy of the Sept. 3 memo containing the order began circulating widely on Wednesday, Prudential said the new policy was “a mistake” and will be rescinded immediately.

The policy would have stopped the reporting of “verbal” complaints against agents and complaints related to “replacement” of policies. Pressuring customers to replace existing life insurance policies unnecessarily is the main problem that got Prudential into hot water with state insurance regulators.

The disclosure appears likely to increase Prudential’s problems with state regulators substantially, since the company issued the order after it reached a settlement with 43 states over fraud in the sale of life insurance policies. Under the settlement, and a related pending settlement of a class-action lawsuit, customers would receive compensation based in part on records of complaints against the individual agents who sold them policies.

Richard Wiebe, spokesman for the California Insurance Department, said the department will investigate the memo and the order immediately. Florida, which is conducting an aggressive investigation of the company under the state’s racketeering law, is understood to have already begun looking into it.

Prudential also acknowledged that the policy spelled out in the Sept. 3 memo would have violated National Assn. of Securities Dealers regulations, which require the reporting of complaints about agents licensed by the NASD.

The memo stated that the new policy “has been approved by legal counsel,” apparently a reference to the company’s lawyers.

In an interview late Wednesday, Prudential spokesman Robert DeFillippo said the policy in the memo “was a mistake.” He said it was based on an “erroneous” interpretation of NASD regulations by Prudential executives, whom he declined to identify. He said top management had become aware of the new policy a week ago and had decided to rescind it.

But he said it hadn’t been retracted yet because “we simply have not gotten the memo [rescinding the original memo] out.”

DeFillippo said the new policy was not meant to reduce compensation to customers who were the victims of deceptive sales practices by reducing the number of recorded complaints against agents. He said it would have had no effect on compensation because since Sept. 3, the company had been retaining in its own files records of all complaints received, even though they were not shared with regulators.

Asked if that meant Prudential was maintaining two separate sets of complaint records, one for regulators and one for the company’s internal use, DeFillippo said, “I don’t know.”

Lawyers representing Prudential customers expressed skepticism about the explanation.

“Prudential has a lot of explaining to do to the task force about how they can rely on their records at all,” said Christopher Hoyer, a lawyer representing a large number of Prudential customers in Florida. Prudential’s settlement with 43 state insurance regulators was negotiated by a multi-state task force led by New Jersey, the company’s home state.

Hoyer noted that oral complaints were especially important because Prudential has been referring all complaining customers to a toll-free telephone number.

DeFillippo said that no records of customer complaints received since Sept. 3 have been destroyed, and that all of them will now be given to the NASD. He declined to comment on whether any Prudential executives will be disciplined over the incident.

NASD rules require the reporting of all fraud complaints and of many other types of customer complaints against licensed agents and brokers, including complaints made orally. The NASD’s database that keeps track of agents’ complaint records is also used heavily by state regulators. Officials of NASD Regulation, the organization’s regulatory arm, could not immediately be reached for comment.

In the memo, Patty Christian, whom DeFillippo identified as a compliance executive in Prudential’s South Plainfield, N.J., office, instructed compliance executives at the company’s three regional headquarters around the country to stop reporting complaints about replacement violations to the NASD. It said, “ ‘Replacement’ violations are no longer deemed [by Prudential] to be captured with the NASD’s reporting definition of ‘fraud.’ ”

It also said that “ ‘verbal’ complaints will no longer be reportable” to the NASD.

Kathleen Bird, spokeswoman for the New Jersey Insurance Department, said Wednesday that she had only just received a copy of the memo. “I couldn’t even begin to comment on this until we get some explanation tomorrow” from the company, she said.

As reported Tuesday, Prudential confirmed earlier this week that through 1994 it had destroyed large numbers of customer complaint files dating from 1992 and before. It acknowledged that the destruction may also have violated NASD rules. The company contended, however, that it retained adequate summaries of the files on computer disks that could be used for determining compensation to customers.

Florida has been investigating other incidents of document destruction, including large amounts of sales material, in Prudential’s regional headquarters in Jacksonville.