Judge Acts to Settle Prudential Class Action

A federal judge in New Jersey has touched off a storm of criticism over a secret, closed-door hearing this week in which he cleared the way for a settlement of a class-action lawsuit strongly favored by Prudential Insurance Co., the target of the suit.

U.S. District Judge Alfred M. Wolin acted as the settlement risked unraveling over opposition from some state insurance regulators and the threat that at least one rival lawsuit, in Alabama state court, might take precedence over his case.

Wolin issued an unusual order halting other class-action lawsuits around the country, some of which are about to go to trial.

Wolin’s surprise ruling would apply the settlement to 10.7 million customers nationwide, including 750,000 in California, who may have been victims of fraud and misrepresentation in the sale of life insurance policies by the nation’s largest insurer.

(The judge still must give final approval to the settlement in a hearing in January.)

Prudential stands to benefit from the settlement because it believes its liability would be capped at about $1 billion. Insurance ratings agencies have threatened to downgrade Prudential’s bond ratings if a settlement much exceeded that amount. A downgrade could also make it much harder for the company to sell new policies.

But many policyholders’ lawyers and insurance regulators in states, including California, Florida and Massachusetts, contend that the settlement unfairly favors Prudential by making it difficult for customers, many of them elderly, to qualify for compensation. The settlement has also drawn criticism because it would give $90 million in legal fees to the lawyers who filed the suit.

In addition to protests from regulators and lawyers who oppose the settlement, law professors expert on class actions said in interviews that the judge appeared to have acted improperly by not conducting the hearing in open court and by failing to inform lawyers directly involved with the case that it was happening.

On Monday, in a courtroom just blocks from Prudential’s headquarters in Newark, N.J.,the judge, with no public notice, held a hearing inside his chambers. He admitted only Prudential’s lawyers and the lead policyholders’ lawyers, who had filed the class-action suit.

No court stenographer was present to record the proceedings. A New Jersey insurance department lawyer, alerted that the hearing was being held, showed up, but the judge denied her request to attend, a spokeswoman for the department said.

While the hearing was in progress, a Times reporter phoned the judge’s secretary, who denied that any hearing was being held or that the judge would take any action that day on Prudential.

Only after being told that Prudential’s spokesman had already confirmed that the company’s lawyers were at that moment in with the judge did the secretary confirm that “there is a private meeting going on that is off the record.”

The controversy in the Prudential case comes amid widening concern nationally over class-action suits, and some appeals court judges have criticized class-action lawyers for settling cases on terms favorable to defendants in exchange for large legal fees.

“I think it stinks,” said Roger Cramton, a law professor and former dean of Cornell University Law School, that a judge overseeing a class action affecting millions of citizens issued rulings in a nonpublic hearing.

Susan P. Koniak, a Boston University Law School professor who has written extensively on class actions, called the closed hearing “shocking” and said: “I find it enormously disturbing that a judge would exclude not just the press but government officials who presumably could provide a check on the very great potential for abuse in class-action settlements.”

Wolin did not respond to a request for an interview. And lawyers for Prudential and Melvyn Weiss, the lead policyholders’ lawyer in the class action, did not respond to numerous messages left with their offices since Monday.

Prudential has said it believes the settlement is fair and in the best interests of its customers.

Richard Wiebe, spokesman for the California insurance department, said he was “mystified how the judge can exercise such authority over California policyholders.” He criticized the judge for not giving notice that would have allowed the state to have its say before the decision.

The lawsuit and investigations by many state insurance departments stem from evidence that Prudential deceived customers into borrowing money from paid-up life insurance policies to buy new ones, often with false promises that they would never have to pay premiums on the new policies. While the transactions were financially harmful to the customers and often left older customers with no insurance coverage, they provided steep commissions for Prudential’s sales force.

Times staff writer William Rempel in Los Angeles contributed to this report.