Ex-Insider Offers Look at Seeds of Prudential Scandal

It was summer, 1982. John Cressman, a fast-rising young auditing executive--a Prudential man like his retired insurance agent father--was stopped in the hall by the consumer affairs chief at the insurance company’s Minneapolis regional office. Could he look into a rash of complaints that some sales agents in Iowa were cheating customers, tricking them into mortgaging the value of their old, paid-up life insurance policies for new ones they couldn’t afford and didn’t need?

The potentially fraudulent sales practice, now known in the insurance industry as churning, earned big commissions for the sales agents but was financially harmful--sometimes ruinous--to the predominantly elderly policyholders, who risked losing substantial portions of their retirement savings as well as their life insurance coverage.

The investigation Cressman launched in response to that five-minute meeting in the hall would ultimately uncover such widespread deceptive practices that it brought the youthful auditor here, to the paneled offices of corporate headquarters. A decade ago, he says, he warned top executives of Prudential Insurance Co. they had a serious problem that would get worse unless the company assigned independent watchdogs to enforce reforms.

Today the nation’s largest insurance company is struggling to contain damage from a scandal Cressman saw in its earliest stages. But now, the costly and embarrassing controversy affects millions of Prudential Insurance Co. of America customers, has spawned lawsuits seeking hundreds of millions of dollars in damages and has made the company a target of investigations by insurance regulators across the nation.

Besieged company officials have backed down from earlier claims that the churning problem was confined to a few rogue agents, accepting the findings last July of a multistate investigative task force that declared deceptive sales practices were common in Prudential offices around the country.

Chairman Arthur F. Ryan issued a public apology, calling such practices “intolerable.” But Prudential has continued to insist that top management had no reason to know of the widespread abuses until recently.

That is what brought Cressman back from previous forced retirement from Prudential. Now the longtime company insider is an outside whistle-blower who has recounted to Florida and New Jersey insurance regulators the contents of his old audit reports and his early warnings to Prudential’s senior management.

“They knew it,” Cressman said. “I told them.”

Cressman’s story, told publicly for the first time in a series of lengthy interviews, provides a rare glimpse of the origins of a scandal. His account that Prudential’s top management knew much earlier than previously disclosed that the company had serious problems with misrepresentation and fraudulent marketing practices is bolstered by documents obtained by The Times and from interviews with other sources.

Prudential would not answer specific questions about Cressman or about the allegations he makes, responding to a four-page list of detailed questions from The Times with a one-paragraph statement reiterating Ryan’s apology and vowing that the firm “is committed to resolving the legitimate complaints of its policyholders.”

At the same time, the company is fighting a Florida insurance department subpoena demanding release of Cressman’s old audit reports.

A copy of one of those contested audit reports, obtained by The Times, shows that Prudential management was alerted more than 13 years ago that “the conditions and pressures that led to the misleading sales practices [in Iowa] exist elsewhere in the country.” The 1983 report called it a matter of “considerable concern” in both regional and corporate headquarters.

Cressman and others say that even after top executives were warned, the company failed to take effective action to stop the practices. In fact, interviews and documents show that Prudential management trained some of its agents to engage in the kinds of sales tactics that its official policy handbook prohibits.

Finally, when internal investigations turned up problems--ranging from fraud to forgery--the company failed to notify authorities and, in many cases, neither notified nor reimbursed the customers.

Cressman’s new allegations have prompted Florida regulators to expand their probe. Investigators from Tallahassee put the former auditor under oath for a six-hour deposition in September. Cressman also has provided a written statement to New Jersey regulators describing his past audits and reports to Prudential executives.

His claims of Prudential’s prior knowledge also are fueling efforts to unravel the proposed settlement of a nationwide class-action lawsuit that could cost the company at least $1 billion.

Private attorneys in Florida, California and elsewhere are organizing opposition to the pending settlement, contending that under its terms most customers would not recover their actual losses.

“We want to prevent the second victimization of these policyholders,” said Beverly Hills attorney Samuel Wilner, who has shuttled among law offices around the country coordinating opposition. Wilner represents both Cressman and a number of Prudential policyholders.

It is not clear how many of Prudential’s 10.7-million customers were victims of such practices, but estimates range from 10% to 30% nationwide. In some states the percentage could be considerably higher.

Cressman, who earlier this year was appointed assistant to the chief financial officer at the Department of Housing and Urban Development after nearly three years as deputy director of administration at the White House, does not relish his new public role as a key critic of his former employer.

For the onetime Prudential auditor, standing up to this financial giant is more disheartening than heroic. It has something to do with history.

Learned Business at Father’s Side

As a boy in eastern Pennsylvania in the 1950s, Cressman liked to tag along with his father, the Prudential insurance agent, when he made rounds collecting the small premiums his clients raised working the steel mills or farming the countryside. Sometimes they could barely scrape together the few nickels to pay their weekly premiums.

He was 6 years old when he attended his first Prudential sales convention with his father in Florida. He discovered his interest in accounting helping his father balance his agency books. He let his father test new sales pitches on him. Prudential was his first job after graduating from Penn State University, and the company paid for his graduate studies in finance at Lehigh University.

“We were a Prudential family,” he said with a mix of pride and disappointment.

Years later, investigating schemes to defraud Prudential customers, Cressman was haunted by visions of those hard-working policyholders he met with his father. “I could see their faces,” he said.

Now it is Cressman and the echoes of his 10-year-old warnings to company management that are haunting Prudential.

When Cressman was forced to retire in 1993 after 22 years with Prudential, he was mystified over what had stymied his once-promising career.

In retrospect, he says, his decline at Prudential coincides with his early discovery of the seeds of scandal.

The key moment: Cressman’s special presentation to a senior management group headed by the corporation’s top marketing executive shortly before Christmas in 1986. The entire meeting took no more than 40 minutes, Cressman said, ending with handshakes all around and pats on the back.

“Fine job . . . extremely helpful,” said the senior vice president in charge of marketing in a follow-up letter to Cressman. “Have a great year in ’87.”

But he didn’t. By spring Cressman was transferred from Minnesota to Newark and, to his disappointment, given a series of backwater assignments where he had nothing more to do with monitoring or reforming fraudulent marketing practices.

Some years later, frustrated and puzzled by the subsequent decline of his career, he left the company. Records made available to The Times show that Cressman accepted a voluntary buyout amounting to a year’s salary after his attempts to be reassigned inside Prudential were rebuffed.

He left his New Jersey office for the last time in the spring of 1993, ending “50 years of Cressmans” at Prudential, still believing that his warnings to management were helping protect millions of policyholders like those who trusted his father.

He was wrong, but it was years before he knew it. Cressman said he learned only last summer, when he read news accounts of the Prudential investigation, that the watchdog reforms he proposed were not in place. For Cressman, that realization also solved the mystery of his sidetracked career.

“It all clicked,” he said. “I was inconvenient. . . . They wanted me to go away.”

Iowa Probe Raised First Red Flags

Trouble in Iowa was Prudential’s wake-up call. Suspect sales offices in Cedar Rapids were the first targeted for investigation by internal auditors in the late summer of 1982 based on about 30 similar complaints. Cressman got his first report from the field by phone within hours after the audit team arrived.

“It looks like we’ve got a problem big time,” Cressman said he was told by Jim Wallis, a crusty senior auditor. And over the next few days the team reported extensive evidence of misrepresentation, fraud and forgery. It was more than a few rogue agents. It was, they found, how many of the salesmen were trained by their Prudential managers.

Cressman, an 11-year veteran of the corporate bureaucracy, did not want management to respond by firing someone and declaring the problem solved. He wanted to know if the problem was bigger than the original 28 complaints his team confirmed involved churning.

The auditing executive ordered a review of the last 2,500 new policies issued through the Cedar Rapids offices and found another 819 cases fit the churning profile. Nearly one-third of the new Cedar Rapids business over a period of 15 months was the apparent product of deceit.

Now, Cressman and Wallis took their findings to regional management. Meeting in a Minneapolis conference room with North Central regional office President Robert Hill and the region’s vice president for marketing, Laurier Horion, Cressman says he had barely discussed the 28 original complaints when Horion offered that “if we have some bad apples down there, I’m going to go down and take care of it.”

That’s when the auditor pulled out his stack of 819 other victims--the policyholders who had not yet complained, perhaps because they still didn’t know they were victims.

“Everyone else stopped talking,” recalled Cressman. In the silence he suggested auditors should go back to Cedar Rapids and debrief every employee and interview a sampling of customers. The marketing executive agreed, to which Wallis snapped: “I’m glad you think so, Mr. Horion, because we’ve already got our plane tickets.”

Despite reports of lingering friction between auditors and marketing officials, the subsequent probe resulted in the dismissals of 14 agents, two sales managers and the district manager. However, it was not until Cedar Rapids TV station KCRG ran a weeklong expose on “The Policy Raiders” that Prudential management announced plans to reimburse Iowa victims.

Pelligrino “Bill” Porraro, the senior Prudential vice president and top marketing official in Newark, went on the air to assure Iowa policyholders that they could have all their diminished policies restored to full value.

After the damaging publicity and costly corrective measures, Cressman dug into other Midwestern offices. He found that one of Prudential’s top sales performers churned 90% of his sales volume.

Marketing executives were getting impatient with Cressman’s aggressive auditing tactics. They were troubled especially that Cressman and his auditors were contacting policyholders, asking a lot of questions and, they felt, jeopardizing good sales. One executive confronted him in the hall in a manner that Cressman, a 4-foot-4-inch dwarf, said seemed physically menacing.

At the time, Milan Johnson was Prudential’s chief audit officer at the Newark headquarters. He was also Cressman’s boss and mentor. Cressman said he got a phone call from Johnson suggesting that perhaps it was time to “stop looking back. . . . You’re going to take the whole place down.” Johnson said he recalls no such conversation.

Cressman says he was responding to Johnson’s call, however, when he dropped audits of other Midwest offices that could have led to the firings of agents and managers for past wrongdoing. Instead, he concentrated on preventing the problem from spreading. He helped design and launch a computer-assisted monitoring program intended to detect suspicious sales activities before they could grow to Cedar Rapids dimensions.

That monitoring program had been in place for about two years when Cressman put it to a test launching a nationwide audit. It was clear from the beginning, he found, that there were major holes in the prevention net.

Churning “was occurring at different levels in different places, but it was occurring throughout the country,” Cressman said. “In some areas it was increasing. We had a problem that was probably going to get a lot worse if we didn’t find a way to fix the monitoring and controls.”

That was the message he said he took to Newark on Dec. 16, 1986. The presentation, accompanied by slides, took place in a wood-paneled conference room attended by Porraro, the corporation’s senior marketing executive; chief auditor Johnson, and at least two of their aides.

Cressman recalled that there was little response. Porraro asked no questions and, except for an occasional nod, made no comment during the presentation--not even when Cressman emphasized what he regarded as the most important reform proposal.

The main problem, he said he told the executives, was that investigations of sales fraud were in the hands of local marketing people--those responsible for much of the churning in the first place and who would be hurt most if the charges were confirmed.

“Our No. 1 recommendation was to put [monitoring and investigation] in the hands of people who would be independent of marketing, who could get the job done right,” Cressman said.

The young auditor had never made such a presentation to corporate executives before, and he had no way to gauge the reaction, which consisted mostly of a pat on the back and a few nice words by Porraro.

In recent interviews, neither Porraro nor Johnson could recall the meeting.

However, a copy of Porraro’s brief letter to Cressman, dated three weeks later, thanked him for reviewing his audit of company business practices, calling it “extremely helpful” and ending with an assurance that his work would aid “effective management of our business practices.”

A few months later, in an annual performance review signed by Chief Auditor Johnson, Cressman’s nationwide audit and oral presentation were cited to support his rating as the company’s “top ranked audit director.”

Cressman said that while he “felt a little bit like a nag”--revisiting a problem “everyone knew about already”--he assumed at the time that the favorable response to his presentation indicated his key proposals to reform anti-churning controls would be incorporated into the company’s monitoring program.

It is not clear today what, if any, measures were adopted and employed after that 1986 presentation, but the historical results are clear. Instead of getting protection from policy raiders, Prudential customers in exploding numbers were becoming victims of churning.

Agent Traces Firing to His Complaints

Within days of Cressman’s warnings in Newark that Prudential had a companywide churning problem, agent Rick Martin assumed the sales manager’s job in Memphis. He found the phones ringing with calls from churned policyholders who had just discovered they were victims.

“I had one lady who cried for about 45 minutes,” Martin recalled in an interview. “She was duped, and the guy that did it to her had been promoted.”

Martin said he reversed the deal, canceling her new policy and reinstating her old one. He did the same for a number of others. A month and a half later, the sales manager found his $1,500 weekly salary reduced to $1,100 to compensate for those lost policies.

“I could go out there and be the good guy, but I couldn’t survive,” Martin said. When he continued to complain about churning practices, he was fined $5,000 and then fired, according to a lawsuit Martin has brought against Prudential for wrongful termination. The company declined to comment about Martin or the case.

About a year later in San Diego County, a 60-year-old woman whose mother and grandmother had been Prudential policyholders before her, unknowingly surrendered the cash value of a $10,000 policy on which she had been paying $19 monthly premiums for half her life.

According to her lawsuit, Jean Desmond of Mira Mesa, now 68, said she believed the agent from “the Rock of Gibraltar” when he told her she could use her old policy to build a much bigger retirement nest-egg and only have to pay premiums for a year.

The salesman got a $1,300 commission, says her suit, while Desmond’s modest insurance nest-egg was wiped out. Prudential declined to comment on the case.

About 90 miles north, Prudential agent Rick Walters was assigned to clean up after the churning mess left by agents working out of one San Fernando Valley office. The manager of that office had been promoted as a reward for his sales volume, but Walters was handed a stack of 150 complaints and told, he said, to do “whatever it takes to stop the bleeding.”

Over the next two months at the end of 1991, Walters said, he encountered numerous cases of fraud, misrepresentation and forgery. He reversed about 75 sales, resolved a handful of pending insurance commission inquiries and, he said, “made a lot of policyholders happy” before being relieved of the assignment with many complaints still unresolved.

Walters’ promotion hopes were dashed almost immediately, however, when he found himself working for the vice president who had promoted the churning manager. Walters’ next assignment: North Dakota. He later was fired and is suing Prudential for wrongful discharge.

Prudential would not comment about Walters’ case or his allegations.

Finally, Prudential senior management got what appears to be its last internal warning in December 1992--six years after Cressman’s Newark briefing.

James C. Helfrich, a lawyer and consumer affairs director for Prudential’s southern region, had never heard of Cressman or his 1986 audit report when he drafted his own 1992 memo noting that the high volume of consumer complaints he investigated had their roots “in the mid to late 1980s”--the period when Cressman first sounded the alarm.

In Helfrich’s memo, a copy of which was obtained by The Times, the Florida official proposed Prudential publicly admit it had a major problem and start reimbursing policyholder victims. “We have to make a decision on whether to . . . do what is right for our customers?”

He also wrote it was time to “admit that [churning] was the primary, or only, way many . . . agents were trained to sell insurance.” He called it “an easy, appealing way to generate commissions.”

Knowledgeable sources said Helfrich handed a copy of his memo to then-Prudential President Ron Barbaro when he visited the Jacksonville office that December. At least two other top management officials and a high-level committee that set company policy for life insurance sales also received copies. Then it was filed away.

Barbaro said he doesn’t recall reading the memo and said he was unaware of widespread churning problems. But he added: “That doesn’t exonerate me, I guess.”

The Helfrich memo would not gain wide circulation until last summer when it was turned over to state regulators, in response to a subpoena, just eight days before the task force report was issued. By then, Helfrich and Prudential had parted company.

He Finds Comfort in Old Memories

Cressman, now 45, remains personally discomforted by his role as a Prudential whistle-blower. But he is reassured by memories of a distant conversation with his late father, by then a retired Prudential agent. He was visiting his son in Plymouth, Minn., in the midst of the 1982-83 Cedar Rapids investigation.

“We were sitting around the kitchen table talking about it and Dad just shook his head,” Cressman recalled. “He was disappointed, but he wasn’t surprised.”

The elder Cressman knew agents who were fired because their sales volume was lower than that of the mostly younger agents willing to engage in churning or similar fraudulent practices.

“I remember he wanted me to know that the problem was bigger than Cedar Rapids--and that he was proud of me,” John Cressman said. “He felt I was sticking up for the old guys. The ones who did it right.”

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How ‘Churning’ Works

Prudential agents went to policyholders who already had paid-up life insurance policies with the company, many dating back 20 or 30 years, and persuaded them to use the built-up cash value and dividends from the old policies to buy new, larger ones.

In essence, the customers were borrowing money from the old policies to buy new ones. According to the multi-state task force that investigated Prudential, the agents frequently “misrepresented to consumers that they would not have to pay any additional out-of-pocket premiums for the new policies or that only a limited number of premium payments would be needed.”

1) Customer has a $10,000 life insurance policy purchased in 1960.

2) Prudential agent persuades the customer to borrow from the cash value of the policy to buy a new, larger one with a death benefit of, say, $100,000.

3) Agent shows the customer an “illustration” showing that there will be no more premium payments on the new policy after a few years and the new policy will generate so much in interest that it will have “paid for itself.”

4) Agents sometimes illegally have customers sign blank “disbursement forms” or forge customer signatures on the forms so that money can continually be withdrawn from the old policy to pay for the new one without the customer realizing that all of the cash value of the old policy is being depleted.

5) Once new policy remains in force for two years, the agent is assured of keeping his commission.

6) Several years after the new policy was sold, the customer receives a new statement from Prudential showing that he or she will have to continue paying premiums indefinitely to keep the new policy in force. Customer learns that in the meantime, the cash value of the old policy was completely used up.