Gaping Holes Found in Probe of Prudential
When New Jersey insurance regulators announced the fruits of a multi-state investigation of giant Prudential Insurance Co. last July, they presented it as a consumer victory.
Prudential would pay a record $35-million fine, they said, as well as restitution to thousands of customers who might have been cheated by misbehaving sales agents--a bill that could add up to $1 billion or more.
The New Jersey-based insurer seemed chastened. Its own executives groused privately that the investigative report had cast their company in an unfair light.
But now, nearly five months later, the New Jersey-led task force and its settlement are coming under increasing criticism from other sources. Regulators from several other states as well as lawyers for aggrieved customers are finding that the New Jersey investigators left gaping holes in their probe.
In many ways, critics say, the outcome was far more favorable to Prudential than the company deserved. It was “a whitewash,” said J. Bruce Miller, a Kentucky lawyer who represents Prudential customers and former agents suing the company.
New Jersey insurance officials strongly defended their actions, contending that their investigation was fair and thorough.
However, a two-month investigation by The Times has found that the New Jersey probe ignored major areas of alleged wrongdoing by Prudential and failed to follow up on significant evidence pointing at culpability by senior executives.
The highly touted settlement, many consumer advocates say, actually makes it difficult or impossible for many aggrieved customers to get their money back. The deal’s terms, said the Massachusetts attorney general’s office, are even less generous than what Prudential had already offered individual customers on its own.
In interviews, New Jersey insurance regulators confirmed that the multi-state investigation:
* Exonerated the company’s current and former senior executives of any direct involvement in wrongdoing--without ever interviewing any of them.
* Made no attempt to question a prominent whistle-blower or a company lawyer who had unearthed evidence of wrongdoing years ago.
* Took no action against Prudential for its repeated refusal to turn over crucial internal documents and never followed up on evidence that the company had destroyed other key documents.
* Never pursued several broad areas of alleged wrongdoing, including claims that sales agents tricked consumers into buying life insurance policies by falsely indicating that they were selling investments or retirement plans.
New Jersey allowed Prudential to get away “without rendering all the facts” about the scope and severity of the wrongdoing, said Bill Nelson, Florida’s treasurer and insurance commissioner, whose state is continuing an independent civil investigation of Prudential under its racketeering law.
Those circumstances may have allowed Prudential and its senior managers to avert harsher corporate and personal penalties. Among other things, the proposed settlement may cap Prudential’s payout to customers at about $1 billion, well short of the $2 billion to $3 billion a more liberal settlement might have cost.
The reason is that the settlement terms, largely based on proposals by Prudential, place a heavy burden of proof on customers, especially older ones. That is “about as bad [for them] as having to go to court,” Nelson said.
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Paul DeAngelo, director of enforcement and consumer protection for the New Jersey department that ran the investigation, rejects that criticism. “I think the elderly are quite capable of speaking for themselves, and protecting themselves,” he said in an interview.
Some of the 12 states that were active participants in the task force are now having second thoughts. Massachusetts and California have refused to sign the settlement and are demanding better terms.
The outcome of the New Jersey investigation troubles consumer advocates because, unlike the securities and banking industries, the insurance trade has no federal regulator. That means a company’s home-state insurance agency is the public’s main line of defense against fraud--even in cases like giant Prudential, which has millions of customers throughout the country, including more than 1 million in California.
“Because these are often the largest employers in a state and carry enormous political weight, they are often able to curry favor with the local politicians and insurance departments,” said Jason Adkins, head of the Center for Insurance Research, a nonprofit consumer advocacy organization based in Cambridge, Mass.
Indeed, Prudential, New Jersey’s third-largest private employer, has long maintained close corporate ties with the state’s political establishment.
In a unique arrangement, six of the 23 members of its board of directors are appointed by the state’s chief justice. These appointees have included several of New Jersey’s former governors--among them Brendan T. Byrne, who spent 11 years on Prudential’s board after leaving office.
In 1974, Prudential saved then-Gov. Byrne’s plan to build the Meadowlands sports complex by buying $50 million of the risky project’s bonds. In 1977, as corporations were deserting Newark, the state’s biggest city, Prudential agreed to stay.
Byrne said the company’s financial backing of governors’ pet projects gives it considerable clout. “You’re respected, your voice is listened to on critical issues, you have access.”
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On Oct. 12, just three months after the task force announced the fine against Prudential and accused the company of widespread fraud against its customers, Gov. Christine Todd Whitman and her husband were honorary chairpersons of a gala dinner thanking Prudential and its chief executive, Arthur Ryan, for the company’s $6.5-million contribution for construction of the New Jersey Performing Arts Center.
The governor’s husband, John Whitman, is the former chief executive of a Prudential subsidiary. A spokesman for Gov. Whitman said her husband has never interceded with his wife on the company’s behalf.
These relationships may have much to do with why New Jersey regulators deferred investigating Prudential for years, even after a swelling tide of customer complaints began reaching their Trenton offices in the late 1980s.
Customers complained that they had lost years of built-up cash value in life insurance policies after Prudential agents pressured them to take out new, bigger policies, falsely promising that they wouldn’t have to pay any more money.
The agents would pocket commissions for the new policies; later the customers would learn that all of the cash value on their old policies had been used up. They thus faced big bills for premiums on the new policies or the loss of their insurance coverage.
These complaints paralleled those arising elsewhere. By early 1995, numerous lawsuits had been filed around the country charging Prudential with this illegal practice, known as “churning.”
But New Jersey held off investigating until after a number of other states--including Texas, Florida, Pennsylvania and Illinois--had already launched their own probes.
State insurance officials later contended that the volume of complaints wasn’t sufficient to raise a red flag, given Prudential’s size.
California, among other states, simply referred complaints to Prudential without launching any investigation of the company.
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It was not until April 1995 that New Jersey Insurance Commissioner Drew Karpinski moved against the company in what appeared to be a bold step. He surprised insurance regulators from other states by announcing that New Jersey would create and lead a multi-state task force to investigate the allegations against Prudential.
Karpinski’s colleagues in other states were gratified at the prospect of consolidating their diverse investigations into one with, presumably, more concentrated resources.
What they did not know, however, was that New Jersey had acted at the behest of Prudential itself.
“Prudential contacted the New Jersey department of insurance and was largely instrumental in having the department try and set up a multi-state solution,” said Stanley C. Van Ness, a Prudential board member who was once New Jersey’s elected public advocate.
Van Ness said the contact was initiated by Ryan, who had just taken over as Prudential chairman and chief executive.
Karpinski moved swiftly to control the scope of the investigation. He proposed confidentiality rules restricting the disclosure of Prudential information so stringently that they conflicted with the laws of several states that had hoped to participate in the probe.
The investigators took no steps to force Prudential to turn over vital information--including internal audit reports that might have shown decisively who knew what and when at the company.
New Jersey law specifically requires companies to turn over such audit reports to the insurance department. But Prudential refused to comply, explaining in a letter that the company’s “ability to continue to do candid reviews of its own affairs would be compromised by the precedent set of regulatory parties reviewing its self-critical analysis.”
Neither the insurance department nor the state attorney general’s office ever filed any legal action to make the company comply.
Anita B. Kartalopoulos, a New Jersey deputy insurance commissioner, said there was “sufficient documentation in the opinion of the task force members for the conclusions that we were coming to.”
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Karpinski, who resigned as insurance commissioner in September 1995, didn’t respond to numerous phone messages or a written request for comment on his conduct of the investigation. Insurance Commissioner Elizabeth Randall, who succeeded Karpinski, also declined requests for an interview.
But other New Jersey officials strongly defend the investigation as thorough and free of improper influence by Prudential and a product of joint decisions by the 12 states that actively participated.
DeAngelo insisted that he was given “free rein” to pursue the probe. “If the examination was not comprehensive, if the examination was not aggressive, in anyone’s opinion, and I’m not accepting that opinion, I’m the one to blame.”
Critics say New Jersey’s lax approach to the investigation was exemplified by its reaction to a bombshell tossed its way July 1, just eight days before the task force was to issue its report.
Prudential, after withholding it for months, abruptly turned over to the task force a copy of a 1992 memo written by James C. Helfrich, a lawyer who was then the director of consumer affairs and marketing practices for Prudential’s 14-state Southern region.
The memo, which DeAngelo has since confirmed was seen by top management, cited massive, companywide problems with churning and urged Prudential to publicly apologize. Helfrich also wrote that the company had systematically trained agents around the country to illegally churn customers and urged the company to fully reimburse customers who were wronged.
The memo was a powerful indication that Prudential brass had known of the churning problem and done nothing to correct the abuses.
Prudential declined to answer any questions from The Times about the memo or the decision to turn it over. Helfrich, who signed a confidentiality agreement upon receiving a severance settlement from Prudential, declined to comment.
With their deadline approaching for a final task force report, New Jersey investigators decided neither to extend the investigation nor to delay the release of the report. When both the task force report and a separate New Jersey report were issued July 9, neither made any mention of Helfrich’s memo.
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When the existence of the memo leaked out a week after the task force report, New Jersey officials said the document was “not a smoking gun,” in Kartalopoulos’ words.
At the press conference in Trenton announcing the report, Insurance Commissioner Randall and her staff minimized the guilt of the company and its top management. No evidence had been found of “affirmative misdeeds” by the company’s senior management, she said.
Randall also pointed out that the report found the company wasn’t even aware it had a problem until at least 1992.
As it happens, that contention ended up driving the investigation into an entirely new phase. One former executive at the company, reading an account of the press conference, said he knew that the 1992 date was not true.
John Cressman, a former national audit director at Prudential, had made a presentation in 1986 to senior managers at the company’s headquarters in Newark to recommend steps for stopping the practice.
Cressman provided the New Jersey regulators with a statement and a number of documents. But the agency “never followed up” by summoning him for an interview or deposition, Cressman said.
In contrast, Florida regulators immediately flew to Washington to take Cressman’s deposition. Florida subpoenaed the Cressman audits and report from Prudential. Prudential has refused to comply with the subpoena, contending the material is irrelevant to Florida’s investigation.
New Jersey continues to strongly deny that Prudential in any way improperly influenced its investigation. But Adkins, of the Center for Insurance Research, said the shortcomings of the New Jersey-led inquiry highlight the problem with leaving regulation of national insurers to individual states.
“The problem is that you have these multibillion-dollar companies that have enormous power and influence in their state, and it affects how the state’s regulators look at them.”
