Florida Issues Charges, May Oust Prudential

Florida insurance officials on Monday formally accused Prudential Insurance Co. of a “widespread, systematic pattern of deception” of its policyholders and said the firm faces stiff sanctions that could bar it from selling insurance in the state.

Those charges were contained in a 34-page administrative complaint filed against the nation’s largest insurance company by Florida Insurance Commissioner Bill Nelson. He also accused Prudential of destroying potential evidence and obstructing a state investigation.

Prudential has 21 days to contest the Florida action. In a prepared statement issued Monday afternoon, the company conceded its agents engaged in deceptive practices that “are clearly unacceptable,” but insisted the company was “taking aggressive steps” to prevent similar future conduct.

The statement expressed surprise at the Florida action, saying it “does not bring us closer to providing remedies to policy owners in that state.”

Nelson said he took action to sanction Prudential in order to protect Florida consumers and to send a message “that no matter how big you are, you still have to obey the law.” And, in a telephone interview, he vowed that Prudential “is certainly going to pay back every dollar it took from Florida.”

He was particularly critical of the company’s refusal to turn over internal audit reports subpoenaed months ago by Florida investigators. Copies of some of those documents, obtained by The Times, show that top Prudential executives were warned about a possible nationwide problem with deceptive sales practices more than a decade ago.

“I’m ordering them to come forth and stop stonewalling,” Nelson said.

In his formal complaint, Nelson specifically cited the company for engaging in illegal conduct that included deception, misrepresentation and forgery involving such improper techniques as “churning”--a practice that involves misleading customers into turning over the cash value of an existing policy to buy new, bigger ones, often with false promises that no additional premiums would have to be paid.

The complaint relies extensively on the disclosures of former Prudential auditing executive John Cressman, who said he informed top management officials about the churning problems in the 1980s and recommended programs to prevent it. Nelson’s complaint said that Prudential could have taken steps to spare victims but “chose instead to do little or nothing to substantially halt these practices.”

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Nelson estimated that 100,000 Florida residents, most of them elderly, were victims of Prudential’s deceptive sales practices.

“The message Prudential needs to get out of this is that when you deceive, you pay the consequences,” Nelson said.

Attorney General Bob Butterworth told a Tallahassee press conference Monday that his office was continuing to conduct a parallel investigation into Prudential’s conduct. There were reports that his office was preparing to file a racketeering complaint against the insurer, and Butterworth left that possibility open.

“We will pursue all the options available to us,” he said.

Florida’s action drew cautious responses from other state regulators.

Mark Lowder, California deputy insurance commissioner for enforcement, said his office has been in settlement discussions with Prudential for some time and expects to make a decision this week. “We haven’t yet decided whether we may announce some settlement or may turn up the heat on Pru,” Lowder said.

But Cressman’s Beverly Hills attorney was among those pressing for California authorities to take a more aggressive role.

“Florida regulators are like the cavalry riding to the rescue of their citizens,” said Samuel Wilner, “but California has a lot of elderly victims, too, who need at least as much protection.”

In New Jersey, the home state of Newark-based Prudential, a statement issued by Banking and Insurance Commissioner Elizabeth Randall defended that agency’s prior investigation of Prudential.

New Jersey had come under criticism by Florida regulators who said it did not require sufficient remediation. Randall’s statement said that “we are confident we’ll reach any and all policyholders who have been wronged.”

J. Robert Hunter, insurance director of the Consumer Federation of America and former Texas insurance commissioner, said he suspected that Florida took such harsh action because regulators “wanted to get management’s attention” at Prudential.

Hunter called the threat of license revocation or suspension “the nuclear weapon.”

He and others said this is the first time a company so large has ever been threatened with a shutdown for a reason unrelated to financial stability.

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From time to time, regulators have taken such sweeping action against firms whose solvency is in question, but Prudential, Hunter noted, has “more assets than all but a handful of countries.

“You’ve got to assume this will be worked out, that they will still be writing policies a year from now. In a sense, they’re too big to fail,” Hunter said.

Moody’s Investors Service, one of the largest credit-rating agencies, is “waiting and watching” to see what happens in Florida, said senior analyst Patrick Finnegan.

Moody’s put Prudential under review last July when the results of a multi-state task force were announced, and Finnegan said the firm is hoping to complete its review “sooner rather than later.”

“Clearly a significant question for our review committee is if we feel this could impact their franchise,” Finnegan said.

Finnegan said he, too, is unaware of any previous insurer receiving such a threat--”the worst of all sanctions”--for nonfinancial reasons.

One prominent insurance industry attorney who asked not to be identified said the threat of imposing “the death penalty” against Prudential may be a hard-ball bargaining ploy by the Florida regulators.

“The last thing that you want is to take Pru down--the consequences for the insurance system would be catastrophic,” the lawyer said.