Big Insurance Broker Vows Reforms as Its CEO Resigns

Bowing to pressure from New York Atty. Gen. Eliot Spitzer, the chief executive of insurance broker Marsh & McLennan Cos. resigned Monday, and the company said it would take steps to address accusations that it had rigged bids and cheated clients.

Jeffrey W. Greenberg was replaced by Michael G. Cherkasky, a former Manhattan prosecutor and onetime mentor to Spitzer. Cherkasky also serves as the court-appointed monitor overseeing reforms in the Los Angeles Police Department.

After Monday’s shakeup, Spitzer announced that he would not file criminal charges against Marsh, though he reserved the right to charge individual executives criminally. Some observers, citing the collapse of the Arthur Andersen accounting firm amid the Enron Corp. scandal, said that criminal charges could have threatened Marsh’s survival, along with the jobs of its 60,000 employees.

The exit of Marsh’s CEO was the latest in a series of events to rattle the industry since Spitzer hit the company with a civil lawsuit this month. The suit said that Marsh, instead of getting the best deals for its mostly corporate clients, steered them to insurance companies that made backdoor payments to the broker.

In the wake of Spitzer’s action, several major insurance companies and brokerages have vowed to change their payment practices. Other authorities, including California Insurance Commissioner John Garamendi, have also taken sharp aim at the industry. And Wall Street has punished insurance stocks.

Industrywide, the slide is estimated to have lopped $40 billion off the stock-market value of insurance companies. The total worth of Marsh shares alone sank below $12 billion last week, down from more than $24 billion the day before the suit was filed.

News of Greenberg’s resignation, made in a statement released after the close of New York Stock Exchange trading, caused Marsh shares to rally in the after-hours market Monday, although they remained well below their pre-lawsuit level.

Marsh, parent of the nation’s largest insurance brokerage, said it would announce a series of moves today that “will be rooted in transparency and under which Marsh will receive compensation for its services from only one party: its clients.”

The developments at Marsh -- which Spitzer hailed as the first steps toward settling the suit he brought -- were the product of intensive negotiations over several days between Marsh officials and the attorney general’s staff.

Outside directors of Marsh shuttled between meetings Monday at the company’s midtown Manhattan headquarters and Spitzer’s office, near Wall Street.

Thus, in less than two weeks, Spitzer has won a major victory in his latest crusade -- trying to stop conduct that he contends has corrupted the insurance marketplace. And he has done so without resorting to criminal charges at Marsh.

“We are persuaded that the goals that would have been advanced by a criminal prosecution of the corporation -- punishment, restitution, general deterrence, and industry reform -- will be better accomplished by criminal prosecution of individuals, adoption of dramatically new business procedures, installation of new leadership, a full examination of prior wrongdoing and a pledge of restitution to those harmed,” Spitzer said in a statement Monday.

The inquiry follows other Spitzer probes that resulted in heavy fines and reforms in the mutual-fund industry and in the way Wall Street stock analysts do business. Spitzer also is examining whether the nation’s record labels are skirting payola laws by hiring middlemen to influence which songs are heard on the public airwaves.

The departure of Greenberg, 53, was widely expected because Spitzer had said he would not negotiate with Marsh’s existing management.

Greenberg is the son of Maurice “Hank” Greenberg, chairman and CEO of insurance giant American International Group Inc., which was named but not charged in Spitzer’s Oct. 14 complaint. The former Marsh CEO is the brother of Evan Greenberg, 49, who runs insurer Ace Ltd. of Bermuda, which was also named in the complaint.

The attorney general had crossed swords with the company before. In April, Marsh’s Putnam Investments subsidiary agreed to pay $110 million to settle allegations of improper mutual-fund trading. Putnam had been the first company charged with wrongdoing in connection with rapid, in-and-out trading of funds, known as market timing. Spitzer exposed the practices in 2003.

Another Marsh unit, consultant Mercer, admitted this year that it provided inaccurate information to the NYSE in connection with ex-Chairman Richard Grasso’s pay package. Mercer returned more than $440,000 in fees it had charged the NYSE as part of a settlement with Spitzer.

Although Greenberg was not personally implicated in any wrongdoing, Marsh’s outside, or non-employee, directors believed his resignation was crucial to a settlement with Spitzer, said one director who asked not to be identified.

“From the time this crisis was reported to the board, Jeff Greenberg expressed his willingness to do whatever he needed to do to save the company, including resigning,” the director said.

Marsh also announced it had formed a committee of outside directors to spearhead the resolution of its legal and regulatory problems. Robert F. Erburu, former chairman of Times Mirror Co., the former parent company of the Los Angeles Times, will head the committee.

In 54-year-old Cherkasky, Marsh at least is assured of having a CEO who can pass muster with Spitzer.

Cherkasky was a senior investigative lawyer in the Manhattan district attorney’s office and a mentor to Spitzer when he began his prosecutorial career there. Cherkasky went on to become chief executive of Kroll Inc., a corporate security and investigations firm that was acquired by Marsh in July.

The day after the Spitzer lawsuit was announced, Marsh elevated Cherkasky to be CEO of its insurance brokerage unit, a title he will continue to hold while he takes over as head of the parent company.

In 2001, Cherkasky was selected as the independent monitor to oversee reforms of the LAPD under a consent decree with the U.S. Justice Department, which threatened to sue the city for a pattern of police misconduct.

Cherkasky’s quarterly reports on the progress of reforms have frequently been critical of the department.

A year ago, he questioned the LAPD’s commitment to reform after learning that undercover officers, posing as citizens trying to report police misconduct, were routinely dismissed or stonewalled by fellow officers in a series of stings. Cherkasky asked whether the LAPD had undergone the “necessary cultural shift” -- even though a close friend, Chief William J. Bratton, was leading the department.

Spitzer has said that the practices alleged to have occurred at Marsh appear to be widespread in the industry. On Monday, a person familiar with the probe said evidence had surfaced of wrongdoing at Aon Corp., the nation’s second-largest broker. Civil charges could be brought in the next few weeks, the source said.

Aon spokesman Gary Sullivan declined to comment.

The person familiar with the probe said that Aon appeared to have steered clients to insurance companies based in part on payments, known as contingent commissions, that it received.

Times staff writers Kathy M. Kristof and Richard Winton in Los Angeles and Walter Hamilton in New York contributed to this report.