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Marsh may face more than $500 million penalty

New York Attorney General Eliot Spitzer said his bid-rigging investigation will seek compensation from the nation's largest insurance broker for "ill-gotten gains" that could far exceed $500 million.
/ Source: The Associated Press

New York Attorney General Eliot Spitzer said his bid-rigging investigation will seek compensation from the nation's largest insurance broker for "ill-gotten gains" that could far exceed $500 million.

That would put any settlement or penalty against Marsh & McLennan Companies Inc. among the largest payments to end enforcement actions by regulators.

Last year, Spitzer made his name nationally when Merrill Lynch & Co. settled his conflict of interest case against the brokerage for $100 million. That settlement was a model for a $1.4 billion settlement with 10 brokerages in the industrywide settlement involving the U.S. Securities and Exchange Commission, Spitzer and his counterparts in several states.

Spitzer wouldn't say how much Marsh & McLennan might have to pay in a settlement or if it loses the state's civil suit. He accuses the broker of accepting fees from insurance companies in exchange for steering customers to the companies. A broker is supposed to represent only the interests of the customer.

Spitzer's civil suit claims Marsh was paid $800 million in 2003 alone through the contingent fees.

"It is going to be a principle of disgorgement of ill-gotten gains," Spitzer told The Associated Press. "We will do the calculation and it could be far higher than the $500 million."

Spitzer added, "Anybody who says $500 million as some kind of cap is going to be miscalculating."

The Wall Street Journal, citing unnamed sources, said the starting figure for any settlement would be $500 million. Since Spitzer announced his suit Oct. 14, the company's chief executive resigned and outside directors have scrambled to settle the case as its stock plummets.

"The number I saw in the paper is not one that I have heard," Spitzer said after speaking to the Federal Law Enforcement Foundation in Manhattan. "There has been no discussion about a number. It is very premature."

A Marsh spokesman didn't respond to a request for comment Thursday.

Also Thursday, Fitch Ratings downgraded Marsh & McLennan debt to BBB from A-minus and kept the company on its "rating watch negative" list for possible further downgrades. Moody's had lowered the company's debt for a second time on Wednesday.

Spitzer filed a civil suit against Marsh & McLennan accusing the firm of price fixing and bid rigging. He also took issue with so-called contingent commissions paid by insurance companies to Marsh & McLennan in exchange for steering more business their way. Spitzer called the fees "kickbacks."

The illegal processes forced businesses to pay more than necessary for property and casualty insurance, Spitzer said.

Determining how much the long-standing commissions practice cost customers is part of the calculation Spitzer has used in most of his corporate settlements.

The Journal, citing unnamed sources, reported in Thursday's editions that any settlement is about two weeks away. The total cost of the case including class action suits and other private litigation recently filed could top well over $1 billion, some of which could be covered by insurance, the newspaper reported.

At least seven federal lawsuits have been filed as of Wednesday, and a California attorney has filed a lawsuit in state court.

Potential litigants number in the tens of thousands, one lawyer said.

When Spitzer announced his suit, he said he wouldn't negotiate with the company's management. Days later, Marsh & McLennan forced the resignation of chairman and chief executive, Jeffrey W. Greenberg. The company on Monday named Michael G. Cherkasky, the former head of Kroll risk consultancy, to lead the company.