New York Attorney General Eliot Spitzer and The Hartford Financial Services Group have reached an agreement resolving Spitzer's investigation of fraud in the sale of group annuities.
Under the agreement, The Hartford will pay $20 million in restitution and fines, and implement reforms designed to bring fair play and transparency to the marketing of retirement products. A similar agreement was announced today by Connecticut Attorney General Richard Blumenthal.
"This investigation shows how payoffs and deception influenced major deals for retirement products," Spitzer said. "This was wrong. But the company at the center of the scandal has acknowledged misconduct, provided compensation for those who were harmed, and implemented reforms that will help protect retirees in the future."
Hartford issued an apology for its acknowledged misconduct. The apology reads in part: "It was wrong to withhold from our pension plan customers the full amount of compensation paid to brokers in connection with the placements of these annuities."
The Attorney Generals office began its investigation of the marketing of retirement products last year after receiving tips indicating that insurance companies might be making secret payments to insurance brokers to recommend group annuities to pension plans.
Investigators confirmed that such payments were being made and that the payments were being concealed from pension plan managers, who believed that the brokers were acting on their behalf. But instead of acting as fiduciaries for the pension plans, the brokers had become, in effect, paid sales representatives for Hartford.
According to a complaint filed today with the settlement agreement, the scheme involved sham "expense reimbursement agreements" (ERAs) between Hartford and each of four brokers who held themselves out as trusted advisors to retirement plans: Dietrich & Associates; Brentwood Asset Advisors; BCG Terminal Funding; and USI Consulting Group.
The ERAs actually had nothing to do with expense reimbursements; they were simply volume-based bonuses designed to reward brokers for pushing Hartford products.
As one Hartford officer said in an email, the ERAs, which amounted to hundreds of thousands of dollars, were intended "to change the buying habit of the [brokers] . . . to stimulate business we would not otherwise get."
Hartford had a legal obligation to report these payments, but, instead, was careful to keep the ERAs secret.
One Hartford officer wrote in an email about the need to keep ERAs confidential: "If there is anyone we feel could leak, then we shouldnt have this setup with them. I think that is the whole point, if they talk, the deal is terminated. We just have to reiterate that over and over to the selected brokers..."
The success of the covert scheme was critical for Hartford because it could not compete in the group annuity marketplace. As a company executive admitted in an internal e-mail: "Our prices are not competitive in open bidding situations."
With the aid of the brokers who participated in the scheme, Hartford was able to sell more than $800 million worth of group annuity pension plans from 1998 to 2004. Major companies and institutions that faced increased costs as a result of this scheme include: Montgomery Ward Co.; Bennetton Sportssystem USA., Inc; PriceWaterhouseCoopers; and Mt. Sinai Medical Center of Florida.
Under the settlement agreement, Hartford is obligated to improve disclosures and stop making the payments for a three-year period. The company will support legislation to curtail such payments thereafter.