Spitzer Strikes Again

By Daren Fonda

Eliot Spitzer received an anonymous letter last March that made for intriguing reading. The message suggested that the New York attorney general poke around Marsh & McLennan, the U.S.'s largest insurance broker and a firm Spitzer had tangled with in earlier financial- industry investigations. This time Spitzer asked Marsh about its practice of receiving "contingent commissions" from insurance companies, a controversial type of payment. That's when things started to get nasty. Spitzer says the more he probed, the more Marsh misled and "fed us the same foolishness they've been feeding the public over the years." He felt that Marsh CEO Jeffrey Greenberg, son of Maurice (Hank) Greenberg, the legendary boss of insurance giant American International Group (AIG), was stonewalling him. "I didn't see in their management a desire for reform," Spitzer says.

Marsh is paying dearly for not playing nice with Spitzer, whose anticorruption crusades in recent years have targeted top executives at Wall Street investment banks, mutual-fund companies, pharmaceutical firms and the New York Stock Exchange (N.Y.S.E.). In a civil suit filed in New York state court last week, Spitzer charged Marsh with a price-fixing and kickback scheme that inflated the cost of insurance for clients ranging from the Greenville County School District in South Carolina to companies like Fortune Brands. According to Spitzer, roughly $800 million of the $1.5 billion in net income Marsh earned last year came from those dicey commissions. The complaint says Marsh would sometimes promise business to one insurer but insist a competitor provide an inflated bid to create an illusion of competition--even demanding a "live body" at presentations to prospective clients.

Marsh, whose stock sank 24% on the news, said it has been cooperating with Spitzer since spring but had not been made aware of the charges until last week, when it agreed to stop taking the payments and replaced the head of the business unit involved in the allegations. In a statement, Marsh said it was "committed to getting all the facts, determining any incidence of improper behavior, and dealing appropriately with any wrongdoing." Separately, the company's independent directors expressed confidence in the firm's leadership. Marsh declined to comment further to TIME. But the attorney general isn't in a forgiving mood. "I won't settle and leave in place a CEO whose behavior has been unhelpful, distortive and unresponsive," Spitzer told TIME.

Is the attorney general really trying to get Marsh's CEO fired? It wouldn't be his first use of prosecutorial leverage to push for dramatic change. When he went after the mutual-fund industry for late- trading violations, he used the opportunity to force funds to lower their fees, which critics decried as overreaching but investor-rights advocates praised. He's now locked in a legal battle with former N.Y.S.E. chief Richard Grasso, trying to force him to return millions of dollars in compensation.

In this latest fight, Spitzer is again crusading against the system. Last week's suit outlines Marsh's deals with several big insurers, suggesting that price fixing and kickbacks may be widespread in the industry. "When you corrupt a market as the insurance carriers and brokers have by permitting cartel-like behavior, prices go up," says Spitzer. He has issued dozens of subpoenas targeting companies like Aon, Willis Group Holdings and, as was disclosed last week, MetLife. Two executives at AIG and one from insurance company Ace, which were mentioned in the Marsh suit, pleaded guilty to charges last week. AIG CEO Maurice Greenberg promised to cooperate. But analysts aren't betting on a quick fix. "The conflicts of interest [in the industry] are pervasive," says Martin Weiss, chairman of Weiss Ratings, an independent insurance-rating firm.

How the Greenberg insurance dynasty will weather Spitzer's latest assault is unclear. Hank and his sons Jeffrey and Evan, CEO of Ace, are widely respected as the first family of insurance. But each now has the rare distinction of heading a firm mentioned in a Spitzer lawsuit. Is Jeffrey really responsible for unethical practices at Marsh? Says Spitzer: "When you have an $800 million stream of income, one has to be either ignorant, lazy or complicit not to examine how this money is being derived." He's clearly ready for another fight. --With reporting by Barbara Kiviat and Jyoti Thottam/New York

With reporting by Barbara Kiviat; Jyoti Thottam/New York