A group of single-premium annuity pension plan brokers who allegedly took kickbacks from insurance carriers is under investigation by the state of Connecticut and may face steep penalties, according to Attorney General Richard Blumenthal.
The brokers may be charged with breaching fiduciary duty to the pension plans, he said. Mr. Blumenthal said they may have also violated antitrust and consumer protection laws.
"A broker has fiduciary responsibility as well as a general duty to follow the relevant statutes and ethical standards imposed by the profession," he said. "We're turning our attention to possible violations of those legal and ethical standards."
Since the investigation continues, Mr. Blumenthal wouldn't name the brokers, but he noted that the scope of the search isn't limited to the annuity brokerage firms named in the latest settlement.
"We're turning our attention toward the ones who may be responsible for violating the law, whether they were named in previous public documents or not," he said.
In May, Connecticut reached a $1.7 million settlement with the Mutual of Omaha (Neb.) Insurance Co. and will also require the company to reimburse consumers' premiums and enact business reforms.
Since at least 1999, the company has paid about $1 million in undisclosed compensation to a cadre of single-premium group annuity brokers, including Brentwood Asset Advisors LLC of Camarillo, Calif. and Dietrich & Associates Inc. of Plymouth Meeting, Pa.
The carrier hid the incentive pay within an "expense reimbursement agreement" so that a lower commission was disclosed to the pension plans and the kickback — which was as high as 1% of the final premium — remained hidden to the plan sponsors, Mr. Blumenthal alleged.
The carrier paid the brokers excess commissions in at least 78 cases, he said.
However, even though Mutual of Omaha was penalized for the kickback programs, Brentwood and Dietrich urged the carrier to use the plans in the first place, according to the settlement document.
Brentwood created the "excess-commission agreement" to fool pension clients into thinking that the brokers took a low commission, while Dietrich convinced Mutual to adopt the reimbursement program, the document states.
It's a familiar story for Dietrich and Brentwood, who were also alleged participants — along with others — in a similar scheme with The Hartford (Conn.) Financial Services Group Inc. and
Principal Financial Group Inc. of Des Moines, Iowa. The Connecticut Attorney General's Office pursued the carriers in both instances, resulting in settlements in 2006 and 2007, respectively.
Nevertheless, the brokers evaded immediate punishment in all three instances, which is "shocking but not surprising," said Jon E. Drucker, partner at an eponymous Beverly Hills, Calif.-based law firm.
"The insurers are making full restitution to the clients under the settlement agreements, so the brokers will probably face no charges," he wrote in an e-mail. "But they committed violations very similar to those settled by the insurers, and could have been brought up on similar charges."
Aside from fiduciary duty, the brokers may have violated the state's antitrust and unfair-trade-practices acts, according to industry experts.
They received the compensation in exchange for giving Mutual of Omaha the "last look" in bidding opportunities and "competitive feedback" to which other carriers didn't have access, Mr. Blumenthal alleged.
But that's not all.
"They disclosed information about the annuity bidding process in exchange for commission," said Thomas Lund, partner with Oppenheimer Wolff & Donnelly LLP of Minneapolis. "That's commercial bribery, and that's something [Mr. Blumenthal] could act against the brokers."
If the lack of disclosure violates state insurance law, individual brokers could also get in trouble, he added. But the Connecticut Insurance Department has not received complaints on the matter and is not investigating, a spokeswoman said.
When it comes to seeking penalties against the brokers, attorneys pointed out a couple of obstacles that could impede the process.
A million dollars in excess payments may not amount to much money per broker, but it would be easier for the state to collect a fine and restitution from an insurance carrier than from an insurance brokerage firm, which would be more inclined to fight in court, Mr. Lund said.
Another roadblock to justice would be the firms' readiness to cooperate with a continuing investigation, which made a difference in the amount of time it took to settle with the insurers, compared with the brokers. This shouldn't be considered a delay, Mr. Blumenthal said.
"The order [of the settlements] may be different here, but the element goal is the same," he said. "It may be an issue of who cooperates first. We view our progression in the investigation as simply a product of how and when evidence becomes available."
In the end, the settlement and investigation question insurance brokers' tenuous relationship with pension plans and their sponsors.
Plan sponsors in this case could be subject to suits from the individual participant, who can claim that the sponsor should have investigated the fees and, in failing to do so, breached fiduciary duty, Mr. Lund said.
The complex position of the broker, who has a material interest in recommending an annuity but is supposed to remain faithful to the plan sponsor, also is up in the air.
The cases are "virtually identical" to past regulatory and class actions against mutual fund firms that paid brokers under the table, he added.
"Some people will think that because this involves insurance instead of mutual funds it makes a difference," Mr. Drucker said. "Every agent of a principal is a fiduciary. It doesn't matter if they're selling or giving advice on funds, insurance, annuities or piggy banks."
E-mail Darla Mercado at [email protected].
