Attorney General: Attorney General Announces $20 Million Settlement With The Hartford Involving Secret Kickback Allegations

Connecticut Attorney General's Office

Press Release

Attorney General Announces $20 Million Settlement With The Hartford Involving Secret Kickback Allegations

May 10, 2006

Attorney General Richard Blumenthal today announced that The Hartford Financial Services Group, Inc. (The Hartford) will pay $20 million under an agreement with Connecticut and New York to settle allegations that it paid brokers millions of dollars in secret kickbacks in exchange for steering lucrative pension plan investment business to The Hartford.

The Hartford is one of the oldest and largest investment and insurance companies in the country, with millions of customers worldwide. The settlement will provide $16.1 million directly to the pension plans harmed by the scheme and $1.95 million in penalties each to Connecticut and New York.

From 1998 through 2004, The Hartford entered into concealed financial agreements with brokers, including Dietrich & Associates, Inc. (Dietrich), Brentwood Asset Advisors (Brentwood), Glastonbury-based USI Consulting Group, and BCG Terminal Funding.

Under these agreements, The Hartford secretly paid brokers millions of dollars in exchange for brokers steering pension plan purchases of annuities, and providing inside information on competitive bidding.

"The Hartford was at the hub of a series of secret conspiracies that enriched both the brokers and The Hartford at the expense of their customers," Blumenthal said. "Our evidence shows a shocking systematic scheme that betrayed their moral and legal duties."

The settlement involves one line of business - terminal and maturity funding group annuities. Terminal funding agreements are annuities purchased by pension plans when the plan is being terminated or frozen due to the dissolution or restructuring of a company. Maturity funding agreements are used by ongoing pension plans to fund future retirement obligations for employees.

"The Hartford paid secret kickbacks to brokers who steered pension plan business and undercut the competitive bidding process - raising the pension plan's costs," Blumenthal said. "The Hartford and its co-conspirators elaborately concealed kickbacks as so-called expense reimbursement agreements - really just false fronts for the scheme. The scheme exploited pension plans - taking funds from retirement vehicles that are the bedrock of our nation's workers' livelihoods.

"There is no pleasure in uncovering wrongdoing by one of Connecticut's best respected corporate citizens. Our continuing investigation of The Hartford and others must be pursued wherever the evidence leads. The Hartford has cooperated - taking the high road - and we hope others will as well. The message is that no one in this industry - insurers or brokers, big or small - can break the law and betray their trust.

"Our reforms - stopping contingent commission agreements - will help prevent future insurance abuses. This investigation was spurred by a whistleblower and we hope others with knowledge will come forward."

Blumenthal said this settlement culminates a year-long investigation conducted jointly with the New York Attorney General's office. Blumenthal said The Hartford cooperated with the investigation.

Department of Consumer Protection Commissioner Edwin R. Rodriguez said, “This settlement is part of an ongoing process to bring transparency to the insurance industry. The message is that the consumer needs to be dealt with honestly and fairly – and not with the kind of backdoor steering and undisclosed compensation to third parties that occurred here. I hope all insurance companies will take note that this kind of anti-consumer behavior will be dealt with to the full extent of the law.”

Blumenthal said The Hartford - unknown to pension plan sponsors - paid tens of thousands of dollars, and in some cases hundreds of thousands of dollars of these secret payments to brokers. The cost of these payments were built into sponsors' annuity purchases.

For example, Crown Vantage, Inc. paid its broker, Dietrich, a $168,287 fee for its services in helping it purchase an annuity for its pension plan. Unknown to Crown Vantage, The Hartford also paid the broker a $841,437 secret payment for bringing the business to The Hartford.

Similarly, Brentwood received a disclosed commission of $150,918 for placing Tenet Health System's pension plan with The Hartford. However, The Hartford and Brentwood failed to disclose a back-end payment of $238,983 to Brentwood for delivering the business to The Hartford. G.E. Consumer Finance in Stamford and Kuehne & Nagel in Hamden were also victimized by the scheme.

These secret agreements - dubbed "expense reimbursement agreements," "ERAs," or "consulting agreements" - claimed to reimburse brokers for expenses related to placing an annuity with The Hartford.

In reality, these arrangements were shams used to pay kickbacks in return for steering business to The Hartford so that The Hartford could increase its share of the market. Or, as described in an email by an employee of The Hartford, ERAs are "used to stimulate business that we otherwise would not get."

In order to receive these secret payments, The Hartford's ERAs required brokers to meet predetermined volume thresholds. For example, under Dietrich's 2003 agreement, if Dietrich placed less than $5 million of premium in a three-month period, its maximum quarterly ERA reimbursement would be $37,500. Under the same agreement, if Dietrich placed over $15 million in a quarter, its maximum quarterly reimbursement would jump to $375,000.

The Hartford also conditioned its undisclosed payments on brokers delivering "quality" business - or business that allowed The Hartford to obtain "adequate" profit margins. This practice discouraged brokers from negotiating too hard against The Hartford, and saddled brokers with a significant conflict of interest.

Under the ERAs, brokers also provided The Hartford with inside intelligence on bidding held for the purchase of the annuities, which gave The Hartford an advantage over its competitors.

For example, The Hartford paid Brentwood an undisclosed $100,000 for providing inside information that landed The Hartford the PricewaterhouseCoopers' $500 million pension plan annuity purchase. An email by an employee at The Hartford recounted that the Brentwood provided "The Hartford with the details of the bidding process and competitors' bids on [the] final day…"

In exchange for secret payment schemes over the years, The Hartford captured upwards of $800 million worth of business, reaping millions more in investment profits. Brokers received close to $4 million in concealed payments that were unknowingly subsidized by their pension plan clients.

As one executive of The Hartford said in an internal email, "distribution partnerships" worked because the brokers "like our money."

Under this settlement, The Hartford has also agreed to cooperate with the attorneys general in their continuing investigation of the insurance industry.

Blumenthal thanked those in his office who worked on the investigation - Assistant Attorneys General Rachel Davis and Mark Kohler, Paralegal Lorraine Measer, Chief Information Officer Evelyn Godbout, and legal intern Danielle Suchcicki, under the direction of Assistant Attorney General Michael Cole, Chief of the Attorney General's Antitrust Department.

View the complaint - (PDF-193KB)

View the settlement agreement - (PDF-3,976KB)