Administrative Complaint: Florida vs. Prudential Pt. 2
(Editor's note: Prudential and Florida reached a settlement agreement 19 Feb. 1997)
(This is the second half of a copy of the administrative complaint filed by Florida officials Dec. 9, 1996. It outlines their case against Prudential and why they are threatening to pull Prudential's license to sell insurance in the state. The first half of the document, pages 1 through 14, is on a linked web page.)
a large extent elderly policyholders, whose retirement nest-eggs were larger, since such values would build over the years. The Department has compiled a random, preliminary profile of victimized PRUDENTIAL Florida policyholders/complainants:
- They are currently 69 years old, with a high school education, and retired to Florida;
- They were 37 years old when they first purchased a PRUDENTIAL life insurance policy;
- They were an average of 62 when PRUDENTIAL sold them a second policy,
- Sixty-eight percent of the churning victims were male; 32 percent female;
- Nearly three-fourths of the time, churned policyholders either did not receive or were not left any sales materials, relying instead upon oral statements of the PRUDENTIAL agent.
24. PRUDENTIAL agents were trained to review OSPR cards and highlight those policies with any accumulated values. Sales visits by PRUDENTIAL agents were then prompted by the values revealed in the OPSR card, although some pretense was usually invented as to why a PRUDENTIAL agent needed to speak to that customer. PRUDENTIAL agents then called upon these customers who had built up accumulated values in their existing policies and solicited these customers to purchase a new insurance policy from PRUDENTIAL that would provide additional death benefits purportedly for little or no additional premiums. Although there were variations upon this common theme, this was the essence of the deceptive sales presentation. Typically, it was part of the common PRUDENTIAL sales pitch to represent to these customers that the ["new" insurance could be obtained from the future dividends of their existing policy. This sales approach was extremely successful, as policyholders were misled by PRUDENTIAL and its agents into believing that they would be receiving additional coverage for little or no future out-of-pocket premium.
25. PRUDENTIAL agents misused forms entitled "Disbursement Request Forms" to accomplish these illegal transactions. These forms were printed by PRUDENTIAL and distributed to PRUDENTIAL agents throughout the country. The form is a multi-purpose one which can be used to make policy loans, dividend option changes, dividend withdrawal changes and cash surrenders. PRUDENTIAL agents routinely manipulated the customer into signing blank disbursement forms, which permitted the agent to subsequently fill in any one of the sections on the Disbursement Request Form. This practice operated to conceal the nature of the transaction from the insured. Furthermore, customer signatures on disbursement forms were on occasion forged by PRUDENTIAL agents. This practice permitted PRUDENTIAL agents to mislead policyholders into believing they had purchased increased death benefits with little or no additional premiums. However, when the accumulated values of the existing policy (which sometimes represented a significant portion of the customer's retirement savings) had been exhausted as a result of the withdrawals from those policies, the insured would be notified that they would have to begin paying significant additional premiums or their policies would lapse.
26. In furtherance of this scheme, PRUDENTIAL agents made numerous deceptive omissions and misrepresentations. For example, customers were not adequately informed or were deliberately misled regarding, but not limited to, such facts as:
a. That the dividend stream on their existing policies could and/or would be insufficient to pay all of the premiums and significant charges (such as agent and management commissions) on their new policies. Moreover, PRUDENTIAL agents often failed to disclose the actual amount of the premium and other charges required to purchase the new policies and that the premiums on the new policy would be higher, since the customer had grown older or was now elderly.
b. That the net accumulated value of their existing policies would decrease.
c. That the loans placed against the cash value of their existing policies would deplete the cash value of their existing policies.
d. That their new policies would lapse when the accumulated value of their existing policies were insufficient to pay the premiums on the new policies unless they began paying premium payments on the new policies, in addition to premiums already being paid on the existing policies.
e. That when the existing policy's loan value became fully encumbered, the policyholder would be required to pay not just premium on the existing policy, but also interest on the loans themselves, or face the lapse of the policy.
27. PRUDENTIAL provided its agents with a substantial incentive to churn or twist, as the selling agent would earn a commission of typically 40% to 50% of the first year's premium on the new policies. Such significant commissions were not disclosed to the PRUDENTIAL policyholder. Moreover, PRUDENTIAL also provided its sales management with a substantial incentive to train sales agents to churn or twist these policies, as a large percentage of manager income was based upon the volume of sales by the PRUDENTIAL agents. As a result, PRUDBNTIAL enjoyed significant sales increases from the illegal sales tactics routinely practiced by their agents,
Additionally, PRUDENTIAL agents and field managers were placed under significant pressure by PRUDENTIAL to increase such sales.
PRUDENTIAL'S MISREPRESENTATIONS REGARDING THE
NATURE OF THE PRODUCT SOLD
28. As a material part of the general fraudulent marketing scheme, unrelated to the churning or twisting transactions, PRUDENTIAL and its agents misrepresented the very nature of the product they were selling to their customers. PRUDENTIAL, through the use of standardized presentations and materials, routinely misrepresented that their life insurance policies (including VALs) were; investment or retirement plans, savings accounts, pension plans, mutual funds or other types of specialized investment products PRUDENTIAL's sales presentations assiduously avoided the term "life insurance" in the sale of life insurance products and referred to life insurance premiums by such terms as "payments", "deposits", "contributions", "savings" or "investments''.
29. As a result of these unfair and deceptive sales practices, PRUDENTIAL customers were materially misled as to the nature of the transaction and the product they were purchasing. PRUDENTIAL either knew or should have known of, or did actively participate in, these illegal and deceptive sales practices. Certainly, PRUDENTIAL encouraged such practices by permitting PRUDENTIAL agents to be trained to use these deceptive sales techniques and by supplying PRUDENTIAL agents and their customers with deceptive sales materials.
PRUDENTIAL's REPLACEMENT VIOLATIONS
30. To protect against such illegal churning practices, the State of Florida requires insurers and their agents to provide consumers with a replacement notice when replacement policies are sold. This notice helps the DEPARTMENT to track and monitor replacement sales and operates to reveal and discourage overreliance upon the sale of replacement policies, which generally work to the detriment of policyholders. The replacement notice also warns consumers of the potential pitfalls of replacing their current policy. A replacement policy generally is financed through the use of the accumulated value from an existing policy. The sale of a new or non-replacement policy only occurs when its purchase does not significantly affect the value of the existing life insurance policy. PRUDENTIAL's marketing scheme, which involved the financing of a new policy from values in an existing policy, clearly and profoundly affected the values of existing policies and PRUDENTIAL agents were thus required to provide replacement warning forms to the policyholders and to retain copies for inspection by the DEPARTMENT.
31. PRUDENTIAL agents regularly and routinely failed to provide replacement forms, which would have alerted consumers to the actual nature of the transaction and would have permitted the Department to monitor such illegal and deceptive sales practices. Again, PRUDENTIAL either knew or should have known of, or actively encouraged or participated in, the failure to provide and retain replacement forms as required by Florida law.
PRUDENTIAL's DESTRUCTION OF RECORDS
32. During 1993, PRUDENTIAL approved for use by its sales staff misleading sales materials that mischaracterized their life insurance policies as "private pension plans," or by other misleading terms, These so-called "pension plans" were, in fact, just life insurance in disguise.
33. In late 1993, a series of newspaper articles appeared in various newspapers around the nation, publicizing that the MetLife Insurance Company was under intense scrutiny for its use of similar sales materials, and indicating that Florida regulatory authorities might investigate PRUDENTIAL's sales practices on a similar basis.
34. On January 5, 1994, Sally Edwards, a mid-level staff member employed by Prudential in its Jacksonville, Florida regional offices, sent an e-mail message to all PRUDENTIAL sales offices in Florida, and throughout the region, as follows:
We just learned this morning that one state is looking into possible violations regarding our "private pension" materials. You must destroy all private pension letters other than the approved versions I referred to in my earlier Focus message today...Again, destroy and discard any other letters. I remind you that we're mailing you copies of the approved versions today. "Life insurance" now appears in both.
35. The instruction to Ms. Edwards to send the 1-5-94 e-mail, including specific instructions to use the word "destroy," came from Mr. David Fastenberg, the top ranking Prudential officer in the Jacksonville Regional Office, and was conveyed through Mr. Dennis Shaver, Ms. Edwards' immediate supervisor. Mr. Shaver reported directly to Mr. Fastenberg.
36. The designated materials (and other materials) were ultimately destroyed as ordered by PRUDENTIAL,
37. In or about May 1995, the Florida Insurance Department issued an investigative subpoena to PRUDENTIAL, requiring the production of, among other things, relevant advertising and sales materials.
38. In the Summer of 1996, while said subpoena and the investigation was pending, PRUDENTIAL destroy the original records of unapproved sales materials maintained in two file cabinets in PRUDENTIAL's Jacksonville Regional Of f ice .
39. In or about May 1995, the Florida Insurance Department issued its above-referenced investigative subpoena to PRUDENTIAL requiring the production of, among other things, PRUDENTIAL CORE reports, sales and training material, financed business training and reports, securities training, disciplinary listings, complaint logs and records, NASD investigations, internal investigations, audits, anti-replacement policy papers, ethics complaints and investigative procedures papers
40. In or about early June 1996, while said subpoena was still pending, PRUDENTIAL destroyed approximately nine more file drawers, consisting of approximately 320 files, of the original files and records of David Fastenberg, the senior PRUDENTIAL of f icer in the Jacksonville region. The destroyed subpoenaed tiles were labeled as follows:
- Audits Business Practices Investigations
- Complaint Report
- Compliance Meeting
- Core Report
- Marketing Practices Cases (stats & Lit)
- Law Department memos
- Financed Insurance
- Abbreviated Pay
- Ohio Insurance Dept
- Pending Legal Cases
- NASD-Compliance Review
- NASD-Quarterly Audits
- 1992 Regional Files
- 1993 Regional Files
- Southwell, Don Strategy
41. The negligent or intentional destruction of these subpoenaed documents in the incidents referenced above may have hampered or obstructed this DEPARTMENT' s lawful investigation of PRUDENTIAL's illegal marketing scheme.
IT IS THEREFORE CHARGED that PRUDENTIAL, in the conduct of business as an authorized foreign insurer in Florida, is accountable under the following statutes and rules:
(a) Is using and has used methods and practices in the conduct of its business as to render its further transaction of insurance in this state hazardous or injurious to its policyholders or the public. [Section 624.418 (1) (b), Florida statutes]
(b) Has violated any lawful order or rule of the department or any provision of this code. [Section 624.418(2)(a), Florida Statutes]
(c) Has engaged in this state in any trade practice which is defined in this part as, or determined pursuant to s. 626.9561 to be, an unfair method of competition or an unfair or deceptive act or practice involving the business of insurance. Any person who violates any provision of this part shall be subject to the penalties provided in s. 627.381. [Section 626.9521, Florida Statutes]
(d) Has knowingly made, issued, circulated, or caused to be made, issued, or circulated, any estimate, illustration, circular, statement, sales presentation, omission, or comparison which misrepresented the benefits, advantages, conditions, or terms of any insurance policy. [Section 626.9541(1)(a)1., Florida Statutes]
(e) Has knowingly made, published, disseminated, circulated, or placed before the public, or caused, directly or indirectly, to be made, published, disseminated, circulated, or placed before the public:
1. In a newspaper, magazine, or other publication,
2. In the form of a notice, circular, pamphlet, letter, or poster,
3. Over any radio or television station, or
4. In any other way, an advertisement, announcement, or statement containing any assertion, representation, or statement with respect to the business of insurance, which is untrue, deceptive, or misleading. [Section 626.9541(1)(b), Florida Statutes]
1. Filed with any supervisory or other public official,
2. Made, published, disseminated, circulated,
3. Delivered to any person,
4. Placed before the public,
5. Caused, directly or indirectly, to be made, published, disseminated, circulated, delivered to any person, or placed before the public, any false material statement, [Section 626.954l(l)(e) l., Florida Statutes]
(g) Failed to establish and at all times maintain a system of control over the content, form and method of dissemination of all its Life Insurance and Annuity Contract advertisements. All such advertisements, regardless of by whom written, created, designed or presented, shall be the responsibility of the insurer(s) benefiting directly or indirectly from their dissemination; provided the insurer shall not be responsible for advertisements that are published in violation of written procedures or guidelines of the insurer. [Rule 4-150.102(2), Florida Administrative Code]
(h) The form and content of a Life Insurance and Annuity Contracts advertisement were not sufficiently complete and clear to avoid deception or the capacity or tendency to mislead or deceive. Whether an advertisement has a capacity or tendency to mislead or deceive shall be determined by the Commissioner of Insurance from the overall impression that the advertisement may be reasonably expected to create upon a person of average education or intelligence, within the segment of the public to which it is directed. [Rule 4-150.105(1), Florida Administrative Code]
(i) Advertisements were not truthful and were misleading in fact or in implication. Words or phrases, whose meanings are clear only by implication or by the consumer's familiarity with insurance terminology, shall not be used, [Rule 4-150.105(2), Florida Administrative Code]
(j) Has failed to clearly identify its Life Insurance and Annuity Contract as an insurance policy. With respect to any product first filed to be offered to Florida residents on or after the effective date of these rules, a policy trade name must be followed by the words "Insurance Policy" or similar words clearly identifying the fact that an insurance policy is being offered. [Rule 4-150.105(3), Florida Administrative Code]
(k) Has solicited a resident of this State for the purchase of Life Insurance and Annuity Contracts in connection with or as the result of the use of any advertisement which;
1. Contains any misleading representations, misrepresentations, or is otherwise untrue, deceptive or misleading with regard to the information imparted, the status, character or representative capacity of such person or the true purpose of the advertisement; or
2. Otherwise violates the provisions of these rules; or
3. Otherwise violates the provisions of the Florida Insurance Code. [Rule 4-150.105(4), Florida Administrative Code]
(1) Has solicited residents of this State for the purchase of Life Insurance and Annuity Contracts through the use of a true or fictitious name which is deceptive or misleading with regard to the status, character, or proprietary or representative capacity of such person or the true purpose of the advertisement. [Rule 4-150.105(5), Florida Administrative code]
(m) The contents of all advertisements, regardless of by whom prepared, created, designed or presented, shall be the responsibility of the insurers benefiting directly or indirectly from its use, if the insurer either requested the preparation of, or reasonably should have known of the content of the advertisement lead generating device or list of prospective insureds. [Rule 4 - 150.105(7), Florida Administrative Code]
(n) Advertisements omitted information or used words, phrases, statements, references or illustrations that had the capacity, tendency or effect of misleading or deceiving purchasers or prospective purchasers as to the nature or extent of any policy or contract benefit payable, loss covered or premium payable. The fact that the policy or contract offered is made available to a prospective insured for inspection prior to consummation of the sale or an offer is made to refund the premium if the purchaser is not satisfied, does not remedy the misleading statement. [Rule 4 - 150.107(1)(a), Florida Administrative Code]
(o) Certificate of Compliance. Each insurer required to file an Annual Statement which is now or which hereafter becomes subject to the provisions of these rules must file with this Department with its Annual Statement a Certificate of Compliance executed by an authorized officer of the insurer wherein it is stated that to the best of his knowledge, information and belief the advertisements which were disseminated by the insurer during the preceding statement year complied or were made to comply in all respects with the provisions of these rules and the Insurance Laws of this State as implemented and interpreted by these rules. [Rule 4 - 150.119(2), Florida Administrative Code]
(p) Failed to comply with all applicable Replacement notice requirements. [Rule sections 4-151.006, 4-151.007 and 4 - 151.011, Florida Administrative Code]
(q) Failed to maintain a complete file containing every printed, published, or prepared advertisement of its policies, as advertisement is defined in Rule Section 4-150.003, Florida Administrative Code, for a period of four years or until the filing of the next regular report or examination of the insurer, whichever is the longer period of time. [Rule 4-150.119(1), Florida Administrative Code]
(r) Failed to make freely available to the DEPARTMENT the records, documents, files, information and matters in its possession or control relating to the subject of the investigation. [Section 624.318(2), Florida Statutes]
(a) Has for any line of business, with such frequency as to indicate its general business practice in this state, without just cause compelled insureds to accept less than the amount due them. [624.318 (2), Florida Statutes]
(t) Has refused to produce its records for examination when required by the DEPARTMENT. [Section 624.418(b), Florida statutes]
(u) Churning - Has deceptively sold policies whereby policy values in an existing life insurance policy or annuity contract, including but not limited to, cash, loan values, or dividend values, and in any riders to that policy or contract are used to purchase another insurance policy or annuity contract with that same insurer for the purpose of earning additional premiums, fees, commissions, or other compensation:
1. without an objectively reasonable basis for believing that the replacement or extraction will result in an actual and demonstrable benefit to the policyholder;
2. in a fashion that is fraudulent, deceptive, or otherwise misleading or that involves a deceptive omission:
3. when the applicant is not informed that the policy values and other assets of the existing policy or contract will be reduced, forfeited, or utilized in the purchase of the replacing or additional policy or contract, if that is the case:
4. without informing the applicant that the replacing or additional policy or contract will not be a paid-up policy or that additional premiums will be due, if that is the case. [Section 626.9541(1)(aa), Florida Statutes]
(v) Twisting - Knowingly making any misleading representations or incomplete or fraudulent comparisons or fraudulent material omissions of or with respect to any insurance policies for the purpose of inducing, or tending to induce, any person to lapse, forfeit,surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy.
[Section 626.9541 (1) (1), Florida Statutes]
(w) Possessing management which has been found by the DEPARTMENT to be incompetent or untrustworthy; or which the DEPARTMENT has good reason to believe are affiliated directly or indirectly through ownership, control or other insurance or business relations, with any persons whose business operations are or have been marked, to the detriment of policyholders or the public by bad faith. [Section 624.404(3) (a), Florida statutes]
(x) Has engaged in conduct that is:
1. An act that demonstrates a lack of fitness or trustworthiness to engage in business of insurance, is hazardous to the insurance buying public, or constitutes business operations that are a detriment to policyholders, stockholders, investors, creditors, or the public.
2. A violation of any provision of the Florida Insurance Code.
3. A violation of any rule of the department. [Section 624.310 (3), Florida Statutes.
WHEREFORE you, PRUDENTIAL , are notified pursuant to Sections 624.310, 624.404, 624.418, 626.9541 and Section 120.57, Florida statutes, to show cause as to why the DEPARTMENT should not enter a permanent final order revoking or suspending your Certificate of Authority to do business in Florida, imposing a Cease and Desist Order pursuant to sections 624.310 and 626.9581, Florida Statutes, and/or to impose other penalties as set forth in Section 624.4211,
Florida Statutes, or to take such other administrative actions as the Treasurer and Insurance Commissioner may deem appropriate as provided by law.
(Bill Nelson signature)
Treasurer and Insurance Commissioner
NOTICE OF RIGHTS
Pursuant to Sections 120.569 and 120.57, Florida Statutes and Rule Chapters 4-121 and 28-5, Florida Administrative Code (F.A.C.), you have the right to request a proceeding to contest this action by the Department. You may elect a proceeding by completing the attached Election of Rights form or filing a Petition. Your Petition or Election of a proceeding must be in writing and must be filed with the General Counsel acting as the Agency Clerk, Department of Insurance. If served by U.S. Mail the Petition or Election should be addressed to the Florida Department of Insurance at 612 Larson Building, Tallahassee, Florida 32399-0333. If Express Mail or hand delivery is utilized, the Petition or Election should be delivered to 612 Larson Building, 200 East Gaines Street, Tallahassee, Florida 32399-0333. The Petition or Election must be received by, and filed in the Department within twenty-one (21) days of the date of your receipt of this notice,
YOUR FAILURE TO RESPOND TO THIS ADMINISTRATIVE COMPLAINT WITHIN TWENTY-ONE
(21) DAYS WILL CONSTITUTE A WAIVER OF YOUR RIGHT TO REQUEST A PROCEEDING ON THE MATTERS ALLEGED HEREIN AND A DEFAULT ORDER OF REVOCATION WILL BE ENTERED AGAINST YOU.
If a proceeding is requested and there is no dispute of fact the provisions of Section 120.57(2), Florida Statutes would apply. In this regard you may submit oral or written evidence in opposition to the action taken by this agency or a written statement challenging the grounds upon which the agency has relied. While a hearing is normally not required in the absence of a dispute of fact, if you feel that a hearing is necessary one will be conducted in Tallahassee, Florida or by telephonic conference call upon your request.
If you dispute material facts which are the basis for this agency's action you may request a formal adversarial proceeding pursuant to Sections 120.569 and 120.57(1), Florida Statutes. If you request this type of proceeding, the request must comply with all of the requirements of Rule Chapters 4-121 and 28-5, F.A.C. and contain
a) A statement identifying with particularity the allegations of the Department which you dispute and the nature of the dispute;
b) An explanation of what relief you are seeking and believe you are entitled to;
c) Any other information which you contend is material.
These proceedings are held before a State administrative law judge of the Division of Administrative Hearings. Unless the majority of witnesses are located elsewhere the Department will request that the hearing be conducted in Tallahassee.
If you request a hearing, you have the right to be represented by counsel, or other qualified representative, to take testimony, to call and cross-examine witnesses, and to have subpoena and subpoena duces tecum issued on your behalf.
Pursuant to Section 120.573, Florida Statutes, you are hereby notified that mediation under Section l20.573, Florida Statutes, is not available; however, the Department's attorney of record will discuss the possibility of settlement of this matter upon your request.
Failure to follow the procedure outlined with regard to your response to this notice may result in the request being denied. All prior correspondence in this matter shall be considered freeform agency action, and no such correspondence shall operate as a valid request for an administrative proceeding. Any request for administrative proceeding received prior to the date of this notice shall be deemed abandoned unless timely renewed in compliance with the guidelines as set out above.
STATE OF FLORIDA
DEPARTMENT OF INSURANCE
IN THE MATTER OF:
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CASE No: 17608-96-C
ELECTION OF RIGHTS
I have received and have road the Administrative Complaint filed against me including the Notice of Rights contained therein and I understand my options. I am requesting disposition of this matter as indicated below. (Choose one)
1. [ ] I do not desire a proceeding. The Department may enter a final order revoking my license(s),
2. I do not dispute any of the Department's factual allegations and I hereby elect an informal proceeding to be conducted in accordance with section 120.57(2), Florida Statutes. In this regard I desire to (Choose one):
[ ] submit a written statement and documentary evidence
[ ] attend an informal hearing to be held in Tallahassee; or
[ ]attend an informal hearing by way of a telephone conference call.
3. [ ] I do dispute the Department's factual allegations. I have attached to this form a statement indicating the specific issues of fact which are disputed and other required information indicated in the Notice of Rights. I hereby request a formal adversarial proceeding pursuant to Sections 120.569 and 120.57(1), Florida Statutes to be held before the Division of Administrative Hearings.
Signature of Petitioner
TO PRESERVE YOUR RIGHT TO A PROCEEDING, YOU MUST RETURN THIS FORM WITHIN TWENTY-ONE (21) DAYS OF RECEIPT TO THE DEPARTMENT OF INSURANCE AT THE ADDRESS INDICATED IN THE NOTICE OF RIGHTS.
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a true and correct copy of the foregoing Order to Show Cause has been furnished by Certified Mail to: Arthur F. Ryan, Chairman & CEO, The Prudential Insurance Company of America, 761 Broad street, Newark, New Jersey 07102; this 9 day of December, 1996.
DOUGLAS A. SHROPSHIRE,ESQUIRE
S. MARC HERSKOVITZ, ESQUIRE
Division of Legal services
612 Larson Building
Attorneys for the Department