More testimony from a confidential witness
More testimony from a confidential witness
EDITOR'S NOTE: This report was among documents regarding an investigation of Prudential Insurance Co. of America that were released in December 1997 by the Florida Department of Insurance.
This particular document, which spans 152 printed pages, is the second part of testimony by a "confidential witness," a former Prudential employee, to Florida officials investigating the insurance company. The testimony was taken Oct. 19, 1996.
STATE OF FLORIDA
PRUDENTIAL LIFE INSURANCE
CASE NO. 16-463-96
Transcript of Continuation of Proceedings on Friday, October 18, 1996. Following SWORN STATEMENT began at 9:00 a.m. on Saturday, October 19, 1996 and concluding at 1:20 p.m. of a CONFIDENTIAL WITNESS, taken at the Taylor Building, 1011 Beach Way Drive, Jacksonville, Florida.
Reported by GAYLE Y. JONES, Professional Reporter and Notary Public for the State of Florida at Large.
GAYLE Y. JONES
AMERICAN COURT REPORTERS
DAYTONA BEACH, FLORIDA 32114
DOUGLAS A. SHROPSHIRE, Esquire
Division of Legal Services
612 Larson Building
Tallahassee, FL 32399-0333
KEITH VANDEN DOOREN
Office of the Attorney
Senior Assistant Attorney General
Bureau Chief, RICO Section
Tallahassee, FL 32399-1050
Investigator, Economic Crimes Division
The Capitol, PL-01
Tallahassee, FL 32399-1050
Appearing on behalf of the Petitioner.
It is hereby stipulated that the witness was sworn in by court reporter on preceding day of Friday, October 18, 1996, and the following proceedings are a continuation of that testimony.
P R O C E E D I N G S
10-19-96 9:00 a.m. (Continuation from proceedings of 10-18-96)
WITNESS: Continuing with a couple of more things that you might want to look at. They don't involve Florida, but give an indication of the attitudes of the people. One is George Shaeffer. I believe it's S-H-A-E-F-F-E-R. He is an agent in California who won the trophy in district agencies for five yearn.
What you would like to ask for with regard to him is all investigative files on investigations done since 1990. What they will show is the lengths that the company will go to to protect the big producer.
He committed acts that would have been terminable for any normal person. And the legal advice given, was don't terminate him because he could hurt the company; but he did no business that I am aware of in Florida, it just gives an attitude.
Another file you would want to look at is Phoenix West. That was an investigation done last year under the direction of the Marketing Practices Officer.
As a result of that investigation there were recommendations with regard to the discipline of many, many people; but if you look at that whole investigation, you will see the attitude of the company toward people who were engaged in wrongful financial insurance transactions over a long period of time, with the knowledge of many people.
Those two things, for you to start with, are to give you an idea of management's attitude about wrongful conduct.
MR. VANDEN DOOREN: Where does this Phoenix West relate to? Here in the Jacksonville area, or is it some other place?
WITNESS: It doesn't relate to Florida, but what it does, is it gives you a picture of agents that were found to be doing financing in the northeast.
They transferred to Phoenix and continued to practice. And you will see that in the interviews of some of the people. They merely state that we did it because we made money and we didn't care.
MR. CAMIL: Does Phoenix West refer to the actual --
WITNESS: -- that is the district office that was investigated.
MR. VANDEN DOOREN: Okay.
WITNESS: You have to figure out the way to ask for them.
WITNESS: Another office you may want to look at the Cape Canaveral, which is managed by Frank Valentini.
And what you would want to do there was ask for all of the complaints that have been made in the last five years.
Frank Valentini is a son of Morrell Valentini. Morrell Valentini is generally considered to be the father of financed insurance.
If you watch where he travels, you will see that the finances and insurance traveled with him. I don't know if that is true; but that is the general belief.
And a person in that office that I have doubts about is a gentleman by the name of Ricco. R-I-C-C-O. I just have never felt good about him.
MR. SHROPSHIRE: Do you know if Morrell still works for the company?
WITNESS: Morrell, he is retired. I believe he lives in Fort Myers.
MR. SHROPSHIRE: You think Morrell has been retired?
MR. SHROPSHIRE: Do you know for approximately how long he has been retired?
WITNESS: Three to four years.
MR. SHROPSHIRE: Did you say Fort Myers?
WITNESS: Yes, I believe it is.
MR. SHROPSHIRE: Is Frank Valentini still with the company?
WITNESS: Yes, as a manager of Cape Canaveral.
MR. SHROPSHIRE: Do you know anything about Cape Canaveral? Specifically, the demographics of the customer base that perhaps made it particularly susceptible to financed insurance?
WITNESS: Well, what they have there is a great number of the civilians, great number of contractors, a great number of retired, a great number of the retired military.
The retired military would be older. They would have the base policies from which to get the financing. Many of the contractors -- keep in mind, Cape Kennedy became a significant employer probably in the '60s. And many of the people that have worked there, a lot of them went back and retired there.
Another office that you will want to look at is the Jacksonville office. I think is it called Seminole with Will Watts. Will Watts is somebody who never saw a sale that he didn't like.
MR. SHROPSHIRE: W-A-T-T-S?
WITNESS: Yes, he what a former VPRM in Kentucky. Another person to be concerned about is Gary Kincaid. Gary Kincaid is the current VPRM who is responsible for all of Florida.
Gary Kincaid actually interfered when when we were demoting Patero. He went to Patero before we delivered the letter and told him he was about to be demoted, and Patero stepped down.
Kincaid then went back and told one of the people that he didn't have to be placed on probation, and that another letter had to be prepared.
That person went to Ren Nelson, and Ren Nelson required it anyhow. But he is somebody who probably does not understand his obligation to the customer. His sole purpose appears to be protecting the agent.
Are you aware of the Business Quality Process?
MR. SHROPSHIRE: No.
WITNESS: The Business Quality Process is something that was started in 1992 in district agencies, which is now called PIFS. That is the process by which they use core reports and define what management is supposed to do.
MR. SHROPSHIRE: But the core reports predated 1992?
WITNESS: Yes, but this is just a process that they put into place to help the general manager monitor business practices within an agency.
It, to my knowledge, it was the first time where they actually put in a defined process. Good thing; but if you look at what they actually do behind it, you will find that very little goes on in most of the functions and most of the functions are not performed competentently, or they're not performed at all.
MR. SHROPSHIRE: Was that instituted at the national level?
MR. SHROPSHIRE: Are you saying that is it a good system if it was rigorously enforced, but it was hollow?
WITNESS: It wouldn't be a good system even if rigorously enforced, but it was an effort do a system for the first time. That is a good thing.
If it were actually done, they would discover the weaknesses, and they could have corrected them. What will ultimately occur is that this will be scrapped after the client acquisition process is put into place.
This client acquisition process will because there is a direct contact with policy holders at or near the time the policy is written by an underwriter. And by letter they will discover much more quickly if there are wrong in some of their sales practices.
MR. SHROPSHIRE: Can you identify some of the major weaknesses in the Business Quality Practice System?
WITNESS: Well, it's the same thing you you find in the core reports. Let me take the marketing practices log. That is a log sheet that is prepared for each representative, and should be kept in a binder. That is often times not kept.
That shows things like finances or placements, things like that. So they don't really keep track of it, except to the extent that they are forced to by compliance.
MR. SHROPSHIRE: Who is to keep this log?
WITNESS: The general manager.
MR. CAMIL: BQPS, that was put into place in 1992?
MR. CAMIL: Now we're in 1996, and it is still the place; is that correct?
MR. CAMIL: Has it ever been reviewed or looked at to determine whether or not if it is in fact effective. Has anyone ever done any follow-up to determine if it is being used properly by management, to do what it is intended to do?
WITNESS: Yes, as part of the review done by the Marketing Practices Office beginning in April '95 they look at these things.
MR. CAMIL: And in April '95, they did a review as to the effectiveness of this process? What did they determine at that time?
WITNESS: That it was not effective, and that is why they came up with the Client Acquisition Process. This is a backend process. You may not get reports on activities for three or four months after they considered it.
That is not a very effective process to catch things and to take action to correct problems. So what the Client Acquisition Process did was they began to move it to the front end where you catch it at or about the time the application was taken.
MR. CAMIL: So who were the people in Marketing Practices who reviewed this thing in April of '95 and found out, or decided at that point it was not effective?
WITNESS: Ren Nelson.
MR. CAMIL: Do we know if any process was begun, or any reports issued that reflect this study that was done from this determination?
WITNESS: It was an oral report. The Sonnenschein people, they did not want anything placed in writing because they were afraid that it would be discovered in litigation.
MR. CAMIL: Is there a reason that the company waited from '92 to '95 to ever even consider whether or not if that was an effective way to manage or supervise it's agents?
WITNESS: No, there is no reason. You would normally think that in due process, you would do a review after a period of time.
MR. CAMIL: And was it possibly the oral report to the Sonnenschein firm that caused the change from the BQP to this Client Acquisition Process?
WITNESS: No, actually the Client Access Process was a recommendation from Marketing Practices Officer after he discovered current processes weren't working.
MR. SHROPSHIRE: Who developed the Business Quality Process System?
WITNESS: I don't know who developed it; but the person who administered at the beginning of it was Jim Tignanelli, T-I-G-N-A-N-E-L-L-I.
MR. SHROPSHIRE: And was he in Newark, do you know?
WITNESS: Yes, or South Plainfields. One of the two, I can't remember where.
MR. SHROPSHIRE: And do you know who directed him to develop it?
WITNESS: I believe it was done at Southwell.
MR. SHROPSHIRE: Do you know what was the impetus for the direction to develop this BCP process?
WITNESS: Well there was general consensus within the company that the agents were not being properly supervised. And this was an attempt to figure out a way to better supervise the agents.
MR. SHROPSHIRE: Do you know of any connection between the direction to develop the BCP process and the Helfreck memo?
WITNESS: No, I don't think there was any connection. The Helfreck memo actually went to the Life Policies Review Committee I believe it was, and that was under the direction of Mary Cervrueggen, C-E-R-V-R-U-E-G-G-E-N.
Mary is now retired, and in fact lives in the Jacksonville area.
MR. SHROPSHIRE: Do you know anything about the process by which this BQP system was developed? I mean were there seminars or workshops by Prudential staff to come up with system?
WITNESS: I don't know.
MR. SHROPSHIRE: Do you know if there was any inquiry to your Jacksonville regional office as to the system or were you given the opportunity to have input into the system?
WITNESS: I don't know, but my guess is some people in the Jacksonville office would have input. The people that may have input would be Hank Fichter, F-I-C-H-T-E-R, or Bruce Wright. W-R-I-G-H-T.
If we are done with that, one more person you may want to look at is a VPRM by the name of Ken Odey O-D-E-Y. When he was a VPRM, his region ran a reported disbursement rate in excess of 21 percent.
Despite that, that he was ultimately promoted, I think, to full Vice President.
MR. CAMIL: What region did he have?
WITNESS: He was in Pennsylvania some place; but that just goes to knowledge of people.
MR. SHROPSHIRE: What would be a typical disbursement rate in that time frame, nationally.
WITNESS: Six to eight.
MR. SHROPSHIRE: And describe what the reported disbursement rate would consist of? What would it include?
WITNESS: That would include surrenders, loans associated with new business.
MR. SHROPSHIRE: Would it include --
WITNESS: No dividends, and I don't believe it would include surrenders of PUAs.
MR. SHROPSHIRE: But it would include surrenders of policies?
MR. SHROPSHIRE: What was the thinking on not including surrender of the PUA writers?
WITNESS: Again, the argument there is very similar to the dividends. They are not a death benefit that was initially negotiated. They were an addition to.
And if people wanted to get them off to get a greater death benefit in another way, that should be fined. And they did not, the surrender of them did not reduce the face value that they bought.
MR. CAMIL: Let me ask you, the purchase of the the PUA did in fact add to the face value?
MR. CAMIL: So, taking those, in fact isn't that reducing the death benefit?
WITNESS: But not the death benefit that you purchased initially.
MR. CAMIL: Additional?
MR. CAMIL: So to take PUA from the current policy and take away additional face value, to put that additional into another policy was okay?
MR. SHROPSHIRE: Approximately what year did Mr. Odey achieve this 21 percent? Do you know?
WITNESS: I don't remember it was, I think, it was in the early '80s.
MR. SHROPSHIRE: Do you know if Mr. Odey is still with the firm?
WITNESS: No, I that believe he retired.
MR. SHROPSHIRE: Do you know where he retired, what state?
WITNESS: No I don't; but if he retired, the company would have an address on him.
Regions or areas where financed insurance was a particular problem, and known to be a particular problem, by 'mid to late '80s were Ohio in its entirety, Region H in Northeastern home office.
MR. SHROPSHIRE: What state would Region H include?
WITNESS: I believe Region H was the Connecticut area, and Buffalo, New York.
MR. SHROPSHIRE: Those areas are -- oh, I'm sorry are -- Region H does not include Connecticut and Buffalo. Buffalo is just another area?
WITNESS: I think Buffalo is separate from Region H.
MR. SHROPSHIRE: And what year did you put on this, saying that these areas were known as being abusive financed insurance areas?
WITNESS: Mid to late '80s and there are reports on each of them.
MR. CAMIL: Do you have any of those reports?
WITNESS: No, I don't.
MR. CAMIL: What kind of reports?
WITNESS: Showing the investigation in each of the areas; and the results of the investigation confirming that they were problem areas.
MR. SHROPSHIRE: An investigation by whom?
WITNESS: Typically, Marketing Practices. Let me, the people who are going to have the most knowledge about the wrongful practices and people who you may be intending to be talking to, are Bruce Wright, who has been in Florida for a very long time. And that's W-R-I-G-H-T.
He also ran the Alabama Project. The Alabama Project was an attempt to reach out to Alabama policy holders on an individual basis to resolve problems before the policies holders discovered the problems. It was fairly successful so he can describe that to you.
MR. SHROPSHIRE: What year was the Alabama Project?
WITNESS: It began in 1993, I believe, and ended in 1995. I think something over a thousand policy holders were contacted.
MR. SHROPSHIRE: Why was Alabama and its policy holders particularly targeted for this effort? Was there any significant scandal or problem there?
WITNESS: There was a 25 million dollar judgment against Prudential in the Gallant case.
MR. SHROPSHIRE: And in what you were talking about, who would probably have these Marketing Practices reports?
WITNESS: Now Bruce Wright, he also has knowledge of the Helfreck memo. How it was prepared and how it was presented. He would be a good to question as to the whole validity of the thing.
MR. CAMIL: Could you tell us Bruce Wright's position and background with the company?
WITNESS: He was an auditor for a period of time; and he has been in Marketing Practices now for probably five years, six years.
MR. CAMIL: Has he ever been an investigator for the company?
WITNESS: Yes, that is the investigative people. Another person who had a great deal of knowledge in the north central area, is a guy named Bob Engdeahl, E-N-G-D-E-A-H-L, I believe it is. He is the head of the Market Training Practices unit in Minneapolis.
The third person who has significant knowledge, particularly in the northeast, is Don Garvey, G-A-R-V-E-Y. I think all three of these people would be extremely forthright.
MR. SHROPSHIRE: Can you give us some more background on their positions?
WITNESS: Engdeahl has been in the Marketing Practices also almost his entire career, as far as I know. And it's a long career. I think he has been in the company 20, 30 yearn.
Garvey, he started out in Consumer Affairs and ended his career in Marketing Practices last, oh probably five to ten years in the Marketing Practices.
MR. SHROPSHIRE: Let's go off the record for a moment. (An off-the-record discussion was held after which the following proceedings were held.)
MR. SHROPSHIRE: Let's go back on the record. Continue please.
WITNESS: A person in auditing that could provide you with a great deal of auditing information -- there are two people. Priscilla Myers and Peg Byrne, B-Y-R-N-E.
MR. SHROPSHIRE: Did you tell us where Engdeahl and Garvey were currently?
WITNESS: Engdeahl is in Minneapolis, Minnesota. Garvey is retired, but I think he still does work for the company.
MR. SHROPSHIRE: In what state?
MR. SHROPSHIRE: And you thought that Bruce Wright was retired?
WITNESS: No, he is an active employee in Jacksonville.
MR. CAMIL: And Meg Byrne, is she --
MR. CAMIL: Oh, Peg. Does she still work for the company?
WITNESS: Yes, she's with the company, and I believe she is located in South Plainfield, New Jersey.
MR. SHROPSHIRE: Please continue.
WITNESS: Well, I think that is all I have.
MR. VANDEN DOOREN: Are you going through certain regions?
WITNESS: I'll do that off the record.
MR. VANDEN DOOREN: And you gave us a couple of regions that had, apparently, high levels of the financing
MR. VANDEN DOOREN: -- problems with Ohio and Region H. the northeast. Any other ones?
WITNESS: Buffalo, New York. We also know that western Pennsylvania had a very high rate; but we are not sure who knew it or when.
There were regions out around the Chicago; but basically if you look in what they call the "Rust Belt" you are gonna find it.
MR. VANDEN DOOREN: Is there some reason for that?
WITNESS: Well, the Rust Belt was Prudential's strength from its beginning through about the end of the '40s, the 1940s.
MR. SHROPSHIRE: What states are the Rust Belt?
WITNESS: Well, if you take the whole northeast down to New Jersey, the bottom of New Jersey and then draw across and go up to Chicago. You get New York, Massachusetts, all of the New England states.
You get New York, New Jersey, Pennsylvania, Ohio, Indiana, Illinois, lesser in Indiana, but basically the industrialized states who have been industrialized for a long time.
It wasn't until the late '40s that Prudential really began to expand their presence, to a great degree in the West and Midwest, and in the South.
But that is where the policies were sold, so that is where the values were. The other thing that helped that, there were a lot of agents there.
The people were suffering from declining incomes, and the agents had to make a living and that's how you make a living. You have got to go out find money.
So the failure there is in Prudential not relocating its agency force to different places where there was a bigger need and the ability to afford it without just raping the outstanding policies, the existing policies.
MR. SHROPSHIRE: Do you know whether you have seen the document, or have a document or not?
Do you know of any internal documents any internal documents that at any time in the '70s, '80s, '90s that have been prepared in the nature of an examination of financed insurance or problems related to financed insurance, other than the Helfreck memo?
WITNESS: Well, the only thing there may be reports prepared at various times and that is why you would talk to Jay Dynes.
You could find out what reports he had prepared. He was there that whole period. And any reports that were prepared would have been prepared under his supervision, probably.
Another person if Jay Dinks can't talk about it would be a gentleman by the name of Joe Rully, R-U-L-L-Y; but I'm not aware of all the reports. I showed you a couple yesterday.
To my knowledge they were sporadic, they weren't regular, but my guess is there were more than what I was able to show you.
MR. VANDEN DOOREN: When they did these various investigative reports and audit reports, and all this stuff that is outlining problems in financing and APP, you know, selling insurance, and some type of retirement plan, did -- did those, where did those reports go? Did they normally go up the organization to high level senior executives?
WITNESS: The agency audit reports typically went to the head of the district agencies or ordinary agencies. And typically they really didn't write down the assignment to somebody and say give me a report back.
What they did was, they -- nothing real happened; but they would paper the file. They would say this what we did, this is what we didn't do.
But I mean if you look and see what action occurred, you will see that not much action occurred because they kept repeating themselves.
MR. VANDEN DOOREN: Let me ask it another way. We talked about annual audit reports?
MR. VANDEN DOOREN: And you go back to 1982, 1983, in that era, there are remarks apparently in the audit reports reflecting problems with the financing?
MR. VANDEN DOOREN: Where did those audit reports go?
WITNESS: Those audit reports were audit reports -- the ones signed by Mylon Johnson and the other person were audit reports for the audit committee of the board directors. And they don't have detail that an agency audit report would have in it.
They were summary conclusions, essentially, about these other audit reports that were done by the business people.
MR. SHROPSHIRE: So there was an annual report, approved as a whole every year, given to the board of directors?
MR. SHROPSHIRE: Did each region, each multistate region also have an audit report for the region as a whole every year?
MR. CAMIL: And this report went to the audit committee?
WITNESS: No, the board.
MR. CAMIL: Who was the audit committee of the board?
WITNESS: It varied over different periods of time.
MR. CAMIL: Was it one person?
WITNESS: No, typically, I think it's five to seven people.
MR. CAMIL: They themselves would determine from the reports they received what should be forwarded?
MR. SHROPSHIRE: Who was the counsel of the board? Is it a specified position in Pru?
WITNESS: It used to be the general counsel was the counsel to the board. The board in '93 or '94 was not satisfied with the representation of the general counsel and hired outside counsel on its own.
And the outside counsel now representing the board, and the general counsel are not particularly close.
MR. SHROPSHIRE: And who is the counsel to the board?
WITNESS: I can't recall his name right now. But the secretary of the corporation, Susan Bryant would know it.
MR. SHROPSHIRE: Is the counsel to the boards from an outside firm?
WITNESS: Yes, a firm out of Chicago, Illinois.
MR. SHROPSHIRE: Is the, do you know what any particular precipitating event was for the board obtaining the outside counsel back in '93, I think you said?
WITNESS: No, I don't. The only thing that occurred back then was, what they called the Jorgensen matter. Jorgensen was reportedly an employee who reported that they were overvaluing real estate properties for their accounts.
And when he reported it, he was evidently fired and told that he was wrong. They later found out that everything he said was true, and they paid him a rather significant sum of money in damages.
MR. SHROPSHIRE: Do you know of any incidents of conflict or dissension there may have been between the board and specifically the audit committee and Prudential management?
WITNESS: No, I know they're not satisfied with all of the things that would have been going on, or the pace of changes at Prudential. And I think that is why they brought in Art Ryan.
MR. SHROPSHIRE: Is the audit committee consisting of, or did it consist of outside board members?
WITNESS: Yes. No inside board members. I think the reality of it is, I think there is only one inside person on the board right now.
MR. CAMIL: The auditing committee reports that would go to the board that they would take from the other auditing reports, would it typically actually truly reflect what those reports said that went to the board?
WITNESS: I have never seen one.
MR. SHROPSHIRE: Have you read the Helfreck memo?
MR. SHROPSHIRE: The Helfreck memo begins by noting, as I recall, that the consumer complaints group is having problems dealing with the number of complaints about financed insurance. Are you able to recall that?
MR. SHROPSHIRE: Is my recollection correct on that?
MR. SHROPSHIRE: And you showed us yesterday, as I recall another memo?
WITNESS: Jim Summers.
MR. SHROPSHIRE: Yes, but much earlier than the Helfreck memo -- likewise noting and indicating we need more budget, if we're not going to do something about these financed insurance complaints. Did I recall that correctly?
WITNESS: Yes, you did.
MR. SHROPSHIRE: Did you notice in Jacksonville any unusual level of complaint activity about financed insurance?
WITNESS: We noticed early on in probably the late '80s that insurance was becoming the dominant complaint activity. Although it may not have been 50 percent, it was rising and was the single most prevalent type of complaint.
MR. SHROPSHIRE: Do you have any information about when financed insurance in the Jacksonville regional office first began to be noticed as a significant source of complaint?
WITNESS: In the late '80s. The first one I noticed was the Summers memo; but Bruce Wright could probably tell you that fairly specifically. And Jim Summers certainly could tell you that very specifically.
He was a former auditor and would have a good memory of what had occurred. And I believe when he retired he was rather frustrated.
MR. SHROPSHIRE: Have you heard, do you have any knowledge of Prudential management's reaction when, to the Helfreck memo?
WITNESS: I was told that when it was presented to Ron Barboro, who was the president of the company at that time, he took it and then later it was given back to Helfreck.
The Helfreck memo and his recommendations became a subject of the discussion in the life policy review task force. There was some life task force going on, and his recommendations became a subject of discussion and action within that committee.
And I don't, I can't remember exactly what happened, but there are some records from the committee that did show what happened.
MR. VANDEN DOOREN: Do you know anything about when did the life review task force get formed?
WITNESS: I think it was in '91.
MR. VANDEN DOOREN: What is that? What kind of body is that?
WITNESS: That was their group of people from all over the country involved in marketing practices. Consumer affairs that were trying to figure out a better way to do business, given what they knew about our problems.
MR. VANDEN DOOREN: Problems, financing APP, all of that?
WITNESS: Yes, I believe so.
MR. VANDEN DOOREN: Okay, were there other task forces, other investigative bodies that had specific names given to them to review these kinds of thing" during the whole time period we have been talking about?
WITNESS: There were periodic investigations, Coopers and Lyburn did an investigation. There is a significant report on that. I have believe that is going to be privileged also. Martha Goss did a report.
MR. SHROPSHIRE: What year would the Coopers and Lyburn report have been prepared?
WITNESS: I believe '93.
MR. CAMIL: Are you familiar with any of the information that came from that report?
WITNESS: Yes, I have read the report, but I can't quote much from it right now. Martha -- but it was very critical. And may I say accurate.
MR. VANDEN DOOREN: Who initiated that, I mean, how was that started?
WITNESS: I don't know. I think it may have come out of the auditing department. I'm just not sure.
MR. VANDEN DOOREN: Okay.
MR. SHROPSHIRE: Do you know, can you summarize again for us what the Cooper's report studied?
WITNESS: It studied the sales practices of the company and made recommendations.
MR. SHROPSHIRE: And what was the precipitating event for engaging Coopers and Lyburn?
WITNESS: I don't know. I also understand a woman by the name of Martha Goss, G-O-S-S has done a report, which I have not seen.
MR. VANDEN DOOREN: Is she still with the company?
WITNESS: I don't think so, but I know the report is in the possession of Sonnenschein.
MR. VANDEN DOOREN: Was Goss at Prudential when she did the report?
WITNESS: Yes, in fact I think she was a full vice-president or senior vice president.
MR. VANDEN DOOREN: In what field, do you know?
WITNESS: For some reason I think she was in the Controller's Department or something like that.
MR. SHROPSHIRE: Do you know of any studies done of the financed insurance in the 1980s'?
MR. VANDEN DOOREN: On this Martha Goss thing, when was that done?
WITNESS: I think that was in the '93, '94 area too.
MR. VANDEN DOOREN: Okay, and she was up in Newark?
WITNESS: In Newark, yes.
MR. VANDEN DOOREN: Do you know of any type of task force or body that was engaged to review and investigate the Cedar Rapids matter? Something with a, anything about a rip-off committee?
WITNESS: It was a nickname given to, the Rip-Off Committee was a name given to the task force that investigated Cedar Rapids.
And basically within the company after a little while, it was believed by most people in the company that the agents had ripped off a great number of the policies holders and the committee to correct it then became the Rip-Off Committee.
MR. VANDEN DOOREN: Do you know who instituted that thing?
MR. VANDEN DOOREN: Do you know generally what they found in their conclusions and all that?
WITNESS: Yes, they found that there were significant wrongful practices, misrepresentations, criminal acts done by the agents within the office; and that they were sponsored, or known, by the management of the office.
MR. VANDEN DOOREN: Did it go beyond the Cedar Rapids office or was it just concentrated on the one office?
WITNESS: It was concentrated on the one office. You will find that in any disciplinary matter, in the history of the company, they never trailed it up to find out the responsibility of the management.
You find that now in disciplining of the agents. They never go up and say, "Okay, what was the management's responsibility?" That is probably the largest weakness in the disciplinary process.
MR. VANDEN DOOREN: What happened to that report? Where did it go to, do you know?
WITNESS: I believe it went to the board.
MR. SHROPSHIRE: In that Rip-Off Committee, do you know if the letters R I P had some other innocuous meaning?
WITNESS: Well, R I P is a return of the initial premium; but I don't believe that rip and rip off is the same. Rip-off, I think, refers to screwing the policy holders.
MR. SHROPSHIRE: You think they used that term or the phrase Rip-off Committee, in the sense of the ripping off the consumers?
MR. SHROPSHIRE: And not just Return of the Initial Premium Committee?
WITNESS: Yes. In fact, Bob Engdeahl will probably confirm that.
MR. VANDEN DOOREN: Did you know who was on that committee?
MR. VANDEN DOOREN: What was Engdeahl relationship to the committee?
WITNESS: Engdeahl, I'm not sure if he was on the committee, but I believe he did do some of the investigation for the committee.
MR. SHROPSHIRE: Did the committee produce any type of formal or informal report to the committee?
WITNESS: I believe they did a report. I don't know if it was in writing or not. Well, there was something in writing because I have seen something in writing. I just don't remember the content of it. It was a long time ago that I saw it.
MR. SHROPSHIRE: Could there be a report that was not in writing?
WITNESS: Oh yes.
MR. SHROPSHIRE: How would that
WITNESS: Prudential, if they don't want to create records does a lot of oral reports. Financed insurance, you won't find anything that says go out and finance your insurance, but it is spread by word of mouth.
MR. SHROPSHIRE: Are you saying that there was a conscious effort not to put anything in writing about financed insurance?
WITNESS: It was a conscious effort not to put things in writing if they think they will be embarrassed later.
MR. SHROPSHIRE: Was this a widespread practice within Prudential during the 1980s?
WITNESS: I don't know about the 1980s, but under the Sonnenschein investigation it was a widespread practice. In fact, Sonnenschein was happy if you never put anything in writing.
MR. CAMIL: Was that practice in existence prior to the Sonnenschein firm coming into --
WITNESS: To some degree, it probably varied, depending on who the boss was. I have never been a believer in any of the stuff about do it orally not written so it wouldn't get out.
Because in a company the size of Prudential, too many people know and orally doesn't do any good.
The other thing is, with a company the size of Prudential, you have to have a record of what went on, what you did, and what -- so I don't think it does anything it's just -- and this crap about oral is just crap.
MR. CAMIL: So oral reporting prior to the Sonnenschein firm coming in was done, but would you say on a minimal basis, or really often?
WITNESS: I would not say often. Probably mostly just in embarrassing situations.
MR. CAMIL: And then it increased to some significant amount or just a minimum amount?
MR. SHROPSHIRE: Well, we were talking about Cedar Rapids.
MR. SHROPSHIRE: And some incidents that specifically happened in 1983; is that correct?
MR. SHROPSHIRE: And you are suggesting that, if I'm understanding you correctly, you would not be surprised if the Rip-Off Committee did an oral report to avoid any written documentation?
MR. VANDEN DOOREN: But something did go to the board?
WITNESS: I believe there was a report to the board. I don't know if it was oral or written.
MR. VANDEN DOOREN: Okay.
MR. SHROPSHIRE: And you're saying that even back in the early 1980s there was, at least to some extent a practice within Prudential management of not reducing to writing adverse findings to writing to avoid embarrassment?
WITNESS: Some embarrassing things weren't, yes. And I don't know to the extent of it. Keep in mind that in Cedar Rapids there were still many lawsuits going on after the report was prepared.
I guess, and I wasn't there, would be that the lawyers advised them not to put it in writing so that it couldn't be discovered.
MR. CAMIL: Would you --
MR. VANDEN DOOREN: Excuse me while I touch on something. On this Rip-Off Committee, when the report, whether it was oral or written went the board, what was their reaction, what was their response, do you know?
WITNESS: I don't know.
MR. VANDEN DOOREN: Do you know if the board has ever responded to any kind of reports or anything going up to them about financing or abbreviation or anything? Has it ever come back down with some kind of response?
WITNESS: No, I have never seen a response from the-board.
Now the way that would likely happen, that would be a direct from Art Ryan and you wouldn't know it came from the board, or from Bob Winters.
MR. SHROPSHIRE: You mean the board would call in the chairman and the CEO would tell him what they wanted done?
WITNESS: Probably. Keep in mind the chairman sits on the board. He's the chairman of the board and the CEO. So if the board wants something done, my guess is the direction would go to Art.
MR. SHROPSHIRE: Tell me this. In the 1980s do you have any feel or information as to whether the board of Prudential was truly effective?
Or were they in large measure captured by the Prudential management? Were they a captive board even though they were an independent company? Do you know?
WITNESS: I really don't know because I'm not familiar with the work within the board.
MR. CAMIL: Could I get you to look at this and, could I have it marked as an exhibit, please?
I would like you to look at the exhibit marked One and just -- it's dated September 10, 1981. It says, "Apparent Irregularities in the Cedar Rapids District."
What I'm interested in really, initially, is the first sentence that says, "as a result of signals received from a computer detection system, the Consumer Affairs Unit has been examining insurance transactions". And then it goes on further.
MR. CAMIL: Can you tell me what computer detection system or what it's talking about? What it's monitoring and what it caught, potential problems; and what kind of problems that it was capable of finding?
WITNESS: I don't know. My guess, it is an audit system of some sort. If you look at the file sticker it was an attorney. Bruce Poulsen was the chief counsel in Minneapolis at the time. Dave Parker, I think he was the head of administration at that time, but I don't know.
MR. CAMIL: So the Rip-Off Committee was actually made up of members from the Consumer Affairs Unit?
WITNESS: It looks like law department Consumer Affairs administration to me. I don't recognize any of these names as being from the audit staff.
MR. CAMIL: Okay, thank you.
MR. SHROPSHIRE: Do you recognize the name Skadden Arps?
WITNESS: Yes. I think it's S-K-A-D-D-E-N A-R-P-S.
MR. SHROPSHIRE: In what way do you recognize it and in regards to Prudential?
WITNESS: It is the New York law firm that did a marketing material review, for Prudential. I believe it was in either '93 or '94. And another thing they looked at was private pension plan materials and they did a report.
MR. SHROPSHIRE: Do you know, was it a written report?
MR. SHROPSHIRE: Do you know who the report went to?
WITNESS: I believe it went to Debra Bellamonica.
MR. SHROPSHIRE: Do you know who requested the report?
WITNESS: I believe it was Debra.
MR. SHROPSHIRE: Do you remember the name Telli Hass?
MR. SHROPSHIRE: Can you tell us why you recognize it in relation to your Prudential employment?
WITNESS: Telli Hass is an actuarial firm that provides professional actuarial data that has been retained by Prudential to help with an estimate of the cost of remediating the problems that we are looking at.
MR. VANDEN DOOREN: How was that initiated? How was that firm engaged? Who did it?
WITNESS: The Sonnenschein firm engaged them.
MR. SHROPSHIRE: Do you have any knowledge of any of the findings?
WITNESS: Yes, but they're complex, and without the report I would hate to try to tell you what they were, because I think I would probably misstate them rather seriously.
MR. CAMIL: Would you believe that that report, in general, adequately reflects the posture of the company and what it says that its potential liabilities are according to its information there?
WITNESS: I think it is fairly close, but there are a number of guesses. And if those guesses are wrong a little bit, then the whole magnitude changes rather dramatically.
So the biggest guess is the number of people who will apply for remediation. If that changes, if that goes from five to six percent, or from five to ten percent, the cost changes would be dramatical.
MR. VANDEN DOOREN: We need to go off the record for a moment. (An off-the-record discussion was held after which the following proceedings were held.)
MR. SHROPSHIRE: Do you have any feel for how the agents feel about their level of training on their products?
WITNESS: I think they feel that they were not well trained; and in fact, may have been misled.
An example of that is in the variable appreciable life is the ultimate, what they call the ultimate premium issue.
The ultimate premium is the premium that you might have to pay if your investment results are not very good. And that can kick in at or by age 65.
That ultimate premium is two, three or four times the annual premium that you have been paying up until then. The reality of it is, is that investment results have been good so it has never kicked in.
But their complaint was that they were never given information so that they could fully inform the consumer about that potential.
And many agents were very upset about that. In fact complaints from the agency forced made us change our policy with regard to that.
MR. CAMIL: So at age 65 the individual's policy tripled or quadrupled and stayed at that tripled or quadrupled rate permanently?
WITNESS: (witness nods head.)
MR. CAMIL: And the training given to the agents, and the sales material given to the agents, and the material given to the agents used for the policy holder, none of that reflected that?
WITNESS: Right. What the agents will tell you, and what they have told me, is that they were misled in the training. They were never told of this.
MR. CAMIL: Did the prospectus itself cover that issue?
MR. SHROPSHIRE: And the ultimate premium is not a one-time change?
WITNESS: It is a one-time change. I think it occurs at age 65, or some years after the policy is enforced.
MR. SHROPSHIRE: But it is a deal where the customer has to make one big drop-in, and then the regular premium resumes?
WITNESS: No, it is a change in the annual premium. Once the change occurs, you continue with that change. But all you really have to talk about is providing of the materials, providing training especially related to the ultimate premium and you won't see any.
MR. CAMIL: How did it come to light that there was this ultimate premium?
WITNESS: What occurred was, we got complaints that when ultimate premiums changed, when the premium changed. And when you get the complaint one of the things you do is you go out to the agent and say, "What did you tell the insured?"
And the agents started to say, "We didn't know anything about it. We didn't tell them anything about it. We told them that their premium was for "X" number of dollars per year for as long as the policy is enforced."
Well, once you get a number of agents saying that, you're pretty sure that that is something that was not told. And then you go to the people who were supposed to do the training, and the actuaries who are supposed to provide the information and you find out they don't understand it.
MR. CAMIL: But the agents weren't they also taught and trained that the variables could in fact abbreviate even?
MR. CAMIL: Wouldn't that give one a belief that there would be no ultimate premium?
MR. CAMIL: But had the agents actually read the prospectus themselves, and understood it? What they were selling to the policy holder shouldn't they have understood the product?
WITNESS: No, I think you have to be realistic about the educational level of the agents and the sophistication of the agents.
I don't know if you have seen a prospectus for the variable appreciable life, but it is in reality several prospectus'.
It is very difficult to understand. Even the policy itself is very difficult to understand.
MR. CAMIL: Do you believe the training for agents to sell the variable products, specifically to the value, was potentially inadequate then the some degree?
WITNESS: Yes, not potentially. I believe it was inadequate.
MR. CAMIL: And were the reports or any information to make management aware that agents did not understand the products, and were misrepresenting the variable products they were selling?
WITNESS: I don't know if there was a written report, but I know that the reports that were provided to the Marketing Practices Officer that discussed this issue.
In fact there are files that the Marketing Practices Officer has on this issue that should describe it rather completely.
MR. CAMIL: In what years would this be?
WITNESS: The discussion occurred I believe in 1995.
MR. SHROPSHIRE: Are you aware of any staff in Jacksonville's regional office who at any time over the years became noted as being particularly antifinanced insurance? Had a reputation for noting the problems, being down on financed insurance?
WITNESS: Do you mean on the sales side?
MR. SHROPSHIRE: Any staff. I mean an an auditor who was outspoken about it, a comptroller, a consumer complaint staffer, or anyone. Can you name some people who were --
WITNESS: Oh, yes.
MR. SHROPSHIRE: Can you name some people?
MR. SHROPSHIRE: Go ahead.
WITNESS: Jim Summers, Jim Helfreck, John Massaro.
MR. SHROPSHIRE: Spell that.
WITNESS: M-A-S-S-A-R-O, I believe.
MR. SHROPSHIRE: Is that all you can think of?
WITNESS: Bruce Wright.
MR. SHROPSHIRE: Any of these people, can you identify them as to which of them in the earliest time period were already down on financed insurance?
WITNESS: I think Jim Summers was probably -- he was the first one that I'm aware of.
MR. SHROPSHIRE: What time frame would you put him as having --
WITNESS: Late '80s.
MR. SHROPSHIRE: And let me ask the same question but for staff in the Prudential's national headquarters in Newark, New Jersey?
WITNESS: On the sales side I can only think of one person who says they were down on financed insurance, and that was Frank Astolfi, A-S-T-O-L-F-I.
MR. SHROPSHIRE: And what position did he hold?
WITNESS: He was a vice president of the district agencies in the Southwest. He said in meetings he said he was down on it. I just don't know if he really was.
MR. SHROPSHIRE: What year?
WITNESS: 1990, 1991.
MR. SHROPSHIRE: So he was a V.P. for district agencies of, you said the Southwest Region?
WITNESS: Right, the Houston district, at the time.
MR. SHROPSHIRE: Okay.
WITNESS: Fran Boucher B-O-U-C-H-E-R. He was Infield Operations Division with district agencies. She indicated she was down on it probably in the 1990 time frame. That is probably it. Keep in mind that even most people today think financed insurance is okay so long as there is no misreputation.
I mean that is a very basic philosophical question you have to answer at some point as a regulator. Is it something that you are going to prevent? My belief is you can't prevent it, but you can essentially stop the companies from using it.
If you were to change the regulation to make the free look period much, much longer -- perhaps two years longer, because with the two year free look period -- the company is going to be much less likely to utilize this mechanism or to train their agents to use this mechanism.
With the current free look period there is no penalty, and the placement rates don't help you at all. They are completely ineffective. You have to make the companies put something on the line. And the only way is to say, "Okay, they can void the policy and get their money back for "X" period of time."
MR. CAMIL: What if the company had to have rules or producers set up for suitability for financing, similar to that of selling a registered product?
WITNESS: If the rules for suitability are enforced in the underwriting areas, not in the field, and if underwriting is free from the bad influence of the sales channel, that could work; but the problem is that anything you put in place tends to be less effective over time.
MR. CAMIL: And the recommendations of the memo we looked at yesterday recommending that the policy holder be allowed to sign the illustration, was definitely indicating that they understand?
WITNESS: Let me give you an idea. A policy holder in purchasing new policies may be required to sign his name as many as ten to fifteen times. Now, you take out a mortgage on your --
MR. SHROPSHIRE: Can you name the particular documents that would have to be signed 10 or 15 times?
WITNESS: I can't name them all, basically there are several signatures on the application. On the illustration there may be signatures. There may be signatures on the M.I.B.
MR. SHROPSHIRE: And what is the M.I.B.?
WITNESS: Medical Information Bureau for release of medical information. Several signatures like that, but if you get the spurt material and you talk to Dave Ducarte, he can take you through all those, because that was studied as part of the introduction of the Client Acquisition Process.
And in fact, one of the goals of the Client Acquisition Process was to reduce the complexity of the application process and reduce the number of the signatures 80 that we could get better assurance that what they actually signed they read and they understood.
And one of the reasons we did that is when we talked to customers, they likened it to purchasing a house. And they said, here is what happens.
They said that the agent sits there, and he says sign there, sign here, sign here, sign here, and I have trust in the agent. I sign, he turns it over and says sign here, sign here, and sign here. I sign.
And then I thought about it, and think about yourself in buying a house. When you buy a house you are typically asked to sign many many times. I venture to say most people, I know I don't, have never read those things before they signed it.
Most people even after they signed them didn't take them home and read them. That is what it's like applying for a life policy.
MR . SHROPSHIRE: So, is it your opinion that most of the people that were sold financed insurance did not read the things they signed?
WITNESS: Yes, in fact that is a allegation of most of the cases. And the reality is that most of the agents have confirmed that off the record to me.
MR. CAMIL: There is a question here: A) If they read so they could understand them; and B) Even if they asked their agent whether or not he understood the information enough to explain it to them; is that correct?
WITNESS: Oh yes. The whole process is flawed, and the regulators are partly at fault for this. They are trying to make regulations to enhance customer understanding. The reality of it is they have made it too complex.
They think in terms of themselves as being the customer. And they say, well I read it and I understand it. The reality of it is, there are too many regulations.
Making the companies do too many things. What we ought to do is figure out a way to simplify the process so that they actually can understand it. If we don't get there these people are never going to be able to understand it.
MR. SHROPSHIRE: Let me change the topic to life insurance that is sold disguised as another product.
MR. SHROPSHIRE: And let me specifically direct attention to the sale of life insurance as a retirement or a private pension plan.
MR. SHROPSHIRE: Do you recognize that the sale of the life insurance, as a private pension plan, is an issue within Pru?
MR. SHROPSHIRE: We have shown letters that were apparently approved by Prudential that were direct mail letters for mass mailings, and they refer to the retirement plan, or the private pension plan, and they don't mention life-insurance?
MR. SHROPSHIRE: Have you ever seen such letters in Pru?
MR. SHROPSHIRE: And purportedly they were officially approved by Pru at all levels?
WITNESS: I'm not sure that that is true. We have never been able to determine that that is in fact true. They were known about, if not approved, at fairly significant levels.
MR. SHROPSHIRE: And when you say that they were known about, if not approved. Are you telling me that acquiesced at high levels?
WITNESS: Either by inaction or by direct action, yes.
MR. CAMIL: When you talk about high levels, can you give us an indication on that?
WITNESS: The senior vice-president level.
MR. SHROPSHIRE: Does that mean senior vice-president at regional, or senior vice-president at national?
MR. SHROPSHIRE: What was, can you give us any more insight of the thinking of the people who either furthered these letters, or did not oppose these?
WITNESS: I think that they way they viewed them is, they were a way to get in the door, and the explanation of what was going to happen would occur once you got in the door. And they assumed that the explanation would be a full and complete explanation.
MR. SHROPSHIRE: You think that was a good faith assumption on their part?
WITNESS: Initially I think it was. After you realize that the supervision of agents was inadequate, I don't think you could say that anymore.
MR. SHROPSHIRE: Do you have any information on the volume of the individual life insurance sales that were, that had premiums in multiples of $5?
WITNESS: Well --
MR. SHROPSHIRE: And do you know of any, in your mind, is there a connection of between that and the sale of life insurance disguised as another product?
WITNESS: I think one of the hallmarks of the sale is even amount premium, odd face value.
MR. SHROPSHIRE: How strong a correlation do you think there is?
WITNESS: Very, very strong because the sale process is how much do you want to put towards your pension. And when you ask somebody that, they don't think in terms of $1431. They think in terms of $2000 or $1500, or something like that. It's a very strong correlation.
MR. SHROPSHIRE: Well, have you ever seen any data on the volume of sales in Prudential that had even premium, odd face amount?
WITNESS: No to my knowledge. We have never done any studies, and we are not aware of potential sales like that.
MR. SHROPSHIRE: To your knowledge could such a study be done? Would it be difficult or impossible to ask the computer data bases how many policies we sold that had even dollar premiums? Specifically premiums in multiples of $5.
WITNESS: I don't think that would be difficult; but I think that would be a little too fine. I think the amount of data you would get would be too great.
I think you would ask it in two ways. I would probably ask it in amounts of a hundred dollars and face value in odd amounts other than thousands.
Life insurance is very seldom sold when it's sold as life insurance as anything other than thousand, two thousand, three thousand. You don't see an $18,400 policy if it is sold as insurance.
So I would want to do a search on the face and on the premium, where premiums were even $100s and face was anything other than a thou s and.
MR. SHROPSHIRE: Do you have any knowledge of whether Pru had any indications internally that this was a problem at any time in the '80s or '90s?
WITNESS: I think in the '90s after Med broke, we believe it was a problem particularly in the west coast of Florida; but I was not involved at that time so I'm not sure what was known.
MR. CAMIL: On the pension letters or material being mailed out, talking about a pension plan, or investment, or retirement plan but actually being life insurance, are you familiar with any computer software that the company had provided to be used by the agents?
WITNESS: There was some contractor provided software. We purchased it from a house that provided it.
I can't remember the name of the software provider, but the marketing material review people would know who they were. Denny Shaeffer, for instance, he would know who they purchased the software from.
MR. CAMIL: And that software, was it distributed nationally?
WITNESS: I don't think so, I think it was distributed by region. I think different regions may have purchased from different vendors.
MR. CAMIL: And did that software, well what did that software allow the agent to do?
WITNESS: Essentially pitch a product as, instead of premium as contribution or some other phrase indicating it as an investment.
MR. CAMIL: But it was not life insurance?
WITNESS: And never mentioned life insurance.
MR. CAMIL: And who within management would have been aware that the company itself had purchased the software and was allowing it to be used?
WITNESS: Well, at least the field management and the marketing directors in the different regions. My guess is that they had to know about that too. Especially where it was a significant sale.
My guess is that in the, with respect to the west cost of Florida, probably a lot of people knew about it.
MR. CAMIL: How high up would someone need to be to order software for all of the agents within his region?
WITNESS: A director could do it. For instance, Denny Shaeffer could do it, maybe not for all of the agents but for the substantial portion. But typically he wouldn't unless he had approval from above him.
MR. SHROPSHIRE: Are you familiar with a Prudential video called the "Nest Egg Video", a training video?
WITNESS: I have seen it, but it was a long time ago that I saw it.
MR. SHROPSHIRE: The one I had in mind, it has Joe Steingoni interviewing a successful Prudential agent. Is that the one you have in mind?
MR. CAMIL: Jeannie March?
WITNESS: I remember Joe, because I know Joe.
MR. SHROPSHIRE: And do you have any recollection of whether that tape, in your mind, had any misleading aspects?
WITNESS: Oh yes, I don't remember what they were when I saw it I just -- I saw it with a lawyer, and I remember seeing it, and we were sitting there thinking, "My God, no."
MR. SHROPSHIRE: Are you telling me you thought it was misleading?
MR. SHROPSHIRE: Substantially misleading?
MR. SHROPSHIRE: But you don't, as you sit here, you don't have any recollection of the particular aspects?
WITNESS: No, I would like to, it's one of the things where I would like to see the tape, and go through the tape, and tell you then as opposed to --
MR. SHROPSHIRE: Do you know who Steingoni was? What position he held when he did that tape?
WITNESS: Yes, he was a vice president of the regional marketing for the state of Florida and the state of Alabama.
MR. SHROPSHIRE: Do you know what, if any, review process that tape would have gone through within Prudential, before it was ever provided to the agents for training?
WITNESS: I believe it was produced by the marketing department in Jacksonville; and I do not believe it was reviewed outside of Jacksonville.
MR. SHROPSHIRE: Who in Jacksonville would have reviewed it?
WITNESS: I believe it was Denny Shaeffer.
MR. SHROPSHIRE: Would it have gone outside his shop though for review?
WITNESS: It should have, but I don't believe it did. Now keep in mind that when you question people about things like this, and they, when they know you are questioning them about something, they figure something happened wrong so they are likely to deny things if they don't remember.
They're not likely to lie to you outright; but they're not going to search their memory, and they are not going to search their files.
MR. SHROPSHIRE: Another video I would like to ask you about is one that features Don Israelson. Are you familiar with that video?
WITNESS: I have not seen it, I have heard about it.
MR. SHROPSHIRE: And in what way did you hear about it?
WITNESS: I can't remember who told me about it, but it was, I was told about it probably in the spring of this year when Israelson was moved to Houston to be a general manager. That was an issue, of that tape. My recollection is the tape has some bad things in it.
MR. CAMIL: Did you ever see the video called "Clients 101"?
WITNESS: Yes, I did.
MR. SHROPSHIRE: Do you know anything about the background of that?
MR. SHROPSHIRE: What can you tell us about the background of that?
WITNESS: That was a video made by two agents. And what the investigation showed was that the --
MR. SHROPSHIRE: What investigation?
WITNESS: There was an investigation after it was brought to light. I think by Boyer's. No, it was Ward and Cognetti. It was a lawyer, Ward's lawyer gave it to us.
And there was an investigation conducted by Deborah Bellimonico as to what occurred. And what we found were that there were two agents that produced this, essentially on their own time with their own money.
They took it in their office and showed it to their manager, who I believe was Dunn, Charlie Dunn. And he showed it at a meeting and Charlie Dunn then he showed it to Gary Kincaid who had it shown at a rather large meeting including a number of home office people.
One was Charles Borek who was B-O-R-E-K. He was a Chief Financial Officer here in Jacksonville at the time. And basically it was decided to discipline the VPRM because it was an unapproved piece, and he showed it in an office, and to discipline the general manager because it wasn't an approved piece.
MR. SHROPSHIRE: What year did they discipline?
MR. SHROPSHIRE: Are you familiar with a series of the audio tapes in which Prudential agents are interviewed and they talk by their sales techniques?
I've seen a collection of these audio cassette tapes, and it's just like -- I forget the title -- but it's like "A Day with Joe Smith" or "A Day With Paula Smith." Are you familiar with,, or have you seen that series?
WITNESS: I think it was "Life With the Leaders" or something.
MR. SHROPSHIRE: Yes, that's it. Have you, are you familiar with that series of tapes?
WITNESS: Yes, I think they were started at about 1990, and I think they were actually put out monthly for a while. I don't know when they stopped.
MR. SHROPSHIRE: Do you have any knowledge as to what the system was, as to reviewing those tapes before they sent out to the sales force?
WITNESS: To my knowledge they were done by corporate marketing, district agency's marketing, and approved by the law department.
MR. SHROPSHIRE: That was at the national level?
MR. SHROPSHIRE: Do you have any knowledge, going back to the Nest Egg video, when that video was produced?
WITNESS: I can't recall.
MR. SHROPSHIRE: Can you give us any time frame at all. Like with bracket dates, like a not later than date, or a not before date?
WITNESS: I think it was before '93, but I just can't remember.
MR. CAMIL: Do you remember the feelings or opinions, if you go through people in management what the view of the clients videos -- what was said?
WITNESS: Well, the feelings ranged from it's inappropriate, it's funny, to the Priscilla Meyers, who had the most difficult time with it.
She said is it a embarrassment, it is racist, and it is inappropriate in the business place. And I don't want either of those people around there. She probably had the most severe reaction.
MR. CAMIL: Was there any view of the tape itself that the agents themselves were poking fun and making fun of sales tactics, and some things that in fact had taken place?
WITNESS: Everybody that saw it, that I'm aware of, thought there was some reality in it. The reality that they were most concerned with was it appeared to be making fun of the Prudential compliance efforts, and how they are not going to pay an attention anymore.
MR. SHROPSHIRE: Are you saying that the satyr was that you are as likely to be disciplined for doing the things that they showed in the tape, as you are to be taken to the top of the building and be thrown off?
WITNESS: No, I think they were trying to say -- To me I think they were trying to say was compliance had become unreasonable, blaming them for everything, instead of the company standing up and taking its responsibility.
And as a result, they were getting blamed, and they were likely to get thrown off the building for something they didn't do wrong, for something they were trained to do.
There was a great deal, there is and was a great deal of frustration among agents, because they feel that the company is trying to blame them for things that they were trained to do.
MR. SHROPSHIRE: Is there, is the agents' union a powerful force?
WITNESS: No, it is meaningless.
MR. SHROPSHIRE: Let me change the subject to Mr. Nick Jamali for a minute. I would like to go back to an incident that involved the sale of penny stocks by Fortara in Alabama?
MR. SHROPSHIRE: And apparently Mr. Jamali purchased some of the penny stocks while he in charge of Mr. Fortara in the geographic area, correct?
MR. SHROPSHIRE: Was there any justification offered to your knowledge by Mr. Jamali for his conduct?
WITNESS: No, and the investigation was done by Ken Eilermann, that's E-I-L-E-R-M-A-N-N, who the chief counsel in Jacksonville.
MR. SHROPSHIRE: Was it viewed as a serious violation?
WITNESS: At the time of the investigation, I don't believe it was viewed as a serious investigation, a serious problem with respect to Jamali because they didn't do anything with regard to him.
The reality of it is, it was a complete abdication of his responsibilities as a registered principal, and he should be fired
MR. SHROPSHIRE: What I'm getting to perhaps is, does it say anything about Prudential's corporate culture that Jamali was subsequently, after this incident, put in charge of the richest district office in the nation?
WITNESS: Oh yes, it really does. It says that rather than address problems in a straight-up fashion, that we shuttle them aside.
MR. SHROPSHIRE: Now let me change the subject again, and on financed insurance as the subject matter. Can you identify particular people, to your knowledge, who in the 1980s who were transferred around, especially management staff, from region or district office to district office, who by those transfers promoted and spread the practice of churning?
Can you identify particular people that really were instrumental?
WITNESS: I can identify people who allegedly spread the practice, some. One, the most famous is Morrell Valente, V-A-L-E-N-T-E.
MR. SHROPSHIRE: Do you know any of his assignments?
WITNESS: He was vice president of the the district agencies, I think in the east somewhere. Then he was vice president of the district agencies in the western home office for a couple of years.
Then he was responsible for marketing for half of the country for district agencies. And I think ultimately he may have have been responsible for marketing for all of the district agencies throughout the country.
Phil D'Achille D' A-C-H-I-L-L-E. He is currently the senior vice president of marketing in the district agencies. He was the one who allegedly did it.
MR. SHROPSHIRE: Do you know any of his transfers and movements around the country, the nation?
WITNESS: He came from the eastern home office to the western home office, then went back to the eastern home office.
MR. SHROPSHIRE: Can you think of other people, and let me include even lower district managers that were transferred to other districts.
WITNESS: Yeah, well it's hard with the district managers. They all run together. Bob Schilp, S-C-H-I-L-P who I believe was a manager in Ohio first, then he was a manager in Sarasota. Then he was vice president of regional marketing and responsible for a portion of Ohio.
MR. SHROPSHIRE: Who was that?
MR. SHROPSHIRE: Okay.
WITNESS: Somebody who allegedly sponsored it, but I have never been sure, was Will Watts. He was a manager in Jacksonville.
Then he was vice president for regional marketing for a region that included Kentucky. Then he was made a manager in Jacksonville again.
Ricky Martin. I don't think he ever was transferred anywhere. He was in Paducah, Kentucky, I believe. There were two brothers who were managers out in the west, and I can't remember their name s .
Gary Budish, B-U-D-I-S-H. He was a manager in district agencies in the Los Angeles area, and then became vice president of regional marketing in the western home office.
MR. CAMIL: Concerning Mr. Budish, did you ever become aware of an instructional tape, either an audio tape or a video presentation that he had made to the agents in that area?
MR. CAMIL: And could you tell us what that consisted of.
WITNESS: It was an instruction on how to avoid replacement guidelines.
(An off-the-record discussion was held after which the following proceedings were held.)
MR. SHROPSHIRE: Okay, we'll go back on the record.
MR. VANDEN DOOREN: Do you recall any other kind of really significant blow ups like Cedar Rapids, Iowa, you know, getting to the media?
WITNESS: Alden, Illinois.
MR. VANDEN DOOREN: Okay, when was that?
WITNESS: I think that was in '93 or '94.
MR. VANDEN DOOREN: Can you kind of tell me about that?
WITNESS: The allegation was that the whole office was involved in wrongful sales practices, including churning. And that it was sponsored and known about by regional sales officers, Vice President of Regional Marketing.
MR. VANDEN DOOREN: Who were they?
WITNESS: I think the Vice President of Regional Marketing was John Green at the time.
MR. VANDEN DOOREN: Where would that be? What office would he be in?
WITNESS: All right, at the time it was Chicago. Now I think he is in Minneapolis. There was reorganization in '96.
MR. VANDEN DOOREN: Any other V.P's or anything at a higher level that knew about it?
WITNESS: There was an allegation that Ed Baird new about it, but I don't think it was ever proven.
MR. VANDEN DOOREN: What --
WITNESS: It would surprise me. Ed Baird seems fairly straight to me.
MR. VANDEN DOOREN: Okay, did the company investigate it?
MR. VANDEN DOOREN: Was there a task force or something that was assigned to this one?
WITNESS: Yeah, I there was out there Chicago. And I think that they attempted a customer out reach in Alten to the people there.
That was the subject of a court hearing because there was a class action pending in Illinois, and then there were motions to stop and out reach to the Alten, Illinois customers.
And then there was something we had to tell them when we contacted them. That there was a class action, that they could be members of the class. There is a significant file on Alten, Illinois in the out reach.
MR. SHROPSHIRE: Was this Alten, Illinois incident-widely reported in the media?
WITNESS: Yes it was, especially in Illinois.
MR. VANDEN DOOREN: Did this task force have a name?
WITNESS: No, not that I recall. After the Rip-off Committee, I think they tried to keep from naming things.
MR. VANDEN DOOREN: Who was on that task force?
WITNESS: I don't remember. Keep in mind now that I wasn't involved at that time.
MR. VANDEN DOOREN: Was it run out of a certain division?
WITNESS: It was run out of Chicago, probably out of the administrative head of the office. I can't remember his name right now either.
MR. VANDEN DOOREN: An administrative head of the marketing training practices or what?
WITNESS: No, head of administration for the Chicago office.
MR. VANDEN DOOREN: Like the home office?
WITNESS: Yes, Dolci D-O-L-C-I. A person who would be very familiar with that, and who was just recently fired by Prudential, is Dan Parsons, P-A-R-S-O-N-S.
MR. VANDEN DOOREN: Do you know why was he fired?
WITNESS: No, I don't know.
MR. VANDEN DOOREN: Okay.
WITNESS: But he is now located in Pennsylvania outside of Fort Washington, Pennsylvania.
MR. SHROPSHIRE: What kind of reputation does Parsons have?
WITNESS: He always had a good reputation, in fact he worked for me as a paralegal in Los Angeles in the 80s' and I'm the one that brought him into the field operation's division in Chicago in about 1990.
MR. VANDEN DOOREN: Lawyer?
WITNESS: Good lawyer, a paralegal. He went to law school and then he became a lawyer. I always thought he had a good reputation for honesty.
MR. VANDEN DOOREN: What was the gist of the findings of the investigation; do you know?
WITNESS: That we had wrongfully sold to a large number of the customers in Alten, Illinois. And I think there was some believe that Green knew about it, but there was no real proof that he knew.
MR. VANDEN DOOREN: Anyone fired because of that, or demoted?
WITNESS: I can't remember. I believe some people were fired, but I can't remember.
MR. VANDEN DOOREN: Did it, was that concentrated to one office, or several offices or what?
WITNESS: One office, there was an office in Alten, Illinois.
MR. VANDEN DOOREN: Okay. Was there an investigation done of other offices within the region?
WITNESS: They looked at surrounding offices as a result of that and didn't find the same magnitude of problems. But keep in mind the way we look, we may not find it. I don't know what the mode of the investigation was.
MR. VANDEN DOOREN: You say that there was an out reach at some point?
MR. VANDEN DOOREN: How was that developed, implemented?
WITNESS: I think there were letters. I think it was developed in Chicago and approved by the Newark office, or the South Plains office. But keep in mind, this occurred in '94 and I wasn't involve.
MR. VANDEN DOOREN: I understand.
MR. VANDEN DOOREN: Do you have any idea how it was done? I mean, you say there were notices that were sent out?
WITNESS: I believe there were letters, and there may have been personal contact too.
MR. VANDEN DOOREN: What was your, do you have any knowledge about how they made restitution back to these people? I mean did they reverse the old ones, or make good on their promises on the new ones?
WITNESS: Redeeming in '95 when the policy on the Relations Center became responsible for administrating remediational with respect to Alten we treated them the same as we treated everybody else.
There were a variety of remedies offered including benefits of bargains, return of funds, things like that.
MR. VANDEN DOOREN: What was the date that you said you started doing that kind of remediation?
WITNESS: I think we actually reached the remediation plan in June of '95. What we were going to do, and how we were going to administer it. Up until then I don't think they had decided.
MR. VANDEN DOOREN: Okay, so what you're telling me is that in 1993 with the Alten matter, what they basically were doing is what you came up with in 1995?
WITNESS: Well, they started to. I'm not sure what the remediation was. And I don't think they started to remediate customers until late '94.
MR. VANDEN DOOREN: Okay.
MR. CAMIL: Let me ask you regarding the Cedar Rapids incident, and the Alden incident, is there any question that the Presidents of the Board were not aware of both of those incidents; and exactly what took place at both of those locations?
WITNESS: I can't imagine the CEO not being aware. We do a news clipping report every day and it was reported in those news clippings so I can't imagine them not being aware of it.
MR. CAMIL: But the analysis and the final investigative reports on both Cedar Rapids and Alten, Illinois, would you think that they would have automatically been forwarded?
WITNESS: I don't know about automatically being forwarded but again, I can't imagine anything with that kind of exposure in the press wouldn't be forwarded and wouldn't be asked about.
MR. SHROPSHIRE: When you say you can't imagine that, to your knowledge are you fairly confident that adverse news stories did get up to the top management fairly quickly?
MR. SHROPSHIRE: Would that be --
WITNESS: On a daily basis.
MR. SHROPSHIRE: Okay, like with clippings?
WITNESS: No, what happens is, over the electronic mail system the Public Affairs Department does a news description of the news effecting Prudential every day.
And then if there is something bad, we might be called in to brief either the CEO or maybe somebody else on whatever had happened.
MR. SHROPSHIRE: Was this true throughout the 1980s?
WITNESS: Uh, actually --
MR. SHROPSHIRE: And what I'm asking is that -- was it true throughout the 1980s that any news reports mentioning Pru in possibly an adverse light would have quickly gotten to the top management?
WITNESS: I believe so, because I think before e-mail they were done by paper; unless people just didn't read them or didn't read the press.
Keep in mind that the Star Ledger rereports most things. The Wall Street Journal. the New York Times, most of the time.
Most of the top people in Newark read all three of those papers. It is unimaginable that a significant and bad story about Prudential would not be known by senior management.
MR. SHROPSHIRE: Let me ask, let me explore this. Are you suggesting that the Newark newspaper, because it is such a big presence in New Jersey, makes it a point of reprinting anything it sees on the wire nationwide that involves Prudential?
WITNESS: Yes, they reprint a lot of the stories. I'm not sure about everything, but a lot of the stories that appear elsewhere would also appear in the Star Ledger.
MR. SHROPSHIRE: For instance, a story from the Saint Pete Times that reports on some problems in the Pru office at Saint Pete, is likely to get reprinted fairly quickly in the New Jersey papers?
WITNESS: Right, unless it is a back page story, or an inside story that doesn't get repeated anywhere.
MR. SHROPSHIRE: In the 1980s did the agents have the practice of clipping and faxing in copies of stories that had run in their area?
MR. SHROPSHIRE: Who would they clip it and send it to, typically?
WITNESS: Typically they would go to the regional office. Either the head of the regional office, or if they knew someone else in the regional office it would go there.
Bruce Wright, for instance, he gets clippings all the time from the field.
MR. SHROPSHIRE: Was that true in the '80s?
WITNESS: Yes, when I was in Jacksonville I used to get clippings from the field.
MR. CAMIL: Let me finish one question that we had left off earlier. Let me try and clarify on Gary Budish?
MR. CAMIL: When he was the Vice-president Regional Manager?
WITNESS: Regional Market.
MR. CAMIL: Regional Marketing in California?
MR. CAMIL: So what was he actually over?
WITNESS: I think he had Arizona and a portion of Southern California.
MR. CAMIL: And while he had this position, he taught classes to agents on how to avoid being picked up on the monitoring system by Prudential?
WITNESS: Actually, the tape occurred while he was a manager.
MR. CAMIL: Okay.
WITNESS: But there is no reason to believe that he wouldn't have continued that activity.
MR. CAMIL: And what did he actually teach? What was he actually teaching, and to whom?
WITNESS: To the agents in his office, he was actually telling them what the rules were, and what they had to do to get around the rules so they could get a full commission.
MR. CAMIL: Like the 90 day or the 120 day period?
WITNESS: I mean the tape is fairly explicit. He claimed that the tape was modified, and examination showed it was modified; but the reality of it was there was nobody that believed he did not in fact teach that.
MR. CAMIL: And when he was teaching this as a general manager, who would have been above him?
WITNESS: It would have been a VPRM, and I don't know who that would have been. But the senior vice-president would have been Jim Novak.
MR. CAMIL: And do we know if Jim Novak had knowledge of any of this?
WITNESS: He knew of it in 1994 and 1995. I don't know if he knew of it before. But Tate Moneli could tell you when he knew of it.
MR. CAMIL: Is that why Budish was terminated?
WITNESS: No, actually Budish had another problem and that was Phoenix West. Where he received reports of, consumer complaints about, consumer complaints about financing and he didn't do anything about them.
That is one of the things I said about the failings, of the BQP process failing.
The BQP process if it had been followed would have picked up that.
Now keep in mind that we had people in Phoenix who were doing seventy percent of their business financed.
MR. CAMIL: Was each region allowed to set its own monitoring standards, or number of complaints, or how many lapses and those different things? Could each region do its own?
WITNESS: Inside the margin I think, I think each regional office could do its own inside the limit. A lot of them, for
instance, financing I think the limit was ten percent.
So if you wanted to do say eighty percent, or sixty percent, you could do that. But to my knowledge there was only one person who did that inside, and that was Vastenburg.
MR. CAMIL: So Vastenburg could determine, as far as the BQP process, and the sheets that would come out with marks beside the agent's name to flag or indicate that they might need to order a focus report or something else?
They could adjust the variables as to how many agents came up, or how many agents should be looked at by management?
WITNESS: They could, they could set a standard more strict than the standard set by corporate.
MR. CAMIL: But not less?
MR. SHROPSHIRE: Let me ask you another question about the BQP system.
MR. SHROPSHIRE: Looking at this document called "Instructions for Review" and it has a page here that refers to the core reports and it talks about life financing.
MR. SHROPSHIRE: It says that Column 2 shows the percentage of life financing; and Column 3 shows the percentage of life financing, minus the dividends transactions?
WITNESS: Right. And that's the one that was tracked, Column 3.
MR. SHROPSHIRE: Well, the implication seems to be that Column 2 would show the life financing including financing by dividends?
WITNESS: That's correct, but that was not a control -- the control point was on life financing without dividends.
MR. VANDEN DOOREN: Was that pursuant to -- headquarters knew it?
MR. VANDEN DOOREN: That is the way they wanted it implemented?
MR. SHROPSHIRE: Does this document indicate or describe what the relationship is between Column 2 and Column 3? In other words does it describe, why are they reporting the Column 2 if what they want you to pay attention to is Column 3?
WITNESS: No it doesn't describe.
MR. SHROPSHIRE: Can you enlighten me as to why they do report Column 2?
WITNESS: Well I think, I think one of the concerns was as people understood the control was on financing excluding dividends, that they would figure out a way around it so you wouldn't also attract dividends.
If you began to see dividends going up and you were a good manager, and total financing was staying low, then you would start to ask questions because that would indicate to them that in the future you are going to have a significant problem with financing.
MR. SHROPSHIRE: So what you're saying is that on Column 2 Prudential's policies did not care what percentage was in that --officially did not care what percentage was in that Column 2?
WITNESS: Well, that is probably a little strong. You couldn't be disqualified from conference on Column 2. You could be disqualified on Column 3 which is really the stick in this. The disqualification from conference for violating the business quality standards.
MR. SHROPSHIRE: Okay, and let me also again refer to it. It says in Column 3 shows the percentage of life financed and transactions; but if I understood you correctly, earlier you said that Column 3 also would not include financing via surrenders?
WITNESS: Yes. I believe that is right.
MR. SHROPSHIRE: Are you fairly convinced of that?
WITNESS: Yes. It wouldn't be the first thing I'm wrong on though.
MR. SHROPSHIRE: Let me ask you about conferences.
MR. SHROPSHIRE: Obviously, the qualifying for conference is a prestige thing and it involves a trip. Is it as simple as the agents like the trips?
Is that why the conferences were important; or was it that the bonuses you got along with qualifying for conference was what was real important?
WITNESS: Actually the conference was probably as important as the money.
MR. SHROPSHIRE: You mean just the trip itself?
WITNESS: Yeah, well there are two things about the conference. One is the trip. The conferences were typically in very nice places that these people probably couldn't afford to go to on their own.
The second is the recognition at the conference in front of your peers. In the insurance industry there is a saying.
That you motivate with two things -- money and medals. Well money is the pay, the bonuses and all that.
The medals are what count -- are you an up agent, are you a PUP agent, are you this or that? That's why you see agents, you like to give them three or four, five recognitions in a year. Because is thought to be a very strong motivating force.
MR. SHROPSHIRE: Did Prudential ever pay for the agent's spouse to go to the conference?
WITNESS: No. I think that the casualty company may have provided some funds to the agents for the spousal trip; but I think under New York rules you couldn't pay for the spouse.
MR. CAMIL: Let me ask you about the BQP report, the field report, regarding the misinformation.
We talked initially about how this process was in fact ineffective. Why was it ineffective if this information on the agents was being sent to each district, to the general managers?
WITNESS: Because basically nothing was done. Either the managers didn't bother to investigate, or when they did they always found it was okay.
Very few cases did they find something was wrong. And that's why I suggested Phoenix West. You have this BQP process that showed continuously growing complaints against a group of agents, financing rates that were all above fifty, and it went on for years.
And that, Phoenix West is just a microcosm of what was really going on in the country. It is a, I think it was magnified in Phoenix West, I think it was much worst than in the rest of the country; but it showed the care that was taken by management and following on its BPQ reports. There was no care.
MR. VANDEN DOOREN: Those core reports are based on the office too, right?
MR. VANDEN DOOREN: Was it also done on individual agents?
MR. SHROPSHIRE: So the report would show both?
WITNESS: Yes. I think there were two separate reports actually.
MR. VANDEN DOOREN: Okay, was that ever manipulated at all. In other words, maybe one regional office says, "Well the way I'm going to apply this is I'll apply this on an office basis." If it gets more than ten percent based on the office rather than individual?
WITNESS: I don't think, to my knowledge it wasn't, because you had to look at the individual and you had to look at the office.
MR. VANDEN DOOREN: Okay, now if they say, they find an individual that has generally gone above ten percent, or whatever the figure is on a consistent basis, then what do they do?
WITNESS: In most cases they did nothing.
MR. VANDEN DOOREN: What were they supposed to do? They were supposed to do something.
WITNESS: Sure, they were supposed to check on the transactions in the financing rate to find out if they were valid transactions, if they were understood, and if they were transactions that we should have entered into.
MR. VANDEN DOOREN: Okay, and were there specifics about how they were to do that?
MR. VANDEN DOOREN: Okay, and what was that?
WITNESS: They were told how to go about the investigation and when.
MR. VANDEN DOOREN: Okay, and how? What was it?
WITNESS: It was, you were supposed to interview the agent.
MR. VANDEN DOOREN: Okay.
WITNESS: Interview the policy holder to assure understanding; and then make a judgment as to the suitability of the transaction.
And then make a recommendation back as to why it is suitable, or not suitable and to state what further action should be taken.
MR. VANDEN DOOREN: Okay, that was to be done by the G.M.?
MR. VANDEN DOOREN: And that was to go where?
WITNESS: To the BPI.
MR. VANDEN DOOREN: Okay, is that where it got reviewed, pretty much?
WITNESS: Pretty much. That is where the review was and the senior vice-president might review on exceptional cases.
MR. VANDEN DOOREN: Now did that happen occasionally where that process was actually done?
MR. VANDEN DOOREN: What did whoever was there, Mr. Massenburg, Mr. Jamali, whoever is the VPRM in Jacksonville, for example. What did they do?
WITNESS: Well, it depended. One of the reasons Fortara came to light was on this.
MR. VANDEN DOOREN: Okay.
MR. CAMIL: Let me ask you --
WITNESS: -- one of the things that was brought to light by BQP.
MR. VANDEN DOOREN: Okay, what did they do?
WITNESS: Ultimately they took disciplinary action when they found that something was wrong.
MR. VANDEN DOOREN: Which was?
WITNESS: Well, in Wood's case I think he was going to be fired, and he went out on disability. In Fotara's case he was first demoted and then fired.
MR. VANDEN DOOREN: Okay.
WITNESS: If you followed it --
MR. VANDEN DOOREN: Yes?
WITNESS: And if they didn't get around it -- two very big ifs -- it could work.
MR. VANDEN DOOREN: You think getting around it was easy not to follow? Were there specific sanctions that were supposed to be implemented if you found certain things?
WITNESS: Yes. There is a sanction guideline, what they call three strikes and you're out. It was published in maybe 1992, 1993.
(A brief break was taken after which the following proceedings were had:)
MR. SHROPSHIRE: Okay, please continue.
MR. VANDEN DOOREN: Do you remember a time when there were some kind of actions taken to tighten up, or there were complaints about tightening up the core reporting system?
WITNESS: Yes, I think Tegninelli argued on that it should be tightened up on several occasions. I was present at two meetings where he argued that.
MR. VANDEN DOOREN: Okay, and who was present at those meetings?
WITNESS: Southwell, Crosswell, Don Southwell, Tom Crosswell, Mike Buckley, Jim Novak, Jim Tegninelli, Dave Fastenburg. I think that was it.
MR. VANDEN DOOREN: Okay, and where were those meetings?
WITNESS: In South Plainfield.
MR. VANDEN DOOREN: And what was the general tenor or gist of the meeting, do you know?
WITNESS: Well, basically that the process wasn't being followed, and the process wasn't good. It wasn't discovering everything that we knew was occurring.
And we had to review it, and do a better job. One of them was specifically a criticism of the job. The other was the criticism of the system itself.
MR. SHROPSHIRE: What year was this meeting?
WITNESS: 1995, I think.
MR. VANDEN DOOREN: And how is it that it can be more specific? How was it not administered the way they thought it should be administered?
WITNESS: Well they weren't getting the responses back from the general manager that would enable compliance to determine whether there was something wrong or not.
And the general managers and the VPRM were ignoring the compliance requests.
MR. VANDEN DOOREN: All right, and in terms of the report itself, what were some of the things that they were saying weren't quite right?
WITNESS: They focused on the -- and I'm going to get confused here I know because there were several meetings -- but I think the one thing they focused on, which Tegninelli focused on was the length of time for the replacement period. That it was just too easy to get around, we need to review that.
MR. VANDEN DOOREN: What was the replacement period that they were looking at?
WITNESS: I think it was a maximum of 120 days, 30 days before and then 90 days after.
MR. VANDEN DOOREN: Anything else that you recall about that meeting?
WITNESS: Not specifically. There may have been other things but I don't want to get that meeting confused with the other ones.
MR. VANDEN DOOREN: Now you said that going back to the administration, they ignored the compliance people. What was compliance saying?
WITNESS: Well compliance, we would get the reports back and review them to try to make sure that everything was done as BQP required for compliance. And Tigninelli was responsible for compliance in the district agencies at that time.
And his people were telling him evidently that they weren't able to do their jobs because the general managers weren't reporting back.
MR. CAMIL: Let me ask you on the core report, the BQP here. What I understand by going through it and have seen looking at one of the reports that list agents names, and the little cross or marker by the name in the field of the column, such as life financing.
And under each one of those it says for instance under life financing -- if there was a mark by an agent's name you were to review his last two disbursements, analyze the disbursements.
If you had a mark under Column 4 or 5 you were to order a 13012 focus report, do this, do this, do this, and each field had the specific things that the manager is supposed to do depending on if there was a mark by an agent?
MR. CAMIL: So is it a fact that none of these reports and things were being requested that made upper management realize that the general managers were not following these guidelines?
WITNESS: I think it was basically that that they weren't getting them back into compliance that made Tegninelli realize that they weren't being followed.
And then when you get an investigation such as Phoenix West, where as a result of the investigation you look at all of the reports that were issued.
And then you find out nothing was done, well you realize that there is something very, very wrong out there.
MR. CAMIL: For instance, it says replacements Column 10 and 11. And then it covers what the concerns are and the five or six things that a manager should do to in the report. And what he should order and what he should check?
Will all of this come out of the compliance? All of these reports and things that he would request to then review and to see if there was an actual problem in the sales?
WITNESS: Yes, he was responsible for the administration of the BQP process.
MR. SHROPSHIRE: Let me ask you a question on a different area, and the topic is sales material that needed approval. And the period is prior to 1994.
Did agents in the field, prior to 1994, develop and use much sales material on their own?
MR. SHROPSHIRE: And the hypothetical I am proposing to you was the agents developing it and using it without going past themselves, without getting approval. Was that common?
WITNESS: We believe it was.
MR. SHROPSHIRE: Is it fair to say that prior to 1994 Prudential sales materials review control process was not very effective?
WITNESS: I think that is fair, yes.
MR. CAMIL: In 1994, a form came out for agents to fill out to be submitted to Schaeffer for review of the promotional material?
MR. CAMIL: Prior to 1994 and the issuance of that form, was there in fact any system of control mechanism set up for agents to actually submit material for review?
WITNESS: Not that I'm aware of, but they were instructed not to use any material?
MR. CAMIL: That was not approved?
WITNESS: They were not supposed to be writing material.
MR. CAMIL: Creating advertising material.
WITNESS: They were supposed to be using the Prudential stuff.
MR. CAMIL: Right, and if they wanted to use something, they created themselves they needed to take it to their --
WITNESS: General manager.
MR. CAMIL: Did he have the authority of approving sales material?
WITNESS: He wasn't supposed to, but we're not sure what happened.
MR. CAMIL: And there was in fact no mechanism in place to
WITNESS: No written.
MR. CAMIL: No written recommendation in place?
MR. CAMIL: Are you aware, or have knowledge that at conferences, seminars Super Stars Meetings that the agents would, in fact, bring stacks of material that had been self created by them for use in the field?
WITNESS: Oh yes, in fact if you look at the agendas for RBCs' you will see typically a time on the agenda where they have booths.
MR. SHROPSHIRE: What's RBC?
WITNESS: Regional business conference, where you have booths in the afternoon and you visit, and basically this is where they exchanged ideas.
MR. SHROPSHIRE: Were there any controls by management to be sure that the material being exchanged was approved?
WITNESS: They were supposed to review it beforehand. I don't think that was done on a very stringent basis.
MR. SHROPSHIRE: Is it fair to say that in the period of 1980 through 1994, sales material review and control was not a high priority in Prudential?
WITNESS: That is fair.
MR. SHROPSHIRE: If an agent was noted to be using an unapproved piece of sales material, such as a direct mail letter, by a member of management; but it wasn't in the context of a complaint. Would management do anything about a typical --
WITNESS: Take any formal disciplinary action?
MR. SHROPSHIRE: Right.
MR. SHROPSHIRE: Typically, would he say anything at all about it? Would he care?
WITNESS: I don't know, I'm not sure. But keep in mind that the managers are paid overrides. If there is a piece that appears to be working, they're not going to say stop using it because it affects their pocket book.
MR. SHROPSHIRE: I have heard a criticism of their core reporting. I would like to see if you can verify it. That the core reports to the district managers only gave the district manager macro numbers on the level of financed insurance by particular agents but didn't give the actual policy identification criteria.
So that if the manager was diligent and brought the agent in, he couldn't deal with specifics. All he could say was, "have you been engaging in excessive financed insurance?" And the agent would deny it and the manager wouldn't have the particular cases to look into?
WITNESS: He could find the cases, the last cases that were submitted. He would only have to go to the underwriting to do that.
And typically, also most good managers would keep a file in their office about the cases being submitted. Also, they can track them through underwriting.
MR. CAMIL: Are you familiar with the core reports called the 13012 report?
WITNESS: Yes, which shows the policies.
MR. SHROPSHIRE: Would the manager be able to requisition the policy files in terms of just those that indicated financing, or would he have to pull all of the agent's policy files for the recent period and look through and try to find the financed sales?
WITNESS: He could ask for the ones, he could ask for Underwriting to give him the ones from financing.
The problem with the process is, if you were investigating a replacement case, by the time you got all the materials and did the investigation, and did the report, it was an average of six hours.
MR. SHROPSHIRE: Per file?
MR. SHROPSHIRE: Well, why wouldn't -- It would seem to me in the core reporting system, that it is obviously necessary for the manager to be able to confront the agent with the particular policy holder's names which are allegedly financed.
Why wouldn't that just be put on the core report, if the agent apparently had an excessive financing rate, why wouldn't that just be provided on the core report to the manager? Why make the manager go to underwriting and ask for the names?
WITNESS: Well, you can't -- you have the listing --
MR. CAMIL: The 13012 actually gave the name of the agent, the person, the dollars, the policy number, and you could go back one year on the agent's policies.
And it even summed up on the back portion a summary of what percentage of people were over a certain age, under a certain age, what type of policy, complete detail.
WITNESS: There is quite a bit of detail to do. But still, to do the investigation adequately took time.
MR. SHROPSHIRE: You mean six hours per file?
WITNESS: An average of six hours per case, yes.
MR. SHROPSHIRE: Let me get this right. The general manager, in order to get to the bottom of whether there was financing in one particular sale, typically it took six hours?
WITNESS: Inappropriate financing. Yes.
MR. SHROPSHIRE: Why? Do you just categorically say an hour to do this, an hour to do that? How could it amount to six hours?
WITNESS: Well, because you have to do an investigation of what occurred in the underwriting, which includes an interview of the agent, and if you're doing it right, an interview of the policy holder.
You then have to figure out what the stories are, and then you have to do a report.
MR. SHROPSHIRE: It sounds as if Prudential has calculated this, done a study.
WITNESS: Prudential didn't. This came as a result of -- when managers or agents don't like something, they try to go to the people they trust to tell them what it is, and why.
And when you interview them you find out these things. But Prudential itself never did a study to find out how insufficient this was.
They also never did a study to determine whether it did any good to investigate cases that may have been written three or four months ago.
The reality of it is, is that the system was inadequate from day one. It couldn't work. You are asking too much from management, and you were giving them the information too late to do anything significant about it.
MR. SHROPSHIRE: Would it be fair to say that from day one that the management did not want to change the system, because they did not want a system that worked too well?
WITNESS: I don't know if that is fair; but I don't think they want anything that would unduly interfere with sales.
MR. VANDEN DOOREN: Let me ask you, do you recall situations where they corrected financing in a particular office or a region, you know, really tightened it up, and then there were complaints. Say, you know, the sales are going right in the tube here. We can't do this?
WITNESS: No. I'm not aware of anybody that puts significant limitations on financing.
MR. CAMIL: Let me ask you, viewing the knowledge that a general manager would have over an office, and if he is getting a report that shows an agent is doing well in financing -- and the company's position is financing is really in the interest of the policy holder -- would the manager really have to look very far to review the last two or three plans for financed or potential churnings, to take a look at what is going on?
MR. CAMIL: Well, how far would he have to go? Through that office who would he have to go through in this BQP process to determine that, "Gee, I have a problem with a couple of particular agents, or with half of my staff?" Is he so far removed from his office?
WITNESS: No, he shouldn't.
MR. CAMIL: Okay.
WITNESS: The question is do we have, do we give management adequate training --
MR. CAMIL: Okay.
WITNESS: -- to be able to know first of all what is and what is not good practice. Secondly, to be able to train people on what is and is not a good practice. Third, having the analytical ability to review practices and determine what is wrong and what is not wrong with them.
MR. CAMIL: Concerning complaints that management received, a general manager receives a complaint on an agent. Say a policy holder calls him. The policy holder says, "He didn't tell me about the policy. He didn't explain it," or whatever.
Did the manager have the authority, whether the complaint was written or verbal to determine whether or not it was going to be forwarded to regional; and for himself to handle that?
WITNESS: He used to in early 1995 we instructed that any complaint from a policy holder had to be referred to Policy Holder Relations.
MR. CAMIL: So prior to that, the manager had soul discretion for determining what complaints were forwarded and which complaints were handled in house?
MR. CAMIL: There was no concern that complaints taking place across the country or districts were not properly being recorded at the home office?
MR. CAMIL: Was there any concern about the fact that regulations in some states required that complaints be recorded at the corporation home office so that when the marketing conduct exam was done, those complaints were on file and could be reviewed?
MR. VANDEN DOOREN: We have been going a while, why don't we take a five-minute break.
(A brief break was taken after which the following proceedings were had:)
MR. SHROPSHIRE: We're on the record. Can you tell me what is the most prevalent or common scenario, in your experience, for the actual technique used in selling the policies today with these techniques of financing?
WITNESS: The one that appears to be the most prevalent is selling a new policy as free insurance, essentially by using the values in an older policy to pay the premiums on the newer policy.
MR. SHROPSHIRE: Would that take just one visit?
WITNESS: That could be done in the one visit as long as you weren't to avoid the replacement period, or the replacement rules. If you were trying to avoid the replacement rules, then it might take two visits.
MR. SHROPSHIRE: Could you avoid the replacement rules if you used disbursements from accumulated dividends in the new policy?
WITNESS: Sure, if you waited the 90 days. And then what you do, you go to the customer and you say, "I'm going to give you, you have a $10,000 policy. I'm going to give you $10,000 in additional insurance for the same price."
And they say "How do you do that"? And you say, "Okay, what we are going to do is on your old policy we are going to start paying out with the dividends or the values in your old policy, to the pay the premiums on your old policy."
After we get that done I'm going to come back and I'm going to then fill out an application and the premium you would have paid me for the old policy, you will pay me on the new policy.
And then I wait until the 91 days is up, 90 days is up, and come back and write the new policy.
MR. SHROPSHIRE: And then that agent will not, that sale will not get noted on Pru's core report system?
WITNESS: Right, it won't be a disbursement that is associated with new business.
MR. SHROPSHIRE: But I also wanted to know if the agent, during that visit, instead sold the new policy but had the premium paid by disbursement out of accumulated dividends on the original policy, would that not also get passed and not be detected by the core report?
WITNESS: No, that would be detected because it doesn't have to be a disbursement that goes anyplace. It just has to be a disbursement on one policy when another policy, at or about the same time another policy is written.
MR. SHROPSHIRE: But I thought you stated in the Column 3 in the core reports did not pick up --
WITNESS: That, Column 3 doesn't pick up the dividends, but I was talking generically about it as an AP loan or dividend. It is picked up on Column 2, the dividends.
MR. SHROPSHIRE: But Column 3 is the important column?
WITNESS: Column 3 is the control column and it wouldn't be picked up as long as you only used dividends.
MR. CAMIL: Or PUAs?
WITNESS: Or PUAs.
MR. CAMIL: What about a partial surrender?
WITNESS: You mean the partial surrenders -- PUAs?
MR. CAMIL: Right.
WITNESS: I don't think that is picked up either.
MR. CAMIL: Okay, can I show him something now?
MR. SHROPSHIRE: Sure.
MR. CAMIL: I am showing you what is marked as Exhibit 2. Let me get you to take a look at that that. It says district agencies RMO version Life New Business Associated with Disbursements?
MR. CAMIL: Are you familiar with that report?
WITNESS: I was. This is an old report, the format may be different now.
MR. CAMIL: Okay, I just wanted to ask you, under Associated Disbursements, it says "Excluding Dividend Accumulations, PUAs, Surrenders."
MR. CAMIL: Would that mean that matching, if those were one of the values that were used, would not show up because it is excluding those?
MR. CAMIL: It does denote those surrenders? Is that referring to the PUA surrenders?
WITNESS: Yes. No, I think that is a cash surrender of the policy.
MR. CAMIL: The cash surrender of a policy?
MR. CAMIL: Okay, so dividends, dividends accumulations or cash surrenders, would not be monitored for matching?
WITNESS: Cash surrender of a policy would be.
MR. CAMIL: Oh, it would be?
MR. CAMIL: So it's not, so what surrender is it talking about, just the PUAs?
WITNESS: In this column it is talking about dividends, PUA surrenders. This is the --
MR. CAMIL: It's the PUA surrenders that aren't monitored?
MR. CAMIL: Okay.
WITNESS: You can produce them, but it is not the control point. The control point are loans and surrenders of the policies, not PUA surrenders.
MR. CAMIL: But if you wanted to look at all matches to consider what the agents were doing --
WITNESS: That would be the total match.
MR. CAMIL: And it would be the total match here?
WITNESS: Yes. Here you have, for some reason you have three here, and you have one here. I don't understand that.
MR. CAMIL: Okay, but I just wanted to verify that the report does not indicate, it does not indicate dividend accums or PUA surrenders, and that is left off the monitoring fields?
WITNESS: Right. It is not a field that is controlled. You won't get disqualified.
MR. CAMIL: I also wanted to ask you if you had ever read or became aware of a memo that was from Donald Southwell to all agents in the country that discussed the change of the company's policy concerning recall of agents commission and management's overrides?
WITNESS: Recovery of compensation memo in 1995?
MR. CAMIL: That is correct.
MR. CAMIL: Could you tell me about that memo?
WITNESS: Yes, that memo was actually a recommendation of Ren Nelson's. In early 1995 it was believed that any time there was a reversal, that the agency was culpable and commission should be recovered.
When Ren Nelson went into the marketing practices job he received information and documents that would indicate that agents were actually trained to do many of the things that we were recovering commissions on.
It was his belief that that was not fair, to punish the agent for something that he was trained to do.
So, and it was also his belief that by tying the remediation to the customer and the recovery of compensation of the agent, you damaged your ability to remediate the customer. Many customers who deserved remediation would not get remediation or would be delayed.
So what he did was first of all was separate the two. The customer remediation would be a decision made first. Recovering the compensation and discipline, that would be a decision made separately and second.
And you would only recover compensation where you found the agent culpability was not due to the management guidance or training by the company.
MR. CAMIL: Well, let me ask you in that respect, where working sort of potentially, someone is made whole, or restored; and then the agent is asked, "Gee, did you do anything wrong?"
And the agent is saying, "Well, if I write that I lied, cheated, stole, they are going to take my money away from me; but if I say I didn't do anything wrong, then they are not going to lose any money."
WITNESS: Well, keep in mind there are substantial documents existing now that show what they were trained to do and when they were trained to do it.
I'll give you an example. On APP cases, it was believed that agents were not trained to write on the illustrations.
We discovered training materials that had been approved by district agencies, and that had been approved by the law department which instructed them as to how to actually write on the illustrations, and what to say while doing so.
We know that that training occurred in, I think it was 1983 and 1991, or 1984 and 1991.
So agents who are were hired and trained during that that period -- if it is an APP case and the allegation of the customer tracks the training materials there would be no recovery of the compensation.
MR. CAMIL: Who was going to actually review what individual or individuals, when an agent wrote in and said "Yes, I did tell the person that they would never have to pay any out-of-pocket money after two years, because that's how I was trained?"
Who is actually going to look at that and make that determination that they were trained to do that, and that it was wrong, so we are not going to take their money back?
WITNESS: Within Policy Owner Relation Center there were rules set up based on the facts that had been discovered.
If the agents, for instance on this one -- if the agent was hired between 1984 and 1991, and was trained during that period -- we didn't look to see whether he actually received' the training.
We just assumed that training was given. Unless the agents in his or her statement said I didn't get that, and I did misrepresent it. That never occurs.
So the initial determination is made by the consumer service rep in PRC. That is referred to the compliance organization for review and implementation.
MR. CAMIL: So the company actually assumed that any complaints against an agent involving an APP, and where the -- where the sale took place before say 1984 and 1991?
WITNESS: No, where the agent was actually trained and hired between 1984 and 1991.
MR. CAMIL: Where the agent was trained and hired between 1984 and 1991, the company automatically assumed the agent was trained wrong and the policy holder was right?
WITNESS: If the policy holder gives the information --
MR. CAMIL: The facts.
WITNESS: That the training would support. For instance, if the policy holder came in and said, "I was told that by the agent, that the premium would vanish after the ninth year."
Well, we know that was the term that they were told to do, and we know that was the training that they were given.
MR. CAMIL: And if the agent wrote back saying, "My manager trained me to do this, and told me this was okay" that he was still safe. He wasn't counting his complaint against him? And he wasn't losing any money?
WITNESS: It is counted as a complaint against him.
MR. CAMIL: Okay.
WITNESS: And if we were, if he were asked to bring up complaints on the agent, it would be a complaint against him; but it would not be a valid complaint against him. It would be a valid complaint of the customer against the company.
MR. CAMIL: And how would complaints against the companies be used as far as scoring for remediation stuff that wasn't counted against an individual agent?
If in remediation they pull up an agent's name and they say, "Gee, he has got three or more, that is going to raise the level of remediation potentially, but we are not going to count a certain, certain types of complaints that way -- we're going to say that's a company complaint, it doesn't count against the agent"?
WITNESS: Well, in the multistate remediation, any complaint against the agent is counted; but I think you have to have ten, counted or not counted.
MR. CAMIL: Okay..
WITNESS: But the way it was handled prior to that was we had the discretion of the consumer service rep. The consumer service rep didn't have to wait until there were ten.
The consumer service rep after one, could give Category Three, if that is what we determined.
MR. CAMIL: Were there any studies done, or anything done to determine the average number of complaints against the agents in Florida, or across the nation or anywhere?
WITNESS: No, but there is a study showing the number of agents with more than four, more than five, more than six, more than seven, up to more than ten.
MR. CAMIL: Do you know what percentage fall into that category with the overall agents?
WITNESS: I think oh, 400, 3 or 400 active agents with more than ten complaints. I believe that's right.
The material is actually in the compliance files under the control of Jim Tigninelli.
MR. SHROPSHIRE: Where was this training that you refer to done? The training that you referred to between 1984 and 1991 that called for agents to be trained or write on the illustrations? Was that the national level training?
WITNESS: Yes, in fact an agent furnished the marketing practices officer with one of the manuals that was used in the training; and the illustrations in it, and the notations that they are supposed to use. And that is in the files of the marketing practices officer right now.
MR. SHROPSHIRE: Was a pamphlet prepared by the national office and distributed to the regional offices for training purposes?
WITNESS: Yes, and approved by the law department.
MR. SHROPSHIRE: And what did it actually suggest that the agents write in the margins or on the illustrations, do you know?
WITNESS: Things like: Emphasize no more premiums due; emphasize no more out of pocket; emphasize that the premium vanishes; Circle it to emphasize.
It gave actual instructions: Words to use, marks to put on, draw it, draw a line under the last premium payment.
MR. CAMIL: Actual samples?
MR. CAMIL: Go bys' for the agent to use?
MR. CAMIL: Did you ever see any of those illustrations where they ever showed where agents might say, receive an inheritance, or the something to that effect at some point?
WITNESS: A drop on?
MR. CAMIL: To do a drop-in?
MR. SHROPSHIRE: What is the name of the training pamphlet?
WITNESS: I don't recall, but as I recall it is in a file labeled Abbreviated Payment Plan in the Marketing Practices Office.
MR. SHROPSHIRE: That's at the national level?
WITNESS: Yes, in South Plainfields
MR. SHROPSHIRE: And who --
WITNESS: It is now called the Vice President of Compliance.
MR. SHROPSHIRE: Who would apparently have custody of that file?
WITNESS: The Vice President of Compliance, Kevin Fraulich.
MR. SHROPSHIRE: And what would the name of the file be?
WITNESS: I think it was Abbreviated Payment Plan.
MR. SHROPSHIRE: And what would the training generally be described as regarding, if we were asking for it?
WITNESS: Training provided, agent training manual on APP. And the use of illustrations in APP. And it is a bound pamphlet. I think it is a blue cover, glossy.
MR. SHROPSHIRE: Was it envisioned, how was the training envisioned to be done? Did they envision that they would just give the pamphlet to the agent and the agent would read it?
WITNESS: I' m not sure. It is not described in there how it was done; but the way it has been described as being done was that in new agent training they would be given these pamphlets.
And then given, there would be discussions about how to do it. Also they would show, where they would go out with sales managers, and show sales managers would help them do it.
MR. SHROPSHIRE: On the subject of core reports, to the best of your knowledge, when did core reports first begin tracking financed life insurance?
WITNESS: I don't remember.
MR. SHROPSHIRE: Prior to 1985?
WITNESS: I don't think so, but I'm not sure because some of the document I have seen indicated that there were some reports in the late '70s.
MR. SHROPSHIRE: Did the core reports in the tracking the financed insurance, always use the 120 day window, to your knowledge?
WITNESS: Now, yes; but I'm not sure what they used previously prior to 1992, 1991.
MR. VANDEN DOOREN: You talked about some records in compliance that deal with a number of complaints?
MR. VANDEN DOOREN: Tegninelli has this or something?
WITNESS: Filed the complaints against the agent.
MR. CAMIL: Okay.
WITNESS: It's there where we're talking about the compensation.
MR. VANDEN DOOREN: Three, four, five, six?
WITNESS: Right. An analysis was done by Steve Keating and Pam Metrione showing agents with the names of the agents and how many complaints they have. And we looked at more than ten was the highest, and I think it went down to more than four.
And there is a listing and there was actually a process that we were going to use to review those complaints to determine whether those agents should continue to remain with us, which to my knowledge, hasn't been implemented.
MR. CAMIL: Was that one done state by state or just nationally?
MR. VANDEN DOOREN: Okay, and when was that done?
WITNESS: I think that the one was actually done early in 1996.
MR. CAMIL: Was there a high percentage of agents that had at least three complaints or over?
WITNESS: I don't remember the percentage.
MR. SHROPSHIRE Okay. Any other questions, gentlemen?
MR. VANDEN DOOREN: No.
MR. SHROPSHIRE: Do you have anything else that you would like to tell us at this time?
WITNESS: I think I have told you about everything that I know.
MR. SHROPSHIRE: We can complete the interview at this time.
MR. CAMIL: Actually, I have just a few other questions.
MR. SHROPSHIRE: Do we need them on the record, or what?
MR. CAMIL: Yes, but it will be real brief.
MR. SHROPSHIRE: All right, we're on the record.
MR. CAMIL: Did you become aware at any time of a program called the Joint Marketing System?
MR. CAMIL: Can you tell me what you know about that?
WITNESS: That was a program to encourage the exchange of information between PSI, Prudential Security, and the insurance agents in Prudential Insurance. And I think it also applied to Prudential Preferred.
What would occur is if an insurance client had, if an insurance agent had a client who wanted to invest money in stocks, they weren't licensed to do it so they would refer them to the PSI broker so that they could handle the stock transaction.
Likewise, the PSI broker was supposed to refer people to the insurance agent if somebody wanted insurance.
MR. CAMIL: Are you familiar with any actual system that was set up to allow the actual splitting of commissions between Series 7, Series 6?
WITNESS: There was a system, but I'm not familiar with how it operated but I am aware that however it operated, it didn't work. That what we found, what was found was that Series Seven commissions were being split with people that weren't Series Seven licensed.
MR. CAMIL: And was that a problem for the company?
WITNESS: Oh yes. It is a violation of NASD rules.
MR. CAMIL: Are you aware of anyone at Prudential Life who was aware of an actual manual that existed that taught the Sixs' and Sevens'?
How to use the computer systems and how to use conduit agents and other methods to avoid being detected and to allow them to split commissions illegally?
MR. VANDEN DOOREN: Do you know if there were any investigations on the commissions splitting?
WITNESS: I think there were, and I think that the person responsible for correcting that is Jim Avery, A-V-E-R-Y. I think there are people working with him to correct it.
MR. VANDEN DOOREN: Where in he located?
WITNESS: Newark, New Jersey.
MR. VANDEN DOOREN: And what is his title?
WITNESS: Vice President in the Individual Insurance Group, I'm not sure exactly which title it is.
MR. CAMIL: Concerning the financing of the existing policies, are you aware of the existing policies, a benefit being taken out of the existing policy to be placed into a registered product, such as limited partnership or actual stock?
WITNESS: I'm aware that that's occurred, yes.
MR. CAMIL: Is there any system based that you're aware of within the core report any other report -- that would monitor funds going from existing policies and being churned into mutual funds, stocks, limited partnerships?
MR. CAMIL: Was it ever discussed, the amount of those type transactions or the dollar value in commissions to company from those types of sales?
WITNESS: No, but I know it's thought to believe that any sales involving an agent and a broker cooperating were rather small because very few agents cooperated. They didn't trust the brokers.
MR. VANDEN DOOREN: Back to the Joint Marketing Sales, do you know when that first came in, by any chance?
WITNESS: In the 80s' some time, I just can't remember when. And I think there have actually been two programs under two different names,.
MR. VANDEN DOOREN: Well, do you know what the predecessor name is to the Joint Marketing Sales?
WITNESS: No, but I'm pretty sure there were two different names to the different programs.
MR. CAMIL: Were you aware of a system in place currently today, that would allow the Series Seven on the security side to split commissions with a Six, or with a Seven that is on the prolife side?
WITNESS: Well, what I'm aware of is that they designate, if the customer is referred and they buy Series Seven, what the broker does is designate some Series Six money from another customer over to the agent to split.
MR. CAMIL: Oh, is there a problem with that?
WITNESS: Oh yes, that is a violation too.
MR. CAMIL: And is that, to your knowledge, still taking place today?
MR. VANDEN DOOREN: This investigation, did it have a name that Jim Avery was running?
WITNESS: No, In fact he is currently involved in it. It is a review of the joint marketing training program.
MR. VANDEN DOOREN: Do you know who initiated that?
WITNESS: Actually, for some reason I think Art Ryan is the one that asked that it be started.
MR. CAMIL: So it's ongoing today?
MR. CAMIL: Do you know when it was started?
WITNESS: No, it is probably less than four, or five months old.
MR. CAMIL: PruCo?
WITNESS: PruCo, broker dealer for --
MR. CAMIL: Pru Life.
WITNESS: PruCo Securities or PruCo Life of the Arizona.
MR. CAMIL: Could you explain what their actual role is under the life unit? Do they actually handle the variable products?
WITNESS: Right, they used to issue all the variable products.
MR. CAMIL: And now?
WITNESS: Actually, I think the only thing that they are doing is running off the old products, they administer the old products.
MR. CAMIL: And --
WITNESS: I think the new variable life is issued under Prudential's thing.
MR. CAMIL: Under Prudential Life itself?
MR. CAMIL: Okay. That's all I have, thank you.
MR. SHROPSHIRE: Okay, if there are no more questions, these proceedings are closed.
(Proceedings were concluded at 2:40 p.m.)
C E R T I F I C A T E
I, GAYLE Y. JONES, Professional Reporter and Notary Public, in and for the State of Florida at Large, do hereby certify that I was authorized to attend the SWORN STATEMENT for A CONFIDENTIAL WITNESS on Saturday, October 19, 1996, at the Taylor Building, 1011 Beach Way Road, Jacksonville, Florida.
The witness was sworn at the beginning of the proceedings on the previous day me as to the truth of the statement which was in question and answer form; and I further certify that the within transcript, Pages 1 to and including 152 is a true and accurate record of my stenographic notes taken at that time.
DATED Thursday, October 24, 1996, at Fernandina Beach, Florida, County of Nassau, State of Florida.