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Administrative Complaint: Florida vs. Prudential Pt. 1

Stories and background:

(Editor's note: Prudential and Florida reached a settlement agreement 19 Feb. 1997)

(This is a copy of the administrative complaint filed by Florida officials Dec. 9, 1996. It outlines their case against Prudential and why they are threatening to pull Prudential's license to sell insurance in the state. The first half of the document, pages 1 through 14, is on this web page. The second half, pages 15 through 34, is on a linked web page.)

CASE NO. 17698-96-C




To: Arthur F. Ryan, Chairman & CEO The Prudential Insurance Company of America 761 Broad Street Newark, New Jersey 07102

YOU ARE HEREBY NOTIFIED that pursuant to the provisions of sections 624.307(3), 624.317, 624.318(2) and 624.321 (1), Florida Statutes, as Treasurer and Insurance Commissioner of the State of Florida, I have caused an investigation So be made of your activities as an authorized foreign insurer in this State and as a result find:

1. That THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (hereinafter referred to as "PRUDENTIAL") is an authorized foreign insurer in the State of Florida and subject to the jurisdiction and regulation of the Florida Department of Insurance (hereinafter referred to as "DEPARTMENT").

2. PRUDENTIAL began doing business in 1875 and has grown to become the largest insurance company in this country with over 200 billion dollars in consolidated assets. It is domiciled in the State of New Jersey and has held a Certificate of Authority in this State since 1915.

3. At all times during the period 1982 to 1995, as relevant to the allegations of this Order to Show Cause, PRUDENTIAL was organized as follows:

a. PRUDENTIAL commonly referred to its national headquarters offices, and the management in that national headquarters, as "Corporate." PRUDENTIAL's Corporate offices were in the Newark, New Jersey area.

b PRUDENTIAL divided its national life insurance sales force into several geographic territories, which are referred to herein as "Regions." The number and names of the Regions, and the states composing the Regions, changed repeatedly in the period 1982 through 1995. In 1982, the nation was divided into eight Regions. These Regions were commonly referred to within PRUDENTIAL by various shortened or other labels including, "Home Offices" and "ROCs" (Regional Operating Companies). Each Region had its own headquarters which are referred to herein as Regional Offices. Each Region reported directly to PRUDENTIAL Corporate headquarters. These Regions were typically headed by a Senior Vice-President of PRUDENTIAL.

c. At all times during the period 1982 to 1995, PRUDENTIAL had a Regional Office located in Jacksonville, Florida, which supervised Florida and other states. This Region was known for most of the period 1982 to 1995, as "GSHO" (Greater Southern Home Office) and/or as the Greater Southern Region, or the Jacksonville ROC.

d. PRUDENTIAL's sales agents were appointed by and were full time employees of PRUDENTIAL. The sales referred to in this Order to Show Cause were all made by these PRUDENTIAL sales agents.

4. Since at least 1982, PRUDENTIAL and its agents have engaged or participated in a widespread, systematic pattern of deception in their sale of life insurance products to Florida consumers. Specifically, PRUDENTIAL and its agents (as trained by PRUDENTIAL) have "churned" or "twisted" life insurance sales by deceptively manipulating consumers into stripping existing life insurance policies of their value to purchase new life insurance products from PRUDENTIAL. These illegal and deceptive acts were committed for the purpose of obtaining commissions and bonuses for PRUDENTIAL agents and managers and to increase profits or minimize losses for PRUDENTIAL. Further, in the general sale of their insurance products, PRUDENTIAL and its agents in many cases misrepresented the nature of the transaction and product being sold by mischaracterizing life insurance as pension plans, investment plans or savings plans. Additionally, PRUDENTIAL and its agents consistently failed to comply with Florida statutes and rules regarding replacement of life insurance policies. Finally, PRUDENTIAL and its agents, on at least three separate occasions, improperly and/or intentionally destroyed records that directly pertained to the Department's investigation of PRUDENTIAL's illegal activities.

5. The illegal actions of PRUDENTIAL and its agents have caused Florida consumers serious financial harm. Moreover, PRUDENTIAL either knew or should have known that such illegal sales tactics were being used to the extreme detriment of Florida insurance consumers. There is estimated to be more than 3 million potential victims nationally and perhaps over 100,000 victimized policyholders in Florida.

6. Since at least 1983, PRUDENTIAL's Corporate management knew, or reasonably should have known in the conduct of its business, that abusive and deceptive sales practices in the sale of its insurance products were a significant problem within the Company and that the problem was likely nationwide, Moreover, PRUDENTIAL knew, or reasonably should have known, what factors were causing these abusive and deceptive sales practices, could have developed tools to detect and help prevent these practices, and chose instead, to do little or nothing to substantively halt these practices.

7. That PRUDENTIAL corporate management knew, or reasonably should have known in the conduct of its business, that abusive and deceptive sales practices were a serious problem and that PRUDENTIAL was advised how to correct the problem, it is amply illustrated by the following:

a. The Cedar Rapids Audit. On or about January 26, 1983, John W. Cressman, Auditing Staff, North Central Home Office (NCHO), issued an audit report concerning the marketing practices of the Cedar Rapids (Iowa) District. The investigation and audit reflected "a serious District Agencies marketing problem in NCHO that may be an indicator and warning of similar problems in other districts in the Company."- An audit conducted in August, 1982, of the Cedar Rapids District had detected ''questionable sales practices." These "questionable sales practices" led to an interview with thirty (30) families who had applications for new business submitted, and who already had older policies in place, The auditors then determined that 90% of the families did not understand the transactions. The interviews disclosed that, for the most part, the agents had apparently told the insureds that the new policies would not cost them anything. The policyholders did not understand that the new policy premiums were financed by dividends from their old policies. The auditors then determined that for the period June 1, 1981, to September 30, 1982, approximately 33% of all new policies were financed by old policies. The auditors proceeded to outline the factors that contributed to the problem:

1. The difficulty in making sales due a depressed economy in Cedar Rapids coupled with the perceived need by Sales Managers and agents to meet sales goals and/or increase income:

2. Agents were inexperienced, unskilled and essentially did not know how to find new sales prospects: and

3. Management did not properly monitor and train agents to ensure sales practices were ethical and in the best interests of the policyholder and the company.

b. The audit results were supplied to all other Regional auditing directors, eight at the time, consisting of the Central Atlantic Home Office (CAHO), Canadian Operations (CDNO), Eastern Operations Home Office (EOHO), Mid America Home Office (MAHO), North East Home Office (NEMO), South Central Home Office SCHO), South Western Home Office (SWHO) and Western Home office (WHO). The audit results were also submitted to the following individuals in the corporate hierarchy in the Corporate home offices in Newark, New Jersey:

1. The Director, Auditing, Corporate Auditing Division;

2.. The Director, Auditing, Systems Audit Coordination Staff;

3. M. Johnson, Vice President & Associate Comptroller, Comptroller's Department;

4.. R. Robinson, Vice President Auditing, Comptroller's Department; and

5. M. Colatarci, Vice President Auditing, Comptroller's Department.

8. Following Iowa TV station KCRG broadcasts concerning the Cedar Rapids scandal, there were terminations of a few PRUDENTIAL employees. However, whatever measures, if any, taken by PRUDENTIAL were wholly ineffective as the exact irregularities cited in the broadcasts and audit report continued.

9. It must be noted that prior to issuing the aforementioned audit report, Mr. Cressman had a face to face meeting with Laurier Horion, Vice President of Marketing for the NCHO, and other Regional officers, where he informed them of the abusive sales practices detailed in the report, This led to a series of meetings with Mr. Horion, or his representative, and others in the NCHO Regional hierarchy (the Regional office responsible for Cedar Rapids). These Regional officers were at all times in contact regarding the audit findings with their respective superiors in the Corporate headquarters in Newark, New Jersey. Moreover, the Regional officers were in contact with Robert Hill, President of the NCHO, regarding the abusive sales practices in Cedar Rapids.

10. Subsequent to the Cedar Rapids audit, Mr. Cressman and his auditors reviewed other districts within NCHO and found the exact same pattern occurring in Milwaukee, Wisconsin and Mt. Clemens, Michigan. By this time, Mr. Cressman and his auditors had developed a software program to identify insurance policies that had been financed in the same manner as Cedar Rapids. However, by the time of the Mt. Clemens audit, the auditors received little or no cooperation from the Mt. Clemens sales management.

11. Also, during the conduct of the Mt. Clemens audit, Mr. Cressman was informed by his Corporate Home Office supervisor, Milan Johnson, Vice President and Associate Comptroller (the chief audit officer of PRUDENTIAL) to review the office on a going-forward basis. Otherwise, Mr. Cressman was going to 'bring the whole place down.'

12. Although alerted by the aforementioned audits, as of 1986, PRUDENTIAL still had no effective corporate system for detecting or preventing the abusive and deceptive sales practices highlighted in the audit report. The majority of measures that existed, varied by Region. On his own initiative, Mr. Cressman performed a national review of the various disparate measures utilized in the Regional offices around the country. On or about December 16, 1986, Cressman made a presentation to PRUDENTIAL Corporate Management in Newark, concerning his findings and recommendations. Chief among Cressman's findings was that the implementation of controls was inconsistent. His primary recommendation was that responsibility for combating the Cedar Rapids-type sales abuses be removed from PRUDENTIAL's marketing staff and management, because they could not be relied upon to adequately address the problem (marketing staff were the ones committing and most directly profiting by the sales abuses). Mr. Cressman was commended for its efforts in this matter by P.P. (Billy Porraro, Senior Vice President, District Agencies Department at the Corporate headquarters. However, as later events would show, nothing substantive was done by PRUDENTIAL to correct this widespread problem.

13. Between 1986 and 1991, Ricky Martin, a District Sales Manger in the Greater Southern Region (which encompasses Florida) persistently and repeatedly informed a Vice President of Regional Marketing and a Vice President of District Agencies in Florida of the continuing and growing problem of abusive and deceptive sales practices. Finally, after several years of attempting to get a management response to his concerns regarding the sales practices in his district, he met with a representative of the Vice President, District Agencies of Florida. He apprised the representative of the same concerns he had echoed for years. Although being assured that his concerns would be addressed, in fact, nothing substantively was done.

14. In 1992, PRUDENTIAL's Director of its Consumers Affairs and Marketing Practices Division, James Helfrich, working in PRUDENTIAL's offices in Jacksonville, Florida, prepared and circulated within PRUDENTIAL a nine page memorandum to PRUDENTIAL Corporate management, urging that proactive steps be taken to address the high volume of policyholder complaints about churning (which Helfrich referred to as "financed insurance"). Helfrich notes that the financing used "the values of the existing products," and that the problems arose from "fluctuating dividend scales and complex use of loan values ... not clearly understood by the consuming public." He notes that "the eventual impact of these financing transactions on insurance plans was mostly negative." Given the ongoing nature of PRUDENTIAL's sales practices, Helfrich curiously titled his memorandum "Fixing the Problems of the Past -- Financed Insurance," and stated that:

Financed insurance is a growing, unrelenting, persistent problem which is attracting the increased attention of regulators, the public and the media. Due to the way that agents were previously educated by management in the sale of insurance...it appears that many, if not most, new agents, were taught to sell insurance through financing mechanisms *** Policies and programs which were initiated in the mid to late 1980's are now [1992] being brought to the Company's attention. It is not uncommon for there to be a 4 to 5 year or longer lag between the initiation of a financed program and its failure....the time lag has been so long that records, memories, and other evidence are unavailable for review and interpretation *** I made a special trip to the Ohio Department of Insurance in the Spring of 1991 to answer concerns by the Department relating to the huge increase in consumer complaints relating to financed insurance....Since that time the volume has increased rather than diminished *** In the past, the common response when agents were questioned as to why they used financed or abbreviated pay mechanisms for selling insurance has been; "That's the way we were trained." I think we have to admit that this response is so common and consistent that, in fact, that was the primary, or only, way many of these agents were trained to sell insurance. In all candor, it was an easy, appealing way to generate commissions and to superficially meet customer needs through very little, if any, new capital input by the insured."

In late November or early December 1992, Helfrich delivered a copy of this memorandum to PRUDENTIAL Corporate President Ron Barbaro, and discussed the content of the Memorandum with him.

15. Thus, it is apparent that PRUDENTIAL was on notice as early as 1983 and thereafter, that the abusive and deceptive sales practices alleged herein were being routinely committed by its agents.

16. PRUDENTIAL'S deceptive sales practices became recognized as a nationwide problem. Ultimately, a multi-state task force was formed to address the issue. On or about July 9, 1996, a 231-page Report of the Multi-State Life Insurance Task Force and Multi-State Market Conduct Examination of the Prudential Insurance Company of America was filed and submitted to all State Insurance Commissioners and Directors. The Multi-State Task Force (hereinafter referred to as the ''TASK FORCE") was spearheaded by the State of New Jersey, the domiciliary state of PRUDENTIAL, and was ultimately joined by a total of thirty (30) states and jurisdictions. The TASK FORCE focused primarily on (1) improperly financed sales, (2) internal replacements and (3) abbreviated payment plans (APP's) (new policies that promised to require limited out-of-pocket premium payments), between the years 1982-1995.

17. The TASK FORCE found that, inter alia:

a. PRUDENTIAL's replacement file maintenance was so unacceptable and violative of the various state regulations that it was a concern of national dimension;

b. When faced with ever-increasing numbers of consumer complaints regarding replacement violations, PRUDENTIAL, in effect, buried its head in the sand and never sought to investigate the extent of the problem on a company-wide basis to correct the problem. The company's reaction was simply to respond to certain individual complainants and to make them whole: "Prudential did little or nothing to stem the improper behavior...Such findings led the examiners to conclude that Prudential was unconcerned with the continuing occurrence of improper replacements." (Pages 55-56 of the Report). There was no adequate outreach program for consumers. Further, the TASK FORCE found that PRUDENTIAL management developed a replacement detection system that both failed to identify most transactions that regulators would consider replacement violations and made the system easier to circumvent. Moreover, PRUDENTIAL compounded the problem by the infrequent disciplining of agents for improper replacements. In some instances, agents were not only not disciplined, they were rewarded with promotions to management positions.

c. As to Financed Policies and Abbreviated Payment Plan Complaints, the TASK FORCE found that complainants were receiving unexpected and unaffordable premium billings, never understood the financial consequences involved in these sales due to the misrepresentations and lack of disclosure by the agents, and were completely unaware that new policies were being financed by existing policies. The TASK FORCE also found that the practice of financing new business with cash values from existing policies was facilitated by the signing of blank disbursement forms pre-signed by policyholders. The TASK FORCE found that in Illinois one file contained fifty-nine (59) blank, signed disbursement forms:

d, The TASK FORCE also identified as "another area of criticism" what was euphemistically referred to as "the company's difficulty at producing requested files and materials for examination." The New Jersey examiners received inaccurate and incomplete files and file listings for examiners review. Similarly, in Florida, a significant number of documents were not only not produced, but were destroyed by PRUDENTIAL. Recently filed lawsuits by former PRUDENTIAL agents state that document destruction was not only condoned, it was encouraged;

e. The TASK FORCE also found a large number of advertising violations. For example, the investigation revealed that PRUDENTIAL failed to identify life insurance as the product being sold, permitted agents to use unauthorized or misleading titles such as "Financial Planner" or "Insurance Consultant", made misleading statements or omissions regarding life insurance and taxes, utilized unsupported or undocumented statistics and used misleading material to market a program known as the "Personal Pension Plan." Curiously, PRUDENTIAL allowed advertising materials which originated in the field or regional home offices to be evaluated by the regional marketing departments for technical accuracy, editorial content and compliance with company standards.

18. Each and every type of problem or violation reported by the TASK FORCE was visited upon PRUDENTIAL's Florida policyholders.

19. The State of Florida, Department of Insurance, has made the decision to not be a part of the TASK FORCE. The proposed resolution is simply inadequate to protect the citizens of this State. Florida has a large proportion of elderly population who were disproportionately the victims of the types of blatantly illegal activities committed by agents of PRUDENTIAL on behalf of the company. Further, in light of the evidence uncovered in both the DEPARTMENT's and the TASK FORCE's investigations, the onus and burden of proof in the TAsK FORCE remediation process is unjustly placed upon the victims and not the perpetrators of illegal insurance activities. Thus, the DEPARTMENT has determined that the victims will not, in most cases, obtain full recovery under the proposed resolution of the TASK FORCE.


20. PRUDENTIAL sells primarily three types of financial products: 1) life insurance (term, whole life and hybrids, including variable appreciable whole life 'VAL' policies), 2) annuities, and 3) securities.

21. The terms "churning" and "twisting" are commonly used in the life insurance industry to describe the act of draining, through misrepresentations and deceptive omissions, the value in an existing life insurance policy or annuity by using that value to acquire an additional insurance policy, generally not in the interest of the policyholder. The terms "churning" and "twisting" both describe deceptive insurance sales techniques that have always been deemed unfair insurance trade practices, pursuant to Sections 626.9541 (l)(a) and(b), Florida Statutes, and previous statutory versions of the unfair insurance trade practice prohibitions of the Florida Insurance Code. Both of these unfair trade practices have since been codified in separate statutory subsections.)

22. Such deceptive sales practices work to the financial detriment of the policyholder because policyholders lose the longstanding value of their previous life insurance policies, without their full understanding or informed consent, to pay for a new policy which they were led to believe would have little or no additional cost. Moreover, the existing policies will, in many instances, lapse when the value or those policies is used up in paying premiums on the new policies. In turn, the new policies would likewise lapse when the amount of the premium required to purchase these policies exceeded the dividend stream and value of the old policies, unless additional, unexpected and significant premium payments were made by the policyholder. This scheme permitted the PRUDENTIAL agent and PRUDENTIAL management to receive large commissions and bonuses on the sale of these new policies and PRUDENTIAL significantly profitted from the illegal transactions.

23. Commonly, the methodology for carrying out this illegal scheme began by aggressively disseminating to PRUDENTIAL agents information targeting policyholders with accumulated values on their existing policies. This accumulated value policy information was made available by PRUDENTIAL on forms referred to as Ordinary Policy Status Records ("OPSRs") and Debt Ordinary Policy Status Records ( "DOPSRs"). The OPSR cards were used to target policyholders, and to

(The second half of this document, pages 15 through 34, is on a linked web page.)















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