UNITED STATES DISTRICT COUR T FOR THE SOUTHERN DISTRICT OF NEW YOR K CIVIL ACTION IN RE MARSH & MCLENNAN : NO : 04-CV-08144 (SWK) COMPANIES, INC . SECURITIES LITIGATION : ELECTRONICALLY FILE D CONSOLIDATED CLASS ACTION COMPLAIN T GRANT & EISENHOFER P .A . Jay W . Eisenhofer (JE-5503) Sidney S . Liebesman (SL-8444) 45 Rockefeller Center, 15th Floor 630 Fifth Avenu e New York, NY 10111 Telephone : (212) 755-6501 Facsimile : (212) 307-321 6 and Geoffrey C . Jarvis Michelle T . Wirtner Sharan Nirmul Naumon A . Amj ed Chase Manhattan Centre 1201 North Market Street Wilmington, DE 19801 Telephone : (302) 622-7000 Facsimile : (302) 622-7100 BERNSTEIN LIEBHARD & LIFSHITZ, LLP Keith M . Fleischman (KF-0199 ) Robert J . Berg (RB-8542 ) U . Seth Ottensoser (UO-9703) Timothy J . MacFall (TM-8634) Felecia L . Stern (FS-3431) Stephanie M . Beige (SB-3590) Gregory M . Egleston (GE-1932) 10 East 40th Street, 22nd Floor New York, NY 10016 Telephone : (212) 779-1414 Facsimile : (212) 779-321 8 Co-Lead Counsel for the Clas s Co-Lead Counsel for the Class
Transcript
UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF NEW YOR K
CIVIL ACTION
IN RE MARSH & MCLENNAN : NO: 04-CV-08144 (SWK)COMPANIES, INC. SECURITIES LITIGATION :
ELECTRONICALLY FILED
CONSOLIDATED CLASS ACTION COMPLAINT
GRANT & EISENHOFER P .A .Jay W. Eisenhofer (JE-5503)Sidney S . Liebesman (SL-8444)45 Rockefeller Center, 15th Floor630 Fifth Avenu eNew York, NY 10111Telephone: (212) 755-6501Facsimile: (212) 307-321 6
and
Geoffrey C. JarvisMichelle T. WirtnerSharan NirmulNaumon A. Amj edChase Manhattan Centre1201 North Market StreetWilmington, DE 19801Telephone: (302) 622-7000Facsimile : (302) 622-7100
BERNSTEIN LIEBHARD & LIFSHITZ, LLPKeith M . Fleischman (KF-0199)Robert J . Berg (RB-8542 )U. Seth Ottensoser (UO-9703)Timothy J . MacFall (TM-8634)Felecia L. Stern (FS-3431)Stephanie M. Beige (SB-3590)Gregory M. Egleston (GE-1932)10 East 40th Street, 22nd FloorNew York, NY 10016Telephone: (212) 779-1414Facsimile: (212) 779-321 8
4. Marsh Encouraged Employees to Steer Business to InsuranceCarriers with the Most Lucrative PSAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
5. Global Broking Uses its Leverage to Steer Business to CertainCarriers Through a Fraudulent Bidding Process . . . . . . . . . . . . . . . . . . . . .52
a. Global Broking Engineers an A,B , and C QuoteSystem of Fake Bids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 2
c. The Senior Management Defend ants ActivelyConcealed Marsh ' s Improper Steering Activities . . . . . .248
d. The Senior Management Defendants had a SpecificDuty to Monitor the Disclosure of ContingentCommission Agreements and Ignored Red FlagsAlerting Them to the Need to Investigate . . . . . . . . . . . . . . .25 1
The Changes in Marsh' s Disclosure About MSARevenue Indicate that Senior ManagementDefendants Knew and Sought to Conceal theTrue Nature of these Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .254
This is a securities fraud class action brought by the Public Employees' Retiremen t
System of Ohio, the State Teachers' Retirement System of Ohio, the Ohio Bureau of Workers '
Compensation, and the State of New Jersey, Department of the Treasury, Division of Investment
on behalf of itself and The Common Pension Fund A, the DCP Equity Fund, and the
Supplemental Authority Fund (collectively, "Lead Plaintiffs"), on behalf of all persons and
entities who purchased or otherwise acquired securities issued by Marsh & McLennan
Companies, Inc . ("Marsh," "MMC" or the "Company"), between and including October 14 ,
1999 and October 13, 2004 (the "Class Period") . As a result of the wrongdoing alleged herein ,
the members of the Class (as defined below) collectively lost billions of dollars .
1 . SUMMARY OF CLAIM S
A. Introduction
1 . Throughout the Class Period, Marsh, the world 's largest insurance broker,
represented itself to the investing public as an honest, ethical company, whose primary goal wa s
to protect the interests of its clients and shareholders . After corporate scandals erupted
elsewhere , Marsh 's CEO, Defendant Jeffrey W . Greenberg ("Greenberg"), was even so bold as
to differentiate Marsh from the Enrons of the world . In the Company's 2002 Annual Report ,
Greenberg told shareholders that "[i]n a year when corporate scandals and allegations of
accounting and financial abuses made headlines ," he was "grateful for the strength of MMC's
ethics, culture, and commitment to client service and professional standards. These qualities
serve our shareholders well . "
2. In truth, while Greenberg was assuring the investing public of Marsh's ethica l
practices, the Company was engaged in the same type of misbehavior as Enron-a massiv e
scheme to defraud its shareholders . Indeed, the activities underlying the scheme led t o
Greenberg's resignation amidst public scandal about Marsh's failure to live up to its fiduciary
duties . Greenberg' s successor, Michael G. Cherkasky ("Cherkasky"), described action s
occurring while Greenberg was Marsh's Chairman and CEO as "shameful" and "unlawful ."
B. Marsh's Securities Frau d
A key element of Marsh's scheme to artificially inflate its share price was, inter
alia, its material misrepresentations and its failure to disclose material information regarding a
critical source of its revenues-"contingent commissions ." "Contingent commissions" are
payments that brokers receive directly from insurance carriers in return for placing business with
those insurance carriers . Marsh has always denied that contingent commissions have an effect
on Marsh's placement of insurance business for its customers. Marsh has unequivocally stated
that "[o]ur guiding p rinciple is to consider our client's best interest in all placements ." It further
stated, "[w]e are our clients' advocates, and we represent them in negotiations . We don' t
represent the [insurance companies] ."
4. Marsh's assurances that it was fulfilling its fiduciary duties to it clients, however ,
like Greenberg's statements about Marsh's ethics, were simply lies designed to mislead it s
customers and the investing public .
5. Marsh also obscured the significance of contingent commissions to Marsh' s
profitability. Marsh dubbed them "placement service agreements ('PSAs')" and "market servic e
agreements ('MSAs')," claimed they were received for valuable and legitimate services, and
minimized their importance to the Company . In fact, to inflate its revenues by any means
possible, Marsh engaged in a systematic plan to increase its contingent commission payments b y
improper bid manipulation and illicit client steering . Despite telling the market that its revenue s
were based on sustainable and ethical business practices , Marsh, in truth, shirked its fiduciary
duties to its clients and made its insurance placement decisions based on the receipt of kick-
backs and payoffs .
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6. Marsh's plan worked, and throughout the Class Period, Marsh experience d
consistent revenue growth and profitability, with annual revenues increasing from $9 .2 billion in
1999 to $11 .588 billion in 2003 . Net income increased from $959 million (before $337 in
special charges) in 1999 to $1 .54 billion in 2003 . Quarter after quarter, this growth could be
traced to the efforts of Marsh's insurance broking division, Marsh Inc . In fact, in 2003, Marsh
Inc. obtained $845 million from contingent commissions, representing more than 50% o f
Marsh's net income .
C. The Truth Is Revealed
7. Marsh's improper business practices came to light on October 14, 2004, when
New York State Attorney General Eliot Spitzer (the "NYAG") stunned Wall Street by revealing
that Marsh was at the center of an industry-wide scandal involving improper steering and bi d
manipulation activities between Marsh and some of the biggest insurance carriers in the industry ,
including American Inte rnational Group, Inc . ("AIG") and ACE Ltd . ("ACE") (which were
headed by Defendant Greenberg 's father and brother, respectively) . On that day , the NYAG
filed a complaint against Marsh revealing that Marsh's clients had been duped into believing tha t
Marsh was acting in their best interests .
Marsh's clients were victimized by paying higher insurance premiums than the y
would have, had Marsh engaged in a genuine, competitive bidding process on behalf of it s
clients . Similarly, Marsh's clients did not necessarily receive the best coverage for their needs .
Instead, clients received the coverage offered by the insurer to which Marsh chose to steer them ,
whether or not that coverage met their needs . Marsh did so for a reason - - it received of billions
of dollars in additional revenues from these improper contingent commissions .
9. The Class members herein, were equally victimized. They were never told that
nearly 50% of Marsh 's profits were derived from contingent commissions . They had no idea
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that Marsh's business model was based on unsustainable and improper business practices .
Consequently , they also had no idea that Marsh was at risk of losing its most profitable revenue
stream -i.e ., the one based on the improper contingent commissions .
10. Once the truth about Marsh' s business model and concomitant improper activity
was revealed, the market's reaction was swift, decisive, and overwhelmingly negative - Marsh' s
stock declined nearly 50% in the five days following announcement of the NYAG suit .
Specifically, on October 14, 2004, the day the NYAG' s complaint was filed, Marsh 's stock
opened at $46 .01 per share. By the end of the day, it collapsed to $34 .85 per share, a one-day
decline of 24 .3%, representing a market loss of $5 .9 billion in market capitalization . By October
19, 2004, Marsh's stock had declined an additional 31 % to $24 .10. Between October 14th an d
October 19th, Marsh' s stock declined 47.6% and shareholders lost an astonishing $ 11 .6 billion in
market capitalization .
D. Marsh's Improper Activities and Defendants' Scienter
11 . At the center of Marsh 's scheme to defraud the investing public are the activities
of its insurance broking subsidiary Marsh Inc . Almost $7 billion, or roughly 60% of Marsh' s
$11 .5 billion in revenues for 2003, came from this division. These revenues included standard
commissions that clients pay brokers for each insurance policy that a broker places .
12. Unbeknownst to the investing public, however, a mate rial portion of the revenue s
were comprised of contingent commissions . Similarly hidden from the investing public, was the
fact that these contingent commissions were payments in exchange for Marsh's imprope r
steering of business to ce rtain carriers that were willing to "pay to play."
13 . Detailed herein are numerous specific examples of Marsh's improper steering . In
a typical steering scenario, Marsh would solicit false bids (referred to as "B quotes") from a
number of insurers to create the illusion of a competitive bidding process . In this way, Marsh
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was able to steer clients to the insurer who was willing to pay Marsh the highest contingen t
commission. In some instances, Marsh went so far as to submit fictitious bids to convince its
clients that it was engaging in a competitive process . Marsh induced insurance companies to
participate in this scheme by promising to protect them from competition and by threatening t o
harm the business of any insurance carrier who refused to cooperate .
14 . As described herein, one senior Marsh executive told his subordinates , the size of
the contingent commission payments to Marsh determined "who [we] are steering business t o
and who we are steering business from . "
15. Marsh provided no legitimate services to the insurance companies under thes e
contingent commission agreements . The "services" performed by Marsh on behalf of th e
insurance companies were, in fact, the same activities that the Company necessarily performed
on behalf of its clients in the ordinary course of its business as an insurance broker . The only
thing "extra" Marsh provided was a guarantee that the designated insurer would get the business .
As such, these contingent commissions were pure profit for Marsh because they involve d
virtually no cost to Marsh .
16. As described herein, despite the fact that Marsh was making its placemen t
decisions based on which insurer paid the highest contingent commission, Marsh repeatedly tol d
the market in filings with the SEC that it was guided by its clients' best interests .
17 . Marsh has now admitted, in a report prepared by its outside counsel, Davis Polk
& Wardwell LLP ("the DPW Report"), that the incentives created by contingent commission s
guided its placement of insurance . Thus, the DPW Report states : "[the] prospect of MS A
revenues was often a factor in discussions among brokers concerning the desirability of doin g
business with particular insurance carriers . . . ." In the DPW Report, Marsh also admits to th e
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soliciting of false bids as part of its steering scheme : "`B quotes' were solicited in the course of
`bid rigging' discussions" and that "[i]t is clear that these `B quote' communications were no t
typically disclosed to clients . "
18 . In addition to lying to investors about Marsh's commitment to its clients, Marsh' s
filings and public statements during the Class Period were also materially false and misleadin g
and violated generally accepted accounting p rinciples ("GAAP") for, inter alia, the following
reasons :
• Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source ofrevenues and that Marsh's contingent commissions included proceeds from itsimproper steering and bid-manipulation practices ;
• Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
• Marsh's earnings were overstated because Marsh failed to establish a reservefor contingent losses associated with its improper activities ; and
• In relying on improper business practices to generate a material portion of itsrevenues, Marsh failed to disclose the material risk that these revenues mightbe discontinued, that disclosure of these practices could have an adverseimpact on its client relationships, and that the Company could be subject tofines, penalties, claims for restitution, and damages .
19. Similarly, throughout the Class Period, Marsh's independent auditing firm,
Deloitte & Touche LLP ("Deloitte"), issued materially false and misleading audit opinions an d
recklessly failed to comply with generally accepted auditing standards ("GAAS") .
20. Given that the revenues derived from contingent commissions constituted ,
according to the NYAG, the "lifeblood" of Marsh's business , defendants and the auditors knew
or were reckless in not knowing everything about the source and sustainability of that revenu e
stream. During a July 28, 2004 earnings conference call, Greenberg himself blatantly conceale d
the true nature of the contingent commissions while he admitted that contingent commission s
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were part of the Company's business model . Greenberg told analysts : "We don't break out
contingent commissions . That is not separately enumerated because it is part of our business
model and so I can 't help you there."
21 . Everyone within the Company, from low-level employees to Marsh senio r
management, was familiar with the improper steering, which served as a vehicle to increas e
Marsh's contingent commissions . Indeed, senior Marsh Inc . executives who have pleaded guilt y
to felony counts of scheming to defraud, have testified that steering was part of Marsh's regula r
practices and that the Company had an official "protocol" regarding how to hide contingen t
commissions from its clients .
22. Moreover, Marsh Global Broking ("MGB" or "Global Broking"), the division
specifically created to centralize the procurement and administration of Marsh's most lucrativ e
contingent commissions, and the center of the steering activities, was located just a few floors
away from Defendant Greenberg's office in New York City. Indeed , Greenberg was activel y
involved in increasing Global Broking's reach to additional insurance lines . Furthermore, th e
President of Marsh Inc. (which includes Global Broking), Defendant Roger E . Egan ("Egan") ,
sat in the office next door to Greenberg.
23 . Tellingly, the NYAG refused to deal with Defendant Greenberg and othe r
defendants once the scandal broke, noting that the management of Marsh was not a managemen t
with whom he would speak . He urged the Company's board to "look long and hard" at Marsh' s
leadership .
E. Marsh Admits Its Wrongdoin g
24. On October 15, 2004, tacitly acknowledging its wrongdoing, Marsh issued a pres s
release announcing that Defendant Ray J . Groves ("Groves") was resigning as Marsh Inc .'s CEO
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and that the Company was suspending its acceptance of contingent commissions . Ten days later,
Marsh announced that Defendant Greenberg had resigned as the Company 's Chairman and CEO .
25 . These swift resignations create a further inference of Groves 's and Greenberg' s
concealment of and involvement in the scheme. In addition, these resignations and others ,
coupled with the multiple criminal guilty pleas set forth in detail herein, further demonstrate th e
pervasiveness and magnitude of the improper steering underlying defendants' securities fraud .
26. Shortly thereafter, on October 26, 2004, Marsh issued a press release announcing
that the Company was implementing "a series of significant reforms to its business model tha t
will ensure that the best interests of its clients are served and that every transaction is executed in
accordance with the highest professional and ethical standards ." These immediate and radical
company-wide reforms instituted in response to the public disclosure of Marsh's steerin g
activities are a stark acknowledgement of the illicit nature of Marsh's prior practices and th e
critical importance of immediate reform . The release further stated :
Accordingly, the following reforms will be initiated by January 1, 2005 :
Marsh has permanently eliminated the practice of receiving any form ofcontingent compensation from insurers .
All revenue streams will be 100 percent transparent to clients . Each client willreceive a full accounting of all revenue earned by Marsh, including fees, retailcommission, wholesale commission and premium finance compensation, if any .
Marsh will insist that insurance companies show commission rates on all policies .
Marsh will seek consistent commission rates so that insureds are better able tocompare costs of alternative proposals .
Marsh will provide transparency to its clients regarding its negotiations withinsurers on their behalf.
27. On January 31, 2005, Marsh announced , as part of a settlement of the NYAG' s
action, that it would create an $850 million restitution fund for the Marsh insurance clients that
were harmed by the Company's bid manipulation and improper steering. This fund, however ,
provided no relief for Marsh's shareholders, who lost nearly $12 billion in market capitalization .
II. BASIS OF THE ALLEGATIONS
28 . Lead Plaintiffs allege the following upon information and belief, except as t o
those allegations concerning Lead Plaintiffs, which are alleged upon personal knowledge . Lead
Plaintiffs' information and belief is based upon, among other things, their investigation regardin g
Marsh and its subsidiaries (including Marsh Inc .), including, without limitation : (a) review and
analysis of filings made by Marsh with the United States Securities and Exchange Commissio n
("SEC"); (b) in person and telephonic interviews with numerous former Marsh employees ; (c)
review and analysis of internal Marsh documents ; (d) review and analysis of press releases ,
public statements, news articles and other publications disseminated by or concerning th e
insurance industry, Marsh, Marsh Inc., Putnam LLC and its subsidiaries and affiliate s
renewal premiums with Global Broking, preparing renewal proposals and reviewing policies .
CW6 provided information concerning Global Broking's control over the placement of busines s
and shared commissions between Global Broking and his/her local office. CW6 also provided
information concerning his/her office's relationship with Global Broking and problems he/she
experienced when placing business through Global Broking .
84. CW7 is a former Marsh broker employed from 1990 through 2004. CW7
provided information concerning Marsh's business practices of steering business to those carrier s
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with whom it had contingent commission agreements . CW7 also provided information
concerning Marsh's encouragement of its brokers to place business with these favored carriers .
CW7 also reported that Marsh held a company-wide Global Broking meeting in 2001/2002 i n
Las Vegas where steering business based on contingent commission agreements was discussed .
85. CW8 is a former Senior Employee Benefits Client Executive employed by Mars h
from 1993 through 2004. CW8 provided information concerning the practice of placing Marsh's
business with those companies that paid Marsh the most contingent commissions .
86. CW9 is a former Client Service Representative employed by Marsh during 200 4
in the Company' s Phoenix office. CW9 has worked in the insurance industry for over 27 years .
CW9 provided information concerning Marsh's policy of steering business to certain companie s
based on contingent commissions . CW9 also provided information concerning Global Broking's
manipulation of bids to ensure the placement of business with a certain carrier .
87. CW 10 is a former Employee Benefits Analyst for one of Marsh's local offices i n
South Carolina, employed by Marsh from 2001 through 2004 . CW 10 was responsible for
soliciting bids from insurance companies involving medical, life, health, accident and denta l
insurance coverage. CW10 provided information concerning contingent commissions , and the
incentive to place business with carriers paying these commissions . CW 10 provided further
information concerning the forwarding of all contingent commissions received from his/he r
office to Marsh's New York office .
88. CWI 1 is a former Vice President in Sales and Client Management in Marsh' s
Middle Market division, employed by Marsh from 1999 through 2004. CW 11 was responsibl e
for overseeing all medical employee insurance placements and consulting for his/her office .
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CW11 provided information concerning the collection of contingent commissions and th e
forwarding of these commissions to Marsh 's New York office .
89. CW 12 is a former Marsh employee, employed from 1983 through 2004. CW 1 2
was responsible for servicing Employee Benefit accounts for small companies . CW12 had
knowledge concerning contingent commissions, and Global Broking's increasing control ove r
the placement of business in the late 1990's .
90. CW 13 is a former Marsh employee, employed in Marsh's New York office, fro m
1987 through 1994. CW 13 specialized in selling professional liability insurance . CW 13 had
knowledge concerning contingent commission agreements and the inner-workings of Marsh' s
New York office .
91 . CW 14 is a former Marsh employee who worked as a Client Representative at
Johnson & Higgins from 1990 through its acquisition by Marsh in 1997, and was employed b y
Marsh from 1997 through 2003 . CW14 provided information concerning the role of Globa l
Broking and the frustrations felt by Marsh's local offices due to Global Broking's control over
all placement negotiations . CW14 also provided information concerning complaints abou t
Global Broking made to Marsh 's senior management .
92. CW 15 is a former Marsh employee who was in charge of Marsh's Middle-Marke t
Employee Benefits Consulting and Property and Casualty divisions from 2001 through 2002 .
CW 15 provided information concerning complaints made to Marsh's senior managemen t
concerning Global Broking .
93 . CW 16 is a former Marsh employee who worked in the commercial insuranc e
sector of Marsh's Washington, D .C. office from 2000 through 2003 . CW 16 has personal
knowledge regarding Donald Holmes' [Marsh Middle Market Practice Leader], concerns about
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Marsh's collection of contingent commissions from insurers . CW16 was present at a Mars h
Middle Market conference held in New York in 2002, where Donald Holmes publicly spok e
about these concern s . CW16 has information concerning Holmes' conversations with Defendant
Egan about his concerns regarding contingent commissions .
94. CW 17 is a former Marsh high level executive employed in the Company' s
broker/dealer business from 1995 through 2003 . CW17 provided information concerning
Defendant Greenberg's pressure to increase revenues .
VII. THE IMPACT OF CONTINGENT COMMISSIONS ON MARSH 'S BUSINESS
A. Class Period Revenue and Earnings Growth
95. Throughout the Class Period, Marsh reported consistent revenue growth an d
profitability, with its reported annual revenues increasing from $9 .2 billion in 1999 to $11 .588
billion in 2003, and reported net income increasing from $959 million (before $337 million in
special charges) in 1999 to $1 .54 billion in 2003 .
96. Defendants publicly trumpeted these financial results, boasting that from 200 0
through 2003, the Company had outperformed the S&P 500 and that the shareholder return s
generated by Marsh had outperformed the market's "dividend aristocrats ." In a letter to
shareholders published in the Company's 2003 Annual Report, Defendant Greenberg wrote :
Each of our principal subsidiaries -- Marsh Inc., Mercer Inc ., and PutnamInvestments -- has experienced good and bad operating conditions in the pastdecade, but overall the company has de livered consistently strong results .Over the last three years, MMC's compound annual growth for earnings pershare was 11 percent . During that same period, EPS for the S&P 500declined 1 percent annually . In 2003 MMC 's consolidated revenues rose 11percent to $11.6 b illion . Net income grew 13 percent to $1 .5 billion, andearnings per share increased 15 percent to $2 .81.
MMC's cash flow is a great strength and provides financial flexibility for thecompany. In 2003 we . . . paid out $631 million in dividends . Standard &Poor 's calls the 50 or so pub lic companies with 25 consecutive years ofincreasing cash payments to shareholders " dividend aristocrats ." MMC's
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dividend has increased for 41 consecutive years, a record matched by only 12other companies traded pub licly in the United States. [Emphasis added . ]
97. The engine driving Marsh's revenue and earnings growth during the Class Period
was the Company's core business, Risk and Insurance Services . For example, the Company' s
Risk and Insurance Serv ices' 1999 revenues of $4 .5 billion increased to $6.868 billion by 2003 -
constituting roughly 60% of the Company's 2003 revenues . The success of the Risk and
Insurance Services segment during the Class Period was, in turn, due to the success of Ris k
Management and Insurance Broking, which generated approximately 75% of the revenues o f
Marsh's core business .
98 . ; The performance of Marsh's Risk and Insurance Services segment wa s
consistently touted by defendants during the Class Period, even in the adverse industry
environment immediately following 9/11 . For example, in a research report dated December 19 ,
2001, Morgan Stanley Equity stated :
Mr. Greenberg appeared most optimistic about the near term outlook for theinsurance brokerage unit, which we believe has not seen an environment asfavorable as the current one since at least 15 years ago .
Changes in risk highlight the importance and the need for insurance brokers andrisk managers . In other words, risk management is a long-term sustainablebusiness .
99. Likewise, in a Dow Jones Business News article, dated October 22, 2002, entitled
Defendant Greenberg stated that despite difficult market conditions, Marsh's Risk and Insuranc e
Services generated strong results :
"The diversity of MMC's market-leading professional service businessescontinues to benefit shareholders, even in the current environment," said JeffreyW. Greenberg, Marsh & McLennan's chairman . "Risk and insurance services,our largest business , performed well for clients in a difficult market an d
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generated excellent results for shareholders - strong revenue and earningsgrowth ." [Emphasis added .]
100. Indeed, the financial performance of Marsh's Risk and Insurances Service s
business, especially insurance brokerage, was so strong that it offset the lackluster performance
of the Company's non-core businesses , such as Putnam . In a July 24, 2004 research report, for
example, UBS Warburg rated the Company a "Strong Buy," stating :
We were pleased with the brokerage results : accelerating revenue growth (16%organic growth vs . 12% in the first quarter) and pretax earnings growth (30% vs .21 % in the first quarter) .
We believe the strong results posted in the Insurance Services reflect trendsthat may extend into 2003 and more than compensate for the weakness atPutnam . We reiterate our Strong Buy rating on MMC . [Emphasis added.]
B. The Company's Market Assurance s
101 . Against this backdrop of revenue growth and increasing profits, Defendant s
repeatedly assured the investing public that the Company operated in accordance with al l
applicable laws, in a transparent manner that was in the best interests of its clients, and in strict
adherence to a formal Code of Ethics . That Code of Ethics, which was attached to th e
Company's 2002 Form 10-K, stated that Marsh " is committed to conducting its business i n
accordance with applicable laws, rules and regulations, to the highest standards of busines s
ethics and with full and accurate financial disclosure . "
102. Defendants knew that such assurances were critical to the market because the
Company's core business and, therefore, a majority of Marsh's revenues and profits, centered o n
its performance of fiduciary services as an insurance broker for its clients . Any doubt cast on the
integrity of Marsh's dealings with those clients would - and, in fact, did - have enormou s
adverse repercussions for the Company and its shareholders . Defendant Greenberg
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acknowledged the direct connection between the Company's purported ethical practices and
shareholder value in his letter to Marsh's shareholders in the 2003 Annual Report :
In a year when corporate scandals and allegations of accounting and financialabuses made headlines, I am grateful for the strength of MMC's ethics, culture,and commitment to client service and professional standards . These qualitiesserve our shareholders well . [Emphasis added .]
103 . Based on defendants' public Class Period statements, the investing public had n o
reason to suspect that the business model for the Company's largest and most significan t
segment, Marsh Inc ., was the maximization of profits through the exploitation of the Company' s
fiduciary position and the betrayal of its clients' trust . Far from conducting its business i n
accordance with "the highest standards of business ethics," Marsh engaged in a pervasive
scheme to steer its clients to those insurance companies that paid the most in contingent
commissions, irrespective of the best interests of those clients .
C. The Magnitude of the Illicit Revenues an dthe Vast Concealment to Deceive the Investing Publi c
104. The scope of the improper scheme was so far-reaching that, by the end of 2003 ,
more than 16%, or $845 million, of the Company's risk management and insurance brokin g
revenues consisted of contingent commissions . Moreover, because there were virtually no
expenses associated with contingent commissions, such revenues constituted more than 50% o f
the Company's 2003 profit . In the Company's 2004 Form 10-K, filed on March 9, 2005 (afte r
the Class Period), Marsh disclosed that it had generated $541 million in contingent commission
revenue du ring the first half of 2004, prior to the announcement of the NYAG Action . Thus ,
before the Company's improper scheme was publicly exposed, in 2004 Marsh was on pace t o
significantly exceed the amount of contingent commission revenues it had generated in 2003 .
105 . The investing public, however, was unaware of the magnitude of the Company' s
contingent commission revenues - let alone the existence of the illicit scheme - because
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Defendants, inter alia, filed materially misleading false and misleading financial statements ;
mischaracterized its contingent commissions as consideration for non-existent market services ;
and falsely represented that the Company' s clients were fully apprised of any such commissions
earned in connection with their policies .
106. Thus, even after it was disclosed that Marsh was subpoenaed in connection wit h
the NYAG's probe of contingent commissions , market professionals opined that this was not a
major issue for the Company. For example, on May 20, 2004, William Blair & Company issue d
a research report that, in relevant part, stated :
In late April, a number of other insurance brokering firms including Marshannounced they had received subpoenas from the New York Attorney Generalseeking information regarding potential conflicts of interest within compensationagreements between insurance brokers and insurance companies . . . . It remainsdifficult to handicap where these regulatory investigation might lead, but therevenue under scrutiny is less than 5% of insurance brokerage revenue -although it represents a greater percentage based upon earnings . [Emphasisadded . ]
107. On May 21, 2004, The Wall Street Journal published an article, entitle d
"Tracking the Numbers/Outside Audit : Clash Over Insurance Brokers' Risks - No One Has A
Good Handle On Contingent Fees or Hit On Industry From Inquiry," in which even the "wors t
case scenario" envisioned by some analysts - which ran counter to the market's conventional
wisdom - grossly underestimated the percentage of the Company's brokerage revenues generate d
by contingent commissions :
The lack of consensus suggests no one really has a good handle on the risks of themurky practice of "contingent commissions," the fees that insurers pay brokers toreward them for directing high-volume or profitable business their way . . . .
Conventional wisdom among analysts holds that brokers adequately disclose thepractices . Besides , analysts add, echoing the brokers, the commissionsconstitute only a small part of the brokers' revenue . [Emphasis added.]
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In fact, Marsh's contingent commissions constituted approximately 16% of its 2003 brokerag e
revenues .
D. The Adverse Effects of the Disclosur e
108 . Like the market professionals, Lead Plaintiffs and the members of the Class were
unaware of either the extent to which Marsh's Class Period financial success was due to the
acceptance of contingent commissions, or the existence of the improper scheme perpetrated t o
maximize such revenues . Instead, Lead Plaintiffs and the Class relied on defendants '
representations and the integrity of the market, in purchasing the Company's securities durin g
the Class Period . The price of those securities, however, was artificially inflated by defendants '
false and misleading statements throughout the Class Period, including, inter alia, the
Company's reported financial results . Thus, upon revelation of the pervasive wrongdoing a t
Marsh and the magnitude of the revenues that were generated by that improper conduct, the pric e
of the Company's common stock dropped by almost 50%, causing a loss of more than $1 2
billion in market value.
109. The Company continues to struggle with the enormous adverse impact of the
disclosure of the wrongdoing . In November 2004, the Company announced that it was cuttin g
3,000 jobs, or 5% of its staff, and would incur $325 million in restructuring charges over th e
following six months. On March 1, 2005, Marsh announced fourth quarter and year-end 200 4
results that were a far cry from the dynamic revenue growth generated during the Class Period :
In the fourth quarter, consolidated revenues declined 1 percent to $3 billion .After restructuring, regulatory settlements, and related expenses, the companyreported a net loss of $676 mil lion in the fourth quarter , or a loss of $1 .28 pershare . Full-year consolidated revenues were $12 .2 billion, up 5 percent over theprior year. Net income for the full year was $180 million, or earnings per share of$.34. MMC's Board of Directors has declared a first quarter 2005 dividend of$.17, a 50 percent decline . [Emphasis added .]
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In addition, the Company has announced the elimination of an additional 2,500 jobs , resulting i n
an additional $337 million in restructuring expenses .
110 . In its 2004 Form 10-K, the Company provided additional details concerning th e
negative effects of the disclosure of its fraud :
Operating income in 2004 declined 74% to $648 million, reflecting costs ofregulatory settlements at Marsh and Putnam and costs related to restructu ringMMC's businesses . Results in ri sk and insurance services include an $850million charge related to the settlement agreement reached with the NYAG andNYSID, the impact of a $304 million decrease in MSA revenue, and $231 millionof restructuring charges.
111 . In the Form 10-K, the Company further explained that it had changed its busines s
model to, inter alia, eliminate contingent commissions . Marsh, however, admitted that it had
experienced "credit rating downgrades and the inability to access commercial paper markets" a s
a consequence of the "uncertainty regarding changes in Marsh's business model, the impact o f
eliminating contingent compensation agreements and potential fines and/or penalties . . . . "
The Company also warned :
there is no assurance that revenues under the new model will be sufficient toachieve operating margins and cash flows that are comparable to historical levels .In addition, client revenue may also be reduced due to negative reaction to theissues raised in the complaint .
VIII. MARSH'S FRAUDULENT SCHEME TO IMPROPERLY MANIPULATE THEINSURANCE MARKET TO BOOST ITS REVENUES
A. An Overview of Marsh ' s Role in the Insurance Market-Place :Brokers, Clients, Insurer s
112. The insurance market consists of clients in need of insurance; risk managers who
advise clients on the type of insurance needed ; brokers who find the needed insurance ; and
insurance companies who provide the insurance.
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113. Clients themselves vary, consisting of businesses, public entities, professiona l
services organizations, private clients and individuals seeking various types of liability an d
casualty insurance .
114 . Risk managers evaluate the client's exposure to loss and quantify it . The risk
manager determines how much and what coverage the client will need . The risk manager then
turns to the broker to find the needed insurance at the best rate .
115 . The insurance broker then analyzes various types of property and liability los s
exposures, including large and complex risks that require access to global insurance markets .
116. Brokers are supposed to be unbiased providers of services for the client . They are
responsible for a wide range of services including : (a) finding the best price ; (b) finding the best
policies ; (c) advising the client ; (d) acting on behalf of the clients in analyzing risk and insuranc e
industry ; (h) keeping clients informed as to developments in the insurance marketplace; and (i)
assisting clients with the filing of claims against the policies they place .
117. When obtaining insurance through a broker, clients are responsible for two types
of payments . First, the client pays the broker an advisory fee or a commission for locating th e
best insurer. Second, the client pays the chosen insurance company a premium for the coverage.
In most instances, the client pays the commission and the first premium payment in one check t o
the broker. The broker then deducts his/her commission and forwards the remaining premiu m
amount to the insurance company . In some cases, particularly with large commercial clients, the
client will pay the broker' s commission directly to the broker .
34
B. Marsh's Role as a Broker
1. Marsh Was Obligated to Act as A Fiduciary for Its Client s
118 . Marsh is the world's largest insurance broker, providing risk and insuranc e
services to clients in 100 countries . Almost $7 billion, or roughly 60 percent of the Company' s
$11 .5 billion in revenue for 2003, came from brokering insurance to its clients . Marsh' s
brokerage services are provided to a predominately corporate clientele .
119 . Throughout the Class Period, Marsh held itself out as a trusted advisor that coul d
help its clients assess their insurance needs and locate the best available insurance . Marsh
emphasized this point throughout the Class Period, repeatedly representing that it worked for it s
clients and not for the insurance companies with which it placed business .
120. For example, some time between 2000 and 2002, Marsh applied to be th e
insurance broker for the Greenville County School Project (the "Greenville Project") i n
Greenville, South Carolina. As part of its application materials, Marsh submitted a response to a
request for a proposal ("Response to RFP") wherein the Company highlighted its allegiance to it s
clients. Specifically, in Section 6 .5.6 of the Response to RFP, under the title "Customer Suppor t
Capability and Philosophy," Marsh included what it referred to as a "Client Loyalty Pyramid, "
which stated that Marsh "builds long-term relationships of openness and trust" and "offer s
objective, relevant counsel ." Further, Marsh represented that its "approach to client service
begins with establishing credibility and trust and referred to itself as a "trusted business partner "
and "not simply an insurance agent ."
121 . Marsh has consistently promoted itself as abiding by strict principles of fidelity t o
its clients and has instructed its employees to repeat this pledge to its clients . In a 2004 Marsh
document, the Company instructed its employees to advise clients that :
35
Our guiding principle is to consider our client's best interest in all placements .We are our clients' advocates and we represent them in negotiations . We don'trepresent the [insurance companies] .
122. In addition, throughout the Class Period, Marsh's web page contained th e
following statements conce rn ing Marsh's Code of Conduct :
Code of Conduct for Insurance Transactions
The following code of conduct with respect to insurance transactions applies to allMarsh colleagues. This code of conduct codifies the principles the companyfollows in the execution of our responsibilities and augments our professionalstandards and MMC's (Marsh & McLennan Companies) Code of BusinessConduct & Ethics .
Clients First - Marsh represents our clients . All decisions will be made oractions taken with the client's objectives or best interests in mind .
Level Playing Field - Qualified insurers will be provided opportunities to offer aninitial proposal if a client retains Marsh to obtain competitive alternatives, withoutregard to Marsh's revenue considerations .
Bidding Integrity - The terms and conditions of competing quotations will not beshared among insurers . It is understood that for layered or quota shareplacements, sharing of insurer terms may be necessary for completion of theplacement. Further, we expect all parties to the transaction to maintain theconfidentiality of proprietary information .
Completeness - All competitive and valid quotes will be presented to the client .Clients will also be advised of any carrier who received a submission anddeclined to provide a quote; did not offer competitive terms; or did not respond ina timely manner .
No Inducements - Marsh colleagues will not seek entertainment or gifts forthemselves or others from anyone with whom Marsh does business, and will notaccept entertainment or gifts that could influence, or appear to influence, anyCompany decisions . Unsolicited and infrequent gifts and business courtesies,including meals and entertainment, are permissible if they are : customary andcommonly accepted, of minimal value, and accepted without an express orimplied understanding of obligations associated with the acceptance of the gift orcourtesies. Gifts of cash or cash equivalents are not permitted .
36
2. Brokers' Relationship With Insurers and the Obligation to DiscloseContingent Commission s
123 . Although Marsh purports to act as a fiduciary for its clients, many brokers ,
including Marsh, receive commissions directly from insurance companies . These commission s
are known as contingent commissions and are made pursuant to PSAs or MSAs.
124. Contingent commission agreements required insurance companies to pay broker s
based on one or more of the following : a) how much business the broker's clients place with th e
insurance company ; b) how many of the broker's clients renew policies with the insuranc e
company; and c) the profitability of the business placed by the broker .
125. Due to the inherent conflict of interest in brokers accepting payments fro m
insurers for placing business with them and the broker's fiduciary duty to serve its client's best
interests, contingent commissions had been an issue within the insurance industry . In 1998 risk
managers and the Risk and Insurance Management Society Inc . ("RIMS") complained about the
lack of disclosure by insurance brokers to their clients about the acceptance of contingent
commissions from insurers .
126. As a result of RIMS' concerns, in 1998, the New York State Insurance
Department ("NYSID") ordered brokers and insurers to disclose to policyholders al l
compensation agreements between brokers and insurers and to keep a record of these fees . The
regulatory order, known as Circular Letter 22 (1998) ("Circular Letter 22"), stated that a broker
is a legal representative of the insured and that the undisclosed receipt of additional
compensation from an insurer is sufficient to create the perception that brokers are conflicted i n
their loyalties . The NYSID provided the following guidelines for brokers and insurers :
- all compensation agreements between an insurer and a broker should bereduced to writing and agreed to by both parties ;
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- all such compensation arrangements should be disclosed to insureds priorto the purchase so as to enable insureds to understand the costs of the coverageand the motivation of their broker in placing the business ;
- all fees paid to brokers should be included as factors in the establishmentof an insurer's premium rates ;
- all fees paid to brokers (and reasons for such fee payments) should beincluded in a broker file maintained by the insurer ; and
- the insurer's internal auditing procedures should include verification thatall fees paid to brokers are proper and within the parameters of the NY InsuranceLaw and Department Regulations .
127. Circular Letter 22 was based upon Section 2110 of the New York Insurance Law ,
which permits the NYSID to revoke, suspend or refuse to renew an insurance broker ' s license if,
after a hearing, there is a finding that the broker has demonstrated his or her untrustworthiness to
act in that capacity . The NYSID has stated that the failure to disclose additional compensatio n
received from an insurer may be considered "untrustworthiness" in violation of the Insuranc e
Law.
128. In response to RIMS' concerns over the disclosure of contingent commissions ,
Marsh advised its clients and the investing public that Marsh's brokers were unaware of th e
commission agreements and, therefore, did not base their placement recommendations on
PSAs/MSAs . Marsh instructed its employees to advise clients that :
Our guiding principle is to consider our client's best interest in all placements .We are our clients' advocates and we represent them in negotiations . We don'trepresent the markets . In fact, clients are the only ones who have the authority tomake the decisions on the terms and conditions of a program and the marketsselected to handle the program . In addition to client preferences, placementdecisions typically take into account such complex factors as market financialstrength, a market's expertise in the line of coverage needed by the client, itsclaims-paying history, client service requirements, breadth of coverage, pricingand other terms and conditions . In all cases, clients make the final decision on themarket chosen to handle their business . Our Client Executives and advisorystaff is unaware of our specific MSA arrangements , thereby furtherremoving their abi lity to have these arrangements influence theirrecommendations . [Emphasis added .]
38
129. In reality, nothing was further from the truth . As fully explained below, Marsh's
brokers and Client Executives were very much aware of the contingent commissions and mad e
placements based on these agreements . In April 2004, Marsh retained DPW to "represent th e
Company in the inquiry launched by Eliot Spitzer and "investigate the relevant facts ." DPW
subsequently issued a report with its findings which states :
The existence of MSA agreements was common knowledge among brokers invarious product lines within Global Broking department . In addition, brokerswere often made aware of the terms of these agreements in discussions about theplacement process . As such, the prospect of MSA revenues was often a factorin discussions among brokers concerning the desirability of doing businesswith particular insurance carriers , as well as a significant topic of discussionbetween placement brokers and the insurances carriers themselves .[Emphasis added . ]
130. Not surprisingly, although New York law required the complete disclosure of an y
contingent commission agreements to a broker's clients, Marsh took great pains to avoid thes e
requirements . As described below, Marsh was using these agreements to improperly boost it s
revenues by improperly steering clients to those insurers that would provide the maximu m
contingent commissions to Marsh . According to a former Marsh Vice President / Clien t
Executive employed by Marsh at the time Global Broking was formed ("CW I"), while
contingent commissions had always existed in the insurance industry, Marsh pioneered thei r
manipulation . CW 1 candidly acknowledged that the motivation underlying Marsh 's improper
practices was : "Just because of their lust for, that's a heavy word, but income, income fro m
every source ."
3. Marsh Forms Global Broking to Control and Maximize ContingentCommissions
131 . During the 1980s and 1990s, the insurance brokerage industry underwent a perio d
of consolidation . Through acquisitions and internal growth, Marsh became one of the world' s
dominant insurance brokers .
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132 . Prior to this industry-wide consolidation, each of Marsh's branch office s
throughout the United States signed its own separate contingent commission agreements with
insurance carriers . However, beginning in the late 1990s, Marsh centralized the negotiation o f
contingent commission agreements into one unit known as Global Broking and assumed greate r
control over both business placement and contingent commission agreements .
133 . According to a former Insurance Services Manager employed at Marsh from 200 0
through 2003 ("CW2"), Global Broking was created by Marsh to enhance its ability to stee r
business to those insurance carriers that paid Marsh the largest contingent commissions . CW2
stated that Global Broking kept tight control over the process of obtaining quotes and
submissions for new and renewal policies and continuously tried to prevent Marsh's local office s
from contacting carriers directly .
134. Global Broking itself is divided into four regions : North, South, East, and West .
There are Global Broking employees in charge of each of the four regions, an employee in
charge of Global Broking North America, and one person who heads Global Brokin g
Worldwide . Global Broking also appointed sub-heads for each product line .
135. In addition, Global Broking was further divided into teams based upon th e
broker's market expertise and by insurance company. For example, there was a broker team fo r
AIG/Excess Casualty which was comprised of brokers with knowledge of excess umbrell a
coverage who worked exclusively with AIG underwriters . Teams also existed for Zurich North
America ("Zurich"), ACE and others .
136. Despite these sub-divisions, according to a former Assistant Vice President i n
charge of Global Broking for one of Marsh's local offices ("CW3"), "everything regarding
Global Broking was overseen by New York ."
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137. Following Defendant Greenberg's appointment as President of Marsh in 1999, the
influence Global Broking had on Marsh's contingent commission agreements and its placemen t
of insurance business became more prominent . According to a former broker at Global Broking
employed from 1996 through 2002, ("CW4"), through Global Broking, Marsh was able to us e
the Company's size as leverage to force insurance companies to pay more in contingen t
commissions in exchange for Marsh placing business with the carriers . Headquartered in New
York, Global Broking oversaw policy placement decisions in all of Marsh's major business lines .
138. For example, beginning in 1999, after Defendant Greenberg became th e
Company's President, Marsh's Property and Casualty Middle-Market, the Company's larges t
growing segment , was mandated by Marsh to go through Global Broking for all polic y
placements and the local and regional contingent commission agreements were replaced with
large national agreements, called PSAs .
139. According to CW4 and ("CW5") ( a former Marsh Managing Director employed
during the Class Period), Marsh' s push to consolidate all placements through Global Broking on
a nationwide basis was orchestrated by the top levels of Marsh management, "the higher-ups, th e
CEOs and Presidents ." CW4 similarly stated that Global Broking was able to convince the loca l
and regional offices to place their business through Global Broking by agreeing to share the
profits received from contingent commissions . According to CW4, the decision to share
commissions also came from the "higher-ups at Marsh . "
140. Similarly, according to CW2, the mandate to use Global Broking "came right
from the top - from Greenberg and Egan ."
41
C. The Scheme -- Marsh Uses Improper Business Practices to Boost Revenue
1 . Marsh's Business Plan was to Increase Revenue by Steering Businessto the Insurance Companies Paying the Highest ContingentCommission s
141 . A central part of Marsh's business plan during the Class Period was to promot e
the interests of insurance companies with whom it had contingent commission agreements .
When Marsh steered business to the favored insurance companies , those insurance companies, in
turn, paid Marsh higher fees. When Marsh helped favored insurance companies retain thei r
existing business at renewal time, those insurance companies paid Marsh higher fees . When
Marsh steered more profitable business (policies with low claims ratios) to favored insuranc e
companies, those insurance companies paid Marsh higher fees . And, when the clients paid
higher premiums, volume and profitability rose - - again increasing Marsh's fees .
142. Marsh's incentive to favor certain carriers and help them retain their business wa s
clear. Marsh, through the DPW Report, has, as noted above, admitted that "the prospect of MSA
revenues was often a factor in discussions among brokers concerning the desirability of doin g
business with particular insurance carriers . . . ." Thus, as one example of this practice, a
"Placement Service Agreement" between Marsh and AIG, dated January 1, 2003, provide d
Marsh with a bonus of 1 % of all renewal premiums if its clients renewed with AIG at a rate o f
85% or higher. If the renewal rate was 90% or higher, Marsh received 2% of the renewal
premium, and if the rate was 95% or higher, Marsh received 3% .
143 . Similarly, a former Senior Client Representative / Assistant Vice President ,
employed from 1995 through 2003 ("CW6"), confirmed that it was the regular course o f
business for Marsh to steer business to those carriers with whom it had PSAs and discusse d
preferred insurance carriers during monthly staff and departmental meetings . These meetings
were attended by all of Marsh's Middle-Market employees, including management.
42
144. Likewise, CW 1 reported that representatives of Global Broking spoke at meetings
in Marsh's regional offices and advised that, when possible, Global Broking would place
insurance with certain carriers because Marsh had a better contingent commission agreement
with them. According to CW1, a list of favored carriers was circulated at one of these meetings .
Chubb and Kemper Insurance were two of the preferred carriers listed .
145 . According to a former Marsh broker who was assigned to the Global Broking uni t
during the Class Period ("CW7"), in late 2001 or early 2002, Marsh held a company wide Globa l
Broking meeting at a resort (either Hilton or Marriot owned) in Las Vegas . The meeting was
attended by everyone in the Global Broking unit, including Christopher M . Treanor, the
division's most senior executive who reported to Defendant Egan, and was chaired by Alexandr a
Littlejohn .
146. According to this former broker, attendees were told about the importance o f
PSAs, and were specifically directed to steer clients to insurers paying the highest contingent
commissions .
147. Marsh executives issued directions about specific companies as well . For
example, in April 2001, a Global Broking Managing Director in the Excess Casualty group in
New York, wrote to the heads of Marsh's regional centers . The Marsh executive asked for
"twenty accounts that you can move from an incumbent [insurance company]" to a company tha t
had just extended its contingent commission agreement and further warned, however, that "Yo u
must make sure that you are not moving business from key [contingent commissio n
companies] ." Highlighting the incentive represented by the directive, the executive concluded,
"This could mean a fantastic increase in our revenue ." (Emphasis added) .
43
148. Former Marsh employees further corroborate Marsh's policy to use certai n
carriers based upon the amounts of their PSAs . According to a former Senior Employee Benefits
Client Executive employed by Marsh from 1993 through 2004 ("CW8"), the goal was to plac e
the coverage with an underwriter who paid an extra-commission . This was confirmed by a
Client Service Representative who was employed in the insurance industry for over twenty-seven
years and was employed by Marsh during 2004 ("CW9"). CW9 stated that emails, memos an d
other internal communications documented Marsh's policy of instructing its employees to stee r
business to certain underwriters because of the contingent commissions Marsh received .
149. Marsh's business protocol of placing business with preferred carriers extended
across all lines of the Company's operations . For example, according to a former Marsh
employee who was employed from the summer of 2001 through the spring of 2004 in one o f
Marsh's local offices as an Employee Benefits Specialist ("CW 10"), the placement of employee-
benefit insurance policies was directly related to incentive compensation received from certain
insurance carriers .
150 . Although the placement of employee-benefit insurance did not go through Globa l
Broking, the local office in which CW 10 worked entered into its own contingent commissio n
agreements, in accordance with Company protocol, and favored carriers who paid the highes t
fees . CW 10 personally maintained internal files of signed incentive compensation agreement s
between his/her office and various insurance carriers and stated that some of the major insuranc e
companies offered his/her office a "tiered" plan, describing that the more business the office
placed with that carrier, the higher percentage of incentive compensation the office would
receive .
44
151 . According to CW 10, the contingent commissions received from certain carriers ,
and the practice of placing business with these carriers, was discussed by the Senior Vice
President of his/her office when placing insurance for a number of the Company's major clients ,
including Rauch Industries, Century Plastics, Inc., and Ryobi .
152. CW 10 was personally responsible for the handling and processing of the
contingent commissions received from insurance carriers and stated that contingent commission s
were mailed to a lock box in New York, with the word "corporate" written on the envelope .
According to CW 10, all checks were forwarded to Marsh 's New York office for processing .
153. Similarly, a former Vice President in Sales and Client Management in Marsh' s
Middle-Market division, responsible for oversight of policy placement and consulting from 199 9
through 2004 ("CW I I"), stated that Marsh collected "overrides" or contingent commission s
from employee-benefit insurance providers for placing a certain amount of business with thos e
insurers .
154. According to CW11, Aetna and Blue Cross/Blue Shield were favored carriers tha t
paid Marsh contingent commissions . For example, if Marsh placed ten different customers with
Aetna, Aetna would pay a straight commission to Marsh on each of the ten placements ,
averaging from one to five percent of the total premium value . In addition, Aetna would pay a n
"override" of an extra $100,000 payment to Marsh .
155 . CW 11 further stated that Marsh would continually pressure these favored insurer s
to pay more in contingent commissions when Marsh was having trouble meeting its monthly an d
quarterly sales goals . CW 1 I stated, "Marsh went back to them for more money because of
[internal] budgets, and so forth and so on, that had to be met . If the sales weren't there, they
would go back to the carriers to try to gain more money, to tighten up the budget ." According to
45
CW 10, the push for additional overrides took the form of phone calls to carriers by a "benefi t
leader" for each particular policy in each of Marsh's offices .
156 . Global Broking's favoring of certain carriers is further evidenced by the fact tha t
in April 2002, Marsh negotiated a $1 million "no shopping" agreement with Chubb, whereb y
Marsh agreed that it would recommend to its top clients that held Chubb policies that they shoul d
renew those policies .
2 . The Scheme Continues -- Marsh Rated Insurance Companies Based on PSA s
157. In furtherance of Marsh's practice of favoring carriers based on lucrative PSAs ,
the Company began internally rating the insurance companies based on how much they pai d
pursuant to their contingent commission agreements, rather than the quality of the company ,
their price competitiveness or their service .
158 . For example, in February 2002, a Marsh Global Broking Managing Director i n
the Healthcare Group provided nine of his/her colleagues with a list of the insurance companie s
that were paying Marsh pursuant to contingent commission agreements . The Managing Director
cautioned, however, that "Some [contingent commission agreements] are better than others," and
said that soon Marsh would formally "tier" their insurance companies . This Marsh Director
went on to say, "I wi ll give you clear direction on who [we] are steering business to and who
we are steering business from." (Emphasis added) .
159. A "Tiering Report - 2003" was later circulated to Global Broking executives,
listing insurance companies as belonging to tiers depending on how advantageous thei r
contingent commission agreement was to Marsh . The instructions to managers who received th e
list included a direction that they were to "monitor premium placements" to assure that Mars h
obtained "maximum concentration with Tier A&B" insurance companies - those with contingen t
commission agreements most favorable to Marsh .
46
160. In addition, in an internal Marsh email dated September 15, 2003, Mars h
employees discussed ongoing negotiations between Marsh and an insurance carrier regarding the
carrier 's 2004 PSA . Discussing Marsh ' s desire to increase the percentages in fees due Marsh i n
relation to certain premium growth targets for the insurance carrier, the email evidences Marsh' s
steering criteria, stating: "I agree we should have another good year with . . . but that al l
depends on their appetite, coverage provided and how much they pay us . We need to place
our business in 2004 with those that have superior financials, broad coverage and pay u s
the most." (Emphasis added) .
161 . The benefit of the steering system to the paying insurance companies was clear .
For example, in July, 2000, an executive in Marsh Global Broking wrote to four colleagues t o
discuss "BUSINESS DEVELOPMENT STRATEGIES" with a particular "preferred " insurance
company that had signed a contingent commission agreement with Marsh . In describing what
Marsh had done for that company, the Marsh executive wrote, "They have go tten the ` lions
[sic] share ' of our Environmental business PLUS they get an unfair `competitive
3. Marsh 's "Pay-To-Play" System Pressures Insurers to Enter IntoPSAs/MSAs
162. In addition to rating carriers based upon how lucrative their contracts were fo r
Marsh, Marsh also instituted a "pay-to-play" system through which it pressured insuranc e
compan ies to enter into contingent commission agreements if they wanted to obtain busines s
from Marsh . For example, in 2002, Marsh used the Greenville Project to force Zurich to ente r
into a contingent commission agreement.
163 . During the bidding process, there were two serious bidders who competed for th e
Greenville Project business : Zurich and ACE. Unbeknownst to Greenville , however, while the
47
bidding process was ongoing, Marsh used the business to entice Zurich into signing a contingen t
commission agreement. As demonstrated in a December 12, 2002 email, Joan Schneider, a
Marsh Global Broking executive , explained to Zurich that they were "neck and neck" with ACE ,
which had a contingent commission agreement with Marsh :
[Y]ou are currently in the running on the Greenville Country [sic] School System(FIX cost near 3MM) . . . . neck and neck with ACE who we have a PSA with .. . . Will bind most likely after the first of the year . . . . where are we on the[contingent commission] agreement . . . . Left messages but haven't heard fromyou . . . . hint hint .
164. Between the December 12, 2002 email, and the award of the Greenville Projec t
contract on January 3, 2003, the contingent commission negotiations progressed and the projec t
was awarded to Zurich . Although Zurich and Marsh never finalized a contingent commission
agreement, Marsh made clear its view of the linkage :
[p]er our conversation today (sorry to call you during your vacation) the goodnews is that we are binding Greenville County School with you today! ! ! ! ! ! Weworked hard to get this to you and as we discussed expect it to be part of the[contingent commission] agreement . On your return Monday, I hope you andyour regional folks can get this ironed out . . . . . . this is a great start to theNew Year and would like to keep it going .
165 . Marsh similarly used its leverage to warn ACE that in order for ACE to reach it s
premium growth targets for the 2004 year, it would have to increase its PSAs with Marsh . In a
November 7, 2003 internal Marsh email , a Marsh employee stated, "I made it clear that if ACE
wants us to meet significant premium growth targets then ACE will have to pay `above market '
for such stretch." The email goes on to state : "We will be candid and absolutely honest about
where their PSA stands relative to similar partners in terms of both %'s and growth thresholds .
We will also be VERY CLEAR to the ACE product line managers what the impact will b e
if they are below market in terms of PSA." (Emphasis added) .
48
166 . That same month, Marsh attempted to force yet another insurance carrier to enter
into a contingent commission agreement . In a series of emails dated November 11 through
November 15, 2003, Marsh employees discussed the Company's response to the insurance
carrier's concerns over the agreement and Marsh's ability to "demonstrate the control," stating :
"We need to work on moving the business to demonstrate the control we have in order t o
make a strong argument for PSA." (Emphasis added) .
167. Tellingly, an internal AIG handwritten memo, dated December 2, states "Per W .
Gilman [Marsh Managing Director ], get to the right number or `we'll kill you ."' (Emphasi s
added) .
168. Internal documents from The Munich Re Group ("Munich") and ACE further
describe the impact on insurance companies when contingent commission agreements wit h
Marsh were not reached . For example, according to an internal Munich document, Munich was
not being offered opportunities to quote excess liability on accounts where they were not
awarded the lead umbrella because "those layers are already destined for other PSA carriers . . .
169. Similarly, internal ACE documents reveal that in 2003, ACE fell victim to th e
consequences of not entering into favorable contingent commission agreements with Marsh . As
evidenced by an ACE email, nine out of ten deals ACE lost during the month of July involve d
Marsh Global Broking . According to the email, "9 out [sic] 10 dead items involved MMGB not
soliciting a quote from us due to ACE not being on the `game plan' . "
4. Marsh Encouraged Employees to Steer Business to InsuranceCarriers with the Most Lucrative PSA s
170. Throughout the Class Period, Marsh encouraged its employees to place contract s
with those insurance carriers with whom Marsh had entered into contingent commissio n
49
agreements . Employees were often praised and considered for promotions solely on account o f
placing business with favored carriers .
171 . For example, CW4, a former broker at Global Broking, reported that placin g
business with those carriers offering contingent commissions to Marsh was a definitive criterio n
factored into his /her performance reviews. According to CW7, this definitive criterion was
reported on a "Balanced Scorecard" which was used to monitor the productivity of Mars h
employees. According to this same former broker, this "Balanced Scorecard" was one of
Defendant Egan's "pet things . "
172. Similarly, in February 2003, a Marsh Senior Vice President in the Global Brokin g
Healthcare Group, nominated a subordinate to become a vice president . On the nomination
form, under the heading "Financial Success," he/she noted that the nominee had increase d
Marsh's revenue "by moving" a renewing client to an insurance company with a contingent
commission agreement . He concluded : "Neighborhood Health Partnership Estimated Revenue -
$390,000."
173 . That nominee's 2002 performance review similarly noted that the nominee "wa s
responsible for renewal of a large HMO in Miami and was successful with placing of thi s
account with a [contingent commission insurance company] - increased revenue from $120,00 0
to $360,000 (estimated) . "
174. A 2003 self appraisal form by that same nominee - - now a vice president - -
stated: "Renewed large account with [contingent commission insurance company] t o
demonstrate our willingness to continue our relationship . Moved a number of accounts to
[contingent commission agreement carriers] for the sole reason to demonstrate partnership."
50
Other employees were similarly praised in performance evaluations for increasing Marsh' s
contingent income from insurance companies "by achieving budgeted tiering goals ."
175 . Similarly, in connection with the Greenville Project described above, even thoug h
Zurich never finalized a contingent commission agreement with Marsh, the employe e
responsible for the negotiations, Glenn R . Bosshardt ("Bosshardt"), was highly praised by
Marsh management in his 2003 performance review . Bosshardt had used the Greenville Project
to try and negotiate a favorable PSA agreement with Zurich . Bosshardt was praised for havin g
"assist[ed] in the implementation of MMGB' s excess liability strategy to maximize
176. In addition , according to CW 10, employees at Marsh ' s local office , who placed
business with insurance companies offering contingent commissions, received bonuse s
specifically linked to the dollar amount of incentive compensation received from carriers .
According to CW 10 , this created a conflict of interest because, as a broker, Marsh represente d
the client, "which didn't make sense to me because it was the insurance company which pays u s
by way of commission for placing the business . "
177. In the same vein, Marsh employees were criticized for bucking the system .
Initially, when Marsh began signing national contingent commission agreements, Globa l
Broking not only negotiated all of the agreements, but also kept all of the revenue . Many of
Marsh's local and regional offices, which had previously had their own contingent commissio n
agreements with insurance carriers, resented the loss of revenue to the central Global Brokin g
office and refused to have Global Broking pass on all of their placements . Eventually, Global
Broking initiated a "revenue repatriation" program under which some of Global Broking' s
national contingent commissions were shared with local and regional offices .
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178 . In June 2003, the head of Global Broking's Excess Casualty group wrote to an
employee in Marsh's Seattle office to chastise her for placing insurance directly with a carrier o n
behalf of a client , thus denying a contingent commission to Global Broking : "The GB
repatriation dollars are no small component of your office's budget. You have lowered tha t
amount with this placement . You may want to consider this in the future . "
5. Global Broking Uses its Leverage to Steer Business to Certain CarriersThrough A Fraudulent Bidding Process
179. In order to maximize the Company' s revenues from contingent commissions b y
steering business to its preferred insurers, Marsh engineered a system of "fake bids ." This
enabled Marsh to steer business to certain carriers by creating a non-competitive environment i n
which Marsh obtained false bids from carriers to ensure control over business placement .
180. While scheming with some insurance companies , and cajoling and intimidating
others, Marsh's system was designed to, and did, increase the Company's revenues by forcing
insurance companies to pay in order to receive Marsh's business . Unbeknownst to investors,
Marsh's criteria for placing business was not based on the insurers' ability to provide neede d
insurance at the best price, but rather, the dollar amount each insurer contributed to Marsh' s
revenues through contingent commissions .
a. Global Broking Engineers an A, B, and C Quote System ofFake Bids
181 . As part of the Company' s protocol , in an effort to place more of its clients '
business with insurers with which Marsh had entered lucrative PSAs, Marsh solicited artificially
high bids from certain insurance companies so it could guarantee that the bid of a preferre d
insurer on a given deal would secure the placement .
182 . Marsh's system depended upon the use of three types of quotes, known as "A,"
"B," and "C" quotes, depending upon the situation. When an incumbent carrier's policy was up
52
for renewal, Marsh solicited what was called an "A Quote" from the incumbent carrier, whereb y
Marsh provided the incumbent carrier with a target premium and the policy terms for the quote .
If the incumbent carrier agreed to quote the target provided by Marsh, the incumbent carrier kept
the business, regardless of whether it could have quoted more favorable terms or premium .
183 . In order to provide the appearance of competition and that Marsh was actuall y
obtaining competitive bids, Marsh would obtain a "B Quote" from another carrier . This quote
was also called a "backup quote" or "protective quote ." A company providing a B Quote woul d
know that it was not getting the business before making its quote . In many instances, Marsh
provided the carrier providing a B Quote with a target premium and the policy terms for thes e
quotes . In these cases , it was understood that the target premium set by Marsh was higher than
the quote provided by the incumbent, and that the carrier should not bid below the Marsh-
supplied target .
184. For example, in October 2003, an underwriter at AIG, which was one of the mai n
participants in Marsh's phony bid process, described a particular quote that he had provided :
"This was not a real opportunity . Incumbent Zurich did what they needed to do at
renewal. We were just there in case they defaulted. Broker . . . said Zurich came in
around $750K & wanted us to quote around $900K ." [Emphasis added .] Even when AIG o r
another carrier providing a B Quote could have quoted a premium lower than the target, it rarel y
did so. Instead, the B Quote carrier would provide a quote consistent with the target premium se t
by Marsh, thereby throwing the bid .
185 . In other instances, when Marsh asked a carrier to provide B Quotes where it wa s
not supposed to get the business, Marsh did not set a particular premium target . In these
instances, the carrier looked at the expiring policy terms and premium and provided a quote hig h
53
enough to ensure that : a) the quote would not be a winner; and b) in the rare case where it did get
the business, it would make a comfortable profit .
186. However, in B Quote situations, carriers did not do a complete underwritin g
analysis and in those situations when a carrier providing a B Quote inadvertently won th e
business (because the incumbent was not able or willing to meet Marsh's target), the carrier' s
personnel would "back fill" the underwriting work on the file -- that is, prepare the necessar y
analysis after the fact.
187. Finally, Marsh would come to carriers (often AIG) for a "C Quote" when there
was no incumbent carrier to protect . Although Marsh often provided premium targets in thes e
situations, it was understood that there was the possibility of real competition .
188. The "A, B, C" quote system was strictly enforced by Marsh through Bill Gilman ,
a Marsh Inc . Managing Director ("Gilman") . Gilman refused to allow AIG to put in competitive
quotes in B Quote situations, and, on more than one occasion, warned that AIG would lose it s
entire book of business with Marsh if it did not provide B Quotes . Gilman likewise advised AIG
of the benefits of the system . For example, in an internal Marsh document, Gilman stated that
Marsh: "protected AIG's ass" when it was the incumbent carrier, and it expected AIG to hel p
Marsh "protect" other incumbents by providing B Quotes .
b. Insurers Participate in the Fraudulent Bidding Proces s
189. AIG was among the most frequent accomplices in the phony bid scheme and wa s
itself entirely complicit in arranging Marsh's fake bids . On February 15, 2005, Carlos Coello, an
underwriter at AIG, pled guilty to participating in a scheme with Marsh employees to provide
false quotes to Marsh's clients, and swore under oath the following :
During - from September of 2002 through September of 2004, I and others atAIG participated in a scheme with individuals at Marsh Inc ., an insurance
54
brokerage firm based in Manhattan . I was employed as an underwriter at the timeand this was done at the direction of others .
During this time period Marsh and AIG periodically instructed me to submitspecific quotes that I be lieved were higher than those of incumbent carriersand were designed to insure the incumbent carrier would win certainbusiness and resulted in clients being tricked and deceived by a deceptivebidding process .
I complied with these requests and by doing so assisted Marsh to obtain propertyin the form of commissions and fees from policy holders . And in turn AIGperiodically benefited from this scheme when AIG was incumbent carrier in thosecases. I believe other carriers also submitted noncompetitive quotes that werehigher thereby, allowing AIG to obtain property in the form of insurancepremiums from more than one client .
Pursuant to this scheme, I intentionally engaged in deception and intentionallyconveyed quotes to Marsh under false and fraudulent pretenses . [Emphasisadded . ]
190. James Mohs, an assistant manager at AIG, also pled guilty to participating in the
improper bidding process . In his plea, Mohs swore under oath the following :
During my career at AIG, I and other employees participated in a scheme withindividuals at Marsh Inc ., also based in Manhattan . The goals of this schemeincluded allowing Marsh to control the market and to protect incumbent insurancecarriers including AIG when their bid was up for renewal .
During this time period , Marsh and AIG personnel periodically instructedme to submit specific quotes for insurance rates that I believed , [1], werehigher than those of incumbent carriers ; [2], were designed to insure that theincumbent carriers would win certain business ; and [3] resulted in clientsbeing tricked and deceived by their deceptive bidding practice. Onnumerous occasions I and others complied with these requests by submittingsuch quotes . By doing so, we assisted Marsh to obtain property in the form ofcommissions and fees from policy holders and insurance companies .
In turn AIG periodically benefited from this scheme when AIG was theincumbent carrier. In those cases I believe the other carriers were submitting noncompetitive quotes specified by Marsh thereby allowing AIG to obtain property inthe form of insure premiums in excess of $1,000 from policy holders .
Pursuant to this scheme I intentionally engaged in deception and intentionallyconveyed quotes to policy holders through Marsh under false and fraudulentpretenses . [Emphasis added .]
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191 . Along with AIG, which was run for many years by Defendant Greenberg's father,
Hank Greenberg, a number of other large insurers regularly worked with Marsh in manufacturing
fake bids . ACE Ltd ., run by Evan Greenberg, brother of Marsh's CEO, Defendant Greenberg,
was one of these companies . ACE signed a contingent commission agreement with Marsh in
order to gain access to the business Marsh controlled . ACE also repeatedly provided the same
type of B Quotes that AIG provided .
192 . The B Quotes given to Marsh by ACE were often in amounts requested by Marsh,
even though a lower quote would have been justified by an underwriting analysis . According to
internal ACE emails, ACE's President of Casualty Risk summarized :
Marsh is consistently asking us to provide what they refer to as "B" quotes for arisk. They openly acknowledge we will not bind these "B" quotes in the layerswe are be [sic] asked to quote but that they `will work us into the program' atanother attachment point . So for example if we are asked for a "B" quote for alead umbrella then they provide us with pricing targets for that "B" quote . It hasbeen inferred that the `pricing targets' provided are designed to ensureunderwriters `do not do anything stupid ' as respects pricing. [Emphasisadded. ]
193 . In this same email, the Casualty Risk President wrote that he "support[ed]"
Marsh's business model, which he described as "unique ."
194 . CW9 described how Global Broking in New York used the phony bid process to
ensure that the Phoenix office placed business with Marsh's so-called "Preferred Marsh
Underwriters ." This preferred group included Travelers, AIG, ACE and CNA . CW8 stated that
Global Broking would falsify the bids by asking some insurance carriers to submit high bids .
He/she explained that if a fairly large account called for a premium of somewhere between
$250,000 and $280,000, and Global Broking wanted to direct the account to a particular carrier,
then the other carriers were told to bid above $280,000 . According to CW8, he/she recalled
56
seeing at least one email from Global Broking directly instructing the Phoenix office to plac e
business with CNA Group, a preferred carrier.
c. Marsh also Schemes with Mid-Sized and Smaller Insurer s
195. Marsh did not limit its phony bidding scheme to its large corporate clients .
According to the NYAG Action, Marsh also engaged in such conduct with The Hartford
Financial Services Group ("Hartford") - a provider of group life benefits, auto, home ownershi p
and business insurance - with respect to Marsh's "Middle Market" and small business clients .
196. Middle Market insurance provides coverage for companies where the annual
premium ranges from tens of thousands of dollars to around $1 million . Hartford became a
"partner market" -- meaning it agreed to pay contingent commissions -- with Marsh's so-calle d
"Advantage America" program in July 2003 . The Advantage America program was developed
by Marsh to fold its small commercial property/casualty business into its Middle Market group .
With annual premiums in the range of $25,000 to $200,000, this program provided coverage t o
small businesses . Marsh centralized its entire small business insurance placement in an office i n
Lake Mary, Florida .
197 . Hartford shared the Lake Mary office with Marsh. On numerous occasions
during 2003 and 2004, Marsh employees asked the two Hartford underwriters assigned to thi s
facility, either in person or by telephone, to provide an inflated quote or "indication" (non-
binding proposed price) for insurance coverage for a small business . Typically, Hartford' s
underwriters were told to price the quote or indication 25% above a particular number, and that
by doing so Hartford need not worry that it would get the business . Hartford colluded in the
scheme.
198. Marsh also ensured that its phony bidding practices would be used in connectio n
with its larger Middle Market customers, i.e., those with annual premiums between $200,000 an d
57
$1 million . The Global Broking office for the Los Angeles area handled larger Middle Market
risks with annual premiums reaching $1 million . Like Marsh's Florida office, the Los Angele s
office is also shared with Hartford .
199. Starting as far back as 2000, Marsh employees, on virtually a daily basis, aske d
Hartford for inflated quotes or indications in a manner similar to the process described above for
the Florida facility. In Los Angeles, however , Marsh often provided Hartford with a spreadsheet
showing the accounts for which it wanted Hartford to provide a losing quote or indication, alon g
with other insurers ' quotes . Marsh instructed Hartford to quote some percentage , typically 25%,
above the other insurers' quotes on the spreadsheet to ensure that Hartford would not get th e
business. These were referred to as "Throwaway Quotes," which Hartford consistently provided .
200. On even larger risks in Southern California, those of over $1 million of annual
premiums, Marsh similarly asked for inflated quotes or indications, also providing spreadsheet s
containing other insurers' quotes to Hartford . Hartford provided these quotes as well . Hartford
provided these quotes and indications because Marsh was its biggest broker, and it felt tha t
Marsh would limit its business opportunities if it refused .
201 . Similarly, as of 2001, Munich had entered into separate contingent commissio n
agreements with Marsh's Excess Casualty, Property, FINPRO (Financial Products) and Health
Spectrum Groups . Throughout 2001 and early 2002, the Marsh Global Broking Excess Casualty
Group repeatedly requested that Munich provide "favors" designed to assist Marsh in its bid-
manipulation process .
202. For example, according to a December 6, 2001 email from a Marsh Senior Vic e
President to a Munich Regional Manager, Marsh requested that Munich not bid on certai n
58
renewals because Marsh owed the incumbent a favor and did not want to risk Munich providin g
the client with a lower quote.
203 . Additionally, in a December 18, 2001 email from a Marsh Senior Vice Presiden t
to a Munich Regional Manager, Marsh requested that Munich either decline the risk altogether o r
submit a quote higher than the incumbent quote in order to ensure that the business stayed with
the incumbent carrier. Marsh would also routinely ask Munich for artificial quotes that could b e
"negotiated" down for the sole purpose of impressing Marsh 's clients .
204. Marsh further misled its clients into staying with incumbent carriers by requestin g
that Munich act as "back-up or wait in the wings" at several client presentations throughou t
2001 . Marsh asked Munich to attend presentations for prospective clients with whom Munich
was already out of the running . One Munich regional manager characterized these presentations
as mere "Drive bys . "
205. For example, in 2001, Marsh sent Munich an email request explaining that i t
"needed to introduce competition" at a prospective client presentation and needed Munich t o
send a "live body." Frustrated with Marsh's continuous requests for "live bodies," a Munich
regional manager responded , "WE DON'T HAVE THE STAFF TO ATTEND MEETING S
JUST FOR THE SAKE OF BEING A `BODY .' WHILE YOU MAY NEED `A BODY," W E
NEED A 'LIVE OPPORTUNITY ."'
206. Marsh's business practices were so well-known within its business circle that, i n
preparing for an April 2001 meeting with Marsh, a Senior Vice President of Munich solicite d
reactions from his regional managers regarding their experiences with Marsh Global Broking .
This Munich Senior Vice President then cut and pasted the managers' comments into a singl e
59
document and circulated it to them for discussion . Complaints and reactions from the Munich
regional managers included :
I am not some Goody Two Shoes who believes that truth is absolute but I do feel Ihave a pretty strict ethical code about being truthful and honest with people . Andwhen I told [sic] I have to say certain things I know to be untrue to people Irespect and have known for a long time, it is not what I feel I should be asked todo of [sic] what this company stands for . Yet it has already happened severaltimes and I have either had to dodge the client and broker on the issue, whichwon't always work, or risk making GB [Global Broking] angry by telling acarefully edited version of the truth, which was more than they wanted out butless than satisfying to the client or broker . This idea of "throwing the quote" byquoting artificially high numbers in some predetermined arrangement for usto lose is repugnant to me , not so much because I hate to lose, but because itis basically dishonest. And I basically agree with the comments of others thatit comes awfully close to collusion or price fixing. WHAT ARE THE RULESON PRICING - ARE WE TO QUOTE OUR NUMBERS OR WHAT MGB[MARSH GLOBAL BROKING] WANTS US TO QUOTE - HOW DOESTHEIR INTERNAL PREFERRED MARKET THING WORK? [Emphasisadded.]
d. Additional Examples of Marsh's Improper and Fraudulent Conduct
(i) Fortune Brand s
207. An example of the operation of Marsh's wrongful conduct is evident in th e
bidding for the excess casualty insurance business of Fortune Brands, Inc ., a holding company
engaged in the manufacture and sale of home products, office products, golf products, an d
distilled spirits and wine . As evidenced by a December 17, 2002 email, an ACE Assistant Vice
President of underwriting sent a fax to Greg Doherty ("Doherty"), a Senior Vice President i n
Marsh Global Broking's Excess Casualty division, quoting an annual premium of $990,000 fo r
Fortune Brand's policy. Later that day, ACE revised its bid upward to $1,100,000 . On the fax
cover sheet with the revised bid, ACE' s Assistant Vice President wrote : "Per our conversation
attached is revised confirmation . All terms & conditions remain unchanged . "
208. An email the following day from the ACE Assistant Vice President to a senio r
ACE executive explained the revision as follows : "Original quote $990,000 . . . . We were
60
more competitive than AIG in price and terms . MMGB requested we increase premium t o
$1.1M to be less competitive, so AIG does not loose [sic] the business . . . ." (Emphasis
added) .
209. Thus, although ACE was able to provide a lower premium than AIG, Marsh
requested that ACE trump up its bid to ensure that AIG got the policy . However, this
arrangement also benefited ACE even though it had to give up this business-the consideration
in participating in the scheme was future business . As Doherty wrote in a June 20, 2003 email to
the same ACE vice president: "Currently, we have about $6M in new business [with ACE]
which is the best in Marsh Global Broking so I do not want to hear that you are not doin g
`B' quotes or we will not bind anything." (Emphasis added) .
(ii) Brambles, USA
210. The bidding process for excess casualty insurance for Brambles, USA, a
manufacturer of commercial industrial pallets and containers (among other products), furthe r
demonstrates Marsh's improper conduct . In June of 2003, ACE learned that Brambles wa s
unhappy with its incumbent carrier. Nevertheless, Marsh asked ACE to refrain from submitting
a competitive bid because Marsh wanted the incumbent, AIG, to keep the business . An ACE
Vice President wrote to the ACE President of Risk and Casualty : "Our rating has a risk at
$890,000 and I advised MMGB NY that we could get to $850,000 if needed . Doherty gave
me a song & dance that game plan is for AIG at $850 ,000 and to not commit our ability in
writing ." (Emphasis added) . ACE continued to provide Marsh with inflated quotes into 2004 .
(iii) The Greenville Project
211 . Marsh's involvement with the Greenville Project further illustrates how Marsh
abused its fiduciary role in an attempt to secure a contingent commission agreement with a n
61
insurance company by manipulating the bidding process . Notably, Marsh was paid a handsome
fee of $1 .5 million for acting as the broker on the Greenville Project .
212 . As discussed above , there were two serious bidders who competed for the
Greenville Project business : Zurich and ACE . Unbeknownst to Greenville, however, while thi s
bidding process was ongoing, Marsh held out the Greenville project as a "carrot" in its effort t o
entice Zurich to sign a contingent commission agreement .
213 . As part of its vigorous effo rt to steer the Greenville contract to Zu rich, Marsh
sought a false bid from a competing insurer and then, despite that insurer's refusal, submitted a
wholly fictitious bid on that insurer's behalf. On December 16, 2002, Bosshardt, the Globa l
Broking Vice President assigned to the project , contacted an Assistant Vice President o f
underwriting at CNA, an individual with whom he had previously worked , and who had alread y
told Bosshardt that CNA had no interest in bidding on the Greenville Project . In the emai l
Bosshardt stated :
[P]er my voicemail, we need to show a CNA proposal . I will outline below theleading programs (ACE & Zurich) . I want to present a CNA program that isreasonably competitive , but w ill not be a winner . [Emphasis added] .
214. Bosshardt proceeded to reveal the ACE and Zurich quotes on the project and
proposed numbers that CNA should quote in order to lose the bid , but still appear to have been
competitive . Although CNA never autho rized Marsh to submit this bid, it was submitted to
Marsh's client as a legitimate competing bid .
215. Notably, Marsh -- at a time when the prospect for a contingent commission
agreement with Zurich remained real -- advised Marsh's client that Zurich was a superio r
company and should be awarded the bid . Marsh did not disclose to its client either that it was
seeking a contingent commission agreement from Zurich, or that it had falsely submitted a bi d
62
under CNA's name . The client ultimately followed Marsh's recommendation and awarded th e
project to Zurich .
6. Global Broking's Bid Manipulations Frustrated Marsh's Localand Regional Office s
216. Lead Plaintiffs' investigation into Marsh's business practices reveals that Globa l
Broking's reputation for manufacturing bids to help its favored insurers retain and/or obtai n
business was known throughout the Company and was resented by many of the Company's local
and regional offices .
217. For example, CW2 (a former Insurance Services Manager in one of Marsh' s
Northeast offices) reported that the relationship between his/her office and Global Broking wa s
plagued with problems and frustrations . CW2 stated that his/her office was required to submi t
all requests for new policies and renewals for its clients through Global Broking . Global
Broking was supposed to obtain various quotes from carriers and forward all of the results bac k
to CW2's office . However , according to CW2, many of the accounts put out to bid through
Global Broking came back with "wrongful" declinations from carriers, thereby allowing th e
incumbent - - often AIG - - to retain the business .
218. CW2 describes the declinations as "wrongful" because he/she later discovered
that Global Broking had never contacted insurance companies to solicit competitive bids .
According to CW2, this was the usual result with submissions through Global Broking, "I woul d
estimate that in at least 50 percent of the accounts there were a lot of declinations that were not
warranted ."
219. For example, CW2, describes that in 1998 or 1999, he/she had an argument with a
Managing Director of Global Broking . CW3 had requested that Global Broking negotiate with a
particular carrier rather than Global Broking's preferred carrier, AIG, to obtain excess capacit y
63
on an umbrella policy, covering a portion of professional liability . CW2 was advised by Global
Broking that the carrier CW2 requested was not interested and that this type of "integrate d
program" was impossible to accomplish .
220. CW2 subsequently contacted the reinsurance company directly and was advise d
that Global Broking had vastly undersold the advantages of the deal . The reinsurance compan y
then agreed to write a piece of the policy for CW2's client . After binding the deal, CW2 was
reprimanded for going around Global Broking and the incident was repo rted to CW2' s
supervisors .
221 . Likewise, CW2 recalls that in early-to-mid 2002, his/her office submitted a
renewal of a Middle-Market Property and Casualty policy to Global Broking . After receiving a
number of declinations from Global Broking, and after Global Broking refused to allow CW2 t o
conduct a conference call with the various insurance companies, an account manager in CW2' s
office contacted the insurance carriers directly. "We found out that the markets had neve r
received the submission . "
222. Subsequently, no longer trusting Global Broking, CW2 demanded direct
communication from the underwriters that had declined client accounts for his/her office . In
addition, CW2 often tried to circumvent Global Broking by calling local insurance carrier s
directly. However, in most instances , CW2 was not successful because the local carriers were
instructed only to deal with Global Broking and feared repercussions from Marsh .
223 . In one instance, CW2 attempted to move a policy from an incumbent carrier
without going through Global Broking . As a result, CW2 received an email from Globa l
Broking reprimanding him/her and was told : "You can't move business if we're not aware of it .
64
We need to deal with senior management at the carrier on this issue before the business i s
moved."
224. CW2 further described another instance where his/her office received a "terrible
quote" from an incumbent carrier, via Global Broking, on an account for an assisted living
facility. As the policy moved toward expiration, the account manager in charge of the account
unsuccessfully attempted to obtain more bids from Global Broking . The account manager, while
on vacation, called three carriers that Global Broking had not contacted and obtained competitive
quotes. These bids were used to negotiate the incumbent's pricing down and saved the client
$400,000 .
225. Internally, Global Broking came to be referred to amongst Marsh employees a s
"the sacred cow." According to CW2, "we were constantly fighting issues where we didn't think
they were doing their job. We constantly sent emails to Global Broking saying, `You kno w
what? This is not the way things need to be done . " '
D. Marsh's Own Investigation and the Guilty Pleas of its Employees ConfirmMarsh's System of Manipulatio n
226. The DPW Report confirms that Marsh was regularly engaged in p rice
manipulation. According to the Report :
Within the Excess Casualty group, we have seen - - in communications amongbrokers and between brokers and carrier representatives - - widespread instancesin which Marsh Inc. brokers solicited so-called "B quotes" from variousinsurance carriers . These solicitations were made in situations where anincumbent carrier was expected to be awarded a policy renewal by the client, inwhich case the non-incumbents, in being asked for "B quotes," were providedwith some indication that they were unlikely to win the bid . (In the ExcessWorkers Compensation group, we have seen analogous types of communications,although none using the particular "B quote" nomenclature .) In a number of theseinstances, the solicitation of a "B quote" by the broker was accompanied by somedisclosure of the amount of the incumbent's quote, the amounts of other quotesgathered to date, and/or other such information . [Emphasis added .]
65
227 . The DPW Report further confirms that "In some cases, `B quotes' were solicited
in the course of `bid rigging' discussions" and that "It is clear that these `B quote '
communications were not typically disclosed to clients ."
228. The DPW Report also concludes that Marsh employed the practice of solicitin g
"Accommodation Quotes." According to the Report, brokers across various product lines
reported that it was common - - within Marsh and throughout the industry - - for brokers to
solicit quotes, however high, from carriers that otherwise were disinclined to bid on a particular
client's risk . The brokers maintain that such quotes were provided by the disinclined carriers as
a favor or "accommodation" when a broker was unable to otherwise obtain a complement o f
quotes that was extensive enough to satisfy a client's expectation . As with the "B quote"
scenario discussed above, such "accommodation" requests were at times accompanied by a
disclosure by the broker to the carrier of information concerning other carriers' bids . These
quotes were not disclosed to the client .
229. The DPW Report also acknowledges that :
the individuals who have pleaded guilty to date have stated that such discussions[regarding bid-rigging] took place regularly, and the relevant emails and othercommunications that we have reviewed are not inconsistent with these statements.We anticipate that additional examples of this type of conduct may well beidentified in these and other product lines as the government investigationscontinue . [Emphasis added . ]
230. According to certain Marsh employees who have pled guilty to scheming t o
defraud in the first degree in violation of New York Penal Law Section 190.65 (an E Felony) ,
Marsh regularly engaged in improper bid manipulation throughout Class Period . In his plea ,
Bewlay swore under oath the following :
I have worked in Manhattan at Marsh Inc. or it subsidiaries from 1991 through2004 . Beginning in approximately 1998 and continuing throughapproximately 2003 , I along with others at Marsh directed the solicitation oflosing quotes from various insurance companies or excess liability insurance for
66
Marsh clients . I personally solicited losing quotes on a number of occasions . Thelosing bids or quotes were often referred to as B quotes . B quotes were typicallysolicited from and provided by the insurance company so the company wouldretain the business when the client's existing coverage expired and that is, in fact,what occurred on numerous occasions and to more than ten clients .
Unknown to Marsh's clients I along with others at Marsh and others at the variousinsurance companies who participated in this conduct, shared the commonpurpose of insuring that the client would select the carrier, typically theincumbent that Marsh had predetermined should win the business .
The B quotes were solicited and obtained related to and as part of this commonscheme caused more than one client, one Marsh client to obtain more expensiveand/or less favorable insurance coverage . [Emphasis added . ]
231 . Similarly, Winter stated :
From about 2001 to about 2004, I was a managing director in the Global Brokingunit of Marsh Inc., an insurance brokerage in New York County. In 2002, I waspromoted to manager of the northeast region of Global Broking . As managingdirector, I and others at Global participated in a scheme with individuals atvarious companies including AIG, ACE, Zurich . The primary goal of this schemewas to maximize Marsh's profits by controlling the market and protectingincumbent carriers when their business was up for renewal . During this periodof time I and others at Marsh regularly instructed non-incumbent carriers tosubmit non -competitive bids for insurance business that I believe :
Were higher than appropriate and more restrictive in coverage terms than bidsprovided by incumbent carriers ;
Were designed to insure that the incumbent carriers would win certain business ;and; resulted in clients being deceived by the bidding process .
On numerous occasions non-incumbent insurance companies complied withthese requests by submitting such quotes to Marsh which Marsh in turnshowed to its c lients . Pursuant to this scheme, I intentionally engaged indeception and intentionally caused non-competitive quotes to be conveyed toMarsh clients under false and fraudulent pretenses . As a result, I and other Marshemployees obtained more than a thousand dollars from each of numerous clientsand incumbent carriers in the form of premiums, commissions and fees .[Emphasis added.]
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E. Marsh Provided No Services in Exchange For PSAs
1. Marsh' s Misleading Disclosures Failed to Disclose that No ServicesWere Provided in Exchange for PSAs
232. Prior to 1998, Marsh did not disclose the existence of its contingent commissio n
agreements . In April 1999, as noted earlier, in response to a statement issued by RIMS regarding
client concerns over contingent commissions, Marsh entered into an agreement with RIM S
regarding disclosures of Marsh's PSA/MSA agreements . The agreement provided that Marsh
would disclose to clients the existence of such arrangements, as well as certain information abou t
the amount of contingent commission revenues the Company received in accordance wit h
Circular Letter 22, discussed above .
233 . Even when Marsh began to disclose the existence of contingent commissions, i t
consistently concealed the true nature of these agreements, i.e ., that they were kick-backs fo r
improper steering agreements . Instead, Marsh falsely told the market the revenues reflected
payments for services provided to the market .
234. For example, in Marsh's 2000 Report on Form 10-K filed on March 29, 2001 ,
Marsh' s disclosure read as follows:
Contingent income for services provided includes payments or allowances byinsurance companies based upon such factors as the overall volume of businessplaced by the broker with that insurer, the aggregate commissions paid by theinsurer for that business during specific periods, or the profitability or loss to theinsurer of the risks placed . This revenue reflects compensation for servicesprovided by brokers to the insurance market . These services include newproduct development , the development and provision of technology,administration, and the delivery of information on developments amongbroad client segments and the insurance markets . [Emphasis added . ]
235 . Marsh's disclosure regarding contingent commissions changed in its 2003 Report
on Form 10-K which read as follows :
Market services revenue is derived from agreements Marsh has with most of itsprincipal insurance markets. Under these agreements , Marsh is paid for service s
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provided to the market, including: access to a global distribution network thatfosters revenue generation and operating efficiencies ; intellectual capital in theform of new products, solutions and general information on emergin gdevelopments in the insurance marketplace ; the development and provision oftechnology systems and services that create efficiencies in doing business ; and awide range of administrative services . Payments under market serviceagreements are based upon such factors as the overall volume, growth, and inlimited cases profitability, of the total business placed by Marsh with a giveninsurer. [Emphasis added . ]
236. Yet again, in 2004, Marsh changed the description concerning contingent
commissions . Marsh described on its website in 2004, contingent commission agreements as :
Market Services Agreements (MSAs) are agreements that cover payment for thevalue brokers provide to insurance carriers and are based primarily on premiumvolume or growth . Brokers principally provide insurers with distributionnetworks, which facilitate the delivery of business, and are uniquely positioned toprovide insurers with intellectual capital, product development, technology, andother administrative and information services . These capabil ities make theoverall marketplace more efficient and competitive, which , in turn , benefitsMarsh ' s clients . [Emphasis added . ]
237. In truth, the services Marsh claimed to provide (i.e ., new product development,
the development of provision of technology), were illusory . The services Marsh cites are no t
services, but, rather a necessary concomitant of Marsh going to the market on behalf of its
clients, something that Marsh was already duty bound to do since it is its clients' agent an d
fiduciary and is compensated through legitimate fees and commissions from its clients .
238. This is further illustrated by Defendant Greenberg's statements concerning th e
role of contingent commissions in a July 28, 2004 analyst conference call, where Greenber g
misleadingly stated that contingent commissions were representative of the services provided by
Marsh, rather than for the sole purpose of increasing the Company's reported earnings :
We think that the most important issue and I have said this before is that weprovide services for which we expect to be compensated and there arevarious ways that one can be compensated . The way in which we handle ittoday is [contingent commissions] but if we found that we needed to change themethod of compensation, we would do so . The principle being that we are goingto be compensated for our services . [Emphasis added .]
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239. The actual "serv ice" that Marsh provided pursuant to its contingent commissio n
agreements was to steer business to the insurance carriers paying these fees, a fact that Marsh ha s
now admitted . Thus, on October 27, 2004, Marsh held a conference call to discuss ce rtain
reforms it had announced in the wake of the NYAG 's investigation . During that call, th e
following colloquy took place in which Defendant Egan made clear that the Company did not, i n
fact, provide services in exchange for contingent commissions :
Unidentified Speaker : Good Morning. A couple of questions - there's a lot ofmisunderstanding - (technical difficulty) - regarding contingent commission .Michael, you mentioned that this is not a fundamental crisis . Could you expand alittle bit more on that? Yesterday, on Chubb's conference call, I think things gotconfused a little bit more, because what they said is they sometimes engage inPSA, engage in MSAs, which they suggested it is something bad, but to engage incontingent commission. Could you (technical difficulty) - for us and what didMarsh do?
Roger Egan (Marsh Inc . President) : You asked about clarification on the labelsthat are being used. Contingent commission is the oldest and generic term foragreements like this . You've heard placement service agreements, TSAs andmore recently you've heard market service agreements . At Marsh, what we had -(technical difficulty) - market service agreements . Our market serviceagreements were based on volume, based on a book of business , and theywere payments from an insurance company to Marsh based on volume onlyand based on a book of business . That process - that payment procedure -was what the Attorney General called and improper incentive for a broker tobe paid from the market. [Emphasis added . ]
240. Thereafter, on November 9, 2004, Marsh conducted a conference call to discus s
the Company's third quarter 2004 results in which Defendant Wijnberg, among others ,
participated . During the question and answer portion of the call, Ron Frank of Smith Barney
asked:
The $.16 figure you gave for the impact of the contingent commission declinesuggests it's treated as basically pure profit in that analysis . Is that a fairassumption as well going forward, that there is no natural offset to that as thoserevenues go way beyond what you actively do on the cost side? [Emphasisadded.]
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241 . Defendant Wijnberg responded, making clear that there were no offsettin g
reductions in expenses resulting from the elimination of MSA revenues : "[b]eyond what we
actively do, there is no change unless we change the business model that would reduce th e
cost of delivery ." (Emphasis added) . Defendant Wijnberg's statement not only corroborated that
the contingent commissions were "pure profit," but the lack of offsetting expenses upo n
elimination of those revenues also demonstrated that Marsh did not, in fact, provide an y
legitimate services to the insurers in exchange for contingent commissions because th e
elimination of those revenues did not reduce the "cost of delivery . "
F. Marsh Purposely Concealed the Importance and Amountsof its Contingency Commission s
242 . Over and above its failure to provide information regarding the lack of services i t
provided in connection with its receipt of contingent commissions during the Class Period ,
Marsh has never revealed to the investing public how important contingent commissions were t o
its revenues . In addition, Marsh actively sought to prevent its clients from discovering ho w
many contingent commissions were obtained .
243 . As noted above , in 1999 , in response to client concerns about the role of
contingent commissions, Marsh announced an agreement with RIMS, pursuant to which RIM S
approved a protocol by which Marsh would disclose to clients certain information about th e
amount of contingent commission revenues that Marsh received. Pursuant to the RIMS
agreement, Marsh was required to provide to its clients a calculation (called an "average
contingency factor" or "ACF") that reflected the percentage amount that Marsh earned from
contingent commissions, as compared to the overall amount of premiums placed by Marsh in a
given calendar year . In addition, clients who requested further information were to be provide d
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with an additional calculation that provided an approximation of the amount of Marsh' s
contingent commissions that would have been attributable to the particular client's placements .
244. Marsh has now admitted, as set forth in the DPW Report, that it intentionall y
misled its clients regarding the amount of contingent commissions it was receiving . The DPW
Report states :
given the manner in which the calculations were performed pursuant to theprotocol, the amounts conveyed to clients could be viewed by certain c lientsas inaccurate or misleading. First, in the initial years following the RIMSagreement, it appears that certain amounts were included in the calculation ofMarsh Inc .'s premium revenue that were not relevant to the computation of theaverage contingency factor . . . .
In addition, depending on the configuration of insurance products that a clientpurchased through Marsh Inc ., the ACF and any additional approximation thatwas conveyed to the client could have been materially different than the amountof MSA revenue that was associated with the particular client's placements . Thatis because the RIMS protocol called for Marsh Inc . to disclose the magnitude ofMSA revenues on a blended basis, across all product lines, without regard to thefact that, among different product lines, there were large variations in thecontingent commission percentages that were paid by different carriers . The netresult was that a client who, for example, purchased policies predominantlythrough Marsh Inc .'s Excess Casualty group (which had the most lucrative MSAagreements of any Global Broking product line) may have generated MSArevenues for Marsh Inc . in excess of ten or fifteen per cent of the client's overallpremium. Upon inquiry, however, the same hypothetical client would have beentold, depending on the year in question, that Marsh Inc .'s ACF, or "average"MSA revenue percentage, was in the range of two per cent or less . In short, thecalculations at issue would in some cases have produced responses that weretechnically accurate, but potentially misleading, as a result of the significantvariations in the amount of MSA revenues that were paid among differentproduct lines . [Emphasis added . ]
245 . The findings of the DPW Report are fully confirmed by Bewlay. Bewlay testified
that Marsh's protocol was designed to discourage clients, and therefore investors, fro m
discovering the true amounts and nature of the contingent commission agreements . In his
allocution, Bewlay testified that during his employment, he :
was made aware of a Marsh protocol designed to prevent Marsh's clientsfrom obtaining accurate information concerning the amount of placemen t
72
service or PSA or MSA revenue Marsh earned from carriers with respect toa particular client in addition to any fee or commission paid . The protocolrequired multiple layers of inquiry to discourage the client from obtaining ananswer. Also that all inquiries be channeled through a single Marsh employeewho directed the answer to the inquiry .
Finally, the percentage or ratio that Marsh used when it responded to a client'sinquiry concerning placement service or PSA or MSA revenue earned withrespect to a particular client . In my department , Global Brokerage and ExcessCasualty significantly understated the amount of PSA or MSA revenueearned by Marsh with respect to a particular client .
When I was told that a client inquired as to the amount of PSA revenue Marshearned from an insurance carrier, I responded that the Marsh employee followMarsh's protocol, including that the client only speak to the Marsh employeedesignated to respond to such inquiries . [Emphasis added . ]
246. Exchanges between Marsh and the insurance carriers with which it had contingen t
commission agreements further support Bewlay's sworn testimony that Marsh had a protoco l
designed to discourage clients from learning about the true nature of contingent commissions .
247. For example, in 2000, Munich disclosed the existence of its contingent
commission agreement with Marsh to a significant client to explain the contingent commission s
that were being passed on to the client . Marsh was furious and chastised Munich . A Senior Vic e
President at Munich apologized to Marsh in an email : "We acknowledge that this was
inappropriate behavior . . . ." He told Marsh that Munich would : "do the necessary to
eliminate all documentation, electronic or otherwise, that references or otherwise alludes t o
the [contingent commissions ] . I apologize for the consternation that this has caused withi n
the Marsh organization ." [Emphasis added . ]
248 . Similarly, in an internal email generated from the American Re Insuranc e
Company ("American Re"), an American Re employee refers to what the company can an d
cannot discuss concerning its agreements with Marsh Global Broking, referring to them as "th e
`third rail' of PSA commission ." [Emphasis added.]
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249 . In addition, the "Placement Service Agreement" between Marsh and AIG date d
January 1, 2003, contained a confidentiality clause prohibiting AIG from disclosing any of th e
terms of the agreement .
G. Marsh's Culture of Profit-Mongering was RampantThroughout its Entire Busines s
250. Marsh's culture of profit-mongering was not limited to Marsh's Insuranc e
business but, instead, was rampant throughout Marsh's various businesses .
251 . Mercer, Marsh's business consulting division, was also poisoned by conflicts o f
interest which subverted its clients' best interests for kick-backs from vendors .
252 . At Putnam, Marsh' s mutual fund business , Marsh engaged in illicit market-timing
and late-trading activities that benefited Putnam's favored large investors over the majority of it s
other investors .
253 . Trident, an investment partnership in which Marsh, together with its most senio r
officers and directors, jointly invested, is an egregious example of how Marsh's leadershi p
profited while Marsh's shareholders subsidized their risks .
1 . Mercer's Contingent Commission Scheme
254. Under the Mercer name, Marsh provides consulting and human resource ("HR" )
outsourcing services to clients around the world .
255. One of Mercer's specialties is providing consulting services to businesses seekin g
health insurance and group employee benefits . In this business, Mercer provides consulting
services to employers seeking to purchase group health, life, accident or disability insurance for
their employees .
256. Mercer holds itself out to its clients as a trusted expert in the analysis an d
businesses and individuals who need insurance retain Mercer to help them design individualize d
insurance plans for their employees and negotiate with insurance companies and other vendors t o
get the best mix of coverage, service, financial security and price . Thus, Mercer, in its capacity
as a broker, is contracted to solicit requests for proposals from insurers, present the insurers '
proposals to the employer, recommend the optimal proposal and represent the employer i n
negotiations with the insurer .
257 . However, like its parent Marsh, Mercer entered into secret kick-back
arrangements with vendors and insurers that it was supposed to be soliciting for competitive bid s
and steered its clients' business to those vendors and insurers that gave Mercer the most lucrativ e
kickbacks .
258 . One example of Mercer's kick-back scheme involved the Houston Independen t
School District ("HISD") and other Texas school districts . In 2000, Mercer was hired by HIS D
to assist it in privatizing its employee benefits plans . Mercer's consulting arrangement with
HISD was highly lucrative averaging more than $500,000 per month in consulting fees .
259. Mercer's consulting contract with HISD provided that it would "provide 30 day s
prior written notice to Client detailing any arrangement or agreement between Consultant an d
any 3rd Party currently existing, where the arrangement or agreement is related to the Serv ices
under this Agreement and where such relationship creates or reasonably could be anticipated t o
create an opportunity for Consultant to benefit financially in any other material manner from the
Client's contract with the 3`d party." In addition, the contract required Mercer to immediately
disclose any payments received from third-parties that could be construed as an inducement for
Mercer to place business with that third-party . Nevertheless, Mercer, consistent with its parent' s
business plan, ignored these contractual and fiduciary obligations .
75
260. Unknown to HISD, rather than provide independent and unbiased brokerage
services to HISD, Mercer secretly conspired with various insurers and vendors to steer the HIS D
business to vendors with which Mercer had secret kick-back arrangements . Moreover, Mercer
secretly acted as an agent for both the insurer and the school district .
261 . For example, in the Fall of 2000, Mercer caused HISD to put its disability ,
hospital indemnity, and cancer voluntary insurance policies out for a request for proposal prior t o
the policies ' renewal dates . Unknown to HISD, Mercer entered into a secret agreement with
American Bankers, a cancer and hospital indemnity provider, to be American Banker's agent . It
then advised HISD to place a health benefits insurance contract with American Bankers withou t
disclosing to HISD that Mercer was acting as American Banker's exclusive agent .
262 . Another example involved Mercer's renewal of HISD's life insurance benefit s
contract with Hartford Life Insurance Company. Unknown to HISD, at the time that Hartford
Life's insurance contract with HISD was up for renewal, Mercer was serving as Hartford Life' s
exclusive agent . While Mercer issued an RFP on HISD's behalf, rather than conduct a tru e
competitive bidding process to secure the most cost-effective bid for HISD, Mercer simpl y
renewed HISD's contact with Hartford Life . According to a complaint filed by HISD, Mutual o f
Omaha ("Mutual") was prepared to submit a competitive bid for this contract, but Mercer tol d
Mutual to submit a "less competitive watered down product" than it originally planed to submit .
263 . Mercer's conduct has not only exposed it to a class action suit in Texas which
seeks treble damages and injunctive relief, it has also drawn the scrutiny of the Texa s
Department of Insurance. According to the Department of Insurance website :
The Texas Department of Insurance is aware of the developments in New Yorkchallenging improper pricing and sales practices by some brokers and insurersand is actively looking into the matter. As always, we will vigorously enforce ourlaws and take whatever action is appropriate after our investigation is concluded .
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2 . Mercer Conspires with Insurers to Conceal its kickback s
264. Mercer's kick-back scheme with vendors and insurers was a well-entrenche d
business practice and a significant source of its revenue . It is apparent that Mercer undertook
extraordinary means to ensure that its clients would not discover these back-door payment s
because these payments were increasing the premiums that the clients were paying .
265. Yet, in hiding its scheme from its clients, Mercer faced a legal obstacle provide d
by federal law. Federal law requires most private employers to disclose all compensation that
they pay to brokers in connection with the purchase of ERISA-covered benefit insurance for their
employees. The employer must report this information to the U .S . Department of Labor on a
"Form 5500 . "
266. Often the employer - Mercer's client - does not pay the broker's commission
directly because the broking fee is bundled into the premium payment that the client pays to th e
insurer. In these cases, the broker extracts its commission from the premium payment. Thus, the
insurer that receives the premium from the employer usually prepares a schedule for the For m
5500 ("Schedule A" or "Form 5500") on behalf of the employer, which reports the amount of
compensation the insurer has paid to the employer's broker out of the premium payment . Of
course, the insurer, as part of its practice, would also include any other fees, including contingen t
fees, paid to the broker on the Form 5500 .
267. Because the Form 5500's reporting requirement threatened to expose Mercer' s
practice of receiving secret contingent commissions - styled as "override payments" o r
"bonuses" - from insurers, Mercer lobbied insurers to stop reporting these override payments o n
the Form 5500 . As early as 2001, an employee at one of Mercer's preferred insurers - Aetna -
wrote to a fellow employee about the "big" issue of Mercer not wanting the insurer' s
"commissions" to Mercer "showing up" on a Form 5500 :
77
[A] BIG issue we will have with the [large brokers] is what do we do with those
accounts where we are not currently paying any commissions (client is paying
them directly) . . . plus the issue of these monies now possibly showing up on a
5500 .
268 . At a major conference with insurance brokers in September 2003, Mercer wa s
reported to have indicated a preference that "the expenses/funding not appear on the 5500 form ."
269. Mercer's concern with insurers reporting kick-backs on the Form 5500s was
obvious. If the Form 5500 disclosed a higher commission paid to the broker than the
commission that Mercer was supposed to receive from the client, Mercer would have to disclose
its contingent fee agreements . Mercer expressed this concern at the September 2003 conference .
Referring to the contingent fee payments from insurers as "overrides," Mercer stated that havin g
these contingent commissions reported on the Form 5500 "is not ideal for us because override s
and regular commissions might be combined on one amount, raising questions from clients o n
why our commission disclosures are less than [Form 5500] commission ." Mercer then
demanded that insurers not report these payments : "This could be a potential deal-breaker fo r
us."
270. As Mercer continued to press for the non -disclosure of contingent commissions
on Form 5500s, Aetna and other insurers began to acquiesce in this scheme and style thei r
payments to Mercer as something other than contingent payments . For example, an internal
Aetna email refers to characterizing a payment to Mercer as a "service fee" because Aetn a
otherwise did not have a "contractual vehicle" to pay Mercer a kick-back without disclosing it o n
the Form 5500 : "Today, we do not have a contractual vehicle to pay 3%-5% of book of busines s
premium, non-5500 disclosed. Probably end of April timeframe . . . until then, the only vehicl e
we have is service fee payments, either single case or aggregate production."
78
271 . To cooperate with Mercer, Aetna came up with other solutions to not repo rt
contingent commissions on the Form 5500 . In another email to Mercer , Aetna suggests "othe r
alternative options" to structure its contingent fees so that they would not have to be disclosed :
"The full amount will be 5500 reportable . If this does not work, we can provide alternative
options, such as a producer administrative agreement ."
272. These "alternative options" became quite popular . In another internal Aetn a
email, an Aetna employee describes how Marsh was interested in structuring its contingent fee s
so that they would not be disclosed on the Form 5500 : "Marsh is interested in having most o f
their bonus off of the 5500 ." Other brokers copied Mercer to the point that an internal Aetna e-
mail complained, "We are encouraging our Producers to be paid MORE off of the 5500 . I
thought it was Aetna's position to have bonus reportable ."
273 . Led by Mercer and other large brokers, the scheme to not report contingent
agreements became a widespread practice in the industry . As one insurance broker commented
on the practice, "[o]ur ability to place business with Aetna . . . depends on your ability to
address certain essential issues [including] . . . [a]n override agreement custom to our
operations . . . ." The broker insisted that any Form 5500 must be sent to it and that other
carriers "do not disclose [override] fees on the Schedule A Form 5500 ." The broker concluded
that "[w]ith satisfactory resolution to the above issues, Aetna is immediately placed on a `leve l
playing field' with other carriers . . . . "
274. Mercer's scheme of extracting improper kickbacks from insurers and pressurin g
these insurers not to reveal the scheme in documents required to be filed with the Department of
Labor is just another example of the pervasive culture at Marsh of concealing fraudulent activit y
and improperly inflating the Company's revenues .
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3. Problems at Putnam
275 . The problems at Marsh were not limited to those lines of its business tha t
brokered or consulted on insurance, but extended to all aspects of Marsh's business . The
philosophy of promoting profits for Marsh at the expense of customers and, ultimately, investors ,
extended also to Marsh's mutual fund company - Putnam .
276. Putnam engaged in a practice known as "market-timing," which allows certai n
favored investors in mutual funds to benefit at the expense of the rest of the investors. Putnam' s
market-timing was the subject of an SEC complaint and settlement, dated April 8, 2004, pursuan t
to which Putnam paid a fine of $50 million and disgorged $5 million in profits from thi s
wrongful activity. An identical fine and disgorgement was also required by the terms of
Putnam ' s settlement with the State of Massachusetts . Thus, Putnam paid a total of $ 111 millio n
to settle regulatory actions arising out its market-timing activities .
4. The Trident Funds, Owned and Operated by a Marsh Subsidiary,MMC Capital, Created Enormous Conflicts of Interest
277. In addition to illicit business practices in Marsh's brokerage business and i n
Mercer and Putnam, Marsh's subsidiary, MMC Capital, is under investigation by the SEC i n
connection with three investment funds, known as Trident I, Trident II and Trident III (th e
"Trident Funds"), which MMC Capital created and operates . According to Marsh's Form 8-K
dated December 22, 2004:
On December 21, 2004, Marsh & McLennan Companies, Inc . ("MMC") receiveda request for information pursuant to a formal investigation commenced by theSecurities and Exchange Commission . The request for information seeksdocuments and other information concerning related-party transactions in which adirector, executive officer or 5% stockholder of MMC had a direct or indirectmaterial interest, including transactions with the Trident funds .
278. The Trident funds are a set of three investment partnerships that Marsh's MM C
Capital subsidiary set up beginning in 1994 to invest in insurance-related businesses . The initial
80
fund, Trident, was very successful, leading to the formation of a second fund, Trident IT, in 1999 .
Trident III was founded in 2003 and was closed to further investment in July 2004 . According to
their website :
The Trident Funds make private equity and equity-related investments in theglobal insurance and financial services industries including investments in theproperty & casualty, life, health, reinsurance, insurance distribution, insuranceservices, insurance and financial services related technology, human resourcesand employee benefits industries . The Trident Funds target investments withaggregate commitments in excess of $25 million .
279. Since 1994, the Trident Funds have raised more than $3 billion from investors .
The Funds have invested in at least twelve insurers, including Ace Ltd ., a company run by Evan
Greenberg, a brother of Defendant Greenberg, XL Capital Ltd ., and Axis, all publicly traded .
Lesser-known companies financed by Marsh include Danish Re, a Lloyd's of London syndicat e
formed in 1999 that operates in Europe; James River Specialty, an insurer in Richmond, Va ., that
began underwriting property and casualty insurance in July 2003 ; and the Gulf Insurance Group ,
a provider of specialty business insurance coverage .
280. Marsh has invested in all three Trident Funds, with investments in each fund o f
approximately $300 million. Marsh officers and Board members also have invested in the funds .
Defendant Greenberg, who "resigned" from the Company on Oct . 25, 2004, as Marsh's CEO,
and Defendant Davis, the chief executive of MMC Capital, were among the largest individua l
investors in the partnerships . The New York Times reported that Defendant Greenberg 's stake in
the partnerships had a future payout value of $2 .8 million at the end of 2003 and Davis '
investments in the partnerships were valued at $4.9 million .
281 . According to an article in The New York Times on October 27, 2004, while it i s
not unusual for financial and insurance companies and their executives to invest together in
partnerships created by the companies, it is rare for directors of a company, whose duty is t o
81
protect the interest of shareholders, to do so . Indeed, the Trident III fund excluded directors
from investing .
282. Part of the reason for such limitations on investors is the potential for conflicts o f
interest . Despite the concerns about possible conflicts, Trident and Marsh conducted severa l
deals together . In June 2002, Trident bought 43 percent of a small insurance broker called the
Arc Group from Marsh for $23 .6 million . The purchase resulted in a $9 million profit for Marsh .
283 . The SEC, in its pending investigation into the Trident Funds, apparently is
examining these potential areas of conflict between Marsh and the funds . In addition, according
to a Forbes December 23, 2004 article, Standard & Poor's Equity Research reiterated a "hold "
rating on Marsh, citing the SEC investigation . "We believe the Trident Funds have hel d
investments in several reinsurers and property and casualty insurers," S&P Equity Research said ,
adding that the probe might be part of an industry-wide probe into possible abuses of financial
insurance and reinsurance transactions in order to manipulate accounting and earnings .
IX. THE TRUTH IS REVEALED AND SUBSEQUENT EVENT S
284 . On October 14, 2004, the pervasive wrongdoing at Marsh was publicly reveale d
when New York State Attorney General Eliot Spitzer ("NYAG") announced that his office had
filed suit against the Company. A press release desc ribing the allegations of that suit stated that
Marsh "steered unsuspecting clients to insurers with whom it had lucrative payoff agreements ,
and that the firm solicited rigged bids for insurance contracts ." It was also announced that "tw o
insurance company executives have pleaded guilty to criminal charges in connection with th e
scheme . "
285 . Those insurance company executives were Jean -Baptiste Tateossian and Karen
Radke, two former mid-level managers at AIG, who on October 14, 2004, each pleaded guilty t o
82
one count of violating section 190 .65 of the NY Penal Law : Scheme to Defraud 1st Degree (E
Felony), for their participation in the improper scheme involving AIG and Marsh .
286. Marsh issued a press release on October 14, 2004, concerning the allegation s
made in the NYAG Action :
We take very seriously the allegations made public by Attorney General Spitzertoday. We have been cooperating with the Attorney General's investigation sinceit began in the spring but have not been made aware of the charges until now .
We are committed to getting all the facts, determining any incidence of improperbehavior, and dealing appropriately with any wrongdoing . This is our highestpriority . Marsh is committed to serving its clients to the highest professional andethical standards as demonstrated by its long history as the industry's leader .
287 . The independent directors of Marsh, in an apparent bid to distance themselve s
from the alleged wrongdoing at the Company, and allay investor concern, issued a separat e
statement on October 14, 2004:
The Board of Directors of Marsh & McLennan Companies, Inc . has learned of thelawsuit brought against Marsh & McLennan by the Attorney General of NewYork. An independent review is underway . The review will be thorough, promptand efficient . Pending the results of the review, we will not draw anyconclusions . We have full confidence in the company's leadership . When thereview has been concluded, the Board will take all appropriate action in theinterests of our shareholders, employees and our clients .
288 . The Board's efforts fell woefully short, however, as the price of the Company' s
common stock fell sharply . Marsh's stock, which had closed at $46 .13 per share (on tradin g
volume of approximately 1 .355 million shares) on October 13, 2004, the day before th e
disclosure, dropped to a close of $34 .85 per share (on trading volume of 44 .415 million shares)
on October 14, 2004, the day that Marsh's fraudulent activities became public .
289. In tacit acknowledgement of the truth of the allegations of the pervasiv e
wrongdoing by the Company, on October 15, 2004, Marsh announced that it was suspending it s
market serv ices agreements :
83
Marsh & McLennan Companies, Inc . (MMC) announced today that Marsh Inc .,its risk and insurance services subsidiary, will immediately suspend its practice ofmarket services agreements (MSA) with insurance carriers .
Today's decision was made in light of the serious allegations and questions thathave been raised about this long standing industry practice .
Jeffrey W. Greenberg, chairman and chief executive officer of MMC, said today :"We are greatly disturbed by the allegations of wrongdoing . We take them veryseriously, and we are conducting a thorough investigation of these allegations . Asthe facts are being reviewed, we believe it is in the best interest of our clients tosuspend MSAs immediately . "
290. On October 15, 2004, the fallout from the public disclosure of Marsh's illici t
schemes continued as the Company issued a press release announcing that Defendant Grove s
was resigning as the CEO of Marsh Inc. The press release stated , in pertinent part, that :
Marsh & McLennan Companies, Inc . (MMC) today announced a change in themanagement of Marsh Inc ., its risk and insurance services subsidiary.
Michael G . Cherkasky has been named chairman and chief executive officer ofMarsh Inc . effective immediately . . . .
Mr. Cherkasky succeeds Ray J . Groves, who has served as chairman and chiefexecutive officer of Marsh since 2003 . Mr. Groves will become senior advisor toMarsh. Roger E . Egan will continue as president and chief operating officer ofMarsh Inc .
Jeffrey W. Greenberg, chairman and chief executive officer of MMC, said :
"Since learning about the Attorney General's allegations, we have taken strongand immediate action . We are committed to determining the facts, and we willtake all appropriate action to deal with any incidence of wrongdoing and assurewe are serving the best interests of our clients . Mike's appointment as chairmanand chief executive officer of Marsh recognizes the new additional priorities thatthe company faces. At the same time, this change will allow Roger Egan tosupport that effort and devote his time to managing the business and servingclients ."
"Pending completion of the investigation, we have suspended market servicesagreements (MSAs), and we are actively reviewing every aspect of Marsh'sbusiness to identify and stop any practices that might encourage behavior that isinconsistent with our values and commitment to the highest professional andethical standards ."
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291 . Despite the Company's efforts at damage control, the market's negative reactio n
continued due, in large measure, to the uncertainty surrounding the magnitude of the MSA
revenues at Marsh and the impact of the suspension of the contingent commission agreements .
Thus, on October 15, 2004, Bear Steams issued a research report stating:
News of a civil suit filed against Marsh & McLennan's insurance brokerageoperations by the NY State Attorney General Eliot Spitzer, sends the market intoa tail spin .
The markets reacted negatively yesterday to New York Attorney General EliotSpitzer's filing with the New York State Supreme Court which alleges that Marsh& McLennan's insurance brokerage operations did not: 1) sufficiently discloseplacement contingent commission arrangements with insurers to their clients, 2)engaged in anti-competitive practices, and 3) did not act in its clients' best interestas a fiduciary representative . The language of the filing is in our opinion verynegative and implies evidence of industry price-fixing . Although the use ofcontingent commissions has been a known industry issue, and in some cases hasbeen disclosed by some insurance brokers, the percentage of revenues derivedfrom this type of commission structure above and beyond the standardcommission compensation structure has not been disclosed by the insurancebrokerage industry. This suit serves to increase the scrutiny on such businesspractices, and raises questions which could have a long term implications forMarsh's margins, and by extension, the industry's business practices in general .
292. On October 15, 2004, Legg Mason downgraded Marsh to a "Sell," characterizin g
the allegations of bid-rigging as a "smoking-gun," noting that questions about the Company' s
management were substantial in light of the kick-back scheme :
Having read the official complaint, we believe that the issues involved are greaterthan just the practice of contingent commissions, and, therefore, we believe thatthere may be additional charges and negative headlines that will weigh on thestock for the foreseeable future . It is our belief that this complaint, in one form oranother, will expand to include most of the publicly traded brokers and additionalcarriers . While we had felt that this issue was riskier than the Street consensus,we did not believe that a "smoking gun" existed . (A smoking gun being directevidence that a client was placed in an appropriate insurance policy solely tocollect a contingent commission) . If the allegations of false bids aresubstantiated then this is the smoking gun. [Emphasis added . ]
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Prior to last year, Marsh and McLennan had been viewed as one of the best-managed companies in the insurance industry . With the issues at Putnam over thelast year, this reputation took a hit; however, the company had begun to restorecredibility through changing the management at Putnam and improving investorcommunications (such as beginning to host quarterly conference calls andscheduled analyst day for next month) . Yesterday's allegations, by being socompany-specific, raise additional concern regarding management . . . .therefore, we believe a Sell rating is most appropriate on the shares .
293 . Marsh's common stock further dropped from a close of $34.85 per share o n
October 14, 2004 to close at $29 .20 per share on October 15, 2004, on trading volume of
approximately 96.325 million shares - more than double the volume on October 14, 2004 .
294. On October 18, 2004, Marsh purported to provide information to the marke t
concerning its MSA revenue . In a press release entitled "MMC Provides MSA Information," the
Company stated :
The company announced today that in 2003, revenue from MSAs recorded byMarsh amounted to $845 million, representing 12 percent of MMC's risk andinsurance services revenue of $6.9 billion and 7 percent of MMC's tota lconsolidated revenue of $11 .6 billion.
For the six months ended June 30, 2004, MSA revenue was approximately $420million, which was 11 percent of risk and insurance services revenue and 7percent of MMC's total consolidated revenue .
MSA revenue has been part of overall compensation for Marsh's services . Thesuspension of MSAs will negatively impact near-term operating income . Theexpenses directly associated with Marsh's global distribution activities amountedto approximately $340 million for 2003 . This amount excludes embedded localoffice expenses that support placement activities . Therefore, it is not possible tocalculate a specific operating income margin for MSA revenue .
295. That press release , however, was itself misleading because it implied that som e
portion of the $340 million in global distribution costs was tied to the receipt of the contingen t
commissions . Thus, in attempting to blunt the adverse effects of the Company's suspension of
MSAs, Marsh falsely represented that it was "not possible to calculate a specific operating
income margin for MSA revenue ." As alleged herein , however, there were no costs or expense s
86
associated with MSA revenue because Marsh provided no actual services in exchange for th e
contingent commissions .
296. On October 18, 2004, The Wall Street Journal Online published an article
concern ing the NYAG Action against Marsh . In that art icle, it repo rted that Spitzer privately
told his top officials that the wrongdoing at the Company was "the same kind of cartel-lik e
behavior carried out by organized crime ." The article reported that Peter Pope, the Deputy
Attorney General for the Criminal Division, stated that "[i]t's like the Mafia's `Cement Club .' . .
. . referring to construction projects in which a corrupt contractor rotated cement companies int o
jobs based on kickbacks ."
297. The Wall Street Journal Online article further reported that "[t]he fees are so
profitable that Prudential Securities Insurance analyst Jay Gelb estimates their absence is likely
to put Marsh's 2005 earnings per share in the neighborhood of $2 .25 instead of $3 .45 as
previously estimated ." The article also noted that Marsh's stock had been "pummeled by the
scandal, losing $9 billion in market capitalization last Thursday [Oct . 14, 2004] and Friday [Oct.
15, 2004] ."
298 . On October 19, 2004, William Blair & Company issued a research report tha t
exemplified the market's surprise at Marsh's illicit practices :
Suspension of MSA Represents Major Indictmen t
The company announced last Friday that it was "suspending" the use of MSAs,which we believe is a major indictment against the use of such practices for allinsurance brokers - including Aon - and represents aggressive action by Marsh &McLennan to help stem client defections and pacify regulators . This indictment isparticularly serious - in our opinion - given that the company and the industryvehemently defended such compensation practices when it was announced earlierthis year that regulators were scrutinizing the appropriateness of these practices .
299. On October 20, 2004, Deutsche Bank-North America issued a research repor t
describing the market repercussions of the disclosure of the Company's wrongdoing :
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Significant value lost . Over the past four trading days, Marsh & McLennan haslost $11 billion of market capitalization . The shares have declined 48%,compared with a 1 % decline for the S&P 500. The New York Attorney GeneralEliot Spitzer's civil suit against Marsh & McLennan regarding contingentcommissions and bid rigging prompted this reaction .
300. On October 21, 2004, the New York State Insurance Department issued a citation
ordering Marsh, and a number of its affiliates which hold insurance licenses in New York State ,
to appear at a November 23, 2004 hearing to show cause why regulatory action should not b e
taken against them .
301 . On October 25, 2004, eleven days after the revelation of wrongdoing at th e
Company, Marsh issued a press release announcing that Defendant Greenberg had resigned :
The Board of Directors of Marsh & McLennan Companies, Inc . (MMC) todaytook a series of actions designed to enable the company to resolve its legal andregulatory issues while continuing to provide high-quality service to its clients .
The MMC Board of Directors has accepted the resignation of chairman and chiefexecutive officer Jeffrey W . Greenberg .
The Board has named Michael G . Cherkasky as president and chief executiveofficer of the company and elected him to the Board of Directors . Mr. Cherkaskywill also continue in his current role as chairman and chief executive officer of th ecompany's risk and insurance services subsidiary Marsh Inc .
The Company also announced the formation of a special committee of outsidedirectors "to spearhead the company's activities in resolving its legal andregulatory matters ."
302. On October 26, 2004, Marsh issued a press release announcing that the Company
was implementing "a series of significant reforms to its business model that will ensure that th e
best interests of its clients are served and that every transaction is executed in accordance with
the highest professional and ethical standards ." In announcing these reforms, the Company i n
essence admitted, among other things, that the contingent commissions were not disclosed t o
clients as had been previously represented . The release further stated :
Accordingly, the following reforms will be initiated by January 1, 2005 :
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Marsh has permanently eliminated the practice of receiving any form ofcontingent compensation from insurers .
All revenue streams will be 100 percent transparent to clients . Each client willreceive a full accounting of all revenue earned by Marsh, including fees, retailcommission, wholesale commission and premium finance compensation, if any .
Marsh will insist that insurance companies show commission rates on all policies .
Marsh will seek consistent commission rates so that insureds are better able tocompare costs of alternative proposals .
Marsh will provide transparency to its clients regarding its negotiations withinsurers on their behalf.
303. On October 26, 2004, Smith Barney Citigroup issued a research report that
questioned the impact of the reforms on the Company's profitability going forward . The report
stated in relevant part :
It remains to be seen how potent or profitable Marsh's new model will be, andwhat franchise damage will occur as a result of the scandal . Clearly the newbusiness model is not the result of extended strategic deliberations, but rather aresponse to a crisis . Marsh has already foregone a highly-profitable revenuestream (contingent commissions), and we think it will be quite challenging toreplace this lost revenue from other sources. If anything, it seems more logicalto us that Marsh's clients (regardless of the actual payment mechanism) willnegotiate aggressively with the company vis-a-vis its compensation . Also, in abusiness predicated on client trust , Mr. Greenberg's departure will notlikely eliminate loss of credibi lity with c lients, leaving Marsh, the world'slargest insurance broker with approximately 41 % of the global market,vulnerable to loss of business . . . . [Emphasis added . ]
304. On November 1, 2004, Marsh issued a press release announcing that it wa s
attempting to collect contingent commission receivables for MSAs in effect prior to October 15 ,
2004 to partially fund a restitution fund created by the Company in response to this crisis . That
press release gave further insight into the magnitude of the revenue loss to Marsh caused by th e
elimination of the contingent commissions :
Marsh & McLennan Companies, Inc. (MMC) announced today that Marsh Inc .,its risk and insurance services subsidiary, is taking steps to collect all amountsowed to it by insurance markets under market services agreements (MSAs) tha t
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were in effect prior to October 15, 2004, when Marsh announced it wasterminating the practice . The company said it will place amounts collected into asegregated account to be used in connection with any restitution agreement it mayreach with the Attorney General of the State of New York . As of September 30,2004, such amounts were approximately $230 million .
305 . On November 8, 2004, MMC issued a press release announcing that Defendant
Egan and Christopher Treanor had been asked to step down from their positions, and that Mars h
General Counsel William L. Rossoff was resigning, as the effects of the disclosure of the
fraudulent conduct continued :
Marsh & McLennan Companies, Inc. (MMC) reported today that Roger E . Egan,president and chief operating officer of Marsh Inc ., its risk and insurance servicessubsidiary, and Christopher M. Treanor, Marsh Inc .'s chairman and chiefexecutive officer of Global Placement, have been asked to step down from theirpositions but will help with transition .
Michael G . Cherkasky, president and chief executive officer of MMC andchairman and chief executive officer of Marsh Inc., said: "These managementdecisions were difficult and were not based on any suggestion of culpability .However, at the end of the day, Mr . Egan and Mr. Treanor were accountable forthe areas of the business that have been the focus of investigations by the NewYork Attorney General's office, and therefore, we thought it was appropriate tomake these changes . . . . "
Separately, William L . Rosoff has stepped down as senior vice president andgeneral counsel of MMC . . . .
306 . On November 9, 2004, Marsh conducted a conference call to discuss the
Company's third quarter 2004 results in which Defendant Wijnberg, among others, participated .
During that call, Wijnberg stated that "market service revenue declined approximately $13 1
million and lowered EPS by $ .16 cents ."
307 . On November 16, 2004, Edward Coughlin and John Keenan, Senior Underwriter s
at Zurich, and Patricia Abrams, an Assistant Vice President at ACE, each pleaded guilty t o
misdemeanors in the Supreme Court of the State of New York, in connection with the crimina l
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charges filed by the NYAG arising from the Marsh scandal . Each was originally charged with
one count of violating General Business Law section 3400 - conspiracy to form a monopoly - a n
E Felony .
308 . On November 18, 2004, the Company issued a press release entitled :
"Management Directors Step Down From MMC Board ; Directors Delay Decision On First
Quarter 2005 Dividend Payment." In that release, Marsh announced that public disclosure of th e
wrongdoing had caused the Company to restructure the composition of its board of directors :
[f]ive members of its Board of Directors, who are also executives of the company,have stepped down from their positions on the Board .
Those leaving the Board include Mathis Cabiallavetta, vice chairman, MMC ;Peter Coster, president, Mercer Inc . ; Charles A . Davis, vice chairman, MMC andchairman and chief executive officer, MMC Capital, Inc .; Ray J. Groves, senioradvisor, Marsh Inc . ; and A.J .C. Smith, chairman, Putnam Investments and formerchairman, MMC .
Robert Erburu, lead director of MMC's Board of Directors, said : "This step is inkeeping with the company's commitment to adhering to corporate governancebest practices . The Board appreciates the services of these executives . "
The company's Board of Directors now consists of Michael G. Cherkasky, thecompany's president and chief executive officer, and ten outside members of theBoard .
309. On January 6, 2005, Robert J . Stearns, a broker and Senior Vice President of
Marsh, pleaded guilty to one count of violating section 190 .65 of the NY Penal Law : Scheme to
Defraud 1 st Degree (an E Felony), in connection with the scheme at Marsh . In a press release on
that same date , the NYAG' s office stated : "In his guilty plea, the Marsh executive admitted that
during a period from 2002 to 2004, he instructed insurance companies to submit noncompetitive
bids for insurance business, and conveyed these bids to Marsh clients under false and fraudulen t
pretenses . These noncompetitive bids allowed Marsh to control the market, to protect incumbent
insurance carriers when their business was up for renewal, and to maximize Marsh's profits ."
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310. On January 21, 2005, the State of Connecticut filed a complaint against Mars h
and ACE Financial Solutions, Inc . in the Superior Court for the Judicial District of Hartford fo r
Unfair Trade Practices in connection with Connecticut's purchase of insurance through Marsh .
311 . On January 31, 2005, both the NYAG office and Marsh issued press releases
announcing the Company's settlement of the actions filed by the NYAG. The press releases
announced the creation of an $850 million restitution fund for Marsh clients that were harmed b y
the Company's bid-rigging and improper steering, as well as the adoption of corporate reform s
by Marsh. The NYAG press release stated , in pertinent part :
Marsh also issued a public statement in which it apologized for "unlawful" and"shameful" conduct, and promised to adopt reforms .
To its credit, Marsh is not disputing the problems identified in our originalcomplaint," Spitzer said . "Instead, the company has embraced restitution andreform as a way of making a clean break from the practices that misled andharmed its clients in the past.
312 . The Marsh press release quoted Marsh President and CEO, Michael G .
Cherkasky :
For over 130 years, Marsh has earned its clients' trust by providing the highestquality insurance brokerage service . We deeply regret that certain of our peoplefailed to live up to our history of dedicated client service . The acts of theseemployees were inconsistent with the integrity and ethics on which this companywas founded and which guide our tens of thousands of other employees everyday. We thank our thousands of clients who have permitted us to continueproviding them high quality insurance brokerage service, and we humbly ask ourexisting and future clients for the opportunity to continue demonstrating our long-standing commitment to providing value and service.
313 . In addition, the press release provided details concerning the settlement :
Under the settlement agreement, MMC will establish an $850 million fund tocompensate clients nationwide . No portion of this fund represents a fine orpenalty .
The fund will compensate U .S . policyholder clients who retained Marsh to placeinsurance with inception dates between January 1, 2001 and December 31, 2004,where such placements resulted in contingent commissions or overrides recorde d
92
by Marsh between January 1, 2001 and December 31, 2004 . These clients will beeligible to receive a pro rata portion of the fund based on the premium and theamount of estimated Market Service Agreement revenue recorded by Marshbetween January 1, 2001 and December 31, 2004 . These clients will be eligibleto receive a payment without having to prove fault, harm, or wrongdoing .
MMC will pay the total amount of the fund in four annual installments . On June1, 2005 and 2006, respectively, MMC will pay $255 million into the fund . OnJune 1, 2007 and 2008, respectively, MMC will pay $170 million into the fund .
In addition to the $232 million reserve established in the third quarter of 2004,MMC said it will take a pre-tax charge to fourth quarter 2004 earnings of $618million to reflect the impact of the settlement .
As part of the agreement and in keeping with the company's commitment to be aleader in establishing and maintaining the highest standards in its industry for thebenefit of clients and shareholders, the company has established the followingreforms in its U .S . brokerage business :
MMC has discontinued the practice of receiving contingent compensation frominsurance carriers . The company adopted this new policy effective October 1,2004 .
The company will provide clients with a comprehensive disclosure of all forms ofcompensation received from insurers .
The company will adopt and implement company-wide, written standards ofconduct for the placement of insurance .
The company will provide all quotes and terms as received from insurancecompanies to enable clients to make informed insurance coverage decisions .
MMC will establish a Compliance Committee of the MMC Board of Directorsand has appointed a chief compliance officer.
314. Since the filing of the NYAG' s complaint in October 2004 , Marsh has
restructured its Board of Directors so that the Board now consists of ten outside directors, i n
addition to its newly appointed president and CEO, Mr . Cherkasky, who serves as the singl e
management director.
315. The Marsh press release also appended a summary of the factual observation s
made by DPW, Marsh's outside counsel, which had been retained to conduct an investigation o f
the allegations of bid-rigging and steering. As described above, DPW's report essentially
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admitted that Marsh steered customers, engaged in a process of fake bids and actively hid it s
contingent commission revenues from its clients and the investing public .
316. On February 15, 2004, Joshua Bewlay, a Managing Director at Marsh; John
Mohs, a vice president at AIG; and Carlos Coello, an underwriter at AIG, each pleaded guilty t o
one count of violating section 190 .65 of the NY Penal Law : Scheme to Defraud 1st Degree (E
Felony) .
317 . According to Marsh, as of February 18, 2005, offices of attorneys general in 1 8
jurisdictions have issued one or more requests for information or subpoenas calling for th e
production of documents or witnesses to provide testimony . In addition, Marsh has receive d
subpoenas, letters of inquiry and other information requests from other departments of insuranc e
or other state agencies in 29 jurisdictions .
318. On February 24, 2005, Kathryn Winter, a broker and Managing Director a t
Marsh, pleaded guilty to one count of violating section 190 .65 of the NY Penal Law : Scheme t o
Defraud 1 st Degree (E Felony) .
319. The effects of the public disclosure of the Company's fraud have been disastrous
for Marsh. In November 2004, the Company announced that it was cutting 3,000 jobs, or 5% of
its staff, and would incur $325 million in restructuring charges over the following six months .
On March 1, 2005, Marsh announced fourth quarter and year-end 2004 results that were a far cry
from the dynamic revenue growth generated during the Class Period :
In the fourth quarter, consolidated revenues declined 1 percent to $3 billion .After restructuring, regulatory settlements, and related expenses, the companyreported a net loss of $676 million in the fourth quarter, or a loss of $1 .28 pershare. Full-year consolidated revenues were $12 .2 billion, up 5 percent over theprior year. Net income for the full year was $180 million, or earnings per share of$.34. MMC's Board of Directors has declared a first quarter 2005 dividend of$.17, a 50 percent decline .
94
The Company has subsequently announced the elimination of an additional 2,500 jobs, resultin g
in an additional $337 million in restructuring expenses .
320. In its 2004 Form 10-K, the Company provided additional details concerning th e
negative effects of the disclosure of its fraud and the elimination of contingent commission
revenues :
Operating income in 2004 declined 74% to $648 million, reflecting costs ofregulatory settlements at Marsh and Putnam and costs related to restructuringMMC's businesses . Results in risk and insurance services include an $850million charge related to the settlement agreement reached with the NYAGand NYSID , the impact of a $304 million decrease in MSA revenue, and $231million of restructuring charges. [Emphasis added . ]
321 . In the Form 10-K, the Company further explained that it had changed its busines s
model to, inter alia, eliminate contingent commission revenues . Marsh, however, admitted that
it had experienced "credit rating downgrades and the inability to access commercial pape r
markets" as a consequence of the "uncertainty regarding changes in Marsh' s business model, the
impact of eliminating contingent compensation agreements and potential fines and/or penalties .
. . ." The Company also warned :
[T]here is no assurance that revenues under the new model will be sufficient toachieve operating margins and cash flows that are comparable to historical levels .In addition, client revenue may also be reduced due to negative reaction to theissues raised in the complaint .
322. On March 31, 2005, the Company filed a definitive proxy with the SEC on For m
14A. In that proxy, the Company disclosed that it may take the position that Defendan t
Greenberg's resignation from Marsh was involuntary . Accordingly, Greenberg may be required
to forfeit more than 760,000 shares of restricted Marsh stock as a consequence of his termination
of employment stemming from the wrongful steering :
At the time of his termination of employment in October 2004, Mr . Greenbergheld restricted stock or restricted stock units representing 762,603 shares of MMCstock. Except as noted below, all of Mr. Greenberg's restricted stock and
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restricted stock units, including those granted to him in 2004, were forfeited inconnection with his termination of employment . Absent such forfeiture, therestricted stock and restricted stock units would have had a value onDecember 31, 2004 of $25,089,639 . Following his termination of employment,MMC entered into a letter of understanding with Mr. Greenberg (described onpage 21 of this proxy statement) under which, in the absence of an agreement,both MMC and Mr. Greenberg are free to maintain their respective positions withregard to the characterization of Mr . Greenberg's termination of employment .MMC has not yet made a determination as to the characterization of Mr.Greenberg 's termination of employment . As a result , a portion of Mr.Greenberg 's forfeited restricted stock and restricted stock units may beeligible for reinstatement , depending on the resolution of the characterizationof his termination of employment . [Emphasis added .]
X. DEFENDANTS' FALSE AND MISLEADINGSTATEMENT S
323 . Prior to, and during the Class Period, Defendants made numerous publi c
statements misstating Marsh's financial results, omitting material facts, and deliberatel y
misrepresenting the Company's business model . As a result, the Company's publicly reporte d
financial results and other public statements disseminated during the Class Period were
materially false and misleading and the price of Marsh's securities was artificially inflate d
throughout the Class Period. When the truth about Marsh's unlawful scheme was finall y
disclosed, investors in Marsh lost billions of dollars as the price of the Company's share s
collapsed .
A. Pre-Class Period Statements
The Second Quarter 1999 Form 10- 0
324. On August 13, 1999, Marsh filed its quarterly report for the quarter ended Jun e
30, 1999, with the SEC on a Form 10-Q . In the Management Discussion and Analysis o f
Financial Condition and Results of Operations (the "MD&A Section") of that Form 10-Q, Mars h
reported second quarter 1999 revenues of $1 .092 billion and earnings of $347 million, as well a s
$1 .092 billion in revenues and $171 million in earnings for Risk and Insurance Services .
96
325. Defendants knew, or recklessly disregarded, that the MD&A Section of the For m
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
326. The second quarter 1999 Form 10-Q also included a section entitled "Claims,
Lawsuits and Other Contingencies ." In that section, Marsh described the various litigations an d
claims asserted against the Company, stating:
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices . Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
327. Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution,
and damages .
328. The second quarter 1999 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included i n
97
financial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added .]
329. Defendants knew, or recklessly disregarded, that because the second quarter 1999
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures ar e
adequate to make the information presented not misleading," was also materially false an d
misleading .
330. The statements in the second quarter 1999 Form 10-Q identified above were
"alive" in the market from the time they were made until the start of the Class Perio d
B Class Period Statement s
The Third Ouarter 1999 Press Release
331 . On October 26, 1999, Marsh issued a press release announcing its results for th e
third-quarter of 1999 . In the third-quarter 1999 press release, the Company stated :
for the third quarter ended September 30, 1999, revenue increased 30 percent to$2.2 billion from $1 .7 billion in 1998 . Net income rose 20 percent to $223million from $186 million, and earnings per share increased 17 percent to $ .81from $ .69 in 1998. For the nine months ended September 30, 1999, MMC'srevenue reached $6 .8 billion, up 30 percent from $5 .2 billion for the same periodlast year. Net income increased 20 percent to $731 million from $610 million in1998, and earnings per share grew 17 percent to $2 .66 from $2.28 in 1998,excluding a special charge taken in the second quarter of this year .
332. Defendants knew, or recklessly disregarded, that the income and earnings result s
reported in the October 26, 1999 press release were materially false and misleading because,
inter alia, Defendants failed to disclose that the results included revenues from contingent
commissions improperly generated from the Company' s illicit client steering and bid
manipulation practices . Furthermore, the earnings were overstated because Defendants failed t o
reserve for contingent losses associated with Marsh's improper activities, as alleged i n
paragraphs 677-83 herein.
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The Third Quarter 1999 Form 10- Q
333. On November 15, 1999, Marsh filed its quarterly report for the quarter ende d
September 30, 1999 with the SEC on Form 10-Q . In the MD&A section of that Form 10-Q ,
Marsh reported third quarter 1999 revenues of $2.227 billion and earn ings of $223 million, as
well as $1 .055 billion in revenues and $165 million in earnings for Risk and Insurance Services .
334. Defendants knew, or recklessly disregarded, that the MD&A Section of the For m
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
335 . The third quarter 1999 Form 10-Q also included a section entitled "Claims,
Lawsuits and Other Contingencies ." In that section, Marsh described the various litigations an d
claims asserted against the Company, stating:
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
336. Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its clien t
99
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
337 . The third quarter 1999 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission . Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading. [Emphasis added .]
338 . Defendants knew, or recklessly disregarded, that because the third quarter 199 9
Form 10-Q was materially misleading as alleged above , the statement that the "disclosures are
adequate to make the information presented not misleading," was also materially false an d
misleading .
339 . On December 23, 1999, Marsh filed an amended quarterly report for the quarte r
ended September 30, 1999 with the SEC on Form 10-Q/A. The 10-Q/A repeated and reaffirmed
the statements made in the third-quarter 1999 Form 10-Q .
340 . Marsh' s statements in its third-quarter 1999 Form 10-Q, which were reaffirmed in
its amended 10-Q, were materially false and misleading for the reasons alleged above .
Greenberg is Elected CE O
341 . On November 18, 1999, Marsh issued a press release announcing the election o f
Greenberg as the Company's CEO. The press release also carried comments from Greenberg ,
who stated:
We have built our businesses into market leaders by anticipating the needs ofour clients , by providing trusted advice and highly professional services andby promoting a spirit of partnership throughout the company. Thesequalities will continue to distinguish Marsh's approach . I am also confident thatwe will find new ways to leverage the exceptional skills and resources of ourcompanies to create attractive new business opportunities that will help u s
100
maintain high quality earnings, generate increased value for shareholders andprovide a stimulating environment for our employees . [Emphasis added . ]
342. Defendant Greenberg knew, or recklessly disregarded, that his statements in th e
November 18, 1999 press release were materially false and misleading because he failed t o
disclose that Marsh's business model was based on improper steering practices, rather than bein g
based on the needs of clients .
Marsh States Clients Are "Well Informed" About Its Contingent Commission s
343 . On February 14, 2000, Business Insurance published a story about a lawsuit filed
against Marsh and other companies, which sought, among other things, better disclosure o f
contingent commission practices . The article quoted a Marsh spokeswoman that described the
lawsuit as "unfounded ." The spokeswoman stated, "`Marsh has made considerable effort t o
ensure its clients are well informed about these agreements . . . . The latest example is last year
we worked closely with RIMS and our clients to reach an agreement over disclosure ." '
344. Defendants knew, or recklessly disregarded, that the statements in the Februar y
14, 2000, Business Insurance article were materially false and misleading . According to
Bewlay, Marsh had a protocol of misleading its clients with respect to the amount of contingen t
commissions earned in connection with their insurance coverage . Among other things, a s
alleged in paragraphs 242-49, Marsh provided clients who inquired about the contingen t
commissions with a calculation called the "Average Contingency Factor", or "ACF ." Because
the ACF disclosed the magnitude of contingent commissions on a blended basis, across al l
product lines, Defendants knew, or recklessly disregarded, that Marsh yielded a misleading an d
understated contingent commission calculation for individual clients due to the significan t
variations in the amount of contingent commissions that were paid among different product lines .
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The 1999 Form 10-K
345. On March 29, 2000 Marsh filed its annual report on Form 10-K (the "1999 10-
K"), which was signed by Defendants Greenberg, Wijnberg, Rapport, Groves, Hardis, King ,
Lang, Olsen, Simmons, Sinnott and Smith . The 1999 10-K reported : revenues of $9.157 billion ;
expenses of $7.698 billion ; operating income of $1 .459 billion ; income before taxes of $1 .247
billion; net income of $959 million (before special charges related to the acquisition of Sedgwick
Group); and earnings per share of $3 .48 (before special charges related to the acquisition of
Sedgwick Group) . In commenting on the results Marsh stated , "MMC had another year of
record results . Revenues rose 27 percent to $9 .2 billion. Net income rose 20 percent to $95 9
million and earnings per share rose 17 percent to $3 .48, before special charges related to the
acquisition of Sedgwick Group . Our operating companies grew profitably ." Marsh also reported
receivables of $2.455 billion, including receivables from commissions and,fees of $1 .928 billion .
In the MD&A Section, Marsh reported that the Risk and Insurance Services segment generate d
$4.523 billion in revenue .
346 . Defendants knew, or recklessly disregarded, that the statements identified abov e
were materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
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347. The 1999 10-K also stated , "Marsh is sought out for its independence of thought
and objective advice based on intense study of clients' needs, its understanding of industrie s
throughout the world and its range of professional services ."
348 . Defendants knew, or recklessly disregarded, that the above statement, whic h
represents that Marsh provided "objective advice based on intense study of its clients' needs "
was materially false and misleading because Defendants failed to disclose that the imprope r
steering of clients to certain insurance companies in order to maximize contingent commissions ,
caused many of the Company' s clients to pay more in insurance premiums and/or obtai n
insurance coverage with more restrictive terms than they would have had Marsh engaged in a
genuine, competitive bidding process on behalf of its clients . Therefore, Marsh did not provide
objective advice based on its client's needs, but instead, provided advice based on th e
Company's own self-interest in maximizing revenues .
349. In discussing Risk and Insurance Services in the MD&A Section of the 199 9
Form 10-K, Marsh stated :
The revenue attributable to MMC's risk and insurance services consists primarilyof fees paid by clients ; commissions and fees paid by insurance and reinsurancecompanies ; interest income on funds held in a fiduciary capacity for others, suchas premiums and claims proceeds ; placement services revenues or contingent feesearned from insurers ; and compensation for services provided in connection withthe organization, structuring and management of insurance and related industryinvestments, including fees and dividends, as well as appreciation that has beenrealized on sales of holdings in such entities .
Revenue generated by risk and insurance services is fundamentally derived fromthe value of the service provided to clients and insurance markets, and is affectedby premium rate levels in the property and casualty insurance markets andavailable insurance capacity, because compensation is frequently related to thepremiums paid by insureds .
Placement services revenue and contingent fees includes payments or allowancesby insurance companies based upon such factors as the overall volume of
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business placed by the broker with that insurer , the aggregate commissionspaid by the insurer for that business during specific periods, or the lossperformance to the insurer of that business . [Emphasis added . ]
350. Defendants knew, or recklessly disregarded, that the statements concerning
placement services revenue were materially false and misleading because they failed to disclos e
that the Company engaged in illicit bid-manipulation and the improper steering of clients to
insurance companies that paid contingent commissions, irrespective of client need, in order t o
maximize placement services revenue .
351 . The 1999 Form 10-K included a section entitled "Claims, Lawsuits and Othe r
Contingencies." In that section, Marsh described the various litigations and claims asserte d
against the Company, stating :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices . Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
352 . Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
353. The 1999 10-K also included a "conversation" with Defendant Sinnott . Excerpts
from Sinnott's conversation are as follows :
WHAT ARE THE FACTORS DRIVING GLOBAL GROWTH? A number ofdevelopments are benefiting our industry and Marsh in particular . . . . Marsh isideally positioned to benefit from these trends . An important strategy for thepast two decades has been to build a worldwide organization to serve clientsbetter and achieve strong long-term performance for MMC's shareholders .[Emphasis added.]
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354. Defendant Sinnott knew, or recklessly disregarded, that his statements tha t
Marsh's strategy was "to serve clients better" was materially false and misleading because th e
Company's actual strategy was maximization of contingent commissions through imprope r
steering and bid manipulation practices .
355 . The 1999 10-K also included a "Report of Management" that stated :
The management of Marsh & McLennan Companies, Inc . has prepared and isresponsible for the accompanying financial statements and other related financialinformation contained in this annual report . MMC's financial statements wereprepared in accordance with generally accepted accounting principles,applying certain estimates and informed judgments as required. Deloitte &Touche LLP, independent auditors, have audited the financial statements and haveissued their report thereon . [Emphasis added . ]
356. Defendants knew, or recklessly disregarded, that the statement that Marsh' s
financial statements were prepared in accordance with GAAP was mate rially false and
misleading for the reasons alleged in paragraphs 647-87 .
357. Deloitte signed the 1999 Form 10-K and stated, "In our opinion, - - [the ]
Supplemental Notes [in the 1999 Form 10-K], when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all material respects th e
information set forth therein ." Deloitte also stated :
We conducted our audits in accordance with generally accepted auditingstandards .
In our opinion, [the] consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 1999 and 1998, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 1999 in conformity with generally accepted accounting principles .
105
358 . Deloitte knew, or recklessly disregarded, that its statement that the consolidate d
financial statements of Marsh as of December 31, 1999 presented fairly, in conformity with
GAAP, the financial position of the Company, was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and tha tMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
359 . Further, Deloitte knew, or recklessly disregarded, that its statement that i t
conducted its audit in accordance with GAAS was materially false and misleading for the
reasons set forth in paragraphs 688-747 below .
The Definitive 2000 Proxy
360. On March 29, 2000, Marsh filed its definitive 2000 proxy on Form DEF 14A an d
recommended that shareholders ratify Deloitte as the Company's "independent" auditor.
361 . With respect to the Company' s compensation philosophy, Marsh stated :
MMC is a professional services firm with businesses having distinct economiccharacteristics, marketplaces and operating conditions . The leadership positionattained over time by MMC's operating subsidiaries in their respective businessesin terms of services provided, market share, revenue, profitability and rate ofgrowth has been earned largely through the selection, training and development oftop caliber executive, managerial and professional talent .
362. As for short-term compensation, Marsh stated, "The size of the incentive awar d
pool for senior management cash bonuses is based on ea rnings and reflects Marsh 's net operating
106
income growth." In discussing the basis for CEO compensation, Marsh stated, "Current and
long-term financial performance of Marsh, information which is available to all Marsh
stockholders , are major factors in arriving at the compensation determinations made by the
Committee relative to the Chief Executive Officer. Consideration is also given to his leadership
and influence on the long-term strength and performance of Marsh." (Emphasis added) .
363 . The 2000 definitive proxy also compared the Company's five-year performanc e
(from December 31, 1994 through December 31, 1999) to that of the S&P 500 index and a
composite industry index . The comparison stated that $100 dollars invested in Marsh in
December 31, 1994 (with dividends reinvested) resulted in a return of $419, which wa s
represented as outperforming the S&P 500's return for the same period of $307 and th e
composite industry index's return of $338 .
364. Defendants knew, or recklessly disregarded, that these statements were materiall y
false and misleading because: the Company failed to disclose that the "leadership position "
achieved by Marsh and its subsidiaries was the result of the Company's improper steering
activities, and not the result of the Company's "selection, training and development of top calibe r
executive, managerial and professional talent;" Marsh failed to disclose that its short term
compensation incentives were based on earnings that were overstated because Marsh failed t o
reserve properly for its improper steering practices ; the Company failed to disclose that
stockholders were not given accurate current and long-term financial figures and therefore, coul d
not properly evaluate the basis for CEO compensation ; the Company failed to disclose that
Marsh's comparison of its stock's five-year return to the S&P 500 and a composite industry
index was false and misleading because the Company's stock was artificially inflated due t o
Marsh's wrongdoing .
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The First Quarter 2000 Form 10- 0
365. On May 12, 2000, Marsh filed its quarterly report for the quarter ending Marc h
31, 2000 with the SEC on a Form 10-Q signed by Defendant Wijnberg . In the MD&A Section
of that Form 10-Q, Marsh reported revenues of $2.665 billion and earn ings of $337 million, as
well as $851 million in revenues and $262 million in earnings for Risk and Insurance Services :
366 . Defendants knew, or recklessly disregarded, that the MD&A Section of the Form
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh ' s contingent commissions included proceeds from its improper stee ring and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
367. The first quarter 2000 Form 10-Q included a section entitled "Claims, Lawsuit s
and Other Contingencies ." In that section, Marsh described the various litigations and claims
asse rted against the Company, stating:
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
368. Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bid
manipulation practices, that these practices could have an adverse impact on its client
108
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
369 . The first quarter 2000 10-Q also stated :
The consolidated financial statements included herein have been prepared byMarsh pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMarsh believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added] .
370. Defendants knew, or recklessly disregarded , that because the Form 10-Q was
misleading as alleged above, the statement that the "disclosures are adequate to make the
information presented not misleading," was also materially false and misleading .
The 2000 Annual Meetin g
371 . On May 18, 2000 Marsh held its annual meeting where Greenberg made th e
following statements :
The past year was one of record results . MMC's revenues rose by 27 percent to$9.2 billion. Net income grew by 20 percent to $959 million, and earnings pershare rose 17 percent to $3 .48, all before the special charge for the Sedgwickintegration .
In the first quarter of this year, the pattern continued . Revenues increased by 13percent to $2 .7 billion, net income by 21 percent to $337 million, and earnings pershare rose 16 percent to $1 .19 .
MMC's record reflects our competitive strengths . These are market-leadingbusinesses, an outstanding group of colleagues, a unique global professionalnetwork and a corporate culture that is dedicated to serving clients throughexcellence, innovation and, increasingly , collaboration . As my predecessorshave said, each business develops and executes its own strategy . The hallmark ofMarsh has been to manage different professional services companies under onecorporate umbrella, each achieving market leadership . We are now creatingadditional shareholder value from collaboration among them. [Emphasis added .]
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1999 was a very good year for Marsh . Revenues reached $4 .5 billion, up 35percent, Operating income reached $806 million, up 31 percent .
372. Greenberg knew, or recklessly disregarded, that his statements concerning
Marsh's "corporate culture that is dedicated to serving clients through excellence" was materiall y
false and misleading . The improper stee ring of clients to certain insurance companies in order t o
maximize contingent commissions and bid manipulation , caused many of the Company's clients
to pay more in insurance premiums and/or obtain insurance coverage with more restrictive term s
than they would have had Marsh engaged in a genuine, competitive bidding process on behalf o f
its clients .
The Second Ouarter 2000 10-0
373. On August 14, 2000, Marsh filed its quarterly report for the quarter ending June
30, 2000 with the SEC on a Form 10-Q signed by Wijnberg . In the MD&A Section of that Form
10-Q, Marsh reported revenues of $2 .481 billion and earnings of $276 million, as well as $1 .155
billion in revenues and $204 million in earnings for Risk and Insurance Services .
374. Defendants knew, or recklessly disregarded, that the MD&A Section of the For m
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
110
375 . The second quarter 2000 Form l0-Q included a section entitled "Claims, Lawsuit s
and Other Contingencies ." In that section, Marsh described the various litigations and claims
asserted against the Company, stating :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
376. Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
377. The second quarter 2000 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added .]
378. Defendants knew, or recklessly disregarded, that because the second quarter 2000
Form 10-Q was misleading as alleged above, the statement that the "disclosures are adequate t o
make the information presented not misleading," was also materially false and misleading .
The Third Quarter 2000 10-0
379. On November 14, 2000, Marsh filed its quarterly report for the quarter endin g
September 30, 2000 with the SEC on a Form 10-Q signed by Defendant Wijnberg . In the
MD&A Section of that Form 10-Q, Marsh reported revenues of $2 .535 billion and earnings of
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$282 million, as well as $1 .132 billion in revenues and $200 million in earnings for Risk an d
Insurance Services .
380. Defendants knew, or recklessly disregarded, that the MD&A Section of that For m
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
381 . The third quarter 2000 Form 10-Q included a section entitled "Claims, Lawsuit s
and Other Contingencies ." In that section, Marsh described the various litigations and claims
asserted against the Company, stating:
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
382. Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
112
383. The third quarter 2000 10-Q also stated :
The consolidated financial statements included herein have been prepared byMarsh pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMarsh believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added .]
384. Defendants knew, or recklessly disregarded, that because the third quarter 200 0
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures are
adequate to make the information presented not misleading," was also materially false an d
misleading .
The 2000 10-K
385 . On March 29, 2001, Marsh filed its annual report on Form 10-K (the "2000 10-
K"), which was signed by Greenberg, Wijnberg, Rapport, Cabiallavetta, Groves, Hardis, King ,
Lang, Olsen, Simmons, Sinnott and Smith . In the 2000 10-K, Marsh reported : revenues of
$10.157 billion ; receivables of $2 .947 billion , including receivables from commissions and fee s
of $2 .370 billion ; operating income of $2 .179 billion; income before taxes and minority interest
of $1 .955 billion ; net income of $1 .181 billion ; and diluted net income per share of $4 .10. In the
MD&A Section, Marsh reported that the Risk and Insurance segment generated $4 .780 billion in
revenue and had operating income of $944 million .
386. Defendants knew, or recklessly disregarded, that the statements identified abov e
were materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
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(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
387. Marsh also reported its five-year compound annual growth between 1996 and
2000 as : 32% for its share price ($34 .67 in 1996 to $117 in 2000) ; 39% for its year end market
capitalization ($7.7 billion in 1996 to $33 .7 billion in 2000) ; and 21 % for revenue ($4 .4 billion in
1996 to $10.2 billion in 2000) .
388 . Defendants knew, or recklessly disregarded, that the compound annual growt h
rate for share price and market capitalization for the period 1996 to 2000 was materially fals e
and misleading because Marsh' s financial results, which affected the price of the Company' s
securities, were due, in large part, to the improper steering and bid-manipulation practices
complained of herein.
389. In commenting on Marsh's results for 2000, Greenberg stated, in a signed letter to
shareholders which was included in the 2000 10-K :
DEAR SHAREHOLDER
Our businesses grew and strengthened their positions in their respective markets .Our attention to delivering the finest and most comprehensive professionalservices led us to continue our investment in the recruiting and developmentof people who can build our company to respond to c lients throughout theworld . We believe that this is vital to the creation of long-term value for ourshareholders . [Emphasis added . ]
Marsh has always been dedicated to providing the best possible advice andservices to clients . To achieve this, the organization allows each operatingcompany to concentrate on the quality and delivery of work in its field . Theshared MMC's vision and purpose allied to individual company strategies haveenabled us to build a long record of successful client service in all of ourbusinesses. This has been important to our reputation as a very effective owner of
114
professional services companies and has been key to growing shareholder value .[Emphasis added.]
390. Defendant Greenberg knew, or recklessly disregarded, that his statement s
concerning delivery of the finest and most comprehensive services to clients, as well as hi s
statements about Marsh's dedication to providing the best possible services and advice to it s
clients, were materially false and misleading . As alleged herein, Marsh engaged in imprope r
steering of clients to certain insurance companies, and bid manipulation, in order to maximiz e
contingent commissions . This caused many of the Company's clients to pay more in insurance
premiums and/or obtain insurance coverage with more restrictive terms than they would hav e
had Marsh conducted a genuine, competitive bidding process on behalf of its clients .
391 . In the MD&A Section, Marsh stated :
Revenue generated by the risk and insurance services segment is fundamentallyderived from the value of the services provided to clients and insurance markets .These revenues may be affected by premium rate levels in the property andcasualty and employee benefits insurance markets and available insurancecapacity, since compensation is frequently related to the premiums paid byinsureds . In many cases, compensation may be negotiated in advance based uponthe estimated value of the services to be performed. Revenue is also affected byfluctuations in the amount of risk retained by insurance and reinsurance clientsthemselves and by insured values, the development of new products, markets andservices, new and lost business, merging of clients and the volume of businessfrom new and existing clients, as well as by interest rates for fiduciary funds .Revenue and fees also may be received from originating, structuring andmanaging investments in insurance, financial services and other industry-focusedinvestments, as well as income derived from investments made by MMC .Contingent income for services provided includes payments or allowances byinsurance companies based upon such factors as the overall volume of businessplaced by the broker with that insurer, the aggregate commissions paid by theinsurer for that business during specific periods, or the profitability or loss to theinsurer of the risks placed . This revenue reflects compensation for servicesprovided by brokers to the insurance market . These services include newproduct development, the development and provision of technology,administration, and the delivery of information on developments amongbroad client segments and the insurance markets . [Emphasis added.]
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392 . Defendants knew, or recklessly disregarded, that the Company's description o f
"contingent income" as compensation for services provided to the insurance market wa s
materially false and misleading. Marsh provided no legitimate services to the insuranc e
companies under the contingent commission agreements. The "services" performed by Mars h
on behalf of the insurance companies were, in fact, the same activities that the Company
necessarily performed on behalf of its clients in the ordinary course of its business as a n
insurance broker. Further, the "factors" cited in the foregoing statement - "overall volume of
business placed by the broker with that insurer, the aggregate commissions paid by the insure r
for that business during specific periods, or the profitability or loss to the insurer of the risk s
placed" - were, in fact, the only consideration for the contingent commissions under the
agreements between Marsh and the insurance companies .
393 . The 2000 10-K included a section entitled "Claims, Lawsuits and Other
Contingencies ." In that section, Marsh described the various litigations and claims asserte d
against the Company, stating :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant.
394. Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices, that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
116
395. The 2000 10-K also included a "Report of Management" that stated :
The management of Marsh & McLennan Companies, Inc . has prepared and isresponsible for the accompanying financial statements and other related financialinformation contained in this annual report . MMC's financial statements wereprepared in accordance with generally accepted accounting principles,applying certain estimates and informed judgments as required. Deloitte &Touche LLP, independent auditors, have audited the financial statements and haveissued their report thereon. [Emphasis added.]
396. Defendants knew, or recklessly disregarded, that the statement that Marsh' s
financial statements were prepared in accordance with GAAP was materially false and
misleading for the reasons alleged in paragraphs 647-87 .
397. The 2000 10-K was signed by Deloitte, which stated , "In our opinion, such
Supplemental Notes, when considered in relation to the basic consolidated financial statements
taken as a whole , present fairly in all material respects the information set forth therein." Deloitte
also stated :
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America .
In our opinion, [the] consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 2000 and 1999, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2000 in conformity with accounting principles generally acceptedin the United States of America .
398. Deloitte knew, or recklessly disregarded, that its statement that the consolidate d
financial statements of Marsh as of December 31, 2000 and 1999 presented fairly, in conformit y
with GAAP, the financial position of the Company, was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
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(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damage s
399. Further, Deloitte knew, or recklessly disregarded, that its statement that i t
conducted its audit in accordance with GAAS was materially false and misleading for the
reasons alleged in paragraphs 688-747 below .
The Definitive 2001 Proxy
400. On March 29, 2001, Marsh filed its 2001 proxy on Form DEF 14A and
recommended that shareholders ratify Deloitte as the Company's "independent" auditor .
401 . With respect to the Company' s compensation philosophy Marsh stated :
MMC is a professional services firm with businesses having distinct economiccharacteristics, marketplaces and operating conditions . The leadership positionattained over time by MMC's operating subsidiaries in their respective businessesin terms of services provided, market share, revenue, profitability and rate ofgrowth has been earned largely through the selection, training and development oftop caliber executive, managerial and professional talent .
402. Defendants knew, or recklessly disregarded, that these statements were materiall y
false and misleading because the Company failed to disclose that the "leadership position "
achieved by Marsh and its subsidiaries was the result of the Company's improper steerin g
activities, and not the result of Marsh's "selection, training and development of top calibe r
executive, managerial and professional talent . "
403 . As for short-term compensation, Marsh stated, "The size of the incentive award
pool for senior management cash bonuses is based on earnings and reflects MMC's net operatin g
income growth."
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404. Defendants knew, or recklessly disregarded, that the statement concerning th e
Company's short term compensation incentives was materially false and misleading because i t
failed to disclose that such short term compensation incentives were based on earnings that were
overstated because Marsh failed to reserve properly for its improper steering practices .
405. In discussing the basis for CEO compensation, Marsh stated, "Both th e
quantitative and qualitative criteria referenced earlier are applied in assessing the performanc e
and determining the compensation of the Chairman and Chief Executive Officer of Marsh, J . W.
Greenberg. Current and long-term financial performance of Marsh, information which i s
available to all Marsh stockholders , are major factors in arriving at the compensatio n
determinations made by the Committee relative to Mr. Greenberg." [Emphasis added . ]
406. Defendants knew, or recklessly disregarded, that the statements concerning CEO
compensation were materially false and misleading because the Company failed to disclose that
stockholders were not given accurate current and long-term financial figures and therefore, coul d
not properly evaluate the basis for CEO compensation.
407. The 2001 definitive proxy also compared the Company's five-year performanc e
(from December 31, 1995 through December 31, 2000) to that of the S&P 500 index and a
composite industry index . The comparison stated that $100 dollars invested in Marsh in
December 31, 1995 (with dividends reinvested) resulted in a return of $450, which wa s
represented as outperforming the S&P 500's return for the same period of $232 and th e
composite industry index 's return of $242.
408 . Defendants knew, or recklessly disregarded, that the comparison of Marsh' s
performance to that of the S&P 500 index and a composite industry index was materially fals e
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and misleading because the Company's stock was artificially inflated due to Defendants '
wrongdoing .
The First Quarter 2001 Press Release
409. On April 19, 2001, Marsh issued a press release announcing its results for the first
quarter of 2001 . In the first quarter 2001 press release, the Company stated, "Compared to th e
first quarter 2000, consolidated revenues declined 3 percent to $2 .6 billion." In commenting o n
the risk and insurance sector's performance, Marsh stated :
Revenues from Marsh's risk and insurance services business rose 5 percent to$1 .4 billion. Underlying revenue (which excludes such items as foreignexchange, acquisitions, and dispositions) grew 9 percent, a reflection of net newbusiness in each major operating territory around the world . Margins improved 3percentage points, and operating income increased 18 percent to $381 million . Ina market where insurance rates are rising and coverage is more difficult toobtain, Marsh provides value to clients by developing the most cost -effectiveresponses to the risks they face. [Emphasis added . ]
410. Defendants knew, or recklessly disregarded, that the statement concerning
Marsh's providing value to clients by developing the most cost-effective responses to the risk s
they face was materially false and misleading . The Company's improper steering of clients in
order to maximize contingent commissions caused many of Marsh's clients to pay more i n
insurance premiums and/or obtain insurance coverage with more restrictive terms than they
would have had the Company engaged in a genuine competitive bidding process on behalf of it s
clients.
The First Quarter 2001 10-0
411 . On May 15, 2001, Marsh filed its quarterly report for the quarter ending Marc h
31, 2001 on a Form 10-Q signed by Defendant Wijnberg . In the MD&A Section of that Form
10-Q, Marsh reported revenues of $2 .594 billion and earnings of $369 million, as well a s
revenues of $1 .354 billion and earnings of $381 million for Risk and Insurance Services .
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412. Defendants knew, or recklessly disregarded, that the MD&A Section of the Form
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
413 . The first quarter 2001 Form 10-Q also included a section entitled "Claims ,
Lawsuits and Other Contingencies ." In that section, Marsh described the various litigations and
claims asserted against the Company, stating :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices . Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
414. Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices, that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
415. The first quarter 2001 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included i n
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financial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading [Emphasis added . ]
416 . Defendants knew, or recklessly disregarded, that because the first quarter 200 1
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures ar e
adequate to make the information presented not misleading," was also materially false an d
misleading.
The 2001 Annual Meeting
417. On May 17, 2001, Marsh held its annual meeting where Defend ant Greenberg
made the following statements :
Marsh's revenue increased 11 percent to $10 .2 billion. Net income grew 23percent to $1 .2 billion, a milestone for the company - the first time in MMC'shistory that we earned more than $1 billion in a year . And earnings per share,before special charges in 1999, rose 18 percent to $4 .10 .
For the quarter ending March 31 of this year, MMC increased its earnings in adecelerating economy. Revenue decreased 3 percent to $2 .6 billion, but netincome rose 9 percent to $369 million . And earnings per share grew 7 percent to$1 .27. MMC benefited from its diverse mix of professional services businessesand from the skills and experience of the executives who manage them .
We are dedicated to c lient service . Throughout its history, MMC has served asa trusted advisor, providing clients with analysis, advice, and transactionalcapabilities . [Emphasis added . ]
We are committed to building value for shareholders . The fiduciary mannerin which we care for their interests has been fundamental to Marsh and to itscredibility with investors . [Emphasis added . ]
* * *
Marsh, our risk and insurance services business, had strong financial results basedon cost savings from mergers and internal growth . Revenue rose 6 percent to $4 . 8
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billion, and margin improvement contributed to a 17 percent increase in operatingincome to $944 million .
Marsh is in a strong financial position . Last year, operating and financial cashflows were nearly $2 billion, which enabled us to reduce debt more rapidly thanwe had foreseen. We think cash flow will be strong again this year, which willallow us flexibility in creating additional shareholder value : through repurchasesof shares when conditions are attractive (so far this year we have repurchasedapproximately $250 million of MMC shares) ; through acquisitions when theystrengthen the firm ; and through dividends to shareholders .
On that last point, I'm pleased to report that at a meeting held earlier thismorning, our board of directors raised the company's quarterly dividend by 6percent, from $ .50 to $ .53, an outstanding common stock .
418 . Defendant Greenberg knew, or recklessly disregarded, that his statement s
concerning the Company's revenue and income increases were materially false and misleadin g
for the reasons stated in paragraph 647-687 herein .
419. Furthermore, Greenberg knew, or recklessly disregarded, that his statement s
concerning the Company's dedication to client service were materially false and misleadin g
because Marsh engaged in improper steering of clients in order to maximize contingen t
commissions , which caused many of the Company's clients to pay more in insurance premium s
and/or obtain insurance coverage with more rest rictive terms than they would have had Marsh
engaged in a genuine competitive bidding process on behalf of its clients .
The Second Quarter 2001 10-0
420. On August 13, 2001, Marsh filed its quarterly report for the quarter ending Jun e
30, 2001 on a Form 10-Q signed by Defendant Wijnberg . In the MD&A Section of that Form
10-Q, Marsh reported revenues of $2 .505 billion and earnings of $293 million, as well as $1 .25 1
billion in revenues and $253 million in earn ings for Risk and Insurance Services .
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421 . Defendants knew, or recklessly disregarded, that the MD&A Section of that For m
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
422. The second quarter 2001 Form 10-Q also included a section entitled "Claims ,
Lawsuits and Other Contingencies ." In that section, Marsh described the various litigations and
claims asserted against the Company, stating :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
423 . Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bid
manipulation practices, that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
424. The second quarter 2001 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included i n
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financial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added .]
425 . Defendants knew, or recklessly disregarded, that because the second quarter 200 1
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures are
adequate to make the information presented not misleading," was also materially false an d
misleading.
The Third Quarter 2001 Form 10- 0
426 . On November 14, 2001, Marsh filed its quarterly report for the quarter endin g
September 30, 2001 on Form 10-Q signed by Defendant Wijnberg . In the MD&A Section o f
Marsh Form 10-Q, Marsh reported revenues of $2.371 billion and earnings of $168 million, a s
well as $1 .219 billion in revenues and $240 million for Risk and Insurance Services .
427 . Defendants knew, or recklessly disregarded, that the MD&A Section of the Form
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
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428 . The second quarter 2001 Form 10-Q also included a section entitled "Claims ,
Lawsuits and Other Contingencies ." In that section, Marsh described the various actions an d
claims asserted against the Company, stating :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
429. Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices, that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
430. The second quarter 2001 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading. [Emphasis added . ]
431 . Defendants knew, or recklessly disregarded, that because the third quarter 200 1
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures ar e
adequate to make the information presented not misleading," was also materially false and
misleading .
The 2001 10-K
432. On March 29, 2002, Marsh filed its annual report on Form 10-K (the "2001 10-
K"), which was signed by Greenberg, Wijnberg, Rapport, Cabiallavetta, Fanjul, Groves, Hardis ,
King, Lang, Olsen, Simmons, Sinnott and Smith . In the 2001 10-K, Marsh reported : revenues of
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$9.943 billion; operating income of $1 .763 billion ; income before taxes and minority interest o f
$1 .590 billion; net income of $974 million ; net income per share of $3 .54 and diluted net income
per share of $3 .39. Marsh also reported receivables of $2 .831 billion, including receivables from
commissions and fees of $2 .288 billion . In the MD&A Section, Marsh reported that the Risk
and Insurance Segment generated $5 .152 billion in revenue and had operating income of $1 .139
billion .
433 . Defendants knew, or recklessly disregarded, that the statements identified abov e
were materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
434. Marsh also reported its five-year compound annual growth between 1997 an d
2001 as : 25% for its share price ($49 .71 in 1997 to $107 .45 in 2001) ; 32% for its year end
market capitalization ($13 .0 billion in 1997 to $30.6 billion in 2001) ; and 18% for its revenu e
($6.0 billion in 1997 to $9.9 billion in 2001) .
435 . Defendants knew, or recklessly disregarded, that the compound annual growt h
rate for share price and market capitalization for the period 1997 to 2001 was materially fals e
and misleading because Marsh's financial results, which affected the price of the Company' s
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securities, were due, in large part, to the Defendants engaging in improper steering and bi d
manipulation practices as described herein .
436 . Commenting on Marsh's results for 2001, Defendant Greenberg stated th e
following in a signed letter to shareholders included in the 2001 10-K :
with premium rates increasing and underwriting capacity decreasing -- trends inthe insurance marketplace that were accelerated by the September 11 attacks --Marsh's advice and services have been in great demand . The professionals in allareas of risk and insurance services are helping clients manage new andmore complex risks as well as the uncertainty in the insurance andreinsurance markets . [Emphasis added . ]
437. Moreover, Greenberg knew, or recklessly disregarded that his statement tha t
professionals in risk and insurance services were "helping clients manage new and mor e
complex risks as well as the uncertainty in the insurance and reinsurance markets," wa s
materially false and misleading because the Company steered clients to those insuranc e
companies with which it had entered into contingent commission agreements in order t o
maximize revenues . This caused many of the Company' s clients to pay more in insuranc e
premiums and/or obtain insurance coverage with more restrictive terms than they would hav e
had Marsh engaged in a genuine competitive bidding process on behalf of its clients .
438. In the MD&A Section, discussing the Risk and Insurance segment, Marsh stated :
Revenue attributable to the risk and insurance services segment consists primarilyof fees paid by clients ; commissions and fees paid by insurance and reinsurancecompanies; compensation for billing and related services, in the form of interestincome on funds held in a fiduciary capacity for others, such as premiums andclaims proceeds ; contingent income for services provided to insurers ; andcompensation for services provided in connection with the organization,structuring and management of insurance, financial services and other industry-focused investments, including fees and dividends, as well as appreciation ordepreciation that has been realized on sales of holdings in such entities .
Revenue generated by the risk and insurance services segment is fundamentallyderived from the value of the services provided to clients and insurance markets .These revenues may be affected by premium rate levels in the property andcasualty and employee benefits insurance markets and available insuranc e
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capacity, since compensation is frequently related to the premiums paid byinsureds . In many cases, compensation may be negotiated in advance based uponthe estimated value of the services to be performed. Revenue is also affected byfluctuations in the amount of risk retained by insurance and reinsurance clientsthemselves and by insured values, the development of new products, markets andservices, new and lost business, merging of clients and the volume of businessfrom new and existing clients, as well as by the level of interest realized on theinvestment of fiduciary funds. Revenue and fees also may be received fromoriginating, structuring and managing investments in insurance, financial servicesand other industry-focused investments, as well as income derived frominvestments made by MMC. Contingent income for services provided includespayments or allowances by insurance companies based upon such factors as theoverall volume of business placed by the broker with that insurer, the aggregatecommissions paid by the insurer for that business during specific periods, or theprofitability or loss to the insurer of the risks placed . This revenue reflectscompensation for services provided by brokers to the insurance market .These services include new product development, the development andprovision of technology, administration , and the delivery of information ondevelopments among broad client segments and the insurance markets .[Emphasis added . ]
439. Defendants knew, or recklessly disregarded, that the Company's description o f
"contingent income" as compensation for services provided to the insurance market wa s
materially false and misleading . Marsh provided no legitimate services to the insurance
companies under the contingent commission agreements . The "services" performed by Marsh
on behalf of the insurance companies were, in fact, the same activities that the Company
necessarily performed on behalf of its clients in the ordinary course of its business as a n
insurance broker . Further, the "factors" cited in the foregoing statement - "overall volume o f
business placed by the broker with that insurer, the aggregate commissions paid by the insure r
for that business during specific periods, or the profitability or loss to the insurer of the risk s
placed" - were, in fact, the only consideration for the contingent commissions under the
agreements between Marsh and the insurance companies .
440. In the MD&A, Marsh reported that the Risk and Insurance segment : generated
$5 .152 billion in revenue, incurred $4.013 billion in expenses, had an operating income o f
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$1 .139 billion and an operating income margin of 22 . 1 % . In commenting on Risk and
Insurance's performance, Marsh stated :
Revenue for the risk and insurance services segment increased 8% over 2000 .Excluding the effects of such items as foreign exchange, acquisitions anddispositions, revenue rose 10% reflecting net new business, the effect of higherpremium rates and an increase in revenue realized from investment activity inMarsh Capital partially offset by lower fiduciary interest income . Riskmanagement and insurance broking revenue, which represented 76% of risk andinsurance services, grew approximately 9% over 2000 . In addition, revenue rose9% in the global consumer business and 13% in the reinsurance business .
In 2000, revenue for the risk and insurance services segment increased 6% over1999. Excluding the effect of such items as foreign exchange, acquisitions anddispositions, revenue rose approximately 8%, reflecting net new business, higherfiduciary interest income, the effect of higher U .S. premium rates and an increasein revenue realized from investment activity in Marsh Capital . Risk managementand insurance broking revenue, which represented 75% of risk and insuranceservices, grew approximately 8% over 1999 . In addition, revenue rose 10% in theglobal consumer business and 7% in the reinsurance business . . . .
441 . The 2001 10-K also included a "conversation" with Defendant Sinnott . Excerpts
Our financial results in 2001 were excellent. Revenues grew 8 percent to $5 .2billion, and operating income grew 21 percent to $1 .1 billion. This performancereflects increased client revenues and the greater efficiencies we have achieved .In fact, over the last five years, including the acquisition of Johnson & Higginsand of Sedgwick, our compound growth rates for annual revenue and operatingincome have been 22 percent and 26 percent, respectively . Last year, wecompleted the consolidation of Sedgwick, which led to $160 million in pretaxsavings for Marsh over three years, primarily in Marsh .
Professional brokers have a long history in the United States of working onbehalf of clients to secure better coverage and prices . [Emphasis added .]
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WHAT IS THE OUTLOOK FOR MARSH ?
We are optimistic about our prospects . In a more complex, uncertain world,Marsh has the resources, knowledge and relationships with insurance marketsaround the world to help clients deal with their rapidly changing needs .
442. Defendant Sinnott knew, or recklessly disregarded, that his statement concernin g
revenue and income growth was materially false and misleading for the reasons set forth herein .
443. Likewise, Sinnott knew, or recklessly disregarded, that his statements concernin g
brokers' ability to secure better coverage and p rices for their clients and, more specifically ,
Marsh's ability to help its clients deal with their rapidly changing needs, were materially fals e
and misleading . The bid manipulation, as well as the improper steering of clients to certai n
insurance companies in order to maximize contingent commissions, caused many of the
Company's clients to pay more in insurance premiums and/or obtain insurance coverage wit h
more restrictive terms than they would have had Marsh conducted a genuine competitive bidding
process on behalf of its clients .
444. The 2001 10-K "Report of Management" stated :
The management of Marsh & McLennan Companies, Inc . has prepared and isresponsible for the accompanying financial statements and other related financialinformation contained in this annual report . MMC's financial statements wereprepared in accordance with generally accepted accounting principles,applying certain estimates and informed judgments as required. Deloitte &Touche LLP, independent auditors, have audited the financial statements and haveissued their report thereon . [Emphasis added.]
445. Defendants knew, or recklessly disregarded, that the statement that Marsh' s
financial statements were prepared in accordance with GAAP was materially false and
misleading for the reasons alleged in paragraphs 647-87 .
446. The 2001 10-K was signed by Deloitte, stated, "In our opinion, such
Supplemental Notes, when considered in relation to the basic consolidated financial statements
131
taken as a whole, present fairly in all material respects the information set forth therein ." Deloitt e
also stated :
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement . An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation . We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2001 in conformity with accounting principles generally acceptedin the United States of America .
447 . Deloitte knew, or recklessly disregarded, that its statement that the consolidated
financial statements of Marsh as of December 31, 2001 and 2000 presented fairly, in conformit y
with GAAP, the financial position of the Company, was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damage s
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The First Quarter 2002 Press Release
448 . On April 23, 2002, Marsh issued a press release announcing its first quarter 2002
results. In that press release, Marsh reported "[c]onsolidated revenues of $2 .6 billion wer e
unchanged from last year." The press release further stated "[i]n the first quarter, clients
continued to experience difficult conditions in the transfer of commercial risk. MMC's advice
and services are especially valuable in an insurance marketplace of higher premium rates ,
coverage exclusions and increasingly restrictive terms ."
449. Defendants knew, or recklessly disregarded, that the statement concerning th e
value of Marsh's "advice and services" in "in an insurance marketplace of higher premium rates ,
coverage exclusions and increasingly restrictive terms," was materially false and misleading .
The improper steering of clients to certain insurance companies in order to maximize contingen t
commissions and the artificial bid process caused many of the Company's clients to pay more i n
insurance premiums and/or obtain insurance coverage with more restrictive terms than they
would have had Marsh conducted a genuine competitive bidding process on behalf of its clients .
The May 3, 2002 Registration Statement
450. On May 3, 2002, Marsh filed a registration statement with the SEC on Form S-4 ,
signed by Greenberg, Wijnberg, Rapport, Cabiallavetta, Fanjul, Groves, Hardis, King, Lang ,
Olsen, Simmons, Sinnott, and Smith, in which the Company offered to exchange up to
$500,000,000 of its new 5 .375% Senior Notes due 2007 for up to $500,000,000 of its existing
5.375% Senior Notes due 2007, and up to $250,000,000 of its new 6 .25% Senior Notes due 201 2
for up to $250,000,000 of its existing 6 .25% Senior Notes due 2012 . These notes were originall y
issued by Marsh in a restricted offering on March 19, 2002 . In this registration statement, the
Company specifically incorporated by reference the information contained in its annual repo rt
filed on Form 10-K for the year ended December 31, 2001 .
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451 . Defendants knew, or recklessly disregarded, that the information incorporated by
reference from the 2001 annual report was materially false and misleading for the reason s
alleged in paragraphs 432-444 above .
452. In connection with Marsh's risk and insurance services, the registration statemen t
stated that :
Once client risks are identified, MMC provides advice on addressing theexposures. This includes structuring programs for retaining, mitigating,financing, and transferring the risks in combinations that vary according to th erisk profiles, requirements and preferences of clients . Specific professionalfunctions provided in this process include loss-control services, the placement ofclient risks with the worldwide insurance and capital markets (risk transfer), thedevelopment of alternative risk financing methods, establishment andmanagement of specialized insurance companies owned by clients ("captiveinsurance companies") ; claims collection, injury management, and otherinsurance and risk related services . [emphasis added .]
453 . Defendants knew, or recklessly disregarded, that the statements concerning the
structuring of risk transfer programs and the placement of client risks with the worldwide
insurance and capital markets based on the "risk profiles, requirements and preferences of the
clients," were materially false and misleading . The primary consideration for the Company in
the structuring of its clients' risk transfer programs, as well as the placement of client risk, wa s
the existence of a contingent commission agreement between Marsh and the insurer, and not th e
risk profile, requirements or preferences of the Company's clients .
The First Quarter 2002 Form 10- Q
454. On May 14, 2002, Marsh filed its quarterly report for the quarter ended March 31 ,
2002 with the SEC on Form 10-Q signed by Defendant Wijnberg . In the MD&A Section of the
Form 10-Q, Marsh reported revenues of $2.63 5 billion and earn ings of $418 million , as well as
$1 .476 billion in revenues and $462 million for Risk and Insurance Services .
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455 . Defendants knew, or recklessly disregarded, that the MD&A Section of the Form
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
456. The first quarter 2002 Form 10-Q included a section entitled "Claims, Lawsuit s
and Other Contingencies ." In that section, Marsh described the various litigations and claim s
asserted against the Company, stating:
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices . Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
457. Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bid
manipulation practices, that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
458 . The first quarter 2002 10-Q also stated :
The consolidated financial statements included herein have been prepared byMarsh pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included i n
135
financial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added . ]
459. Defendants knew, or recklessly disregarded, that because the first quarter 2002
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures ar e
adequate to make the information presented not misleading," was also materially false an d
misleading.
The May 23, 2002 Prospectu s
460. On May 23, 2002, Marsh filed a prospectus with the SEC on Form 424(b)(3) i n
connection with the Company's offer to exchange up to $500,000,000 of its new 5 .375% Senior
Notes due 2007 for up to $500,000,000 of its existing 5.375% Senior Notes due 2007 and up to
$250,000,000 of its new 6 .25% Senior Notes due 2012 for up to $250,000,000 of Marsh' s
existing 6 .25% Senior Notes due 2012 . In that prospectus, the Company specifically
incorporated by reference the information from its annual report for the year ended Decembe r
31, 2001 and the quarterly report on Form 10-Q for the quarter ended March 31, 2002 .
461 . Defendants knew, or recklessly disregarded, that certain of the informatio n
incorporated by reference from the 2001 annual report and the Form 10-Q for the quarter ended
March 31, 2002 was materially false and misleading for the reasons alleged in paragraphs 432-
46; 454-59 above .
462 . In connection with Marsh's risk and insurance services, the May 23, 2002
prospectus stated that :
Once client risks are identified, MMC provides advice on addressing theexposures . This includes structuring programs for retaining, mitigating,financing, and transferring the risks in combinations that vary according to th erisk profiles, requirements and preferences of c lients . Specific professionalfunctions provided in this process include loss-control services , the placementof c lient risks with the worldwide insurance and capital markets (ris k
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transfer), the development of alternative risk financing methods, establishmentand management of specialized insurance companies owned by clients ("captiveinsurance companies") ; claims collection, injury management, and otherinsurance and risk related services . [Emphasis added .]
463 . Defendants knew, or recklessly disregarded, that the foregoing statements
concerning the structuring of risk transfer programs and the placement of client risks based on
the "risk profiles, requirements and preferences of the clients," were materially false an d
misleading. The primary consideration for the Company in the structuring of its clients' risk
transfer programs, as well as the placement of client risk, was the existence of a contingent
commission agreement between Marsh and the insurer, and not the risk profile, requirements o r
preferences of the Company's clients .
The July 23, 2002 Press Release
464. On July 23, 2002, Marsh issued a press release announcing its second qua rter
2002 financial results . In that press release, the Company reported"[c]onsolidated revenues fo r
the quarter increased 3 percent to $2 .6 billion from the second quarter of 2001 ." Defendant
Greenberg was quoted as stating, "Strong revenue growth and increased profitability in risk an d
insurance services drove our second quarter growth . Clients are continuing to face a challengin g
environment for commercial insurance. MMC's global risk transfer capab ilities , depth of
broking expertise and wide range of specialized resources are invaluable to clients dealin g
with increasingly complex risks and marketplace conditions ." [Emphasis added .]
465. Defendant Greenberg knew, or recklessly disregarded, that his statement tha t
"MMC's global risk transfer capabilities, depth of broking expertise and wide range o f
specialized resources are invaluable to clients dealing with increasingly complex risks an d
marketplace conditions," was materially false and misleading . The phony bid process, as well as
the improper steering of clients to certain insurance companies in order to maximize contingen t
137
commissions , caused many of the Company's clients to pay more in insurance premiums and/or
obtain insurance coverage with more restrictive terms than they would have had Marsh engage d
in a genuine competitive bidding process on behalf of its clients .
The August 7, 2002 Certifications of Greenberg and Wiinber g
466. On August 7, 2002, Marsh filed a Form 8-K with the SEC incorporating b y
reference the sworn statements of Defendants Greenberg and Wijnberg, pursuant to SEC Orde r
No . 4-460, attached thereto as exhibits 99 .1 and 99 .2, respectively. Both sworn statement s
contained the following attestations :
(1) To the best of my knowledge, based upon a review of the covered reportsof Marsh & McLennan Companies, Inc ., and, except as corrected orsupplemented in a subsequent covered report :
no covered report contained an untrue statement of a material fact as of theend of the period covered by such report (or in the case of a report onForm 8-K or definitive proxy materials, as of the date on which it wasfiled); and
no covered report omitted to state a material fact necessary to make thestatements in the covered report, in light of the circumstances under whichthey were made, not misleading as of the end of the period covered bysuch report (or in the case of a report on Form 8-K or definitive proxymaterials, as of the date on which it was filed) .
(2) I have reviewed the contents of this statement with the Company's auditcommittee .
(3) In this statement under oath, each of the following, if filed on or beforethe date of this statement, is a "covered report" :
Annual Report for the year ended December 31, 2001 on Form 10-K ofMarsh & McLennan Companies, Inc . ;
all reports on Form 10-Q, all reports on Form 8-K and all definitive proxymaterials of Marsh & McLennan Companies, Inc . filed with theCommission subsequent to the filing of the Form 10-K identified above ;and
any amendments to any of the foregoing .
138
467 . Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that thei r
sworn statements concerning the absence of any untrue statement or omission of material fact i n
the Company's 2001 Form 10-K and Forms 10-Q for 2002, were materially false and misleading .
As alleged in paragraphs 432-46 ; 454-59 above, the Company's 2001 Form 10-K and its Form
10-Q for the first quarter of 2002 contained materially false and misleading statements and/o r
material omissions concerning, among other things, Marsh's reported financial results, th e
contingent commissions , and the risks related to the Company's steering practices .
The Second Quarter 2002 Form 10-0
468. On August 13, 2002, Marsh filed its quarterly report for the quarter ended Jun e
30, 2002 with the SEC on Form 10-Q . This 10-Q was signed by Defendant Wijnberg . In the
MD&A Section of that Form 10-Q, Marsh reported revenues of $2.612 billion and earnings of
$336 million, as well as $1 .436 billion in revenues and $329 million in earnings for Risk an d
Insurance Services .
469. Defendants knew, or recklessly disregarded, that the MD&A Section of the For m
10-Q identified above were materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
139
470. The second quarter 2002 Form 10-Q included a section entitled "Claims, Lawsuit s
and Other Contingencies ." In that section, Marsh described the various litigations and claim s
asserted against the Company, stating :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant .
471 . Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices, that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
472. The second quarter 2002 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading. [Emphasis added . ]
473 . Defendants knew, or recklessly disregarded, that because the second quarter 200 2
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures are
adequate to make the information presented not misleading," was also materially false and
misleading.
The October 22, 2002 Press Release
474. On October 22, 2002, Marsh issued a press release announcing its third quarte r
2002 financial results . In that press release, the Company reported "[c]onsolidated revenues fo r
the quarter increased 6 percent to $2 .6 billion from the third quarter of 2001 ." Defendant
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Greenberg was quoted in the press release as stating, "[t]he diversity of MMC's market-leadin g
professional services businesses continues to benefit shareholders, even in the curren t
environment . Risk and insurance services, our largest business , performed well for c lients
in a difficult insurance market and generated excellent results for shareholders - stron g
revenue and earnings growth ." [Emphasis added . ]
475 . Defendant Greenberg knew, or recklessly disregarded, that his statement that risk
and insurance services had "performed well for clients in a difficult insurance market," wa s
materially false and misleading . The improper steering of clients in order to maximiz e
contingent commissions, caused many of the Company's clients to pay more in insuranc e
premiums and/or obtain insurance coverage with more restrictive terms than they would hav e
had Marsh conducted a genuine competitive bidding process on behalf of its clients .
The November 11, 2002 Sinnott Interview
476. On November 11, 2002, The Wall Street Transcript interviewed Defendant
Sinnott :
TWST: When you look at the current environment from the client side, they'rebeing asked to shoulder more risk and to be more creative in the way they addressrisk within their own organization . That can lead to their saying, "If I have to takeon more risk, I also have to reduce my costs for the insurance I am providing orobtaining . Therefore, I really have to be more competitive in bidding out andgetting pricing on the policies that I do end up with ." What does that say about theoverall competitive landscape when you look at the advantages that Marsh Inc .has and when you look at the requirement that the clients now have on their costside?
Mr. Sinno tt : [ . . .] We endeavor to meet their [the clients] capacity requirementsand their scope of coverage requirements and structure the program in a waythat, relative to current market conditions, gives them the best possible costequation. [Emphasis added .]
477. Defendant Sinnott knew, or recklessly disregarded, that his statement that Mars h
endeavored to structure client's risk programs "that . . . gives them the best possible cos t
141
equation," was materially false and misleading. The improper steering of clients to certain
insurance companies in order to maximize contingent commissions, caused many of th e
Company's clients to pay more in insurance premiums and/or obtain insurance coverage wit h
more restrictive terms than they would have had Marsh engaged in a genuine competitiv e
bidding process on behalf of its clients .
The Third Quarter 2002 Form 10-0
478 . On November 14, 2002, Marsh filed its quarterly report for the quarter ende d
September 30, 2002 with the SEC on Form 10-Q signed by Defendant Wijnberg . In the MD&A
Section of that Form 10-Q, Marsh reported revenues of $2 .553 billion and earnings of $29 9
million, as well as $1 .431 billion in revenues and earnings of $334 million for Risk and
Insurance Services .
479. Defendants knew, or recklessly disregarded, that the MD&A Section of the Form
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
480. The third quarter 2002 Form 10-Q included a section entitled "Claims, Lawsuit s
and Other Contingencies ." In that section, Marsh described the various litigations and claim s
asserted against the Company, stating :
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MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices. Some of these matters seek damages, including punitive damages, inamounts which could, if assessed, be significant.
481 . Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bid
manipulation practices and that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
482. The third quarter 2002 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMMC believes that the disclosures are adequate to make the informationpresented not misleading [Emphasis added . ]
483 . Defendants knew, or recklessly disregarded, that because the third quarter 2002
Form 10-Q was materially false and misleading as alleged above, the statement that the
"disclosures are adequate to make the information presented not misleading," was also materiall y
false and misleading.
The January 29, 2003 Press Release
484. On January 29, 2003, Marsh issued a press release announcing its fourth quarter
2002 and year-end results . In that press release, the Company reported "[c]onsolidated revenue s
in the fourth quarter increased 15 percent to $2 .6 billion from the fourth quarter of 2001 . "
485. The press release quoted Defendant Greenberg, who stated "[w]e are pleased with
our results for 2002. The year presented challenging conditions for each of MMC's businesses .
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Marsh's professionals served the needs of clients in an environment where risks increased ,
capacity decreased, insurance rates rose, and terms and conditions were restricted . . . ."
486. Defendant Greenberg knew, or recklessly disregarded, that his statemen t
concerning Marsh's service of the "the needs of clients in an environment where risks increased ,
capacity decreased, insurance rates rose, and terms and conditions were restricted," wa s
materially false and misleading . The improper steering of clients in order to maximize
contingent commissions caused many of the Company's clients to pay more in insurance
premiums and/or obtain insurance coverage with more restrictive terms than they would have
had Marsh conducted a genuine competitive bidding process on behalf of its clients .
The February 13, 2003 Prospectus Supplement
487 . On February 13, 2003, Marsh filed a supplement to a prospectus dated March 30 ,
1999, with the SEC on Form 424(b)(2) in connection with the Company's 3 .625% senior notes
due 2008 and its 4 .850% senior notes due 2013 . In that prospectus, the Company specifically
incorporated by reference the information from its annual report for the year ended Decembe r
31, 2001 and the quarterly repo rts on Forms 10-Q for the quarters ended March 31, 2002, June
30, 2002, and September 30, 2002 . The issuance of the prospectus supplement and the offering
of the notes pursuant thereto was authorized by the Marsh Board in effect at the time .
488 . Defendants knew, or recklessly disregarded, that certain of the information
incorporated by reference from the 2001 annual report and the Forms 10-Q for the quarters
ended March 31, 2002, June 30, 2002, and September 30, 2002 were materially false and
misleading for the reasons alleged .
The 2002 10-K
489. On March 26, 2003, Marsh filed with the SEC its 2002 Form 10-K, which wa s
signed by Greenberg, Wijnberg, Rapport, Cabiallavetta, Fanjul, Groves, Hardis, King, Lang ,
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Olsen, Schapiro, Simmons, Sinnott, and Smith. In the description of the Company's risk and
insurance serv ices business in that Form 10-K, the Company stated :
Once client risks are identified, MMC provides advice on addressing clientexposures, including structuring programs for retaining, mitigating, financing, andtransferring the risks in combinations that vary according to the risk profiles,requirements and preferences of clients . Specific professional functionsprovided in this process include loss-control services , the placement of c lientrisks with the worldwide insurance and capital markets (risk transfer), thedevelopment of alternative risk financing methods, establishment andmanagement of specialized insurance companies owned by clients ("captiveinsurance companies") ; claims collection, injury management, and otherinsurance and risk related services . [Emphasis added .]
490. Defendants knew, or recklessly disregarded, that the foregoing statement s
concerning the structuring of risk transfer programs and the placement of client risks based o n
the "risk profiles, requirements and preferences of the clients," were materially false and
misleading . The primary consideration for the Company in the structuring of its clients' risk
transfer programs, as well as the placement of client risk, was the existence of a contingen t
commission agreement between Marsh and the insurer, and not the risk profile, requirements or
preferences of the Company's clients .
491 . The Company also stated :
Revenue generated by risk and insurance services is fundamentally derived fromthe value of the services provided to clients and insurance markets . Theserevenues may be affected by premium rate levels in the property and casualty andemployee benefits insurance markets and available insurance capacity, sincecompensation is frequently related to the premiums paid by insureds . In manycases, compensation may be negotiated in advance based upon the estimatedvalue of the services to be performed . Revenue is also affected by fluctuations inthe amount of risk retained by insurance and reinsurance clients themselves andby insured values, the development of new products, markets and services, newand lost business, merging of clients (including insurance companies that areclients in the reinsurance intermediary business) and the volume of business fromnew and existing clients, as well as by the level of interest realized on theinvestment of fiduciary funds .
Revenue and fees also may be received from originating, structuring andmanaging investments in insurance, financial services and other industry-focused
145
investments, as well as income derived from investments made by MMC .Placement service revenue includes payments or allowances by insurancecompanies based upon such factors as the overall volume of business placed bythe broker with that insurer, the aggregate commissions paid by the insurer forthat business during specific periods, or the profitability or loss to the insurer ofthe risks placed . This revenue reflects compensation for services provided bybrokers to the insurance market . These services include new productdevelopment, the development and provision of technology , administration,and the delivery of information on developments among broad clientsegments and the insurance markets . [Emphasis added .]
492. Defendants knew, or recklessly disregarded, that the Company's description o f
"placement service revenue" as compensation for services provided to the insurance market wa s
materially false and misleading: Marsh provided no legitimate services to the insuranc e
companies under the contingent commission agreements . The "services" performed by Marsh
on behalf of the insurance companies were, in fact, the same activities that the Company
necessarily performed on behalf of its clients in the ordinary course of its business as an
insurance broker . Further, the "factors" cited in the foregoing statement - "overall volume o f
business placed by the broker with that insurer, the aggregate commissions paid by the insure r
for that business during specific periods, or the profitability or loss to the insurer of the risks
placed" - were, in fact, the only consideration for the contingent commissions under the
agreements between Marsh and the insurance companies .
493 . The Form 10-K also contained the following statement concerning the adequac y
of the Company' s disclosure controls and procedures :
Based on their evaluation, as of a date within 90 days of the filing of this AnnualReport on Form 10-K, MMC's Chief Executive Officer and Chief FinancialOfficer have concluded that MMC's disclosure controls and procedures (asdefined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934)are effective in timely alerting them to material information relating to MMCrequired to be included in our reports filed under the Exchange Act .
494. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
foregoing statement concerning the Company's disclosure controls and procedures wa s
146
materially false and misleading because it failed to disclose that material information that wa s
required to be disclosed in the reports that Marsh filed with the SEC was omitted o r
misrepresented as alleged in paragraphs 489-92 above .
The 2002 Annual Repor t
495 . Attached to the 2002 Form 10-K were several documents , including the Marsh
2002 annual report to its shareholders, in which it reported earnings of $1 .365 billion .
496. Defendants knew, or recklessly disregarded, that the revenue and income result s
reported for 2002, 2001, and 2000 were materially false and misleading because of the reason s
set forth in paragraph 677-83 .
497. The 2002 annual report also contained a letter from Defendant Greenberg to the
Company's shareholders, dated March 3, 2002 . In that letter, Defendant Greenberg stated :
MMC performed well in 2002. Consolidated revenues rose 6 percent to $10 .4billion .
MMC had excellent results . Revenues from risk and insurance services increased15 percent to $5 .9 billion. Operating income rose 31 percent to $1 .5 billion .MMC responded to the needs of clients, who faced new risks , more complexexposures , and an insurance market characterized by reduced underwritingcapacity, higher rates, and restricted terms and conditions . In thisenvironment , MMC's specialized expertise in risk consulting and risktransfer and its longstanding relationships with global insurance andreinsurance markets are a great competitive advantage . [Emphasis added .]
498 . Defendant Greenberg knew, or recklessly disregarded, that his statement that the
Company responded to the needs of clients who faced new risks, more complex exposures,
higher rates and more restrictive terms, was materially false and misleading . The improper
steering of clients to certain insurance companies in order to maximize contingent commission s
and the artificial bid process, caused many of the Company' s clients to pay more in insurance
147
premiums and/or obtain insurance coverage with more restrictive terms than they would hav e
had Marsh engaged in a genuine competitive bidding process on behalf of its clients .
499. The March 3, 2003 letter continued :
In a year when corporate scandals and allegations of accounting and financialabuses made headlines, I am grateful for the strength of MMC 's ethics,culture, and commitment to client service and professional standards . Thesequalities serve our shareholders well. [Emphasis added . ]
MMC has always aspired to a system of corporate governance that is appropriateto the company and serves the long term interests of its shareholders. Effectiveoversight of the company requires independent directors who are dedicated,skilled, and experienced . For MMC, we believe that a board combining amajority of such directors with a number of well qualified executive directors isthe best approach to corporate governance.
500. Defendant Greenberg knew, or recklessly disregarded, that his statemen t
concerning the strength of "MMC's ethics, culture and commitment to client service" was
materially false and misleading because the Company was engaged in a scheme whereby Marsh
steered clients to those insurance companies with which it had entered into contingent
commission agreements in order to maximize revenues . The phony bidding process, as well as
the improper steering of clients, caused many of the Company's clients to pay more in insurance
premiums and/or obtain insurance coverage with more restrictive terms than they would have
had Marsh engaged in a genuine competitive bidding process on behalf of its clients .
501 . Similarly, Greenberg knew, or recklessly disregarded, that his statement that th e
Company's system of corporate governance served the long-term interests of its shareholder s
was materially false and misleading because, under that system, Marsh engaged in illicit conduct
that improperly inflated the Company's revenue results . As a consequence of that illicit conduct ,
Marsh was subjected to investigation by various regulatory agencies , incurring substantial costs ,
including the creation of an $850 million restitution fund for its clients . Moreover, as a result of
the regulatory action in connection with Defendants' scheme, Marsh has ceased acceptin g
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contingent commissions, thereby eliminating substantial revenues that the Company had publicl y
and falsely represented were proper throughout the Class Period .
502 . The 2002 annual report also contained a section entitled "Risk And Insuranc e
Services - A conversation with John T. Sinnott, chairman, and Ray J . Groves, president and
chief executive officer, of Marsh Inc ." In that section, Defendants Sinnott and Groves stated :
The specialists in our Global Broking practice concentrate on insuranceplacements by industry, line of insurance coverage, and specific insurancecompanies. These brokers know the global insurance markets well and haverelationships with the senior decision makers in insurance companies around theworld. This approach makes risk transfer more efficient and less costly forall the participants in the process . It gives our clients unique access to theinsurance markets and underwriters the opportunity to work with brokerswho understand their individual requirements and risk tolerance . [Emphasisadded. ]
503 . Defendants Sinnott and Groves knew, or recklessly disregarded, that the statement
that specialization by Global Broking made risk transfer more efficient and less costly for al l
participants in the process, was materially false and misleading . The improper bidding scheme ,
as well as the improper steering of clients, caused many of the Company's clients to pay more in
insurance premiums and/or obtain insurance coverage with more restrictive terms than they
would have had Marsh engaged in a genuine competitive bidding process on behalf of its clients .
In addition, Sinnott and Groves knew, or recklessly disregarded, that their description of th e
purported benefits inuring to Marsh clients as a result of Global Broking' s specialization failed to
disclose that Global Broking engaged in a phony bid process and steered clients in order to
maximize contingent commissions, rather than acting in the best interests of the Company' s
clients .
504. In the MD&A Section, the Company stated :
In 2002, operating revenue, derived primarily from commissions and fees, rose6%. The increase resulted from a higher volume of business in the risk andinsurance services segment, partially offset by a decline in revenue in the
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investment management segment due to lower assets under management on whichfees are earned . . . . The risk and insurance services segment experiencedunderlying revenue growth of 15% primarily due to net new business and theeffect of higher commercial insurance premium rates, partially offset by lowerfiduciary interest income .
505 . Defendants knew, or recklessly disregarded, that the statement identified abov e
were materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
506. With respect to risk and insurance services, the 2002 annual report stated :
Once client risks are identified, Marsh provides advice on addressing clientexposures, including structuring programs for retaining, mitigating, financing, andtransferring the risks in combinations that vary according to the risk profiles,requirements and preferences of clients . Specific professional functionsprovided in this process include loss-control services, the placement of clientrisks with the worldwide insurance and capital markets (risk transfer), thedevelopment of alternative risk financing methods, establishment andmanagement of specialized insurance companies owned by clients ("captiveinsurance companies"); claims collection, injury management, and otherinsurance and risk related services . [Emphasis added .]
507. Defendants knew, or recklessly disregarded, that the foregoing statement s
concerning the structuring of risk transfer programs and the placement of client risks with th e
worldwide insurance and capital markets based on the "risk profiles, requirements an d
preferences of the clients," were materially false and misleading . The primary consideration for
150
the Company in the structuring of its clients' risk transfer programs, as well as the placement o f
client risk with a particular insurance company, was whether Marsh received a kickback pursuan t
to a contingent commission agreement, and not the risk profile, requirements or preferences of
the Company's clients .
508. In addition, the 2002 annual report stated :
Placement service revenue includes payments or allowances by insurancecompanies based upon such factors as the overall volume of business placed bythe broker with that insurer, the aggregate commissions paid by the insurer forthat business during specific periods, or the profitability or loss to the insurer ofthe risks placed. This revenue reflects compensation for services provided bybrokers to the insurance market. These services include new productdevelopment, the development and provision of technology , administration,and the delivery of information on developments among broad clientsegments and the insurance markets . [Emphasis added.]
509. Defendants knew, or recklessly disregarded, that the Company's description of
the "placement service revenue" as compensation for services provided to the insurance marke t
was materially false and misleading . Marsh provided no legitimate services to the insurance
companies under the contingent commission agreements . The "services" performed by Marsh
on behalf of the insurance companies were, in fact, the same activities that the Compan y
necessarily performed on behalf of its clients in the ordinary course of its business as a n
insurance broker . Further, the "factors" cited in the foregoing statement - "overall volume of
business placed by the broker with that insurer, the aggregate commissions paid by the insure r
for that business during specific periods, or the profitability or loss to the insurer of the risk s
placed" - were, in fact, the only consideration for the contingent commissions under the
agreements between Marsh and the insurance companies .
510. In the section of the 2002 annual report entitled "Segment Information," Marsh
reported risk and insurance services revenues of $5 .910 billion .
151
511 . Defendants knew, or recklessly disregarded, that the statements identified abov e
were materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
512. In the section of the Annual Report entitled, "Legal and Other Los s
Contingencies," the Company stated :
MMC and its subsidiaries are subject to various claims, lawsuits and proceedingsconsisting principally of alleged errors and omissions in connection with theplacement of insurance or reinsurance and in rendering investment and consultingservices . GAAP requires that liabilities for contingencies be recorded when it isprobable that a liability has been incurred before the balance sheet date and theamount can be reasonably estimated . Significant management judgment isrequired to comply with this guidance . MMC analyzes its litigation exposurebased on available information, including consultation with outside counselhandling the defense of these matters, to assess its potential liability .
513 . Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages.
514. The 2002 annual report also contained a "Report of Management" signed by
Defendant Wijnberg which, in pertinent part , stated :
152
The management of Marsh & McLennan Companies, Inc . has prepared and isresponsible for the accompanying financial statements and other related financialinformation contained in this annual report . MMC's financial statements wereprepared in accordance with generally accepted accounting principles, applyingcertain estimates and informed judgments as required . Deloitte & Touche LLP,independent auditors, have audited the financial statements and have issued theirreport thereon.
515. Defendant Wijnberg knew, or recklessly disregarded, that the statement tha t
Marsh 's financial statements were prepared in accordance with GAAP was materially false and
misleading for the reasons alleged in paragraphs 647-87 .
516. The 2002 annual report also included a copy of the February 28, 2003
Independent Auditors' Report from Deloitte & Touche LLP . In that Report, Deloitte stated :
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America . Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement . An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation . We believe that our audits provide a reasonablebasis for our opinion .
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 2002 and 2001, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2002 in conformity with accounting principles generally acceptedin the United States of America. [Emphasis added.]
517. Deloitte knew, or recklessly disregarded, that its statement that the consolidate d
financial statements of Marsh as of December 31, 2002 and 2001 presented fairly, in conformit y
with GAAP, the financial position of the Company was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh 's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
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(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damage s
518 . Further, Deloitte knew, or recklessly disregarded, that its statement that i t
conducted its audit in accordance with GAAS was materially false and misleading for reasons
alleged in paragraphs 688-747 below .
Marsh's "Code of Ethics for Chief Executive and Senior Financial Officers"
519 . Also attached to the Marsh 2002 Form 10-K was a document entitled "Code O f
Ethics For Chief Executive And Senior Financial Officers ." In that code of ethics, the Company
represented :
Marsh & McLennan Companies, Inc ., including its operating companies,("MMC" or the "Company") is committed to conducting its business inaccordance with applicable laws, rules and regulations, to the highest standards ofbusiness ethics and with full and accurate financial disclosure . This Code ofEthics for Chief Executive and Senior Financial Officers ("Code of Ethics"),applicable to the Company's Chief Executive Officer, Chief Financial Officer an dController (together, "Senior Officers"), sets forth specific policies as a guide inthe performance of their duties . Senior Officers of MMC must not only complywith applicable laws, rules and regulations, they also have a responsibility toconduct themselves in an honest and ethical manner. They have leadershipresponsibilities that include creating a culture of high ethical standards andcommitment to compliance, and maintaining a work environment that deterswrongdoing, encourages employees to raise concerns, and promptly addressesemployee compliance concerns .
520. Defendants knew, or recklessly disregarded, that the foregoing statement s
concerning the Company's commitment to conducting its business in accordance with applicabl e
laws, rules, regulations, and the highest standards of business ethics, were materially false an d
misleading . Marsh engaged in improper steering and an artificial bid process in which its client s
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were defrauded to enable the Company to maximize contingent commissions . In addition, the
Company's improper steering of clients in order to maximize contingent commissions cause d
many of the Company's clients to pay more in insurance premiums and/or obtain insurance
coverage with more restrictive terms than they would have had Marsh engaged in a genuin e
competitive bidding process on behalf of its clients, and constituted a significant departure from
the "highest standards of business ethics ." Similarly, according to Bewlay, a former Marsh
Senior Vice President and Managing Director in its excess casualty group, Marsh had a protoco l
of misleading its clients with respect to the amount of contingent commissions earned in
connection with their insurance coverage . Marsh's protocol of misleading clients who inquired
about the amount of contingent commissions not only constituted a gross violation of busines s
ethics, but constituted a fraud perpetrated against its clients .
521 . The Company's "Code of Ethics" also stated :
DISCLOSURE S
As a public company, MMC is required to file various periodic and other reportswith the Securities and Exchange Commission ("SEC") . It is Company policy tomake full, fair, accurate, timely and understandable disclosure in compliance withall applicable laws and regulations in all reports and documents that the Companyfiles with, or submits to, the SEC and in all other public communications made bythe Company. Senior Officers are required to promote compliance with thi spolicy in their area of responsibility and amongst their colleagues and to abide byall Company standards, policies and procedures designed to promote compliancewith this policy .
522. Defendants knew, or recklessly disregarded, that the statement concernin g
Marsh's purported policy to make "full, fair, accurate, timely, and understandable disclosure i n
compliance with all applicable laws and regulations in all reports and documents" filed with th e
SEC, was materially false and misleading. As alleged herein, Defendants filed quarterly an d
annual reports, as well as prospectuses, throughout the Class Period that they knew, or recklessly
disregarded, contained materially false and misleading statements and/or material omissions
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concerning, among other things, the Company's reported financial results, the contingen t
commissions and the true facts and risks related to the Company's steering practices .
523 . The 2002 Form 10 -K contained the cert ifications from Defendants Greenberg an d
Wijnberg in which each certified that they had :
reviewed the Form 10-K ;
2. based on their knowledge, the annual report did not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by the annual report ;
3 . based on their knowledge, the financial statements, and other financialinformation included in the annual report, fairly presented in all material respectsthe financial condition, results of operations and cash flows of MMC as of, andfor, the periods presented in the annual report ;
4. MMC's certifying officers were responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for MMC and have :
a) designed such disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidated subsidiaries, wasmade known to them by others within those entities, particularly during the periodin which the annual report was being prepared ;
b) evaluated the effectiveness of MMC's disclosure controls and procedures as ofa date within 90 days prior to the filing date of the annual report (the "EvaluationDate") ; and
c) presented in the annual report their conclusions about the effectiveness of thedisclosure controls and procedures based on their evaluation as of the EvaluationDate ;
5. the Company's certifying officers had disclosed, based on their mostrecent evaluation, to the Company's auditors and the audit committee of MMC'sboard of directors (or persons performing the equivalent functions) :
a) all significant deficiencies in the design or operation of internal controls whichcould adversely affect the Company's ability to record, process, summarize andreport financial data and have identified for MMC's auditors any materia lweaknesses in internal controls ; and
b) any fraud, whether or not material, that involved management or otheremployees who had a significant role in the registrant's internal controls ; and
156
6. the Company's certifying officers had indicated in the annual reportwhether there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of their mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses .
524. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
statements concerning the absence of any untrue statement or omission of material fact in the
Company's 2002 Form 10-K were materially false and misleading. As alleged in paragraphs
495-522 above, the Company's 2002 Form 10-K contained materially false and misleadin g
statements . Further, the financial statements did not fairly present the financial condition of th e
Company.
525. Defendants Greenberg and Wijnberg also knew, or recklessly disregarded, tha t
their statements concerning the disclosure of the existence of fraud was materially false and
misleading because neither Greenberg nor Wijnberg reported the existence of the wrongful
steering and bidding scheme . Likewise, Greenberg and Wijnberg knew, or recklessl y
disregarded, that their statements concerning the reporting of internal control deficiencies wer e
materially false and misleading because neither reported the existence of any of the internal
control deficiencies that enabled the steering and artificial bid system to be perpetrated .
The Definitive 2003 Proxy
526. On March 27, 2003, Marsh filed its 2003 proxy on Form DEF 14A an d
recommended shareholders ratify Deloitte as the Company's "independent" auditor.
527 . With respect to the Company' s compensation philosophy Marsh stated :
MMC is a professional services firm with businesses having distinct economiccharacteristics, marketplaces and operating conditions . The leadership positionattained over time by MMC's operating subsidiaries in their respective businessesin terms of services provided, market share, revenue, profitability and rate ofgrowth has been earned largely through the selection, training and development oftop caliber executive, managerial and professional talent .
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528 . As for short-term compensation, Marsh stated, "The size of the incentive awar d
pool for senior management cash bonuses is based on earnings and reflects MMC's net operatin g
income growth." In discussing the basis for CEO compensation, Marsh stated, "Current and
long-term financial performance of MMC, information which is available to all MMC
stockholders , are major factors in arriving at the compensation determinations made by the
Committee relative to [the Chief Executive Officer] . Consideration is also given to hi s
leadership and in fluence on the long-term strength and performance of MMC." [Emphasi s
added.]
529 . The 2003 definitive proxy also compared the Company's five-year performanc e
(from December 31, 1997 through December 31, 2002) to that of the S&P 500 index and a
composite industry index . The comparison stated that $100 dollars invested in Marsh i n
December 31, 1994 (with dividends reinvested) resulted in a return of $208, which wa s
represented as outperforming the S&P 500's return for the same period of $97 and the composite
industry index's return of $103 .
530. Defendants knew, or recklessly disregarded, that the statements in Marsh's 200 3
definitive proxy were false and misleading because : the Company failed to disclose that the
"leadership position" achieved by Marsh and its subsidiaries was the result of the Company' s
improper steering activities, and not the result of the Company's "selection, training an d
development of top caliber executive, managerial and professional talent ;" Marsh failed to
disclose that its short term compensation incentives were based on earnings that were overstated
because Marsh failed to reserve properly for its improper steering activities ; the Company failed
to disclose that stockholders not were given accurate current and long-term financial figures an d
therefore, could not properly evaluate the basis for CEO compensation ; the Company failed to
158
disclose that Marsh's comparison of its stock's five-year return to the S&P 500 and a composite
industry index was false and misleading because the Company 's stock was artificially inflated
due to Marsh's steering activities and receipt of improper contingent commissions .
The April 4, 2003 Deutsche Bank Report
531 . On April 4, 2003, Deutsche Bank issued a research repo rt entitled "Marsh &
McLennan - Positive and Enlightening CEO Meeting ." The report stated in relevant part :
Meeting with the CEO confirms that the business keeps getting better . We metwith senior management, including Mr . Jeffrey Greenberg, and they discussedmany topics, including the increasing value of insurance brokers to clients, thecontinued rise of insurance prices , and grooming of employees to be advisorsrather than product pushers . [Emphasis added . ]
532. Defendants knew, or recklessly disregarded, that the statements in the Deutsch e
Bank research report attributed to senior management, including Defendant Greenberg ,
concerning the increasing value of insurance brokers to clients and the continued rise o f
insurance prices, were materially false and misleading because they failed to disclose that Marsh
engaged in a bidding scheme and improperly steered clients to certain insurance companies i n
order to maximize contingent commissions , causing many of the Company' s clients to pay more
in insurance premiums and/or obtain insurance coverage with more restrictive terms than the y
would have had Marsh engaged in a genuine competitive bidding process on behalf of its clients .
The April 23, 2003 Press Release
533 . On April 23, 2003, Marsh issued a press release announcing its results for the firs t
quarter of 2003 . In that press release, the Company reported "[c]onsolidated revenues increase d
8 percent to $2 .9 billion from $2.6 billion in the first quarter of 2002 ." The press release
continued, "[c]lients have a heightened awareness that risks have increased and become mor e
complex. At the same time, they are facing restricted terms and conditions, coverage exclusions ,
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and higher prices for commercial liability insurance. Marsh's full range of specialized service s
and its unparalleled access to worldwide insurance markets are of great value to clients ."
534. Defendants knew, or recklessly disregarded, that the statement concernin g
Marsh ' s value to its clients when "they are facing rest ricted terms and conditions , coverage
exclusions, and higher prices for commercial liability insurance," was materially false an d
misleading . The improper steering of clients in order to maximize contingent commissions ,
caused many of the Company' s clients to pay more in insurance premiums and/or obtai n
insurance coverage with more restrictive terms than they would have had Marsh conducted a
genuine competitive bidding process on behalf of its clients .
The First Quarter 2003 Form 10-0
535. On May 13, 2003, Marsh filed its quarterly report for the quarter ended March 31 ,
2003 with the SEC on a Form 10-Q signed by Defendant Wijnberg . In the MD&A Section o f
that Form 10-Q, Marsh reported service revenues of $2 .841 billion and earnings of $443 million ,
as well as $1 .773 billion in revenues and earnings of $560 million for Risk and Insuranc e
Services .
536. Defendants knew, or recklessly disregarded, that the MD&A Section of the Form
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued ,
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that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
537. The first quarter 2003 Form 10-Q included various sections relating to risks to the
and "Other." In the section entitled "Other," the Company stated :
The insurance coverage for potential liability resulting from alleged errors andomissions in the professional services provided by MMC includes elements ofboth risk retention and risk transfer . MMC believes it has adequately reserved forthe self-insurance portion of the contingencies . Payments related to the respectiveself-insured layers are made as legal fees are incurred and claims are resolved andgenerally extend over a considerable number of years . The amounts paid in thatregard vary in relation to the severity of the claims and the number of claimsactive in any particular year . The long-term portion of this liability is included inOther liabilities in the Consolidated Balance Sheets .
538 . Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper stee ring and bid
manipulation practices, that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
539 . The first quarter 2003 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principles generallyaccepted in the United States of America have been omitted pursuant to such rulesand regulations, although Marsh believes that the disclosures are adequate tomake the information presented not misleading . [Emphasis added .]
540 . Defendants knew, or recklessly disregarded, that because the first quarter 200 3
Form 10-Q was materially misleading as alleged above , the statement that the "disclosures are
adequate to make the information presented not misleading," was also materially false and
misleading .
161
541 . The May 2003 Form 10-Q contained the certifications from Defendant s
Greenberg and Wijnberg in which each certified that :
1 . They had reviewed the Form 10-Q ;
2. based on their knowledge, the quarterly report did not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by the quarterly report ;
3. based on their knowledge, the financial statements, and other financialinformation included in the quarterly report, fairly presented in all materialrespects the financial condition, results of operations and cash flows of MMC asof, and for, the periods presented in the quarterly report ;
4. MMC's certifying officers were responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for MMC and had :
a) designed such disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidatedsubsidiaries, was made known to them by others within those entities,particularly during the period in which the quarterly report was beingprepared ;
b) evaluated the effectiveness of MMC's disclosure controls andprocedures as of a date within 90 days prior to the filing date of the annualreport (the "Evaluation Date") ; and
c) presented in the quarterly report their conclusions about theeffectiveness of the disclosure controls and procedures based on theirevaluation as of the Evaluation Date ;
5. the Company's certifying officers had disclosed, based on their mostrecent evaluation, to the Company's auditors and the audit committee of MMC'sboard of directors (or persons performing the equivalent functions) :
a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the Company's ability to record, process,summarize and report financial data and had identified for MMC'sauditors any material weaknesses in internal controls; and
b) any fraud, whether or not material , that involved management or otheremployees who had a significant role in the registrant' s internal controls ;and
162
6 . the Company's certifying officers had indicated in the annual reportwhether there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of their mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses .
542 . Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
statements concerning the absence of any untrue statement or omission of material fact in the
Company's first quarter 2003 Form 10-Q were materially false and misleading for the reason s
stated in paragraphs 535-40 above . Further, the financial statements did not fairly present the
financial condition of the Company because such statements failed to disclose that a material
portion of the Company's revenue results were the proceeds of inappropriate contingen t
commissions . Defendants Greenberg and Wijnberg also knew, or recklessly disregarded, that th e
statements concerning the reporting of the existence of fraud were materially false and
misleading because neither Greenberg nor Wijnberg reported the existence of the improper
steering scheme. Likewise, Greenberg and Wijnberg knew, or recklessly disregarded, that thei r
statements concerning the reporting of internal control deficiencies were materially false and
misleading because the Form 10-Q failed to disclose information concerning the internal control
deficiencies that permitted the scheme to be perpetrated.
The May 15, 2003 Regulatory News Service Article
543 . In a May 15, 2003 article entitled "REG-Marsh & McLennan Annual
Shareholders Meeting," the Regulatory News Service reported :
In his remarks to shareholders at the meeting, Jeffrey Greenberg, chairman, said :"MMC is a strong company with a proven business model, a culture ofexce llence , and great people ; and all these a ttributes have helped us createvalue for shareholders in good times and bad. We are very well positioned .. . Our prospects have never been better ." [Emphasis added . ]
544 . Defendant Greenberg knew, or recklessly disregarded that his statemen t
concerning Marsh's "culture of excellence" was materially false and misleading because th e
163
Company was engaged in an illicit scheme to defraud its clients, and that Marsh steered clients t o
those insurance companies with which it had entered into contingent commission agreements i n
order to maximize revenues. The phony bid scheme, as well as the improper steering of clients ,
caused many of the Company' s clients to pay more in insurance premiums and/or obtai n
insurance coverage with more restrictive terms than they would have had Marsh engaged in a
genuine competitive bidding process on behalf of its clients .
545 . Likewise, Greenberg knew, or recklessly disregarded, that his statement tha t
Defendants ran Marsh to build long term shareholder value was materially false and misleading .
Marsh engaged in illicit conduct that improperly inflated the Company's revenue results . As a
consequence of that illicit conduct, Marsh was subjected to investigation by various regulatory
agencies, incurring substantial costs, including the creation of an $850 million restitution fun d
for its clients . Moreover, as a result of the regulatory action in connection with Defendants '
unlawful scheme, Marsh has ceased accepting contingent commissions, thereby eliminatin g
substantial revenues that the Company had publicly and falsely represented were proper
throughout the Class Period.
The July 25, 2003 Prospectus Supplement
546. On July 25, 2003, Marsh filed a supplement to a prospectus dated March 30, 1999
with the SEC on Form 424(b)(2) in connection with the Company's 5 .875% senior notes due
2033 . In that prospectus, the Company specifically incorporated by reference the informatio n
from its annual report for the year ended December 31, 2002, the quarterly report on Form 10- Q
for the quarter ended March 31, 2003 and the July 22, 2003 press release (filed on Form 8-K on
July 23, 2003) .
547. Defendants knew, or recklessly disregarded, that certain of the informatio n
incorporated by reference from the 2002 annual report, the Form 10-Q for the quarter ended
164
March 31, 2003 and the July 22, 2003 press release was materially false and misleading for th e
reasons alleged above .
The July 28, 2003 Business Insurance Article
548 . On July 28, 2003, Business Insurance published an article entitled "Retired Marsh
chief takes a look back ; Q&A: John T. Sinnott ." That article , in pert inent part , reported :
Q. Around the same time, controversy also erupted over the contingentcommissions Marsh and other brokers were receiving from insurers . Do you stillhear complaints about these commissions?
A. I, frankly, don't hear it as much , but there are a few cases where it doe scome up.
Q. What are your thoughts about the controversy?
A. Distribution is something that inures to the benefit of the market, it doesnot inure to the benefit of the client . If we have a client in Chicago, it doesn'tneed all of the offices we have that are distributors to access the marketplace.
We need to have those offices because that's where the knowledge is and that'swhere we work with the client, but the market needs us, too ; otherwise, theywould have to have their people like the direct writers . There is a very smallpart of what the broker does that inures to the benefit of the market , and allwe're saying is that we should be . . . properly paid for what we do forthem. [Emphasis added . ]
549. Defendant Sinnott knew, or recklessly disregarded, that his statement tha t
contingent commissions were paid in exchange for the distribution services that Marsh provide d
to the insurance companies, were materially false and misleading . Marsh did not provide
services to insurance companies in exchange for contingent commissions, but instead, th e
contingent commissions were based on the volume of business placed with the insuranc e
company or, to a lesser degree, the profitability of the insurance carrier . The distribution benefi t
cited by Sinnott was illusory because Marsh utilized its large network of offices to service it s
clients, not to benefit the insurance companies .
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The Second Quarter 2003 Form 10-0
550. On August 14, 2003, Marsh filed its quarterly report for the quarter ended Jun e
30, 2003 with the SEC on a Form 10-Q signed by Defendant Wijnberg . In the MD&A Sectio n
of that 10-Q, Marsh reported service revenues of $2.84 billion and earnings of $365 million, a s
well as $1 .68 billion in revenues and $403 million in earnings for Risk and Insurance Services .
551 . Defendants knew, or recklessly disregarded, that the MD&A Section of the For m
10- identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
552. The second quarter 2003 Form 10-Q included various sections relating to risks t o
the Company, including Market Risk, Interest Rate Risk, Foreign Currency Risk, Equity Pric e
Risk, and "Other ." In the section entitled "Other," the Company stated :
The insurance coverage for potential liability resulting from alleged errors andomissions in the professional services provided by MMC includes elements ofboth risk retention and risk transfer . MMC believes it has adequately reserved forthe self-insurance portion of the contingencies . Payments related to the respectiveself-insured layers are made as legal fees are incurred and claims are resolved andgenerally extend over a considerable number of years . The amounts paid in thatregard vary in relation to the severity of the claims and the number of claimsactive in any particular year . The long-term portion of this liability is included inOther liabilities in the Consolidated Balance Sheets .
166
553 . Defendants knew, or recklessly disregarded, that the foregoing statements wer e
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
554. The second quarter 2003 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principles generallyaccepted in the United States of America have been omitted pursuant to such rulesand regulations, although Marsh believes that the disclosures are adequate tomake the information presented not misleading . [Emphasis added .]
555 . Defendants knew, or recklessly disregarded, that because the second quarter 2003
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures are
adequate to make the information presented not misleading," was also materially false and
misleading .
556. Attached to the second quarter 2003 Form 10-Q were certifications fro m
Defendants Greenberg and Wijnberg, dated August 14, 2003, in which each certified that :
1 . They had reviewed the Form 10-Q;
2. based on their knowledge, the quarterly report did not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by the quarterly report ;
3. based on their knowledge, the financial statements, and other financialinformation included in the quarterly report, fairly presented in all materialrespects the financial condition, results of operations and cash flows of MMC asof, and for, the periods presented in the quarterly report ;
4 . MMC's certifying officers were responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for MMC and had :
167
a) designed such disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidatedsubsidiaries, was made known to them by others within those entities,particularly during the period in which the quarterly report was beingprepared ;
b) evaluated the effectiveness of MMC's disclosure controls andprocedures as of a date within 90 days prior to the filing date of the annualreport (the "Evaluation Date") ; and
c) presented in the quarterly report their conclusions about theeffectiveness of the disclosure controls and procedures based on theirevaluation as of the Evaluation Date ;
5 . the Company's certifying officers had disclosed, based on their mostrecent evaluation, to the Company's auditors and the audit committee of MMC'sboard of directors (or persons performing the equivalent functions) :
a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the Company's ability to record, process,summarize and report financial data and had identified for MMC'sauditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involved management or otheremployees who had a significant role in the registrant's internal controls ;and
6. the Company's certifying officers had indicated in the annual reportwhether there were significant changes in internal controls or other factors thatcould significantly affect internal controls subsequent to the date of their mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses .
557. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
statements concerning the absence of any untrue statement or omission of material fact in the
Company's second quarter 2003 Form 10-Q were materially false and misleading for the reason s
stated above. Further, the financial statements did not fairly present the financial condition o f
the Company. See paragraphs 647-87 . Defendants Greenberg and Wijnberg knew , or recklessly
disregarded, that the statements concerning the reporting of the existence of fraud wer e
materially false and misleading because neither Greenberg nor Wijnberg reported the existenc e
168
of the steering and bidding scheme described above. Likewise, Greenberg and Wijnberg knew ,
or recklessly disregarded, that their statements concerning the reporting of internal contro l
deficiencies were materially false and misleading because the Form 10-Q failed to disclos e
information concerning the internal control deficiencies that permitted the unlawful scheme to b e
perpetrated .
558. Also attached to the second quarter 2003 Form 10-Q, was a certification signed b y
Defendants Greenberg and Wijnberg pursuant to Rule 13a-14(b) or Rule 15d-14(b) of th e
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. In pertinent
part, that certification stated that "the information contained in the Report fairly presents, in al l
material respects, the financial condition and results of operations of Marsh & McLennan
Companies, Inc . "
559. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that thei r
statements that the information contained in the second qua rter 2003 Form 10-Q fairly presented
the financial condition and results of the Company's operations, were materially false an d
misleading for the reasons stated above .
The September 5, 2003 Registration Statement
560. On September 5, 2003, Marsh filed a registration statement and prospectus signe d
by Greenberg, Wijnberg, Rapport, Bernard, Cabiallavetta, Fanjul, Groves, Hardis, King, Lang ,
Olsen, Schapiro, Simmons, and Smith, with the SEC on Form S-3 in connection with a shel f
registration of $3 billion in common stock, preferred stock, or debt securities (the "September 5 ,
2003 registration") . In the September 5, 2003 registration, the Company expressly incorporated
by reference Marsh's Form 10-K for the year ended December 31, 2002, as well as the quarterl y
reports on Forms 10-Q for the periods ended March 31, 2003 and June 30, 2003 .
169
561 . Defendants knew, or recklessly disregarded, that the information incorporated by
reference from the 2002 annual report and quarterly reports for the quarters ended March 31 ,
2003 and June 30, 2003 was materially false and misleading for the reasons alleged above .
562. Deloitte also signed the September 5, 2003 registration and expressly consented t o
the use of their clean audit opinion for Marsh's annual report for the year ended December 31 ,
2002 (incorporated by reference in the preceding paragraph) .
The Third Quarter 2003 Form 10-0
563. On November 14, 2003, Marsh filed its quarterly report for the quarter ende d
September 30, 2003 with the SEC on a Form 10-Q signed by Defendant Wijnberg . In the
MD&A Section of that Form 10-Q, Marsh reported service revenues of $2 .809 billion and
earnings of $357 million, as well as $1 .64 billion in revenues and $388 million in ea rnings for
Risk and Insurance Services .
564. Defendants knew, or recklessly disregarded, that the MD&A Section of the Form
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
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565 . The third quarter 2003 Form 10-Q included various sections relating to risks to
the Company, including Market Risk, Interest Rate Risk, Foreign Currency Risk, Equity Price
Risk, and "Other." In the section entitled "Other," the Company stated :
The insurance coverage for potential liability resulting from alleged errors andomissions in the professional services provided by MMC includes elements ofboth risk retention and risk transfer. MMC believes it has adequately reserved forthe self-insurance portion of the contingencies . Payments related to the respectiveself-insured layers are made as legal fees are incurred and claims are resolved andgenerally extend over a considerable number of years . The amounts paid in thatregard vary in relation to the severity of the claims and the number of claimsactive in any particular year. The long-term portion of this liability is included inOther liabilities in the Consolidated Balance Sheets .
566. Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices, that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution,
and damages .
567. The third quarter 2003 10-Q also stated :
The consolidated financial statements included herein have been prepared byMMC pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principles generallyaccepted in the United States of America have been omitted pursuant to such rulesand regulations, although MMC believes that the disclosures are adequate to makethe information presented not misleading. [Emphasis added .]
568. Defendants knew, or recklessly disregarded, that because the third quarter 200 3
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures are
adequate to make the information presented not misleading," was also materially false an d
misleading .
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569. Attached to the third quarter 2003 Form 10-Q were certifications from Defendant s
Greenberg and Wijnberg, dated November 14, 2003, in which each certified that :
1 . reviewed the Form 10-Q ;
2 . based on their knowledge, the quarterly report did not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by the quarterly report ;
3 . based on their knowledge, the financial statements, and other financialinformation included in the quarterly report, fairly presented in all materialrespects the financial condition, results of operations and cash flows of MMC asof, and for, the periods presented in the quarterly report ;
4. MMC's certifying officers were responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for MMC and have :
a) designed such disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidatedsubsidiaries, was made known to them by others within those entities,particularly during the period in which the quarterly report was beingprepared ;
b) evaluated the effectiveness of MMC's disclosure controls andprocedures as of a date within 90 days prior to the filing date of the annualreport (the "Evaluation Date") ; and
c) presented in the quarterly report their conclusions about theeffectiveness of the disclosure controls and procedures based on theirevaluation as of the Evaluation Date ;
5. the Company' s cert ifying officers disclosed , based on their most recent
evaluation , to the Company' s auditors and the audit committee of MMC' s boardof directors (or persons performing the equivalent functions).
a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the Company's ability to record, process,summarize and report financial data and have identified for MMC'sauditors any material weaknesses in internal controls ; and
b) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant's internal controls ;
and
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6 . the Company's certifying officers have indicated in the annual reportwhether there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of their mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses .
570. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
statements concerning the absence of any untrue statement or omission of material fact in th e
Company's third quarter 2003 Form 10-Q were materially false and misleading for the reason s
stated above. Further, the financial statements did not fairly present the financial condition of
the Company. See paragraphs 647-87 . Defendants Greenberg and Wijnberg knew, or recklessl y
disregarded, that the statements concerning the reporting of the existence of fraud were
materially false and misleading because neither Greenberg nor Wijnberg reported the existenc e
of the illicit scheme described above . Likewise, Greenberg and Wijnberg knew, or recklessl y
disregarded, that their statements concerning the reporting of internal control deficiencies were
materially false and misleading because the Form 10-Q failed to disclose information concernin g
the internal control deficiencies that permitted the unlawful bid-rigging scheme to be perpetrated .
571 . Also attached to the third quarter 2003 Form 10-Q, was a certification signed b y
Defendants Greenberg and Wijnberg pursuant to Rule 13a-14(b) or Rule 15d-14(b) of th e
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code . In pertinent
part, that certification stated that "the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of Marsh & McLenna n
Companies, Inc . "
572. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that their
statements that the information contained in the third quarter 2003 Form 10-Q fairly presente d
the financial condition and results of the Company's operations, were materially false an d
misleading for the reasons stated above .
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The 2003 10-K
573 . On March 15, 2004, Marsh filed its Form 10-k with the SEC its annual report fo r
the year ended December 31, 2003, signed by Greenberg, Wijnberg, Rapport, Cabiallavetta ,
Fanjul, Groves, Hardis, King, Lang, Olsen, Schapiro, Simmons, and Smith . In the description o f
the Company's risk and insurance services business in that Form 10-K, the Company stated :
Once client risks are identified, Marsh provides advice on addressing . ..[client] exposures , including structuring programs for retaining , mitigating,financing, and transferring the risks in combinations that vary according tothe risk profiles, requirements and preferences of clients . Specificprofessional functions provided in this process include loss-control services, theplacement of client risks with the worldwide insurance and capital markets (risktransfer), the development of alternative risk financing methods, establishmentand management of specialized insurance companies owned by clients ("captiveinsurance companies") ; claims collection, injury management, and otherinsurance and risk related services . [Emphasis added . ]
574. Defendants knew, or recklessly disregarded, that the foregoing statement s
concerning the structuring of risk transfer programs and the placement of client risks with th e
worldwide insurance and capital markets based on the "risk profiles, requirements an d
preferences of the clients," were materially false and misleading . The primary consideration for
the Company in the structuring of its clients' risk transfer programs, as well as the placement o f
client risk, was whether Marsh received a kickback pursuant to a contingent commissio n
agreement, and not the risk profile, requirements or preferences of the Company' s clients .
575. The 2003 10-K also stated :
Revenue generated by risk and insurance services is fundamentally derived fromthe value of the services provided to clients and insurance markets .
Market services revenue is derived from agreements that Marsh has withmost of its principal insurance markets . Under these agreements, Marsh ispaid for services provided to the markets, including : access to a globaldistribution network that fosters revenue generation and operatingefficiencies ; intellectual capital in the form of new products, solutions an d
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general information on emerging developments in the insurancemarketplace ; the development and provision of technology systems andservices that create efficiencies in doing business ; and a wide range ofadministrative services . Payments under market service agreements are basedupon such factors as the overall volume, growth, and in limited cases profitability,of the total business placed by Marsh with a given insurer . [Emphasis added . ]
576. Defendants knew, or recklessly disregarded, that the Company's description o f
the "market services revenue" (previously referred to as "placement services revenue") a s
compensation for services provided to the insurance market was materially false and misleading .
Marsh provided no legitimate services to the insurance companies under the contingent
commission agreements . The "services" performed by Marsh on behalf of the insurance
companies were, in fact, the same activities that the Company necessarily performed on behalf of
its clients in the ordinary course of its business as an insurance broker . Further, the "factors"
cited in the foregoing statement - "overall volume of business placed by the broker with tha t
insurer, the aggregate commissions paid by the insurer for that business during specific periods ,
or the profitability or loss to the insurer of the risks placed" - were, in fact, the onl y
consideration for the contingent commissions under the agreements between Marsh and th e
insurance companies .
The 2003 Annual Report
577. Attached to the 2003 Form 10-K were several documents , including the Marsh
2003 annual report to its shareholders . The annual report contained a letter from Defendant
Greenberg to the Company's shareholders, dated March 5, 2004 . In that letter, Defendant
Greenberg stated :
Marsh had another great year in 2003, extending to seven years its record ofdouble-digit earnings growth, the longest in MMC's history as a public company .Revenues rose 16 percent to $6 .9 billion, and operating income increased 18percent to $1 .8 billion .
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Marsh serves clients--and creates value for MMC shareholders-through itsglobal presence, specialized expertise, and market knowledge and access . Aroundthe world, clients have a growing appreciation of the value of the insurancebroker, as exemplified by Marsh . Its services do not simply lower the cost ofpremiums and effect the transfer of risk in a time of turmoil in insurancemarkets . They help manage and reduce risk , thereby lowering its total cost .[Emphasis added . ]
578 . Defendant Greenberg knew, or recklessly disregarded, that his statement that th e
Company's risk and insurance services "do not simply lower the cost of premiums and effect th e
transfer of risk in a time of turmoil in insurance markets," but "help manage and reduce risk ,
thereby lowering its total cost," was materially false and misleading . The improper steering o f
clients to certain insurance companies in order to maximize contingent commissions cause d
many of the Company's clients to pay more in insurance premiums and/or obtain insurance
coverage with more restrictive terms than they would have had Marsh engaged in a genuin e
competitive bidding process on behalf of its clients .
579. The 2003 annual repo rt also contained a section entitled "A conversation with
Ray J . Groves, chairman and chief executive officer, and Roger E. Egan, president, of Marsh
Inc." In that section, Defendants Groves and Egan stated :
Our financial performance in 2003 was excellent . Revenues rose 16 percent to$6.9 billion, a 13 percent increase on an underlying basis . Operating incomeincreased 18 percent to $1 .8 billion. The growth was broadly based across clientsegments, geographic regions, and risk specialties . We continued to extend ourgeographic reach, expertise, and service offerings .
580. In the MD&A Section of the 2003 annual report, the Company reported financia l
data for its various segments , including risk and insurance serv ices . Under risk and insuranc e
services, Marsh reported risk management and insurance broking revenues of $5 .173 billion and
$4.411 billion for 2003 and 2002, respectively. That section further stated :
The 6% growth in underlying revenue over 2002 was primarily driven by higherrenewal revenue and market service revenue and the impact of higher premiumsin the risk and insurance services segment combined with growth in each of the
176
practices of the consulting segment . Offsetting this growth was an 8% decrease inthe investment management segment due to a decline in the amount of assetsunder management on which fees are earned and a decline in underwriting anddistribution fees .
581 . With respect to revenues, the 2003 annual report stated :
Revenue for the risk and insurance services segment grew 16% in 2003 over2002, 13% on an underlying basis, reflecting an increase in renewal business,higher market services revenues, and the effect of higher premiums . Fiduciaryinterest income in 2003 declined 3% compared to 2002 . . . . In 2003, theunderlying revenue in risk management and insurance broking, which isapproximately 75% of this segment's revenues, grew 13% . Within riskmanagement and insurance broking, underlying revenue grew 15% in the UnitedStates, 10% in Europe, and 15% in other geographies .
582. In the section of the 2003 annual report entitled "Segment Information," Mars h
reported risk and insurance services revenues of $6 .868 billion, including $5 .179 billion in
revenues for risk management and insurance broking .
583 . Defendants knew, or recklessly disregarded, that the statements identified abov e
were materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
584. The Groves and Eagan section of the 2003 annual report further stated :
Marsh's experience in the global insurance and reinsurance markets gives usthe ability to arrange and place the complex insurance coverages clientsneed. We reach across markets to tap into risk capital wherever it exists ,
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seeking the best terms, conditions, and prices . Our brokers' knowledge ofthe interests of insurers for different types of risk and their relationshipswith senior underwriters are an advantage for clients as well asunderwriters . [Emphasis added . ]
Marsh's ability to identify, analyze, mitigate, and transfer risk will be a criticalfactor in driving revenue growth, particularly as businesses develop globally andrisks grow more complex . Evidence of expanding risks is visible in the demandfor worldwide property and casualty insurance, which produced over $1 trillion inpremiums in 2003 . The insurance broker offers the most efficient distributionsystem through which clients purchase commercial insurance. Brokers provideincreased access to the global insurance marketplace , more and betterinsurance products at competitive prices, and greater knowledge andprofessional risk management expertise . [Emphasis added . ]
585 . Defendants Groves and Egan knew, or recklessly disregarded, that the statement
concerning Marsh's efforts to seek "the best terms, conditions, and prices" on behalf of its client s
was materially false and misleading. The improper steering of clients to certain insurance
companies in order to maximize contingent commissions caused many of the Company' s clients
to pay more in insurance premiums and/or obtain insurance coverage with more restrictive term s
than they would have had Marsh engaged in a genuine competitive bidding process on behalf o f
its clients .
586. Similarly, Groves and Egan knew, or recklessly disregarded, that their statemen t
concerning the broker's ability to provide "more and better insurance products at competitiv e
prices," was materially false and misleading because it failed to disclose that Marsh engaged in a
phony bid scheme, as well as the improper steering of clients to certain insurance companies, i n
order to maximize contingent commissions, which caused many of the Company's clients to pa y
more in insurance premiums and/or obtain insurance coverage with more restrictive terms tha n
they would have had Marsh engaged in a genuine competitive bidding process on behalf of it s
clients .
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587 . The 2003 annual report further stated :
Market services revenue is derived from agreements that Marsh has with most ofits principal insurance markets . Under these agreements, Marsh is paid forservices provided to the markets including : access to a global distributionnetwork that fosters revenue generation and operating efficiencies ;intellectual capital in the form of new products , solutions , and generalinformation on emerging developments in the insurance marketplace ; thedevelopment and provision of technology systems and services that createefficiencies in doing business ; and a wide range of administrative services .Payments under market service agreements are based upon such factors as theoverall volume, growth, and in limited cases profitability, of the total businessplaced by Marsh with a given insurer . [Emphasis added . ]
588. Defendants knew, or recklessly disregarded, that the Company's description o f
the market service revenue as compensation for services provided to the insurance market wa s
materially false and misleading. Marsh provided no legitimate services to the insuranc e
companies under the contingent commission agreements . The "services" performed by Marsh
on behalf of the insurance companies were, in fact, the same activities that the Company
necessarily performed on behalf of its clients in the ordinary course of its business as an
insurance broker . The "factors" cited in the foregoing statement - "overall volume, growth, and
in limited cases profitability, of the total business placed by Marsh with a given insurer" - were ,
in fact, the only consideration for the contingent commissions under the agreements between
Marsh and the insurance companies .
589. The 2003 annual report also contained a "Report of Management" signed by
Defendant Wijnberg which, in pertinent part, stated :
The management of Marsh & McLennan Companies, Inc . has prepared and isresponsible for the accompanying financial statements and other related financialinformation contained in this annual report . MMC's financial statements wereprepared in accordance with generally accepted accounting principles, applyingcertain estimates and informed judgments as required . Deloitte & Touche LLP,independent auditors, have audited the financial statements and have issued theirreport thereon .
179
590 . Defendant Wijnberg knew, or recklessly disregarded, that the statement tha t
Marsh' s financial statements were prepared in accordance with GAAP was materially false and
misleading for the reasons alleged in paragraphs 647-87 .
591 . The 2003 annual report also included a copy of the March 5, 2004 Independen t
Auditors' Report from Deloitte & Touche LLP . In that Report, Deloitte stated :
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America . Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement . An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies,Inc. and subsidiaries as of December 31, 2003 and 2002 , and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America . [Emphasis added . ]
592. Deloitte knew, or recklessly disregarded, that its statement that the consolidate d
financial statements of Marsh as of December 31, 2003 and 2002 presented fairly, in conformit y
with GAAP, the financial position of the Company was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenuesand that Marsh's contingent commissions included proceeds from its impropersteering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might bediscontinued, that disclosure of these practices could have an adverse impact on
180
its client relationships, and that the Company could be subject to fines, penalties,claims for restitution, and damage s
593 . Further, Deloitte knew, or recklessly disregarded, that its statement that i t
conducted its audit in accordance with GAAS was materially false and misleading for the
reasons alleged in paragraphs 688-747 below .
594. The 2003 Form 10-K contained the certifications from Defendants Greenberg an d
Wijnberg in which each certified that they had :
reviewed the Form 10-K ;
2. based on their knowledge, the annual report did not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by the annual report ;
3. based on their knowledge, the financial statements, and other financialinformation included in the annual report, fairly presented in all material respectsthe financial condition, results of operations and cash flows of MMC as of, andfor, the periods presented in the annual report;
4. MMC's certifying officers were responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for MMC and have :
a) designed such disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidatedsubsidiaries, was made known to them by others within those entities,particularly during the period in which the annual report was beingprepared ;
b) evaluated the effectiveness of MMC' s disclosure controls andprocedures as of a date within 90 days prior to the filing date of the annualreport (the "Evaluation Date") ; and
c) presented in the annual report their conclusions about the effectivenessof the disclosure controls and procedures based on their evaluation as ofthe Evaluation Date;
5. the Company's certifying officers disclosed, based on their most recentevaluation, to the Company's auditors and the audit committee of MMC's boardof directors (or persons performing the equivalent functions) :
181
a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the Company's ability to record, process,summarize and report financial data and have identified for MMC'sauditors any material weaknesses in internal controls ; and
b) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant's internal controls ;and
6. the Company's certifying officers have indicated in the annual reportwhether there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of their mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses .
595. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
statements concerning the absence of any untrue statement or omission of material fact in th e
Company's 2003 Form 10-K were materially false and misleading . As alleged above, th e
Company's 2003 Form 10-K contained materially false and misleading statements concerning ,
among other things, Marsh's reported earnings and the criteria for structuring risk programs fo r
the Company's clients . Further, the financial statements did not fairly present the financia l
condition of the Company because of the reasons set forth in paragraphs 647-87 .
' 596. Defendants Greenberg and Wijnberg also knew, or recklessly disregarded, tha t
their statements concerning the disclosure of existence of fraud was materially false and
misleading because neither Greenberg nor Wijnberg reported the existence of the illicit scheme
described above. Likewise, Greenberg and Wijnberg knew, or recklessly disregarded, that their
statements concerning the reporting of internal control deficiencies were materially false and
misleading because neither reported the existence of any of the internal control deficiencies that
enabled the illicit scheme to be perpetrated .
597. Also attached to the November 2003 Form 10-K was a certification signed b y
Defendants Greenberg and Wijnberg pursuant to Rule 13a-14(b) or Rule 15d-14(b) of th e
182
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. In pertinent
part, that certification stated that "the information contained in the Repo rt fairly presents, in all
material respects, the financial condition and results of operations of Marsh & McLenna n
Companies, Inc ."
598. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that thei r
statement that the information contained in the 2003 Form 10-K fairly presented the financia l
condition and results of the Company's operations, was materially false and misleading for th e
reasons stated in paragraphs 647-87 above .
The 2004 Definitive Proxy
599. On March 27, 2003, Marsh filed its 2004 proxy on Form DEF 14A and
recommended shareholders ratify Deloitte as the Company's "independent" auditor .
600. With respect to the Company's compensation philosophy Marsh stated :
MMC is a professional services firm with businesses having distinct economiccharacteristics, marketplaces and operating conditions . The leadership positionattained over time by MMC's operating subsidiaries in their respective businessesin terms of services provided, market share, revenue, profitability and rate ofgrowth has been earned largely through the selection, training and development oftop caliber executive, managerial and professional talent .
601 . Defendants knew, or recklessly disregarded, that the statement concerning th e
"leadership position" achieved by Marsh and its subsidiaries was the result of the Company' s
improper steering activities, and not the result of Marsh's "selection, training and developmen t
of top caliber executive, managerial and professional talent . "
602. The 2004 definitive proxy also compared the Company's five-year performanc e
(from December 31, 1998 through December 31, 2003) to that of the S&P 500 index and a
composite industry index . The comparison stated that $100 dollars invested in Marsh i n
December 31, 1998 (with dividends reinvested) resulted in a return of $184, which was
183
represented as outperforming the S&P 500's return for the same period of $97 and the composit e
industry index's return of $132 .
603. Defendants knew, or recklessly disregarded, that the comparison of Marsh' s
performance to that of the S&P 500 index and a composite industry index were materially fals e
and misleading because the Company failed to disclose that the price of its stock was inflated, i n
part, by the financial results that were achieved, in material part, due to Marsh's imprope r
scheme and receipt of kickbacks paid pursuant to contingent commission agreements .
The First Quarter 2004 Form 10- 0
604. On May 10, 2004, Marsh filed its quarterly report for the quarter ended March 31 ,
2004 with the SEC on a Form 10-Q signed by Defendant Wijnberg . In the MD&A Section o f
that Form 10-Q, Marsh reported service revenues of $3.177 billion and net income of $44 6
million, as well as $1 .944 billion in revenues and $637 million for Risk and Insurance Services :
605. Defendants knew, or recklessly disregarded, that the MD&A Section of the For m
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenuesand that Marsh's contingent commissions included proceeds from its impropersteering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might bediscontinued, that disclosure of these practices could have an adverse impact onits client relationships, and that the Company could be subject to fines, penalties,claims for restitution, and damages .
184
606 . The first quarter 2004 Form 10-Q included various sections relating to risks to the
and "Other." In the section entitled "Other," the Company stated :
The insurance coverage for potential liability resulting from alleged errors andomissions in the professional services provided by MMC includes elements ofboth risk retention and risk transfer. MMC believes it has adequately reserved forthe self-insurance portion of the contingencies . Payments related to the respectiveself-insured layers are made as legal fees are incurred and claims are resolved andgenerally extend over a considerable number of years . The amounts paid in thatregard vary in relation to the severity of the claims and the number of claimsactive in any particular year. The long-term portion of this liability is included inOther liabilities in the Consolidated Balance Sheets .
607. Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices and that these practices could have an adverse impact on its clien t
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
608. In addition, in the section entitled "Other Industry Inquiries," the Form 10- Q
stated:
The New York Attorney General has issued subpoenas to numerous insurancebrokers related to an inquiry into market service agreements and other similaragreements which compensate brokers for distribution and other servicesprovided to insurance carriers . The Company has received such a subpoena and iscooperating fully in the investigation .
609. Defendants knew, or recklessly disregarded, that the foregoing statemen t
concerning the inquiry into market service agreements was materially false and misleading
because Marsh did not disclose the existence of the unlawful bid-rigging and kickback schem e
undertaken by the Company to maximize revenues under such market se rv ice agreements .
Furthermore, Defendant Greenberg did not cooperate fully with the investigation, therefore ,
185
Marsh's statement that it was "cooperating fully" with the investigation was materially false an d
misleading.
610. The first quarter 2004 10-Q also stated :
The consolidated financial statements included herein have been prepared byMarsh pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to suph rules and regulations, althoughMarsh believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added .]
611 . Defendants knew, or recklessly disregarded, that because the first quarter 2004
Form 10-Q was materially misleading as alleged above, the statement that the "disclosures ar e
adequate to make the information presented not misleading," was also materially false and
misleading .
612. Attached to the first quarter 2004 Form 10-Q were certifications from Defendant s
Greenberg and Wijnberg, dated May 10, 2004, in which each certified that they had :
1 . reviewed the Form 10-Q ;
2. based on their knowledge, the quarterly report did not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by the quarterly report ;
3. based on their knowledge, the financial statements, and other financialinformation included in the quarterly report, fairly presented in all materialrespects the financial condition, results of operations and cash flows of MMC asof, and for, the periods presented in the quarterly report ;
4. MMC's certifying officers were responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for MMC and have :
a) designed such disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidatedsubsidiaries, was made known to them by others within those entities,particularly during the period in which the quarterly report was beingprepared ;
186
b) evaluated the effectiveness of MMC's disclosure controls andprocedures as of a date within 90 days prior to the filing date of the annualreport (the "Evaluation Date") ; and
c) presented in the quarterly report their conclusions about theeffectiveness of the disclosure controls and procedures based on theirevaluation as of the Evaluation Date ;
5 . the Company's certifying officers disclosed, based on their most recentevaluation, to the Company's auditors and the audit committee of MMC's boardof directors (or persons performing the equivalent functions) :
a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the Company's ability to record, process,summarize and report financial data and have identified for MMC'sauditors any material weaknesses in internal controls ; and
b) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant's internal controls ;and
6. the Company's certifying officers have indicated in the annual reportwhether there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of their mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses .
613. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
statements concerning the absence of any untrue statement or omission of material fact in the
Company's first quarter 2004 Form 10-Q were materially false and misleading for the reason s
stated above. Further, the financial statements did not fairly present the financial condition o f
the Company for the reasons set forth in paragraphs 647-87 . Defendants Greenberg and
Wijnberg also knew, or recklessly disregarded, that the statements concerning the reporting of
the existence of fraud were materially false and misleading because neither Greenberg nor
Wijnberg reported the existence of the illicit scheme described above. Likewise, Greenberg and
Wijnberg knew, or recklessly disregarded, that their statements concerning the reporting of
internal control deficiencies were materially false and misleading because the Form 10-Q faile d
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to disclose information concerning the internal control deficiencies that permitted the illici t
scheme to be perpetrated .
614. Also attached to the first quarter 2004 Form 10-Q was a certification signed b y
Defendants Greenberg and Wijnberg pursuant to Rule 13a-14(b) or Rule 15d-14(b) of th e
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code . In pertinent
part, that certification stated that "the information contained in the Report fairly presents, in al l
material respects , the financial condition and results of operations of Marsh & McLennan
Companies, Inc . "
615. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that thei r
statement that the information contained in the first quarter 2004 Form 10-Q fairly presented th e
financial condition and results of the Company's operations, was materially false and misleadin g
for the reasons stated above .
The June 9, 2004 Best' s Insurance Article
616. On June 9, 2004, in a Best's Insurance news article, Defendant Sinnott wa s
reported as stating :
Brokers also play a vital role as intermediaries who have extensive knowledge ofthe market, allowing the proper match between buyers and sellers, he said . In theend, the broker has come a long way from the days when the answer to th eclient's question about methods or payments might have been "none of yourbusiness," said Sinnott . "Now, brokers are fine-tuning their transparency astheir role becomes increasingly important ," he said. [Emphasis added . ]
617. Defendant Sinnott knew, or recklessly disregarded, that his statement that broker s
"are fine-tuning their transparency," was materially false and misleading . According to Bewlay,
Marsh had a protocol of misleading its clients with respect to the amount of contingen t
commissions earned in connection with their insurance coverage . Marsh provided clients who
inquired about the contingent commissions with a calculation called the "Average Contingenc y
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Factor," or "ACF ." Because the ACF disclosed the magnitude of contingent commissions on a
blended basis, across all product lines, Sinnott knew, or recklessly disregarded, that it yielded a
misleadingly understated contingent commission calculation with respect to individual client s
due to the significant variations in the amount of contingent commissions that were paid among
different product lines .
The June 24, 2004 Conferenc e
618. On June 24, 2004, Defendant Greenberg appeared at the Sanford C . Bernstein &
Co. 20th Annual Strategic Decisions Conference 2004 . During his remarks, Greenberg stated :
Centralized placement increases the number of insurance companies that cancompete for clients ' risks because an insurance company doesn't need a branchsystem when we centralize placement. So there's a level playing filed comparedto scattered specialists that require the insurance company to match up a branch .Through more concentrated contact with carriers we gain advantage. We canassess the risk appetite of each insurance company more accurately, we cansubmit risks that each wants - and they're all different - and we can submit risksin the form that each insurance company wants, and those are all different . Sothere's really not a standardization in a lot of our business, and so thisconcentration of specialization by risk, by risk type, and often by insurancecarrier, has led to much improved results over the years . It's requiredconsiderable investment on our part, large-scale reorganization of the companyover the last years, but it' s produced better placement for clients . So it works .[Emphasis added . ]
619. Defendant Greenberg knew, or recklessly disregarded, that his statements abou t
increased competition amongst insurance companies and better placement for clients resulting
from Marsh's centralized placement, were materially false and misleading. Centralized
placement through Marsh's Global Insurance Broking enabled the Company to engage in a n
improper steering and bid manipulation scheme that eliminated the competitive bidding proces s
for insurance companies, enabling them to secure client placement by Marsh in exchange fo r
contingent commission kickbacks, while engaging in sham competitive bidding for that business .
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Marsh improperly steered clients to those insurance companies that paid the Company contingen t
commissions , irrespective of the adequacy of the coverage or the cost to Marsh's clients .
620. During a question and answer session, Greenberg was asked, "There are severa l
questions relating to the current issue on contingent commissions, various issues . How big a
magnitude is it for Marsh? How do you see disclosure changing the future? How do you think i t
will affect your businesses, your brokerage businesses going forward?" Greenberg responded :
Unsurprising that there would be a level of interest . Of course these are anindustry-wide subject of regulatory reviews right now, so there's a lot I cannotsay.
But I think what is missing - at least I can speak about Marsh better than I canabout anybody else, but I think holds true for many of the competitors of Marsh -is that the nature of placement is not simple . It's complex work. The risks of theclients are very complex and always changing . The limits of liability are huge .The need to strategize and structure first and then to think about where the marketexists is very important in negotiating skills . And insurance carriers like anyother people who negotiate will negotiate more effectively with people who theyknow and have come level of trust with . So relationship bu ilding has workedwell for clients as well.
In the mix don't forget the fact that clients have claims that are often complex anddifficult and don't get settled right away - long tailed liability, for example . Socontinuity with carriers can become an issue, either having it or what do you do ifyou don't have it . If you need to move business for one reason or another -there's a lot that goes behind placement . The need for databases today globally totrack carriers, to track placement .
I guess what all this adds up to me is that the nature of placement in ourorganization is not a simple subject ; it isn't a commodity. Every risk is difference[sic] and has to be thought of that way. And so one way or another Marsh w illbe compensated for its services, whether it 's through one arrangement - butif those are thought to be deficient by the industry, by clients, then we willhave to consider what shifts to make . But I think the important thing is to focuson the nature of placement, rather than the particular form of compensation .[Emphasis added. ]
621 . Greenberg knew, or recklessly disregarded, that his statements concernin g
Marsh's "relationship building" working well for clients were materially false and misleading
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because the improper steering of clients and bid manipulation in order to maximize revenue s
caused clients to pay more in premiums and/or obtain insurance coverage with more restrictiv e
terms than they would have had Marsh conducted a genuinely competitive bidding process .
Furthermore, his statements concerning the nature of "placement" and Marsh's compensation fo r
its services, were materially false and misleading . As alleged herein, Marsh did not provide
services to insurance companies in exchange for contingent commissions, but instead, th e
contingent commissions were based on the volume of business placed with the insuranc e
company or, to a lesser degree, the profitability of the insurance carrier . Moreover, the primary
consideration in client placement was whether Marsh received kickbacks under a contingen t
commission agreement, and not the nature or complexity of the risk presented by the client, a s
alleged herein.
The July 8, 2004 Prospectus Supplemen t
622 . On July 8, 2004, Marsh filed a prospectus supplement with the SEC on Form
424(b)(3) in connection with the Company offering $650 million in 5 .375% Notes due 2014 and
$500 million in floating rate senior Notes due 2007. That prospectus supplement was issued in
connection with a Marsh $3 billion shelf registration, and incorporated by reference th e
information from its annual report for the year ended December 31, 2003 and the quarterly repor t
on Form 10-Q for the quarter ended March 31, 2004.
623 . Defendants knew, or recklessly disregarded, that certain of the informatio n
incorporated by reference from the 2003 annual report and the Form 10-Q for the quarter ended
March 31, 2004 was materially false and misleading for the reasons alleged above .
The July 28, 2004 Analysts Call
624. On July 28, 2004, Marsh conducted a conference call with analysts regarding th e
first quarter 2004 results . During that call, Tom Cholnoky of Goldman Sachs asked Greenberg
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about margins in the insurance services area, as well as "the issue of contingent commissions . "
In response, Greenberg stated, "As I have said for some years now, we don't run our business t o
optimize margin . What we do is run our business to build long term shareholder value and serve
clients better."
625. Defendant Greenberg knew, or recklessly disregarded, that his statement tha t
Defendants ran Marsh to build long term shareholder value, was materially false and misleading .
Marsh engaged in unlawful conduct to improperly generate revenues . As a consequence of that
conduct, Marsh was subjected to investigation by various regulatory agencies, incurring
substantial costs, including the creation of an $850 million restitution fund for its clients .
Moreover, as a result of the regulatory action in connection with Defendants' unlawful scheme ,
Marsh has ceased accepting contingent commissions, thereby eliminating substantial revenue s
that the Company had publicly and falsely represented was proper throughout the Class Period .
626 . Likewise, Greenberg knew, or recklessly disregarded, that his statement tha t
Marsh was run "to . . . serve clients better," was materially false and misleading . Marsh' s
improper steering and bid manipulation practices defrauded the Company' s clients to enabl e
Marsh to maximize contingent commissions, in violation of criminal law . In addition, the
Company's improper steering of clients in order to maximize contingent commissions cause d
many of the Company's clients to pay more in insurance premiums and/or obtain insuranc e
coverage with more restrictive terms than they would have had Marsh engaged in a genuine
competitive bidding process on behalf of its clients . Similarly, according to Bewlay, Marsh ha d
a protocol of misleading its clients with respect to the amount of contingent commissions earned
in connection with their insurance coverage .
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627. Cholnoky followed-up by asking, "what the markets seem to be struggling with is ,
let's say there is a change in the way contingent commissions are, how companies approach that ,
if there was a drastic change in the way you could receive them or what not, would that have a
meaningful impact on your revenues? Do you think you could make it up elsewhere?" Greenber g
responded :
We think that the most important issue and I have said this before is that weprovide services for which we expect to be compensated and there are variousways that one can be compensated . The way in which we handle it today isMSAs but if we found that we needed to change the method of compensation, wewould do so . The principal [sic] being that we are going to be compensated forour services. It is not something we spend a lot of time worrying about . We aredealing with regulators a step at a time, and knowledgeable about how ourbusiness works, what our model is, and what values we provide, and expecting tocontinue to be compensated for what we do . [Emphasis added . ]
628. Defendant Greenberg knew, or recklessly disregarded, that his statement tha t
contingent commissions paid pursuant to MSAs were compensation for services provided by
Marsh, was materially false and misleading. Marsh provided no legitimate services to th e
insurance companies under the contingent commission agreements . The "services" performed
by Marsh on behalf of the insurance companies were, in fact, the same activities that the .
Company necessarily performed on behalf of its clients in the ordinary course of its business as
an insurance broker . Instead, the contingent commissions were, in reality, nothing more tha n
kickbacks from the insurance companies based on the volume of business placed by Marsh or, t o
a lesser extent , the profitability of the insurer .
629. During that same conference call, Jay Cohen of Merrill Lynch asked if there ha d
been any change in the behavior of carriers in "how they set these things up, how they react
going forward given the scrutiny? Have they changed their behavior regarding these
arrangements at all?" After Greenberg stated that his relationships with the carriers had not
changed, Mike Bischoff, Marsh's Vice President for Investor Relations stated :
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We haven't noticed any material change in the market's attitude . We are mostconcerned about our client's attitude given the press on this issue . In speaking toclients, it is a ma tter of disclosure . Marsh has led the industry in terms ofdisclosure, and we think we wi ll continue to lead the industry in terms ofdisclosure . [Emphasis added . ]
630. Defendant Bischoff knew, or recklessly disregarded, that his statement tha t
"Marsh has led the industry in terms of disclosure, and we think we will continue to lead th e
industry in terms of disclosure," was materially false and misleading . According to Bewlay,
Marsh had a protocol of misleading its clients with respect to the amount of contingent
commissions earned in connection with their insurance coverage .
631 . During the July 28, 2004 conference call, Mark Lane of William Blair &
Company asked, "On the contingent commission, someone had asked a question about hav e
insurers changed their behavior . But have you broadly, since this issue came out formally, have
you broadly changed your disclosure that you are providing to your clients?" Defendant Egan ,
President and Chief Operating Officer of Marsh, responded :
First of all, you should know that the issue has surfaced recently, but it actuallywas a fairly well known issue and discussed heavily in the press and publicforums in the late 1990's . During that time, Marsh took initiative to develop aprotocol with respect to disclosure , and agreed to that protocol with thebuyer organization , the Insurance Management Society [ indiscernible]. Wehave continued to abide by that protocol that was established and continuedto disclose to clients when they ask as much information as they need toknow about these agreements . [Emphasis added . ]
632. Defendant Egan knew, or recklessly disregarded, that his statements concernin g
the disclosure protocol used by Marsh in connection with client inquiries regarding contingen t
commissions, was materially false and misleading because Egan failed to disclose that Marsh' s
protocol was to mislead clients by understating the amount of contingent commissions earned i n
connection with the client's insurance placement for the reasons stated paragraph 242-49 above .
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The Second Quarter 2004 Form 10- 0
633. On August 3, 2004, Marsh filed its quarterly report for the quarter ended June 30 ,
2004 with the SEC on a Form 10-Q signed by Defendant Wijnberg . In the MD&A Section o f
that Form 10-Q, Marsh reported service revenues of $2.964 billion and earnings of $389 million,
as well as $1 .817 billion in revenues and earnings of $445 million for Risk and Insuranc e
Services . In the MD&A Section, the Company reported :
634. Defendants knew, or recklessly disregarded, that the MD&A Section of the For m
10-Q identified above was materially false and misleading because :
(a) Marsh failed to disclose the magnitude of its contingent commissions in itsfinancial statements despite the fact that they were a material source of revenues and thatMarsh's contingent commissions included proceeds from its improper steering and bid-manipulation practices ;
(b) Marsh failed to disclose the true nature of the services it was providing inreturn for the receipt of contingent commissions ;
(c) Marsh's earnings were overstated because Marsh failed to reserve forcontingent losses associated with Marsh's improper activities ; and
(d) in relying on improper business practices to generate a portion of itsrevenues, Marsh failed to disclose the material risk that these revenues might be discontinued,that disclosure of these practices could have an adverse impact on its client relationships, andthat the Company could be subject to fines, penalties, claims for restitution, and damages .
635. The second quarter 2004 Form 10-Q included various sections relating to risks to
the Company, including Market Risk, Interest Rate Risk, Foreign Currency Risk, Equity Pric e
Risk, and "Other ." In the section entitled "Other," the Company stated :
On June 9, 2004, MMC reached a final settlement of the previously disclosedarbitration proceeding with Lawrence J . Lasser, former president and chiefexecutive officer of Putnam . The settlement represents approximately $25million less than the company had accrued for compensation expense for Mr .Lasser in prior years . In addition, as further discussed in Note 13 to theConsolidated Financial Statements, administrative proceedings and a number oflawsuits have commenced against Putnam and MMC .
195
The insurance coverage for potential liability resulting from alleged errors andomissions in the professional services provided by MMC, includes elements ofboth risk retention and risk transfer. MMC believes it has adequately reserved forthe self-insurance portion of the contingencies . Payments related to the respectiveself-insured layers are made as legal fees are incurred and claims are resolved andgenerally extend over a considerable number of years . The amounts paid in thatregard vary in relation to the severity of the claims and the number of claimsactive in any particular year. The long-term portion of this liability is included inOther liabilities in the Consolidated Balance Sheets .
636. Defendants knew, or recklessly disregarded, that the foregoing statements were
materially false and misleading because Marsh failed to disclose its improper steering and bi d
manipulation practices, that these practices could have an adverse impact on its client
relationships, and that the Company could be subject to fines, penalties, claims for restitution ,
and damages .
637. In addition, in the section entitled "Other Industry Inqui ri es ," the Form 10-Q
stated:
The New York Attorney General has issued subpoenas to numerous insurancebrokers related to an inquiry into market service agreements and other similaragreements which compensate brokers for distribution and other servicesprovided to insurance carriers . The Company has received such a subpoena and iscooperating fully in the investigation .
638. Defendants knew, or recklessly disregarded, that the foregoing statemen t
concerning the inquiry into market service agreements was materially false and misleading
because Marsh did not disclose the existence of the improper steering and bid manipulatio n
practices undertaken by the Company to maximize revenues under such market serv ice
agreements . Furthermore, as alleged herein, Defendants were not, in fact, cooperating fully wit h
the investigation .
639. The second quarter 2004 10-Q also stated :
The consolidated financial statements included herein have been prepared byMarsh pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included i n
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financial statements prepared in accordance with generally accepted accountingprinciples have been omitted pursuant to such rules and regulations, althoughMarsh believes that the disclosures are adequate to make the informationpresented not misleading . [Emphasis added . ]
640. Defendants knew, or recklessly disregarded, that because the second quarter 2004
Form 10-Q was misleading as alleged above, the statement that the "disclosures are adequate t o
make the information presented not misleading," was also materially false and misleading .
641 . Attached to the second quarter 2004 Form 10-Q were certifications from
Defendants Greenberg and Wijnberg, dated May 10, 2004, in which each certified that they had :
reviewed the Marsh August 2004 Form 10-Q ;
2 . based on their knowledge, the quarterly report did not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by the quarterly report ;
3 . based on their knowledge, the financial statements, and other financialinformation included in the quarterly report, fairly presented in all materialrespects the financial condition, results of operations and cash flows of Marsh asof, and for, the periods presented in the quarterly report ;
4. Marsh's certifying officers were responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for MMC and have :
a) designed such disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidatedsubsidiaries, was made known to them by others within those entities,particularly during the period in which the quarterly report was beingprepared;
b) evaluated the effectiveness of Marsh's disclosure controls andprocedures as of a date within 90 days prior to the filing date of the annualreport (the "Evaluation Date") ; and
c) presented in the quarterly report their conclusions about theeffectiveness of the disclosure controls and procedures based on theirevaluation as of the Evaluation Date ;
5. the Company's certifying officers disclosed, based on their most recentevaluation, to the Company's auditors and the audit committee of Marsh's boardof directors (or persons performing the equivalent functions) :
197
a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the Company's ability to record, process,summarize and report financial data and have identified for Marsh'sauditors any material weaknesses in internal controls ; and
b) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant's internal controls ;and
6. the Company's certifying officers have indicated in the annual reportwhether there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of their mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses .
642. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that th e
statements concerning the absence of any untrue statement or omission of material fact in th e
Company's second quarter 2004 Form 10-Q were materially false and misleading for the reason s
stated above . Further, the financial statements did not fairly present the financial condition o f
the Company because of the reasons set forth in paragraphs 647-87 . Defendants Greenberg and
Wijnberg also knew, or recklessly disregarded, that the statements concerning the reporting of
the existence of fraud were materially false and misleading because neither Greenberg nor
Wijnberg reported the existence of the illicit scheme. Likewise, Greenberg and Wijnberg knew ,
or recklessly disregarded, that their statements concerning the reporting of internal contro l
deficiencies were materially false and misleading because the Form 10-Q failed to disclos e
information concerning the internal control deficiencies that permitted the illicit scheme to be
perpetrated .
643. Also attached to the second quarter 2004 Form 10-Q, was a certification signed b y
Defendants Greenberg and Wijnberg pursuant to Rule 13a-14(b) or Rule 15d-14(b) of th e
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. In pertinen t
part, that certification stated that "the information contained in the Report fairly presents, in al l
198
material respects, the financial condition and results of operations of Marsh & McLenna n
Companies, Inc ."
644. Defendants Greenberg and Wijnberg knew, or recklessly disregarded, that thei r
statement that the information contained in the second quarter 2004 Form 10-Q fairly presented
the financial condition and results of the Company's operations, was materially false an d
misleading for the reasons stated above .
The September 10, 2004 Best's Insurance News Articl e
645. On September 10, 2004 , Best 's Insurance News published a news art icle entitled
"Marsh Believes Web Site Will Improve Income Disclosure ." The article, in relevant part ,
reported:
With regulatory probes of market service agreements between insurers andcommercial brokers the subject of regulatory probes in New York, California andConnecticut, as well as lawsuits in California and Illinois, Marsh & McLennanCos. has launched a new Web site to provide clients with a betterunderstanding of how the company does business , according to Chief FinancialOfficer Sandra S . Wijnberg. Launched Sept . 1, the site allows clients see asample contract, Marsh's code of conduct, and see some aggregate figures on thepercentage of income the company makes from contingent commissions andplacement fees paid by insurers, Wijnberg told attendees of Keefe, Bruyette andWoods' 2004 Insurance Conference. [Emphasis added . ]
"What we found is that bigger clients already were pretty knowledgeable, andthey haven't been particularly agitated about this," Wijnberg said. "From ourperspective, the most important thing is what is happening with our clients, andwe believe in working with the clients and working with the regulators, we'llcome to the right conclusion. Our clients are telling us that the most importantthing to them is disclosure, and obviously we've been working with the regulatorsto show them what we know from clients and what we're going to do to enhancedisclosure of that . "
646. Defendant Wijnberg knew, or recklessly disregarded, that her statements that th e
Company had launched a website to provide clients with a "better understanding of how th e
company does business," was materially false and misleading because she failed to disclose tha t
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Marsh continued to conceal the existence of the improper steering and bid manipulation
practices, as well as the fact that Marsh improperly steered clients to certain insurance companies
in order to secure higher contingent commissions, irrespective of the best interests of the clients .
Likewise, her statement that the Company's "bigger clients were already pretty knowledgeable ,
and they haven't been particularly agitated about this," was materially false and misleadin g
because Marsh's bigger clients were not knowledgeable about the unlawful bid-rigging scheme ,
or that the Company improperly steered clients to certain insurance companies in order to secure
higher contingent commissions, irrespective of the best interests of the clients.
XI. MARSH 'S FRAUDULENT ACCOUNTIN G
647. Marsh's scheme to generate revenues from improper steering and bid-
manipulation practices, and its efforts to conceal these practices from the public and its clients,
rendered its financial statements materially false and misleading and in violation of GAAP and
the SEC's regulations governing financial statement reporting .
648. Deloitte was Marsh's "independent auditor" during the Class Period and i n
accordance with GAAS, was charged with the responsibility of opining upon whether or not
Marsh prepared its financial statements in accordance with GAAP. As set forth below,
however, Marsh's financial statements violated GAAP in many respects . In certifying that
Marsh's financial statements fairly presented Marsh's financial condition and results o f
operations in conformity with GAAP, Deloitte knowingly or recklessly ignored red flags tha t
should have alerted it to the fact that Marsh's financial statements violated GAAP and wer e
materially false and misleading .
200
A. Marsh' s Financial Statements Failed to Comply with GAAP and SECRegulations Prohibiting False and Misleading Public Filing s
649. GAAP are those principles recognized by the accounting profession as th e
conventions, rules, and procedures necessary to define accepted accounting practices at a
particular time . Those principles are the official standards accepted by the SEC and promulgate d
in part by the American Institute of Cert ified Public Accountants ("AICPA"), a p rivate
professional association, through three successor groups it established : the Committee on
Accounting Procedure ; the Accounting Principles Board (the "Board"), and the Financial
Accounting Standards Board (the "FASB") with the permission of the SEC (Accounting Serie s
Release 150) .
650. The SEC requires that public companies prepare their financial statements i n
accordance with GAAP. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, "[f]inancial
statements filed with the [SEC] which are not prepared in accordance with [GAAP] will be
presumed to be misleading or inaccurate ." 17 C .F.R. § 210.4-01(a)(1) . Management is
responsible for preparing financial statements that conform with GAAP. As noted by AICPA
auditing standards ("AU"), § 110 .02 :
Financial statements are management's responsibility . . . [M]anagement isresponsible for adopting sound accounting policies and for establishing andmaintaining internal controls that will, among other things, record, process,summarize, and report transactions (as well as events and conditions) consistentwith management's assertions embodied in the financial statements . The entity'stransactions and the related assets, liabilities and equity are within the directknowledge and control of management . . . Thus, the fair presentation of financialstatements in conformity with Generally Accepted Accounting Principles is animplicit and integral part of management's responsibility.
651 . Marsh's financial statements filed with the SEC during the Class Period violated
the following provisions of GAAP, among others discussed below :
a. The principle that financial reporting should provide information that is useful topresent and potential investors and creditors and other users in making rational
201
investment, credit and similar decisions . (FASB Statement of FinancialAccounting Concepts - "SFAC" No . 1) .
b. The principle that financial report ing should provide information about theeconomic resources of an enterprise , the claims to those resources , and the effectsof transactions, events, and circumstances that change resources and claims tothose resources . (SFAC No . 1) .
c. The principle that financial reporting should provide information about howmanagement of an enterprise has discharged its stewardship responsibility toowners (stockholders) for the use of enterprise resources entrusted to it. To theextent that management offers securities of the enterprise to the public, itvoluntarily accepts wider responsibilities for accountability to prospectiveinvestors and to the public in general . (SFAC No . 1) .
d. The principle that financial report ing should provide information about anenterprise ' s financial performance during a certain time period . Investors andcreditors often use information about the past to help in assessing the prospects ofan enterprise . Thus, although investment and credit decisions reflect investors'expectations about future enterp rise performance , those expectations arecommonly based at least partly on evaluations of past enterprise performance .(SFAC No . 1) .
e. The p rinciple that the quality of reliability and, in particular, of representationalfaithfulness leaves no room for accounting representations that subordinatesubstance to form . ("SFAC No . 2") .
f. The principle that financial repo rting should be reliable in that it represents whatit purpo rts to represent . That information should be reliable as well as relevant isa notion that is central to accounting . (SFAC No . 2) .
g. The principle of completeness , which means that nothing is left out of theinformation that may be necessary to insure that it validly represents underlyingevents and conditions. (SFAC No . 2) .
h. The principle that conservatism be used as a prudent reaction to uncertainty to tryto ensure that uncertainties and risks inherent in business situations are adequatelyconsidered . The best way to avoid injury to investors is to try to ensure that whatis reported represents what it purports to represent. (SFAC No . 2) .
i. The principle that losses be accrued for when a loss contingency exists .(Statement of Financial Accounting Standards - "FASB Statement" - No. 5) .
The principle that if no accrual is made for a loss contingency, then disclosure ofthe contingency shall be made when there is at least a reasonable possibility that aloss or an additional loss may have been incurred . (FASB Statement No . 5) .
202
k. The principle that contingencies and other uncertainties that affect the fairness ofpresentation of financial data at an interim date shall be disclosed in interimreports in the same manner required for annual reports . (Accounting PrinciplesBoard - "APB" Opinion No . 28) .
1 . The principle that disclosures of contingencies shall be repeated in interim andannual reports until the contingencies have been removed, resolved, or havebecome immaterial . (APB Opinion No . 28) .
in . The principle that management should provide commentary relating to the effectsof significant events upon the interim financial results . (APB Opinion No . 28) .
o. The principle that disclosure of accounting policies should identify and describethe accounting principles followed by the reporting entity and the methods ofapplying those principles that materially affect the financial statements . (APBOpinion No. 22) .
652. The foregoing provisions of GAAP were violated because : (1) Marsh's failed to
disclose its contingent commissions in its financial statements despite the fact that they were a
material source of revenues; (2) Marsh failed to explain the true nature of its contingen t
commissions and, instead, falsely attributed them to fictitious "services" that were not actuall y
rendered; (3) Marsh overstated its earnings by failing to account for contingent losses arisin g
from the placement of clients with insurance companies that did not provide coverage at the bes t
price; exposing its clients to insurance risks as a result of steering its clients to insurers that did
not provide adequate coverage of risk for those clients, as well as fines, penalties, claims fo r
restitution and damages as a result of its improper steering and bid manipulation practices ; and
(4) Marsh failed to disclose the uncertainty surrounding its ability to continue to recognize
revenues from contingent commissions in the event that the true nature of these revenues (e .g . ,
steering and false bids) were publicly disclosed .
653 . The SEC regulates statements by companies "that can reasonably be expected t o
reach investors and the trading markets, whoever the intended primary audience ." SEC Release
No. 33-6504, 3 Fed . Sec. L. Rep. (CCH) 23,120, at 17,095-3, 17 C .F.R. § 241 .20560 (Jan . 13 ,
203
1984). Under SEC regulations, the management of a public company has a duty promptly "to
make full and prompt announcements of material facts regarding the company's financia l
condition ." SEC Release No. 34-8995, 3 Fed . Sec . L. Rep. (CCH) 23,120A, at 17,095, 1 7
C.F .R. § 241 . 8995 (Oct. 15, 1970) . The SEC has emphasized that "[ i]nvestors have legitimate
expectations that public companies are making, and will continue to make, prompt disclosure o f
Fed. Sec. L. Rep. (CCH) 83,049, at 84,618 (Nov. 19, 1981) .
654. In Securities Act Release No . 6349 (Sept. 8, 1981), the SEC stated that :
[I]t is the responsibility of management to identify and address those keyvariables and other qualitative and quantitative factors which are peculiarto and necessary for an understanding and evaluation of the individualcompany.
655. In Accounting Series Release 173, the SEC reiterated the duty of management t o
present a true representation of a company's operations :
[I]t is important that the overall impression created by the financialstatements be consistent with the business realities of the company'sfinancial position and operations .
656. Item 7 of Form 10-K and Item 2 of Form 10-Q, Management's Discussion an d
Analysis of Financial Condition and Results of Operations, require the issuer to furnis h
information required by Item 303 of Regulation S-K [17 C .F.R. § 229.303] .
657. On May 18, 1989 , the SEC issued an interpretive release (Securities Act Release
No . 6835 -May 18, 1989 ) which stated , in relevant part :
The MD&A requirements are intended to provide, in one section of afiling, material historical and prospective textual disclosure enablinginvestors and other users to assess the financial condition and results ofoperations of the registrant, with particular emphasis on the registrant'sprospects for the future . As the Concept Release states :
The Commission has long recognized the need for anarrative explanation of the financial statements, because a
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numerical presentation and brief accompanying footnotesalone may be insufficient for an investor to judge thequality of earnings and the likelihood that past performanceis indicative of future performance . MD&A is intended togive the investor an opportunity to look at the companythrough the eyes of management by providing both a shortand long term analysis of the business of the company . TheItem asks management to discuss the dynamics of thebusiness and to analyze the financials .
658. The SEC has thus stated, "[i]t is the responsibility of management to identify an d
address those key variables and other qualitative and quantitative factors which are peculiar t o
and necessary for an understanding and evaluation of the individual company . "
659. SEC Staff Accounting Bulletin No . 101 ("SAB 101"), Revenue Recognition i n
Financial Statements, drawing from Regulation S-K, Article 303, and Financial Reportin g
Release No . 36, also reiterated the importance of the MD&A in financial statements :
Management's Discussion & Analysis (MD&A) requires a discussion ofliquidity, capital resources, results of operations and other informationnecessary of a registrant's financial condition, changes in financialcondition and results of operations . This includes unusual or infrequenttransactions, known trends, or uncertainties that have had, or mightreasonably be expected to have, a favorable or unfavorable material effecton revenue, operating income or net income and the relationship betweenrevenue and the costs of the revenue . Changes in revenue should not beevaluated solely in terms of volume and price changes, but should alsoinclude an analysis of the reasons and factors contributing to the increaseor decrease . The Commission stated in Financial Reporting Release(FRR) 36 that MD&A should "give investors an opportunity to look atthe registrant through the eyes of management by providing ahistorical and prospective analysis of the registrant 's financialcondition and results of operations , with a particular emphasis on theregistrant 's prospects for the future ." [Emphasis added; footnotesomitted . ]
660. In discussing results of operations, Item 303 of Regulation S-K requires th e
registrant to "[d]escribe any known trends or uncertainties that have had or that the registrant
reasonably expects will have a material favorable or unfavorable impact on net sales or revenues
or income from continuing operations ." The Instructions to Paragraph 303(a) further state, "[t]h e
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discussion and analysis shall focus specifically on material events and uncertainties known t o
management that would cause reported financial information not to be necessarily indicative o f
661 . In addition, the SEC, in its May 18, 1989 Interpretive Release No . 34-26831, has
indicated that registrants should employ the following two-step analysis in determining when a
known trend or uncertainty is required to be included in the MD&A disclosure pursuant to Ite m
303 of Regulation S-K : (a) A disclosure duty exists where a trend, demand, commitment, event
or uncertainty is both presently known to management ; and (b) is reasonably likely to have a
material effect on the registrant's financial condition or results of operations .
662 . As more fully set forth below, however, the MD&A section of Marsh's filings
with the SEC during the Class Period failed to comply with the foregoing SEC regulation s
because : (1) Marsh failed to disclose its contingent commissions in its financial statements
despite the fact that they were a material source of revenues ; (2) Marsh failed to explain the tru e
nature of its contingent commissions and, instead, falsely attributed them to fictitious "services "
that were not actually rendered; (3) Marsh overstated its earnings by failing to account fo r
contingent losses arising from the placement of clients with insurance companies that did no t
provide coverage at the best price ; exposing its clients to insurance risks as a result of steering it s
clients to insurance companies that did not provide adequate coverage of risk for those client ,
and fines, penalties, claims for restitution and damages as a result of its improper steering an d
bid manipulation practices ; and (4) Marsh failed to disclose the uncertainty surrounding its
ability to continue to recognize revenues from contingent commissions in the event that the
nature of these revenues were publicly disclosed .
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663 During the Class Period, Marsh and Deloitte falsely represented that the
Company's financial statements were in full compliance with GAAP . From 2002 onward ,
Marsh issued certifications signed by its CEO and CFO, Defendants Greenberg and Wijnberg ,
respectively , pursuant to the requirements of the Sarbanes Oxley Act of 2002, which stated that
the Company's SEC filings did not contain any untrue statement of material fact or omit to stat e
a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading and that the financial statements, and other financia l
information included in the SEC filings, fairly presented in all material respects the financia l
condition, results of operations and cash flows of the Company . In addition, Deloitte issue d
auditor reports stating that the Company's financial statements were presented fairly, in al l
material respects , in conformity with GAAP .
1. Marsh Violated GAAP and SEC Regulations by Failing to Disclosethe Magnitude of its Contingent Commissions Which Were a MaterialSource of Revenu e
664. In 2003, Marsh recorded $845 million from contingent commissions . For fiscal
year 2003, this represented approximately 7% of Marsh's $11 .588 billion in total revenues ,
approximately 12% of its $6.868 billion in revenues from insurance and risk services, and 16%
of its $5 .2 billion in risk management and insurance broking revenues .
665. For the period from 1999 to 2003, Marsh's revenues from contingen t
commissions from insurance carriers were as much as $3 .6 billion, or 7% of its $51 .58 billion in
total revenues. In 2003 alone, Marsh has admitted that its contingent commissions were $84 5
million .
666 . While Marsh's contingent commissions were clearly material in the context of a
percentage of revenues and profits analysis, they were also material, and thus required
disclosure, because of their importance to Marsh's overall business plan . The SEC states in
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Staff Accounting Bulletin ("SAB") No . 99 that materiality also concerns the significance of a n
item to readers of a company's financial statements . In Marsh's case, contingent commission s
were material and thus required disclosure because they materially affected :
• Marsh' s earn ings trends ;
• whether Marsh met analysts ' consensus expectations ;
• the profitability of Marsh' s risk and insurance services segment;
• Marsh's compliance with loan covenants ;
• management's compensation; and
• the volatility of Marsh's stock price as a result of the market's sensitivity tothese revenues .
667 . Clearly, contingent commissions were mate rial to understanding Marsh' s
financial position and operating results and, by withholding meaningful disclosure abou t
contingent commissions , Marsh violated GAAP as part icularized below .
2 . Marsh Violated SEC Disclosure Rules by Concealingthe Nature of its Contingent Commission Revenues
668 . The SEC requires an issuer to furn ish information required by Item 303 of
Regulation S-K [17 C .F.R. § 229 .303] in the section of its Form 10 -K (Item 7) and Form 10-Q
(Item 2) titled MD&A . Paragraph (a) of Item 303 of Regulation S-K requires that a basic an d
overriding requirement of the MD&A is to "provide such other information that the registrant
believes to be necessary to an understanding of its financial condition, changes in financia l
condition and results of operations . "
669. The MD&A requirements are intended to provide, in one section of a filing ,
material historical and prospective textual disclosure enabling investors and other users to asses s
the financial condition and results of operations of the registrant, with particular emphasis on the
registrant's prospects for the future . Marsh violated the MD&A requirements by materiall y
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misstating the nature of the services it was providing in return for the receipt of contingen t
commissions, and failing to disclose the proceeds of its improper steering and bid manipulatio n
practices .
670. Despite the SEC mandate that the MD&A discuss "unusual" transactions "that
have had, or might reasonably be expected to have, a favorable or unfavorable material effect on
revenue," Marsh failed to disclose the true nature of its revenues in its Class Period publi c
filings .
671 . Marsh's concealment of the magnitude of its contingent commission revenues an d
the illicit revenues derived from improper steering and bid manipulation practices wa s
particularly significant for the investing public because it deprived them of the knowledge that
revenues were improper and the ability to assess the consequences of this fact, including whether
the Company would be compelled to cease its improper activities in the future . It is for precisely
this reason that the SEC in SAB 101, citing Financial Reporting Release No . 36 (promulgated b y
the SEC), explained that the MD&A should "give investors an opportunity to look at th e
registrant through the eyes of management by providing a historical and prospective analysis o f
the registrant's financial condition and results of operations, with a particular emphasis on th e
registrant ' s prospects for the future . "
672 . Similarly, under Regulation S-K Item 303, Management 's Discussion and
Analysis of Financial Condition and Results of Operations, the SEC states that disclosure shoul d
focus specifically on material events and uncertainties known to management that would caus e
reported financial information not to be necessarily indicative of future operating results or of
future financial condition . With respect to results of operations, the SEC states that management
should :
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Describe any unusual or infrequent events or transactions or anysignificant economic changes that materially affected the amount ofreported income from continuing operations and, in each case, indicate theextent to which income was so affected . In addition, describe any othersignificant components of revenues or expenses that, in management'sjudgment, should be described in order to understand the results ofoperations; and describe any known trends or uncertainties that have hador that management reasonably expects will have a material favorable orunfavorable impact on net sales or revenues or income from continuingoperations .
673 . According to the SEC, these requirements are intended to provide in one section
of a filing, material historical and prospective textual disclosure enabling investors and other
users to assess the financial condition and results of operations of the company, with particula r
emphasis on a company's prospects for the future . Disclosure is mandatory where a known tren d
or uncertainty is reasonably likely to have a material effect on a company' s financial condition or
results of operations .
674. Rather than complying with the spirit and intent of disclosure requirements se t
forth in the above regulations , Marsh's SEC filings reveal a deliberate manipulation of it s
disclosures relating to its contingent commissions and a concerted effort to mislead investors as
to the actual source of these revenues . In Item 1 of Marsh's 1998 Form 10-K, Marsh disclosed
that it earned "placement services revenues or contingent fees" from insurers . It explained thi s
revenue as "payments or allowances by insurance companies based upon such factors as th e
overall volume of business placed by the broker with that insurer, the aggregate commissions
paid by the insurer for that business during specific periods, or the loss performance to th e
insurer of that business ." A substantially similar disclosure was made in Item 1 of Marsh's 1999
Form IO-K .
675 . From 1999 onward, however, Marsh engaged in ever more misleadin g
disclosures. Thus, in Marsh's 2000 and 2001 Form 10-Ks, Marsh deleted the reference t o
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earning "placement services revenues or contingent fees revenue" from insurers and replaced thi s
disclosure with the claim that it earned "contingent income for services provided to insurers . "
Marsh claimed that it was receiving contingent income from insurers "for services provided b y
brokers to the insurance market," which included services such as "new product development ,
the development and provision of technology, administration, and the delivery of information o n
developments among broad client segments and the insurance markets :
Contingent income for services provided includes payments or allowancesby insurance companies based upon such factors as the overall volume ofbusiness placed by the broker with that insurer, the aggregate commissionspaid by the insurer for that business during specific periods, or th eprofitability or loss to the insurer of the risks placed. This revenue reflectscompensation for services provided by brokers to the insurance market .These services include new product development, the development andprovision of technology, administration, and the delivery of informationon developments among broad client segments and the insurance markets .
676. Then, in 2002, aside from an opaque reference to "contingent compensatio n
thresholds," Marsh deleted all references to "contingent commissions" or "contingent income . "
Instead, Marsh resorted to the term "placement service revenue from insurers" and claimed, onc e
again, that this revenue was :
payments or allowances by insurance companies based upon such factorsas the overall volume of business placed by the broker with that insurer,the aggregate commissions paid by the insurer for that business duringspecific periods, or the profitability or loss to the insurer of the risksplaced. This revenue reflects compensation for services provided bybrokers to the insurance market . These services include new productdevelopment, the development and provision of technology,administration, and the delivery of information on developments amongbroad client segments and the insurance markets .
677. Finally, Marsh's 2003 10-K, in furtherance of its efforts to disguise the source o f
these revenues , claimed that these revenues were from a whole host of illusory services :
Market services revenue is derived from agreements that Marsh has withmost of its principal insurance markets . Under these agreements, Marshis paid for services provided to the markets, including : access to a
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global distribution network that fosters revenue generation andoperating efficiencies ; intellectual capital in the form of new products,solutions and general information on emerging developments in theinsurance marketplace ; the development and provision of technologysystems and services that create efficiencies in doing business ; and awide range of administrative services . Payments under market serviceagreements are based upon such factors as the overall volume, growth, andin limited cases profitability, of the total business placed by Marsh with agiven insurer .
678. Marsh's assertion in Item 1 of its filings with the SEC that it was receiving
revenues for specific services performed for insurance carriers violated SEC disclosur e
requirements, because Marsh was not being paid for the "services" it disclosed in its financia l
statements ; rather, the Company was doing nothing more than receiving kickbacks for steerin g
business to insurers .
3. Marsh's Earnings were Overstated Because Marsh Failed to ReserveProperly for Contingent Losses Associated with Marsh's ImproperActivities
679. As a result of its improper steering and bid manipulation practices , Marsh not
only caused its clients to overpay for insurance coverage, it also failed to provide its clients with
optimal insurance coverage because it was steering its clients to insurers with which Marsh had
the highest contingent fee arrangement . Put another way, Marsh's clients were overpaying fo r
their insurance products placed through Marsh because it placed clients with insurers irrespective
of the premium charged in order to maximize contingent commissions, and the insured' s
premium was inflated by the contingent commission that Marsh extracted from the insurers .
This additional sum could have been used by Marsh's clients to purchase more risk protection .
Instead, these monies simply lined Marsh's pockets . As such, Marsh caused its clients t o
overpay for the coverage they received, while exposing them to potential losses that could have
been mitigated with additional or more appropriate insurance coverage or through lower levels o f
risk retention .
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680. By cheating its clients out of appropriate insurance coverage through improper
steering and bid manipulation practices, Marsh knowingly exposed its clients to insurance risk s
that could have been transferred to insurance carriers by selecting less expensive coverage a
more appropriate carrier. In so doing, Marsh exposed itself to liability for any losses incurred b y
its clients in those instances where Marsh's steering or bid-rigging resulted in its client s
assuming greater insurance risks that could have been transferred to more suitable insuranc e
carriers . Marsh's improper steering, bid manipulation and kick-back practices also expose d
Marsh to liability in the form of fines, penalties, claims for restitution and damages .
681 . Under GAAP, specifically FASB Statement No . 5, Accounting for Contingencies ,
a contingency is defined as an existing condition, situation, or set of circumstances involvin g
uncertainty as to possible gain or loss to company that will ultimately be resolved when one o r
more future events occur or fail to occur . An estimated loss from a loss contingency shall b e
accrued by a charge to income if both of the following conditions are met : (a) information
available prior to issuance of the financial statements indicates that it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial statements ; and (b) the
amount of loss can be reasonably estimated . If no accrual is made for a loss contingency because
one or both of the conditions are not met, the disclosure of the contingency shall be made whe n
there is at least a reasonable possibility that a loss may have been incurred .
682. Marsh's conduct was clearly improper because, among other reasons, Marsh was
deceiving its clients as to the services it was providing and the actual cost of these services .
Marsh's probable liability as a result of its improper conduct was reasonably estimated .
Accordingly, at all relevant times, accrual for probable losses was required.
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683 . Applying this standard, at all relevant times, there was a reasonable possibility o f
the loss because it was probable at the time that it collected contingent commissions from it s
improper steering, bid manipulation and kick-back practices that this scheme would b e
discovered and Marsh would be become liable for damages . Accordingly, in the absence o f
accrual, disclosure was required . Marsh has already agreed to reimburse its clients at least $850
million in connection with the contingent commissions . With respect to client losses resultin g
from inappropriate insurance coverage to which these clients were steered, this potential liabilit y
remains undisclosed and could easily dwarf the amount that Marsh has set aside to pay its clients
for premium overcharges . As a result of the foregoing, Marsh's earnings during the Class Perio d
were overstated .
4. Marsh Knew That Its Reported Financial Information Was NotIndicative of Future Operation s
684. Under Regulation S-K Item 303, MD&A, the SEC states that disclosure shoul d
focus specifically on material events and uncertainties known to management that would caus e
reported financial information not to be necessarily indicative of future operating results or of
future financial condition . With respect to results of operations, the SEC guides management to :
Describe any unusual or infrequent events or transactions or any significanteconomic changes that materially affected the amount of reported incomefrom continuing operations and, in each case, indicate the extent to whichincome was so affected. In addition, describe any other significantcomponents of revenues or expenses that, in management's judgment, shouldbe described in order to understand the results of operations; and
Describe any known trends or uncertainties that have had or that managementreasonably expects will have a material favorable or unfavorable impact onnet sales or revenues or income from continuing operations .
685 . The SEC has stated that these requirements are intended to provide in one section
of a filing, material historical and prospective textual disclosure enabling investors and othe r
users to assess the financial condition and results of operations of the company, with particular
214
emphasis on the company's prospects for the future . The SEC states further that disclosure is
mandatory where there is a known trend or unce rtainty that is reasonably likely to have a
materi al effect on the company's financial condition or results of operations . Accordingly, the
development of disclosure for this SEC regulation should begin with management's identificatio n
and evaluation of what information, including the potential effects of known trends ,
commitments, events, and uncertainties, is important to providing investors and others an
accurate understanding of the company's current and prospective financial position and operatin g
results.
686. In addition, Statement of Position 94-6, Disclosure of Certain Significant Risk s
and Uncertainties ("SOP 94-6"), a GAAP issued in December 1994, requires that a compan y
disclose in its financial statements any vulnerabilities arising due to the fact that the business i s
exposed to certain risks that might have a "severe impact" on its future operations . SOP 94-6,
defines a "severe impact" as "a significant financially disruptive effect on the normal functionin g
of the entity ." SOP 94-6 requires, among other things, disclosure of information that is adequate
to inform users of financial statements of the nature of the company's operations and "th e
general nature of the risk associated with concentrations" in the :
a. volume of business transacted with a particular customer, supplier, lender,grantor, or contributor .
b. revenue from particular products or services .
c. available sources of supply of materials, labor, or services .
687. In addition, Marsh's financial statements failed to comply with the disclosur e
provisions of SOP 94-6 because Marsh failed to disclose :
a. the true nature of the Company's wrongful activities and contingent commissionarrangements, although they were required to include "a description of the majorproducts or services the reporting entity sells or provides ;"
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b. the general nature of the risk associated with concentrations in the volume ofimproper steering business transacted with insurance companies ;
c . the general nature of the risk associated with the discovery of the Company'ssteering activities and the cessation of the revenue flow associated therefrom ; and
d. the general nature of the risk associated with the discovery of the Company' ssteering activities and the loss of available sources to supply these revenues .
B. Deloitte Recklessly Certified that Marsh' sFinancial Statements Complied with GAAP
688. Deloitte is a worldwide firm of certified public accountants, auditors and
consultants which provides a variety of accounting, auditing, and consulting services . Deloitte
served as Marsh's independent auditor and principal accounting firm prior to, and during, th e
Class Period. Deloitte acted in these capacities pursuant to the terms of contracts it had wit h
Marsh that, among other things, required Deloitte to audit Marsh's financial statements i n
accordance with GAAS, and to report the results of those audits (and quarterly reviews) to
Marsh, its Board of Directors, its Audit Committee, and the members of the investing public ,
including Lead Plaintiffs and the members of the Class .
689. Deloitte was engaged by Marsh to provide independent accounting, busines s
consulting and auditing services to Marsh and gave Marsh accounting advice and consultatio n
regarding Marsh's annual and quarterly reports which were filed with the SEC and publicl y
distributed . Defendant Deloitte, by virtue of its position as independent accountant and audito r
of Marsh, had access to the files and key employees of the Company at all relevant times . As a
result of the auditing and other services it provided to Marsh, Deloitte personnel were frequentl y
present at Marsh's corporate headquarters throughout each year, and had continual access to an d
knowledge of Marsh's confidential internal corporate, financial, operating, and busines s
information, and had the opportunity to observe and review the Company's business an d
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accounting practices, and to test the Company's internal accounting information and publicl y
reported financial statements as well as the Company's internal controls and structures .
690. For this service to Marsh, and for numerous other non-audit services, Deloitte wa s
highly compensated . During the Class Period, Deloitte earned $15,450,000 in auditing fees from
MMC for fiscal year 2004, $9,675,000 in auditing fees for fiscal year 2003, $8,796,000 in
auditing fees for fiscal year 2002, $8,396,000 for fiscal year 2001, and $8,302,000 in auditing
fees for fiscal year 2000 . Thus, from 2000 through 2004, Deloitte was paid $50,619,000 i n
auditing fees alone . In addition to these auditing fees, during the Class Period, Deloitte's paren t
also collected $45,476,000 from non -auditing fees, including consulting arrangements, from
fiscal year 2000 to 2004 .
691 . An auditor is required to perform its audits in accordance with Generally
Accepted Auditing Standards ("GAAS") . The AICPA' s Auditing Standards Board has also
developed Statements on Auditing Standards (hereafter "AU § _"), which serve as
"interpretations of generally accepted auditing standards ." AU § 100 states :
The objective of the ordinary audit of financial statements by the independentauditor is the expression of an opinion on the fairness with which they present, inall material respects, financial position, results of operations, and its cash flows inconformity with generally accepted accounting principles. The auditor's report isthe medium through which he expresses his opinion or, if circumstances require,disclaims an opinion . In either case, he states whether his audit has been made inaccordance with generally accepted auditing standards . These standards requirehim to state whether, in his opinion, the financial statements are presented inconformity with generally accepted accounting principles and to identify thosecircumstances in which such principles have not been consistently observed in thepreparation of the financial statements of the current period in relation to those ofthe preceding period .
692 . When an auditor represents that a company's financial statements conform in al l
mate rial respects with GAAP, the auditor "indicates [his] belief that the financial statements
taken as a whole are not materially misstated." AU § 312 . Indeed, "[f]inancial statements are
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materially misstated when they contain misstatements whose effect, individually or in th e
aggregate, is important enough to cause them not to be presented fairly, in all material respects,
in conformity with [GAAP]." AU § 312 .
693 . Despite the numerous GAAP violations evident in Marsh 's financial statements
during the Class Period, Deloitte issued unqualified opinions, representing that the Mars h
financial statements were presented fairly, in all material respects , and in accordance with GAAP
for each of the years ended December 31, 1999 to December 31, 2003 .
694. Deloitte's audit Report dated March 3, 2000, reporting on Marsh's Financia l
Statements as of and for the year ending December 31, 1999, was filed with the SEC on March
29, 2000. In its audit report regarding Marsh's 1999 financial statements, Deloitte stated :
We have audited the accompanying consolidated balance sheets of Marsh &McLennan Companies, Inc . and subsidiaries as of December 31, 1999 and 1998,and the related consolidated statements of income, stockholders' equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 1999 . These financial statements are the responsibility of theCompany's management . Our responsibility is to express an opinion on thesefinancial statements based on our audits .
We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement . An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements . An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation .We believe that our audits provide a reasonable basis for our opinion .
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 1999 and 1998, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 1999 in conformity with generally accepted accounting principles .
695. Deloitte's audit report dated March 2, 2001, reporting on Marsh's financia l
statements as of and for the years ending December 31, 1999 and December 31, 2000, was file d
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with the SEC on March 29, 2001 . In its audit report regarding Marsh's 2000 financials, Deloitt e
stated :
We have audited the accompanying consolidated balance sheets of Marsh &McLennan Companies, Inc . and subsidiaries as of December 31, 2000 and 1999,and the related consolidated statements of income, stockholders' equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2000 . These financial statements are the responsibility of theCompany's management . Our responsibility is to express an opinion on thesefinancial statements based on our audits .
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement . An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation . We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 2000 and 1999, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2000 in conformity with accounting principles generally acceptedin the United States of America .
696. Deloitte's audit report dated March 1, 2002, reporting on Marsh's financia l
statements as of and for the years ending December 31, 2000 and December 31, 2001, was filed
with the SEC on March 29, 2002 . In its audit report regarding Marsh's 2001 financials, Deloitt e
stated :
We have audited the accompanying consolidated balance sheets of Marsh &McLennan Companies, Inc . and subsidiaries as of December 31, 2001 and 2000,and the related consolidated statements of income, stockholders' equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2001 . These financial statements are the responsibility of theCompany's management . Our responsibility is to express an opinion on thesefinancial statements based on our audits .
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan
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and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement . An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation . We believe that our audits provide a reasonablebasis for our opinion .
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2001 in conformity with accounting principles generally acceptedin the United States of America .
697 . Deloitte's audit report dated February 28, 2003, reporting on Marsh's financia l
statements as of and for the years ending December 31, 2001 and December 31, 2002, was filed
with the SEC on March 26, 2003 . In its audit report regarding Marsh's 2002 financials, Deloitt e
stated :
We have audited the accompanying consolidated balance sheets of Marsh &McLennan Companies, Inc. and subsidiaries as of December 31, 2002 and 2001,and the related consolidated statements of income, stockholders' equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2002 . These financial statements are the responsibility of theCompany's management . Our responsibility is to express an opinion on thesefinancial statements based on our audits .
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement . An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation . We believe that our audits provide a reasonablebasis for our opinion .
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 2002 and 2001, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2002 in conformity with accounting principles generally acceptedin the United States of America .
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As described in Notes I and 5 to the consolidated financial statements, theCompany changed its method of accounting for goodwill amort ization to conformto Statement of Financial Accounting Standards No. 142, GOODWILL ANDOTHER INTANGIBLE ASSETS .
698 . Deloitte's audit report dated March 5, 2004, reporting on Marsh's financia l
statements as of and for the years ending December 31, 2002 and December 31, 2003, was filed
with the SEC on March 15, 2004 . In its audit report regarding Marsh's 2003 financials, Deloitt e
stated:
We have audited the accompanying consolidated balance sheets of Marsh &McLennan Companies, Inc . and subsidiaries as of December 31, 2003 and 2002,and the related consolidated statements of income, stockholders' equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2003 . These financial statements are the responsibility of theCompany's management . Our responsibility is to express an opinion on thesefinancial statements based on our audits .
We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement . An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Marsh & McLennan Companies, Inc .and subsidiaries as of December 31, 2003 and 2002, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2003 in conformity with accounting principles generally acceptedin the United States of America.
As described in Note 5 to the financial statements , the Company changed itsmethod of accounting for goodwill amortization to conform to Statement ofFinancial Accounting Standards No . 142, Goodwill and Other Intangible Assets .
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1 . Numerous "Red Flags" Should Have Alerted Deloitte to Marsh'sMaterially False and Misleading Financial Statement s
699. Had Deloitte conducted its audits in accordance with GAAS, it would have
discovered that Marsh's financial statements were mate rially false and misleading and failed to
comply with GAAP .
700. In October 2002, the AICPA's Auditing Standards Board issued SAS #99 ,
Consideration of Fraud in a Financial Statement Audit, which requires auditors to plan an d
perform audits to obtain reasonable assurance that the financial statements are free of materia l
misstatement whether caused by error or fraud . The auditor's consideration of fraudulent act s
under AU Section 317 establishes that for those fraudulent acts that have a direct and materia l
effect on the determination of financial statement amounts, the auditor's responsibility to detec t
misstatement resulting from such fraudulent acts is the same as that for errors . (AU Section 312) .
701 . SAS #99 served as an update to AU § 316 that provided auditors with a
significant level of detail to enhance the auditor's understanding of the nature and characteristic s
of fraud. This pronouncement provided additional examples of how the auditor should respond
to the identified risks of material misstatements relating to fraudulent financial reporting. For
instance, if there is an identified risk of material misstatement due to fraud that involve s
improper revenue recognition, the auditor is required to perform: substantive analytica l
procedures relating to revenue using disaggregated data, such as comparing revenue by produc t
line or segment source; confirming with customers certain relevant contract terms and the
absence of side agreements, and making inquiries of the company's sales and marketin g
personnel .
702. Even prior to the issuance of SAS #99, GAAS had identified various "red flags "
that the auditors need to consider in determining audit risk relating to misstatements arising from
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fraudulent financial repo rting (AU § 316) . SAS #99 served to expand the audit procedures and
emphasize the need for increased auditor professional skepticism and professional judgment in
assessing the risks of fraud or misstatement .
703 . Numerous "red flags" should have alerted Deloitte to the potential of irregularitie s
in Marsh's accounting. GAAS identifies various "red flags" that the auditors need to consider in
determining the risk relating to material misstatements arising from fraudulent financial
reporting . These include :
a. A known history of securities law violations or claims against the entity or itssenior management alleging fraud or violations or securities laws ;
b. Intentional misapplication of accounting principles ;
c. Alteration of supporting documents for amounts in the financial statements ;
d. Pressure to commit fraud ;
e. Significant related party transactions;
f. Management is dominated by a select group ;
g. Complex transactions ; and
h. Management setting aggressive financial goals .
704. Many of the following red flags that should have alerted Deloitte to Marsh' s
fraudulent accounting practices which were rampant at Marsh and endemic in to its corporate
culture. For example,
• In its public filings, Marsh failed to disclose its contingent commissionsdespite the fact that these fees constituted a material part of Marsh's revenues ;
• For each reporting year between 1999 and 2004, Marsh adopted differentdescriptions of the source of its contingent commissions, including removingall references to contingent commissions in its 2002 and 2003 10-K's, andreplacing them with the terms "placement services revenue" and "marketservices revenue;"
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Even though Marsh listed services that it ostensibly was providing to insurersunder its "market services agreements," including "new product development,the development and provision of technology, administration, and delivery ofinformation on the developments among client segments and insurancemarkets," there were no services, the contingent commissions were merely"pay to play" arrangements ;
• Marsh recorded no costs or minimal costs in connection with the provision ofservices pursuant to its "market service agreements" which should havealerted Deloitte that Marsh was not actually providing these services toinsurers ;
• The New York State Department of Insurance had specifically identified theacceptance of contingent commissions by insurance brokers in 1998 as aserious problem involving the trustwo rthiness of a broker and issued CircularNo. 22 requiring full disclosure of these commissions . Thus, Marsh'sacceptance of contingent commissions and the manner in which suchcommissions were repo rted should have been subject to intense scrutiny;
Marsh, through its CEO, had significant contacts to two insurers that it placedbusiness with on behalf of its clients : AIG, where Jeffrey Greenberg's father,Maurice, was CEO and for which Jeffrey Greenberg had served as a seniorofficer ; and ACE, by virtue of Greenberg's brother, Evan . Marsh placed asignificant percentage of its customers' business with AIG and ACE throughsteering and bid-manipulation practices and the potential conflicts of interestbetween Marsh and these entities should have been a red-flag to Deloitte toexamine these transactions more closely ;
Marsh set aggressive growth targets, yet typically met analysts' projections .Between 1999 and 2004, Marsh's Risk and Insurance Services enjoyed a 15%compound growth rate while Marsh's operating expenses increased by only6%. This discrepancy between revenues attributable to services and the costof providing these services should have been a red flag as to how theseservices were rendered .
2 . Deloitte either Deliberately Ignored or Was Reckless In Ignoring RedFlags Because Its Audits Were Not Performed In Accordance WithGAAS
705. In issuing unqualified audit opinions on Marsh's financial statements despit e
Marsh' s violations of GAAP, and in failing to heed the numerous red flags that should hav e
alerted it to Marsh's accounting violations, Deloitte either acted knowingly, or was reckless, i n
failing to comply with the professional standards dictated by GAAS (AU § 150), including:
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a. General Standard No . I was violated, which standard requires that the audit is tobe performed by a person or persons having adequate technical training andproficiency as an auditor .
b. General Standard No. 3 was violated, which standard requires that dueprofessional care is to be exercised in the performance of the audit and in thepreparation of the report .
c. Standard of Field Work No . 1, which requires that the auditor's work beadequately planned and assistants, if any, are to be properly supervised;
d. Standard of Field Work No . 2, which requires that an auditor gain sufficientunderstanding of a company's internal control to plan the audit and to determinethe nature, timing, and extent of tests to be performed;
e. Standard of Field Work No . 3, which requires that the auditor obtain sufficientcompetent evidential matter through inspection, observation, inquiries, andconfirmations to afford a reasonable basis for an opinion regarding the financialstatements under examination;
f. Standard of Reporting No . 1, which requires that an auditor's report state whetherthe financial statements are presented in accordance with generally acceptedaccounting principles ; and
g. Standard of Reporting No . 3, which requires that informative disclosures in thefinancial statements are to be regarded as reasonably adequate unless the auditorotherwise states in his report.
706. As set forth above, Marsh's financial statements during the Class Period failed t o
comply with GAAP and applicable SEC regulations . Pursuant to GAAS, Deloitte was required
to qualify its opinions-as opposed to issuing unqualified opinions -on Marsh' s financial
statements (AU § 508) and thereby disclose to the investing public the nature and extent of th e
Company's non-GAAP accounting and to provide the disclosures that the Company's financial
statements omitted .
707. However, Deloitte violated GAAS by issuing unqualified opinions on the
Company's financial statements during the Class Period and by failing to provide the necessar y
disclosures .
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a. Deloi tte Failed to Adequately Plan Its Audit
708 . Under GAAS, it is inherent in the planning process (AU § 311) to have sufficien t
knowledge of the Company, the industry, the environment , areas of audit exposure , weaknesse s
in internal control and various other important matters in order to properly plan the audit . GAAS
(AU § 311) states that :
The auditor should obtain a level of knowledge of the entity's business that willenable him to plan and perform his audit in accordance with generally acceptedauditing standards . That level of knowledge should enable him to obtain anunderstanding of the events, transactions, and practices that, in his judgment, mayhave a significant effect on the financial statements . . . Knowledge of the entity'sbusiness helps the auditor in :
a. Identifying areas that may need special consideration ;
b. Assessing conditions under which accounting data are produced, processed,reviewed, and accumulated within the organization;
c. Evaluating the reasonableness of estimates ;
d. Evaluating the reasonableness of management representations ; and
e. Making judgments about the appropriateness of the accounting principles appliedand the adequacy of disclosures .
709. Moreover, the auditor is required to design the audit with professional skepticis m
(AU § 230) in order to provide reasonable assurance of detecting errors, material misstatements
(AU § 312) or fraud (AU § 316) .
710. Deloitte failed to comply with GAAS as it failed to design its audit plan to
provide reasonable assurance of detecting material errors as required by AU § 312 . Deloitte was
required under GAAS to obtain knowledge of the Company' s business , apply analytical
procedures and assess the risk of material misstatement in planning for its audit .
711 . Deloitte failed to consider or overlooked the existence of the red flags identifie d
herein, and other risk factors, or failed to properly design or modify its planned audit procedures
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to mitigate those risks . Despite these obvious issues, Deloitte failed to develop an adequate
strategy for the conduct and scope of the audit of the Company's commissions' receivable ,
reserves, related party transactions and revenue .
712. Deloitte audited Marsh's financial statements and provided tax, consulting, and
other services prior to and during the Class Period, and had a thorough knowledge of the
Company's financial history, accounting practices, internal controls, and business operations .
Despite this intimate familiarity with Marsh's business practices, in auditing Marsh's financia l
statements , Deloitte either knowingly or recklessly failed to :
a. Identify areas that needed special consideration (such as related partytransactions, kickbacks, service fees, and contingent commissions) or identifiedsuch areas and audited them in a manner which was so deficient that it amountedto no audit at all, while making audit judgments that no reasonable auditor wouldhave made if confronted with the same facts ;
b. Assess the conditions under which accounting data (such as "placement servicerevenue" and "market services revenue") was produced, processed, reviewed, andaccumulated within the organization or assessed such conditions and made auditjudgments based upon said assessment that no reasonable auditor would havemade if confronted with the same facts ;
c. Evaluate the reasonableness of estimates and management's representations (suchas its estimates of contingent losses and its representations regarding the nature ofthe Company's revenues, its related party transactions, and its significant risksand uncertainties) or evaluated them in a manner which was so deficient that itamounted to no evaluation at all ; and
d. Judge the appropriateness of the accounting principles applied (such as theprinciple that losses be accrued for when a loss contingency exists) and theadequacy of disclosures in the Company's financial statements (such as thoserequired by FASB Statement No . 5, APB Opinion No . 28, SOP 94-6, and FASBStatement No. 57), or did so and arrived at judgements that no reasonable auditorwould have arrived at if confronted with the same facts .
713 . GAAS (AU § 311) states that audit planning involves developing an overal l
strategy for the expected conduct and scope of the audit . Accordingly, GAAS recognizes that
the nature, extent, and timing of audit planning may vary with the size and complexity of th e
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company, experience with the company, and knowledge of the company's business . In this
regard, GAAS (AU § 311) provides that in planning the audit, the auditor should prepare a
written audit program (or set of written audit programs) for every audit and that this audit
program should set forth in reasonable detail the audit procedures that the auditor believes are
necessary to accomplish the objectives of the audit . GAAS further states that, in developing the
program, the auditor should be guided by the results of the planning considerations and
procedures and, as the audit progresses, changed conditions may make it necessary to modify
planned audit procedures .
714. In preparing this audit program, GAAS provides that the auditor should consider,
among other things (AU § 311) :
a. Matters relating to the entity's business and the industry in which it operates .
b . The entity's accounting policies and procedures .
c. The methods used by the entity to process significant accounting information .
d. Planned assessed level of control risk .
e. Preliminary judgment about materiality levels for audit purposes .
f. Financial statement items likely to require adjustment.
g. Conditions that may require extension or modification of audit tests .
715 . Deloitte failed to comply with the foregoing provisions of GAAS in that Deloitte
knew or was reckless in not knowing that Marsh's contingent commissions were a material part
of the Company's business operations, and Deloitte failed to utilize this information in planning
and performing its audit or utilized this information in a manner that no reasonable auditor would
have used if confronted with the same facts . Given that Deloitte had unrestricted access to all of
the Company's books and records, counseled the Company on a wide variety of tax, accounting
and other business matters, and attended meetings of the Audit Committee of the Company' s
228
Board of Directors to discuss the planning and staffing of its audit, the Company' s internal
controls, and the management letters which Deloitte issued on a regular basis, it is apparent tha t
Deloitte was thoroughly familiar with all aspects of the Company's financial history, accountin g
practices, internal controls, and business operations .
716 . GAAS mandates (AU § 150) that : "Due professional care is to be exercised in the
planning and performance of the audit and the preparation of the report ." Providing guidance on
the concept of due professional care , GAAS (AU § 230) states :
• Due professional care requires the auditor to exercise professional skepticism .Professional skepticism is an attitude that includes a questioning mind and acritical assessment of audit evidence . The auditor uses the knowledge, skill,and ability called for by the profession of public accounting to diligentlyperform, in good faith and with integrity, the gathering and objectiveevaluation of evidence;
• Gathering and objectively evaluating audit evidence requires the auditor toconsider the competency and sufficiency of the evidence . Since evidence isgathered and evaluated throughout the audit, professional skepticism shouldbe exercised throughout the audit process ; and
The auditor neither assumes that management is dishonest nor assumesunquestioned honesty. In exercising professional skepticism, the auditorshould not be satisfied with less than persuasive evidence because of a beliefthat management is honest .
717. During the performance of its 1999 audit, Deloitte was aware of the fact that i n
1999, Marsh had announced that it would be transparent in its disclosure of contingent
commissions . The fact that Marsh' s financial statements concealed Marsh' s contingent
commissions subsequent to this announcement served as a red flag with regard to the lack o f
integrity of Marsh' s management. GAAS (AU § 333) addresses the auditor's responsibility with
regard to these representations as follows :
If a representation made by management is contradicted by other audit evidence,the auditor should investigate the circumstances and consider the reliability of therepresentation made. Based on the circumstances, the auditor should consider
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whether his or her reliance on management's representations relating to otheraspects of the financial statements is appropriate and justified .
718 . The dollar amounts of the Company's placement service revenue, market service
revenue, and contingent commissions were unusual as well as mate rial to the Company's
operations particularly because there were no associated costs or minimal associated costs .
719. Given the materiality (as discussed in SEC Staff Accounting Bulletin No. 99) of
the Company's contingent commissions and the pervasive impact of this pure-profit area on the
Company's financial statements, Deloitte should have significantly expanded the scope of it s
audits and the nature of its procedures in obse rvance of GAAS (AU § 312) which states that :
"Higher risk may cause the auditor to expand the extent of procedures applied, apply procedure s
closer to or as of year end, particularly in critical audit areas, or modify the nature of procedure s
to obtain more persuasive evidence." Deloitte failed to do so, violating GAAS .
720. Even assuming, arguendo, that Deloitte was not required to significantly expan d
the scope of its audits and the nature of its procedures in observance of GAAS (AU § 312), th e
magnitude of the amounts involved in the Company's misclassification and concealment o f
contingent commissions was so huge that it could not possibly have gone unnoticed by a n
auditor absent recklessness . The number of unusual, high dollar pure-profit transactions made i t
virtually impossible to audit any of the Company's financial statements in accordance wit h
GAAS without noticing the systematic false and misleading disclosures and omissions i n
Marsh's financial statements .
721 . As stated by the Attorney General of the State of New York in its action against
Marsh, contingent commissions constituted the "lifeblood" of Marsh's business .
722. Given the fact that it was public knowledge that Marsh and AIG and ACE were
related part ies , Deloitte was required by GAAS (AU § 230) to exercise professional skepticism
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in evaluating the transactions between Marsh and these companies . Moreover, Deloitte wa s
required by GAAS (AU § 150, AU § 431, and AU § 411) to assess whether the transaction s
between Marsh and these companies were properly disclosed in compliance with GAAP (FASB
Statement No. 57) and the rules and regulations of the SEC (Item 404 of Regulation S K) .
723 . Pursuant to GAAS (AU § 334), Deloitte was required to understand the business
sense behind Marsh ' s transactions with AIG and ACE:
Until the auditor understands the business sense of material transactions, hecannot complete his audit . If he lacks sufficient specialized knowledge to obtainthat understanding for a particular transaction, he should consult with personswho do have the requisite knowledge. In addition, to understand the transaction,or obtain evidence regarding it, the auditor may have to refer to audited orunaudited financial statements of the related party, apply procedures at the relatedparty, or in some cases audit the financial statements of the related party .
724. Deloitte either complied with the foregoing GAAS and understood the busines s
sense of Marsh's transactions with AIG and ACE-and thus the true nature of Marsh' s
contingent fee arrangements with these insurers --or recklessly failed to comply with GAAS and,
thus, failed to know , thereby violating GAAS (AU § 230) which states :
Due professional care requires the auditor to exercise professional skepticism .Professional skepticism is an attitude that includes a questioning mind and acritical assessment of audit evidence . The auditor uses the knowledge, skill, andability called for by the profession of public accounting to diligently perform, ingood faith and with integrity, the gathering and objective evaluation of evidence . .Gathering and objectively evaluating audit evidence requires the auditor toconsider the competency and sufficiency of the evidence . Since evidence isgathered and evaluated throughout the audit, professional skepticism should beexercised throughout the audit process .
725. In addition , GAAS (AU § 230) states that "Auditors should be assigned to task s
and supervised commensurate with their level of knowledge, skill, and ability so that they ca n
evaluate the audit evidence they are examining . The auditor with final responsibility for th e
engagement . . . should be knowledgeable about the client ."
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726. Deloitte either possessed the requisite level of knowledge to understand an d
evaluate the unusual, high dollar pure-profit transactions (many of which were related-part y
transactions) as well as the Company's compliance with required GAAP disclosures (such as
those required by FASB Statement No . 5, APB Opinion No . 28, SOP 94-6, and FASB Statement
No . 57), and knew and ignored that the unusual , high dollar pure-profit transactions , were illici t
and improperly concealed, and that required GAAP disclosures were not made, or Deloitte failed
to possess the requisite level of knowledge and understanding and failed to know these facts .
727. Even assuming that Deloitte did not evaluate the unusual, high dollar pure-profi t
transactions which constituted the "lifeblood" of Marsh's business, it was nonetheless required
by GAAS (AU § 334) to be "aware of the possible existence of material related-party
transactions that could affect the financial statements" and to "review the extent and nature o f
business transacted with major customers . . .for indications of previously undisclosed
relationships." Compliance with this GAAS mandate, alone, should have caused Deloitte t o
identify the improper steering and bid manipulation transactions and the contingent commission s
which were concealed from the investing public, the non-provision for associated los s
contingencies, and the various disclosure violations discussed above.
b. Deloitte Failed to Obtain Sufficient Competent Evidential Matter
728 . GAAS provides that accounting data alone is insufficient to suppo rt an opinion on
financial statements . Before rendering an opinion on financial statements, the auditor mus t
obtain sufficient, competent "evidential matter" to afford a reasonable basis for the opinion .
"Evidential matter" consists of the underlying accounting data and all corroborating informatio n
available to the auditor. (AU § 326.) Corroborating evidential matter includes both
documentation obtained during the field work (e.g., checks, invoices, contracts, and independent
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confirmations) and information obtained from inquiry, observation, inspection and physica l
examination . (AU § 326) .
729. Management's representations are not a valid substitute for the application o f
audit procedures to form a reasonable basis for an auditor's opinion of financial statements (A U
§ 333). Evidential matter that can be obtained from independent sources outside an entit y
provide greater assurance of reliability than any internally developed . Confirmation of account s
receivable is a generally accepted auditing procedure (AU § 330) . GAAS AU § 330 provide s
that these confirmations are to be used to obtain evidence from third parties about financial
statement assertions made by management, such as rights and obligations, and presentation and
disclosure . Deloitte either complied with GAAS and sent appropriate confirmations and knew
and ignored that Marsh's financial statement assertions were materially false and misleading, o r
it failed to comply with GAAS (AU § 330) and failed to know .
730. In the course of auditing Marsh's financial statements during the relevant tim e
period, Deloitte either knew or recklessly disregarded facts that indicated that it had failed to
obtain sufficient competent evidential matter to afford a reasonable basis for expressing
unqualified opinions on Marsh's financial statements . Deloitte's staff was frequently present at
Marsh's offices and had access to Marsh's internal corporate books and records particularl y
during its annual audits . In addition, Deloitte's staff had access to Marsh's private and
confidential financial and business information . Given the availability of such records an d
information, Deloitte either obtained, through inspection, observations, inquiries, and other audi t
procedures, sufficient competent evidential matter to compel it to issue qualified or adverse
opinions on Marsh's financial statements, or it recklessly failed to utilize the available record s
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and information in the performance of its audits and recklessly failed to issue qualified or
adverse opinions on Marsh's financial statements .
731 . GAAS (AU § 326) notes that underlying accounting data and all corroboratin g
information available to the auditor ( including books of o riginal entry, the general and subsidiary
ledgers, related accounting manuals, and records such as work sheets and spreadsheets
records of electronic fund transfers, invoices, contracts, minutes of meetings, and reconciliations )
constitute evidence that should be subjected to inquiry, observation, inspection, confirmation ,
and physical examination during an audit . It is inconceivable that Deloitte could have inquired
about, observed, inspected, confirmed and physically examined the available documentation and
failed to detect the fraudulent activities of the Company and the associated concealment action s
(as discussed above) undertaken by the Company' s management . Accordingly, Deloitte eithe r
performed audits which were so deficient that they amounted to no audits at all, or it identifie d
and ignored, or recklessly failed to investigate extremely questionable transactions and
documents, and made audit judgments that no reasonable auditor would have made if confronted
with the same facts .
732. Significantly, Marsh attributed its contingent commission revenues to "serv ices"
that were purpo rtedly being performed for insurance companies . Clearly, if Marsh was truly
performing these services, then all of the underlying accounting data and corroboratin g
information verifying that such services were performed, which was required to have been
available for audit by Deloitte, was not present in the Company's files . Accordingly, any attempt
by Deloitte to audit these "services" would have led Deloitte to a missing paper trail at every tur n
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-- a conspicuous red flag requiring Deloitte to expand the extent of procedures applied (AU §
312) and exercise a heightened level of professional skepticism . (AU § 230)
733 . Deloitte was also required to have significantly expanded the scope of its audit s
and the nature of its procedures in observance of GAAS (AU § 311) which states that
"conditions that may require extension or modification of audit tests" include "the existence o f
related party transactions" and (AU § 316) which states :
In performing procedures and gathering evidential matter, the auditor continuallymaintains an attitude of professional skepticism. The performance of auditingprocedures during the audit may result in the detection of conditions orcircumstances that should cause the auditor to consider whether materialmisstatements exist . If a condition or circumstance differs adversely from theauditor's expectation, the auditor needs to consider the reason for such adifference .
c. Deloitte Improperly Issued Unqualified Audit Report s
734 . The Standards of Reporting under GAAS, provide the following : (1) the report
shall state whether the financial statements are presented in accordance with generally accepte d
accounting principles (AU § 410); (2) the report shall identify those circumstances in which suc h
principles have not been consistently observed in the current period in relation to the precedin g
period (AU § 420) ; (3) informative disclosures in the financial statements are to be regarded a s
reasonably adequate unless otherwise stated in the report (AU § 431) ; and (4) the report shal l
either contain an expression of opinion regarding the financial statements, taken as a whole, o r
an assertion to the effect that an opinion cannot be expressed . When an overall opinion canno t
be expressed, the reasons therefore should be stated . In all cases , where an auditor' s name i s
associated with financial statements, the report should contain a clear-cut indication of the
character of the auditor's work, if any, and the degree of responsibility the auditor is taking (A U
§ 504) .
235
735 . Deloitte issued unqualified audit opinions on the Company's annual financia l
statements for each of the years ended December 31, 1999 to 2003, falsely stating that thos e
financial statements had been prepared in accordance with GAAP.
736. Deloitte failed to comply with GAAS in that Deloitte's opinions failed to stat e
that the disclosures in the Marsh financial statements were not reasonably adequate .
737. Deloitte, as long-time auditor for Marsh, ignored the fact that Marsh manipulate d
its disclosures concerning contingent fees through various iterations and descriptions of the
contingent revenues that Marsh was receiving from insurers .
738 . Moreover, despite the fact that Marsh's contingent fees were more than 5% o f
Marsh's total revenues in 2003, and more than 16% of revenues from Risk and Insuranc e
Services, and moreover, constituted a critical element of Marsh's revenues and growth, and thu s
were material, Deloitte's opinions failed to disclose that these improper revenues were no t
disclosed in Marsh ' s financial statements as required by GAAP .
739. Deloitte, when confronted with financial statements that exhibited a blatan t
disregard of GAAP-mandated disclosures, failed to express a qualified or adverse opinion and
provide the information in its repo rts as required by GAAS. Instead, Deloitte stated, in each and
every audit opinion which it issued during the Class Period, that it examined "evidence
supporting the amounts and disclosures in the financial statements" and assessed the "accountin g
principles used . . .as well as . . .the overall financial statement presentation" and determined tha t
Marsh's financial statements were presented "fairly, in all material respects . "
740. Deloitte should have insisted that Marsh adjust its financial statements prior t o
issuing its unqualified audit opinions . If Marsh had refused to make the corrections, then
Deloitte should have complied with the GAAS provisions of AU § 508, Reports on Audited
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Financial Statements, and written either adverse opinions stating that Marsh's financia l
statements did not comply with GAAP and were not presented fairly or qualified opinions .
These types of opinions should have disclosed the reasons Deloitte was departing from th e
standard unqualified audit opinion. If such audit reports had been issued by Deloitte, then
investors would have been notified of the substantial risk they were shouldering by investing i n
and lending to Marsh. Instead, Deloitte became a primary violator of the securities laws by
issuing `clean' audit opinions which greatly facilitated and prolonged the fraud . Without these
materially false and misleading unqualified audit opinion reports, the fraud could not have been
perpetuated.
d. Deloitte Failed to Adequately Apply Auditing Procedures to SegmentDisclosures
741 . As stated previously, in 2003 alone, Marsh recorded $845 million in contingen t
commission revenue, representing approximately 12% of the Company's risk and insuranc e
services revenue of $6 .868 billion, and 16% of its $5 .2 billion in risk management and insuranc e
broking revenues . Accordingly, contingent commissions were a material portion of th e
Company's reported Risk and Insurance Services business segment revenue .
742. SFAS No. 131, Disclosures about Segments of an Enterp rise and Related
Information, requires public companies report certain financial and descriptive information about
their reportable operating segments, including: the factors used to identify reportable segments, a
measure of profit or loss, certain revenue and expense items, and assets of reportable operating
segments and the basis of measurement of these items .
743 . GAAS (AU § 9326), which requires the auditor to examine segment disclosure s
notes that GAAP (FASB Statement No. 131, Disclosures about Segments of an Enterpri se and
Related Information) establishes standards for the way that public business enterprises disclose
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information about segments in annual financial statements and in condensed financial statements
of interim periods issued to shareholders, and it states that the auditor should obtain an
understanding of who performs the function of the chief operating decision maker ("CODM") ,
and how management organizes the entity into operating segments for internal reporting
purposes . It notes that procedures that the auditor should consider performing to evaluat e
whether the entity appropriately identified its reportable operating segments include the
following: "Review corroborating evidence, such as information that the CODM uses to assess
performance and allocate resources, material presented to the board of directors, minutes from
the meetings of the board of directors, and information that management provides i n
management's discussion and analysis (MD&A), to financial analysts, and in the chairman' s
letter to shareholders, for consistency with financial statement disclosures . "
744. It is inconceivable that Deloitte could have reviewed the "information that th e
CODM uses to assess performance and allocate resources" to the Company's Risk and Insuranc e
Services business segment without identifying that countless key source documents were
missing, the tip of the iceberg which would have led any competent auditor to detect the
fraudulent activities in the business segment and the concealment thereof in Marsh's financia l
statements .
745. The egregiousness of Deloitte's audit failures is highlighted by the fact that :
a. approximately seven months after Deloitte issued its March 5, 2004 clean bill ofhealth on the Company's 2003 financial statements, the Attorney General of theState of New York brought an action against Marsh stating : "Marsh, however, hasnever disclosed to its shareholders how contingent commissions constitute thelifeblood of its business . . .victims here are Marsh's own shareholders, who havenever been told that hundreds of millions of dollars of Marsh's profits derive fromillegal activities . "
b. Deloitte audited the financial statements of The Hartford Financial ServicesGroup, Inc. which also engaged in improper bid-manipulation practices withMarsh. As stated in the complaint filed by the Attorney General of the State o f
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New York : "Marsh did not limit its bid rigging practices to its large corporateclients . It also engaged in such conduct with The Hartford Financial ServicesGroup . . ." Thus, Deloitte was "required" to have audited both sides of many ofthe illicit transactions in which Marsh engaged .
e. Deloitte Failed to Adequately Perform Procedures on FederalSecurities Filings
746. According to AU § 711 .05, because a registration statement under the Securities
Act of 1933 speaks of an effective date, the auditor whose repo rt is included in the registratio n
statement has a statutory responsibility that is determined in the light of the circumstances on
that date. The statutory responsibility of the auditor is specified in § 11 of the 1933 Act . Under
this section, the auditor is responsible to sustain a burden of proof that they had, after reasonable
investigation, reasonable ground to believe and did believe, at the time such part of th e
registration statement became effective, that the financial statements were true and there was n o
omission to state a material fact required to be stated or necessary to make the statements not
misleading . To sustain the burden of proof that it has made a "reasonable investigation" as of the
effective date, the auditor is required to perform subsequent events procedures to a date as close
to the effective date of the registration date as is reasonable and practicable in the circumstances .
747. Marsh filed registration statements throughout the Class Period . At the time of
the filings, Deloitte was required to perform procedures in order to provide it reasonable groun d
to believe the included financial statements had no material omissions or misstatements . Deloitte
repeatedly failed to identify the material improper commission practices and MSA payment s
recognized by Marsh, both during its audits and in performing these required procedures .
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XII. KNOWLEDGE OR RECKLESS DISREGARD OF MARSH'S FRAUD BY TH ESENIOR MANAGEMENT DEFENDANTS
A. General Allegations of Scienter
748 . The Senior Management Defendants, by virtue of their receipt of informatio n
reflecting the improper and fraudulent behavior described above and/or their failure to revie w
information they had a duty to monitor, their actual issuance of and control over Marsh' s
materially false and misleading statements, and their association with the Company which mad e
them privy to confidential proprietary information concerning the Company, were active ,
culpable, and primary participants in the fraudulent scheme alleged herein . The Senior
Management Defendants knew or recklessly disregarded the materially false and misleadin g
nature of the information they caused to be disseminated to the investing public .
749 . The Senior Management Defendants also knew or recklessly disregarded that th e
misleading statements and omissions contained in Marsh's public statements would adversely
affect the integrity of the market for the Company's common stock and would cause the price o f
the Company's common stock to be artificially inflated . The Senior Management Defendants
acted knowingly or in such reckless manner as to constitute a fraud and deceit upon Lea d
Plaintiffs and other members of the Class .
750. In addition to the foregoing and other acts alleged herein, the following fact s
provide compelling evidence that the Senior Management Defendants acted with actua l
knowledge, or, at the very least with recklessness.
240
B. Knowledge or Reckless Disregard by the Senior Management Defendant s
1 . The Senior Management Defendants' Knowledge or RecklessDisregard that Marsh's Revenue and Contingent CommissionDisclosures were Materially False and Misleadin g
751 . A key element of the Senior Management Defendants' securities fraud is their
materially false and misleading disclosures and material omissions regarding Marsh's contingent
commission revenue. This revenue accounted for a huge percentage of Marsh's net income. For
example , in 2003, it consisted of approximately 50% of Marsh 's net income .
752 . By virtue of the magnitude and the importance to Marsh's bottom line of the
contingency commission revenues, as described below, the Senior Management Defendants mus t
have known or were reckless in not knowing everything about the source and sustainability o f
those revenues . Consequently, the Senior Management Defendants knew or were reckless in not
knowing that their disclosures regarding these revenues were materially false and misleading .
753. When the size of the revenue stream at the heart of the wrongdoing is couple d
with the following additional facts, among others as described herein, the strong inference tha t
the Senior Management Defendants acted with scienter is undeniable :
(a) the improper activities engaged in by Marsh employees that generated Marsh'shigh contingent commission revenue stream were widespread and part of Marsh'soverall business strategy ;
(b) the Senior Management Defendants actively concealed their improper activities ;
(c) the Senior Management Defendants had a specific duty to monitor contingentcommission revenues and ignored red flags indicating problems with thepropriety of Global Broking's procurement of insurance quotes;
(d) the changes in Marsh's disclosures about contingent commission revenue indicatethat Senior Management Defendants knew and sought to conceal the true natureof these revenues ; and
(e) the Senior Management Defendants were on notice of a lack of internal controlsthroughout Marsh's business divisions .
241
a. The Magnitude of the Revenues Attributable to Marsh's ImproperSteering Practices Confirms Senior Management Defendants'Scienter
754. Marsh received billions of dollars in contingent commissions during the Class
Period, including more than $845 million in 2003 alone, or about half of Marsh's 2003 ne t
income . Thus, Marsh ' s revenue from contingent commissions was c ritical to Marsh ' s overal l
performance and prospects .
755. As detailed below in paragraphs 811-824, the Senior Management Defendants, b y
virtue of their managerial positions, were aware of the magnitude of this revenue stream .
756. Given the importance of contingent commissions to Marsh's financial well-bein g
(its "lifeblood"), and the direct knowledge by the Senior Management Defendants of thi s
importance, even if the Senior Management Defendants were not themselves involved i n
negotiating improper steering agreements with insurers and reinsurers , they were aware of thes e
agreements (or were reckless if they were not aware) . Without these improper steerin g
arrangements, Marsh would have been unable to increase its contingent commission revenues t o
the levels they greedily sought .
757. Indeed, as noted earlier, according to CW2, Global Broking was a "cash cow." As
this former employee recognized, "when you have a group of people that are producing that kin d
of revenue , rest assured that Greenberg, et al . know what's going on . "
758. Accordingly, the Senior Management Defendants knew or were reckless in no t
knowing that their disclosures regarding Marsh's revenues, including their failure to disclose thi s
material source of revenues and the fact that contingent commission revenues were derived fro m
improper business activities, were materially false and misleading .
242
b. Marsh's Improper Steering was Part of Marsh's Overall BusinessProtocol and Widely Known Throughout Marsh
759. The myriad examples of improper steering described herein were not isolate d
incidents . They were part of a carefully-planned and well-supervised scheme to inflate Marsh' s
revenues of which the Senior Management Defendants were aware and/or recklessly disregarded .
According to CW7, Marsh ' s practice of steering business to a carrier with a favorable contingent
commission agreement was "rampant ." Specifically,-as set forth below and detailed above ,
Marsh employees were regularly directed by senior management to steer business to thos e
carriers that were willing to pay the largest contingent commissions .
760. As desc ribed herein, according to Bewlay's plea allocution , the practice of
obtaining B quotes to steer business was widespread in the Company, and was not just the effor t
of a few employees . Bewlay went so far as to say that Marsh had an official "protocol "
regarding these unethical practices . Bewlay himself pled guilty to a scheme to defraud .
761 . Other high level Marsh executives, including Winter, a former manager of th e
northeast region of Global Broking, and Stearns, a Senior Vice President of Marsh Inc ., have
similarly pled guilty to this same scheme to defraud, admitting that they "regularly" instructe d
non-incumbent carriers to submit non-competitive bids in order to steer the business to certai n
incumbent carriers .
762 . According to the findings of the DPW Report, the relevant emails and othe r
communications reviewed by DPW are consistent with statements that discussions of bi d
manipulation "took place regularly ." Indeed, DPW reported that it "anticipated that additional
examples of this type of conduct may well be identified in [the Excess Casualty and Excess
Workers Compensation] and other product lines as the government investigation continues ."
243
763 . An April 2, 2001 e-mail from the Managing Director in Marsh ' s Excess Casualty
group, exemplifies these official directives from managing directors to engage in imprope r
steering to inflate revenues . The Managing Director wrote (via email) to the heads of regiona l
centers asking for "twenty accounts that you can move from an incumbent [insurance company] "
to a company that had just extended its contingent commission agreement, stating that `[t]hi s
could mean a fantastic increase in our revenues ." See paragraphs 97, 147.
764 . Statements by former employees further echo this official directive to increase
revenues by any means possible. According to CW6, the preferred insurance carriers who Marsh
sought to steer business to were also discussed at monthly staff and department meetings which
were attended by all of the Middle Market employees in the office, including management . See
paragraphs 97, 143.
765. The existence of the Global Broking division further supports this stron g
inference that the Senior Management Defendants had direct knowledge of the improper
steering. This special business unit was created to centralize Marsh's control over the mos t
lucrative contingent commissions . See paragraphs 131-140 . Through the operations of this unit ,
Marsh was able to protect its systematic steering of business to insurance carriers that paid the m
the highest contingent commissions .
766. While this division was formed shortly before Greenberg's appointment a s
President , it became much more active in 1999 when Greenberg became CEO of Marsh . At that
time, the senior management of Marsh mandated that all of Marsh's Property & Casualt y
Middle-Market divisions, located throughout the country, had to submit their clients' requests fo r
bids on insurance policies to Global Broking , situated in New York City. See paragraphs 137-
138.
244
767. According to CW2, the mandate to use Global Broking "came right from th e
top-from Greenberg and Egan ." See paragraph 140 ; see also paragraph 139 . Since Middle
Market was the largest growing segment in Marsh, Greenberg and the other Senior Management
Defendants recognized the opportunity to capture more contingent commissions from that
segment .
768 . According to a former Marsh employee who worked as a client executive durin g
the Class Period and was familiar with the formation of Global Broking CW 1, Global Brokin g
was set up as a "profit center ." According to this former employee, "[t]here is only one way th e
broking unit could make a profit and this is to rig the contingency commission system becaus e
that was the only source of income they controlled ." This employee was present at forma l
meetings where managers of Global Broking admitted that Global Broking would try, wheneve r
possible, to place insurance with certain carriers because Marsh had better placement services
agreements with those insurers . CW6, similarly referred to Global Broking as a "profit center . "
769 . According to CW2, Global Broking kept tight control over the process and would
try to prevent the broking field office from directly contacting the insurers . See paragraph 133 .
Specifically, according to numerous confidential witnesses, Gilman, who was Executive Director
of Marketing at Global Broking and a Managing Director of Marsh during the Class Period ,
sternly enforced the routing of placement decisions through Global Broking . For example ,
Gilman issued the following warn ing to ACE in a June 20, 2003 email: "Currently we have
about $ 6 million in new business [with ACE] which is the best in Marsh Global Broking so I do
not want to hear that you are not doing `B' quotes or we will not bind anything . "
770. CW12, a former Vice President of Seabury & Smith , a division of Marsh,
described the widespread acknowledgment within Marsh that Global Broking was engaged in
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improper practices . From this witness's experience , Global Broking began increasing its revenue
by employing questionable practices and procedures in the late 1990s -- the time Greenber g
became CEO of Marsh . According to CW 12, people were saying that "Global Broking was out
of control . "
771 . The senior management of Marsh fu rther reinforced Marsh ' s steering system by
giving employees who moved business to contingent fee payers positive performance reviews .
Conversely, employees were criticized for placing business with non-preferred carriers who did
not pay contingent commissions or who did not pay enough in contingent commissions . See
paragraphs 170-178.
772. Marsh' s stee ring scheme was so formalized , and so integral to Marsh's busines s
plan, that Global Broking prepared a "Tiering Report,',' which was distributed to senio r
executives that classified the insurance companies based on their contingent commission
agreements with Marsh . Marsh's Managing Directors then instructed their subordinates that ,
based on this report, they would receive "clear direction on who [we] are steering business to an d
who we are steering business from ." See paragraph 158 .
773 . Even those outside of Marsh recognized that the stee ring was integral to Marsh' s
business plan. For example, in a November 3, 2003 email regarding "MMG Model Concerns, "
marked confidential , ACE executives wrote about their concern s with being asked to provide a B
quote . ACE repeatedly refers to this system as "MMGB's business model ."
774. The business model was still further officially enforced by a system of internal
accounting wherein branch offices and divisions that placed business with preferred carriers go t
credit for "revenue repatriation." See paragraphs 177-78 .
246
775. Given that bid manipulation and steering were part of Marsh's official protocol ,
the Senior Management Defendants were aware of these improper practices by virtue of their
supervisory and controlling positions within the Company . Defendants Egan, Grove and Sinnot t
were all senior executives of Marsh Inc ., the subsidiary that was the locus of the illicit steerin g
activities .
776. Defendant Greenberg was actively involved with the operations and business
model of this subdivision, which was so critical to Marsh 's success . According to CW5, on
several occasions Greenberg attended the annual meetings of Marsh Inc .'s Managing Directors
and other senior officials held at the Greenbrier, in West Virginia. At these meetings, the
management of Global Broking made presentations about what Global Broking was doing, ho w
they were doing it, and the revenues they were generating from it . Furthermore, as noted above ,
Greenberg spearheaded the effort to have Middle Market placements done through Globa l
Broking . According to an article circulated in April 2000 by The McCarthy Companies, a
property/casualty carrier , six weeks into his job as CEO of MMC, Greenberg even attended
Marsh's annual Middle-Market Conference .
777. Moreover, according to CW 13, Greenberg sat on the same floor as the senio r
executives of Marsh Inc ., including Defendant Egan, in the very same building that housed
Global Broking . According to CW13, "you would have a hard time proving to me that Jeffrey
didn't know everything about it [Global Broking], because, first of all he was the CEO of th e
company that did it and he is on the floor with the people that do it and the people that are in
charge of it, I mean their offices are in shouting distance of each other and they all talk to eac h
other all day long . . . How could he not know!"
247
778 . Similarly, when CW7 explained that his/her performance reviews specifically
acknowledged his/her efforts in steering business to markets where Marsh had contingen t
commission agreements , CW7 stated : "I can assure you that throughout the Global Broking
enterprise, from the top down, people were substantially rewarded for doing business with PS A
markets and were criticized if they did a non-PSA placement, so there is no question that it goe s
at least as high as Egan and I'm assuming that when it's 800 plus million dollars, that it woul d
have gotten everyone's attention, all the way to the top. They knew what was going on and the y
encouraged it . "
779. Eliot Spitzer recognized the same inevitable inference . In negotiating a settlement
of this action against Marsh, the NYAG demanded that Greenberg, Davis, Cabiallavetta, Groves ,
and Smith resign from their positions as officers and directors of Marsh as a condition of an y
settlement negotiation . According to a Bear Stearns report issued on Friday, October 15, 2004 ,
the NYAG indicated that his department was misled by "the highest senior management level at
Marsh and called for the board of directors to `re-evaluate the leadership of the company ." '
c. The Senior Management Defendants Actively Concealed Marsh'sImproper Steering Activities
780. The extensive efforts by Senior Management Defendants to conceal thei r
unethical plan is yet further evidence of their knowledge of the improper activities that helpe d
sustain Marsh's enormous contingent commission revenue stream . Marsh employees at every
level were involved in making sure that information about the improper steering and contingent
commissions was kept from clients and the public .
781 . According to Bewlay's plea allocution, Marsh had a specific "protocol" designed
to prevent Marsh's clients from obtaining information concerning the amount of contingen t
commission revenue Marsh earned from carriers . The protocol required multiple layers of
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inquiry to discourage the client from obtaining the answer . The Marsh protocol also require d
that all inquiries be channeled through a single Marsh employee who directed the answer to th e
inquiry . Even when Marsh eventually responded to the request, according to Bewlay, they lied .
Specifically, they " significantly understated the amount of PSA or MSA revenue earned with
respect to a particular client ."
782. An email from insurer Munich further demonstrates the efforts by Marsh to keep
the contingent commissions hidden . In 2000, Munich told a client about its contingent
commission agreement with Marsh in order to explain the contingent commissions that wer e
being passed on to the client . According to a March 14, 2000 e-mail, a senior vice presiden t
apologized to Marsh in an e-mail : "We acknowledge that this was inappropriate behavior . . . "
He told Marsh : "[Munich would] eliminate all documentation, electronic or otherwise, tha t
references or otherwise alludes to the [contingent commissions] . I apologize for the
consternation that this had caused within the Marsh organization ." (Emphasis added) .
783 . As revealed by DPW's internal investigation, even when Marsh did disclose to its
clients the amount of contingent commission revenues that it received, Marsh manipulated it s
calculations with the result that they "could be viewed by certain clients as inaccurate or
misleading ." According to the report :
In 1999, in response to client concerns about the role of contingent commissions,Marsh Inc . announced an agreement with RIMS . . . in which RIMS approved aprotocol by which Marsh Inc . would disclose to clients the existence of sucharrangements, as well as certain information about the amount of contingentcommission revenues that Marsh Inc. received . Pursuant to this protocol . . .Marsh Inc . has provided to clients upon request a calculation (called an "averagecontingency factor" or "ACF") that reflected the percentage amount that MarshInc. earned globally from MSA revenue, as compared to the overall amount ofpremiums placed by Marsh Inc ., in a given calendar year . . . given the mannerin which the calculations were performed pursuant to the protocol, the amountsconveyed to clients could be viewed by certain clients as inaccurate ormisleading. . . . First, in the initial years following the RIMS agreement, i t
249
appears that certain amounts were included in the calculation of Marsh Inc .'spremium revenue that were not relevant to the computation of the averagecontingency factor . . . . In addition, depending on the configuration ofinsurance products that a client purchased through Marsh Inc., the ACF and anyadditional approximation that was conveyed to the client could have beenmaterially different than the amount of MSA revenue that was associated with theparticular client's placements .
784. Once the Senior Management Defendants were notified that the NYAG wa s
investigating Marsh's steering and bid manipulation, these defendants dramatically increase d
their concealment efforts . The NYAG's office began serving subpoenas upon Marsh in o r
around April, 2004 . Upon receipt of these subpoenas, the Senior Management Defendants
attempted to impede the investigation . The NYAG described Defendant Greenberg 's respons e
as "unhelpful, distortive and unresponsive ." At about the same time, Defendants Greenberg,
Egan, Groves and Smith began negotiating in earnest to purchase Kroll . Sensing an imminent
threat and the possibility of prosecutions, Marsh purchased Kroll to help try to shield it fro m
liability for its improper business plan . Specifically, by purchasing Kroll, the Senio r
Management Defendants hoped to cash in on Knoll's investigatory expertise and to obtain th e
services of Cherkasky, a friend and former boss of Eliot Spitzer, to try to negotiate Marsh's wa y
out of the regulatory action by the NYAG .
785. Marsh's concealment efforts continue to this day. According to numerous former
employees who were recently terminated, anyone laid off in 2004 was offered a severance
"package" if they signed a confidentiality agreement . These efforts at concealment support the
inference that improper steering was part of Marsh protocol and was known and sanctioned b y
the highest levels of Marsh management . Accordingly, the Senior Management Defendant s
knew or were reckless in not knowing that their disclosures were materially misleading .
250
d. The Senior Management Defendants had a Specific Duty to Monitorthe Disclosure of Contingent Commission Agreements and IgnoredRed Flags Alerting Them to the Need to Investigate
786. Given that the receipt and disclosure of contingent commissions was an issu e
within the industry, the Senior Management Defendants were reckless in not monitoring th e
source of Marsh's contingent commission revenue and the Company's disclosure of thes e
agreements both to its clients and to its shareholders .
787. Specifically, in 1998, the New York State Insurance Department ordered broker s
and insurers to disclose to policyholders all compensation agreements between brokers an d
insurers and to keep a record of these fees . The regulatory order, known as Circular Letter No .
22, even warned that the department would inquire about these agreements in future marke t
conduct exams .
788. In addition, as discussed above, in 1999, Marsh Inc . announced an agreement with
RIMS (the risk managers trade association) in which RIMS approved a protocol by which Mars h
Inc. would disclose to clients the existence of such arrangements, as well as certain informatio n
about the amount of contingent commission revenues that Marsh Inc . received . Notably, RIMS '
concerns were prompted by a 1997 internal Marsh memo written by Robert J . Newhouse, III,
Executive Vice-President and Chairman of the U .S . operations at the time, discussing a policy by
Marsh to place some Chubb corporate business through regional Global Broking offices rathe r
than through Marsh's local offices .
789. Given Circular Letter No . 22 and the RIMS agreement, the Senior Managemen t
Defendants had an affirmative duty to monitor the issue of contingent commissions and thei r
disclosure .
790. Moreover, the Senior Management Defendants were aware of the great potentia l
for these contingent commission agreements to create an enormous incentive for Marsh
251
employees to improperly steer business to those insurance carriers who were willing to pay th e
highest contingent commissions . These incentives were particularly strong given Marsh' s
intense emphasis on generating revenues . Even Cherkasky, new to the insurance broking
industry, quickly recognized the faults of this system and publicly acknowledged in a March 3 ,
2005 art icle in the Pioneer Press, that the contingency fee agreements "provide the wrong
incentives ."
791 . Marsh's Code of Ethics further emphasized the point that the Senior Managemen t
Defendants had a duty to monitor these innately questionable agreements . According to th e
Code, the Company's CEO (Greenberg), CFO (Wijnberg) and Controller (Rapport) "hav e
leadership responsibilities that include creating a culture of high ethical standards and
commitment to compliance, and maintaining a work environment that deters wrongdoing ,
encourages employees to raise concerns, and promptly addresses employee complianc e
concerns." See paragraph 519 .
792. Indeed, in direct contradiction of Marsh's Code of Ethics, the Senior Managemen t
Defendants ignored specific complaints raised by Marsh employees relating to Global Broking -
the division in which the procurement of contingent commissions was centralized . According to
numerous confidential witnesses, employees regularly complained that when they were forced t o
use Global Broking, they did not believe clients were receiving accurate information regardin g
the most competitive bids . See paragraphs 216-225 . For example, as discussed at paragraph s
217-221, employees were falsely told by Global Broking that certain carriers declined to submi t
a bid, when in truth, Global Broking had never even requested bids from these carriers .
793 . According to "CW 14" (a former Marsh client representative employed from 1990
through 2003), similar concerns were raised by high level executives Kevin Youngs, Jim Meath e
252
and Donald Holmes, all managers in the property/casualty arena . According to multiple forme r
employees , CW2, CW3, CW5, CW 14, " CW 15" (a former Marsh employee in charge of Middle-
Market Employee Benefits consulting and Property divisions from 2001 through 2002) an d
"CW 16" (a former Marsh employee from 2000-2003, who was present at a Marsh Middle-
Market Conference in 2002), Holmes, Middle-Market Practice leader for Marsh nationwide ,
during the Class Period, openly criticized Global Broking for not necessarily fulfilling it s
fiduciary duties to obtain the best results for Marsh' s clients . According to CW 16, Holmes
publicly spoke about his concerns with Global Broking before a 2002 Middle Market conferenc e
in New York, attended by all Middle-Market practice leaders throughout the country .
794. According to CW3 and CW5, over the years, Holmes voiced these concern s
directly to Defendant Egan . According to these same witnesses , his complaints culminated in a
memo to Defendants Egan and Sinnott and all the other senior leaders of Marsh Inc in June 2003 .
According to CW5, Holmes's complaints were ignored . Indeed , according to a November 2004
press report, Holmes told a reporter at Reuters that he had gone above Gilman's head at Globa l
Broking and contacted Christopher Treanor to criticize the structure and amount of PSA .
Holmes further told the reporter that Treanor responded by threatening Holmes' job .
Accordingly, the Senior Management Defendants were at least reckless in not monitoring an d
reviewing more closely Marsh's policies regarding the procurement of contingent commission s
and the operations of Global Broking .
795 . In its settlement agreement with the NYAG, Marsh went so far as to tacitly admi t
its failure to properly monitor the disclosure of contingent commission agreements . As part of
that settlement, Marsh agreed to establish a Compliance Committee to monitor all issues relatin g
to any compensation received by Marsh from each insurer with which it placed insurance .
253
796. Defendants Greenberg and Wijnberg had a separate statutory duty, pursuant t o
Sarbanes -Oxley, to monitor Marsh 's disclosure and its "disclosure controls and procedures . "
They each specifically signed swo rn certifications that they implemented proper disclosur e
controls and procedures and evaluated their effectiveness .
e . The Changes in Marsh's Disclosure About MSA Revenue Indicatethat Senior Management Defendants Knew and Sought to Conceal theTrue Nature of these Revenues
797. The pattern of disclosures in Marsh 's filings with the SEC regarding the nature o f
contingent commissions demonstrate that the Senior Management Defendants knew or wer e
reckless in not knowing that these payments were simply illicit kick-backs . In Marsh's 199 9
Report on Form 10-K filed with the SEC on or about Marsh 29, 2000, Marsh disclosed th e
following information regarding its placement service revenue :
Placement service revenue and contingent fees includes payments or allowancesby insurance companies based upon such factors as the overall volume of businessplaced by the broker with that insurer, the aggregate commissions paid by theinsurer for that business during specified periods, or the loss performance to theinsurer of that business .
798 . The following year, in the 2000 Report on Form 10-K filed with the SEC on o r
about March 29, 2001, Marsh changed its disclosure to read as follows :
Contingent income for services provided includes payments or allowances byinsurance companies based upon such factors as the overall volume of businessplaced by the broker with that insurer, the aggregate commissions paid by theinsurer for that business during specific periods, or the profitability or loss to theinsurer of the risks placed . This revenue reflects compensation for servicesprovided by brokers to the insurance market . These services include newproduct development, the development and provision of technology,administration, and the delivery of information on developments amongbroad client segments and the insurance markets .
799 . Marsh's disclosure regarding the MSAs was changed yet again on or about March
15, 2004. Marsh's 2003 Report on 10-K with the SEC reads as follows :
254
Market services revenue is derived from agreements Marsh has with most of itsprincipal insurance markets . Under these agreements, Marsh is paid forservices provided to the market , including : access to a global distributionnetwork that fosters revenue generation and operating efficiencies ;intellectual capital in the form of new products, solutions and generalinformation on emerging developments in the insurance marketplace ; thedevelopment and provision of technology systems and services that createefficiencies in doing business ; and a wide range of administrative services .Payments under market service agreements are based upon such factors as theoverall volume, growth, and in limited cases profitability, of the total businessplaced by Marsh with a given insurer .
800. Before such significant changes could be made in Marsh's disclosure, the Senior
Management Defendants were duty bound to review and approve the new disclosures .
Furthermore, the signatories to these SEC filings were required to assure their accuracy . Indeed,
Defendants Greenberg and Wijnberg signed certifications attesting to the accuracy of th e
disclosures. Specifically, they swore that they reviewed Marsh's 10-Ks and they were no t
materially false or misleading.
801 . If indeed, the PSAs were payments for new product development, including th e
development of technology, there would need to be costs associated with these services . There
were none. According to statements made by Defendant Wijnberg, there was no offsetting
expense savings as a result of Marsh's decision to stop accepting contingent commissions . See
paragraph 241 . In other words, there were no services being eliminated as a result of th e
elimination of contingent commissions .
802. Wijnberg's statement acknowledges that she knew of the misleading nature of the
Company's disclosure i.e. - that Marsh was not in fact being paid for its services to the market .
Her knowledge can be imputed to Jeffrey Greenberg, her immediate supervisor, who, as note d
above had an obligation to verify the accuracy of the Company's disclosures . This same
knowledge can be imputed to Defendant Rapport, who, as described herein, was involved i n
Marsh's financial reporting process .
255
803 . Defendant Egan made similar statements acknowledging his awareness that th e
payments Marsh received were not really for any "services provided by brokers to the insuranc e
market." In an October 27, 2004 investor conference call (after the Class Period), Egan ,
President and COO of Marsh Inc ., clearly explained that the payments Marsh received pursuan t
to the market service agreements were "payments from an insurance company to Marsh based o n
volume only and based on book of business . "
804. Accordingly, given the changes in the disclosures regarding contingent
commissions which were intended to hide the true nature of these revenues, the Senior
Management Defendants knew or were reckless in not knowing that their disclosure of Marsh' s
MSA revenue was materially false and misleading .
f. The Senior Management Defendants Ignored the Red Flags Signalinga Serious Lack of Internal Control s
805 . Given the similar problems in the Company's other business units, the Senio r
Management Defendants knew or recklessly disregarded that Marsh did not have proper interna l
controls . Specifically, the following facts served as red flags that the Senior Management
Defendants needed to carefully monitor the disclosure of contingent commissions because of th e
innately improper incentives these agreements provided.
806. As described herein, the investment management business at Putnam wa s
enmeshed in numerous scandals . On October 28, 2003, the SEC commenced a major suit agains t
Putnam. Marsh eventually agreed to an order finding that many of Putnam's investmen t
managers engaged in excessive short-term trading in their personal accounts and that at least fou r
had engaged in insider trading on accounts in which they had investment responsibilities . Other
investigations, including the investigation by the NYAG, focused on illegal market-timing and
late trading. Ten securities class actions and fifty-six individual actions were filed .
256
807. Similarly, Mercer is under investigation by the SEC for conflicts of interest at it s
pension-consulting division, including alleged illicit payments to consultants who provide advic e
to pension funds regarding the selection of investment advisors to manage plan assets .
Separately, in a matter unrelated to the SEC pension investigation, Mercer was an advisor to th e
NYSE when its ex-chairman , Richard Grasso, secured an infamous $187 million pay package .
Mercer, which admitted when it settled, that it had provided information to the board that wa s
inaccurate and incomplete , agreed to return the fees that it charged NYSE .
808. Further, as explained herein, Mercer engaged in very similar kick-back conduc t
with its preferred insurers . This demonstrated that the improper practices must have been
imposed and/or known by Marsh management, the common point of contact between Mercer &
Marsh Inc .
2. Marsh's Disclosure Concerning its Fiduciary Duties
809. Another key element of Marsh's securities fraud is its materially false statement s
to the market that it was an ethical company acting in its clients' best interests . The Senior
Management Defendants all signed SEC filings and/or made public statements containing thes e
materially false representations . The Senior Management Defendants knew or recklessly
disregarded that those statements were not true . Specifically, as discussed herein, among othe r
things, the Senior Management Defendants knew or recklessly disregarded that : (1) the
Company's business model was based on steering clients to the carriers that paid the highes t
contingent commissions ; (2) the Company had a protocol of hiding the amount it received in
contingent commissions from its clients despite regulations requiring full disclosure ; and (3 )
numerous employees had raised concerns about Marsh's failure to keep its clients properl y
informed.
257
810. Accordingly, at the time the Senior Management Defendants were assuring th e
market that Marsh was acting in its clients' best interests, the Senior Management Defendant s
were aware of, or were reckless in disregarding, the material fact that Marsh was guided by it s
own financial interest, rather than that of its clients . At the very least , the Senior Management
Defendants were reckless in failing to monitor the proper disclosure of these agreements t o
Marsh's clients, as they were required to do . Had the Senior Management Defendants properly
monitored the disclosure of these agreements, the Senior Management Defendants would hav e
known that, in direct contradiction of the Company's clients' interests, Marsh was failing to giv e
its clients required and material information necessary for their decision making . As such, the
Senior Management Defendants were reckless in telling investors that Marsh was acting in it s
clients' best interests .
C. Additional Scienter Allegations for Each of theSenior Management Defendants
811 . In addition to the allegations asserted above, in light of Defendants' either actua l
knowledge or reckless disregard of the facts, Defendants signed the false and misleadin g
statements complained of herein .
812. Defendant Greenberg : As Chairman and CEO of Marsh, the parent company of
Marsh Inc ., Greenberg had access to all significant corporate information possessed by Marsh
Inc., including all information about the magnitude of the revenues from contingen t
commissions . Furthermore, according to CW5, Greenberg attended several annual meetings o f
the Managing Directors and senior leaders of Marsh Inc . held at the Greenbrier, in Wes t
Virginia, wherein management of Global Broking made presentations about the size and sourc e
of the contingent commissions . According to CW5, through the use of PowerPoin t
presentations, Global Broking highlighted the stream of contingent commissions . Furthermore,
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CW5 stated that "there was an overall recognition in their presentation that contingent incom e
was where their revenue was coming from and that was supporting their placement activities . "
813 . Greenberg was a major force in instilling the Marsh corporate directive t o
increase revenues at all costs . According to a former Marsh high-level executive in the
Company's broker\dealer business ("CW 17"), Greenberg "was only concerned with Marsh
making their numbers ." Furthermore, Greenberg admitted that he was well aware of th e
importance of contingent commission revenues to Marsh's financial success when he tol d
analysts during a July 28, 2004 conference call that MSA revenues were part of Marsh's busines s
model .
814. Finally, Greenberg is an insurance industry insider with a long history in the
insurance business . Greenberg is the son of Hank Greenberg, the CEO of AIG until his abrupt
resignation in March 2005 . Prior to joining Marsh, Greenberg spent seventeen years at AIG.
Greenberg's brother is Evan Greenberg, the CEO of ACE Insurance . Both AIG and ACE were
among the insurers who benefited the most from Marsh's steering practices and who provide d
fake bids to Marsh .
815 . Based on the above allegations and the reasons stated above, Greenberg acted
intentionally or with reckless disregard in making false and misleading statements to the marke t
regarding the Company's contingent commissions and its commitment to serve its clients' bes t
interests .
816. Defendant A. J. Smith: Defendant A . J. Smith served as the Company's CEO
from 1992 to 1999. Like Greenberg, he too had access to all significant corporate informatio n
possessed by Marsh Inc ., including all information about the magnitude of the revenues fro m
contingent commissions . For these reasons and the reasons stated above, Smith acte d
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intentionally or with reckless disregard in making false and misleading statements to the marke t
regarding the Company's contingent commissions and its commitment to serve its clients' bes t
interests .
817. Defendant Groves : Defendant Groves was Chairman and CEO of Marsh Inc .
from January 2003 until October 2004 when he was forced to step down following the NYAG' s
investigation . He joined Marsh as a senior advisor in August 2001, became president and CO O
of Marsh Inc. in October 2001 and CEO in January 2003 . In these control positions at Mars h
Inc., Defendant Groves was privy to all information regarding revenues attributable to contingent
commissions. For these reasons and the reasons stated above, Groves acted intentionally or with
reckless disregard in making false and misleading statements to the market regarding th e
Company's contingent commissions and its commitment to serve its clients' best interests .
818 . Defendant Sinnott : Defendant Sinnott was Chairman and CEO of Marsh Inc .
from 1999 through 2002. Like Groves, as Sinnott was head of Marsh Inc ., Sinnott was privy to
all information regarding revenues attributable to contingent commissions . Moreover, as noted
above, Sinnott was directly alerted to the fact that Global Broking was not necessarily acting i n
the clients' best interest in procuring insurance. For these reasons and the reasons stated above ,
Sinnott acted intentionally or with reckless disregard in making false and misleading statement s
to the market regarding the Company' s contingent commissions and its commitment to serve it s
client's best interests .
819 . Defendant Egan : Defendant Egan was President and COO of Marsh Inc . until he
was forced to resign by MMC in November 2004 in connection with the NYAG's investigation .
Prior to his departure, Egan had spent over thirty years with Marsh, and also served as head o f
Marsh's Northeast operations , President and CEO of North American operations, and
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immediately preceding his appointment as President, Vice-Chairman of Marsh . When Egan was
ordered to step down from his position, Michael Cherkasky, Greenberg's replacement, noted tha t
Egan was "accountable for the areas of the business that have been the focus of investigations by
the New York attorney general 's office ." As such, Egan was aware of the magnitude of the
revenues derived from contingent commissions. Indeed, as the immediate head of the division of
Marsh in which all of the improper steering practices occurred , Egan was also directly aware or
was reckless in not knowing that the revenues were the result of improper activities . Moreover ,
as noted above, Egan was directly alerted to the fact that Global Broking was not necessaril y
acting in the clients' best interest in procuring insurance . For these reasons and the reason s
above, Egan acted intentionally or with reckless disregard in making false and misleadin g
statements to the market regarding the Company's contingent commissions and its commitmen t
to serve its clients' best interests .
820 . Defendant Wijnberg: Defendant Wijnberg was appointed Senior Vice President
and CFO of Marsh in January 2000. Wijnberg reported directly to Greenberg and was ultimately
responsible for the preparation and filing of Marsh's financial statements , including MD&A
disclosures , compliance with GAAP, and maintaining adequate internal controls . As the
executive most directly responsible for the accuracy of the Company's accounting, Wijnber g
knew of the magnitude of the contingent commission revenue. Indeed, as set forth in detai l
above, Wijnberg had direct knowledge that the Company's disclosures regarding its MS A
revenues were false and misleading. Accordingly, Wijnberg acted intentionally or with reckles s
disregard in making false and misleading statements to the market regarding the Company' s
contingent commissions and its commitment to serve its clients' best interests .
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821 . Defendant Rapport: Defendant Rapport was Vice President and Controller o f
Marsh and its Chief Accounting Officer. According to Marsh's bylaws, Rapport, as Controller ,
was responsible for keeping "all books of account and accounting records of the Corporation "
and was required to "render to the Chairman, the chief financial officer and the Board o f
Directors whenever they may require it, a report of the financial condition of the Corporation . "
Rapport, therefore, was involved in Marsh's financial reporting process . Accordingly, Rapport
knew of the magnitude of the contingent commission revenue. For these reasons and the reason s
stated above, Rapport acted intentionally or with reckless disregard in making false an d
misleading statements to the market regarding the Company's contingent commissions and it s
commitment to serve its clients' best interests .
822. Defendant Cabiallavetta: Defendant Cabiallavetta was Vice Chairman of Marsh
and was also Chairman of Marsh Global Development until November 2004, when he wa s
forced to step down as a condition to the NYAG discussing a possible settlement with Marsh . In
Cabiallevetta 's control position , he was privy to information concerning the magnitude o f
contingent commission revenue. For these reasons and the reasons stated above, Cabiallavett a
acted intentionally or with reckless disregard in making false and misleading statements to th e
market regarding the Company' s contingent commissions and its commitment to se rve its
clients' best interests .
823. Defendant Bischoff: Defendant Bischoff was a Senior Vice President and the
head of Investor Relations . In this position, Bischoff was involved in drafting the Company' s
press releases. In addition, in June 2004, Marsh announced that the Company would begin to do
earnings conference calls and Bischoff would participate . In his position as the Company' s
official spokesperson, Bischoff had a duty to ensure the accuracy of his statements . For these
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reasons and the reasons stated above, Bischoff acted intentionally or with reckless disregard in
making materially false and misleading statements to the market regarding the Company' s
disclosure .
824. The swift resignations of Greenberg, Davis, Cabiallavetta, Groves, Smith an d
Egan, following the public disclosure of Marsh's improper activities, further supports a stron g
inference of these individuals' culpability .
XIII. KNOWLEDGE OR RECKLESS DISREGARDOF MARSH'S FRAUD BY THE AUDIT COMMITTE E
825 . Defendants Fanjul, Hardis, King, Lang, Olsen, Schapiro, and Simmons served a s
members of Marsh's Audit Committee during the Class Period (the "Audit Committee
Defendants") .
826. During the Class Period, Marsh's Audit Committee was charged with assisting the
Board in fulfilling its oversight responsibilities with respect to : (a) the integrity of Marsh' s
financial statements; (b) the qualifications, independence and performance of Marsh' s
independent auditors ; (c) the performance of Marsh' s internal audit function ; (e) and compliance
by Marsh with legal and regulatory requirements .
827. Marsh's Audit Committee was privy to all of Marsh's financial information b y
virtue of their positions. Moreover, the Audit Committee Defendants acted with scienter with
respect to the wrongful scheme complained of herein . The following "red flags," among others ,
give rise to a strong inference that the Audit Committee Defendants acted with knowledge or
were reckless in signing various Company public filings that contained materially false an d
misleading statements during the Class Period :
(a) the inherent conflict of interests arising from the acceptance of paymentsfrom both the Marsh's clients and the insurance companies, who stood onopposite sides of the transactions ;
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(b) the 1998 NYSID issuance of Circular Letter 22, which imposed uponMarsh the regulatory requirement that it disclose to, and obtain theconsent of, its clients with respect to the payment of contingentcommissions ;
(c) the Company's 1999 announcement that it would be transparent by full ydisclosing its contingent commissions to its clients in accordance with anagreement with RIMS;
(d) Marsh failed to disclose contingent commissions were a material part ofthe Company's Class Period revenues ;
(e) the magnitude of the contingent commission revenues was unusual, aswell as material, to the Company's operations, particularly because thereare no costs associated with such revenues ;
(f) the contingent commission agreements with AIG and ACE, which wereheaded by Defendant Greenberg's father and brother, respectively, wererelated party transactions ;
(g) the numerous instances of bid manipulation and steering by the Company,as well as the fact that the improper practices extended over many years ;
(h) the numerous allegations of wrongdoing relating to Marsh's othe rbusinesses, including Mercer and Putnam ;
(i) the description of the contingent commission revenues in the Company'spublic filings changed several times during the Class Period ; and
(j) the Company ranking and promoting Marsh executives and otheremployees for steering clients to insurance companies with which Marshhad contingent commissions .
XIV. APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD ON THE MARKET
828 . Lead Plaintiffs are entitled to a presumption of reliance on the Defendants'
material misrepresentations and omissions for the following reasons :
829. Marsh's publicly-traded securities were actively traded in an efficient market on
the NYSE during the period in which Lead Plaintiffs bought and/or sold Marsh securities . The
average daily trading volume of Marsh shares was more than 1,447,699 shares traded . The total
number of shares traded during the Class Period was 1,818,310,400 shares .
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830. As a regulated issuer, Marsh filed periodic public reports with the SEC .
831 . Marsh regularly communicated with public investors via established marke t
communication mechanisms, including through regular disseminations of press releases on th e
major news wire services and through other wide-ranging public disclosures, such a s
communications with the financial press, securities analysts and other similar reporting services .
832 . The market reacted to public information disseminated by Marsh .
833 . Marsh was followed by numerous securities analysts employed by majo r
brokerage firms who wrote reports which were distributed to the sales force and certain
customers of their respective firms . Each of these reports was publicly available and entered the
public marketplace .
834. The material misrepresentations and omissions alleged herein would tend t o
induce a reasonable investor to misjudge the value of the Marsh's shares .
835 . Without knowledge of the misrepresented or omitted material facts alleged herein ,
Lead Plaintiffs and other members of the Class purchased Marsh securities between the tim e
Defendants misrepresented or failed to disclose material facts and the time the true facts wer e
disclosed .
836. In addition to the foregoing, Lead Plaintiffs are entitled to a presumption o f
reliance because, as more fully alleged above, Defendants failed to disclose material informatio n
regarding Marsh's business, financial results and business prospects, throughout the Class
Period.
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XV. CAUSES OF ACTION
COUNT I
Violation Of Section 10(b) Of The Exchange ActAnd Rule 10b-5 Promulgated Thereunder Agains t
All Defendants (except Defendants Bernard, Coster, Erburu and Lasser)
837. Lead Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein .
838. Throughout the Class Period, Defendants carried out a plan, scheme, and cours e
of conduct that was intended to and did : (i) deceive the investing public, including Lead
Plaintiffs and the other class members, as alleged herein ; (ii) artificially inflate and maintain the
market price of Marsh' s securities ; and (iii) cause Lead Plaintiffs and the other members of the
Class to purchase Marsh's securities at artificially inflated prices . In furtherance of this unlawfu l
scheme and course of conduct, Defendants took the actions set forth herein .
839. Defendants : (a) employed devices, schemes and artifices to defraud ; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business that
operated as a fraud and deceit upon the purchasers of the Company's securities in an effort t o
maintain artificially high market prices for Marsh's securities in violation of Section 10(b) of th e
Exchange Act and Rule I Ob-5. Defendants are sued either as primary participants in the
wrongful and illegal conduct charged herein or as controlling persons as alleged below .
840. In addition to the duties of full disclosure imposed on Defendants as a result o f
their making of affirmative statements and reports , or pa rt icipation in the making of affirmative
statements and reports to the investing public, Defendants had a duty to promptly disseminat e
truthful information that would be material to investors in compliance with the integrate d
disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C .F.R.§ 210.01 et
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seq .) and Regulation S-K (17 C.F.R. § 229.10 et sec .) and other SEC regulations , including
accurate and truthful information with respect to the Company's operations, financial condition ,
and earnings so that the market price of the Company's securities would be based on truthful ,
complete, and accurate information .
841 . Defendants, individually and in concert, directly and indirectly, by the use, mean s
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal material, adverse information about the business ,
operations, and future prospects of Marsh as specified herein .
842. Defendants employed devices, schemes and artifices to defraud, while i n
possession of material, adverse, non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Marsh's value an d
performance and continued substantial growth, which included the making of, or th e
participation in the making of, untrue statements of material facts and omitting to state materia l
facts necessary in order to make the statements made about Marsh and its business operation s
and future prospects in light of the circumstances under which they were made, not misleading ,
as set forth more particularly herein, and engaged in transactions, practices and a course of
business that operated as a fraud and deceit upon the purchasers of Marsh's securities during th e
Class Period .
843 . Defendants had actual knowledge of the misrepresentations and omissions o f
material facts set forth herein, or acted with reckless disregard for the truth in that they failed t o
ascertain and to disclose such facts, even though such facts were available to them . Defendants
also engaged in a scheme or artifice to defraud the public regarding Marsh . Defendants' material
misrepresentations and/or omissions and the scheme to defraud were done knowingly o r
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recklessly and for the purpose and effect of in flating Marsh's operating results and suppo rt ing
the artificially inflated price of its securities . As demonstrated by Defendants' overstatements
and misstatements of the Company's business, operations and earnings throughout the Clas s
Period, Defendants, if they did not have actual knowledge of the misrepresentations an d
omissions alleged, were reckless in failing to obtain such knowledge by deliberately refrainin g
from taking those steps necessary to discover whether those statements were false or misleading .
844. As a result of the fraudulent scheme complained of herein , the dissemination of
materially false and misleading information and failure to disclose material facts, as set fort h
above, the market price of Marsh' s securities was artificially inflated during the Class Period. In
ignorance of the fact that market prices of Marsh's publicly-traded securities were artificiall y
inflated, and relying directly or indirectly on the false and misleading statements made b y
Defendants, or upon the integrity of the market in which the securities trade, and/or on th e
absence of material, adverse information that was known to or recklessly disregarded b y
Defendants but not disclosed in public statements by Defendants during the Class Period, Lea d
Plaintiffs and the other members of the Class acquired Marsh securities during the Class Perio d
at artificially high prices and were damaged thereby .
845 . At the time of said misrepresentations and omissions, Lead Plaintiffs and th e
other members of the Class were ignorant of their falsity, and believed them to be true . They
also were unaware of Defendants' scheme and artifice. Had Lead Plaintiffs and the other
members of the Class and the marketplace known of the true financial condition and busines s
prospects of Marsh, which were not disclosed by Defendants, Lead Plaintiffs and the othe r
members of the Class would not have purchased or otherwise acquired their Marsh securities, or ,
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if they had acquired such securities during the Class Period, they would not have done so at th e
artificially inflated prices that they paid .
846. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act and Rule lob-5 promulgated thereunder .
847. As a direct and proximate result of Defendants ' wrongful conduct , Lead Plaintiffs
and the other members of the Class suffered damages in connection with their respectiv e
purchases and sales of the Company' s securities during the Class Period.
COUNT II
Violation Of Section 20(a)Of The Exchange Act Against All Defendants
(except Defendants Bernard, Coster, Erburu and Lasser )
848. Lead Plaintiffs repeat and reallege each and every allegation contained above as i f
fully set forth herein .
849. During the Class Period, Defendants Egan, Groves, and Sinnott acted a s
controlling persons of Defendant Marsh Inc . Further, Marsh controlled Marsh Inc. at all relevan t
Groves, Hardis, King, Lang, Lasser, Olsen, Schapiro, Simmons, Sinnott and Smith wer e
principal officers, directors and representatives of the Company who signed and/or wer e
otherwise responsible for the contents and dissemination of the Registratio n
Statement/Prospectus . As such, the Defendants issued, caused to be issued, and participated in
the issuance of materially false and misleading written statements that were contained in th e
Registration Statement/Prospectus, which misrepresented or failed to disclose, among other
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things, the facts set forth above . By reasons of the conduct alleged herein, each of these
defendants violated, or controlled a person, who violated Section 11 of the Securities Act .
859 . At the time Lead Plaintiffs and other members of the Class acquired the securitie s
in Marsh's 4.850% debt offering pursuant to the Registration Statement/Prospectus, they did no t
know of the wrongful conduct alleged herein or of the facts concerning the untrue an d
misleading statements and omissions alleged herein, and could not have reasonably discovere d
such facts or wrongful conduct. Less than one year has elapsed from the time that Lead
Plaintiffs discovered or reasonably could have discovered the facts upon which this Complaint i s
based to the time that Lead Plaintiffs first filed their first complaint . Less than three years
elapsed from the time that the securities upon which this count is brought were bona fide offered
to the public to the time Lead Plaintiffs first filed their first complaint .
860. Lead Plaintiffs and the other members of the Class have sustained damages . The
value of Marsh's securities sold in Marsh's 4 .850% debt offering has declined substantiall y
subsequent to, and due to Defendants' violations .
861 . By reason of the foregoing, the Defendants named in this count are liable fo r
violations of Section 11 of the Securities Act to Lead Plaintiffs and the other members of the
Class who purchased securities in Marsh's 4.850% debt offering pursuant to the Registratio n
Statement/Prospectus .
COUNT IV
Violations of Section 15 of the Securities Act AgainstGreenberg, Cavialetta, Davis, Bernard, Coster, Erburu ,
Fanjul, Groves, Hardis, King, Lang Lasser, Olsen, Schapiro,Simmons, Sinnott and Smith (the "Section 15 Defendants" )
862. Lead Plaintiffs repeat and reallege each and every allegation contained above as i f
fully set forth herein .
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863 . This count does not sound in fraud . All of the preceding allegations of fraud or
fraudulent conduct and/or motive are specifically excluded from this count .
864. This count is asserted against the Section 15 Defendants for violations of Sectio n
15 of the Securities Act, 15 U .S .C. §77o , on behalf of all members of the Class who purchase d
or otherwise acquired securities in connection with Marsh's debt offerings pursuant to th e
Registration Statement/Prospectus .
865. At all relevant times, each of the Section 15 Defendants were controlling person s
of the Company within the meaning of Section 15 of the Securities Act . The Section 1 5
Defendants were controlling persons by virtue of their positions as directors and/or senio r
officers of the Company .
866. Each of the Section 15 Defendants was a culpable participant in the violations o f
Section 11 of the Securities Act alleged in the Counts above, based in their having signed or
participated in the preparation and/or dissemination of the Registration Statement/Prospectus o r
having otherwise participated in the process that allowed the Company to issue securitie s
through Marsh's 4.850% debt offering .
867. By reason of the aforementioned wrongful conduct, each of the Section 1 5
Defendants named in this count are liable under Section 15 of the Securities Act, jointly an d
severally with, and to the same extent as the Company, is liable under Section 11 of the
Securities Act, to Lead Plaintiffs and the other members of the Class who purchased securities i n
Marsh's 4.850% debt offering. As a direct and proximate result of the wrongful conduct of each
of the Section 15 Defendants named in this count, Lead Plaintiffs and the other members of th e
Class suffered damages in connection with their purchase or acquisition of securities issued b y
the Company.
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COUNT V
Violation of Section 18 of the Securities Exchange Act Against Marsh, Deloitte, Greenberg,Wijnberg, Rapport, Bernard, Cabiallavetta, Coster, Davis, Erburu, Fanjul, Groves ,
Hardis, King, Lang, Lasser, Olsen, Schapiro, Simmons, Sinnott and Smith ("Section 18Defendants")
868. Lead Plaintiffs repeat and reallege each and every allegation contained above as i f
fully set forth herein .
869. This count is asserted against the Section 18 Defendants by Lead Plaintiffs o n
behalf of themselves and all members of the Class for violation of Section 18 of the Exchang e
Act .
870. As set forth above, the Section 18 Defendants made or caused to be mad e
statements which were, at the time and in light of the circumstances under which they wer e
made, false or misleading with respect to material facts, in documents filed with the SEC by
Marsh, including filings made on Form 10-K .
871 . In connection with the purchase of the Company's securities, Lead Plaintiffs and
all other members of the Class, and/or their respective agents, specifically read and relied upon
the Company's SEC filings, including : its Annual Reports on Form 10-K for the years endin g
December 31, 1999 through December 31, 2003 and the financial statements contained therein
and/or relied upon mate rials incorporating information from these filings. Specifically, Lead
Plaintiffs and all other members of the Class, and/or their respective agents, read and relied o n
Marsh's statements in those filings including statements regarding the Company's financia l
condition and revenue figures, without knowing that such information was false and misleading .
As alleged herein, the Section 18 Defendants knew, or recklessly disregarded, that such figures
were materially false and misleading because the results failed to adequately disclose the amount
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of contingent commission revenues being earned by Marsh and failed to disclose that Marsh was ,
in fact, providing no real services for those commission revenues .
872 . Lead Plaintiffs and all other members of the Class further relied on th e
Company's statements in those filings as being materially complete, and as not omitting materia l
information, including information about Marsh's financial condition and disclosures regarding
the Company's improper steering of clients to certain insurance companies in order to maximiz e
contingent commissions, including the procuring of false quotes to mislead customers . Lead
Plaintiffs and all other members of the Class, and/or their respective agents, relied on these SEC
filings not knowing that they were false and misleading . The reliance by Lead Plaintiffs and al l
other members of the Class, and/or their respective agents, was reasonable.
873 . When the truth began to emerge about the false and misleading statements an d
omissions that were contained in the Company's documents and reports filed with the SEC, Lea d
Plaintiffs and all other members of the Class were significantly damaged by the resulting drop in
the value of the Company's stock .
874. As a direct and proximate result of the Section 18 Defendants ' wrongful conduct ,
Lead Plaintiffs and all other members of the Class suffered damage in connection with thei r
purchases of the Company' s stock.
875. By virtue of the foregoing, the Section 18 Defendants have violated Section 18 o f
the Exchange Act .
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COUNT VI
Common Law Fraud And Deceit Against All Defendants (except Defendants Bernard,Coster, Erburu , and Lasser) the ("Common Law Fraud Defendants ") On Behalf of the
Municipal and State Pension Fund Subclass Plaintiffs
876. This claim is brought on behalf of the Municipal and State Pension Fund Subclas s
Plaintiffs who purchased Marsh securities throughout the Class Period . The Municipal and State
Pension Fund Subclass Plaintiffs repeat and reallege each and every allegation contained above
as if fully set forth herein .
877. This claim is brought against the Common Law Fraud Defendants for commo n
law fraud and deceit on behalf of the Municipal and State Pension Fund Subclass Plaintiffs .
878. As alleged herein, the Common Law Fraud Defendants made material
misrepresentations and employed a number of manipulative accounting practices to conceal
these improper practices, or omitted to disclose material facts in Marsh's financial statements, t o
the Municipal and State Pension Fund Subclass Plaintiffs and the investing public regardin g
Marsh's financial condition .
879. The Common Law Fraud Defendants were required to present Marsh's financial
condition in a fair and accurate manner in, among other documents, reports that Marsh wa s
required to file with the SEC and in press releases . As described herein, the Common Law Fraud
Defendants, by virtue of their positions at the Company, knew or should have known that Marsh
was engaging in improper steering and bid manipulation practices to inflate its revenues, th e
Company's financial statements concealed these improper activities, and Marsh's financial
statements were not presented in accordance with GAAP . Each of the Common Law Frau d
Defendants knew or were reckless in not knowing that Marsh was engaged in improper activitie s
and that Marsh's financial statements were materially false and misleading in failing to disclos e
the true source of Marsh's contingent fees . Each of the Common Law Fraud Defendant s
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participated in drafting, reviewing and/or approving the misleading statements, releases, report s
and other public representations about Marsh, and was responsible for Marsh's busines s
protocols, including the creation and maintenance of its contingent fee system, financia l
accounting system , internal controls , and the preparation and review of the audited and unaudite d
financial statements prepared and published in the name of the Company and contained i n
reports and other documents, including those filed with the SEC .
880. As alleged herein, the Common Law Fraud Defendants made (both orally and i n
writing) untrue statements of material facts and/or omitted material facts required to be stated
therein to make the statements therein not misleading.
881 . Additionally, as "independent " auditors of the Company, Deloitte had a duty t o
examine the Company's financial statements in accordance with GAAS to determine, among
other things , whether the financials were presented in accord ance with GAAP . Further, in
connection therewith, Deloitte had a duty to disclose to management, and in particular th e
Company's Audit Committee, any defects in the system of internal controls .
882. As alleged in greater detail above, Deloitte's unqualified audit opinions wit h
respect to the Company's 1999, 2000, 2001, 2002 and 2003 financial statements were materially
false and misleading. Deloitte knew and understood that its Audit Opinions and reports
concerning the Company's financial statements would be distributed to the investing public, an d
that investors would rely and had a right to rely on such reports .
883 . Deloitte knew or recklessly disregarded that it had violated GAAS in auditing th e
Company's books and records and system of internal controls, although it had represented t o
investors that it had complied with GAAS and that the Company's financial statements were
presented in accord ance with GAAP. Deloitte knew or recklessly disregarded that th e
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Company's financial results were not presented in accordance with GAAP , and knew or
recklessly disregarded that it should not have issued unqualified Audit Opinions in connection
with the Company' s financial statements .
884. By virtue of its position as independent auditor of Marsh, Deloitte knew al l
relevant facts regarding the transactions described herein, knew Marsh's confidential corporate ,
financial, operating, and business information at all relevant times, and knew Marsh's tru e
financial and operating condition . Moreover, Deloitte intentionally or recklessly failed to take
steps which, as Marsh's auditor, it could and should have taken to fully and fairly disclose th e
true facts to the public .
885. At all relevant times, Deloitte made or caused to be made statements contained i n
reports and other documents the Company filed with the SEC which were, at the time and i n
light of the circumstances under which they were made, false and misleading with respect t o
material facts .
886. As alleged more fully herein, Deloitte knew or was severely reckless in no t
knowing that Marsh's disclosures concerning the source of its contingent commissions were
false and misleading and that Marsh's accounting for its contingent commissions failed t o
comply with GAAP . Nevertheless, Deloitte continued to certify materially false and misleading
financial statements .
887. Deloitte's scienter is further evidenced by the nature and magnitude of Marsh' s
continent commissions which resulted in the Company disgorging $850 million in imprope r
revenues to compensate the consumer victims of its fraud, numerous red flags which would hav e
alerted Deloitte to Marsh's improper steering and bid manipulation practices, and blatan t
violations of GAAP contained in Marsh's financial statements . Absent intentional or reckles s
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conduct, Deloitte would have detected Marsh's misstatements during the course of their audit s
and either taken corrective action or declined to issue unqualified audit opinions .
888. The Common Law Fraud Defendants acted with scienter in making, or causing t o
be made, the materially false and misleading statements and omissions alleged herein .
889. The materially false and misleading statements by the Common Law Fraud
Defendants were made in connection with the financial statements upon which the Municipa l
and State Pension Fund Subclass Plaintiffs relied in purchasing Marsh securities .
890. At the time the Municipal and State Pension Fund Subclass Plaintiffs purchase d
Marsh securities, they did not know of any of the false and/or misleading statements an d
omissions , and justifiably relied upon the representations made by the Common Law Fraud
Defendants in purchasing such securities . The Municipal and State Pension Fund Subclas s
Plaintiffs justifiably relied on Deloitte's Audit Opinions, as well as the Common Law Frau d
Defendants' misrepresentations in the Company's annual and quarterly reports, press release s
and other public statements and analyst reports, in purchasing Marsh securities .
891 . The aforesaid misrepresentations and omissions by the Common Law Fraud
Defendants were made to the Municipal and State Pension Fund Subclass Plaintiffs an d
constitute fraud and deceit under applicable state law.
892. The aforesaid misrepresentations and omissions by the Common Law Fraud
Defendants caused the Municipal and State Pension Fund Subclass Plaintiffs to purchas e
securities .
893 . As a direct and proximate result of the fraud and deceit of the Common Law
Fraud Defendants, the Municipal and State Pension Fund Subclass Plaintiffs, in reasonabl e
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reliance on the Common Law Fraud Defendants' misrepresentations and in ignorance of th e
material omitted facts, suffered damages in connection with their purchase of Marsh's securities .
COUNT VII
Negligent Misrepresentation Against All Defendants (except Deloitte)(the "Negligent Misrepresentation Defendants") By
The Municipal and State Pension Fund Subclass Plaintiffs
894. The Municipal and State Pension Fund Subclass Plaintiffs repeat and reallege
each and every allegation contained above as if fully set forth herein .
895. This claim is brought against the Negligent Misrepresentation Defendants fo r
common law negligent misrepresentation .
896. As alleged herein, the Negligent Misrepresentation Defendants caused Marsh t o
engage in improper steering and bid manipulation practices, made material misrepresentation s
and employed a number of manipulative accounting practices to conceal these imprope r
practices, or omitted to disclose material facts, to the Municipal and State Pension Fund Subclas s
Plaintiffs and the investing public regarding Marsh's financial condition .
897. Marsh and the Negligent Misrepresentation Defendants owed the Municipal an d
State Pension Fund Subclass Plaintiffs and other shareholders the duty to represent th e
Company's financial condition in a fair and accurate manner. Moreover, as shareholders of
Marsh, the Municipal and State Pension Fund Subclass Plaintiffs were in privity with th e
Company and its officers and directors .
898. As detailed in the preceding paragraphs, the Negligent Misrepresentatio n
Defendants employed manipulative accounting practices and made material misrepresentations ,
or omitted to disclose material facts, to the Municipal and State Pension Fund Subclass Plaintiff s
and the investing public regarding Marsh's use of improper steering and bid-rigging
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manipulation practices . The Negligent Misrepresentation Defendants, by virtue of thei r
positions at the Company, were negligent in not knowing that the Marsh was engaging i n
improper steering and bid-manipulation practices, the Company's financial statements conceale d
these improper activities and Marsh's financial statements were not presented in accordance wit h
GAAP . Each of the Negligent Misrepresentation Defendants part icipated in drafting , reviewing
and/or approving the misleading statements, releases, reports and other public representations
about Marsh, and was responsible for Marsh's business protocols, including the creation an d
maintenance of its contingent fee system, financial accounting system, internal controls, and th e
preparation and review of the audited and unaudited financial statements prepared and publishe d
in the name of the Company and contained in repo rts and other documents , including those filed
with the SEC .
899. As detailed in preceding paragraphs, the Negligent Misrepresentation Defendant s
intentionally manipulated Marsh's accounting practices in order to overstate income an d
maintain the Company's image of consistent growth . These actions resulted in the Negligent
Misrepresentation Defendants making material misrepresentations of fact in the Company' s
financial statements and omitting to state material facts therein .
900 . The Municipal and State Pension Fund Subclass Plaintiffs justifiably an d
reasonably relied upon the false presentations of the Company's status in the Negligen t
Misrepresentation Defendants' misrepresentations in the Company's annual quarterly reports ,
press releases and other public statements and analyst reports in purchasing Marsh securities .
901 . The aforesaid misrepresentations and omissions by the Negligen t
Misrepresentation Defendants were made negligently.
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902. The aforesaid misrepresentations and omissions caused the Municipal and Stat e
Pension Fund Subclass Plaintiffs to purchase Marsh securities throughout the Class Period .
903 . As a direct and proximate result of the negligence of the Negligen t
Misrepresentation Defendants, the Municipal and State Pension Fund Subclass Plaintiffs, i n
reasonable reliance on the Negligent Misrepresentation Defendants' misrepresentations, suffere d
damages in connection with their purchase of Marsh securities .
COUNT VIII
State Securities Laws Violations Agains tAll Defendants On Behalf Of Municipal and State
Pension Fund Subclass Plaintiffs
904. The Municipal and State Pension Fund Subclass Plaintiffs repeat and realleg e
each and every allegation contained above as if fully set forth herein .
905 . This Count is brought pursuant to those state securities laws that have a privat e
right of action of each of the states in which the members of the Municipal and State Pensio n
Fund Subclass Plaintiffs are located .
906. As set forth above, Defendants, and each of them, made or caused to be mad e
statements in applications, reports and documents that were filed with the SEC and/or otherwise
disseminated to the public, which were, at the time and in light of the circumstances under whic h
they were made, false or misleading with respect to material facts .
907. The Municipal and State Pension Fund Subclass Plaintiffs read and relied upo n
Defendants' public statements in deciding to purchase Marsh securities .
908 . The Municipal and State Pension Fund Subclass Plaintiffs relied upon th e
statements contained in the reports and documents set forth above not knowing that such
statements were false and misleading.
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909. The statements contained in such repo rts, as set forth above, were materially false
and misleading because the Defendants : (a) knew or had access to the materially adverse non-
public information about Marsh's accounting practices, financial results and then existin g
business conditions, which were not disclosed ; (b) participated in drafting, reviewing and/o r
approving the misleading statements, releases, reports and other public representations relating t o
the financial statements and/or financial condition and performance of Marsh ; and (c) had an
obligation to inform themselves and the shareholders, including the Municipal and State Pensio n
Fund Subclass Plaintiffs, of the accounting policies and procedures, as well as the financia l
statements and/or financial condition of the Company .
910. The Defendants' conduct in making or causing to be made false and misleading
statements resulted in the Company falsely reporting revenue and net income .
911 . In connection with the purchase of Marsh securities, the Municipal and Stat e
Pension Fund Subclass Plaintiffs and its agents had a right to rely and did reasonably rely upo n
the false and misleading statements of the Defendants regarding the financial statements and/or
financial condition and performance of Marsh .
912. The material misstatements and falsehoods by Defendants, all of which ar e
detailed above, had the direct effect of artificially inflating the price of Marsh's stock, and th e
Municipal and State Pension Fund Subclass Plaintiffs and their agents relied on those materia l
misstatements in purchasing Marsh stock at such artificially inflated prices .
913. When the truth regarding the scope of the Company' s improprieties was finally
revealed, the Municipal and State Pension Fund Subclass Plaintiffs were significantly damaged
by the resulting precipitous drop in the stock's trading price.
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914. Defendants directly and indirectly, with scienter and/or recklessly, in connectio n
with the offer or sale of Marsh securities, made untrue statements of material fact and/or omitted
to state material facts necessary in order to make the statements made, in the light of th e
circumstances under which they are made, not misleading.
915. As a direct and proximate result of Defendants' wrongful conduct, the Municipal
and State Pension Fund Subclass Plaintiffs suffered damage in connection with their purchase s
of Marsh common stock .
916 . By reason of the foregoing, Defendants proximately caused the Municipal an d
State Pension Fund Subclass Plaintiffs' damages .
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs pray for relief and judgment, as follows :
A. Determining that this action is a proper class action under Rule 23 of the Federal
Rules of Civil Procedure;
B. Awarding compensatory damages in favor of Lead Plaintiffs and the other
members of the Class against all Defendants for all damages sustained as a result of Defendants '
wrongdoing, in an amount to be proven at trial, including interest thereon ;
C . Awarding Lead Plaintiffs and the Class their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees ; and
D. Such other and further relief as the Court may deem just and proper .
JURY TRIAL DEMANDE D
Lead Plaintiffs hereby demand a trial by jury .
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Dated : April 19, 2005 Respectfully submitted ,
GRANT & EISENHOFER P .A .
By :Jay W. isenhofer (JE-5503)Sidney S. Liebesman (SL 8444)445 Park Avenue, 9th FloorNew York, NY 10022Telephone: (212) 307-3245Facsimile : (212) 307-321 6
and
Geoffrey C. JarvisMichelle T. WirtnerSharan NirmulNaumon A. Amjed1201 North Market StreetChase Manhattan CentreWilmington, DE 19801Telephone: (302) 622-7000Facsimile: (302) 622-710 0
Co-Lead Counsel for the Class
BERNSTEIN LIEBHARD & LIFSHITZ, LL P
By : '7V ? .Keith M. Fleischman (KF-0199 )Robert J . BergU. Seth OttensoserTimothy J . MacFallFelecia L. StemStephanie M. BeigeGregory M . Egleston10 East 40th Street , 22nd FloorNew York, NY 10016Telephone : (212) 779-1414Facsimile : (212) 779-321 8
Co-Lead Counsel for the Clas s
KROLL HEINEMAN GIBLINVincent M . GiblinMetro Corporate Campus I99 Wood Avenue South , Suite 307Iselin, NJ 08830Telephone: (732) 491-2100Facsimile: (732) 491-212 0
