Bill Weld's Insurance Screw
How the governor helped stick it to the little guyby Tim Sandler
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It was the third week in June, 1995, and Governor William Weld was tearing through his State House mail when a personal letter caught his attention. Both a warning and a prediction, the letter cautioned Weld that unless he intervened, his administration was poised to help rob tens of millions of dollars from insurance policyholders -- and put it into the pockets of Wall Street money merchants.
More on Bill Weld's Insurance Screw...
A Pattern of Deception
Duck and Cover-Up
What Money Can Buy
Weld might not have thought twice about the letter had it not been written by his confidant and trusted advisor, Robert A.G. Monks. An investment banking consultant and lawyer who worked in the Reagan administration with Weld, Monks is nationally known as a voice of conscience in the financial world. He has sat on presidential commissions, served on boards of directors for numerous public companies, authored financial books, and even run for US Senate in Maine on the Republican ticket.
Monks implored Weld to take a serious look at an arcane, high-stakes transaction called "demutualization." That is the term used when an insurance company owned by its policyholders, called a "mutual company," converts to a public company able to raise money by selling its stock on the open market. The theory is straightforward enough: pay the policyholders a fair price for their stakes, and then sell stakes in the company to investors. Because so much money can be raised, it's a move that's becoming popular among insurance companies nationwide looking to be more competitive in the marketplace.
In this case, Worcester-based State Mutual Life Assurance -- a multi-billion-dollar, politically connected insurance company -- was the first company to try the maneuver in Massachusetts. Thus it fell to the Weld Administration to ensure that the 108,000 policyholders nationwide got a fair price from the company for their investment. About 10,000 of those policyholders were from Massachusetts, mostly working men and women.
Knowing that only a handful of other mutual insurance companies had pulled off similar conversions, the eyes of financial analysts nationwide were on the Massachusetts Division of Insurance as it made its precedent-setting decision.
Monks was one of those analysts. He worried that State Mutual policyholders were about to become the victims of corporate piracy -- and that the Weld Administration would be a willing accessory. Noting that Weld's insurance division had "eschewed the procedural niceties" as it rushed State Mutual's plan through the bureaucracy, Monks bluntly wrote, "The absence of any effective outside independent advocate for the economic interest of the policyholders is egregious. This raises the perception of co-optation." Monks argued that Weld, who in the past had spoken eloquently of the need for corporate citizenship, immediately form an independent blue-ribbon commission to review the proceedings.
Weld asserts that he was not involved. "Monks is a reputable guy, he's often right . . . I put a little spin on the ball and said [to Kevin Smith, his chief of staff], `Look into this and make sure there's nothing wrong here'," Weld recalls from his elegant State House corner office. "I try not to micro-manage adjudicatory proceedings that the [insurance] commissioner has, but, you know, on something like this, I thought it looked like an interesting point." That, Weld says, was the extent of his role.
It's uncertain whether Weld's professed lack of participation in the State Mutual transaction is the genuine naïveté of a laissez-faire leader or the deft maneuvering of an adroit lawyer and politician who recognizes plausible deniability when he sees it.
But by the time the governor wrote back to Monks in July of 1995, a few things were certain: that Weld and his administration had a close and profitable relationship with the insurance industry, and that State Mutual's conversion plan would receive kid-glove treatment, screwing tens of thousands of Massachusetts residents and other policyholders across the country out of money that was rightfully theirs. The numbers are staggering. In August 1995, Weld's hand-picked insurance commissioner approved the arrangement -- a $1.2 billion deal that ultimately shortchanged policyholders some $105 million, particularly the company's 93,000 individual life-insurance policyholders.
Why the Weld Administration participated in and condoned such a flagrant breach of public trust is not so much a story about the so-called demutualization of an insurance company. Instead it's a story of big money, political influence, backroom dealing, and cover-ups. It's a story of how easily big business can commandeer the regulatory process to advance its financial interests. And it's a story of how William Weld -- part of the "new breed" of moderate Republicans who believe in good government -- was an accomplice in the deal. This the same governor who rode into office on the strength of his disdain for political corruption, and on his record of integrity as a federal prosecutor. (He once resigned his post in the Reagan Administration because of ethical misgivings about his boss, US Attorney General Ed Meese.) Now, as Weld vies for a seat in the US Senate, evidence suggests that he and his administration have succumbed to the same coercive influences that he has made a career out of denouncing.
Indeed, a three-month Phoenix investigation of State Mutual's corporate conversion reveals a pattern of collusion between the Weld Administration and State Mutual executives that ultimately enriched both of them -- at the expense of thousands of ordinary mom-and-pop policyholders. (See "A Pattern of Deception.") The administration's complicity left a clear paper trail, obtained by the Phoenix through the Freedom of Information Act. The voluminous documents -- some of which are marked CONFIDENTIAL -- tell quite a disturbing story:
Monks wasn't the only prominent national figure keeping tabs on the conversion of State Mutual, now known as Allmerica Financial Corporation. Consumer advocate Ralph Nader, a classmate of Monks at Harvard Law School, also monitored the process.
State Mutual executives continuously and successfully applied pressure on Weld, his staff, and his supposedly independent regulators to speed up the approval process.
The state Division of Insurance disregarded its role as a neutral judge and worked secretly and closely with State Mutual to develop the plan for nearly two years. Whenever questions about the plan's propriety were raised, top state insurance officials aggressively did the company's bidding.
Weld's insurance commissioner assured the governor's office that she supported State Mutual's conversion two years before the company ever submitted its plan to her for approval.
Lawyers and financial consultants retained by State Mutual and the state changed their legal opinions on whether parts of the plan complied with Massachusetts law, apparently to ensure the plan was approved faster.
The Division of Insurance ignored serious concerns expressed by one of its lawyers, who said his staff didn't have the information or expertise to make a proper decision. The lawyer also concluded that policyholders likely didn't know they weren't getting the money they deserved.
Moreover, the same state lawyer, noting that the decision-making staff he was part of was "still wet behind the ears," wrote: "Perhaps they want a less than thorough hearing on this matter . . . There may be more pressure on the Comm'r and consequently on [the presiding officer] than we are aware."
The Weld Administration knowingly -- and illegally -- withheld public records and leaked confidential documents to suit its needs, until after the insurance commissioner approved State Mutual's conversion.
"This was corrupt symbiosis between the government of Massachusetts and the company managers," says Nader.
"Weld was clearly on the alert and he didn't care," adds Nader, whom Weld calls "a buddy of mine" from his days in Washington. "He figured he could use the insurance department as a buffer and the hand of accountability wouldn't reach him."
Jason Adkins, the crusading executive director of the Cambridge-based Center for Insurance Research, was the most adamant critic of the plan as the approval process unfolded (see "Duck and Cover-Up"). "This administration's insurance department and its high-priced legal advisors knowingly engaged in criminal conduct," he says. "It cut private deals with industry and intentionally buried material evidence -- to which policyholders and the public are entitled -- to suit their own political agenda."
"This," Weld told the Phoenix, "is the first I've heard of that."
To understand how so much money could be misdirected with such ease, one first must understand what might charitably be called a quirk in the American legal system. For many years, insurance companies have fought -- successfully -- to prevent the federal government from keeping an eye on them. Instead, it falls to 50 different state governments, some more vigilant than others, to stand up to the $3.1 trillion industry.
In Massachusetts, the process is all the more susceptible to corporate coercion. Some states elect their insurance commissioners. Most others, such as Texas and Vermont, require their legislatures to confirm the governor's appointment. But Massachusetts is one of only a handful of states that permits the governor to appoint an insurance commissioner without legislative confirmation. That means that the insurance commissioner ultimately reflects the will of only one person: the governor.
So it's understandable that the Massachusetts insurance industry has an ample record of using its influence to the fullest -- and of going too far. The Weld Administration and the members of the state legislature have repeatedly been reprimanded in recent years for ethical violations stemming from their cozy relationship with the insurance industry. In fact, just five months before Monks sent his June 1995 letter to the governor, Weld's former insurance commissioner, Kay Doughty, was fined $2000 by the state ethics commission for "routinely" accepting free dinners and tickets from insurance lobbyists and executives.
A year before, Attorney General Scott Harshbarger indicted Marshfield insurance executive and Republican fundraiser Peter Cook for violating state campaign-finance laws in 1990 by illegally funneling $16,000 into the Weld/Cellucci campaign. (Late last year, a Superior Court judge threw out the case, citing procedural errors. The Attorney General's office is appealing.) Also in 1994, Lieutenant Governor Paul Cellucci was fined $275 for allowing William Sawyer, former chief lobbyist for the John Hancock Mutual Life Insurance Company, to pick up his restaurant tabs when he was a state legislator. Because Cellucci and Sawyer had been friends, the relatively small fine was apparently levied to send a message to Cellucci about the appearance of impropriety.
John Hancock lobbyists were also implicated in former insurance commissioner Doughty's case. But that was before the mega-insurer and its chief lobbyist, William Sawyer, became fully embroiled in one of the state's most notorious political scandals. After the dust settled, John Hancock had paid $1.1 million in fines for illegally wining and dining dozens of state legislators.
(Sawyer's 1995 bribery conviction was overturned this summer in federal court. Prosecutors say they will retry the case. Meanwhile, one of Sawyer's primary benefactors, former House Insurance Committee chairman Francis Woodward, went on trial in federal court this week for accepting Super Bowl and golf trips from John Hancock.)
And it was none other than Sawyer and John Hancock officials that drafted, and then aggressively lobbied for, the state's first demutualization law, known at the time as the Hancock bill.
While Sawyer worked the state legislature, Stephen Brown, then John Hancock's president and now its chairman, took his case right to Weld. In a November 1991 letter to Weld, he asked the governor to "look favorably on this important matter to John Hancock." Weld obliged and signed the bill into law.
By then, Weld had already begun accepting large amounts of campaign money from people tied to the insurance industry. (See "What Money Can Buy.") And State Mutual certainly did its part to keep Weld's attention as it set out on its multi-million-dollar conversion odyssey. (For the record, Weld's opponent in the US Senate race, John Kerry, does not accept campaign contributions from PACs.)
State Mutual's top executives contributed $10,960 to Weld's election campaigns between 1990 and 1994. And since Weld declared his candidacy for US Senate last November, they have donated at least another $5500. The political action committee funded by Allmerica, the new company formed by the deal, sent another $1000 Weld's way in May, part of $61,000 that insurance-industry PACs contributed to Weld through September 1.
A large portion of that cash came from three companies with a keen interest in Massachusetts insurance regulation. John Hancock ($5000) is widely believed to be next in line for demutualization. Massachusetts Mutual Life Insurance Company ($10,000) just completed a state-approved merger with Connecticut General Life Insurance Company, and Mass Mutual chairman and CEO Tom Wheeler is a close friend of -- and fundraiser for -- Governor Weld. Last month, state insurance regulators approved a $275 billion merger between Metropolitan Life Insurance Company ($3000) and New England Mutual Life Insurance Company -- the largest life-insurance merger ever in the US.
That's a considerable amount of PAC money going to a governor who in 1993 proclaimed that "PACs just try to buy influence . . . and I'd like to see an end to this type of money-funneling in Massachusetts."
The demutualization legislation that Weld signed into law in 1991 was a simple two-page document that opened the door for all mutual insurance companies in the state to convert into publicly held operations. It charged the state Division of Insurance with overseeing the process.
And that law was only the beginning. By 1993, State Mutual was attempting to amend the law to suit its own needs. The new law would limit the state's powers to a legal review of the final version of the plan, meaning that the state wouldn't have a working knowledge of the exceedingly complex plan before public hearings and final approval. But State Mutual's top brass was finding that the ethical cloud over Beacon Hill was making legislators less willing to go to bat for the company.
That's when State Mutual president John O'Brien made an indignant call to Weld's office.
In a memo to Weld dated November 2, 1993, the governor's personal secretary informed the governor that O'Brien, who had spoken with Weld at a friend's gathering the week before, was disturbed by the lack of progress his bill was making. Even the insurance commissioner, he said, was balking.
"He is at a loss at [sic] to what to do, and mentioned that he was leaning towards not moving the 300 jobs to Marlborough that he had originally anticipated doing," the memo said, without explanation. (Weld says he does not know what O'Brien was alluding to, and is unclear whether those jobs were ever moved.)
The memo continued: "Mr. O'Brien wants to speak with you about this issue, and I don't think you should have such a conversation." Weld, perhaps mindful of the John Hancock probe, scrawled next to that comment: "Right, I can't." But he directed his aide to have his chief policy advisor, Mary Lee King, work out the problem.
That same day, King called Insurance Commissioner Linda Ruthardt to inquire about the delay. Ruthardt, a former insurance executive for the Girl Scouts of America, who had also been a manager for Raytheon, immediately faxed a response to King, explaining that she was concerned only that State Mutual's proposed law would strip too much authority from the state. But make no mistake, Ruthardt stressed: "We do support State Mutual's demutualization. That is not an issue."
Considering that Ruthardt is supposed to be an objective judge of all insurance matters, it's telling that she voiced her support for the conversion two years before State Mutual ever submitted a plan for her approval.
Ruthardt, known for her imperious schoolmarm manner, now explains that she merely supported the idea of demutualization. "We made no promise," she insists.
To further emphasize the distance she claims to have kept from the company, Ruthardt notes that around that time, she turned down a Weld staffer's request to arrange a meeting between her and O'Brien. It would have been improper, she says.
A year later, however, Ruthardt's thinking seems to have changed a bit. Despite her official role as the final judge of State Mutual's plan, in the fall of 1994 she offered to make a presentation before State Mutual's board of directors and explain the regulatory process to them -- a proposal akin to Judge Lance Ito offering to explain the legal system to the O.J. Simpson prosecution team.
Ruthardt says she never made the presentation. But that gesture was only one example of the lengths to which her office went to accommodate the company. By December 1993, the Division of Insurance and State Mutual had reached a compromise on the 1993 legislation. Ruthardt says she was satisfied that the amendments made to the 1991 law allowed her office to be more than a rubber-stamp agency in the demutualization process.
But when all was said and done, that is precisely what the Division of Insurance became. Immediately after the law was amended, division employees actually began working with State Mutual to develop the company's plan.
Ruthardt assigned four seasoned staffers to a full-time "working group" that toiled with the company on its plan. They were on one side of a so-called Chinese wall -- an invisible boundary conceived by Ruthardt that would, in theory, separate division staffers working with the company on the plan from those who would be involved in making a final decision, Ruthardt included.
The working group was hardly a paragon of consumer advocacy. It was led by Ruthardt's deputy commissioner and general counsel for the Division of Insurance, Richard Mastrangelo. A small, autocratic man with a fondness for bow ties, Mastrangelo had been a lawyer in the Nixon Administration under former Attorney General Elliot Richardson, and is a former executive director of the Republican State Committee. Before joining the Division of Insurance, he was for 14 years a top official for Associated Industries of Massachusetts -- a powerful corporate lobbying group.
Also in the working group was assistant commissioner Cynthia Martin, who worked as a project manager for Liberty Mutual Insurance Company, in Boston, for five years before she began her tenure with the state Division of Insurance.
In addition, Ruthardt hired outside lawyers, as well as financial and actuarial consultants. The actuarial advisor chosen: Ernst & Young, a firm that for several years worked for State Mutual and whose political action committee has since donated $3000 to Weld's Senate campaign.
The salaries of working-group members and the outside consultants were paid by State Mutual. (State law requires that companies seeking demutualization are responsible for paying all expenses incurred by the state during the process.) And the company clearly got its money's worth.
Other Division of Insurance projects got put on hold as the state attempted to push State Mutual's complicated plan swiftly through the bureaucracy. The working group huddled weekly behind closed doors with State Mutual executives. Sometimes they met in the hearing room of the division's spare downtown Boston office; other times they gathered in Worcester, at State Mutual's expansive headquarters. And the more they met, the more the working group became vested in the plan. At times, state officials went so far as to edit partial drafts of the company's plan.
But almost a year after State Mutual and the Division of Insurance began developing their plan, the state of New York raised hurdles that threatened to scuttle the entire process. New York law states that any demutualization plan affecting New York policyholders (in this case, about 15,000 individual and group policyholders), must be approved by the state's own insurance department. New York was reluctant to accept the formula by which State Mutual proposed to pay off its policyholders. And the longer New York held out, the more it became clear that Ruthardt and Mastrangelo had the interests of State Mutual's executives -- not its policyholders -- in mind.
On August 12, 1994, the division's working group and State Mutual informally agreed on their joint plan. But with New York still applying the brakes, Ruthardt fretted. Ruthardt, who (had the Chinese wall been serving its purpose) shouldn't even have known about the problems the working group was having with the state of New York, was particularly miffed by the lack of urgency New York exhibited toward the plan.
In an October 1994 memo to Priscilla Douglas, then the Massachusetts secretary of consumer affairs, whose office oversees the Division of Insurance, Ruthardt said she was "very concerned" that New York's decision to hire outside advisors -- a decision made in part because of the state's refusal to turn over financial records -- "will significantly delay the process and may result in State Mutual abandoning its business plan to demutualize."
By then, Ruthardt had shed all pretense that she was a neutral arbiter. Instead, she appeared particularly mindful of the pressure on her division, from State Mutual and the governor's office, to push the plan through. "We still have a situation where we are being asked to keep the tracks clear so the train can keep moving, but the train is still in the yard," she wrote in another letter to Douglas's office.
And -- testimony to just how far over the Chinese wall Ruthardt had jumped -- records show that she made at least two calls to top New York insurance officials involved in the matter.
For her part, Ruthardt now distances herself from her interaction with the New York Insurance Department.
"New York never said it was opposed to the plan," she asserts. "I assume that, just as we had some issues that were worked out, they must have had some issues to work out."
Richard Mastrangelo, for his part, seemed to take New York's hesitation personally. He traveled to New York twice in an attempt to iron out the problems -- trips that were perhaps motivated by the questions he says he was getting from the governor's office about when a final ruling would be made on the conversion.
He now says he was angered by New York's attempt to hijack a decision that was supposed to be made by Massachusetts regulators. Yet memos addressing Massachusetts's battle with New York indicate that Mastrangelo shared Ruthardt's concern that further delays would result in State Mutual's spending a lot more than the $25 million it had already sunk into the plan.
By February 1995, Mastrangelo's frustration had boiled over. State Mutual's board needed to approve a plan within three days if it was to meet its self-imposed timetable, and New York still hadn't given ground.
Mastrangelo called New York's deputy insurance commissioner, Peter Serio, a Republican who was new to the post. With photos of his Nixon Administration mentor Elliot Richardson looking down from his office walls, Mastrangelo pleaded with Serio to overrule his staff and their advisors. He asked for Serio's assurance "that my Commissioner will not be embarrassed by a letter or an appearance at our hearing."
Why would Mastrangelo have thought that an open discussion of the plan's merits at a public hearing would embarrass the commissioner?
To help bring New York around to its line of thinking, the state did something that critics now say was a flagrant violation of state law: it "leaked" (in the words of a lawyer retained by the Division of Insurance) to New York regulators documents that state officials had previously claimed were legally not public records. The package sent to New York also said Massachusetts regulators would "leak additional materials."
And when Massachusetts and New York finally did come to terms, both states made concessions about how much policyholders would receive -- concessions that shortchanged policyholders some $105 million. The smaller policyholders were the hardest hit.
Policyholders were to be paid in two waves: first, a fixed amount to be distributed evenly to everyone; then, a second payout that went to a smaller group of the company's more important policyholders -- those who held larger stakes, or had been with the company longer.
New York had argued that the portion of the company's assets devoted to the first wave -- the so-called "fixed" payout -- was too low, meaning that all the 108,000 policyholders would get less than they deserved. Massachusetts and State Mutual had proposed to distribute 10 percent of the company's total assets -- $63.5 million, or $588 each for all 108,000 policyholders.
That 10 percent, as Monks later noted to Weld, was significantly lower than the figure used in previous demutualizations around the country. The State of New York and the Center for Insurance Research argued that 20 percent was a fairer figure. In Maine, whose demutualization statute is similar to Massachusetts's, the figure for the state's only demutualization to date was even higher: 22 percent. In New York, it was also 22 percent.
Charles Carroll, a partner at Ernst & Young who assisted the state in its financial assessments, said the figure was "not scientifically arrived at." But, he added, the total amount was considered ample for each policyholder by State Mutual and the others involved in developing the plan.
In the end, New York agreed to that 10 percent. Had the fixed payout been set at 20 percent of the company's value, all policyholders would have received $1176 each, rather than the $588 they got -- or a total of $127 million. That's an additional $63.5 million that policyholders never saw.
On the second wave of payment -- the so-called "variable" payout -- it was Massachusetts that conceded. But, as before, it was the little guy who lost out again.
The issue hinged on a debate over which formula to use in distributing the company's remaining assets among the policyholders who qualified. The first formula, known in the industry as "historic only," would pay qualifying policyholders in proportion to the value of their investment. The second formula, called "historic plus," would take into consideration the projected future value of each policy. Because group policies tend to increase in value as time goes on, for example, as companies hire more employees, the "historic plus" formula effectively shifts money away from individual policyholders, 60,000 of whom were eligible for the second part of State Mutual's payout, and toward 15,000 group policyholders.
State Mutual's lawyers -- from two firms, including Boston-based Ropes & Gray -- concluded in 1994 that Massachusetts law "required" the first formula; the state's lawyers agreed. But then New York insisted that Massachusetts approve the "historic plus" plan.
Then, without explanation, State Mutual's lawyers and financial advisors, as well as lawyers for the Division of Insurance, completely reversed their 1994 legal opinions. In their 1995 reports, they concluded that the historic-plus method was "fair and reasonable" to policyholders. Their 180-degree turnaround ended up costing mom-and-pop individual policyholders an average of $688 apiece -- for a total of about $41.3 million.
Asked why Ropes & Gray altered its position, Douglass Ellis, a partner in the firm who worked on the project, replied: "Good question." He referred inquiries to another lawyer in the firm, who was later instructed by State Mutual/Allmerica not to discuss the matter further.
(Allmerica's top officials also declined the Phoenix's requests for interviews. Instead, the company issued a generic statement that failed to address questions raised about its conversion deal. Shortly after the Phoenix's first interview request, Allmerica distributed a company-wide memo stating that "all field associates should refrain from all discussions with the media.")
And keep in mind, even as these questions played themselves out, State Mutual's policyholders still had no official word from the company that it was even considering a plan that would strip them of their ownership of the company. That notification wouldn't take place for another few months.
With New York withdrawing its objections, State Mutual submitted its plan to the state in February, 1995. The following month, Ruthardt appointed a presiding officer to oversee the agency's public hearing on the plan, review the proposal, and make a final recommendation to her.
This was supposed to be a key element of the legally mandated "independent" judgment the agency was to pass.
But here again, Ruthardt's choice for presiding officer was apparently designed to avoid any objections to the deal. Her choice was Janice Wilson, a trial lawyer with little experience in insurance matters. Ruthardt also named two lawyers who were new to the Division of Insurance to research the proposal and help Wilson reach a decision. One was a contracted consultant; the other was a new staff lawyer named Joe Mulkern.
If Ruthardt was looking for a patsy in Mulkern, she didn't find one. And if Monks was Governor Weld's voice of conscience, Mulkern, a strait-laced 30-year-old with the clean-cut looks of an Eagle Scout, was Wilson's.
Soon after Mulkern began reviewing the State Mutual proposal, he sensed something was amiss, and bluntly voiced his misgivings in a series of interdepartmental memos. For example:
Indeed, it wasn't until May of 1995, a month before the public hearing on the plan, that policyholders received a 250-page packet of complex information from State Mutual in their mailboxes that for the first time outlined the conversion and what policyholders would be paid.
In a March 28, 1995 memo to his colleague, William Harpin, Mulkern asked, "[S]ince the Comm'r has the final say on whether the plan passes muster with [state law], is this not all just a formality to give the appearance of satisfying procedural due process requirements, when in fact the end result will be a purely policy-based decision disguised as an impartial "quasi-judicial" ruling?"
On April 20, 1995, Mulkern wrote to Wilson and deputy commissioner Mastrangelo, asking for additional professional help in assessing the plan. "[T]he consensus amongst the decisional staff is that it is simply far too technical a document on which to attempt an unassisted examination." Mulkern's request was denied; he was told he could seek the advice of two in-house financial analysts.
Two weeks before Commissioner Ruthardt issued her final ruling, Mulkern concluded in a July 15, 1995, memo to Wilson: "[S]ince most policyholder information statements were probably not read or not fully comprehended, the majority of the policyholders probably did not understand the plan well enough to realize that maybe they will not be receiving as much as they deserved, either in the aggregate or individually."
Mulkern's last statement is also startling in light of the fact that the state is legally required to ensure that policyholders get all the money they are entitled to. It also lends credence to Nader's assertion that the Division of Insurance and State Mutual "deceived and tricked policyholders into ratifying their agreement."
Mulkern's assessment of how little policyholders knew about the finer points of the plan may explain why they overwhelmingly approved State Mutual's proposed plan in June 1995. Soon afterward, it was submitted to the state for final approval.
State Mutual and the Division of Insurance may have thought they were in the homestretch by then, but they faced an unexpected eleventh-hour obstacle. And the state again showed the lengths to which it would go -- including violating Massachusetts public-records laws -- to get the plan approved.
Despite the landslide approval of the plan by policyholders, there were a handful of policyholders who were not pleased with the plan -- or with how late in the game they had been informed of it.
Three of those policyholders contacted Jason Adkins at the Center for Insurance Research, which had already begun looking into State Mutual's conversion. Adkins attempted to participate in the public review process on behalf of his clients, but says he was shut out by the Division of Insurance at almost every turn.
"They made our lives difficult, no doubt about it," he says. "They attempted to restrict access to information and blocked our ability to meaningfully participate -- through obfuscation, procedural abuse, and, as it turns out, criminal misconduct in the denial of public records."
State Representative James Marzilli (D-Arlington) was equally concerned about the process that had brought State Mutual's plan within weeks of approval. Calling the plan "a hostile takeover from the inside," Marzilli filed legislation in June, 1995, calling for a one-year moratorium on a final decision on the plan to allow policyholders time to review it carefully.
But State Mutual's Beacon Hill lobbyists quickly took action. They flooded legislators' mailboxes with letters opposing the bill, pressed key lawmakers, and, in a mass mailing, asked state policyholders not to allow legislators to stand in the way of the plan.
"The only remaining approval needed before you receive your compensation is that of the Massachusetts Commissioner of Insurance," said the letter.
Marzilli's bill never made it out of committee. And he's not surprised.
"There are two big political currents flowing through this," he says. "One is the broad stream of industries buying public policies that benefit them. The other stream is that of the Weld Administration and its Division of Insurance's too-close relationship with the companies they should be regulating."
The legally mandated "public" hearings that took place in the summer of 1995 were carefully scripted by the Division of Insurance and went off without a hitch. The only voice of opposition came from Atkins, the policyholders he represented, and their experts.
After the public hearing, State Mutual sent an 88-page memo to the state which detailed why the plan should be approved, and which attempted to discredit assertions made by the plan's opponents.
Predictably, the state's presiding officer, Janice Wilson, thereafter ignored concerns about the plan expressed by her staff lawyer, and recommended that Ruthardt approve it.
Much of Wilson's 60-page decision was taken, word-for-word, from the company's post-hearing memo. Wilson declined the Phoenix's request for comment.
In August 1995, Ruthardt concurred with Wilson and announced her unwavering support of State Mutual's conversion to Allmerica Financial Corporation. She stated in a press release that policyholders were being well served and that it was "a major move forward for the Commonwealth's important financial services industry."
To add insult to injury, when the company first sold shares on the stock market two months later, the rich got richer. As with all initial public offerings (IPOs), it was an elite group of clients -- wealthy investors well-connected to the underwriters -- who had the first opportunity to purchase shares. In this case, Monks had argued to Governor Weld that the dealmakers were setting the share price ($21) too low. When the shares began to trade, he predicted, the price would immediately rise, giving the initial investors a windfall.
That, in the end, is exactly what happened. Within a week of trading, the share price climbed from $21 to $26. The upshot: $55 million (the $5 difference in share price times the 11 million shares) went mostly to the bank accounts of a select group of investors. And the policyholders had no way of knowing that their stock had been undervalued. About two-thirds of the policyholders hung onto the stock distributed to them as part of the deal, and thereby reaped the benefits of the price climb, But the other one-third cashed out their shares at $21 and never got the benefit of that bounce in the stock price. As of September 17, the stock's value had climbed to 32.
Now, nearly a year after Weld's commissioner approved the plan, it's clear that State Mutual's executives had more in mind than expanding the company as they railroaded the plan through the Division of Insurance.
Beginning in October, the company's latest proxy statement shows that its top executives are poised to receive up to 2.35 million shares, stock awards -- that is, outright gifts -- and stock options (the right to purchase a specified number of shares at a set price) over the next 10 years. They're entitled to receive up to 500,000 shares each -- a bonus far larger than would have come their way had they been stuck in the old mutual company's relatively confining income-bonus brackets.
In the extreme case, if the company's board of directors were to approve the maximum bonuses, each executive would stand to gain some $16 million at today's stock value; the total awards could hit more than $75 million.
There's good reason to believe that the board of directors won't shortchange the company's top brass. One incentive: next month, board directors who don't work for the company (all except president and CEO Jack O'Brien) will be given an "automatic grant" of 450 shares each, or about $14,400 at today's market value. Beginning next year, the company will give them each 800 shares annually, or more than $25,600 at today's rate.
In the final analysis, it's clear that State Mutual's policyholders were the only losers in this high-stakes game. State Mutual's executives, Weld, and Wall Street all received their payoffs. But policyholders were left hanging by a Division of Insurance that ignored well-founded warnings by respected financial experts, that shut the public out of a public process, that operated behind closed doors to develop a plan with a company it was supposed to regulate, and that reflexively rebuffed critics and illegally withheld public records from them.
But all the talk of the state not fulfilling its obligation to protect the company's policyholders doesn't faze Insurance Commissioner Ruthardt.
"This was probably one of the most scrutinized events in the insurance industry in the last five years," she says, noting how proud she is of her staff's handling of the process.
For Nader, the Weld Administration's handling of the State Mutual deal exemplifies government's moral erosion and offers a warped blueprint for other companies intent on following the company's lead.
"The governor deserves severe censure by the legislature and should be severely reprimanded at the polls," he says. "And if the insurance department displays the same traits next time, Weld should be impeached."
Informed of Nader's denunciation, Weld simply smiled wryly, and said nothing.
Additional research was provided by Adrianna Alba.
Tim Sandler can be reached at tsandler[a]phx.com.
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