Not Guilty But Fired for Cause
Employees who refused to cooperate in an investigation were fired for cause and not eligible for employment benefits, even though they were found not guilty.
In 2004 New York Attorney General (AG) Eliot Spitzer began investigating “contingent commission” arrangements, under which insurance brokers are paid to steer clients to particular insurance carriers. Contingent commission arrangements are not illegal. But, as The Economist noted at the time, “legal momentum against contingent commissions has been building,” as such agreements can “harm customers, because a broker might choose not to push for a legitimate claim that will reduce the insurer’s profits.”
Marsh & McLennan
Later in 2004, the AG’s investigation shifted to an alleged bid-rigging scheme involving Marsh & McLennan Companies (Marsh), the world’s biggest insurance broker, and several insurance carriers. Two employees at American International Group (AIG), the world’s biggest insurer, pleaded guilty to participating in a bid-rigging scheme with Marsh. One of the AIG employees identified William Gilman and Edward McNenney Jr., managing directors at Marsh, as co-conspirators. The next day, the AG sued Marsh for fraudulent business practices and antitrust violations. At the same time, the AG announced settlements of criminal charges with two employees at AIG (whose CEO, Hank Greenberg, was the father of Marsh’s CEO, Jeffrey Greenberg) and one employee at property-casualty insurer ACE (where the CEO was Hank Greenberg’s son, Evan).
According to the lawsuit, although Marsh claimed that its “guiding principle is to consider our client’s best interest in all placements,” the company designed and executed a business plan in which it received payments to steer business to insurance companies and shield the insurance companies from competition. In one instance, an insurance company president who was trying to expand her firm’s sales was told not to provide a better product to Marsh’s clients but, instead, to enter into a contingent commission agreement paying Marsh an amount that was “above market.” As one Marsh executive told subordinates, the size of contingent commissions paid to Marsh determined which companies Marsh steered business to and which it steered business away from. Notably, the lawsuit alleged that of the $1.5 billion that Marsh reported as net income in 2003, $800 million of its earnings were attributable to contingent commission payments.
Marsh’s stock price plummeted, civil lawsuits were filed by investors who felt they were misled, and Marsh’s directors, clients, and shareholders demanded answers. After expanding an internal investigation that it had started earlier, Marsh suspended Gilman and McNenney with pay. At about the same time, Marsh’s counsel asked Gilman and McNenney to sit for in-house interviews, warning them that failure to comply would result in termination. McNenney refused to be interviewed, and he was fired the next day. Gilman eventually agreed to be interviewed but, the day before the interview, he faxed in paperwork for early retirement—then refused to go to the interview. Marsh did not accept his early retirement, and fired him instead.
As employees of Marsh, Gilman and McNenney were eligible for employment benefits like stock options and severance packages as long as they were not fired “for cause.” Marsh refused to give them the benefits, claiming that it fired them for cause.
In 2008 Gilman and McNenney were found guilty of antitrust violations and not guilty of fraud and grand larceny. But in July 2010, citing new evidence, a New York judge threw out their convictions. The New York AG’s office ultimately dropped its appeal of the ruling.
In October 2010 Gilman and McNenney sued to recover their employment benefits.
Termination “For Cause”
Under the Delaware law that applied to the contracts between Marsh and Gilman and McNenney, “cause” for termination included the refusal to “obey a direct, unequivocal, reasonable order of the employer.” Gilman and McNenney conceded that the interview orders were direct and unequivocal. The Court concluded that the interview demands were reasonable because at the time they were made, Gilman and McNenney were Marsh employees who had been implicated in an alleged criminal conspiracy for acts that were within their scope of employment and that imperiled the company.
Marsh had the right to act to protect its standing with investors, clients, employees, and regulars. It also had a duty to its shareholders to investigate any potentially criminal conduct by its employees that could harm the company. In addition, as corporate officers, Gilman and McNenney had a duty to Marsh to disclose information that they had about the AG’s allegations. As the Court noted, when Gilman and McNenney were named as co-conspirators, “Marsh had sufficient basis to act on the allegations, made under oath in open court, and would have had cause to terminate Gilman and McNenney, regardless of the ultimate resolution of the allegations.”
The Court acknowledged that Gilman and McNenney were facing the choice of employment or incrimination. However, although Gilman and McNenney had the right to refuse to be interviewed, they were still subject to the “collateral consequences” that came from their refusal. In the absence of an explanation, said the Court, “Marsh needed to assume the worst: that the bid-rigging allegations were true and that Marsh was vicariously liable for their criminal conduct.”
“Given the circumstances,” said the Court, “Marsh’s demand that Gilman and McNenney explain themselves in an interview under the penalty of termination was unassailable, even routine. It did what any other company would do, and (arguably) what any company should do. Marsh’s interview demands were reasonable and it had cause to fire Gilman and McNenney for refusing to comply.”
The Court also disagreed with Gilman’s claim that he had retired before the date of the interview. “The definitions of ’cause’ in the Stock Award and Severance Plans would be rendered ‘meaningless or illusory’ if an employee could preempt a known, imminent, for-cause termination with a voluntary retirement, and thereby reap all of the benefits of being a faithful employee,” said the Court. [Gilman v. Marsh & McLellan Companies, Inc. (2nd Cir. 2016) no. 15-0603-cv(L)]
In 2005 Marsh settled the New York civil fraud charges, agreeing to pay $850 million in restitution to clients who were overcharged. Marsh also apologized, saying “recent admissions by former employees of Marsh and other companies have made clear that certain Marsh employees unlawfully deceived their customers. Such conduct was shameful, at odds with Marsh’s stated policies and contrary to the values of Marsh’s tens of thousands of other employees.” It also agreed to stop accepting or requesting contingent compensation, “pay to play” arrangements, “bid-rigging” arrangements, leveraging (requiring insurers to use services of other Marsh businesses), and the inappropriate use of wholesalers.
“Marsh shall not place its own financial interest ahead of its clients’ interests in determining the best available insurance product or service for its clients,” the company stated.
In May 2009 the Connecticut Attorney General announced a $2.4 million dollar settlement with Marsh “for alleged bid rigging, price fixing and illegally steering Connecticut businesses and consumers to favored insurers in exchange for millions of dollars in undisclosed kickbacks.”
Also in 2009, without admitting any liability or wrongdoing, Marsh paid $435 million to settle class action lawsuits brought on behalf of public pension plans in Ohio and New Jersey, concerning statements Marsh had made to investors about the contingent compensation.
In 2010 insurance regulators in Connecticut, Illinois, and New York agreed to allow the insurance brokers involved in the 2005 settlements to begin accepting contingent commissions again, to “level the playing field” with brokers who had continued to accept them.