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The answers to two questions could determine the scope and direction of New York Attorney General Eliot Spitzer’s assault on alleged corruption in the insurance industry: � How might he prove the existence of the price-fixing conspiracy of which he accuses Marsh & McLennan Companies should the parties go to trial? � Why has he not sued the insurers he excoriated throughout the civil complaint filed against Marsh in New York Supreme Court? Spitzer’s suit against insurance broker Marsh alleges bid-rigging, a patent violation of antitrust law. He accuses the company of arranging sham bidding procedures that steered business to insurers based on kickbacks to Marsh rather than what was in the best interest of the clients buying the policies. At the heart of these claims lie so-called contingency agreements, under which insurers paid commissions to Marsh. Like others targeted by Spitzer, Marsh is likely to seek a settlement. Recent news reports indicate as much. The terms of the settlement depend on the strength of the case against Marsh and the insurers it did business with. The price-fixing scheme described by Spitzer would be a per se violation of antitrust laws under New York’s Donnelly Act. Based on the federal Sherman Antitrust Act, Donnelly was put in place in 1893 out of fear that federal laws would not apply to intrastate commerce. Donnelly, and other state-based “little Shermans,” filled in the gap though they remained largely dormant. “The question becomes purely, did you enter into a conspiracy to fix prices and rig bids,” regardless of its economic impact, said Tyler Baker, a former antitrust official now at Fenwick & West based in Silicon Valley. Antitrust lawyers say there are two ways in which Spitzer can prove the existence of bid-rigging. One is the “smoking gun” scenario in which prosecutors present incontestable evidence of price-fixing. A textbook example, lawyers say, is the 1990s Archer Daniels Midland case that attracted attention when tapes from an FBI informant shed light on a vast conspiracy among the manufacturers of lysine, an additive used to feed livestock. The government’s findings were the precise type of evidence needed to prove a price-fixing conspiracy. New York’s complaint against Marsh, which is represented by Davis Polk & Wardell, lists a myriad of e-mails and correspondence that, on their face, appear to point to equally damning evidence. The alleged conspiracy rests on Marsh’s contingency agreements with insurers that Spitzer claims led to a conflict of interest in which Marsh recommended or arranged for artificial bids to push clients to pick insurers that would pay the highest commissions for Marsh. CONTINGENCY AGREEMENTS The complaint includes several internal communications allegedly pressuring Marsh employees to favor insurers that pay the best commissions regardless of the value of their bids. While prosecutors have pointed to inflammatory communications, Marsh can introduce context and industry standards to explain away seemingly culpable acts. Insurance industry associations defend contingency agreements as a widely accepted industry practice and say they are in no way conducive to fraud. Marsh also can argue that it is not a “horizontal” competitor with the insurers, said one lawyer, making a price-fixing scheme more difficult to prove because they generally take place among competitors rather than businesses up and down a supply chain. If the “smoking gun” strategy falls through, the attorney general can prove price-fixing through inference, lawyers said. An inference of price-fixing can be made if competitors commit actions that are contrary to their own interests or undermine their ability to compete. The complaint alleges anti-competitive behavior from several insurers accused of contributing fake bids or caving into Marsh’s demands to supply higher premiums than they would have offered if they were bidding legitimately. In one exchange cited by Spitzer, a representative at an insurer allegedly agreed to raise its bid so that a competing insurer — preselected by Marsh — would win the contract. This type of evidence, if true, would point to price-fixing by inference, said lawyers. THE INSURERS This second scenario brings in the insurers listed in Spitzer’s complaint — AIG, Ace, Hartford, and Munich-American Risk Partner. Spitzer did not sue the insurers themselves despite saying they were part of a bid-rigging scheme masterminded by Marsh. It remains an open question whether he will add them to the suit or hopes to force changes through a settlement or through voluntary changes within the industry. A settlement could come on the same day a complaint is filed, following Spitzer’s practice in previous instances. Or the industry could avoid a suit by changing its behavior voluntarily. “He’s using the possibility of granting leniency as a basis to have people volunteer information rather than face criminal charges,” said Stephen Axinn of Axinn Veltrop & Harkrider. Two insurance executives from AIG pleaded guilty to felony charges and are expected to aid Spitzer’s investigation. Filing under the Donnelly Act has advantages for Spitzer by allowing him to bring criminal charges, though he has brought a civil suit against Marsh. Only the Department of Justice can bring criminal charges under federal law. Violations of the state statute are Class E felonies. Criminal charges pose great dangers for companies. Arthur Andersen, which was otherwise solvent, fell into bankruptcy after being found guilty of obstruction of justice in 2002. Companies will go to great lengths to avoid a criminal indictment, said Marc Powers of Baker & Hostetler. Marsh seems to have done that. Its CEO, Jeffrey Greenberg, resigned and his replacement, Michael Cherkasky, spent 16 years in the criminal justice system, notably as head of the investigations division for the Manhattan District Attorney’s Office. By also scrapping its contingency agreements, Marsh may have persuaded Spitzer to drop a criminal case. Spitzer signalled as much on Monday in a press release. But the insurers remain. Spitzer “wants to flush some people out” in excluding the insurers from the lawsuit, said Powers. “He wants to do it systematically and go after what he considers are the worst offenders.” Another attorney speculated that, by focusing on Marsh, Spitzer has taken on a small player within the insurance industry and will build a case against the larger insurers after finishing with Marsh, much like federal prosecutors have done in targeting lower-level executives at Enron before moving on to top executives such as Kenneth Lay.

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