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Insurance broker Marsh & McLennan Companies Inc. settled with government regulators Monday, agreeing to pay $850 million in restitution to clients in what authorities said was bid-rigging. The settlement comes after months of negotiations sparked by New York Attorney General Eliot Spitzer’s investigation into the insurance industry. A civil complaint filed by Spitzer on Oct. 14 accused the company of arranging sham bidding procedures that steered business to insurers based on kickbacks to Marsh, rather than procedures in the best interest of the clients buying the policies. So-called contingency agreements, under which insurers paid commissions to Marsh, lay at the heart of the matter. The filing started a chain reaction inside the company. Within weeks, Marsh abandoned the contingency arrangements despite protests by the insurance industry supporting their legitimacy, and its CEO and general counsel stepped down. They were replaced respectively by Michael Cherkasky, who spent 16 years in the criminal justice system, notably as head of the investigations division for the Manhattan District Attorney’s Office, and Peter Beshar, a securities lawyer from Gibson Dunn & Crutcher. Marsh hired Davis Polk & Wardell to conduct an internal investigation and to help negotiate a settlement. Led by partner Robert Fiske Jr., it involved 40 attorneys and investigators from Davis Polk and Kroll, a company related to Marsh. The teams reviewed 2.4 million pages of documents and e-mail messages and interviewed 200 employees, according to a letter released by the law firm. The reaction to Spitzer’s action did not stop with Marsh. Insurers mentioned in the civil complaint saw their stock prices drop precipitously, and so far six now-former industry executives have pleaded guilty to criminal charges from companies including AIG and Zurich American Insurance Co. For Spitzer, who has announced he will run for governor next year, it is the last of three big investigations with industrywide consequences. In 2003, a $1.4 billion settlement with Wall Street’s biggest players changed the way financial institutions conduct stock research. Also in 2003, Spitzer targeted the mutual fund industry for allowing exclusive clients to participate in market-timing schemes at the cost to smaller, long-term investors. The investigation led to a myriad of settlements and changed industrywide practices. Under the terms of the agreement, the entire $850 million will go to compensate clients nationally. Marsh will not pay a separate penalty or fine. Marsh agreed to make wholesale changes to its business practices, some of which it adopted soon after the announcement of the complaint last fall. It agreed to scrap the contingency fee arrangements at the center of Spitzer’s investigation and stop any conduct relating to bid-rigging in which it allegedly manipulated bids to maximize its own fees at the expense of its customers. The company also agreed to implement greater transparency with its clients and institute corporate governance changes by establishing a compliance committee of the board of directors and by appointing a chief compliance officer. Marsh still faces a host of securities class action suits, charging it with defrauding investors, launched soon after Spitzer’s filing when the company’s stock price dropped by almost 50 percent. Marsh issued an apology for the “shameful” and “unlawful” conduct of some its employees but inserted a clause saying it did not admit any wrongdoing on a companywide basis. Companies settling with regulators generally include the clause to shield themselves from related private actions.

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