Good Afternoon. Thank you for inviting me to testify here today. My name is Jason Adkins, I am Executive Director of Center for Insurance Research, a nonprofit public policy and advocacy consumer organization based in Cambridge. Last year, I was the attorney for policyholders of State Mutual who sought to intervene, and participated in the Massachusetts Division of Insurance public hearing on the State Mutual demutualization proposal in June 1995.
I applaud the Senate Insurance Committee for holding this oversight hearing to review the Division of Insurance's conduct in the State Mutual conversion to a stock company, and explore how the governing statute can be improved. I offer my insights on these two questions based on my experience as the attorney who challenged the State Mutual plan in the Division's public hearing process, and who has since successfully litigated against the Division to obtain 200,000 pages of public records which the Division had refused to make public.
I am familiar with the State Mutual plan itself, the process by which it was developed in close cooperation with the Division, the process by which the Division approved it without releasing critical evidence in its possession, and the statutory interpretations the Division has invoked in our litigation in an effort to conceal its practices. I will speak to these elements in my statement.
Let me first note that, if the adage "Past is Prologue" ever had validity it is in how the Division of Insurance conducts itself. In the half dozen matters we have engaged in with the Division over the last year, including the multi-billion dollar mergers between MetLife and The New England, and that between Massachusetts Mutual and Connecticut Life, and the Electric Mutual Liabiity Insurance Company move to Bermuda (which resulted in a half Billion dollar loss), the Division claims total exemption from public review, meets privately with regulated companies who are given unfettered access to their regulator, improperly withholds from policyholders and other interested parties information necessary to meaningfully participate, and fails to give adequate notice or other due process rights essential to any public proceedings.
Consumers suffer significant harm when their government acts to benefit private industry over their interests, as we believe has happened in the above referenced transactions. No simple matters, Billions of policyholder dollars and consumer protection itself is in jeopardy. These are serious allegations which I will explain below and in answers to your questions.
First, the process by which State Mutual's plan was developed in conjunction with the Division.
State Mutual met privately with Division staff, including the Commissioner periodically, for a period of a year and a half. A special "working group" of the Division's top staff met in private as often as weekly with State Mutual executives and advisors. Hundreds of documents were submitted by State Mutual, many of which were designed to influence the Division's interpretation of Section 19E, including what kind of public hearings were required, and who could participate. The Division disclosed neither the occurance of the meetings, nor the existence of the documents, to policyholders or the public prior to or during the public hearing.
Based on the documents produced through our litigation (i.e., "litigation documents") it is clear that the Division also heavily edited and even authored whole segments of the company's actual plan. And when the New York Insurance Department raised significant objections to the plan one year into the Division's process, and threatened to oppose the plan in the Massachusetts hearing, both the Commissioner, and the First Deputy and General Counsel (Richard Mastrangelo), communicated with the newly appointed (post-election) leadership in New York to halt their involvement. Mr. Mastrangelo pleaded that New York's opposition to the plan would "embarrass" the Commissioner. One must ask, why would the Commissioner, who is charged by statute with neutrally adjudicating the plan, be embarrassed should New York provide her with additional and obviously important information about the unfairness of State Mutual's plan in the public hearing? The answer is obvious -- her Division had already approved the plan and wanted no opposition of any kind in their well-choreographed public hearing process, a process which the legislature obviously intended to be more than show.
Rather than describe the entire process which is well exposed in the Boston Phoenix (September 20, 1996), I note for the Committee several procedural "irregularities:"
-At the start of the public hearings, Commissioner Ruthardt declares the demualization "one of the most, if not the very most complex and interdisciplinary corporate insurance transaction which any regulator must oversee." Yet, although Division has a professional hearing officers staff with decades of experience, Janice Wilson was hired having no experience in insurance, financial, or administrative law matters. She had never run a hearing before, and only had "official" access to two attorneys who, in their own words, were "still wet behind the ears," and surmised that they were hired to rubber stamp the process. Although the inexperienced staff sought "access to experienced, IMPARTIAL consultants" of their own, these were never provided. If Ms. Wilson and staff did receive any advice it was from the Working Group and State Mutual ex parte.
-The Commissioner, who is charged with adjudicating the plan, engages in routine meetings with State Mutual, its advisors, and her own Working Group, which is supposed to be on the other side of the "Chinese Wall," early on in the process (and perhaps throughout). She offered to talk to State Mutual's board of directors (in a November 2, 1994 memo) to protect management from board accusations that they mishandled the project.
-The Commissioner herself participated in negotiations with the New York Insurance Department to dissuade them from intervening in the Massachusetts hearings to oppose the plan. As stated above, First Deputy and General Counse Richard Mastrangelo pleaded with New York not to intervene because it would "embarrass" the Commissioner, a point he reiterated throughout his conversation with NY. (See talking points memo dated February 24, 1995.)
-Presiding Officer Wilson herself considers meeting with State Mutual to discuss "procedure" in a March 16, 1995 memo -- two months before the public hearings were even announced.
The Center can provide the Committee with much more information about the process which is described in our court papers, public records appeals and the documents the Division was forced to produce as a result of our litigation.
Second, the hearing process by which the Division considered and approved the plan under Section 19E, including the knowing and willful denial of public records which contained evidence in support of claims that the plan was unfair to policyholders.
Unbeknownst to the public, the Division and State Mutal agreed in private on the time table and procedures for the public hearings. Policyholders were provided less than three weeks to obtain, read and digest 250 pages of complex information, and file papers to intervene in the State Mutual public hearings. The schedule thereafter was equally punishing and ultimately only the company was granted the right to present its case, although we were given "limited participation" status. We were denied the right to an extention of time, discovery, and cross-examination.
Although the Division and dozens of advisors reviewed the plan, policyholders and the public were expected to reach their own conclusions without kind of information that even the New York Insurance Department thought was minimally necessary for them to reach any conclusions.
And, although policyholders were required by statute to vote on the plan, the Division approved State Mutual's 248 page proxy statement which failed to disclose the significant material information.
(Note: the compensation for extinguishing policyholder membership rights was historically low for demutualizations, 10% of the company's total assets. The NYID thought policyholders were entitled to 20% of the company's value, which amounted to $600 more per policyholder than offered in the plan.)
(Note: This quote is from a memo (Jan. 26, 1995) from State Mutual's own actuary -- Godfrey Perrott, at Milliman & Robertson).
(Note: within a week after the IPO the stock price jumped 20 percent from the discounted rate of $21 to $26 a share, and has been at $32/share or higher since mid-1996.)
Multiple requests for information by the poilcyholders I represented in the hearing were denied. I requested information on the effects of using the Historic Plus versus the Historic Only allocation methodology, and the Presiding Officer hurredly denied my request in the hearings after State Mutual's actuary (of Milliman & Robertson) claimed he did not have the information available.
I sought information from the Division by filing a public records request pursuant to c. 66, Section 10 on March 1, 1995 before the hearings. This request was flatly denied and none of the hundreds of thousands of public records were made public prior to or during the hearing. Based on the documents obtained through litigation, we now know what we long suspected, that the Division knowingly and intentionally withheld the public records from the policyholders and the public. Such violations are not insignificant, as evidenced by the criminal sanction for violations of the statute. The evidence to support this allegation includes the following (attachments have been provided to the Committee):
1. Of the nearly 200,000 pages of information released to the Center pursuant to this litigation, no document specifically evidences the Division's claim that a G.L. c. 175, Section 4 examination would or had taken place -- not one. (Section 4 contains a provision that entitles an insurer to request that proprietary information be maintained as confidential.)
2. In his communications with the New York Department of Insurance in October 1994, Division General Counsel and First Deputy Richard Mastrangelo refused to provide New York with documents on the express grounds that by doing so the documents would lose their confidentiality. See Attachment. In a memorandum to Governor Weld's office, Commissioner Linda Ruthhardt made the same assertion. See Attachment. In fact, as Mr. Mastrangelo and the Commissioner well know, Section 4 examination documents, by explicit statutory language, do not lose their confidentiality when provided to another state's insurance department. But as Mr. Mastrangelo and the Commissioner have well known at least since the communication of October 1994, the documents in question then and now simply are not Section 4 examination documents.
3. The New York Insurance Department was refusing to cooperate with the Massachusetts Division in New York's own review of State Mutual and was threatening to intervene in opposition to the plan at the Massachusetts public hearing. This is clear from the Division's frantic and revealing documents. In February 1995, the Division, in concert with its outside advisors, "leaked" documents to the New York department in order to provide New York with information while creating public deniability regarding disclosure of the documents under the public records law. See Attachment. One of the Division's leaked documents stated that it planned to "leak" additional information to New York. The memos outlining these plans were circulated among the Division's most senior staff and the outside advisors one week prior to the date when the Center for Insurance Research filed its public records request. The Division's outside counsel, LeBoeuf, Lamb, Greene & MacRae, authored the memo containing the documents for New York further attesting to the fact that even the Division's own lawyers never considered the process to be part of a Section 4 examination and therefore exempt from disclosure. None of these "leaked" documents were released to the Center prior to June 1996, however, and then only buried amongst the 150,000 pages of information released to us. (Note that despite the wide circulation of the LeBoeuf leak memo, we have found only one copy in the information released to date).
4. The Division's own actuarial firm of Ernst & Young stated in an attachment to its opinion letter submitted in the public hearing that: "because the procedures described above are substantially less in scope than an examination, the objective of which is an expression of opinion of compliance, we do not express such an opinion." (emphasis added). See Attachment.
5. The Division retained outside expert advisors for purposes of its §19E review of the proposed demutualization, and billed the costs of this expert assistance to State Mutual explicitly under the provisions of §19E. Although payment provisions are also available under Section 4, these provisions were not invoked in this matter. See Attachment.
6. The Division, as recognized by Judge Lauriat, did not rely on Section 4 for its denial of the Center's public records request in its lengthy appeal for reconsideration of the Supervisor of Public Records order to disclose documents to the Center. See Attachment.
Third, I shall discuss the nature and significance of information that was kept from the public and policyholders prior to their vote to approve the plan.
Over 200,000 pages of information that was kept from policyholders contained critical documents which supported criticisms made by the policyholders I represented in the public hearings, and for which the Commissioner claimed there was no evidentiary support in her Final Order approving the plan. Policyholders were denied information about the significant objections raised by the New York Insurance Department, criticisms that paralled those raised by me and the policyholders I represented in the hearings.
Policyholders were denied the right to consider the fact that State Mutual's own actuaries opined that the allocation method selected by the company (historic plus) was not appropriate for State Mutual, and that it would "shift" 11 to 5 percent of the assets away from the block of individual policyholders who controled the majority of votes. Policyholders were denied State Mutual's own legal memorandum stating that Massachusetts law required the allocation method (historic only) advocated by the Center in opposition to the plan. Hundreds of material documents, submitted by State Mutual to influence the process behind closed doors never say the light of day during the proceedings.
To date, neither the Presiding Officer nor the Commissioner has stated whether or not they were privy to these materials prior to approving the plan. Rather, the Commissioner has taken the position that such documents were not public and were therefore beyond the scope of the hearing officer's and Commissioner's own review. Clearly, such critically important, highly material documents which provide evidence for positions raised in the hearings must be public and debated on their merits, and must be considered and publicly addressed in any determinations by the Commissioner.
Fourth, the statutory interpretation claimed by the Division, in litigation to exempt its activities from public view, is unsupported in state law.
The Division has claimed ex post facto that its review of State Mutual was actually a Section 4 examination, and that Section 4 provides a blanket exemption from any disclosure, no matter the document and no matter its source as long as it was deemed to relate to the "examination," was advanced only after all other arguments to prevent disclosure had failed, and is "precisely the species of transparent defense to which a party should not be required to respond." Lewis v. Emerson, 391 Mass. 517, 462 N.E.2d 295 (1984).
This total blanket exemption, first claimed by the Division in litigation brought by the Center, was never raised in response to the Center's public records request or in the proceedings before the Supervisor of Public Records. It was only after every other attempt to avoid disclosure had failed that the Division created this unprecedented blanket exemption theory under Section 4, which was properly characterized by Judge Lauriat as "an entirely new theory [which] became necessary to support the Division's position in this litigation". See Center for Insurance Research v. Linda Ruthardt, (Jan. 24, 1996), at 15.
Judge Lauriat also pointed out that "the Division's own behavior in this case suggests that it itself never considered examination records to be an all-encompassing category until it had failed in every other argument for exempting the materials it had withheld." Slip op. at 12. After examining the opinions of the Supervisor of Public Records, Judge Lauriat also stated that "the Division's earlier limited assertion of the G.L. c. 175, §4 exemption is strong evidence that the general and typical interpretation of that provision is relatively narrow, and that in the absence of this litigation, the Division would have been unlikely to adopt the interpretation it now advances." Slip op. at 13. He further noted as "even more striking" the absence of any mention of a Section 4 exemption in the second ruling from the Public Records office, "which suggests that this exemption was not even raised by the Division in its argument for reconsideration of Schwind's August 14 ruling". (emphasis in the original). Judge Lauriat correctly concluded that the Division itself did not rely on a Section 4 exemption with regard to these records "until all other possible arguments in support of its withholding of documents had failed." Slip op. at 14. See Attachment.
The Division created this blanket exemption claim for the sole purpose of avoiding liability for its persistent failure to comply with public records law. This claim is without foundation in the law or in the history of the State Mutual proceedings, and is a frivolous and wholly insubstantial position. The documentary evidence in the Division's own possession demonstrates that no Section 4, and only a Section 19E examination, took place.
Finally, the Center believes that the statutes governing the demutualization process and agency conduct must be amended to ensure that policyholders and the public are protected. The demutualization statute should be amended as follows:
Attached is a copy of the Center's testimony on the State Mutual plan dated July 11, 1995 when this body considered a moratorium on demutualizations pending an assessment of the process and fairness to policyholders. That testimony further discusses the substantive unfairness of the plan and the process by which it was reviewed.
Thank you for the opportunity to appear before you here today. I am available for any questions.