March 21, 2005

Mike Hatch, American Bankers and the Media: Part 1

Nearly two years ago, the Mower County attorney brought a misdemeanor campaign finance charge against State GOP chairman Ron Eibensteiner.

Since this story is back in the news, I'm going to exhume the five-part series I did on the entire controversy, back in June and July of 2003.

I will reprint the series, one part per day, during this week. Next week, I'll update the story, revisiting some of my sources and following up some of the key questions left behind two years ago.

Part 1: If a Settlement Falls In The Forest, and Nobody Hears It...

A source close to the story says "Make no mistake, American Bankers was a bad player. Everyone acknowledges that."

American Bankers Insurance (which was originally two companies, American Bankers Insurance Company of Florida and American Bankers Life Assurance Company of Florida) was an insurance company that dealt in several niche insurance markets, including Accidental Death and Dismemberment coverage. The company was acquired by Fortis, Inc., a company based in Europe, in 1999.

They solicited customers from mailing lists bought from lenders like Chase Manhattan Mortgage Corp., Fleet Mortgage Group, Household Financial Services and The Money Store.

And in the nineties, their business practices left something to be desired, according to Minnesota insurance regulators. The state of Minnesota cited American Bankers Insurance four times between 1993 and 1998 for a variety of regulatory problems. (American Bankers Insurance is also the subject of at least one class action suit related to
overcharging for insurance).

This story starts with one of those actions.

In May of 1998, regulatory officials from 43 states began a cooperative "market conduct examination" of American Bankers Insurance, with Minnesota, Kentucky and Maryland taking the lead roles. In these types of investigations, say sources close to the story, the various participating states take on different portions of the investigation. Each state then relies on the work done by the other states in pursuing the overall action.

As a result, American Bankers agreed to a settlement with the 43 participating states on November 23, 1998, to settle the regulatory violations. American Bankers agreed, according to documents related to the case, to pay a sanction of up to $15 million, and to change its rates and forms subject to a compliance plan to be worked out with the states. The company distributed $12 million among the states involved in the action. Minnesota's share came to $688,776 - the largest fine ever charged an insurance company in Minnesota at the time. The settlement withheld the other $3 million pending a "reexamination"; to be held after a year. The settlement would be paid if the company was not found to be complying with its end of the deal.

The company failed the reexamination, according to a November 2000 report issued by the Maryland Insurance Department, and American Bankers Insurance agreed to pay the $3 million deferred penalty. Minnesota's share came to about $67,000.

In the two years since the initial settlement, the executive branch in Minnesota had changed.

Enter Bernstein

By this time, Jesse Ventura was governor of Minnesota. Ventura's second Commerce Commissioner, James Bernstein, a longtime DFL party activst, was appointed in April of 1999. He presided over an investigation of American Bankers Insurance.

On February 5, 2002, Bernstein filed charges with the Office of Administrative Hearings - the state agency that supplies Administrative Law Judges to hear contested Administrative Law cases - against American Bankers.
That same day, Bernstein held a press conference. According to the report from the Twin Cities Business Journal:

Bernstein charged...that the two insurers have repeatedly violated Minnesota insurance laws and have issued illegal insurance policies to more than 200,000 Minnesota residents. The companies are also charged with failing to provide information to the department.

James Sykes, an Atlanta-based spokesman for the insurance companies, said the charges were without merit.

Bernstein said he would seek a fine of at least $10 million, and to bar the company from doing business in Minnesota. This would have been one of the largest fines in the history of the insurance business, had it been imposed.

While the Commerce Department was leading the effort, the Attorney General's office was involved. The Attorney General's office provided lawyers and legal expertise to help the Commerce Departent proceed with the case. According to Attorney General Hatch's testimony to the Legislative Auditor:

We do the legal work, we try to stay out of the policy, at least at the line level. [The Attorney General's office attorneys] would not be getting into policy matters...we've had a policy since '99, if there's a lawsuit, only the agency is on the pleadings"
Up until August of 2002, according to the record, this was the extent of the Attorney General's Office's involvement.

The Settlement. Or Not.

Negotiations proceeded through the summer. Letters included in the Legislative Auditor's report show:

  • A May 23 letter from Assistant Attorney General Michael Tostengard to Tim Thornton, an attorney from the Minneapolis firm Briggs and Norton, who was representing American Bankers, laying out the terms of the settlement.
  • A June 20 fax/letter from Thornton, outlining his understanding of the terms. It includes an amusing apology for Thornton's delay in responding - remodelers had gotten a late start on his house.
  • A July 3 letter from LaVasseur to Thornton, with a funny, collegial aside about the remodelling - "Remember, if you start having problems with the project, we also regulate residential builders and remodelers" - that noted in a more serious vein that Thornton had missed Tostengard's deadline to accept the terms, but adding that the Commerce Department still wanted to settle out of court.
The State and American Bankers were, by all accounts, in basic agreement on all points but one by early summer; American Bankers wanted to keep the settlement secret.

All this led up to a meeting on August 7, 2002, between Hatch, his deputies (Tostengard and Steven Warch), Commerce Commissioner Bernstein, Thornton, and Jerome Atkinson, a lawyer from American Bankers.

Thornton and Atkinson told Hatch that American Bankers wanted to back out of the deal.

By his own description from the deposition transcript, Hatch was dumbfounded. "I said I think what you're doing is you are trying to run out the clock here. and it was clear to me, I mean...the administration was about to change. By that time, the Governor [Ventura] had indicated he wasn't going to run again. And that's my assumption was what was going on is that they were running out the clock."

But there were two hitches with the settlement. First: the settlement may or may not have actually been a settlement. Second: it was election season.

On the first point, there is disagreement. A source in the Attorney General's office is clear about the Attorney General's office's opinion - the agreement had been printed up, and the agreement was a done deal, as Attorney General Hatch said in his deposition to the Legislative Auditor on April 15, 2003,

There was an issue as to whether or not it was a done deal. We had all the terms done. And there is some law that if two lawyers agree, then they've got authority, it's a done deal. In fact, I was involved in a case involving that. The clients can't pull out afterwards...The lawyer gives an oral
agreement. It's done. It's never been done with the State. It would have been in bad taste, and I don't think we'd push that. But clearly, in my mind, it was a done deal.
But Commissioner Wilson disagrees. In a May 16, 2003 letter to Legislative Auditor Jim Nobles, Wilson says:
It is not accurate to say that the State and American Bankers had agreed “in principle” to settle for $3.5 million in August 2002. An agreement in principle is one where the parties have specifically or generally agreed on all essential terms and will then proceed to nail down the details, generally in a definitive document. Here an essential term – secrecy or public disclosure – had not been agreed upon and the parties had fundamentally different positions on that issue so there was no agreement in principle.

If I agree to sell you my business for cash and a secured note and we agree on the price and the terms, but we disagree on what security shall support the note we do not have an agreement in principle. If we agree, however, that the security will be one of three specific items (but leave for later agreement as to which one) we have an agreement in principle although we do not yet have a legally binding contract. In August 2002 the State and American Bankers were in the first situation, not the second. This is an important point. This writer’s view is that in February 2003 Commissioner Wilson and American Bankers did have an agreement in principle before the consent order was signed because they had agreed on all essential terms, but at no point

Prior to that point had any such agreement ever been reached between the State and American Bankers. Indeed, I think one of the reasons for all the confusion here is that some of the players — Commissioner Bernstein comes to mind – do not understand this legal point. (I thought Gary LaVasseur [former Deputy Commerce Commissioner, currently Director of Enforcement] touched on it in his testimony and explained it well.)

So "when is a settlement really a settlement?" might be a valid question.

But on the second point, there is no argument. By August of 2002, the gubernatorial election campaigns were in full swing. The polling at the time was too close to call; opinion polls in July showed a three-way dead heat between Independence Party nominee Tim Penny, DFLer Roger Moe and eventual winner, Republican Tim
Pawlenty. A new commerce commissioner was a distinct possibility. American Bankers and their attorneys apparently liked the odds that the new commissioner might give American Bankers a better deal. So,
as Attorney General Hatch described it, the company "went "political". While the legal discussion returned to the procedural ping-pong match after the abortive August 7 meeting, the story moved into the political arena.

When companies want to get things done politically, they hire specialists, or "lobbyists".

In early August of 2002, American Bankers Insurance retained Ron Jerich, an Eagan-based lobbyist.

[Next Part 2 - The Check]

Posted by Mitch at March 21, 2005 06:11 PM | TrackBack
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