Monday, December 19, 2016

No. 193: Prudential Suspends Life Insurance Sales in Wells Fargo Branches

On December 12, 2016, Prudential Financial, Inc. (NYSE:PRU), parent of New Jersey-based Prudential Insurance Company of America, announced it has suspended sales of life insurance through branches of California-based Wells Fargo Bank pending the results of Prudential's internal investigation of how Wells Fargo sold the policies. I learned of the announcement from an online article in The New York Times that day. An expanded version of the article appeared in the print edition the next day. The story has been reported in other outlets, including a December 12 online article in The Wall Street Journal. Two lawsuits have been filed against Prudential. California and New Jersey insurance regulators are investigating. A U.S. Senate committee is investigating.

Background on Wells Fargo
On September 8, 2016, the Consumer Financial Protection Bureau (CFPB) issued a consent order directed at Wells Fargo. The order said in part:
[CFPB] has reviewed the sales practices of Wells Fargo, N.A. and determined that it has engaged in the following acts and practices: (1) opened unauthorized deposit accounts for existing customers and transferred funds to those accounts from their owners' other accounts, all without their customers' knowledge or consent; (2) submitted applications for credit cards in consumers' names using consumers' information without their knowledge or consent; (3) enrolled consumers in online-banking services that they did not request; and (4) ordered and activated debit cards using consumers' information without their knowledge or consent....
[Wells Fargo's] employees engaged in "simulated funding." To qualify for incentives that rewarded bankers for opening new accounts that were funded shortly after opening, [Wells Fargo's] employees opened deposit accounts without consumers' knowledge or consent and then transferred funds from consumers' authorized accounts to temporarily fund the unauthorized accounts in a manner sufficient for the employee to obtain credit under the incentive-compensation program....
[Wells Fargo's] analysis concluded that its employees opened 1,534,280 deposit accounts that may not have been authorized and that may have been funded through simulated funding, or transferring funds from consumers' existing accounts without their knowledge or consent...and that its employees submitted applications for 565,443 credit-card accounts that may not have been authorized using consumers' information without their knowledge or consent....
Wells Fargo agreed to pay a civil monetary penalty of $100 million to CFPB, and up to $5 million in redress to consumers. It also agreed to, among other things, retention of an independent consultant, oversight by the Wells Fargo board of directors, reporting and record keeping requirements, and cooperation with CFPB. (See In the Matter of Wells Fargo Bank, N.A., Administrative Proceeding 2016-CFPB-0015.)

Prudential's "MyTerm" Life Insurance
The product at the center of the current story is "MyTerm." In its December 12 announcement, Prudential said it launched the product in 2007, entered into a distribution agreement with Wells Fargo in June 2014, and said the product "was created to give customers greater choice and access to life insurance through a self-assisted, technology-enabled application process." The announcement attributed this statement to Stephen Pelletier, executive vice president and chief operating officer of Prudential's U.S. businesses:
We stand behind the MyTerm product but have decided to suspend sales of that product through Wells Fargo's retail banking franchise until we have all the facts about whether it is being distributed properly and in the best interest of customers. While our review is ongoing, Prudential remains squarely focused on doing what is right for our customers. If any Wells Fargo MYTerm customers have concerns about the way in which the product was purchased, we will reimburse the full amount of the premiums they paid and cancel the policy. We have also set up a toll-free hotline [1-877-291-7193] for these customers.
The Broderick Lawsuit
On December 6, six days before Prudential's announcement, three individuals who claim they were "wrongfully terminated" filed a lawsuit in New Jersey state court. The case was assigned to Superior Court Judge L. Grace Spencer. Governor Christie nominated her in May 2016, and the New Jersey Senate confirmed her. She received her law degree from the Rutgers University Law School. (See Broderick v. Prudential, Superior Court, Essex County, New Jersey, Docket No. ESX-L-8348-16.)

The plaintiffs and their positions prior to their termination are Julie Han Broderick, vice president, corporate counsel and co-head of the Corporate Investigations Division (CID); Darron Smith, director of CID; and Thomas Schreck, director of CID. The defendants are Prudential; Deborah Bello, chief regulatory officer; and Jane and John Doe, currently unknown Prudential "supervisors who actively and intentionally engaged in retaliatory conduct against Plaintiffs."

According to the complaint, by January 2015 Prudential had learned that MyTerm policies sold through Wells Fargo had a high lapse rate. Prudential sent a survey to MyTerm clients in an effort to determine the cause. More than 700 emails were returned as undeliverable, 12 clients did not understand the policy or know about the premiums, and at least one client complained of high pressure tactics used in an attempt to sell insurance to an individual who did not need insurance. The plaintiffs allege that Prudential took no action in response to the survey results.

In or about September 2016, Prudential conducted an inquiry into whether a fraud scheme similar to that involving Wells Fargo bank accounts could occur with regard to MyTerm policies. The review found, among other things, a 70 percent lapse rate among MyTerm policies sold in 2014, sales spikes near the end of each quarter, and sales predominately to individuals with Hispanic sounding last names concentrated in the southern portions of Arizona, California, Florida, and Texas. Steps were taken to review the results further.

At about the same time, CID received a call on its fraud hotline from a client who said he had never authorized the purchase of a policy and was trying to cancel the policy before the next premium due date. CID learned that the money to start the policy had come from the client's small and unused savings account.

CID investigated further and found many clients with similar experiences. Many did not speak English, and needed an interpreter. The complaint describes developments in October and November 2016, when CID officials were pushing for strong measures and Prudential officials senior to them disagreed on how to proceed. The complaint says the plaintiffs eventually were escorted out of the building in a kind of "perp walk," and later were "wrongfully terminated."

The complaint contains two counts of alleged violations of New Jersey's Conscientious Employee Protection Act. The plaintiffs seek, among other things, back pay, compensatory and punitive damages, attorney fees, and costs.

According to the December 12 article in the Journal, Pelletier also sent a letter to employees that day. A Prudential spokesman did not respond to my email request for a copy of the letter. According to the Journal, Pelletier said the three individuals who filed a wrongful-dismissal lawsuit in state court in New Jersey had been "brought in after the review was already under way to assist in gathering facts, and that review continues." According to the Journal, Pelletier added that "these employees were dismissed in response to an entirely unrelated ethics complaint filed against them by individuals who were in no way involved in the Wells Fargo review."

The Perea Lawsuit
On December 12, the day Prudential issued its announcement, Alex Perea filed a class action lawsuit against Prudential in federal court in New Jersey. The case was assigned to U.S. District Judge John Michael Vazquez. President Obama nominated him in March 2015, and the Senate confirmed him in January 2016. He received his law degree summa cum laude from the Seton Hall Law School. (See Perea v. Prudential, U.S. District Court, District of New Jersey, Case No. 2:16-cv-9134.)

The plaintiff, an Arizona resident, held and still holds a Wells Fargo bank account he opened in 2010. Around October 2016, he received a past due letter from Prudential for MyTerm life insurance. The complaint alleges that at no time did he approve, sign up for, or enter into an agreement for such a policy. The defendants are Prudential, Pruco Life Insurance Company of New Jersey, and Pruco Life Insurance Company.

Perea alleges that Prudential authorized Wells Fargo employees to sell MyTerm policies to Wells Fargo banking customers and set up an incentive ("kick back") program for Wells Fargo agents based on the volume of MyTerm sales. He also alleges that the program "permitted and encouraged wide-scale cheating whereby Wells Fargo employees established and 'sold' MyTerm policies to Wells Fargo banking customers without their consent." The complaint includes allegations similar to some of those in the Broderick case. The plaintiff seeks to certify a nationwide class consisting of all persons in the U.S. who were Wells Fargo banking customers and were enrolled in MyTerm policies without their knowledge or consent.

The complaint includes two claims. One is for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). The other is for violation of the New Jersey Consumer Fraud Act. The plaintiff seeks class certification; a declaratory judgment; injunctive relief; compensatory, exemplary, and statutory penalties, including treble damages and interest; return of unauthorized premiums; and attorney fees and costs.

The California and New Jersey Investigations
On December 12, the California Department of Insurance issued a press release announcing it was launching an investigation into the allegations made by former Prudential employees about Wells Fargo employees signing up consumers for Prudential policies without authorization. According to the press release, the investigation will be in collaboration with the New Jersey Division of Insurance, which is also investigating the matter.

The Cummings-Warren Investigation
U.S. Senator Elijah E. Cummings (D-MD) is the Ranking Member of the Committee on Oversight and Government Reform. On December 13, 2016, he and U.S. Senator Elizabeth Warren (D-MA) sent a letter to John R. Strangfeld, chairman and chief executive officer of Prudential Financial.

Cummings and Warren asked Strangfeld to provide, by January 13, 2017, documents relating to: (1) Prudential's investigations of Wells Fargo's practices in selling Prudential policies at Wells Fargo branches; (2) contracts between Prudential and Wells Fargo authorizing sale of Prudential policies at Wells Fargo branches or kiosks; (3) marketing and promotion of Prudential policies sold at Wells Fargo branches; (4) notification to Prudential employees of alleged fraudulent activity in the sale of Prudential policies at Wells Fargo branches; (5) how and when Prudential management first became aware of improper sales tactics used in the sale of Prudential policies at Wells Fargo branches; (6) income and profit derived by Prudential from the sale of its policies at Wells Fargo branches; (7) Prudential surveys of customers' experiences with Prudential policies sold at Wells Fargo branches; and (8) rates of complaints from customers regarding Prudential policies sold at Wells Fargo branches.

General Observations
There has been very little discussion of the Perea class action lawsuit. The Broderick case has been described as a "whistle blower" lawsuit and as a "wrongful termination" lawsuit. I think either description is accurate. I think it is possible that the Broderick case prompted Prudential's December 12 announcement, which in turn led to the media coverage and the investigations.

I believe that Prudential's entanglement in the Wells Fargo scandal relating to bank accounts is a major embarrassment for Prudential. I also think it is a development that may have an impact on the sale of life insurance and annuities through banks, credit unions, and other financial institutions. The results of the investigations should be watched closely.

Available Material
I am offering a complimentary 79-page PDF containing six items: the Prudential December 12 announcement (1 page), the California Department of Insurance December 12 press release (1 page), the Cummings-Warren December 13 letter to Strangfeld (3 pages), the Broderick December 6 complaint (21 pages). the Perea December 12 complaint (27 pages), and the CFPB September 2016 consent order directed at Wells Fargo (26 pages). Email jmbelth@gmail.com and ask for the December 2016 package relating to Prudential and Wells Fargo.

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