Prudential 2006 Annual Report Download - page 179

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
From November 2002 to March 2005, eleven separate complaints were filed against the Company and the law firm of Leeds
Morelli & Brown in New Jersey state court. The cases were consolidated for pre-trial proceedings in New Jersey Superior Court,
Essex County and captioned Lederman v. Prudential Financial, Inc., et al. The complaints allege that an alternative dispute
resolution agreement entered into among Prudential Insurance, over 350 claimants who are current and former Prudential Insurance
employees, and Leeds Morelli & Brown (the law firm representing the claimants) was illegal and that Prudential Insurance
conspired with Leeds Morelli & Brown to commit fraud, malpractice, breach of contract, and violate federal racketeering laws by
advancing legal fees to the law firm with the purpose of limiting Prudential’s liability to the claimants. In 2004, the Superior Court
sealed these lawsuits and compelled them to arbitration. In May 2006, the Appellate Division reversed the trial court’s decisions,
held that the cases were improperly sealed, and should be heard in court rather than arbitrated. In November 2006, plaintiffs filed a
motion seeking to permit over 200 individuals to join the cases as additional plaintiffs, to authorize a joint trial on liability issues for
all plaintiffs, and to add a claim under the New Jersey discrimination law. The motion is pending decision.
The Company, along with a number of other insurance companies, received formal requests for information from the State of
New York Attorney General’s Office (“NYAG”), the Securities and Exchange Commission (“SEC”), the Connecticut Attorney
General’s Office, the Massachusetts Office of the Attorney General, the Department of Labor, the United States Attorney for the
Southern District of California, the District Attorney of the County of San Diego, and various state insurance departments relating
to payments to insurance intermediaries and certain other practices that may be viewed as anti-competitive. The Company may
receive additional requests from these and other regulators and governmental authorities concerning these and related subjects. The
Company is cooperating with these inquiries and has had discussions with certain authorities in an effort to resolve the inquiries into
this matter. In December 2006, Prudential Insurance reached a resolution of the NYAG investigation. Under the terms of the
settlement, Prudential Insurance paid a $2.5 million penalty and established a $16.5 million fund for policyholders, adopted
business reforms and agreed, among other things, to continue to cooperate with the NYAG in any litigation, ongoing investigations
or other proceedings. Prudential Insurance also settled the litigation brought by the California Department of Insurance and agreed
to business reforms and disclosures as to group insurance contracts insuring customers or residents in California and to pay certain
costs of investigation. These matters are also the subject of litigation brought by private plaintiffs, including purported class actions
that have been consolidated in the multidistrict litigation in the United States District Court for the District of New Jersey, In re
Employee Benefit Insurance Brokerage Antitrust Litigation, and two shareholder derivative actions, Gillespie v. Ryan and Kahn v.
Agnew. Both derivative actions were dismissed without prejudice. In Gillespie, the plaintiff entered into a tolling agreement with the
Company to permit a Special Evaluation Committee of the Board of Directors to investigate and evaluate his demand that the
Company take action regarding these matters. The Committee has completed its investigation and has informed counsel for
Mr. Gillespie that it has determined to refuse his demand. The regulatory settlement may adversely affect the existing litigation or
cause additional litigation and result in adverse publicity and other potentially adverse impacts to the Company’s business.
In April 2005, the Company voluntarily commenced a review of the accounting for its reinsurance arrangements to confirm
that it complied with applicable accounting rules. This review included an inventory and examination of current and past
arrangements, including those relating to the Company’s wind down and divested businesses and discontinued operations.
Subsequent to commencing this voluntary review, the Company received a formal request from the Connecticut Attorney General
for information regarding its participation in reinsurance transactions generally and a formal request from the SEC for information
regarding certain reinsurance contracts entered into with a single counterparty since 1997 as well as specific contracts entered into
with that counterparty in the years 1997 through 2002 relating to the Company’s property and casualty insurance operations that
were sold in 2003. These investigations are ongoing and not yet complete and it is possible that the Company may receive
additional requests from regulators relating to reinsurance arrangements. The Company intends to cooperate with all such requests.
The Company’s subsidiary, American Skandia Life Assurance Corporation, has commenced a remediation program to correct
errors in the administration of approximately 11,000 annuity contracts issued by that company. The owners of these contracts did
not receive notification that the contracts were approaching or past their designated annuitization date or default annuitization date
(both dates referred to as the “contractual annuity date”) and the contracts were not annuitized at their contractual annuity dates.
Some of these contracts also were affected by data integrity errors resulting in incorrect contractual annuity dates. The lack of notice
and data integrity errors, as reflected on the annuities administrative system, all occurred before the acquisition of the American
Skandia entities by the Company. The remediation and administrative costs of the remediation program are subject to the
indemnification provisions of the acquisition agreement pursuant to which the Company purchased the American Skandia entities in
May 2003 from Skandia.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
177