Ex-Prudential Insider's Look At The Seeds Of A Scandal

NEWARK, N.J. - It was summer 1982. John Cressman, a fast-rising young auditing executive - a Prudential man like his retired insurance-agent father - was stopped in the hall by the consumer affairs chief at the insurance company's Minneapolis regional office. Could he look into a rash of complaints that some sales agents in Iowa were cheating customers, tricking them into mortgaging the value of their old, paid-up life-insurance policies for new ones they couldn't afford and didn't need?

The potentially fraudulent sales practice, now known in the insurance industry as churning, earned big commissions for the sales agents but were financially devastating, sometimes ruinous, for their predominantly elderly policyholders, who risked losing substantial portions of their retirement savings as well as their life insurance.

The investigation Cressman launched in response to that five-minute meeting in the hall would ultimately uncover such widespread deceptive practices that it brought the youthful auditor here, to the paneled offices of corporate headquarters. A decade ago, he says, he warned top executives of Prudential that they had a serious problem that would get worse unless the company assigned independent watchdogs to enforce reforms.

Today the largest U.S. insurance company is struggling to contain damage from a scandal Cressman saw in its earliest stages. But now the costly and embarrassing controversy affects millions of Prudential Insurance Co. of America customers, has spawned lawsuits seeking hundreds of millions of dollars in damages and has made the company a target of investigations by insurance regulators across the nation.

Besieged company officials have backed down from earlier claims that the churning problem was confined to a few rogue agents, accepting the findings last July of a multistate investigative task force that said deceptive sales practices were common in Prudential offices around the country.

Chairman Arthur Ryan issued a public apology, calling such practices "intolerable." But Prudential has continued to insist that top management had no reason to know of the widespread abuses until recently.

That is what brought Cressman back from previous forced retirement from Prudential. Now the longtime company insider is an outside whistle-blower who has recounted to Florida and New Jersey insurance regulators the contents of his old audit reports and his early warnings to Prudential's senior management.

"They knew it," Cressman said. "I told them."

His claims of Prudential's prior knowledge also are fueling efforts to unravel the proposed settlement of a nationwide class-action lawsuit that could cost the company at least $1 billion.

It is not clear how many of Prudential's 10.7 million customers were victims of such practices, but estimates range from 10 percent to 30 percent nationwide. In some states the percentage could be considerably higher.

Career sidetracked

When Cressman was forced to retire in 1993 after 22 years with Prudential, he was mystified over what had stymied his once-promising career.

In retrospect, he says, his decline at Prudential coincides with his early discovery of the seeds of scandal.

The key moment: Cressman's special presentation to a senior management group headed by the corporation's top marketing executive shortly before Christmas in 1986. The entire meeting took no more than 40 minutes, Cressman said, ending with handshakes all around and pats on the back.

"Fine job . . . extremely helpful," said the senior vice president in charge of marketing in a follow-up letter to Cressman. "Have a great year in '87."

But he didn't. By spring, Cressman was transferred from Minnesota to Newark and, to his disappointment, given a series of backwater assignments where he had nothing more to do with monitoring or reforming fraudulent marketing practices.

Some years later, frustrated and puzzled by the subsequent decline of his career, he left the company. Cressman accepted a voluntary buyout amounting to a year's salary after his attempts to be reassigned inside Prudential were rebuffed. Cressman earlier this year was appointed assistant to the chief financial officer at the Department of Housing and Urban Development after nearly three years as deputy director of administration at the White House.

He left his New Jersey office for the last time in the spring of 1993, still believing that his warnings to management were helping protect millions of policyholders like those who trusted his father.

He was wrong, but it was years before he knew it. Cressman said he learned only last summer, when he read news accounts of the Prudential investigation, that the watchdog reforms he proposed were not in place. For Cressman, that realization also solved the mystery of his sidetracked career.

"It all clicked," he said. "I was inconvenient. . . . They wanted me to go away."

More than a few rogue agents

Trouble in Iowa was Prudential's wake-up call. Suspect sales offices in Cedar Rapids were the first targeted for investigation by internal auditors in the late summer of 1982 based on about 30 similar complaints. Cressman got his first report from the field by phone within hours after the audit team arrived.

"It looks like we've got a problem big time," Cressman said he was told by Jim Wallis, a senior auditor. And over the next few days the team reported extensive evidence of misrepresentation, fraud and forgery. It was more than a few rogue agents. It was, they found, how many of the salesmen were trained by their Prudential managers.

The auditing executive ordered a review of the last 2,500 new policies issued through the Cedar Rapids offices and found 819 cases fit the churning profile. Nearly one-third of the new Cedar Rapids business over a period of 15 months was the apparent product of deceit.

The subsequent investigation resulted in the dismissals of 14 agents, two sales managers and the district manager. However, it was not until Cedar Rapids TV station KCRG ran a weeklong expose on "The Policy Raiders" that Prudential management announced plans to reimburse Iowa victims.

After the damaging publicity and costly corrective measures, Cressman dug into other Midwestern offices. He found that one of Prudential's top sales performers churned 90 percent of his sales volume.

It is not clear today what, if any, measures were adopted and employed after Cressman met Prudential brass in 1986 to present his recommendations for anti-churning controls, but the historical results are clear. Instead of getting protection from policy raiders, Prudential customers in exploding numbers were becoming victims of churning.

Prudential senior management got what appears to be its last internal warning in December 1992, six years after Cressman's Newark briefing.

James Helfrich, a lawyer and consumer affairs director for Prudential's southern region, had never heard of Cressman when he proposed Prudential publicly admit it had a major problem and start reimbursing policyholder victims. "We have to make a decision on whether to . . . do what is right for our customers."

`Sticking up for the old guys'

Cressman, now 45, remains personally discomforted by his role as a Prudential whistle-blower. But he is reassured by memories of a distant conversation with his late father, by then a retired Prudential agent. He visited his son in the midst of the Cedar Rapids investigation in the early 1980s.

"We were sitting around the kitchen table talking about it and Dad just shook his head," Cressman recalled. "He was disappointed, but he wasn't surprised."

"I remember he wanted me to know that the problem was bigger than Cedar Rapids - and that he was proud of me," John Cressman said. "He felt I was sticking up for the old guys. The ones who did it right."