NEW YORK – Embattled insurance brokerage Marsh & McLennan (search) said Tuesday that it will lay off 3,000 employees, or about 5 percent of its work force, as it struggles to deal with the fallout from a bid-rigging probe by New York Attorney General Eliot Spitzer.
On another regulatory front, the company disclosed that it has reached a $40 million "settlement agreement in principle" with the Securities and Exchange Commission over questionable brokerage allocation practices at its Putnam asset management firm.
Both announcements came as the company reported third-quarter earnings that were well below analysts' estimates.
In midday trading, Marsh & McLennan's (MMC) shares were down 55 cents at $26.81 on the New York Stock Exchange. The company's share value has fallen more than 40 percent since Spitzer announced his investigation on Oct. 14.
The New York-based brokerage — the nation's largest — said in a statement accompanying its earnings report that it was reducing staff levels "based on the realities of the marketplace and our current situation."
The company said most of the layoffs would come in its risk and insurance businesses, but that others would affect Putnam and its Mercer human resources consulting businesses.
Marsh & McLennan said it would take restructuring charges of about $325 million over the next six months to cover the costs.
Asked about the layoffs, Spitzer spokesman Marc Violette said: "It's terrible when workers lose their jobs because of the illegal conduct of management."
The announcement of layoffs came a day after Marsh & McLennan ousted two top executives of Marsh Inc., the company's risk and insurance services unit.
Roger Egan, president and chief operating officer of Marsh, and Christopher Treanor, chairman and chief executive of the firm's global placement business, were asked to step down, the company said.
"These management decisions were difficult and were not based on any suggestion of culpability," Michael Cherkasky, president and chief executive officer of the firm's parent company, Marsh & McLennan Cos., said in a written release. "However, at the end of the day, Mr. Egan and Mr. Treanor were accountable for the areas of the business that have been the focus of investigations...and, therefore, we thought it was appropriate to make these changes."
Marsh & McLennan also said Monday that the parent company's senior vice president and general counsel, William Rosoff, had stepped down. Rosoff was widely reported to have tried to stonewall Spitzer's inquiry, prompting the attorney general to declare that he wouldn't negotiate with the existing leadership of the company. Two weeks earlier, Jeffrey W. Greenberg resigned as chairman and chief executive.
Marsh & McLennan's proposed settlement with the SEC involved so-called directed brokerage practices at Putnam. Directed brokerage involves a fund company giving its trading to a broker in exchange for the broker selling the firm's funds. Earlier, Putnam reached an agreement with the SEC over market timing in its funds. Both practices raise the costs and lower the returns for small savers who invest for the long term.
Marsh spokeswoman Barbara Perlmutter said Putnam employs about 5,000 workers in Boston. It wasn't immediately clear how many of them would be affected by the cuts at Putnam, which had $209 billion in assets under management at the end of last month. The total is down from about $280 billion before the mutual fund trading scandal enveloped Putnam and several rivals last fall.
Spitzer, in his civil suit, accused the company of bid rigging, price fixing and collecting large incentive fees from insurance companies in exchange for steering business their way. This forced business customers to pay more than necessary for property and casualty insurance coverage, Spitzer alleged.
The company has since banned the use of contingent commission fees, and Cherkasky has pledged reforms in the way Marsh does business.
"This has been a difficult time for the company," Cherkasky said in Tuesday's statement. "We are determined to address the issues at hand. ... We recognize the seriousness of the problems we are facing and are moving to correct them."
He said that while Marsh & McLennan would be laying off some staff, it also was "developing compensation programs to retain, motivate and reward employees" who remained on the payroll.
In a conference call with analysts, Cherkasky said the company's internal investigation was within about 10 days of completion and promised to make the results public.
"We absolutely will tell our clients and the public what we've found," he said.
Cherkasky also said the review so far has found "very limited price-fixing issues confined to a few people in a very narrow practice line." He didn't elaborate.
Sandra Wijnberg, Marsh & McLennan's chief financial officer, told the conference call that the company was negotiating a new loan agreement with its banks.
"We expect to announce a multiyear credit facility shortly," she said. Wijnberg declined to give any details on the size or terms of the deal.
In its earnings report Monday, Marsh & McLennan said net income declined to $21 million, or 4 cents a share, in the third quarter from $357 million, or 65 cents a share, a year earlier.
The company said third-quarter earnings were reduced by a total of 55 cents a share by several charges: a 27 cents per share reserve "for Marsh's possible regulatory settlements," 16 cents due to a decline in market services revenues, 7 cents for an expected Putnam settlement of a Securities & Exchange Commission investigation, and 5 cents for an increase in tax liabilities.
The results of 59 cents a share after charges were well below the 67 cents expected by analysts surveyed by Thomson First Call.
Net income for the first nine months of the year totaled $856 million, or $160 a share, down from $1.17 billion, or $2.12 a share, in 2003.
Revenues totaled $2.97 billion in the third quarter, up from $2.84 billion a year earlier. For the first nine months of the year, revenues were $9.22 billion, up from $8.55 billion in 2003.
Although Spitzer's investigation was announced after the quarter ended, it had repercussions on the July-September numbers.
Marsh & McLennan said, for example, that revenues in its risk and insurance services business rose 8 percent to $1.8 billion. But it said market services revenues — which include contingent commissions — declined $46 million in the quarter.
Because of Spitzer's probe, it said, Marsh & McLennan "did not accrue a significant portion of market services revenues expected from placement activity."
The company repeated that it intends to collect all commissions earned before Oct. 1 for the reserve fund of $232 million it is setting up to help cover expected settlement costs with Spitzer.