Santa Monica, CA – Mercury General Corp. has failed to fully disclose family ties within the company in possible violation of federal law and its own internal policies, Consumer Watchdog wrote to the Securities and Exchange Commission today. The company did not tell investors that the chief actuary -- responsible for financial projections relied on by shareholders, policyholders, regulators and the public -- is the CEO’s nephew.
“This is a publicly traded company that is being run like a family business and investors aren’t being told the truth,” said Consumer Watchdog president Jamie Court.
The letter and exhibits can be read here:
The Sarbanes-Oxley corporate governance law requires that “companies disclose "relationships that may present actual or potential conflicts of interest that may affect officers’, directors’ and director nominees’ execution of their duties.” A review of Mercury, conducted by Consumer Watchdog, raises serious questions around Mercury’s previously-undisclosed practice of employing numerous relatives of company Chairman George Joseph, sometimes in sensitive positions.
For example, Charles F. Toney II, who is Joseph’s nephew as well as the company's chief actuary and vice president, is listed in SEC filings as an executive officer, but not a relative.
At least 9 relatives of George Joseph have worked at Mercury or its affiliated enterprises, including MetroWest Insurance Services.
Another pressing question is whether Mercury, which has a strong policy against nepotism, has ever disclosed if its policy was waived by Joseph in connection with his relatives.
Mercury Insurance has also spent $10 million on California Prop 17, to legalize currently illegal surcharges. The financial projections behind the measure, presumably overseen by the Chairman’s nephew, have been used by the company in a deceptive campaign to convince the public there will no rate hikes if Proposition 17 passes.
Charles Toney’s position presents a significant potential conflict of interest. On March 17, the respected brokerage Stifel Nicolaus issued a report questioning the Mercury's unusually low level of loss reserves, which is based on implausibly optimistic assumptions about the insurer’s loss-ratio. Those assumptions make Mercury “an extreme outlier” in the industry, Stifel Nicolaus said. Standard practice deems that the loss-ratio estimates come from the chief actuary, i.e., the chairman's nephew.
Stifel issued a second note last month predicting that Mercury would take "an imminent reserve charge due to aggressive reserves, particularly for accident years 2008 and 2009."
Mercury has resisted providing full disclosure to the SEC of Mercury’s connections to Metro West. In a June 5, 2009 letter to Mercury President and Chief Executive officer Gabriel Tirador, the SEC requested additional information regarding the contract between Mercury and Metro West, but to date Mercury declined to provide a copy of this contract partly on the grounds that the company was sold in February 2008 and is no longer owned by George Joseph's daughter Ellen Joseph. But that reply from Mercury, dated June 19, 2009, fails to note that ownership of Metro West merely passed to another member of the Joseph family, George Toney -- who in fact is the brother of Mercury's chief actuary Charles F. Toney II.
There are several other Joseph family connections to Metro West. Louise Toney, George Joseph's sister and the mother of chief actuary Charles Toney, is the head agent at Metro West. In 2008, she received $150,000 in commissions from Mercury. Metro West also employs George Toney's wife Katie, and her brother Bryan Lovell.
While corporate nepotism is not illegal, the SEC has previously found that failure to disclose employment of family members can be a violation.
“Even George Joseph the billionaire can’t buy his way out of this one. He is playing fast and loose with SEC law. We urge the Commission to promptly conduct a thorough review of Mercury’s practices and hold the Chair of Mercury accountable to his actions.”
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