Another unpleasant
confrontation between legal authorities and financial services
industry heavyweights is brewing in the US. This follows the Los
Angeles City Attorney’s filing of an enforcement action against
three health insurers controlled by investment bank Goldman Sachs
and alternative asset management firm Blackstone Group.

Named in the city attorney’s
filing are California health insurers Mega Life and Health
Insurance Company; health insurer Mid-West National Life Insurance
Company of Tennessee; their parent company HealthMarkets; Goldman
Sachs, Blackstone and three affiliated non-profit

Control of HealthMarkets,
which operates in 44 states, was bought by Goldman Sachs and
Blackstone in 2006 for $850m.

The city attorney alleges
that the defendants violated California’s Unfair Competition and
False Advertising Laws by engaging in “unlawful, unfair and
fraudulent business acts and making false and misleading
advertising claims.”

Specifically, it is alleged
that Mega, Mid-West and HealthMarkets train their insurance agents
with the use of deceptive marketing techniques and incentivise them
to say and do whatever it takes to sell a policy, including making
misrepresentations and concealing important information about the
most basic terms of the coverage being offered.

The city attorney alleges
further that, at the time of the acquisition, Blackstone and
Goldman knew, must have known, or should have known that
HealthMarkets was engaged in a fraudulent scheme to sell junk
insurance products, and that they allowed the scheme to continue
while in control of the HealthMarkets board and key committees,
including its compliance and governance committee.

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According to the city
attorney, HealthMarkets reported revenue from the sale of its
health insurance products of $1.1bn in 2009, and so far in 2010 has
paid special dividends to Blackstone and Goldman totalling

In the city attorney’s action it seeks, among other
things, an order requiring the defendants to provide coverage
consistent with the promises their agents made to California
policyholders. It also requests that they present restitution for
the victims of the defendants’ “scheme” and civil penalties of
$2,500 for each violation of the Unfair Competition and False
Advertising Laws, which could total in the tens ofms of