Editor's Note, May 2014: On April 22, 2003, the presiding judge in this case ordered that all allegations and claims against defendant Rupa Mathur be dismissed without prejudice after receiving a notice of partial non-suit from Richardson-Eagle Inc. In fact, by August 2004 Judge Grant Dorfman had dismissed all the claims against William M. Mercer as well.
In 2003, HISD officials hailed the latest successes of its human resources outsourcing as a "commitment to excellence and innovation" that would provide workers with "maximum choice at the lowest possible cost, especially in today's expensive health-care market."
That glowing assessment came from the Informed Source newsletter of the Houston school superintendent's office. It quoted then-board member Dianne Johnson -- currently the HISD board president -- as commending the "creative approach" to an employee benefit package that was "nothing short of phenomenal."
More praise was heaped upon the chief architect of this change, Mercer Human Resource Consulting. Since it has gained the district's outsourced contract for insurance coverage responsibilities, the firm anticipates receiving about $25 million through this year in fees on its stated savings for HISD.
However, a recent lawsuit offers up another explanation for Mercer's supposed successes for the school district:
• While touting its services as an "independent consultant," the company's decisions -- and profits -- have been influenced by "commissions" paid to it from HISD vendors that Mercer did not disclose to the district.
• The company claims significant savings for the district, but those have resulted from little more than inferior or reduced insurance coverage. Rather than lowering costs of commissions and fees paid to agents, those payments went to Mercer itself in several instances.
• In at least some cases, Mercer is accused of rigging the bidding process to make it appear that it had substantially reduced costs. Companies participating in those supposedly competitive bid processes would be rewarded with other business, the suit alleges.
Defendants in the suit are Mercer, Human Resource Consulting Inc., Mercer Human Resource Consulting of Texas, Inc. and their parent company, Marsh & McLennan Companies Inc. The Marsh insurance-consulting giant is based in New York City.
The suit seeks class-action status among the covered workers of HISD's 28,000 employees, as well as other districts involved in pooled coverage with Houston. If certified to become class action, the suit could expand the plaintiffs to include employees of Dallas ISD, Katy ISD and some other school districts in the state.
"Defendants have fraudulently obtained millions of dollars from Texas school districts in consultant fees," the suit states. It seeks to have Mercer's revenues forfeited and triple damages awarded to those covered under Mercer-influenced contracts.
Marsh & McLennan and Mercer are accused of racketeering, fraud, abusing the financial trust with school districts, bid-rigging, deceptive trade practices and violations of the state's insurance code.
Allegations mirror many of those arising from an intensive investigation by New York state Attorney General Eliot Spitzer into other Marsh & McLennan business activities. A civil suit by Spitzer accused the company of misleading clients, fraudulent bid procedures and gaining kickbacks from insurance firms that increased the costs of coverage for those insured.
Last month, Marsh & McLennan agreed to pay $850 million to settle the civil litigation with the AG's Office. The company admitted no wrongdoing. And later in February, a senior official of Marsh pleaded guilty to two criminal charges of bid-rigging involving coverage for corporations. Other executives are reported to be under investigation in the expanding probe.
There is no indication that HISD contracts are part of that investigation, although the local suit refers to the New York AG's action in making its own accusations.
Other questions arise about the oversight by the HISD administration and board on the massive changeover to privatizing human resources operations of the district. It began in the final year of Rod Paige's reign as superintendent, before he became Secretary of Education under President George W. Bush.
The federal suit here says that in 2000, Mercer Consulting helped draft the district's Request for Proposals that "helped Mercer land its lucrative entry into the Texas school district business."
The Houston district virtually turned over its entire insurance coverage responsibilities to the firm to be its exclusive agent, the suit says. That included handling everything from analyzing insurers' proposals, recommending coverage packages, negotiating with vendors, finalizing contracts and acting as HISD's trusted agent in securing the best plans for the least cost.
No individuals are named as defendants in the suit, although the allegations extend to some current or former HISD officials and consultants.
The suit states that Rupa Mathur was both an insurance agent and consultant as well as benefits manager with HISD. While with the district, the suit alleges, she received about $250,000 from insurers, including about $24,000 from a Marsh insurance firm.
Mercer offered her $1.18 monthly for each employee in coverage pools from other school districts, according to the suit. That bounty, for example, would amount to $11,800 a month for a district of 10,000 employees.
"While not tied directly toward her approval of Mercer at HISD, she had every motivation to get the program started at HISD so she could help sell it to other Texas school districts," the suit says.
It also refers to the district's former CFO, Leonard Sturm. It describes him as an independent consultant heading the HISD marketing department who helps promote the "Mercer scheme" to other districts. "Sturm has conspired with Mercer to engage in the plan to bilk millions of dollars from school districts and their employees," the suit alleges.
According to the suit, another HISD consultant who was influential in pushing the insurance program to other districts was Wade Jacobs, whose Infinet firm receives about $30,000 monthly from the Houston district.
Once in as the agent for HISD, "Mercer eliminated the watchful eyes of any outside agent/brokers and eliminated any chance of lawful competition," the suit says.
Alleged impacts of the exclusive arrangements are cited in the suit. It says that Mercer's deals with insurers caused several types of coverage to be restricted or reduced. In 2000, the consultants convinced American Bankers insurance company to drop its outside agent on the HISD account and began "secretly receiving contingent commissions from American Bankers based on the amount of business Mercer placed for it," the suit states.
"These conflicts of interest were not disclosed to HISD or the employees that were actually paying for the voluntary insurance coverage provided by American Bankers and approved by Mercer," the suit says.
It notes that a clause in the HISD contract required Mercer to disclose any conflicts, and that the company did rebate about $700,000 in commissions back to the district in the first two years of its contract.
In other cases, Mercer pressured agents and companies to reduce their commissions just to make it appear that Mercer had significantly lowered costs to the district. Those contract "performance guarantees" required Mercer to demonstrate savings before it received its money from HISD.
As for the integrity of the insurance selection process, the suit says "evidence strongly suggests Mercer invoked the same bid-rigging at HISD" that New York investigators uncovered against its parent company Marsh.
The Houston suit cites the example of Mercer issuing a request for proposals for voluntary life coverage:
The firm told Mutual of Omaha to "submit a less competitive watered down product" than the one it had planned to submit with an independent agent. "Had Mercer not been involved, the employees of HISD would have had a more competitive choice than the Hartford [company's] product [that was] actually selected."
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Mutual of Omaha and Hartford both paid commissions to Mercer, which also received the consulting fee from HISD, the suit contends.
The plaintiff is Dr. Robert H. Kimball, an education faculty member at UH-Clear Lake. The former HISD assistant principal gained a $90,000 settlement last year in an unrelated whistle-blower suit that accused the district of retaliating against him for reporting that HISD had altered student dropout records. (Kimball also authored a July 1, 2004, Press guest column about ethnic educational disadvantages in HISD.)
HISD spokesman Terry Abbott declined comment, saying the district had not reviewed the lawsuit yet. A Mercer spokeswoman said they would not comment on pending litigation. Requests for responses were not returned from Kimball attorney James L. Reed Jr. and Gayle Fallon, president of the Houston Federation of Teachers.
"I'm honored to take the lead in this case," Kimball would only say. "It supports the teachers and other employees of these school districts who appear to have been wronged by this relationship between the districts and the defendants."