November 13, 2004
Spitzer's Next Shoe
New York Attorney General Elliot Spitzer dropped another shoe from his closet on an insurance company, although it was not Aon Corp., about which there was some speculation when Spitzer announced that another suit was coming on Friday morning (Nov. 12). This time, the target is Universal Life Resources (ULR), which is a San Diego-based insurance broker, and the complaint alleges bid-rigging in violation of New York's Donnelly Act similar to that charged against Marsh & McLennan.
Unlike Marsh Mac, which is a multi-billion dollar company with thousands of employees spread across different divisions, ULR is a closely-held company, organized as a limited partnership with only one owner, Douglas P. Cox, and 80 employees.The complaint alleges that "Cox completely controls ULR," other companies doing business with it viewed Cox and the organization as interchangeable, and engaged in "self-dealing transactions" with the company and its subsidiaries. As the sole owner of the company, it is not surprising that Cox completely controls it, indeed that's the very nature of being the sole owner of a company. Moreover, the fact that other companies that did business with ULR viewed Cox as the embodiment of the company is commonplace, and there is nothing necessarily improper about it. While corporate formalities have to be observed, owners of closely-held businesses are not held to the same standard in dealing with their company as officers and directors of publicly traded corporations. That does not mean Cox can treat the company as a personal piggy-bank, but a closely-held business is often run with less formality because the owner suffers any loss associated with the business directly.
Because the lawsuit names both ULR and Cox, there is a greater possibility that Cox (and ULR) will fight Spitzer, rather than immediately seek a settlement. While a public company has a powerful incentive to cooperate with the government, a private company, especially one with a single owner who is also the object of the government enforcement action, does not need to protect the interests of a large group of shareholders. If Cox decides to fight, then ULR will fight, something we have not really seen in any of Spitzer's earlier cases. (ph)