The aftershocks of October's insurance scandal continued to punish

Marsh & McLennan

(MMC) - Get Report

Tuesday.

Just weeks after it was hit with kickback and bid-rigging allegations, the New York insurance broker set plans Tuesday to slash 3,000 jobs and create a $232 million reserve to cover a possible regulatory settlement.

Nearly two-thirds of the job cuts will come in the firm's Marsh insurance brokerage division, which is central to the investigation launched last month by New York Attorney General Eliot Spitzer.

On Oct. 15, Spitzer's office

charged Marsh with civil fraud, an event that sparked a nearly 50% drop in the company's stock. The resignation of Jeffery Greenberg, the company's chairman and chief executive, and the departure of a number of other top executives soon followed.

The firm also agreed to stop collecting a disputed payment from insurers, a move that will reduce annual revenue by hundreds of millions of dollars going forward. The decision to forgo the payments, which critics have likened to kickbacks, is the main reason the company is laying off about 5% of its workforce.

"We are cognizant of our revenue," Michael Cherkasky, Marsh's new president and chief executive, said in a conference call with analysts. "We need to create a flatter and a more efficient organization."

The combination of job cuts and regulatory reserves resulted in a hefty charge that slashed Marsh's third-quarter earnings by 94% from a year ago. In the quarter, the nation's largest insurance broker earned $21 million, or 4 cents a share, compared with $357 million, or 65 cents a share, a year ago.

Setting aside money for a legal reserve reduced Marsh's earnings by 27 cents. The firm also took a charge totaling $40 million, or 7 cents a share, for a pending settlement with the

Securities and Exchange Commission

over a series of infractions at Marsh's Putnam Investments mutual fund subsidiary. Earlier this year, Putnam paid $55 million to the SEC for its role in the mutual fund trading scandal.

The company forecast pretax restructuring costs of $325 million over the next six months, and Cherkasky said more cost cuts are possible. The company estimates the job cuts will result in $350 million in annual savings.

The company vowed to consider "any modifications" that would help erase the cloud of scandal that first arose over its Putnam Investments unit in 2003 and now clouds its much larger insurance brokerage unit.

Backing out the items, Marsh appeared to earn roughly 59 cents a share on revenue that rose 5% from a year ago to $3 billion. Analysts surveyed by Thomson First Call had been forecasting earnings of 67 cents a share on revenue of $3.03 billion.

In afternoon trading, shares of Marsh were down 33 cents to $27.

Prepare for a Very Rough Day

Marsh's third-quarter earnings were a preview of rough days ahead for the company, now that it will no longer accept so-called market services agreements. These payments, better known as contingent fees, are the disputed fees at the heart of the scandal.

In the quarter, revenue from such fees fell to $46 million from $177 million because of the impact of the scandal. But in future quarters, contingent fees will disappear altogether.

"Due to the filing of the New York attorney general's civil complaint, Marsh & McLennan was unable to complete the normal process to verify amounts earned or determine that the collection of these amounts was reasonably assured for certain contracts," the company said, in a press release. "As a result, Marsh & McLennan did not accrue a significant portion of market services revenue expected from placement activity in the third quarter."

Marsh said "almost all" of the decline in market services revenue in the third quarter is due to the above factors and not to a decline in the amount of business placed.

The company, meanwhile, announced late Monday that it fired two executives at its Marsh brokerage subsidiary. The departing executives are Roger Egan, president and chief operating officer, and Christopher Treanor, chairman and chief executive of the firm's global placement division. The executives are the latest to go in the scandal's wake.

Within days of the lawsuit's filing, Greenberg resigned. Replacing him was Cherkasky, a former colleague of Spitzer's and a top executive at Kroll, the corporate investigative firm that Marsh acquired this summer.

Cherkasky and the Marsh board have been scrambling the past few weeks to salvage the company's reputation and reach a settlement with Spitzer. The company fired five other executives who have been implicated in the mushrooming scandal.

"These management decisions were difficult and were not based on any suggestion of culpability," said Cherkasky. "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

the investigations."

In a separate move, the company also announced that William Rosoff has stepped down as senior vice president and general counsel of the firm. It's been reported that Rosoff had a number of run-ins with Spitzer's staff in the days leading up to the filing of the lawsuit.