Two affiliated nonprofit organizations with 11 million elderly members were accused by one of their former top executives yesterday of being a "cover" for profit-making by one of the nation's most lucrative corporations.
The organizations are the Washington-based American Association of Retired Persons (AARP) and the much smaller National Retired Teachers Association (NRTA).
The corporation is the Colonial Penn Group of Philaelphia. It sells - overwhelmingly to AARP-NRTA members - health, life, auto and home-owner insurance policies, as well as travel, employment and other services.
Harriet Miller, executive director of the AARP from February 1976 until she was ousted in October 1977, made the accusation in a $4 million damange suit filed in Superior Court. She had worked for AARP since 1971.
In addition to Colonial Penn, one of the defendants is Leonard Davis, principal founder of the associations (in 1958), and, with his family, principal stockholder in the company. Their shares are currently valued at about $85 million and pay annual dividents of about $2.9 million.
The other defendants are partners in New York City law firm closely tied to Davis and the company. They are Lloyd I Singer, former chairman and chief executive of Colonial Penn Alfred Miller; and Cyril F. Brickfield, who succeeded Harriet Miller as AARP executive firector after holding the post in the 1960s, and then serving as its legislative counsel.
In Chicago, where the AARP is holding its annual convention, Brickfield termed the charge that the associations are a front for Colonial Penn "false" and "a great disservice" to the members (one of four Americans over 55).
In New York, Arthur Kalish counsel for Colonial Penn, and Davis denounced some of the charges in the suit as being "totally without foundation."
Both men emphasized that they had not seen the 27-page complaint and were relying on informal summaries.
The suit, which reinforces allegations made in news articles dating back to 1972, comes as the U.S. Postal Service is winding up an investigation into the eligibility of the AARP NRTA for nonprofit mail rates worth millions of dollars a year.
The associations' nonprofit mailing permits are used not only for their own magazines and other materials, but also for computerized promotional mass mailings by Colonial Penn to AARP-NRTA members.
The company has exclusive access to the AARP-NRTA members lists and publications. No other insurer, for example, can advertise or be promoted in "Modern Maturity," the ARPmagazine.
In exchange , Colonial Penn pays the associations millions of dollars a year in so-called "administrative allowances." These enable the associations to offer low membership fees - now $3 per year for a person or a couple - and thereby achieve phenomenal growth.
But the bargain ends there, Miller's suit charged. The arrangement operates not to secure insurance and other services "at the lowest possible rates," but to "extract monopolistic profits" for Colonial Penn, she alleged.
The suit cited the contrast in premium dollars returned in claims in 1974 to buyers of group health policies: 90.6 percent in the case of commercial insurers, 61.9 percent in the case of Colonial Penn.
In the five-year period ended last Dec. 31, Colonial Penn's after-tax return on Capital averaged 30.5 percent. Among 1,005 biggest public companies, those with sales exceeding $250 million, only two did better. Forbes magazine, which ranked the firms in January, called Colonial Penn "a money funnel for old People."
Postal inspectors began their investigation after Arthur S. Cahn, then a Postal Service assistant general counsel, wrote a memo in August raising the question "whether any of the activities engaged in by NRTA/AARP are subsidized by the Colonial Penn Group in order to promote its own business growth." Cahn went on to say:
"The leadership of NRTA/AARP does not appear to have excercised the degree of review and control over its relationship with Colonial Penn Group companies which would comport with accepted standards of business practice.
"Our inquiries to representatives of NRTA/AARP as to the reason for what appear to be less than arms length business dealings have not resulted in fully satisfactory answers."
In this regard, the Miller suit charged that documents prepared by the defendants at the request of the Postal Service included "untruthful information" about the association's eligibility for nonprofit status.
She alleged that she was asked to sign transmittal letters but was not told of the "false contents." Whether the particular documents at issue were among those sent to the Postal Service over the signature was unclear.
Miller's charge is one of several to the effect that she has tried to serve AARP members in good faith, only to de "deceived as to the true nature of the associations and their management." These charges and others, including purported efforts to ruin her reputation, from the basis of her claims for damages.
In the Cahn memo on the postal investigation, one of the suggested areas of inquiry was the Possibility that decisionmakers in the associations have financial interests in Colonial Penn enterprises.
Lawyer Brickfield has said that the associations recommend the company's offerings "because we have faith" in them "and know they are good for their members."
A Postal Service official said yesterday that he expects the investigation to be completed "reasonably soon."
In a related development, The Washington Post learned that the Bureau of Consumer Protection of the Federal Trade Commission has broadened an ongoing inquiry into the adequacy of disclosure of the true costs of life insurance to include the links between Colonial Penn and the associations. The Colonial Penn aspect was understood to be a highly preliminary stage.
The government investigations aside, the links between the company and the associations are under challenge in class-action lawsuits filed by AARP members in state and federal courts in New York City.
Among the principal charges in the Miller suit:
With "substantially total" and sometimes "totalitarian" secret control of the associations, Davis and his allies have deceived the AARP-NRTA membership, wielded powers supposedly invested ih their boards, concealed and denied the ties to Colonial Penn, and prevented members from buying lower-priced insurance and other products.
Minutes of association board and executive committee meetings "have at times been rewritten and/or fabricated. . . "
The firm that audits the association "is under the control of Davis." CAPTION: Picture 1, HARRIET MILLER . . . $4 million damage suit; Picture 2, LEONARD DAVIS . . . one of the defendants