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Alleged Bid by Lawyers to Fatten Fees Is Focus of Probe

Times Staff Writer

More than a dozen Los Angeles-area lawyers are under scrutiny in a criminal investigation of a suspected scheme to defraud insurance companies of millions of dollars in legal fees.

The investigation, launched by federal authorities in Los Angeles in 1987, shifted late last summer to San Diego, where it is being handled by the U.S. attorney, postal inspectors and a federal grand jury.

Assistant U.S. Atty. George Hardy confirmed that the probe is under way but otherwise would not comment.

However, other sources familiar with the investigation say authorities are examining whether the lawyers, paid by insurers to defend policyholders, have deliberately prolonged litigation and fattened their fees by filing spurious claims against each other’s clients and through other maneuvers.

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Authorities also are investigating why some of the lawyers paid large sums to clients they were defending at insurance company expense, The Times has learned.

Worked Undercover With Investigators

A San Diego attorney and two of his clients recently testified in a civil case that they worked undercover with investigators. The three men secretly recorded conversations with targets of the probe, who allegedly discussed questionable payments and manipulation of cases, according to sources familiar with the investigation.

The probe has targeted about 15 lawyers--most of them sole practitioners or members of small law firms in the San Fernando Valley, West Los Angeles or Beverly Hills--who have concentrated their work on an arcane area of insurance law. They take a type of case in which insurance companies must pay lawyers to defend policyholders, but cannot choose the lawyers or direct defense strategy. Experts say there are sound reasons for this twist in insurance law, but acknowledge it can lead to unnecessary work and excessive billing.

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Several of the lawyers denied any wrongdoing in interviews with The Times. “I’m not in a conspiracy with anybody against anybody,” said Alan Arnold, a lawyer from Woodland Hills.

Others said they have been stigmatized for bucking the insurers. “I liken it to McCarthy stuff in the ‘50s,” said Richard Noyer, a Calabasas attorney.

The criminal investigation parallels civil lawsuits brought by insurance companies against some of the lawyers. Insurance officials could not estimate the total of questionable billings by lawyers in the group, but said it runs into the millions of dollars.

“Somebody has to pay those lawyers, and it’s our policyholders who end up paying,” said Doug Martin, assistant vice president and counsel for Fireman’s Fund Insurance Cos.

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In one arrangement under scrutiny, Alan Arnold and another lawyer, Lewis Koss of Calabasas, have acknowledged in interviews with The Times that they have been paying $50,000 a month to a client to serve as a consultant in his own defense. The client, convicted swindler Barry Marlin, who spent nearly two years in prison at Terminal Island, is being defended by Arnold in civil litigation over the collapse of his investment empire.

Arnold and Koss defended the arrangement, saying Marlin’s research has saved insurers money by paring the number of lawyers and paralegals needed to defend him and his company. Arnold also acknowledged paying smaller consulting fees to a client in an Orange County case.

Undercover Operation

John Naslund, a San Diego County businessman, recently testified in a civil case that in 1987, while working as a government undercover operative, he was paid $2,000 by Studio City lawyer Marc Kent and a Kent client. Naslund said that in return he was to fire his lawyer, hire Kent to defend him in an Orange County case, and refer other defendants in the case to lawyers in the group. Naslund said he returned the money a short time later.

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Kent declined requests for an interview.

Wayne Watson--another businessman who testified in the same case that he also worked undercover--said he was offered a $300-a-month “consultation fee” if he would hire another of the Los Angeles lawyers to defend him in a case.

“It just slapped me upside the face as to being very blatant . . . what they were doing here,” Watson said in an interview.

Naslund’s and Watson’s depositions were taken in a suit by insurers against Marc Kent over his bills in a San Diego case. According to the insurers, over a 2-year period Kent billed them more than $2 million for work by 42 different lawyers and paralegals.

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The insurers also questioned a purported real estate deal between Kent and the client they were paying him to defend. Kent paid the client $100,000 for an option to purchase property, but did not exercise the option.

“Clients usually pay their attorneys, not the other way around,” according to court papers filed by one of the insurers.

The client, Gar C. May, defended the transaction as “100% arms-length.” Kent countersued the insurers, charging them with conspiring to drive him out of business.

In some lawsuits reviewed by The Times, the lawyers got more money in defense fees than was originally in dispute. In one marathon Los Angeles case being looked at by investigators, insurers have paid defense bills of more than $70 million--about twice the losses of investors who sued--although not all was paid to targets of the investigation. In that case, one lawyer has billed more than $7 million to defend a company that has no assets or payroll and has conducted no business in more than a decade, sources told The Times.

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Authorities also are examining whether legal fees were deliberately padded by meaningless pretrial discovery. In cases involving the Los Angeles lawyers, millions of dollars in fees and expenses have been consumed by depositions--formal pretrial proceedings at which attorneys examine potential witnesses under oath. Often many attorneys attend, and a single deposition can cost many thousands of dollars in legal fees, expenses and transcription costs.

Depositions are a customary cost of lawsuits, but many of these have been long on cost and short on information, according to other attorneys in the cases. In the biggest Los Angeles case, lawyers have traveled to nearly every major U.S. city, to Hawaii, and to London and Paris to take as many as 1,000 depositions.

According to court records reviewed by The Times, the lawyers have turned up together as defense counsel in a number of the same cases in Los Angeles, San Diego and Orange counties.

Typically, one lawyer enters a case to represent an insured defendant, and then refers other defendants to lawyers in the group. Once in a case together, the lawyers sometimes expand it by filing cross-claims against each other’s clients, multiplying the amount of defense work for which each lawyer can bill. (A cross-claim is a secondary suit filed by a defendant against co-defendants or other parties.)

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In several cases, one member of the group has worked the plaintiff side, starting the lawsuit the others come in to defend.

Sources familiar with the investigation said a key figure in the probe is Lynn B. Stites, 43, head of Stites Professional Law Corp. in West Los Angeles. Stites, known as an able, if hair-trigger, litigator, divides his time between homes in Ventura County and Gstaad, Switzerland. He declined to be interviewed.

In a January, 1988, proceeding boycotted by Stites, a Los Angeles County Bar Assn. arbitration panel ruled against him and for National Union Fire Insurance Co. in a dispute over defense bills of $635,000.

According to the decision: “The arbitrators are persuaded that some of the Stites billings are fraudulent--that is, the reported hours billed were not in fact worked and . . . were so inflated that any person preparing, reviewing or approving the bills would have known the time was not worked.” The panel had reviewed billing summaries showing that a lawyer and a paralegal employed by Stites each had billed for working 22 to 24 hours a day on several days.

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And in a ruling for First State Insurance Co. in another dispute with Stites, Los Angeles Superior Court Judge Edward M. Ross said in 1987 he was persuaded Stites was “filing false statements for fees.”

The lawyers specialize in cases in which insurance companies pay the bills but don’t pick the lawyers or direct their work.

Many times, these are investment cases in which some claims are covered by insurance but others are not. For example, it might be alleged that a policyholder is liable for property damage--which is covered by insurance--and for fraud, which is not.

Conflict of Interest

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In such cases, insurers often agree to defend policyholders, but reserve their right to refuse to pay damages resulting from fraud.

This creates a conflict between the interests of the insurer and its policyholder. In theory, the insurer’s hand-picked lawyer might vigorously fight the insured claims, but do less to oppose the uninsured claims that would fall squarely on the policyholder.

In such situations, the policyholder has the right to a lawyer of his choice, according to state court rulings. Even some industry lawyers acknowledge that insurers brought these rulings on themselves by neglecting the rights of policyholders.

In the argot of the profession, the policyholder’s independent attorney is called a “Cumis” lawyer, after a ruling that confirmed the legal doctrine.

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The Cumis lawyer has a client who wants a Cadillac defense and doesn’t worry what it costs because the insurance company pays. If the insurer resists bills it thinks excessive, it can be sued for undermining the defense of its insured.

A state law that took effect last year is meant to curb Cumis abuse. It established the right of insurers to pay their usual hourly rate rather than whatever the independent lawyer demands, and set experience and competence requirements for Cumis work.

Refusing to Pay

During the last year, some of the insurers have refused to pay bills of the Los Angeles lawyers. Some of the lawyers have responded with bad-faith suits, seeking punitive damages for alleged failure of the insurers to provide for their policyholders’ defense.

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Noyer, one of the lawyers battling over his fees, said there is a conspiracy “amongst the insurers to make it uneconomical for lawyers” to do Cumis work.

Since last fall, the insurers’ suit against Kent has produced a series of bombshells. Even before Naslund and Watson revealed their undercover work, San Diego lawyer Leonard Radomile stunned a crowd of insurance company lawyers by testifying at his deposition that he had worked undercover with federal authorities since 1987.

Radomile had been a defense lawyer in some of the same cases as the Los Angeles lawyers and referred several clients to them.

Radomile told The Times the criminal probe began after he went to federal authorities in Los Angeles in early 1987. Hardy, the head of the investigation, declined comment.

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