Ex-Law Firm Official to Help U.S. in Fraud Case

A former office administrator for a Woodland Hills law firm pleaded guilty Friday to mail fraud and agreed to cooperate with federal authorities investigating a group of Los Angeles-area lawyers suspected of defrauding insurance companies of millions of dollars in legal fees.

Kathleen M. Monahan, 45, pleaded guilty to a single mail fraud count, becoming the third target of the federal probe to agree to assist prosecutors. She was accused of mailing an inflated bill from the office of attorney Alan Arnold to an insurance company in November, 1985.

U.S. District Judge John Rhoades set sentencing for Aug. 21.

Monahan declined comment.

The Times reported in January that the U.S. attorney and postal inspectors here are investigating at least a dozen lawyers from the San Fernando Valley, Beverly Hills and the Westside of Los Angeles, who have appeared together repeatedly in a certain type of case, in which insurers had to pay their fees.

Federal authorities and insurance firms allege that lawyers in the group conspired to prolong litigation and fatten their fees through various legal maneuvers, including filing spurious claims against each other’s clients. The cases were in San Diego, Orange and Los Angeles counties. Some are still active.

Plea Bargain

Monahan was charged Friday in a four-page criminal information, a type of charge usually filed in lieu of a grand jury indictment when a defendant agrees to a plea bargain.

According to the information, Monahan and the lawyers were part of a scheme “to defraud the judicial systems of the United States and the state of California and numerous insurance companies.”

The fraud on the courts involved the lawyers representing themselves as “independent attorneys, free from any conflict of interest,” when in fact they were part of “a network of attorneys with interlocking financial and professional interests,” the charge alleges.

Assistant U.S. Atty. George D. Hardy declined to say when more charges will be filed. He confirmed that Monahan’s plea bargain, filed under seal with the court, requires her to assist the investigation.

In response to questions from the judge, Monahan said she had not been promised a more lenient sentence for her plea. A mail fraud conviction carries a maximum penalty of five years imprisonment and a $250,000 fine.

In February, Suzanne Rubin, former operator of a Reseda-based court reporting service, pleaded guilty to one count of mail fraud in the case. She is cooperating with the government and has yet to be sentenced.

Rubin’s court reporting firm took hundreds of depositions for the lawyers under investigation, charging unusually high prices and taking in hundreds of thousands of dollars in fees from insurance companies, according to lawyers familiar with Rubin’s operation.

Rubin later supervised billing for the Arnold law firm, where Monahan worked, and for Calabasas attorney Lewis Koss. The charge against her involved the mailing of a fraudulent bill from Koss to an insurance company in 1985.

A third target of the federal probe, Studio City lawyer Marc I. Kent, a Granada Hills resident, has not formally been charged but has agreed to plead guilty to two counts of mail fraud, Kent’s lawyer and federal authorities have confirmed.

No charges have been filed against the alleged mastermind of the scheme, West Los Angeles lawyer Lynn B. Stites, who divides his time between homes in Bell Canyon in Ventura County and Gstaad, Switzerland.

Although not identified by name, Stites was referred to in the informations against Monahan and Rubin as “the organizing attorney,” and was said to have had “a secret financial connection” with other lawyers in the group. Sources connected to the investigation have identified Stites as the “organizing attorney” referred to in the documents.

Stites has refused requests for an interview.

The Times reported last January that the investigation has focused on payments by some lawyers to clients they were defending at insurance company expense. These payments purportedly involved consulting services or business deals but have been investigated as possible kickbacks to clients for the right to defend them at insurance company expense.

A San Diego County businessman testified last year in a related civil case that Kent paid him $2,000 to dump his lawyer, hire Kent to defend him in an Orange County case and refer more insured defendants in that case to lawyers in the group. The businessman, John Naslund, testified that he was working undercover with federal authorities at the time and returned the money to Kent.

Kent also paid about $100,000 to a client in another case, Gar C. May, for an option on property near Atlanta. Kent did not exercise the option, thus forfeiting the money to May.

May defended the transaction in an interview as “100% arms-length.” Kent has refused to be interviewed.

In the biggest case involving the lawyers, Alan Arnold--whom Monahan worked for as office administrator--and Lewis Koss acknowledged paying a client $50,000 a month for about two years to serve as a consultant in his own defense. The client was convicted swindler Barry Marlin, still involved in litigation in Los Angeles over the collapse of his investment empire in the 1970s.

In an interview several months ago, Arnold defended the payments to Marlin, saying they saved insurers money by reducing the number of lawyers and paralegals needed on the case. Arnold failed to return a phone call Friday.

The lawyers under investigation were heavily involved in a type of case in which insurers must pay legal fees but lose the right to select their policyholders’ lawyers or direct defense strategy.

Often these were investment cases in which some claims against policyholders--such as property damage--were covered by insurance but other claims--such as fraud--were not. In such cases, insurers typically claim a right not to pay damages for any non-covered claims. This creates a conflict of interest between the policyholder and insurance company, which might fight the insured claim more vigorously than an uninsured one for which the policyholder would pay if he loses the case.

Under California insurance law, the policyholder has the right to pick his own lawyer in such situations. In legal jargon, the policyholder’s independent attorney is called a “Cumis” attorney after a ruling that confirmed the legal doctrine.

In “Cumis” situations, insurers often have paid for questionable legal work without resistance, fearing they will otherwise be hit with multimillion-dollar damage suits for undermining the defense of their policyholders.

According to court records reviewed by The Times, the lawyers under investigation turned up together as “Cumis” counsel in a number of cases in Los Angeles, San Diego and Orange counties.

Typically, one or more entered a case to represent insured defendants and then referred other defendants to lawyers in the group. Once in a case together, the lawyers often expanded it by filing cross-claims against each other’s clients, multiplying the amount of defense work for which each lawyer could bill insurers, a review by The Times of court files showed. A cross-claim is a secondary lawsuit filed by a defendant against co-defendants or other parties.

In some cases, attorneys switched roles. An attorney who usually appeared for defendants appeared instead for the plaintiff side, starting the lawsuit the other lawyers came in to defend.