Figure in Scheme by Lawyers to Defraud Insurers Pleads Guilty

The former office administrator for a San Fernando Valley law firm pleaded guilty in San Diego Friday to mail fraud and agreed to cooperate with federal authorities investigating a purported scheme by a group of lawyers to defraud insurers of millions of dollars in legal fees.

In pleading guilty to a single count of mail fraud, Kathleen M. Monahan, 45, became the third target to agree to assist the government inquiry. 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 an Aug. 21 sentencing date for Monahan, who declined comment.

The Times reported in January that federal authorities are investigating at least a dozen lawyers from the San Fernando Valley, West Los Angeles and Beverly Hills who have appeared together repeatedly in cases in which insurers were obliged to pay their fees. Federal investigators and insurers contend that the lawyers conspired to prolong litigation and fatten their fees through legal maneuvers, including filing spurious claims against each other’s clients. The cases, including some still pending, are in San Diego, Orange and Los Angeles counties.

According to the charge against Monahan, she was part of a scheme “to defraud the judicial systems of the United States and the State of California and numerous insurance companies.”

‘Network of Attorneys’

The fraud on the courts stemmed from 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,” according to the charge.

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

Last February, Suzanne Rubin, former operator of a Reseda-based court reporting service, pleaded guilty to one mail fraud count and agreed to cooperate in the investigation.

Rubin’s court-reporting firm took hundreds of depositions for the lawyers, charging unusually high fees and collecting hundreds of thousands of dollars from insurers.

Rubin later supervised billing for the Arnold law firm and for Calabasas attorney Lewis Koss. She was accused of mailing a fraudulent bill from Koss to an insurance firm in 1985.

A third target, Studio City lawyer Marc I. Kent, has not been formally charged but has agreed to plead guilty to two counts of mail fraud, Kent’s lawyer and prosecutors said.

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

In court papers, prosecutors have referred to Stites as “the organizing attorney,” saying he had “a secret financial connection” with other lawyers in the group. Stites has refused interview requests.

One focus of the probe is payments by lawyers to clients they were defending at insurance company expense. The payments purportedly involved consulting or business deals, but have been investigated as suspected kickbacks to clients for the right to defend them at insurance company expense.

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

In another case, Kent also paid about $100,000 to a client for a lease and option on a piece of property near Atlanta, Ga. Kent didn’t exercise the option, thus forfeiting the money to the client, who 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, for whom Monahan served as office administrator, and Lewis Koss paid 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 with The Times 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 were heavily involved in a type of case in which insurers pay legal fees but lose the right to pick the lawyers or direct legal strategy.

This occurs with lawsuits involving covered claims along with uninsured claims, such as fraud. In such cases, insurers usually assert a right not to pay damages for the uninsured claims. That creates a conflict of interest between the policyholder and insurer, who might fight the insured claim more vigorously than the uninsured one the policyholder would have to pay.

Under California insurance law, the policyholder has the right to pick his own lawyer in such situations.

In many of these cases, insurers have gone on paying for seemingly frivolous legal work, fearing that they will otherwise be hit with multimillion-dollar damage suits for undermining their policyholders’ defense.

According to court records reviewed by The Times, the lawyers under investigation typically entered cases as a defense counsel and then secured other defendants for 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 charge.

In some cases, one of the lawyers worked the plaintiff side, starting the lawsuit the others came in to defend.