Fraud Suit Parallels U.S. Probe of Attorneys : Insurance: Lawyers accused of conspiring to fatten their fees face both a private lawsuit and a criminal investigation.

Allegations of fraud and racketeering in a lawsuit scheduled for trial next week in U. S. District Court in Los Angeles mirror those in a federal criminal investigation of lawyers purportedly involved in an elaborate insurance fraud.

Insurance giant USF & G is accusing the main defendant in the civil case, attorney Lynn Boyd Stites, 44, of conspiring to prolong and expand litigation in order to collect legal fees from insurers--to the point of trying to prevent the dismissal of a suit against an Orange County business insured by USF & G. USF & G is seeking $6 million in damages.

Stites, who lives in Bell Canyon in eastern Ventura County, could not be reached for comment, but his lawyers have contended in court papers that his “litigation activities were altogether proper.”

USF & G’s claims against Stites echo allegations being pursued by federal authorities in San Diego, who are investigating an alleged insurance billing scheme involving a network of lawyers, mostly from the San Fernando Valley, West Los Angeles and Beverly Hills.

Although Stites has not been charged there, prosecutors say he masterminded a scheme in which attorneys conspired to lengthen litigation and fatten their fees through various legal maneuvers, such as filing spurious suits against one anothers’ clients to increase defense fees, and paying kickbacks to clients for the right to defend them at the expense of insurance companies.

With the civil trial scheduled to begin Oct. 31, the criminal investigation is casting a long shadow on the USF & G case. Some unusual effects have resulted:

* In the USF & G case, more than a dozen potential witnesses, most of them lawyers, refused to answer questions in pretrial depositions, invoking their Fifth Amendment privilege against self-incrimination. Many of those who took the Fifth are targets of the criminal investigation in San Diego, including Stites and his defense lawyers, Alan I. Arnold of Woodland Hills and Gregory S. Bodell of West Los Angeles.

* Stites’ lawyers sought to use the depositions as a window on the activities of the criminal investigators--spying on those who had spied on the lawyers. They recently took depositions of three men who had no involvement in the Stites-USF & G dispute but who had worked undercover with federal authorities, secretly recording conversations with Stites, Arnold and other targets of the probe.

The three--San Diego attorney Leonard Radomile and two of Radomile’s clients, businessmen John Naslund and Wayne Watson--were questioned by Stites’ lawyers about which conversations they taped and where they concealed their recording devices.

* Earlier this month, U. S. District Judge Harry L. Hupp ruled one defendant, Stites Professional Law Corp., in default because Lynn Stites, citing the Fifth Amendment, refused to turn over tax returns and other records sought by USF & G. The default means that the law corporation could be liable for damages to USF & G even if Stites and the other defendants are exonerated in the trial.

* This summer, the U. S. attorney’s office in San Diego filed court papers in the USF & G case seeking to delay the deposition of a potential witness who may also testify in the criminal case. The delay, which was denied, was sought “to prevent interference with the criminal proceedings,” the government said. Stites’ lawyers also asked that the civil trial be delayed until the “almost identical criminal proceeding in San Diego” is completed, but Hupp refused.

It was 10 years ago this month that a suspicious jewelry theft gave birth to the dispute in the USF & G case.

The supposed victims of the $2-million theft were Robert A. and Tiare Ogle, operators of Newport Galleries, a jewelry business in Newport Beach. The Ogles had taken jewelry on consignment to sell in Saudi Arabia. In October, 1979, after buying $2 million in insurance from Lloyds of London to cover the trip, they set off for Los Angeles International Airport.

On the way, the Ogles stopped at the Cockatoo Inn in Hawthorne for a farewell dinner with friends. As they were leaving the building, witnesses said, armed robbers accosted them and took the jewels.

But Robert Ogle had an extensive police record, and police and Lloyds of London--after examining such things as the Ogles’ deficient travel documents and their history of being robbed of insured jewels--concluded that the robbery was a hoax. No criminal charges were filed against the Ogles in the incident.

In one of a dozen lawsuits filed against Newport Galleries and the Ogles by those who lost their jewels, an Orange County Superior Court judge agreed. “The entire trip to Saudi Arabia was a sham,” Judge Robert J. Polis wrote. “It never could have happened as planned and was never intended to occur. The robbery was staged and probably nothing of value was stolen.”

Newport Galleries had a general liability policy with USF & G that did not cover theft. But the insurance company agreed to pay for the legal defense of Newport Galleries and the Ogles pending a court determination of its duties under the policy.

To represent Newport Galleries and themselves, the Ogles hired Stites and several of his associates, who were paid about $400,000 by USF & G, court records show.

One of the lawsuits was brought by owners of a $17,000 diamond bracelet. Their lawyer was Paul Mast, a former Orange County Municipal Court judge. Run ragged by the defense team, Mast in 1983 made a written offer to drop the suit, which was proving too costly to pursue considering the size of his clients’ loss.

But victory was not what Stites had in mind, Mast said later. On July 20, 1983, over lunch at the Velvet Turtle in Long Beach, Stites and West Los Angeles lawyer William Conkle, a former Stites partner who represented the Ogles, proposed that Mast keep the suit alive.

Mast later testified in a deposition that he told Stites and Conkle “that they had worn me down” and “that we were willing to give up and just get out of the case.”

But Mast said his hosts “informed me that the defense of the action was now being paid for by USF & G, an insurance company,” that “never questioned the bill.” They wanted the case to go to trial, “and they were going to do everything they possibly could to make the trial last as long as possible,” Mast said.

At the time of the lunch, USF & G seemed on the verge of winning a court ruling that it had no duty to defend Newport Galleries and the Ogles. But according to Mast, Stites had a plan to keep the insurer on the hook.

Mast said his hosts described the following scenario: Instead of dropping the suit, Mast would amend it to claim that his clients had suffered emotional distress and other damages covered by the USF & G policy. Stites would help by reviewing and rewriting the amended complaint before Mast filed it to make certain that it fit within insurance coverage. The case would proceed to trial, Mast would be allowed to win, and USF & G would probably refuse to pay the judgment. Both sides then would hit the insurer with bad-faith suits. “And . . . in those lawsuits we would be able to clean up against USF & G,” Mast said.

The “purpose of the lunch was to solicit me to engage in a conspiracy to defraud USF & G by continuing the lawsuit for the purpose of building up attorneys’ fees . . . and . . . to set USF & G up for a bad-faith lawsuit that, in the words of Mr. Conkle and Mr. Stites, we would all derive an extremely large amount of money from,” Mast testified in the deposition.

Following the meeting, Mast went back to his office and wrote his clients a letter to tell them what had transpired.

Later in 1983, a judge ruled that USF & G had no duty to defend Newport Galleries and the Ogles. USF & G asked Stites to submit any unpaid bills. Stites suddenly produced bills for another $350,000, which the firm refused to pay when the bills were not substantiated, according to USF & G.

In 1985, Stites sued USF & G over the unpaid bills. It was in that suit, which was later dismissed, that Mast gave his explosive account of the lunch.

The following year, USF & G filed the fraud suit against Stites, Conkle and other lawyers involved in defending Newport Galleries and the Ogles. Some of the defendants were later dismissed, including Conkle, who reached an undisclosed settlement with USF & G.

In a sworn declaration, Stites acknowledged having lunch with Mast but said Mast’s “contentions as to what occurred at that meeting are untrue.”

But aside from Mast, three other lawyers who sued Newport Galleries on behalf of jewelry owners said they were advised by either Conkle or Stites to amend their complaints to add claims of emotional distress. None of the lawyers amended the suits.

In court papers, Stites said it is worth noting that four lawyers maintained that they were approached “to amend their pleadings; . . . none of them did so.”

So even if such an attempt ever occurred--which it did not, the court papers said--USF & G would have suffered no damages as a result, Stites said.

In a recent pretrial conference, lawyers for USF & G said they will also present evidence about other cases in which a “Stites Network” of lawyers joined to “defraud various insurance companies” by billing “excessive, unnecessary and fraudulent attorneys’ fees for their own illicit gain.”

The language is strikingly similar to that used by federal authorities in San Diego to describe the criminal probe, which has targeted about 30 lawyers and associates of lawyers.

In court papers filed in the USF & G case, Assistant U. S. Atty. George D. Hardy, who is heading the San Diego inquiry, said the criminal investigation involves “a network of lawyers and associates . . . who have systematically and with great deliberation” inserted themselves in complex cases to generate big bills. “The total potential loss has been alleged to be between $50 million and $200 million.”

Stites hit back at Hardy in pleadings filed in the USF & G case, dismissing him as “the former insurance industry counsel”--a reference to Hardy’s prior work at a private law firm that had insurance clients.

Hardy said indictments in the criminal case are expected before the end of the year.

The criminal investigation began in Los Angeles in 1987 but shifted to San Diego late last year. Since then, one lawyer and two employees of targeted law firms have pleaded guilty to mail fraud charges and have agreed to assist federal authorities.

The most recent conviction came last week when Studio City lawyer Marc I. Kent, 40, pleaded guilty to two mail fraud counts and agreed to surrender his license to practice law.

During that appearance in federal court in San Diego, Kent, a Granada Hills resident, said Stites brought him into the scheme about 1984. He said that Stites sent insured clients to him and other attorneys, that the attorneys would file counterclaims against one another’s clients to generate more defense fees, and that they would kick back part of their insurance billings to Stites.