State Insurance Commissioner Roxani M. Gillespie has filed a civil suit charging operators of the bankrupt Coastal Insurance Co. with racketeering, fraud, gross mismanagement and breach of fiduciary duty, and is asking that they be ordered to reimburse state liquidators $66 million plus punitive damages, it was announced Monday.
The complaint filed Friday in Los Angeles Superior Court accuses Harry O. Miller, president of Coastal; Gerald Milton, an officer and director of a Coastal holding company; Sidney M. Field, owner of FGS Acquisition Co., and numerous other Coastal officers and directors of illicitly draining the auto insurance company of funds and forcing it into insolvency.
"California will not tolerate this kind of fraudulent and self-serving behavior," Gillespie said in a statement Monday. "This department fully intends to prosecute those who violate the public trust."
A secretary in Miller's office said he was on vacation and unavailable for comment. Attorneys for other defendants could not be reached, but Miller, Milton, Field and other Coastal officers last year denied to a legislative investigatory panel that they were guilty of any wrongdoing.
Richard D. Martland, chief assistant state attorney general in charge of the civil division, said there still could be criminal indictments, depending on the course of the investigation. The attorney general's office and two outside attorneys will represent Gillespie in the civil case.
Ron Rosen, chief liquidator for the Department of Insurance, said Gillespie decided to proceed first with the civil suit in part because the penalties for civil wrongdoing are much greater in terms of dollars than the relatively small fines called for in the criminal code.
Rosen said Coastal "would have been close" to remaining solvent had wrongful diversions of funds not occurred.
"We're hoping to get at least some of the $66 million we have in claims against Coastal back," Rosen said, even though Advent, the Coastal holding company--to which many of the alleged diversions were initially made--has also gone bankrupt. "Whatever we recover goes into the estate of Coastal and goes to pay these claims."
Coastal became well known to television viewers in the late 1980s for its advertising slogan, "It's no problem," and sold about 200,000 policies, mainly in Southern California, by appealing to drivers with poor records.
It went bankrupt early last year and was ordered liquidated on the petition of Gillespie shortly after Miller had made $5.2 million in political contributions to a campaign for a 1988 insurance initiative, Proposition 101, that ended up winning only 13.3% of the vote.
The Gillespie lawsuit alleges that the political contributions were among the funds drained from the company at a time when it should have been apparent to its operators that it was in dire difficulty.
The suit also names a $17.5-million purchase of FGS as another example of how funds were drained from Coastal. Just before the company went bankrupt, the suit notes, Coastal sold FGS back to Field for only $156,000, and even that amount was allegedly not paid to Coastal.
Gillespie has been engaged for more than a year in an effort to force Field to divest his interest in FGS and force that company to stop what Insurance Department investigators charge are fraudulent sales practices. Although the Insurance Department took away Field's license, a loophole in state law allows him to continue in business as long as someone in his employ has a license.
The complaint against Coastal officials charges the defendants with creating various schemes to divert funds from Coastal, including gross overpayment of commissions, payment of illegal bonuses and dividends, and pursuing deals between officers that were of benefit only to them.
Under California law, claims against Coastal that cannot be paid by company assets are assessed against all California insurance policyholders.