Judge Freezes Quackenbush Fund’s Assets

A Superior Court judge on Friday froze the assets of a foundation created by Insurance Commissioner Chuck Quackenbush after hearing it described as a “sham” operation whose monies were improperly diverted by one of the commissioner’s key deputies.

Sacramento Superior Court Judge John R. Lewis ruled that funds deposited with the foundation for Northridge earthquake victims will be frozen until he can conduct a hearing May 22. On that date, the court will consider state Atty. Gen. Bill Lockyer’s request for a temporary restraining order preventing the organization from continuing to dole out grants.

Lewis rejected arguments by a lawyer for the foundation, the California Research and Assistance Fund, that Lockyer’s case against it is built on outdated information and designed “essentially to close my client down.”

The judge said he had concerns about what would happen to $6.3 million that would soon be deposited into the foundation by 21st Century Insurance Co. (formerly 20th Century) for distribution to earthquake victims who lacked sufficient insurance to cover damages from the 1994 disaster.

The foundation was set up with insurance company penalties for improper claims handling. The penalties were in lieu of fines--perhaps in the billions--that Quackenbush’s top deputies had threatened to impose on the companies.

Quackenbush, who declined to be interviewed about the judge’s decision and was not at the hearing, issued a statement suggesting that he may ask the insurance company to deposit the money elsewhere.

“We have been reviewing all options for expeditiously distributing that money to victims through another vehicle,” said Quackenbush spokesman Dan Edwards.

He said a plan for disbursing funds was approved recently by 21st Century and a special administrator for the foundation.

‘Pervasive Fraud and Abuse of Authority’

The judge’s action was prompted by a 177-page complaint from Lockyer charging that the powers of the foundation’s board of directors had been usurped by George Grays, a top deputy to Quackenbush, and used to improperly divert millions of dollars to friends and acquaintances.

Lockyer said Grays and the foundation’s directors were guilty of “persistent and pervasive fraud and abuse of authority.”

“[They] have engaged in the mismanagement of the charitable assets of CRAF and have wasted those so that the vast majority have not been used for any charitable purpose whatsoever,” wrote Lockyer, who oversees the state’s charitable trusts.

The complaint also says that Grays ran the foundation directly from his Department of Insurance office, even though by law it should have been operated independent of state government. He resigned his department post last month.

The foundation was created by Quackenbush with money paid by insurance companies as penalties for mishandling Northridge earthquake claims. Nearly $6 million has been paid to the foundation already; an additional $6.3 million was to have been deposited by 21st Century within the next week.

Lockyer, who began an audit of the organization in February, said the commissioner’s agreements with insurance companies clearly required the foundation’s assets to be spent “specifically to address earthquake-related issues.”

Instead, he said, “Grays essentially treated the assets of the corporation as his own and the corporation served as a mere shell for his own purposes, disregarding all corporate formalities such as meetings, minutes or other adequate corporate documents.”

An accounting by the attorney general’s office showed that $1.4 million was distributed to a dozen nonprofit organizations that operated minority outreach programs, mostly outside of the Northridge quake zone.

Much of the remaining money, Lockyer’s complaint said, was unlawfully spent on services that were exorbitantly priced. This included, it said, $3 million paid to Target Enterprises for producing television spots that featured the commissioner, and $1.1 million paid to Strategi, a Los Angeles company that produced earthquake video kits for schools. The complaint said the kits have never been distributed.

Target Enterprises, a media consulting business, has frequently worked on Quackenbush’s political campaigns.

The complaint said Ron Weekley, a member of the foundation’s board, was guilty of “self-dealing” for distributing $18,000 from the foundation to Community Connections, a business he owns.

“Directors have to exercise good business judgment,” said Deputy Atty. Gen. Sonja Berndt. “We believe these [payments] were excessive at this point and the benefit . . . received was minimal.”

Berndt, who argued the case for Lockyer, said the managers of the foundation had quickly depleted its assets, spending $6 million in six months. She said only $14,000 remained in its bank accounts at the end of January.

Pivotal evidence in the case compiled by her office was provided by former foundation board President Kimberly Brockman, Berndt said.

In a sworn statement, Brockman said during the six months she served on the board, she attended only one foundation meeting. She said that on July 13, 1999, she sat in Grays’ Department of Insurance office and talked with one other board member via telephone conference call.

“I have no recollection of discussing at this meeting any specific programs that CRAF would undertake, any specific contractors that CRAF might consider . . . or any grants that CRAF might make,” Brockman said, according to the statement.

Yet at least $640,000 had already been distributed before that meeting, including $500,000 to the Sacramento Urban League. Quackenbush is on the board of directors of the league. The commissioner has denied knowing anything about the contribution, but he appeared to take credit for it at an Urban League speech last October that was videotaped.

Under state law governing charitable trusts, a board must approve all disbursements.

Brockman said she did not recall any other meetings of the board, despite the fact that more that $5 million has been distributed since the July 13 meeting.