Ex-Quackenbush Aide Pleads Guilty

George Grays, the former deputy insurance commissioner whose mismanagement of charitable foundations helped bring down his boss, Chuck Quackenbush, was charged in federal court Tuesday with mail fraud and money laundering.

Within hours, Grays, who has since become a government witness, appeared before U.S. District Judge David Levi to enter a guilty plea to three felony counts. The charges accuse him of accepting $170,900 in kickbacks from an athletic camp for children. He was released on his own recognizance pending a pre-sentence investigation.

Grays, 38, is the first state official to be charged in the scandal that forced Quackenbush to leave office July 10.

Federal prosecutors said the charges carry a maximum penalty of 30 years’ imprisonment and a $1-million fine. But as part of a plea bargain agreement they would recommend that Grays receive a lower sentence. Because of his cooperation with the government, they said, they would propose that he be required to serve only half that sentence in prison.

Grays also agreed to pay restitution of at least $263,000 to one of the foundations he managed.

Grays’ attorney, William Portanova, a former federal prosecutor, said his client had requested that he be charged and sentenced as quickly as possible.

“Mr. Grays knows he has written a dark chapter in his own life and he’s eager to close that chapter,” Portanova said. “He is fully committed to ensuring that the entire truth comes out concerning the Department of Insurance and its handling of millions of dollars which should have gone to the taxpayers.”

A spokeswoman for state Atty. Gen. Bill Lockyer, who is part of a task force that includes the FBI and the Sacramento district attorney, said a criminal investigation “into the activities of the Department of Insurance” is continuing. Quackenbush, a Republican elected to two terms as the state’s chief regulator of the insurance industry, resigned rather than face possible impeachment.

His resignation came after a series of legislative hearings revealed that he had reached secret settlements with major insurance companies that allowed them to contribute to foundations instead of being fined for mishandling Northridge earthquake claims.

Although the foundations were created to help earthquake victims, millions of dollars in assets had actually been used for television spots designed to enhance Quackenbush’s political image.

Court documents filed Tuesday by federal prosecutors said Grays controlled the checkbook for one of the foundations, the California Research and Assistance Fund, although he was not one of its officers.

Besides payments that were made to help Quackenbush, the documents said, Grays participated in a scheme to defraud the foundation through a $263,000 “donation” to the Skillz Athletics Foundation.

Skillz was a nonprofit corporation founded by Brian Thompson, a friend of Grays, in September 1999, ostensibly to coach and counsel troubled young athletes. But in reality it was created as part of the fraudulent scheme, the documents said.

“Rather than use CRAF’s donations for charitable purposes,” prosecutors said, “Thompson made illegal kickbacks to Grays from Skillz bank accounts totaling approximately $170,900 and paid himself the remaining $92,100 in the form of cash and checks.”

The prosecutors said the payments to Grays were made in 23 separate checks, including one for $20,000 that covered his credit card debt.

To cover up the payments, they said, Thompson, who was not charged Tuesday, created phony corporate records that showed Grays was being reimbursed for expenses.

State Sen. Jack Scott (D-Altadena), the former Assembly Insurance Committee chairman who presided over the Quackenbush hearings, said he had expected criminal charges to be filed against Grays because evidence gathered by the Legislature “certainly smelled of a kickback.”

But, he said, it was shocking “to imagine that not a single dime went to the kids that were supposed to be helped by that athletic camp.”

Levi scheduled Grays’ sentencing for April 12.

During arraignment proceedings, he repeatedly asked the former state official if he was guilty of the charges.

“Did you enter into a scheme to defraud CRAF?” he asked at one point.

“Yes, your honor,” Grays replied.

At another point, the federal judge noted that although the accusation against Grays was written in complex language, it basically “charges you with a kickback scheme.” Grays nodded.

Grays later declined comment, on the advice of his attorney, but Portanova said he believes his client will not be the only person to be charged in connection with the scandal.

“I would be very surprised if it ended here,” Portanova said. “I anticipate charges against others in the future.

“Mr. Grays has been extensively debriefed by agents of the federal government and the attorney general’s office over the course of the past several months, and those contacts are continuing.”