State-run insurer faces audit

Gov. Arnold Schwarzenegger on Wednesday said he was working with insurance regulators and the Legislature “to straighten out that mess” at California’s troubled State Compensation Insurance Fund.

“We have auditors that are involved in this, and we will know very soon what the reality is there. But we want to bring integrity back” to the fund, the governor said at a news conference.

Schwarzenegger’s remarks came as a state Senate committee launched hearings into reported mismanagement and alleged financial conflicts of interest at the government-controlled fund, the state’s largest insurer. Known as State Fund, it provides workers’ compensation insurance for 230,000 California employers.

The Senate inquiry brought additional scrutiny to a brewing scandal that led to the resignation of two State Fund board members last fall as well as the abrupt firing a week ago of the fund’s president and another top executive.

The fund’s board based the firings on the findings of an external review conducted by an outside law firm.

Meanwhile, California Insurance Commissioner Steve Poizner stepped in this week and ordered a “top-to-bottom” audit of the $6 billion-a-year fund. He assigned Insurance Department fraud investigators to look for evidence of criminal actions.

The state attorney general’s office has been briefed on the fund’s situation and is considering whether to conduct its own criminal probe.

Several people familiar with the case said investigators were looking at reported payments of hundreds of millions of dollars made to firms connected to the board members who resigned. The people asked not to be identified for fear of interfering with a possible criminal investigation.

The chief committee witness at Wednesday’s hearing was Jeanne Cain, State Fund’s board chairwoman. The Schwarzenegger appointee told members of the Senate Banking, Finance and Insurance Committee that she fully supported a review of the fund’s organization and financial management by its outside law firm.

“We ask for your patience and assure you that we will continue to take every step necessary to ensure it is conducted thoroughly and properly,” Cain said.

But don’t expect a quick solution to long-festering problems, she said.

Although the board acted quickly last week by firing the fund’s president, making bigger changes at the workers’ compensation insurer could take months or longer, she cautioned.

Governance reforms proposed by the State Fund board and Insurance Commissioner Poizner, such as creating a board audit committee and hiring a chief financial officer, would require the Legislature to pass laws that could take effect in January at the earliest, Cain said.

“The changes have to come from the Legislature,” said Sen. Mike Machado (D-Linden), the Senate committee’s chairman. “We all have to sit down and figure out how to fix this problem.”

Machado said he understood that some of State Fund’s problems were linked to abuses in the payment of so-called administrative fees to companies controlled by former board members.

The board members, who resigned in November, managed associations of employers in the restaurant, auto repair, contractor and other trades that qualified for discounted policies.

The former directors “were making millions transacting business with the very organization they were charged with managing,” Machado said. “The board thought there was significant impropriety to cause the dismissal of two individuals. It’s a conflict of interest and probably an abuse of power.”

Fired were State Fund President James Tudor and Renee Koren, a vice president in charge of group sales.

Interim President Lawrence Mulryan said a third person, whom he declined to name because of state personnel confidentiality rules, was placed on administrative leave. The unidentified executive was “close to Tudor,” Mulryan said.

Poizner has given the fund two weeks to make a number of structural changes if it wants to avoid being called before an administrative law judge in a formal regulatory hearing.

marc.lifsher@latimes.com