Nearly four years ago, state authorities forced out top-level officials at the government-run workers’ compensation insurance firm, revamped the operation and launched a criminal investigation into reports of conflicts of interest, self-dealing and misuse of as much as $1billion.
Today, that probe involving the State Compensation Insurance Fund continues in silence as prosecutors face possible statutes of limitations that would bar some criminal charges and civil lawsuits.
The last publicly known activity occurred 18 months ago, when a search warrant was issued on a former board member in Redding, about 150 miles north of Sacramento.
“This seems to have dropped off the face of the Earth,” said Mark Webb, a vice president for rival Pacific Compensation Insurance Co. in Agoura Hills. “When you think of how much this played out publicly, it would seem that there would be at least enough to take this to the grand jury.”
Lawmakers also are starting to ask questions about the State Fund case.
“It’s time for the Legislature to check in with the district attorney’s office” and State Fund, said Assembly Insurance Committee Chairman Jose Solorio (D-Santa Ana). “Everyone deserves to know whether this case is being resolved or if it’s still being investigated.”
Former state Sen. Mike Machado, now a State Fund board member, said “the length of time and seeming lack of activity” made him frustrated with the investigation. He declined to comment further on the case.
The company’s chairwoman, Jeanne Cain, said only that “State Fund has long moved past the events” of 2007.
The investigation was headed by San Francisco Dist. Atty. Kamala Harris, whose office created a task force that included the California Highway Patrol and the state Department of Insurance.
But Harris is leaving in two weeks for her new job as California’s attorney general. Erica Derryck, a spokeswoman for the district attorney’s office, said only that “this is an open and active investigation by the task force.”
Insurance Commissioner Steve Poizner, whose office issued a scathing audit of State Fund three years ago, said that his staff has concluded its work on the case and that he could not discuss the status of the investigation.
The $21-billion company is a crucial part of California’s economy because it serves as the insurer of last resort, especially for small and medium companies that can’t get affordable workers’ comp coverage, which the state requires. This year, State Fund expects to write $1.1 billion in premiums for 150,000 California employers.
Troubles at the fund began in fall 2006, when the governor’s office pressured two board members to resign over possible conflicts of interest. Less than six months later, State Fund’s directors, after conducting an internal review, ousted the company’s president, James Tudor, and a vice president, Renee Koren.
The review uncovered questionable financial practices involving the sale of discounted policies through outside associations with links to certain board members.
An Insurance Department audit released in December 2007 found that while Frank DelRe and Kent Dagg were on the board, DelRe’s Western Insurance Administrators in Long Beach received $140 million in State Fund marketing fees and building-trades associations connected to Dagg received $125 million.
The audit said potential conflicts of interest occurred when DelRe and Dagg participated in decisions to raise commissions paid to businesses — including their own — that administered discounted group policies to associations of similar employers, such as contractors and restaurants.
Confidential State Fund board minutes indicated that the two men had no conflict of interest, the audit said. But “the fact that board members might have gained monetarily from the fund’s decisions creates the appearance of a potential conflict,” auditors said.
Since then, the investigation has gone largely quiet.
Legal experts said time could be running out.
Most state felony laws, including fraud, require prosecution within three years of the alleged crime, though prosecutors have leeway in some cases. Relevant civil laws carry four-year limits. Some criminal charges, such as embezzlement of public money, do not have statutes of limitations.
“These are complicated cases, and they do take some time,” said Robert Fellmeth, executive director of the Center for Public Interest Law at the University of San Diego School of Law and a former San Diego County deputy district attorney.
“But if you have the Department of Insurance, the California Highway Patrol and the San Francisco district attorney all contributing resources to an investigation, they should know where they stand after four years,” he said. “Those three agencies have a lot of power.”
If the evidence isn’t strong enough, investigators should tell the public and their presumed targets that the probe is officially over, he said.
“Maybe they don’t have probable cause or it turns out that it’s just circumstances of bad markets, stupidity or maybe there’s no law covering” the situation, Fellmeth said. “Then, fine, they should stop wasting resources on the inquiry or at least tell people that it’s over and there’s no grand jury. That’s fair.”
Sam Sorich, president of the Assn. of California Insurance Companies, an insurance industry trade group, said he was dumbfounded that nothing has happened publicly with the inquiry.
“It does seem a little curious that there’s been no action on the case,” Sorich said. “The allegations were very disturbing.”