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A new round of controversy over actions taken by former California Insurance Commissioner Chuck Quackenbush has been triggered by articles recently published in the Los Angeles Times.
The strongest of the allegations charges the California Department of Insurance (CDI) with covering up the purpose of a $400,000 payment made to the state by Lloyd’s of London in April 1999.
The payment came three years after Quackenbush had sided with Lloyd’s in a securities fraud suit filed by the Department of Corporations, settlement of which is credited with maintaining Lloyd’s right to do business in California.
One article maintained that, against the advice of a CDI attorney, Quackenbush’s staff allegedly produced a false invoice to justify the payment. An excerpt from that invoice, dated March 19, 1999, was reproduced alongside text from a Feb 25, 1999, letter, ostensibly signed by Lloyd’s attorney William C. Marcoux, of the law firm LeBoeuf, Lamb, Greene & MacRae.
Proposed draft language, later replicated in the Lloyd’s invoice, billed the $400,000, “In connection with efforts of DOI to review & respond to changes in the reporting structure, capital base & regulation of the Lloyd’s insurance market and educational briefing to regulators.”
It was further alleged that in reality, the money was used to pay legal fees incurred by Quackenbush while working on behalf of Lloyd’s in relation to the Department of Corporations’ suit. Quackenbush’s involvement was said to include the hiring of a top law firm to initiate legal action in favor of Lloyd’s.
Joseph P. Gunset, general counsel for U.S. regulatory affairs for Lloyd’s, denied that the British insurer had reimbursed the CDI for legal expenses. Lloyd’s also released the following response to the L.A. Times’ article: “Lloyd’s of London is often called upon by regulators in various states to co-operate in providing detailed information. Regulators audit Lloyd’s business frequently and will, on occasion, visit its headquarters in England. Under U.S. legislation, Lloyd’s is required to reimburse regulators for their expenses when carrying out this type of activity.
“Lloyd’s reimbursed the [CDI] for expenses incurred during work to monitor Lloyd’s and gain a greater understanding of its complex financial structure. Lloyd’s, in common with all other major insurers trading in the U.S., makes similar reimbursements to regulators in other states and continues to do so.”
It was also reported that in internal memos from the CDI, various officials expressed concern regarding how to pay the large legal fees incurred in the Lloyd’s case without attracting the attention of lawmakers to the expenditures.
Approximately 75 percent of the legal fees may have been paid through assets of bankrupt insurance companies, or estates, taken over by the CDI, according to the L.A. Times. When the Lloyd’s payment was received, $300,000 of it allegedly went to the estates that had first paid the legal costs.
Last November, current Insurance Commissioner Harry Low proposed that the Bureau of State Audits conduct an audit of the Conservation and Liquidation Office (CLO). In a letter to California Senator Jackie Speier, Low stated: “As the CLO has operated outside of the accountability practices ordinarily required of government agencies, all such practices should be audited.”
This would include “any lack of ordinary processes to prevent conflicts and favoritism among outside contractors, including the retention of attorneys, investment advisors, and other experts in the management of estates…In addition, my staff has identified a few estates that appear to lack appropriate internal control.”
The L.A. Times also reported that in the months preceding his resignation, Quackenbush took a number of overseas trips, paid for by various insurance companies, including one to London at Lloyds’ expense. Other destinations included Beijing and Amsterdam.
On the London trip, Quackenbush was accompanied by former CDI Deputy Insurance Commissioner George Grays, who recently pled guilty to a $250,000 kickback scheme involving monies from foundations created by Quackenbush with Northridge insurer donations. On some occasions, Quackenbush was allegedly accompanied by San Francisco attorney James Woods, managing partner for LeBoeuf, Lamb, Greene & MacRae.
William Portanova, an attorney representing Grays, confirmed that his client had accompanied Quackenbush on the London trip, during which the former Commissioner and aide were treated to first-class accommodations. Portanova told Insurance Journal that Grays’ original sentencing date of April 12, 2001, had been continued for about 90 days during his ongoing cooperation with federal authorities investigating the actions of the CDI during the Quackenbush regime.
Regardless of conclusions reached by anyone following the story, the important question now is—will the ongoing federal investigation turn up any hard evidence that Quackenbush is guilty of something criminal?
“That’s where it gets tough,” Portanova said. “For that reason, these cases are extremely difficult to bring into the courtroom…Ten suspicious transactions in a row still don’t add up to one provable one. You need facts—you need evidence.
“This is an extremely complicated case, even by federal standards,” Portanova continued. “The number of players, the amount of time and the intimate nature of some of these relationships makes it especially difficult for an investigation to move quickly.”
The way the insurance commissioner’s office was constructed during Quackenbush’s tenure also comes into play. “Frankly, the underlying legislation was shabby, so the ethical standards were not legislatively mandated as they are in other states, giving the commissioner lots more freedom financially,” Portanova said.
Scott Edelen, deputy commissioner at the CDI, said that Commissioner Low had decided to establish an Office of Ethics to be housed within the CDI’s Internal Audits and Information Security Office.
“This new operation will serve as the point of contact for employees to use and confidentially obtain answers to questions regarding proper conduct during the scope of their employment here at CDI,” Edelen said. “This office will also establish procedures for employers to report improper department activities and seek out whistleblower protections if necessary. This office and its functions will be a direct report to the chief deputy and also Commissioner Low.”
Low has also requested that a formal code of conduct for CDI employees be promulgated. This includes a policy under which CDI employees would not be allowed to accept such things as gifts, dinners and entertainment from regulated entities of the CDI on a going-forward basis.
Edelen said development of the code has been underway since Low’s first days in office. “It’s going to be fairly comprehensive,” Edelen said. “Everyone in the CDI will know soon exactly what’s expected of them.”