Powerful Friends, Enemy Insiders and Embezzlement Charges
We are destroyed as of today,” Michael Segal, owner of Chicago-based Near North National Group, told me several weeks ago in his 20th-floor office in the John Hancock Tower. The group’s subsidiary, Near North Insurance Brokerage Inc. (NNIB), was Chicago’s third-largest brokerage as recently as 2002 with annual revenues of $115 million but is now a shell of its former self. Segal’s trial on federal charges that he embezzled more than $20 million from Near North’s premium fund trust is set to start in April 2004. He has pleaded not guilty.
In spite of the intense public scrutiny brought by his arrest by federal authorities in January 2002 and the indictment filed shortly thereafter, Near North apparently managed to maintain good relationships with its key carriers and clients. During our two-and-a-half-hour interview, Segal even shared supportive letters he’d received from executives at AIG and Chubb, among others. None of the executives returned calls seeking comment on Near North or Segal.
At the end of 2002, Near North National Group even boasted an 11 percent revenue increase from the previous year, to $120 million. But when the government added NNIB itself to defendant’s table on seven counts of fraud, things fell apart. What followed was a series of short-lived agreements to sell the brokerage, which would seemingly be an attractive investment, considering the high-caliber clients Segal had acquired in 30 years of Windy City politicking and operating.
Let’s (not) make a deal
Even before the indictment against the brokerage a deal with Chicago-based private equity firm Frontenac Co. fell through. Frontenac President Rodney L. Goldstein, an old friend of Near North President William Bartholomay, did not return a call seeking comment on why the deal fell through.
“Frontenac had a good strategy to enter the insurance business, but they received pressure from competitors and other interested parties scared them off,” Segal claimed. “It doesn’t help that Aon is one of the largest investors in Frontenac.” Aon, the world’s No. 2 insurance broker, is the villain in Segal’s version of this tale. More on that later.
In July 2003, Chicago-based brokerage Hub International Ltd. signed a purchase proposal but decided just one month later to back out.
“Although we had strong interest in this acquisition, we were unable to negotiate terms that match our investment discipline and suit our structural objectives,” Hub CEO Martin Hughes said in a statement. He too could not be reached to further explain the decision.
“I was disappointed not to deal with Hub,” Segal said. “You could raise the question that they were scared off. … Hub was also concerned they didn’t have the people to handle it. We would’ve been more valuable to Hub.”
Ultimately, it would take the permanent loan of 105 Near North employees to convince another Chicago brokerage, Mesirow Insurance Services Inc., to assume the brokerage’s accounts. Mesirow CEO John Tyree told Insurance Journal that about 4,000 accounts were acquired from Near North, accounting for about $25 million to $30 million in premium volume. Tyree said Mesirow has been able to retain “the vast majority, maybe 98 percent” of the accounts, about 85 percent of which are corporate.
“We’d been looking to acquire the business for some time,” Tyree said. “I made several offers, but was continually rebuffed.” Segal was apparently ready to deal this time. Tyree said there was “no way” the accounts would be sold back to Near North in the case of a not-guilty verdict.
Role of premium fund trust account
But we’re putting the cart before the horse here, aren’t we? What was that about embezzling $20 million? Yes, $20 million in only 10 years, according to the government’s indictment, filed in the U.S. District Court of Northern Illinois by crusading U.S. Attorney Pat Fitzgerald. The indictment alleges that Segal embezzled the Near North money by running it through a bogus postal stamp account. Title 50, Part 3113.40 of the Illinois Administrative Code requires producers who deposit or hold premiums for more than 15 days to keep them in a separate premium fund trust account (PFTA).
“The account itself acts as a holding either for monies coming from the company due to the insured or money from the insured paid to company paid through producer in the middle,” according to Bill McAndrew, a spokesman for the Illinois Department of Insurance. The DOI does not conduct any examination of a producer’s PFTA unless spurred by a complaint, McAndrew said. A DOI investigation of Near North’s accounting was begun shortly after Segal’s arrest, but McAndrew would not comment on the status of that investigation other than to say it is ongoing.
The government alleges that Segal essentially used the PFTA as an operating account, and that by certifying to the DOI that he was properly maintaining a PFTA, he committed repeated acts of mail and wire fraud. The PFTA ran deficits ranging from $5 million in 1990 to $24 million in 2001, the indictment alleges. External audits in 1996 and 1999 revealed the severe shortfalls, but Segal refused to take any action, according to the government.
The government also indicted Near North accountant Daniel Watkins, but he is attempting to work out a guilty plea to cooperate in the prosecution’s case. The government alleges that he regularly handed over huge sums of the brokerage’s money for Segal’s personal and entertainment expenses.
For his part, Segal has explained the missing funds as a computer mix-up. During the period of the 1990s, Segal told me Near North used the Sagitta system as well as Applied Systems, both of which are very reputable.
“The systems are only as good as what you put into them,” he said. “Ask around the industry. No one’s very happy with the systems available.”
According to the government, Segal not only misused the PFTA by using funds as an operating account, but he allowed many customers to carry credit balances, which is illegal under Illinois law. At the end of each year, the government alleges, Segal would order his department heads to put together a list of customers with credit balances – that is, who were owed money by Near North, money they should not have been owed for that long at time to begin with.
Segal would then go through the list, picking and choosing which customers would be paid. The rest would simply be “written off,” according to the indictment. A document from 2000 attained by the prosecution showed more than $1.2 million in “credit write-offs.” A confidential informant told the government that Segal allegedly ordered that customer invoices not reflect any credit balances, but when Near North changed to a new accounting system four years ago this information could not be omitted. At that point, the government alleges, Near North stopped sending out invoices altogether.
Insiders tip off feds
So how did the feds get the goods on Segal? That’s where the story gets really good. The three confidential informants the government relies on are former Near North employees, who got much of their documentary evidence from another man, David Cheley. He had been employed in the brokerage’s information technology department.
Segal’s lawyers have presented evidence the government has not disputed showing that over the course of a year Cheley hacked into Near North’s computer system to pull out files that would be damaging to Segal and the company. Segal’s defense and whatever shadow of a future his company has relies on the argument that this was a violation of his constitutional rights.
Segal filed a civil lawsuit against the three former employees—Tim Gallagher, Matt Walsh and Dana Berry—alleging that Aon CEO Pat Ryan, a fierce rival, cooperated with the Near North turncoats to finally bring him down. The defense’s theory is that the three ex-employees wanted to wrest control of the company from Segal and when they couldn’t, decided to destroy him.
“You don’t have to compete with a company that’s no longer around,” Segal said.
In filings, prosecutors have scoffed at the argument, saying Segal is concocting conspiracy theories to undermine the witnesses’ credibility and that the PFTA shortfalls preceded the whistleblowers’ time at the company. An Aon spokesman said Ryan refuses to respond to any allegations made by Segal.
A constitutional question
I asked Segal if, given the evidence, he would be satisfied if he were found guilty, but the employees who stole company documents were in turn prosecuted for their crimes.
“This is a question of my constitutional rights, not a question of my being happy,” he said. But in fact, it is perfectly constitutional for the government to use evidence that was stolen by private parties, so long as the government took no direct part in it, according to UCLA law professor Eugene Volokh.
“The exclusionary rule is meant to deter government misconduct,” he explained. “If government takes advantage of private search and was no way in cahoots with that private party they’re perfectly free to do so. For example, a computer hacker breaks into a computer, finds child porn and then turns it over to the police anonymously. Well, the police can say, ‘We’re not particularly interested in hunting you, Mr. Hacker, but we’ll go after this guy with the child porn on his computer.”
However, if the government initiates the illegal private search, then there would be a constitutional problem, according to Volokh.
“If the cops say, ‘Hey, you know, White Hat Hack, we’re really curious about what happened there. Sure would be nice if we had some information about it.’ That would not be allowed. And of course there are some gray areas in between.”
Segal’s defense lawyers are hoping to exploit the gray area in this case. If they can prove the government was not only aware of but actively encouraged illegal private searches to further its case, they may be able to have the evidence suppressed.
In August, the government had to correct a previous filing in which it had denied knowing about any of Cheley’s hacking or that the documents they received came about as a result of hacking.
A source familiar with Segal’s legal situation said he has already spent $6 million on legal bills for the civil and criminal proceedings. Segal said the figure was too high, but admitted: “The process is long and expensive, especially if you’re a poster child for the media. … As soon as the government is after you, you have very little leeway. You’d be amazed at the amount of time and resources it takes. It feels like you’ve gone through law school in the time it takes to defend yourself.”
AIG and Fireman’s Fund each lent Segal $10 million, allegedly to help replenish the depleted PFTA.
Yet another wrinkle in all of this is Segal’s reputation as a “clout-heavy” figure in Chicago politics. Yes, we saved the best for last: Segal began his insurance career as a political assistant to 42nd Ward Committeeman George Dunne, who also had a small insurance agency, as many Chicago politicians have for decades. The operation typically worked like this: If you wanted to get anything done in the ward — open a bar, store or restaurant, say — you made sure to buy your insurance from the alderman’s agency. After getting his law degree from DePaul University, Segal decided for good to stay away from elected office and do his business in private. He turned the small Near North Insurance Agency into a powerhouse brokerage with offices in Chicago, Nevada and Los Angeles.
The agency’s growth was aided by Segal’s relationships with influential people. To take just two examples, Near North was awarded no-bid contracts to broker nearly all the contracts on a $1.4-billion O’Hare Airport redevelopment run by the city in 1985, as well as the $205-million buildout of the McCormick Place convention center.
With a little help from my friends
“I’d be lying if I told you it didn’t help to have friends,” Segal told reporters at the time. Today he says that only 4 percent of Near North’s business comes from public entities, and 95 percent of that business is bid through requests for proposals.
Especially during the condominium boom of the early to mid-1970s, Segal earned the reputation as the man to seek out to get your development sped through the system. A source who used to work with Segal said this “value-added” service may explain why so many customers didn’t seem to complain that their premiums were perhaps higher than they should have been.
Segal happened to be good friends with Mayor Richard M. Daley’s brother, John Daley, who is a Cook County Commissioner and who has earned as much as $400,000 brokering O’Hare Airport contracts, according to a former top executive at Near North. Homer Ryan, the son of former Gov. George H. Ryan, is also a close friend and Near North broker. The elder Ryan was indicted last December by the U.S. Attorney’s Office on charges of racketeering. Segal also reportedly gave premium discounts – which could be illegal under anti-rebating laws – to politically powerful friends such as 42nd Ward Alderman Burton Natarus and ex-con U.S. Rep. Dan Rostenkowski.
I asked Segal if it was true he had given $313,000 to 110 influential individuals on a so-called “VIP list” of Near North clients. He paused before answering and said: “Repeat that question to me exactly as you asked it.” I did.
“No,” he said.
“Well, did you give Burton Natarus a premium discount?” I asked.
“No comment,” he said.
With so many well-placed friends, it’s likely the government thought it could get Segal to turn on his friends. Though Segal told me that “the government is not interested in any level of cooperation. People have made too much an issue of this,” he told Chicago Tribune columnist Carol Marin that U.S. Attorney Dean Polales told him, “You know people, you have information, you could work with us going forward.”
Don’t look back
Nothing came of it, of course, and it is now probably too late for Segal to turn back. Most pressing of all are the hands of time, which can never be turned back, and push on toward that court date in April.
“I have no big anger at the government,” Segal said in a reflective moment. “I have some disappointments. I’m extremely disappointed, but I’m not angry at [Fitzgerald]. … This is a political town. There’s a whole history and patterns of segments of the government focusing on what’s going to attract attention.
I’m more looked at as a political person as opposed to someone who created an insurance business hopefully thought of as strategically put together. …
“If I was a DA and someone came to me and said, ‘You could get a real hot case,’ I might pursue it,” he said. “I know that seems self-serving.”
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