Failed Reciprocal of America Executives Sentenced for Role in Fraud

June 30, 2005

Two former executives of a failed malpractice insurer were sentenced in federal court this week as part of an ongoing fraud investigation that has helped expose troubling practices in the industry.

Kenneth R. Patterson, former president of Reciprocal of America, was sentenced to 12 1/2 years for conspiracy to commit insurance fraud and two counts of mail fraud. Carolyn Hudgins, former executive vice president, was sentenced to five years for conspiracy to commit insurance fraud.

Both defendants, who are in their 50s, pleaded guilty in January and agreed to cooperate in the investigation.

Richmond-based Reciprocal insured tens of thousands of doctors, lawyers and hospitals. Its collapse in late 2002 left policyholders scrambling to find insurance, and thousands may be liable for malpractice and other claims.

“It’s a very devastating case in terms of the effects on people,” Assistant U.S. Attorney David T. Maguire told the court.

Reciprocal’s collapse was followed by a federal investigation and several court cases that have ensnared other large insurers.

Virginia and Tennessee regulators have accused Reciprocal and its business partners, including Berkshire Hathaway Inc.’s General Re insurance unit, of hiding the failed insurer’s deteriorating finances through fraudulent financial transactions. Their cases have been consolidated in a federal court in Tennessee, where Reciprocal’s three affiliates were based.

The probe also prompted General Re to disclose a questionable transaction with American International Group Inc., one of the world’s largest insurers, according to the office of New York Attorney General Eliot Spitzer, who already had been investigating AIG.

In June, two former General Re executives pleaded guilty in federal court in Alexandria, Va., to conspiring to file false financial reports that made AIG’s books appear better than they were.

Separately, Spitzer filed a civil fraud suit against former AIG Chief Executive Officer Maurice Greenberg, another former executive and the company in May.

Reciprocal’s finances began to deteriorate in the late ’90s. The defendants admitted to federal prosecutors that they concealed and misrepresented the company’s financial condition in a bid to prevent Reciprocal’s collapse.

Patterson admitted to one scheme in which the company used fraudulent write-downs of reserves for future losses and backdated the write-downs.

Both Patterson and Hudgins also admitted to fraudulently transferring $10 million in capital to an offshore reinsurer that had management common to Reciprocal. This transaction should have resulted in a reduction to Reciprocal’s surplus capital. Instead, the two defendants mischaracterized the transfer as an asset.

“The defendants took extreme measures to circumvent systems that protect subscribers and insured individuals,” Paul J. McNulty, U.S. Attorney for the Eastern District of Virginia, said earlier this year. “In doing so, they destroyed one of the largest insurance companies in Virginia.”

Patterson’s attorney, Theodore Brenner, said his client is a good man who made some bad decisions. Unlike other executives in the news, he said, Patterson does not enjoy a high standard of living.

An attorney for Hudgins said the former executive was only trying to do damage control as Reciprocal fell apart. Her friends spoke at the sentencing, describing her as honest, kindhearted and caring.

But Caprisa Scruggs, a former Reciprocal employee who says she was left stranded after the company’s demise, says she felt as if Hudgins’ friends were describing a person vastly different than the one she knew.

“I just hope they get what they deserve,” Scruggs said of the defendants.

Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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