Kentucky Central Insurance: Latest Ethics Issue in Gov.’s Race

By | November 6, 2007

Kentucky’s race for governor between Democrat Steve Beshear and Gov. Ernie Fletcher looked like it would focus on the ethics of the Republican incumbent, who spent much of his first term battling a hiring scandal.

In the closing weeks of the campaign, however, Fletcher has seized on ethical questions about Beshear’s legal work in a complicated insurance company liquidation that the Fletcher campaign has dubbed “Kentucky’s Enron.”

Both sides claim a just-released 1995 report bolsters their positions: Fletcher says Beshear and his former law firm acted unethically and hampered efforts to bail out the Kentucky Central Life Insurance Co., while Beshear contends the report negates Fletcher’s claims.

Throughout a bruising three-way GOP primary in the spring, Fletcher had to almost constantly defend himself against claims the hiring scandal left him too politically weakened to withstand a Democratic challenge in the fall.

Fletcher’s 2006 indictment on charges that he illegally rewarded political supporters with protected state jobs was dismissed in a deal with prosecutors, after the governor pre-emptively pardoned his entire administration and invoked his Fifth Amendment right against self-incrimination.

However, a special grand jury said Fletcher had approved a “widespread and coordinated plan” to skirt state hiring laws. Fletcher called the special grand jury’s investigation a political witch hunt by Attorney General Greg Stumbo, a Democrat.

The general election campaign began with Fletcher focusing his attacks on Beshear’s call to legalize casino gambling. Fletcher said social ills would follow if Beshear succeeded in getting the Kentucky Constitution amended to allow casino gambling. Beshear claims casinos could bring $500 million annually in state revenues.

Then Kentucky Central Life Insurance Co. emerged as a campaign issue after polls showed Fletcher trailing Beshear by 15 to 23 percentage points.

“At this point, the Fletcher campaign is grasping at straws because that’s all they’ve got,” said Michael Baranowski, a political scientist at Northern Kentucky University.

Kentucky Central once had 1,100 to 1,200 employees and had billions of dollars in assets. It went bankrupt in the early 1990s, and in 1993 the state Office of Insurance seized the company and put it into rehabilitation.

Beshear’s firm, Stites & Harbison, was hired to serve as general counsel to rehabilitator Donald Stephens, who was the state insurance commissioner.

But Stites & Harbison already was the lawyer for the Bank of Louisville, whose holdings included millions of dollars of securities put up as collateral for a loan connected to Kentucky Central in a complicated real estate deal.

The bank had loaned a developer about $15.5 million between 1989 and 1992. Kentucky Central backed the loan by depositing $15.65 million in securities at the bank, and agreed to buy the developer’s loan from the bank if it defaulted.

In 1993, however, the bank liquidated the securities and used the money to cover the loan, even though it was not in default.

That prevented the securities from being turned over to the Office of Insurance. The bank later agreed to a $27 million settlement with the insurance office.

Stephens asked another law firm in 1995 to look into allegations that Stites & Harbison had a conflict of interest representing the Office of Insurance while continuing to represent the Bank of Louisville.

Its report, not released until early October, at the request of the Lexington Herald-Leader and The (Louisville) Courier-Journal, said Beshear was not directly involved but had “general knowledge” of the conflict of interest and should have told the insurance commissioner.

Stites & Harbison Chairman Kennedy Helm III said the firm has served honorably on the case for 15 years. Beshear has said he and the firm acted properly, noting that no ethics complaints were ever filed in the case.

Retired Jefferson County Circuit Judge Richard Revell, who was brought into the case to look into the actions of Beshear and his former law firm, dismissed the matter, recently calling it “a dead issue.”

Nevertheless, Fletcher’s campaign has aired television commercials accusing Beshear of participating in a cover-up and claiming his former law firm paid “hush money” to keep the ethics report secret.

Fletcher and other Republicans have tried to draw parallels to Enron, which was the seventh-largest company in the United States before its collapse in 2001. The Enron failure claimed thousands of jobs, more than $60 billion in stocks and more than $2 billion in pension plans.

An undecided Democrat, retired Paducah businessman William Usher, said the Kentucky Central issue has become so intertwined with campaign rhetoric that most people aren’t sure what to believe.

“I don’t think most people understand it,” Usher said. “I don’t put much stock in it. I couldn’t draw a conclusion either way.”

Kentucky voters are at the polls today.

Associated Press correspondent Roger Alford contributed to this report.

Topics Kentucky

Was this article valuable?

Here are more articles you may enjoy.