Zalma's Insurance Fraud Letter
Saturday, June 16, 2007 | 688 | 0 | min read
By Barry Zalma
As you read through this rather long edition consider the fact that convictions for insurance fraud vary from terms of as little as a few days to 25-years in prison.
This is ridiculous. It is essential if there is to be an effective anti-fraud campaign it is necessary that those few who are caught and prosecuted receive reasonable and objectively regular punishment. As long as fraud perpetrators can believe that the punishment is less than the amount of profit they will make the crimes will continue.
Fraud Will not Collect $27 Million Insurance Verdict
On May 3, 2007, a federal appeals court reversed a $27 Million verdict. for a former insurance agent. The court reversed one of the largest verdicts ever awarded in South Dakota.
Eugene Kent of Sioux Falls, South Dakota sued United of Omaha Life Insurance Co. of Nebraska, a subsidiary of Mutual of Omaha. In September 2005, a federal jury in Aberdeen awarded Kent $27.4 million for being wrongly imprisoned, lost income and punitive damages.
Kent lost his insurance license and spent two years in federal prison after being found guilty of two counts of mail fraud. A judge later overturned the convictions after concluding Kent's lawyer was ineffective.
Kent sued United of Omaha, claiming it should have provided certain evidence pertaining to the case when he was sentenced, but his lawyer at the time never requested the documents. The jury awarded Kent $17.5 million for punitive damages, $7 million for loss of liberty for his two years in prison and $2.9 million for lost income. Kent had sold life insurance for approximately 12 years and operated his own insurance business, Kent Insurance, Inc., for six years before he agreed in 1985 to serve as the exclusive agent for the Independent Community Bankers Association (ICB) in its search for a health insurance provider. Kent first contracted with Central Life Insurance Company (Central) to provide health insurance for ICB, but in August 1989 Central informed Kent that it would no longer offer group coverage and that he needed to find a new provider. Kent approached United later that year and it was agreed after negotiations that United would provide health insurance for ICB beginning in January 1990 and that it would designate Kent as the insurance agent for these transactions. Kent received an 8% fee from United for the ICB account, and he rebated a portion of his fee to ICB.
In late 1990 Kent initiated talks with United about converting the fully insured ICB health insurance plan into one that would be self insured and using his financial services entity, Kent Financial, Inc., as the plan sponsor. Although some member banks had expressed an interest in a self insured policy, Kent did not tell ICB that he was discussing conversion of the health insurance plan with United nor did he inform United that he did not have authorization from ICB for the proposed conversion. He discussed the conversion with United's regional manager, Dick Norberg, who sought advice from its legal department about the self insured plan. Norberg then told Kent about requirements for converting the plan, such as the need for new descriptive materials and a joint checking account with Kent. They agreed that the plan sponsor would be required to maintain a sufficient reserve while United would provide stop-loss coverage for excessive losses and services pursuant to an "administrative services only" agreement. Norberg also informed Kent that United's legal department considered it likely that his practice of rebating a portion of his fee to ICB was illegal.
Although Kent never told ICB that he had switched the plan into one that was self insured and still had not informed United that ICB had not authorized the conversion, United and Kent began treating the ICB plan as being self insured beginning in January 1991. United sent Kent a contract for the administrative services provision later that month, but Kent did not sign it because it listed ICB as the plan sponsor and not him. United also sent Kent a check made out to ICB for $150,000 based on unused premiums paid in 1990, and Kent deposited the check in the joint account he had opened with United. Kent withdrew $10,000 per month from the joint account as his fee and used the account to pay claims for the 1991 year.
The state insurance division commenced proceedings. As a result, United agreed to a penalty of $42,500, and an administrative law judge recommended that Kent's insurance license be revoked. The insurance division revoked the license in August 1995, concluding that Kent had "deliberately concealed" from ICB that he was converting its fully insured plan into a self insured plan and that he had also withheld from United the fact that he was acting without authority from ICB. Kent appealed to the state circuit court which held that the revocation was justified, and the South Dakota Supreme Court affirmed. [Kent v. Lyon, 555 N.W.2d 106, 118 (S.D. 1996)]. Kent later reapplied for a new license, and the insurance division issued one in 2001, based in part on the fact that Kent had paid back to United the total amount of the premium checks he had deposited in his own account.
The United States Attorney also initiated a criminal investigation into Kent's relationship with ICB and United. A 61 count indictment issued in 1996 indicting Kent for mail fraud and money laundering. Kent was found guilty by a jury on two of the mail fraud counts which charged that the mails had been used to deposit the ICB checks into the joint account. At trial Kent's former secretary and Norberg both testified that the mails had been used, but prior to sentencing Kent began to question whether the checks had actually been sent through a private courier. Kent sought to obtain the shipping records from United, but it would not release the documents without a subpoena. The district court declined Kent's request for a subpoena, and the government did not consent to one. Kent never sought a subpoena from the clerk of court but instead filed a motion for a new trial. Attached to the motion were his former secretary's affidavit stating that her testimony had been in error and evidence from his own records indicating that a private courier had been used to deliver one of the checks. The court denied Kent's motion for a new trial and sentenced him to 27 months imprisonment.
The mail fraud law at the time only applied to items sent through the U.S. Postal Service, not UPS. United of Omaha had documents showing the checks were sent by UPS, but Kent's lawyer never requested those documents, something the judge said the attorney should have done.
The Eighth Circuit, reversing the massive judgment, concluded:
Based on evidence presented to the insurance division, the South Dakota Supreme Court concluded that Kent had violated "seven provisions of the Insurance Code" and that the decision to revoke his license was not "too harsh a penalty" based on Kent's misrepresentations, fraudulent conduct, and general dishonesty. Kent v. Lyon, 555 N.W.2d 106, 117-18 (S.D. 1996). [footnote omitted] The court found specifically that Kent made "material misrepresentations to United about his authority," that he "fraudulently concealed material facts from ICB," and that he "evinced a dishonesty in the manner in which he conducted his affairs." [citation omitted]. The court also concluded that Kent "cannot now blame United" because it was his responsibility to inform ICB of the change in its policy, id. at 112, and that "United's conduct was far less egregious than his."
Concluding that there was no fiduciary relationship between the insurer and Kent and that Kent was responsible, by his fraudulent conduct, for his problems and his incarceration the court could not allow the verdict to stand.
Wow! 22 Years in State Prison.
On May 22, 2007, Magdalena Zanoletti, 54, a medical clinic administrator, and her husband, Ramon Alfonso Zanoletti, 53, a law office administrator, were sentenced in Los Angeles Superior Court for insurance fraud that took in more than $100,000, which in this case is an aggravated white collar crime that enhances the sentence.
The Zanolettis were each sentenced to 22 years in state prison, and ordered to pay $200,000 in fines and $108,533 in restitution.
After nearly three weeks of trial that included 22 witnesses and thousands of pages of evidence the Zanoletti's were convicted. Magdalena was convicted on 38 counts of insurance fraud; Ramon was convicted on 19 felony counts of insurance fraud and the unauthorized practice of law. The case was prosecuted by Los Angeles Deputy District Attorney Alker.
In March 2004, the Los Angeles Auto Insurance Task Force (AIFTF), consisting of the California Department of Insurance's Fraud Division, the California Highway Patrol, and L.A. District Attorney Steve Cooley's Office, began investigating a staged auto collision ring. Evidence from the December 2004 execution of multiple search warrants and arrest warrants related to that investigation led AIFTF investigators to discover the insurance fraud ring in this case.
This ring involved the Zanolettis, Dr. Clarence E. Franklin, Jr., DC, and Franklin Chiropractic, his Los Angeles medical facility. In June 2006, the Zanolettis, Franklin and an additional 20 suspects were arrested. Next month, co-defendant Franklin is set to begin his own trial proceedings.
Under the scams in this case, Ramon paid cappers for referrals of "victims." As every fraud investigator knows a capper (called a "runner" in some states) is an individual involved in recruiting false victims of accidents to submit fraudulent claims to insurance companies; cappers are paid either a flat fee or a percentage of the total receipts from the false claims. Ramon then referred the claimants/patients to Franklin Chiropractic, where Magdalena, his wife, instructed patients to sign-in for multiple medical treatments. These treatments were never received, but subsequently used to create false medical reports and billings.
Some of the collisions that Ramon Zanoletti purchased from cappers were staged collisions on L.A. County and Orange County freeways and surface streets. Stagers targeted innocent motorists, frequently light duty commercial vehicles, high-dollar vehicles, SUVs, and elderly drivers - drivers most likely to be covered by insurance.
The AIFTF was assisted by the special investigations units of Mercury Insurance, State Farm Insurance, Bristol West/Coast National, USAA Insurance, Western United, Viking Insurance, Automobile Club of Southern California, Hartford Insurance, Geico Insurance, Wawanesa Insurance, Progressive Insurance, and Infinity Insurance, as well as the U.S. Postal Inspection Service and the National Insurance Crime Bureau.
Presidential Candidate -- Insurance Fraud Is Due to Insurers
On May 14, 2007 U.S. Senator Barack Obama said in a press release that as president, he will end government subsidies to insurance companies who have been using deceitful and illegal methods to enroll seniors in private Medicare plans that can result in higher co-payments and fewer health care choices.
Recent news reports have detailed how insurance companies aggressively market private Medicare plans to seniors - in some cases even forging their signatures and providing false information. The private plans under Medicare receive higher subsidies for services than under traditional Medicare. For some seniors, these plans can actually increase their co-payments and reduce their health care choices.
"We shouldn't be rewarding the insurance industry for deceiving and defrauding our seniors, we should be doing everything we can to stop them," Obama said. "No one's corporate bottom line should stand between the American people and the quality, affordable health care they deserve.
The Medicare Payment Admission Commission, an independent group that advises Congress on the Medicare program, recently reported that on average the government pays 12 percent more to private Medicare plans than it costs to treat comparable beneficiaries through traditional Medicare. These excessive subsidies cost the government billions of dollars every year. The Des Moines Register has called these plans a "bad deal for taxpayers."
Obama proposed eliminating taxpayer-funded giveaways to the insurance industry, which would take away the incentive for companies to push seniors into these private plans and one that would save us up to $150 billion over the next ten years. Obama will use those savings to strengthen and preserve Medicare and other public health programs.
Enrollment in private Medicare Advantage plans has increased 39 percent in the last year and a half. Over 53,000 Iowa seniors are enrolled in Medicare Advantage plans.
Fraud Fight Advances
According to the National Insurance Crime Bureau (NICB) property and casualty insurance companies in the United States are taking aggressive action to increase the attack on the insurance fraud problem based on a two-year, industry-wide review of their fraud fighting efforts.
While individual insurance carriers continue to refine and expand their aggressive anti-fraud processes into their claim-handling procedures, today's more sophisticated criminals create a special challenge according to the NICB. Fraudsters are much more insidious in that they will simultaneously target numerous companies with multiple fraudulent claims generating millions of dollars in bogus payments. This kind of criminal enterprise requires more than an individual company is able to withstand.
Over the last two years various committees were created and staffed with industry professionals charged with identifying weak spots in existing fraud-fighting efforts. These groups recently completed their work and found that the industry's approach to fraud was fragmented and inadequate. While there are isolated examples of effective anti-fraud programs, the NICB says that a nationwide, coordinated effort on multiple fronts is necessary to reduce this costly economic problem.
The committees identified five "pillars" as being critical components to an effective fraud-fighting structure. They are:
* Public Awareness
* Legislative Advocacy
* Data Analysis
The NICB Board of Governors is required to develop an Integrated Business Plan (IBP) for a new fraud fighting organization incorporating the five pillars based on the NICB model. Overseeing this effort is an Executive Steering Committee staffed by Mark C. Russell, Vice President and Chief Administrative Officer, Grange Insurance; Susan Q. Hood, Claims Vice President, State Farm Mutual Automobile Insurance Company; William J. Breslin , Senior Vice President, Claims Service, USAA; Robert M. Bryant, President and Chief Executive Officer, NICB; and Dennis Jay, Executive Director, Coalition Against Insurance Fraud.
Five committees representing each of the pillars have been established. They are staffed with professional law enforcement officers, state insurance regulators, prosecutors, insurance executives, researchers, legal experts and consumer advocates. They will examine the current practices within each of the five areas looking for successful operations, as well as missing elements and/or weaknesses. This will be followed by a process of incorporating "best practices" into each committee's deliberations and, finally, producing a report of findings and recommendations.
We can only hope that insurers and public agencies will take this effort seriously. I have, through ClaimSchool, created multiple insurance claims and insurance fraud training courses in a strategic alliance with North American Training Group that can be used by individual insurers to train their people easily, on line, at ClaimSchool on Line at http://www.claimschool.com.
Three Days in Jail & Restitution for WC Fraud
On May 2, 2007, Los Angeles Superior Court Judge David Horwitz ordered Rogelio Mata, owner of Rogma Construction Services, to pay full restitution to State Fund of $100,000 after pleading no contest to one count of California Insurance Code Section 11880 - insurance premium fraud. Judge Horwitz also sentenced Mata to three days in county jail.
Mr. Mata operated Rogma Construction Services out of his Los Angeles home, and represented his company to State Fund - a workers' compensation insurance carrier - as a construction clean-up service rather than a construction demolition company. Construction demolition requires a more expensive category for workers' compensation premiums. Rogma Construction Services had 15 to 20 employees, and while Mata reported the correct total payroll to State Fund, he reported it in a lesser-rate class code in order to pay less for his premiums.
The fraud was discovered after State Fund received a tip from one of Rogma's business competitors. State Fund's Los Angeles District Office fraud liaison then conducted a detailed investigation of Rogma's business records which included a review of over a dozen holders of certificates of workers' compensation and found all had interior demolition work done by Rogma.
In addition, State Fund's Fraud Investigation Program found that Rogma Construction Services had taken part in the television show "Extreme Make Over, Home Edition" as an interior demolition contractor. Rogma Construction's website also listed the interior demolition services it performed.
State Fund's Fraud Investigation Program submitted its suspected fraud case to the Department of Insurance and the Los Angeles District Attorney's Office for their review. Charges were filed against Mata in September 2006 by the DA's Office. Mata was originally charged with four counts of workers' compensation insurance premium fraud.
Mata had been insured with State Fund from 1985 to 2005.
Three Years for WC Fund Fraud
On May 7, 2007 an investment marketer who pleaded guilty to conspiring to bribe a former official at the state's insurance fund for injured workers was sentenced to three years and one month in prison by an U.S. District Judge David Dowd in Ohio.
Clarke Blizzard acknowledged in court documents that he agreed to provide "things of value' to Terrence Gasper, the former chief financial officer of the Ohio Department of Workers' Compensation, in exchange for agency business.
Gasper pleaded guilty last June to accepting bribes in exchange for doling out agency business and awaits sentencing as he cooperates with authorities.
More than $300 million in losses were reported, and the investigation reached all the way to former Gov. Bob Taft, who pleaded no contest to charges that he failed to report golf outings and other gifts on his disclosure forms. Taft was fined $4,000.
A state audit released in March cited mismanagement and a lack of oversight as the keys to scandals at the agency. The report by Auditor Mary Taylor's office also found during the review of operations for 2005 and 2006 that some key financial documents had been destroyed.
The scandals started with rare-coin dealer Tom Noe, now imprisoned for stealing from a $50 million rare-coin investment he managed for the bureau.
Ex-Insurance Adjuster Pleads Guilty to Embezzlement
In May 2007 a Pennsylvania man pleaded guilty to embezzling more than $400,000 from an insurance company and using the money to buy expensive sports cards, sports memorabilia and vehicles.
Richard Slonchka, of Kennedy Township, Pennsylvania was a claims adjuster with Universal Underwriters Insurance Co., now known as Zurich, according to Federal Prosecutors who claimed, and to which Slonchka admitted, between April 1997 and April 2002, Slonchka had the insurance company write 140 checks totaling more than $400,000 purportedly for workers' compensation claims he had approved. The money, instead, was used to buy various goods for himself. Slonchka is scheduled to be sentenced August 31, 2007.
Barrel Racer Pleads Guilty to Fraud Charges
On May 14, 2007 Texas Mutual Insurance Company reported that a Houston woman pleaded guilty to workers' compensation fraud-related charges in a Travis County district court. The court sentenced Sheryl K. Reynolds to a 10-year probation and ordered her to repay $21,976 in benefits and pay a $1,000 fine.
According to Texas Mutual, Reynolds reported a job-related injury while working as a secretary for B-K Company in Houston. She claimed she was unable to work as a result of the injuries, and Texas Mutual Insurance Company began paying her disability income benefits.
An investigation uncovered evidence that Reynolds continued to work while she collected benefits. She was also an active barrel racer.
Mother & Son Chiropractors Imprisoned
A mother and son were imprisoned on May 17, 2007 for their roles in a corrupt organization in which they committed numerous acts of insurance fraud while operating a chiropractic business.
Dr. Richard J. Walinsky, 35, of Holland, Bucks County, who operated All-Care Chiropractic in Northeast Philadelphia, was sentenced to one to two years in the Montgomery County Correctional Facility and 10 years probation after he pleaded guilty to multiple counts of corrupt organizations, insurance fraud and theft by deception in connection with incidents that occurred between January 2000 to June 2003.
"He was motivated by nothing but greed when he created this corrupt organization," said Montgomery County Judge Joseph A. Smyth, referring to Walinsky. Walinsky's mother, Eileen Nelson Means, 59, of Palmyra, N.J., who worked as her son's office administrator, was sentenced to one to 10 years in a state correctional facility after she pleaded guilty to similar charges in connection with the fraud.
Walinsky, the father of two children, appeared stunned and his wife wept, when Smyth rejected defense lawyer Marc Steinberg's request that Walinsky be allowed more time to report to jail.
"I think the time has come. It's time to start serving the sentence," Smyth responded as sheriff's deputies handcuffed Walinsky for the trip to jail. Means also was transported to prison on Thursday.
Walinsky and Means presented a $362,850 check to the court to cover the full amount of restitution in connection with the fraud. Their lawyers indicated mother and son had to borrow from family and friends to raise the restitution.
Walinsky and Means were two of more than two-dozen people indicted by the Pennsylvania Attorney General's Office in connection with the insurance fraud scheme that allegedly defrauded insurance companies.
Now We're Talking -- 14 Years for WC Fraud
On May 21, 2007 BestWire reported that the former owner of a professional employee organization was sentenced to 14-years in prison for his part in a $217 million workers' compensation fraud scheme.
The Florida Department of Financial Services' Division of Insurance Fraud said, in a statement, Thomas Daniel King, the former owner and operator of the now-defunct Miralink Group Inc., collected more than $5.8 million in premiums, but left thousands of workers without workers' compensation coverage.
King is one of seven men that were either charged or convicted the scheme, which was uncovered through a joint investigation of the Florida Department of Financial Services' Division of Insurance Fraud, the Federal Bureau of Investigation and the U.S. Attorney's Office.
King was convicted on 23 federal counts of wire fraud, mail fraud and money laundering stemming from his role in the scheme. Miralink, formerly of Jacksonville, represented to its clients that its 33,000 employees were covered by Regency Insurance of the West Indies, Ltd., which was based in California. The investigation revealed that Miralink principles knew the coverage was bogus.
In April, Michael Lee McCafferty, a former executive of TTC Illinois, was sentenced to 33 months in prison and was ordered to pay $7 million in restitution for his part in the scam. TTC was one of the nation's largest employee leasing organizations with headquarters in Kankakee, Ill. and clients in 40 states.
From the Coalition Against Insurance Fraud:
* Rogelio Mata illegally lowered his workers comp premiums more than $100,000 by lying that his demolition firm only did construction cleanup. The Los Angeles man reported the correct payroll for the 15-20 employees of Rogma Construction Services, but the safer risk category of cleanup service dropped his premiums substantially. Mata didn't exactly hide his scam. He was featured as an interior demolition contractor on the TV show Extreme Make Over, Home Edition, and his website listed his firm's interior demolition work. Mata was busted after a competitor tipped off California's state workers comp fund. Even so, he received only three days in county jail Wednesday, but was ordered to pay back $100,000.
* In the largest under-the-table payroll scheme ever in Massachusetts, three owners of a temp firm paid employees about $30 million in cash wages to avoid taxes and state-required workers comp premiums for 10 years. Tina Le, Steven Nguyen and Mercedes Acar employed hundreds of workers at their Quincy firm. They hid employees in shell companies, shutting down the firms and resurfacing with new companies in a cat-and-mouse game with investigators. They also used straw corporate officers who had fancy titles but did no work. The Massachusetts fraud bureau played a prominent role in the state-federal probe. Le, Nguyen and Acar will be sentenced in September.
* Robert David Neal created fake insurance companies that sold worthless workers comp coverage at below-market premiums to legitimate Professional Employer Organizations (PEOs). He said his firms were affiliated with established firms such as Lloyd's of London, Safety National Casualty Corporation and AIG. The Texas man gave his firms similar names such as American Lloyd's Life & Casualty and Safety National Casualty. Neal also created a slick website that made American Lloyd's appear to underwrite a wide range of risks because it was controlled by two of the largest underwriting syndicates of Lloyd's of London. He also created false certificates of coverage, and even forged coverage application forms by piecing together forms from real insurers. Three legitimate PEOs wired Neal more than $400,000 to buy comp coverage. He was set to take in millions more when he was busted. Neal pleaded guilty Monday, and faces possible life in federal prison when sentenced in July.
* A claims specialist for Universal Underwriters had 139 checks worth more than $400,000 fraudulently written for workers comp claims. Richard Slonchka spent the money on sports cards, memorabilia and cars. The Pittsburgh-area man faces up to 10 years in prison when he's sentenced in August.
* A sham employee-leasing firm left a trail of wrecked lives. Florida-based Miralink Group handled workers comp, taxes, payroll and other services for 2,200 small businesses with 33,000 employees in eight states. But owner Thomas King knowingly bought comp coverage from a fake insurer, leaving employees uncovered when they were hurt. An injured grandmother lost her horse farm when her comp checks stopped coming; she had to sleep in her truck outside a convenience store for weeks. King, meanwhile, drove a Mercedes and $50,000 Hummer, and bought a $37,000 diamond ring for his wife. Miralink collapsed in 2002, sparking a nationwide FBI probe of employee leasing. King received 14 years in federal prison this week.
* Sheryl Reynolds claimed she couldn't work after being injured as a secretary for B-K Company in Houston. She raked in nearly $22,000 in workers comp money until investigators caught her barrel racing. She received 10 months of probation and must repay the money.
This column was first published in Zalma's Insurance Fraud Letter. Zalma's Insurance Fraud Letter (ZIFL) is published 12 months a year by ClaimSchool. Zalma serves as an expert witness or consultant in insurance coverage, claims handling, insurance bad faith and fraud. Zalma's law practice is limited to the representation of insurers and those in the business of insurance. He is available to provide advice and counsel concerning insurance fraud, first and third party insurance coverage issues, bad faith and first party insurance appraisals. It is republished here with permission.
You can read the full Insurance Fraud Newsletter at http://www.zalma.com.
The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.