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SAN FRANCISCO -- Federal regulators have taken control of a troubled group health insurance plan whose operators and service providers include several men who have something in common: long histories of helping to run failed insurance ventures.
The U.S. Department of Labor earlier this month won a court order to shut down Interstate Services Inc. of Novato, Calif., and a predecessor company, Thorndyke International Inc. Both companies administered a self-funded health plan dubbed The ERISA Advantage that was sold mainly to clients of staff leasing companies in half a dozen states.
While ISI took in nearly $2 million in employer contributions between August 1997 and last April, only a fraction of the money went to fund claims. ISI's operators meanwhile diverted an "obscenely excessive" 45% of the contributions to themselves and others in the guise of commissions, fees and other costs, a Labor Department lawsuit charges.
The plan already has failed to pay $400,000 in claims for five covered employees, according to the Labor Department, which has not estimated the plan's total unfunded losses.
The ISI program is only the latest in a series of failed health insurance plans operated by John B. Hyde, who has moved participants from one failed plan to another in recent years, leaving a trail of unpaid claims, the Labor Department charges. Most recently, Mr. Hyde last year agreed to an injunction barring him and Thorndyke from managing a purported union welfare fund that was found to be insolvent by $1.2 million.
In interviews, Mr. Hyde and his San Francisco lawyer, Michael Hardiman, blamed the ISI plan's troubles on the failure of its stop-loss reinsurer to pay claims.
"ISI as the administrator did not have the money" to cover the claims, Mr. Hyde conceded. "The reinsurer is supposed to pay it."
The Labor Department, however, cited ISI's purported stop-loss arrangement as one of a wide array of "imprudent" and self-dealing actions that the department says violate the Employee Retirement Income Security Act.
The purported stop-loss reinsurer is Colonnade Insurance Co. A.V.V., an Aruba company formed in 1996 that is "not financially secure" and that is operated by James Charge, the complaint notes. Mr. Charge previously ran another offshore insurer that was barred in California in the early 1990s and is now defunct.
In addition, ISI reached Colonnade -- which paid ISI a "kickback" of 22.5% of its stop-loss premiums -- through a chain of five intermediaries that included one man already sanctioned by the Labor Department in an unrelated case and another who had worked with Mr. Hyde on a previous failed health plan in the 1980s, court filings say.
A federal judge in San Francisco earlier this month issued a temporary restraining order freezing the assets of ISI, Thorndyke, Mr. Hyde and several other defendants named in the Labor Department's complaint. The court also appointed an independent fiduciary to take over the ISI health plan.
A hearing on a preliminary injunction to continue Labor Department control of plan is scheduled for Friday.
The "ERISA Advantage Self-Insured Retention/Single Employer Trust" program started operating in 1994 with Thorndyke as plan administrator, according to court filings. In August 1997, ISI acquired Thorndyke and took over administering the program. Mr. Hyde was president of both companies.
Under the program, ISI set up individual trust accounts for each of about 300 participating employers. Plan documents called for ISI to allocate 30% of each employer's premiums to the employer's trust account to fund a self-insured portion of its losses, with the remaining 70% supposedly paying for stop-loss insurance that would cover claims in excess of the retention.
The plan's actual operations bore little resemblance to this, though, with ISI commingling employers' contributions and paying only 3.7% of the contributions into the employers' trusts and 5.5% to Colonnade, the Labor Department charges.
Along the way, the ISI plan's operators misrepresented many aspects of the program and committed "a remarkably wide range of ERISA violations," the government alleges in a lawsuit filed Aug. 4 in U.S. District Court in San Francisco. In addition to ISI and Thorndyke, the suit names Mr. Hyde and his wife, daughter and son, who acted as directors, officers and/or shareholders of ISI and Thorndyke.
In 1984, the California Insurance Department fined Mr. Hyde after finding that he had committed several violations of state law as plan administrator of a now-defunct health trust known as the Scotsman Plan, including making false statements to plan beneficiaries, court filings say.
In 1988, he filed for personal bankruptcy but was hit by the bankruptcy court with a $1.8 million judgment for defrauding an Arizona life insurer, documents show.
Mr. Hyde and Thorndyke began offering the single employer trust program in 1994, initially through a Texas organization, called the National Assn. of Preferred Providers, and later on their own (BI, July 22, 1996).
In the face of state regulatory scrutiny that followed complaints of unpaid claims, Mr. Hyde later moved several hundred of these single-employer plan participants into a purported New York-based union welfare fund called the Local 122 Health & Welfare Fund Inc. Employee Benefit Plan Trust, court papers say. The Labor Department last summer won an injunction against the Local 122 plan, which an actuary estimated to have a $1.2 million deficit.
Shortly after agreeing to the injunction, Mr. Hyde activated ISI, then a shell company, which then acquired Thorndyke and continued the single-employer trust program, the Labor Department says.
Also named in the San Francisco lawsuit are:
* Lawrence R. Sellars, an unlicensed Irvine, Calif., consultant who acted as an intermediary on ISI's stop-loss placement with Colonnade.
Mr. Sellars worked with Mr. Hyde on placing coverage for the Scotsman Plan in the 1980s and was found by California regulators to have aided Mr. Hyde in misrepresenting the plan, court filings say.
In 1986, Mr. Sellars also pleaded no contest and was sentenced to 30 months' probation on a felony charge of defrauding the state of Alaska on insurance covering state deposits in Alaska credit unions. An Alaska judge discharged the probation and expunged Mr. Sellars' record in 1988, according to a copy of the order provided by Mr. Sellars.
In an interview, Mr. Sellars also denied any wrongdoing connected with the Scotsman plan, calling it an "outstanding program" that generated no complaints while he was involved.
* Kenneth L. Ruff, an officer and shareholder of ISI and Thorndyke.
* Security National Corp. of Washington, D.C., which acted as trustee for the 300-odd employer trusts ISI set up at Riggs Bank in Washington; and Patricia Tyler, who operated Security National from her home.
* Malcolm Cordell Hull, who marketed the ISI program as executive director of the National Assn. for Alternative Staffing, an Austin, Texas, association of staff leasing companies.
Mr. Hull is a former Texas insurance agent whose license was revoked in 1992 for marketing worthless health insurance written by the fraudulent Cabot Day Insurance Co. of the British Virgin Islands. Cabot Day left $5.7 million in unpaid health claims after it collapsed.
* Billie Gannaway, a Texas insurance agent and former partner of Mr. Hull, and Herman Robert Brown, a Phoenix agent, both of whom marketed the ISI plan.
Messrs. Ruff, Hull, Gannaway and Brown could not be reached.
The Labor Department charges the defendants with a variety of ERISA violations.
Mr. Hyde and ISI, for example, misled participants by promising that 100% of their contributions would be used exclusively to benefit their own employees.
In fact, Mr. Hyde moved employer funds at will among several accounts he controlled, commingling the money and using a given employer's funds to pay other employers' claims, the suit charges.
Of $2 million in employer contributions collected between August 1997 and last April, only token amounts went into employer trusts, and only $1.1 million was used to pay claims and reinsurance premiums, the suit says.
Another $888,382 -- a "grossly excessive" 45% of contributions -- was siphoned out as fees and commissions to ISI's operators and service providers, making the health plan roughly twice as costly as the most expensive "legitimate" health plans, federal regulators charge.
The suit cites several examples of the alleged waste of plan assets, including ISI's payment of $9,000 a month to Riggs Bank to maintain the employer trusts. The trusts served no purpose other than to maintain the illusion the the program was an ERISA plan rather than a multiple employer welfare arrangement subject to state regulation, regulators allege.
ISI's stop-loss program also represented a waste of assets, the Labor Department says. While claiming at various times that the program was insured by several domestic "A" rated insurers, Mr. Hyde placed the coverage with Colonnade through a string of intermediaries who each took a commission on the placement.
Mr. Hyde was referred to Mr. Sellars by Martin Levine, a Los Angeles-area consultant who had previously done work for the Thorndyke program and who is barred from most roles in ERISA plans under a 1995 consent order in an unrelated case. Mr. Levine said in an interview that he offered Mr. Hyde several names, including Mr. Sellars', and received no payments from ISI.
Mr. Sellars then went to Graham Mitchell, a Beverly Hills, Calif., intermediary, who in turn went to Hans Goemans, president of Christal International Management Ltd., a Dublin, Ireland, broker. Mr. Goemans then approached Moorgate Management (U.K.) Ltd. of Brentwood, Essex, which is owned by David King and Colonnade's Mr. Charge and which placed the risk with the Aruba insurer.
In the 1980s, Mr. Charge -- who could not be reached -- tried to obtain a license for Victoria Insurance Co. in Delaware. Victoria was later licensed in Georgia and run by the late insurance swindler Alan Teale before it collapsed in 1988. In the early 1990s, Mr. Charge operated the now-defunct West Point Insurance Co. of Antigua, which California regulators barred from the state (BI, May 4, 1992).
Mr. King, meanwhile, confirmed that he pleaded guilty "four or five years ago" to a U.K. criminal charge related to a diversion of funds from an intermediary in which he was a partner. Mr. King said he received a suspended sentence.
The Labor Department charges that the web of intermediaries was unnecessary and that a prudent health plan manager would not have bought coverage from Colonnade.
ISI never received an actual policy from Colonnade -- only placement slips -- and Colonnade has since canceled the coverage and has failed to pay claims amid a dispute with ISI over the terms of the reinsurance and ISI's withholding of reinsurance premium, court records say.
Mr. King said he believes Colonnade is financially sound.
In a Nov. 30, 1997, balance sheet audited by New York accountant Charles J. Davitian -- who also audited West Point's financial statements -- Colonnade reports $102 million in assets, including $100 million in "investments" that consist of "negotiable treasury certificates, denominated in U.S. dollars, issued by the United States Government.'