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Nominee for State Post Is Scrutinized

Fred Buck seeks to head the insurance agency's liquidation office. Some see a conflict of interest.

August 09, 2004|Marc Lifsher | Times Staff Writer

SACRAMENTO — Lawmakers are investigating conflict-of-interest concerns involving Insurance Commissioner John Garamendi's nominee to head a state agency that controls more than $1 billion in failed insurance company assets.

Fred A. Buck's nomination as chief executive of the Insurance Department's Conservation and Liquidation Office has been stalled in the Senate since last September, when Garamendi nominated him for the $260,000-a-year post.

Buck had been running the office on a consulting basis since January 2003 and assumed the CEO role when his name was sent to the Senate.

While managing the liquidation office, Buck also has been working as a paid consultant for the National Organization of Life and Health Guaranty Assns., an industry group that acts as a payer of last resort for claims against failed insurers and often seeks reimbursement from assets held by the liquidation office.

The dual roles present the strong suggestion of a conflict of interest, critics allege. To cite one example, the two entities are adversaries in the long-running, multibillion-dollar litigation surrounding the demise of Los Angeles-based Executive Life Insurance Co.

"You're either a consultant or the CEO of the Conservation and Liquidation Office," said Loren Suter, Buck's predecessor in the state post. "I don't see how you can do both."

Because of such concerns, lawmakers are moving slowly on Buck's nomination, which must be approved by the end of this month for Buck to keep his job.

"We're holding off," said Senate President Pro Tem John Burton (D-San Francisco), who is chairman of the Rules Committee, a key gatekeeper in the appointments process. "There are concerns about possible conflicts of interest on this, and the committee is looking into it. It's a very sensitive position."

In an interview last week, Buck acknowledged that his relationship with the insurance industry could create "appearances of conflict," but he denied that that was the case. He said Garamendi wasn't considering withdrawing his nomination. Garamendi declined to comment.

The flap is the latest controversy to rattle the Conservation and Liquidation Office, which takes over the assets of failed insurance companies with the intention of paying outstanding claims from policyholders.

In the last decade, a series of scathing audits has uncovered widespread mismanagement and poor financial oversight at the liquidation office. The audits -- plus a corruption scandal that led to the resignation in 2000 of then-Insurance Commissioner Chuck Quackenbush -- were the impetus for a law that required Senate confirmation of liquidation office chief executives. Another new law applies state conflict-of-interest rules to the liquidation office.

In the interview, Buck said that his one-person consulting firm, Buck & Associates, earned $67,000 last year from contracts with the Reston, Va.-based guaranty organization. The fees were for work on claims against three insolvent insurance companies. Assets of two of them, Reliance Insurance Co. and Legion Insurance Co., had been seized by the California Department of Insurance.

Buck said his handling of the Reliance and Legion insolvencies for the guaranty organization didn't present conflicts because he dealt only with the accident and health business of each company, whereas the assets seized by California were earmarked to pay workers' compensation insurance claims.

What's more, Buck said, the Reliance and Legion cases are primarily under the jurisdiction of regulators in other states.

Critics said the potential for conflict between Buck's work for the state and his employment by the insurance industry was particularly high in the case of Executive Life, a giant insurer seized by Garamendi during his first term as commissioner in 1991. Garamendi at the time said he took control of the company because of a sharp drop in the value of its portfolio of mainly high-risk junk bonds.

A federal criminal fraud probe into the sale of Executive Life to a group of French investors in 1993 resulted in a $770-million settlement in January. (The Department of Insurance and the California attorney general's office have filed separate suits against the French investors, including Credit Lyonnais, on behalf of 330,000 Executive Life policyholders.)

The California Department of Insurance recently received $110 million in restitution from the settlement, and the guaranty organization and Executive Life policyholders are vying for the balance of the funds.

Maureen Marr, an activist with an Executive Life policyholder group, said that even though Buck wasn't directly working on the Executive Life case for the guaranty organization, his representing both the organization and the state was "a huge conflict of interest."

The Department of Insurance's top attorney, Gary Cohen, acknowledged that the interests of the guaranty organization "may not always be in line" with the Insurance Department's. However, Rick Baum, the department's chief deputy commissioner, said he saw "no conflict" and was "very comfortable" with Buck's appointment and his performance in office.

For his part, Buck said he would be evenhanded in the Executive Life case. "I don't feel I'm swayed one way or the other ... either for or against the guaranty associations," he said. "My goal is to get the best deal for the claimants. I don't view that as a conflict."

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