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Former State Fund official served search warrant in criminal probe

As many as eight other warrants are served in the conflict-of-interest probe, according to a state official, who says recipients are likely to have included other former officials at the insurer.

June 20, 2009|Marc Lifsher

reporting from sacramento

A 2-year-old criminal investigation into possible conflicts of interest and misuse of government property at the state-run company that is California's largest workers' compensation insurer moved into high gear Friday.

Law enforcement officials from a multi-agency task force served search warrants at the home and office of a Redding construction industry executive in Northern California and former board member at the State Compensation Insurance Fund.

As many as eight other search warrants had been served to people in Northern and Southern California, according to a state official who said she was briefed on the probe but was not authorized to release the information. In addition to Kent Dagg of Redding, other search-warrant recipients were likely to include former board member Frank DelRe of Long Beach, former fund President James Tudor and Vice President Renee Koren, the person said.

Neither Dagg nor any of the other former board members or company executives responded Friday to requests for comment, but in the past they have denied wrongdoing.

Investigators remained closed-mouthed about the day's activities. Erica Derryck, a spokeswoman for the San Francisco district attorney's office, the lead agency in the probe, said only that "a law enforcement action" was underway, involving her office, the California Highway Patrol, the state Department of Insurance and the Franchise Tax Board.

Jennifer Vargen, a spokeswoman for the insurer, generally known as State Fund, said the century-old company had been cooperating with the Highway Patrol and investigators since May 2007. She said she knew little about the probe other than that "multiple" search warrants were involved.

State Fund is owned by the state but is operated as a private insurer with its own board of directors. Except for seven top executives, all of its 7,700 employees are state civil servants.

The company, headquartered in San Francisco, controls 22% of California's market for workers' compensation insurance. It has $20 billion in assets and last year wrote $1.6 billion worth of workers' compensation coverage for 175,000 employers, mostly small and medium-sized firms and nonprofit organizations.

The company is legally obligated to serve as the "insurer of last resort" for employers, which are required to buy coverage to pay medical bills and disability benefits for victims of on-the-job injuries.

State Fund long had been considered a dull backwater of state government until a scandal rocked the company beginning in November 2006. Without notice, former directors Dagg and DelRe resigned after questions arose about whether they should be voting on State Fund business at a time when they ran insurance-related entities that collected millions of dollars in fees from the fund.

The resignations came after the two discussed conflict-of-interest issues with officials in the office of Gov. Arnold Schwarzenegger.

In March 2007, the State Fund board abruptly fired the company's two top executives, Tudor and Koren, after an internal legal review of operations, particularly those involving the sale of discounted policies by so-called safety groups of employers. DelRe and Dagg had administered such groups.

A December 2007 audit of State Fund, ordered by California Insurance Commissioner Steve Poizner, was scathing in its criticism of the group's programs. The audit noted that the insurer spent more than $500 million over the previous decade for marketing help that often provided "minimal services."

According to the audit, DelRe's company, Western Insurance Administrators, was paid $140 million in group administrative fees from 1996 to 2007. During the same period, the fund paid $125 million in fees to building-trades associations with which Dagg had a business relationship.

State Fund Board Chairwoman Jeanne Cain asked the Highway Patrol to look into the alleged corruption at the insurer.


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