LOS ANGELES, CA — Consumer advocates and a government official Wednesday called for prosecutors to investigate the financing of a failed insurance company that left the Los Angeles suburb of Gardena near bankruptcy, saddled with more than $20 million in debt.
The calls came the same day newspapers published an investigation by The Associated Press that detailed how Gardena officials ignored numerous warnings that the insurance venture was a bad idea and essentially covered up their roles as it bled cash.
“Taxpayers should never be in that situation, and the people who put them there should be in jail,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based consumer group. “The attorney general or the district attorney should absolutely launch this investigation.”
The Los Angeles County district attorney’s office had no comment and the state attorney general’s office did not respond to requests for comment Wednesday.
Two banks could slap hefty financial penalties on Gardena after the city failed this week to pay about $26 million in debt, most of it from the collapsed Municipal Mutual Insurance Co. The city also owes $6 million from a failed home-loan program.
The AP’s investigation revealed a litany of issues involving the creation of the insurance company, including no-bid contracts and other questionable transactions. While the company failed, consultants and financial specialists earned millions of dollars in fees, and the former city manager spent lavishly on four-star hotels and travel.
Councilman Oscar Medrano Jr., who was in office when city officials created Municipal Mutual in 1993, said taxpayers are entitled to know why his predecessors moved ahead despite being told by financial and insurance experts that the company was risky at best.
After the city’s first financing advisers walked out over concerns the company would flop, the AP found, Gardena rewrote its own rules to pay another underwriter $500,000 – a fee nearly 70 percent higher than the previous estimate.
“The Insurance Department and the district attorney should look at this to see who was negligent, who should have done their job when they didn’t do it,” Medrano said in a telephone interview. “A lot needs to be investigated, how it was created, why it was created.”
Meanwhile, the Insurance Department disclosed it was among those who warned Gardena officials in the early 1990s against creating the company – though the state agency later licensed it for business.
Norman Williams, a spokesman for Insurance Commissioner John Garamendi, said the agency sent memos to the city warning Gardena of “the inherent risks in such a venture, and the department’s concern over the city undertaking this operation.”
The agency also required Gardena to get approval from the state attorney general to form the company, he said.
Williams noted the agency’s major concern was protecting policyholders. The company, now under state supervision, is essentially out of business but holds sufficient cash reserves to cover projected liabilities.
That has never been a problem, since the company never sold more than a handful of policies.