The Honorable Bill Lockyer
State of California
1300 I Street, #125
Sacramento, CA 95814
Dear Attorney General Lockyer:
Recent articles by the Los Angeles Times raise serious allegations of misconduct by Insurance Commissioner Charles Quackenbush. We are writing to request that you investigate these charges, which appear to constitute violations of state laws, as set forth in part below:
1. Shielding insurance companies from fines and penalties for violations of state law in exchange for donations and campaign contributions.
Lawyers for the California Department of Insurance (CDI) commenced investigations of State Farm, Allstate, 20th Century and other insurance companies. These investigations, known as Market Conduct Examinations, are required of all licensed insurance companies every five years under Insurance Code section 730(b). However, the investigations apparently focussed on charges that the insurance companies improperly handled claims by policyholders and others arising out of the 1994 Northridge earthquake.
According to the Los Angeles Times, these examinations uncovered major violations of law, and CDI staff recommended restitution as well as severe fines. However, the examinations were terminated and shortly thereafter, the subject insurance companies were asked by the Commissioner or others acting on his behalf to make modest donations to one or more non-profit foundations apparently created and/or controlled by the commissioner. (At least some of these funds were spent to broadcast
advertisements in which the Commissioner appeared). Additionally, the insurers were asked by the Commissioner or others acting on his behalf to make campaign contributions to his personal campaign committee. (A portion of these funds was transferred to his wife’s political committee and thence to his wife to pay off her campaign debts).
Attached is a summary of the transactions, based on information contained in the Los Angeles Times.
Possible violations of statute:
Campaign contributions are not, of course, unlawful under California law. Nor are transfers unlawful under present California law. However, the law prohibits quid-pro-quo arrangements. Penal Code section 68 provides that:
[e]very executive or ministerial officer, employee or appointee of the State of California, county or city therein or political subdivision thereof, who asks, receives, or agrees to receive, any bribe, upon any agreement or understanding that his vote, opinion, or action upon any matter then pending, or which may be brought before him in his official capacity, shall be influenced thereby, is punishable by imprisonment in the state prison for two, three or four years; and, in addition thereto, forfeits his office, and is forever disqualified from holding any office in this state.
Additionally, Government Code Section 84308(b) provides as follows:
No officer of an agency shall accept, solicit, or direct a contribution of more than two hundred fifty dollars ($250) from any party, or his or her agent, or from any participant, or his or her agent, while a proceeding involving a license, permit, or other entitlement for use is pending before the agency and for three months following the date a final decision is rendered in the proceeding if the officer knows or has reason to know that the participant has a financial interest, as that term is used in Article 1 (commencing with section 87100) of chapter 7. This prohibition shall apply regardless of whether the officer accepts, solicits, or directs the contribution for himself or herself, or on behalf of any other officer, or on behalf of any candidate for office or on behalf of any committee.
Numerous campaign contributions were made by insurers during and after insurance department proceedings, including these market conduct examinations and various rate hearings.
2. Creation of non-profit foundations.
Mr. Quackenbush apparently arranged for the establishment of one or more non-profit organizations under provisions of Internal Revenue Code section 501 and its California counterpart.
Possible violations of statute:
Creation of non-profit foundations as part of the settlement of civil litigation involving numerous private plaintiffs in order to effectuate a public purpose once full restitution has been made to the plaintiffs is an equitable remedy approved by the courts. (See, e.g., Kerry Barnett, “Equitable Trusts: An Effective Remedy in Mass Consumer Class Actions,” 96 Yale L.J. 1591 (1987)).
However, we can find no statutory or other authority permitting the Insurance Commissioner as a public official to establish a non-profit organization in connection with his or her responsibility to enforce California insurance laws or regulations.
If the purpose of creating the foundation(s) was to obtain political support and hence evade campaign finance laws, this would be a violation of numerous state and federal laws.
3. Ordering insurers to pay fines/penalties to non-profit foundations.
Department of Insurance records show that State Farm, Allstate, 20th Century, and Fireman’s Fund each agreed to make payments to the Quackenbush non-profit(s) to “settle” unspecified issues uncovered by the apparently destroyed investigations. The Los Angeles Times reported that the CDI officials believe these payments were “very significant fines.”
Possible violations of statute:
Insurance Code Section 12975.7 states that all fines or penalties levied by the Insurance Commissioner must be paid to the state treasury. The Insurance Commissioner does not have the authority to order or agree to payments to non-profit foundations as a substitute for payments to the state Treasury.
4. Use of non-profit foundations controlled by Insurance Commissioner to promote the Insurance Commissioner.
The settlements between the Commissioner and the target insurance companies state that they will make donations to the non-profit foundations for public education purposes. Apparently, Insurance Commissioner Quackenbush controls the non-profit foundations.
While we have been unable to obtain any official information concerning the activities of these organizations, it appears that the money has been, at least in part, to pay for television commercials featuring Insurance Commissioner Quackenbush.
Possible violations of statute:
Government Code Section 1090 provides that
members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. Nor shall state, county, district, judicial district, and city officers or employees be purchasers at any sale or vendors at any purchase made by them in their official capacity.
The courts have broadly construed this conflict of interest statute. (See People v. Honig (Ct. App. 1996) 55 Cal.Rptr.2d 555, 567-68).
Further, Government Code Section 87100 prohibits public officials from making a governmental decision in which they have a financial interest. Section 87103 defines financial interest to include:
if it is reasonably foreseeable that the decision will have a material financial effect, distinguishable from its effect on the public generally, on the official, a member of his or her immediate family” ‘ or when the decision will have an effect on “any donor of, or any intermediary or agent for a donor of, a gift or gifts aggregating two hundred fifty dollars ($250) or more in value provided to, received by, or promised to the public official within 12 months prior to the time when the decision is made. (see also CCR sect. 2690.5(3)).
Additionally, federal and state laws governing the operation of non-profit organizations require that the assets of such organizations be utilized for public purposes and prohibit their use to confer private benefits upon its officers or directors. (See, e.g., Internal Revenue Code Section 503(b), 26 U.S.C.A. sect. 503(b); California Corporations Code Section 5210, 5227, 5231, and 5233). The Attorney General, under Corporations Code Section 5250, on behalf of the state, has the power to examine the activities of non-profit public benefit corporations to ascertain to what extent they have departed from the purposes for which they were formed.
Moreover, non-profit organizations are generally prohibited from endorsing or opposing political candidates unless doing so furthers the organization’s purposes; political activity must not be the principal purpose of the organization. (See IRS Revenue Ruling 81-95, 1981-1 IRS Cum. Bull. 332).
Whether these requirements have been violated depends on the nature of the non-profit’s activities and the nature and timing of the advertisements in which the Commissioner appeared. Absent minutes of meetings and other corporate documents, the governing structure of the non-profits and whether it has complied with applicable state and federal laws regarding such organizations, is not known.
Finally, if the purpose of creating the foundation(s) was to obtain political support and hence evade campaign finance laws, this would be a violation of numerous state and federal laws, requiring, at the very least, disclosure of campaign contributions. (See Gov. Code Section 84000, et. seq.).
Because of the sensitive nature of these charges, we believe it important that action be taken to preserve and protect relevant evidence, and that Department of Insurance staff be interviewed promptly.
Please do not hesitate to contact us should you require any further information.
Harvey Rosenfield Doug Heller Pamela Pressley
FTCR President Staff Advocate Staff Attorney