California Wins $14.6 Million Judgment in Comp Fraud Case

Dec. 28, 2004
In one of the largest awards of its type in the history of California's workers' compensation system, the California State Fund has won a $14.6 million judgment against two Rancho Cucamonga businesses that used an elaborate shell game to avoid paying correct workers' compensation premiums and payroll taxes.

San Bernadino County Superior Court Judge Ben Kayashima awarded the judgment against Ideal Payroll Plus Ltd. and Ideal Management LP, both professional employer organizations (PEOs) formerly insured by State Fund. San Bernadino County resident David W. Clancy Jr. formed the PEOs, which underreported payroll to the State Fund, the Internal Revenue Service and the State Franchise Tax Board.

Under the scheme, Clancy enrolled workers in an alleged "K-1 Dividend Distribution Plan," in which employees received two checks -- one for what Clancy called "W-2 wages" and another referred to as a "dividend."

Clancy, the general partner of Ideal entities, claimed that he could reduce premiums by 50 percent and provide complete workers' compensation coverage through State Fund. As part of the scheme, Clancy failed to disclose the amount of the so-called K-1 dividend paid to each employee, which usually amounted to more than half of the employee's income, and thereby avoided paying correct premiums to State Fund. State Fund uncovered Clancy's scheme during an audit. State Fund then cancelled his policy and filed suit for damages.

The judgment represents an estimated $1.3 million in unpaid premium owed to State Fund -- as well as interest and costs -- and 10 times the premium amount pursuant to Insurance Code 756. That code section authorizes State Fund to pursue a civil action for 10 times the difference between the lower premium paid and the premium properly payable against an employer who knowingly procures a lower premium by willfully misrepresenting the amount of payroll.

"We hope that this judgment will send a strong message and serve as a deterrent against other companies who are considering defrauding California's workers' compensation insurance system," said State Fund Vice President and General Counsel Charles Savage.

The judgment is against two of four defendants in the case. State Fund will continue to pursue legal action against the non-defaulting defendants, David Clancy Jr. and San Bernadino County resident Telma Moguel, who is the trustee of the Ideal Alliance Trust established to pay the alleged K-1 dividends to employees.

About the Author

Sandy Smith

Sandy Smith is the former content director of EHS Today, and is currently the EHSQ content & community lead at Intelex Technologies Inc. She has written about occupational safety and health and environmental issues since 1990.

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