Trustee levels hefty fine in Genovese connected phony union health fund case
Maybe the boxes of unpaid claims should have tipped off Cynthia
Holloway, trustee of the Professional Industrial Trade Workers Union
Health and Welfare Fund, situated in an office suite along Route 70 in
Cherry Hill.
All around the country - in New Jersey, Texas, Louisiana, and North Carolina - employees, presumably covered by health insurance, were going to doctors or hospitals, but their bills were not getting paid.
Clearly the fund was in trouble. Financial records were missing, state insurance departments sent cease-and-desist letters, and insurance administrators were calling Holloway to tell her that the fund was not forwarding enough money to pay the claims.
As it turned out, the reason the claims were not being paid was that the fund was a fraud and the union itself was phony, a prop to further the scheme.
This tangled tale of deceit began to unfold a decade ago, but legal ramifications continue - especially for Holloway, who was soundly criticized and heavily fined last month by a federal judge in Camden.
U.S. District Judge Joseph H. Rodriquez fined Holloway at least $4.7 million, plus interest, saying she could have stopped the debacle, and making her the latest casualty in this 12-year-old crime.
Lawyers familiar with union health and welfare funds say they have never seen such a penalty levied against a fund trustee who was not complicit in the fraud.
The scheme's architects were business people operating on the fringes of the staffing industry, with some ties to organized crime, using the phony Cherry Hill union, the Professional, Industrial and Trade Workers Union, as a front from 1999 to 2003.
On a checkbook level, its victims were employers or employees, mostly in small businesses around the country, who paid $7.8 million in health insurance premiums, but didn't get coverage.
Most of the funds were improperly diverted as "fees," "commissions," and "union dues," and some money paid the salary of the union's president, Franklin "Frankie the Flea" Militello, linked by federal prosecutors to the Genovese organized-crime family.
Worse, employees and family members, thinking they were covered by insurance, went to hospitals or doctors and later found themselves dunned by collection agencies, on the hook for tens of thousands of dollars in medical bills, bills never paid by the fake fund.
There is no indication that Holloway, who supervised the fund from California, improperly received any money.
After 18 months as trustee, from May 1, 2001, to Sept. 27, 2002, Holloway quit, expressing concerns about the "chaotic state of affairs of the fund," in documents that wound up in court records.
But resigning did not let her off the hook, Rodriguez ruled Nov. 28.
"She cannot ignore the kind of information that was being presented to her and walk away," Rodriguez wrote. "Her lack of prudence enabled others to commit a breach, of which she had knowledge, and she did not make reasonable efforts to remedy that breach."
Holloway, who runs Employers Depot Inc., a staffing company in California, did not return phone calls. Her attorney said she would appeal the ruling.
"I've never seen a fiduciary hit with that kind of penalty," said Rick Grimaldi, a management-side employment lawyer at Fisher & Phillips L.L.P., of Radnor.
Neither had John A. DiNome, a management-side employment partner at the Philadelphia office of the Reed Smith L.L.P. law firm.
"The standards are very high for trustees," DiNome said. "Most of the times the funds are fine. This is an example of the polar opposite."
In the phony union-health-fund case, there is enough legal paperwork - criminal and civil - to fill several file cabinets.
The union "did not conduct any of the traditional activities [of a union] except collecting dues," the U.S. Labor Department wrote in a court filing.
Its main purpose was to establish a phony union health-and-welfare fund for selling insurance to employers, said Mark Machiz, who, as Philadelphia regional director of the U.S. Labor Department's Employee Benefits Security Administration, is familiar with the department's 2005 civil suit related to the fraud.
"The economic niche that these bad guys operated in was the difficulty of getting affordable health insurance, so these [employers] were susceptible to the pitch," he said.
One employer was R.D.D. Associates L.L.C., a North Jersey food brokerage. When $100,000 worth of employees' claims were not paid, the firm quit the plan and filed suit.
"After they weren't paying, I canceled it," said Andy Galligan, chief financial officer.
The insurance was touted in 2001, 2002, and 2003 by Privileged Care Marketing Group (PCMG), Privileged Care Inc., and Northpoint PEO Solutions, all owned or operated by James Doyle of Sewell and others.
In this and similar phony union schemes, employers were told union funds could charge less, Machiz said.
All employers had to do was enroll workers in the do-nothing union and pay two checks - one for union dues and one for health premiums and fees. The legal documents do not say whether the employers were aware they were signing up for a scam.
Before the scheme collapsed in May 2003, PCMG received $7.8 million in premiums and dues. Only $2.4 million went to pay health claims, according to court papers.
Rodriguez ordered Doyle, who disbursed PCMG funds to all the players, to pay $3.9 million. Doyle could not be reached for comment.
Whether Holloway, who was recruited to serve as a fund trustee, is to blame for not stopping the debacle is not clear-cut.
Initially, in the civil case, Rodriguez ruled that Holloway had not shirked her duties. His decision was overruled by an appeals court that sent it back for reconsideration.
Then, Rodriguez changed his opinion, writing on Nov. 28 that Holloway "breached her duty of prudence" to the fund. She did not sue her fellow trustees or contact law enforcement officials, he wrote.
DiNome, who has no connection to this case, said some fund trustees do not fully recognize the responsibility that comes with the job.
"You have to ask hard questions. You have responsibilities that go beyond sitting in a meeting," he said.
"That works 89 percent of the time," DiNome said. "You don't usually have a phony union."
http://www.philly.com/philly/business/20141216_Trustee_s_hefty_fine_is_latest_twist_in_phony-health-fund_case.html
All around the country - in New Jersey, Texas, Louisiana, and North Carolina - employees, presumably covered by health insurance, were going to doctors or hospitals, but their bills were not getting paid.
Clearly the fund was in trouble. Financial records were missing, state insurance departments sent cease-and-desist letters, and insurance administrators were calling Holloway to tell her that the fund was not forwarding enough money to pay the claims.
As it turned out, the reason the claims were not being paid was that the fund was a fraud and the union itself was phony, a prop to further the scheme.
This tangled tale of deceit began to unfold a decade ago, but legal ramifications continue - especially for Holloway, who was soundly criticized and heavily fined last month by a federal judge in Camden.
U.S. District Judge Joseph H. Rodriquez fined Holloway at least $4.7 million, plus interest, saying she could have stopped the debacle, and making her the latest casualty in this 12-year-old crime.
Lawyers familiar with union health and welfare funds say they have never seen such a penalty levied against a fund trustee who was not complicit in the fraud.
The scheme's architects were business people operating on the fringes of the staffing industry, with some ties to organized crime, using the phony Cherry Hill union, the Professional, Industrial and Trade Workers Union, as a front from 1999 to 2003.
On a checkbook level, its victims were employers or employees, mostly in small businesses around the country, who paid $7.8 million in health insurance premiums, but didn't get coverage.
Most of the funds were improperly diverted as "fees," "commissions," and "union dues," and some money paid the salary of the union's president, Franklin "Frankie the Flea" Militello, linked by federal prosecutors to the Genovese organized-crime family.
Worse, employees and family members, thinking they were covered by insurance, went to hospitals or doctors and later found themselves dunned by collection agencies, on the hook for tens of thousands of dollars in medical bills, bills never paid by the fake fund.
There is no indication that Holloway, who supervised the fund from California, improperly received any money.
After 18 months as trustee, from May 1, 2001, to Sept. 27, 2002, Holloway quit, expressing concerns about the "chaotic state of affairs of the fund," in documents that wound up in court records.
But resigning did not let her off the hook, Rodriguez ruled Nov. 28.
"She cannot ignore the kind of information that was being presented to her and walk away," Rodriguez wrote. "Her lack of prudence enabled others to commit a breach, of which she had knowledge, and she did not make reasonable efforts to remedy that breach."
Holloway, who runs Employers Depot Inc., a staffing company in California, did not return phone calls. Her attorney said she would appeal the ruling.
"I've never seen a fiduciary hit with that kind of penalty," said Rick Grimaldi, a management-side employment lawyer at Fisher & Phillips L.L.P., of Radnor.
Neither had John A. DiNome, a management-side employment partner at the Philadelphia office of the Reed Smith L.L.P. law firm.
"The standards are very high for trustees," DiNome said. "Most of the times the funds are fine. This is an example of the polar opposite."
In the phony union-health-fund case, there is enough legal paperwork - criminal and civil - to fill several file cabinets.
The union "did not conduct any of the traditional activities [of a union] except collecting dues," the U.S. Labor Department wrote in a court filing.
Its main purpose was to establish a phony union health-and-welfare fund for selling insurance to employers, said Mark Machiz, who, as Philadelphia regional director of the U.S. Labor Department's Employee Benefits Security Administration, is familiar with the department's 2005 civil suit related to the fraud.
"The economic niche that these bad guys operated in was the difficulty of getting affordable health insurance, so these [employers] were susceptible to the pitch," he said.
One employer was R.D.D. Associates L.L.C., a North Jersey food brokerage. When $100,000 worth of employees' claims were not paid, the firm quit the plan and filed suit.
"After they weren't paying, I canceled it," said Andy Galligan, chief financial officer.
The insurance was touted in 2001, 2002, and 2003 by Privileged Care Marketing Group (PCMG), Privileged Care Inc., and Northpoint PEO Solutions, all owned or operated by James Doyle of Sewell and others.
In this and similar phony union schemes, employers were told union funds could charge less, Machiz said.
All employers had to do was enroll workers in the do-nothing union and pay two checks - one for union dues and one for health premiums and fees. The legal documents do not say whether the employers were aware they were signing up for a scam.
Before the scheme collapsed in May 2003, PCMG received $7.8 million in premiums and dues. Only $2.4 million went to pay health claims, according to court papers.
Rodriguez ordered Doyle, who disbursed PCMG funds to all the players, to pay $3.9 million. Doyle could not be reached for comment.
Whether Holloway, who was recruited to serve as a fund trustee, is to blame for not stopping the debacle is not clear-cut.
Initially, in the civil case, Rodriguez ruled that Holloway had not shirked her duties. His decision was overruled by an appeals court that sent it back for reconsideration.
Then, Rodriguez changed his opinion, writing on Nov. 28 that Holloway "breached her duty of prudence" to the fund. She did not sue her fellow trustees or contact law enforcement officials, he wrote.
DiNome, who has no connection to this case, said some fund trustees do not fully recognize the responsibility that comes with the job.
"You have to ask hard questions. You have responsibilities that go beyond sitting in a meeting," he said.
"That works 89 percent of the time," DiNome said. "You don't usually have a phony union."
http://www.philly.com/philly/business/20141216_Trustee_s_hefty_fine_is_latest_twist_in_phony-health-fund_case.html
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