Quackenbush Secretly Routed Funds to TV Ads

By VIRGINIA ELLIS

May 12, 2000 12 AM PT

TIMES STAFF WRITER

SACRAMENTO — Even before they set up controversial earthquake foundations, Insurance Commissioner Chuck Quackenbush and his aides created a system to secretly use $1.9 million in public money to pay for television spots featuring the Republican official.

Over the course of a year, documents obtained by The Times show, money from state settlements with several insurance companies was funneled to private political consultants and production studios through a system devised to operate outside of normal state controls and avoid the scrutiny of the Legislature and other government agencies.

Some of the money was paid by insurance companies directly to businesses and consultants under the terms of agreements with Quackenbush, which required them to pay “vendors” designated by department officials.

“We have a need to not receive the funds directly, but have the company hold the money and pay out to three parties at our direction,” Patricia Staggs, one of the department’s top lawyers, wrote in a November 1997 internal e-mail obtained by The Times.

Other money was channeled to a private fund, named the Insurance Education Fund, that the department established in Marin County with a fund manager who spent it according to directives faxed by department officials.

Among the businesses getting payments were Target Enterprises, an Encino-based media buyer used by Quackenbush to purchase air time during his reelection campaign, and Chetwood Productions, a business owned by a college friend of William Palmer, who was then the department’s chief counsel.

A few months later, Palmer reported that Timothy McNeal, owner of Chetwood, had loaned him $4,000 to help make a down payment on a new home.

Most of the settlement funds were used to pay for a television ad campaign in December 1997 and again in August 1998, featuring Quackenbush telling viewers of the work done by his department to protect consumers.

A spokesman for Quackenbush said an attorney for the commissioner had advised him that each of the settlements was legal under California law.

Lawmakers who on Thursday were advised of the agreements and the expenditures for television spots said it appeared the commissioner had abused his authority.

“These latest revelations show a pattern of behavior on the part of Commissioner Quackenbush of diverting money for his own political use that should have gone to taxpayers or to victims of the insurance companies,” said Assembly Insurance Committee Chairman Jack Scott (D-Altadena).

The assemblyman said at a recent committee hearing that Quackenbush often claimed ignorance when asked to explain actions by his department.

“Now it looks like he either knew what was happening, or as the insurance commissioner, surely should have known,” Scott said. “If these reports are accurate, then his misconduct in office is outrageous.”

Nothing Illegal, Says Quackenbush Staffer

Although Scott declined to comment further, “misconduct in office” is the standard used to impeach state officials. Article 4, Section 18 of the California Constitution says: “State officers elected on a statewide basis . . . are subject to impeachment for misconduct in office.”

Quackenbush appeared before Scott’s committee last month to answer questions about foundations he created with $12.8 million collected from six insurance companies as penalties for their handling of Northridge earthquake claims. The foundations have been under investigation by state Atty. Gen. Bill Lockyer, who oversees charitable trusts.

Last week, Lockyer moved to freeze the assets of one of the foundations, the California Research and Assistance Fund, arguing that it was a “sham” operation whose assets had been diverted to friends and acquaintances of a key aide to Quackenbush. Lockyer also questioned the expenditure of $3 million for public service television spots featuring the commissioner, which aired in the fall of 1999.

Deputy Insurance Commissioner Dan Edwards, a spokesman for Quackenbush, said the commissioner has been told by his lawyers that there was nothing illegal in the way he handled settlement funds, either through the foundations or through agreements he made in 1997 and 1998.

“The commissioner had been advised by staff counsel that the agreements in the various settlements were within the settlement authority available to him and to other regulators in the state,” Edwards said.

The decision to use some of the money for television spots, he said, was an attempt to alert consumers that they might be eligible for restitution if they had been victimized by insurance companies.

Aired as Quackenbush was preparing to run for reelection and his wife, Chris Quackenbush, was gearing up for a campaign for the state Senate, the first ad featured the commissioner on screen for nearly the entire 30 seconds of the spot.

“I’m California Insurance Commissioner Chuck Quackenbush,” he said. “Billions of dollars are available to be returned to California consumers. This money is there because my department vigorously enforced consumer protection laws.”

Newspaper reports at the time said the spots prompted a surge of calls to insurance companies from policyholders demanding money they were owed. But department officials conceded that the “billions” referred mostly to funds held by the Insurance Department from 86 companies that had been liquidated. They acknowledged that in 84 of those “open estates,” the deadline for making claims had already expired.

At the height of his campaign, in August 1998, another spot featuring Quackenbush aired throughout the state. In that one, he urged consumers to call a hotline if they were having trouble with their insurance companies.

State Sen. Liz Figueroa (D-Fremont) said those spots struck her as so political in nature that she proposed legislation to prevent insurance commissioners from using settlement money to finance advertisements that featured them. The bill died in a legislative committee.

“It was his name, his face all over the ad and we thought it was very inappropriate,” she said, “for that to be on the air at the same time he was running for reelection and his wife coincidentally was running for the Senate. It not only highlighted his name but the Quackenbush name.”

Spending Arranged to Elude Outside Scrutiny

The nearly $2-million advertising campaign was paid for with money from several insurance companies and businesses targeted by the department for enforcement actions.

Internal e-mails and contracts show that the agreements were structured under Palmer’s direction to give the department direct control over expenditures and to ensure that there would be no outside scrutiny from other government agencies.

“I’ve heard that we have about $1.3 million allotted for consumer outreach efforts outside of the state budget,” the department’s finance officer e-mailed Palmer in 1997.

Normally expenditures by government agencies are scrutinized by the Legislature through the state budget, and their contracts with outside business by the California Department of General Services.

An agreement with Levitz Furniture and General Electric Capital Corp. in August 1997 to settle a complaint related to credit insurance required that a $675,000 payment be made to the Insurance Education Fund. Internal documents show that the money was to be held by Gilardi & Co., a fund manager in Larkspur, Calif.

Other documents show that department lawyers periodically faxed directions to Gilardi “to fund the airing of the previously produced television spots.”

Two months later, an agreement was reached with John Hancock Mutual Life requiring a payment of $550,000 “directly to vendors selected by the commissioner for mass media outreach communication, which shall include radio, newspaper, mailings and television.”

The agreement specified that the television spots it financed could not “mention by name” or otherwise refer to Hancock.

Department officials said Hancock was ultimately required to make payments directly to Target Enterprises, a media buyer that purchased television time on stations throughout the state. From the ad campaigns, Target was paid a small percentage--$138,000--for placing the spots. Another $50,000 was paid to Chetwood Productions for producing them.

Another agreement with Dayton Hudson Corp. a year later required that company to pay $42,500 for “consumer outreach.” Department records showed the company was ultimately required to make the payment directly to Target Enterprises.

Tony Miller, a lawyer and former acting secretary of state, said he filed a complaint with the Fair Political Practices Commission in 1997 contending that the settlement payments were really campaign contributions that benefited the commissioner. The FPPC rejected the complaint.

“Quackenbush was positioning himself and he was using this money to enhance his political prospects as he faced a tough election,” Miller said. “I still believe that technically speaking these were campaign contributions because they went to an entity controlled by an elected official which was structured to be outside state control.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Financing for TV Ads

Using money obtained from Department of Insurance settlements with private companies, Insurance Commissioner Chuck Quackenbush financed “consumer outreach” television spots that aired as he was facing reelection. According to department records, money from the settlements was diverted to skirt the state accounting and budgeting process.

Where Some Settlement Money Went

* John Hancock Mutual Life settled Oct. 28, 1997, for $550,000, paid to Target Enterprises

* Levitz Furniture and General Electric Capital Corp., which sells credit insurance, settled Aug. 19, 1997, for $675,000, paid to Insurance Education Fund

* Dayton Hudson and Mervyn’s, which sells credit insurance, settled Aug. 25, 1998, for $42,500, paid to Target Enterprises

Quackenbush in a public service advertisement that aired in December 1997.

$1.2 million for ad

Quackenbush in a public service advertisement that aired in August 1998.

$732,000 for ad