Behind door #2 – Come on down State Farm Bank (the good neighbor, the good customer, and the Rigsby qui tam)

You see, State Farm has a bank. A thrift to be exact. And it likes to offer loans, and other banking products to its insurance customers. But the people that they do this through are not employees of State Farm. They are the various independent agents (as State Farm likes to call them) that run State Farm offices.

Russell introduced State Farm’s Bank so well in  A different State Farm Battle (January 2008) that it seemed appropriate to give it another run.  It should come as no surprise that State Farm’s website has a more formal introduction (another h/t to Steve):

State Farm Bank, F.S.B. received formal approval for a thrift charter from the Office of Thrift Supervision (OTS) in November 1998 and is generally referred to as “State Farm Bank®”. Its focus is on consumer-oriented financial products, complementing State Farm’s insurance focus on personal lines.

State Farm Bank is a nontraditional financial institution and does not have branch offices. The bulk of direct customer interaction and product assistance is provided by State Farm® agents, augmented by a telephone call center, mail and the Internet. As of December 31, 2005, the Bank held $12 billion in total assets.

Documents filed in Katrina litigation introduce State Farm’s Bank in a different light – suggesting just how nontraditional it may have been following the storm. In fact, the amended RICO complaint added the State Farm Bank as a Defendant:

… State Farm Bank is wholly-owned by State Farm Mutual, and is headquartered in Bloomington, Illinois.  As of March 21, 2003, State Farm Bank had assets totaling in excess of 5,000,000,000 (five billion) U.S. dollars.

State Farm Bank aided and abetted a civil conspiracy by providing substantial assistance in carrying out the civil conspiracy. State Farm Bank aided and abetted a civil conspiracy by committing one or more tortious acts in concert with State Farm, or pursuant to a common design, engaged in same with State Farm.

State Farm Bank knew that State Farm’s conduct in the civil conspiracy was a breach of duty to the Plaintiffs as insured policyholders, and yet the Defendants and each of them gave substantial assistance or encouragement to the scheme. State Farm Bank’s aiding and abetting a civil conspiracy to conduct corrupt property inspections and procure contrived inspection reports was a direct and proximate cause of damages sustained by Plaintiffs.

Interestingly, the Forensic Rebuttal to Relator’s Response to Motion for Clarification of Order Denying Motion for Summary Judgment ignores the obvious connection and steps over those issues to get to the Brian Ford deposition:

In the interests of brevity, Forensic incorporates by reference its previous briefing on the substantive questions of law dealing with conspiracy, and will not repeat all of those arguments here. However, one factual issue bears mention – Relators’ reliance on the Ford report as nothing less than holy writ. For instance, on page 3 of their response, Relators say that “if State Farm had accepted the conclusions in the Ford report, it would have been required to reimburse the federal government.” Forensic will not belabor the point here, as the folly of blindly accepting the conclusions of the Ford report has been amply demonstrated in prior briefing.

I, for one, just flat missed the folly; but, perhaps it’s because the Forensic motion reminded me that I’d read something about a loan the firm took out to purchase the RV needed to work for State Farm and I began digging through the Forensic email filed with the Shows’ RICO complaint – dismissed without prejudice as I recall.

But, there I go, mixing apples and oranges – no doubt inspired by same in the Forensic Rebuttal:

Here, the “allegedly suspicious activity” that forms the basis for Relators’ claims against Forensic indisputably post-dates the payment of the McIntosh flood claim and can thus form no basis for a claim of conspiracy.

Even if Relators could make a convincing case that there exists a cause of action for conspiracy to commit a reverse false claims violation – which they cannot – they run squarely into their own disavowal of any action for a reverse false claim:

“If they are calling this a reverse false claim, then we would submit that now we withdraw our agreement and we’d like to keep it in play. But we don’t need to because a reverse false claim is not what’s at issue here. A reverse false claim is if the government — if you falsely represent that you don’t need to make a payment that you owe to the government, so, like, a tax return might be a good example of it. This is a false claim. There’s only one claim at issue here. There was a continuing duty to make sure that that claim was not false. So we’re not in the reverse false claim situation at all.”

Perhaps, a look at Randy Down’s email message responding to Bob Kochan’s “very good news” is in order.  Remember, it was after Brian Ford’s report that Forensic needed to get “back in business with SF:Randy Down re Lecky report requirements and wind

Based on what I read in the email messages recovered from Nellie Williams’ hard drive, this one dated November 17, 2005 for example,  Bob Kochan was between the proverbial rock and the hard place.

I also spoke with a couple of RIV sales locations in the Gulf Coast region and it appears that if we turned the RIV in to be resold on Consignment, we most probably would get $117-120,000 for it. If I recall correctly, I borrowed $135K and put 9947 down. I suspect you have made or will be making the second installment payment of -$2350 so we should have a payoff balance of about $134,000 at present. If we sold it tomorrow, we would have to come to the table with roughly 17K which I don’t believe we have available. Thus it appears that if we keep it a few months longer and hopefully get some return revenue from it, we might be better off. Please let me know your thoughts on the matter.

A good place to start putting these messages in the context of the State Farm Bank is with the Motion and Memorandum in Support of Forensic Analysis & Engineering Corp.’s Motion to Quash Subpoena Duces Tecum Served Upon State Farm Bank and Motion for Protective Order filed in McIntosh v State Farm (the Subpoena is here):

It is anticipated that Plaintiffs wish to gain information on a loan made to Robert K. Kochan, on behalf of FAEC, to purchase a recreational vehicle (“RV”) for FAEC so that FAEC could establish a mobile office after Hurricane Katrina. This inference is gained by the loan number referenced in the subpoena directed at State Farm Bank. However, nowhere in Plaintiffs’ Complaint is there any allegation related to the RV or any financial relationship between State Farm Bank and the persons/entity identified in the subpoena. Plaintiffs’ Complaint contains two “Counts” against FAEC: 1) Fraud and 2) Aiding and Abetting Fraudulent Actions of  Defendant, State Farm, Civil Conspiracy Engaged in by Both Defendants to Deny Coverage. There exists no basis to seek financial information from State Farm Bank in this case.

A more likely explanation is that Plaintiffs’ counsel is attempting to engage in premature discovery in an unrelated case currently before this Honorable Court (i.e. Shows, et. al. v. State Farm, et. al., United States District Court for the Southern District of Mississippi…).   As this Court is likely aware, the same group of attorneys in the case at bar represent the Shows Plaintiffs. In the Shows Complaint, Plaintiffs make a slew of baseless, farfetched, and ludicrous allegations surrounding FAEC’s purchase of an RV for FAEC’s Biloxi mobile office.

Only a few pages from the Shows complaint were attached as exhibits to the Memorandum in Support of the FAEC motion to quash.   A more complete picture of the “slew of…allegations” is found in the Amended Complaint in Shows v State Farm .  Quoted text in the paragraphs that follow are taken from the complaint and alternated with text from a related email message found in the exhibits:

On or before September 26, 2005, STATE FARM’s employee Mark Wilcox (“Wilcox”), on information and belief using interstate telephone lines, called or faxed Kochan and proposed that STATE FARM hire Forensic to furnish engineers, inspect properties and prepare inspection reports for STATE FARM’s use in processing Hurricane Katrina damage claims in Mississippi. As alleged with particularity below, the purpose of the call was to lay the groundwork for the scheme to defraud Plaintiffs.

In the early morning hours of the 26th, Kochan sent a lengthy email (pages 80-81) to Williams:

Just so that you understand what Mark Wilcox from State Farm and I discussed, I mentioned being able to do about 3 inspections a day, and thus maybe able to tum in about 7-9 reports with invoices per day op and running. He said that he has up to $25oo to spend on each home claim that gets denied for rising water and more than that if the loss can be substantiated to have been caused by wind. I don’t see how we can spend $2500 on any of these claims if we don’t have to drive too far. If we average 3K per and do 6 a day that 18K l/day times 6 days per week x 4.333wks/month equals $467,964 plus expenses per month potential or/ If we get our pro-rata share ofthe probable 4000 claims contended, we could see about 1.2 – 1.5 Million in the next three months.  Pretty exciting potential.

According to the Complaint, Kochan secured a line of credit from the State Farm Bank and purchased a “luxury RV” with the expectation monthly fees from State Farm would cover the cost.

Anticipating a lucrative relationship with STATE FARM, after the proposal was telephoned and/or faxed in, allegedly over interstate lines, Kochan secured a line ofcredit from STATE FARM’s banking unit (STATE FARM BANK) and purchased a $150,000.00 luxury RV. Kochan later referred to the purchased RV as Forensic’s “mobile RV office…In the interstate phone calls with Wilcox, Kochan was assured that STATE FARM had “up to $2500 to spend on each home claim that gets denied for rising water… Kochan’s investment in the RV, itself essential to the conduct of the racketeering scheme, was expected to be recovered through STATE FARM’s payment of a $6,950.00 monthly fee for use of the RV.

The $6,950.00 monthly fee was less than the $7500 per month Kochan instructed Williams to add to the rate sheet (page 89).

Next important step is to specifically note his conversation with me in which I asked him about what State Farm would be paying experts for our services and he directly stated that State Fann would be paying us’ for our services at our standard published rates for all needed professional services and associated expenses. I need you to add on to our rate sheet a line for the use of FAEC’s MOBILE Catastrophe Office and Living Center at $7500 per month.

The next step detailed in the complaint was for Kochan to  confirm and accept the offer.

On or about September 26, 2005, the proposal made in the Wilcox – Kochan telephone conversation was accepted and confirmed in a letter written and transmitted by Kochan, on information and belief, via U.S. Mail or by interstate telefax line, to Wilcox and STATE FARM. The purpose of the confirmation letter was to secure the financing for the scheme to defraud Plaintiffs… The final copy of the confirmation letter that Kochan signed changed the statement “[STATE FARM] has up to $2500 to spend on each home claim that gets denied for rising water” to read: “$2500 for each home claim investigated for rising water…”.

Nellie Williams prepared the letter for Kochan, sending him an email message and draft of the letter mid-morning on the 26th asking him to Please confirm this is what you wanted. Note that in this letter the monthly rate for the use of the RV has dropped to $6500 per month (pages 91-92):

Forensic Analysis & Engineering Corporation (FAEC) is pleased to accept your verbal commitment stating that you and State Farm Insurance authorize FAEC to deploy our Catastrophe Response Team to the Biloxi area in our mobile office and that you are authorizing us to utilize three or four professional engineers and administrative staff on site for at least the month of October, and possibly extending up to six or more months, depending on the total number of specific claims received by State Farm from throughout the region that need forensic investigation services.

As per our conversation, State Farm will be paying experts for services rendered at our standard published rates for all needed professional services and associated expenses. I have enclosed for your review a current Fee Schedule for your files.

As we have our own RV set up for these type of emergency situations, we will not be incurring a nightly expense for a hotel bill for any of our people on assignment down there, up to a maximum of 4 per day. Instead, our charge will be for the use of the RV for up to 4 persons at our published rate of $6500 per month…

In what appears to be the actual letter to State Farm, the monthly rate changes once again (page 93 – 94):

As FAEC has its own fully equipped functioning mobile office and living quarters RV set up for these type of emergency situations, through its used [sic] FAEC  will be reducing the living costs that State Farm might otherwise expect to incur to house four of our staff at distant motels. As such we will not be incurring a nightly expense for a hotel bill for any of our people on assignment down there, up to a maximum of 4 per day. Instead, our charge  for the complete use of the RV for office and housing up to 4 persons each night win be at our published rate of $6950.00 per month.

Kochan did not have to wait until the unit was on the Coast to begin work.

Prior to Kochan’s September 26,2005, confirmation letter, Wilcox and STATE FARM sent to Forensic’s Raleigh, North Carolina office, fourteen (14) inspection assignments involving Katrina damaged properties insured by STATE FARM.

The letter from Kochan, in fact, notes these assignments (page 94):

We are very eager to do our part to help the victims of Hurricane Katrina get their lives back to as close to normal as soon as possible.  In that light, we have accepted the first 14 or so cases that have been faxed over and my lead personnel will be beginning our on site efforts   on Thursday of this week. I look forward to personally meeting you upon my arrival next weekend.

Meet they did and more! According to the Complaint:

After sending the confirmation letter, Kochan personally drove the RV to storm-ravaged Biloxi, Mississippi, where, by prior arrangement, he was met by Wilcox who assisted him in setting up the RV as an operations center for the Enterprise.

The Shows Complaint in our right sidebar under legal is a great read – but, as John Gresham has said, you can’t make this stuff up.  I’ll add the documents from this post to our McIntosh file, also on the right under legal.

I do wonder after reviewing the dozens of documents I pulled in preparation of this post why Forensic’s counsel would ridicule the Relators’ comment about the Brian Ford deposition.

I’m guessing for the same reason State Farm waged a relentless campaign to disqualify attorneys that were simply employed by the venture group firms.

You can bank on it – truth is one thing no surge can wash away – assuming, of course, you don’t do your banking at the State Farm Bank.