may cost state
WHO: The Pacific Group Medical
Association's collapse in 1997 could leave the
state liable for millions lost
WHY: A financial investigator says
state regulators failed to heed 'red flags'
pointing to the company's problems
Grand jury seeks UPW, Rodrigues' family records
By Ian Lind
The state could be legally liable for millions of dollars lost in the 1997 collapse of Pacific Group Medical Association because regulators failed to respond to "red flags" pointing to the health insurer's severe financial problems, financial investigator Thomas E. Hayes has charged.
While PGMA was racking up millions in unpaid bills, company founder Peter Po Sang Wong used a series of related companies and "a complex web of transactions and fund transfers" to funnel nearly $4.4 million to himself and family members for personal use, Hayes says in a recently completed report.
The company, which began operations in 1993, was finally seized by regulators in March 1997, leaving debts later estimated at $26 million owing to public workers, their doctors and other health providers, court records show.
Hayes filed the 18-page report as part of the ongoing PGMA liquidation proceedings, in which a state court is supervising the attempt to recover assets that can eventually be used to pay off the insurer's outstanding debts.
The report is based on a computer analysis of records, including 14,400 checks, 5,000 deposits, and 2,700 credit card transactions, obtained through subpoenas from 92 different bank, brokerage and credit accounts.
Hayes took the unusual step of hiring his own attorneys to file the report with the court rather than submitting it to Insurance Commissioner Wayne Metcalf.
Metcalf said he did not see the report until it was filed in court. "I can't comment on whether that is usual or unusual," Metcalf said. "But I can say this is the first instance in which I've ever seen such a report filed in this manner."
Report called 'unauthorized'Attorneys representing the insurance commissioner criticized Hayes for releasing "an unauthorized and preliminary report." In a three-page letter prepared after questions were raised by the Star-Bulletin, the attorneys also instructed Hayes not to disclose further information about the case without Metcalf's consent.
Hayes declined to comment. His attorney, Louise Ing, said the report "speaks for itself."
Wong and his wife, Susan, who now operate an insurance business in California, could not be reached for comment. A receptionist said they were traveling and would not be checking for messages. In previous court filings, the Wongs have denied any wrongdoing.
According to Hayes' report, PGMA had no employees and few assets when it started operations in September 1993, just three years after the Wongs filed for personal bankruptcy.
PGMA entered into a management and marketing agreement with Pacific Equity Growth & Management, another company controlled by Wong, while insurance premiums and medical claims were initially handled through a contract with Queen's Health Care Inc.
Hayes alleges "the pillaging of PGMA" began in September 1994, when Wong ended Queen's contract and transferred those functions to companies he controlled.
By November 1994, PGMA was insolvent, but the state allowed the company to continue operating, the report says.
In mid-1995, PGMA entered into agreements to offer health insurance to members of the United Public Workers and Hawaii Government Employees Association, the state's two largest public employee unions. The deals lost money for PGMA, but dramatically increased the flow of cash through the companies.
Diversion of funds allegedHayes alleges Wong dipped into the growing cash flow by writing checks for personal expenses. According to the report, more than $1 million was deposited into the accounts of three companies controlled by Wong, who also took $657,000 in cash or equivalents, while paying his mother an extra $627,600.
Smaller amounts went for clothing, automobiles, casino expenses and "other" personal expenses.
The filing of the report reflects a rift between Hayes and Metcalf over the direction of the case.
Hayes, who has investigated several of Hawaii's largest financial frauds, was hired in April 1997 as a special administrative assistant to then-Insurance Commissioner Rey Graulty.
Hayes was terminated on Aug. 31 when Metcalf became commissioner after Graulty was named a Circuit Court judge. Metcalf at the same time dropped two law firms, which had also been selected by Graulty. Both moves, Metcalf said, were necessary in order to cut costs in the extended legal proceedings.
Hayes said the state was slow to act despite clear warnings of PGMA's shaky finances and tentative questions from auditors in 1994 about several related companies sharing "common management" and under Wong's control.
"Inquiry into the related party issue would have revealed extensive intercompany transactions that permitted the Wong family ultimately to loot almost $4,400,000 from PGMA by funneling funds" through two interlocked firms, the report charges.
"In my opinion, PGMA should have been shut down fully two years before its actual termination date," Hayes concluded.
When Hayes was terminated, he was trying unsuccessfully to obtain documents from the Insurance Division and the consultant that had worked on the 1994 examination of PGMA, the report states.
"For the record, it should be noted that the management team in controlling PGMA's Liquidating Trust consists of the same structure and personnel as were in the Insurance Department during the period that PGMA spiraled down to its ultimate debacle," Hayes' report concludes.
Prepared to seek damagesMetcalf, a former state legislator from Hilo, was Gov. Cayetano's first insurance commissioner until he was appointed in early 1997 to serve out the remaining term of the Big Island Sen. Richard Matsuura, who resigned for health reasons and later died.
Metcalf said he had only met Hayes on one occasion, and was unaware of the concerns detailed in the report.
"He (Hayes) was the individual gathering information, and to the extent that he had information that was relevant, the obligation is clearly his to bring any pertinent information to the attention of the liquidator. The first I've heard from him is this report," Metcalf said.
Metcalf said he is prepared to seek damages from the state if warranted. This would require Metcalf, as PGMA liquidator, to sue the Insurance Division, which he heads.
"The issue is whether or not there is evidence of the state's negligence. If there is, they, like any other party that may be liable in some form or fashion, necessarily have to be pursued."
Grand jury seeksBy Ian Lind
records from UPW,
A federal grand jury in Honolulu has subpoenaed records from the United Public Workers and a daughter of UPW state director Gary Rodrigues as part an apparent probe of financial transactions involving Rodrigues and Pacific Group Medical Association.
PGMA at one time provided health insurance to thousands of UPW members.
Richard L. Hoke Jr., attorney for Rodrigues' daughter, Robin H. Sabatini, has confirmed that Sabatini has turned over records of transactions between PGMA and Four Winds RSK Inc., a company she owns.
Hoke said Sabatini has cooperated fully with the grand jury and is not a subject of the investigation.
"The records were provided pursuant to a grand jury subpoena, but we would have provided it to them straight up," Hoke said.
Hoke said the documents were turned over several months ago along with those of other record providers, whom he did not identify.
Sources familiar with aspects of the investigation, including several people asked to provide information, say Rodrigues' union has also turned over thousands of pages of documents to the grand jury.
The federal probe has involved investigators from the U.S. Department of Labor regional office in San Francisco and the criminal division of the Internal Review Service, along with the U.S. attorney's office in Honolulu, the sources said.
Rodrigues could not be reached for comment. He has refused to answer questions from the Star-Bulletin about these matters since last year.
Honolulu attorney Robert F. Miller, who represents UPW in matters regarding PGMA, did not respond to requests for comment.
Fraud investigator Thomas E. Hayes, who compiled a detailed computer analysis of PGMA's finances, recently disclosed that he "has recently been retained by the United States Department of Justice as a litigation consultant for matters related to PGMA."
Insurance Commissioner Wayne Metcalf said that Sabatini's company "had a contractual relationship with PGMA."
State business registration records show Four Winds was formed in February 1996 with Sabatini listed as its sole officer, director, and shareholder.
Metcalf declined to comment on reports that Sabatini received more than $100,000 in consulting fees from PGMA or a related company during an eight-month period in 1996.
"I'm not in a position to comment on what may have been paid," Metcalf said. "I don't think its appropriate to comment on that matter prior to the deposition."
Attorneys representing Metcalf have asked a state judge to order Sabatini to appear with the records for a deposition.
Court records show she failed to show up twice in late 1997 after being served with a subpoena for the same records.
A hearing on the request is pending, but Hoke says Sabatini's records are already available to the state under the terms of a document sharing agreement with the federal government.