Insurance Industry: Chronology of F.T. Riley's Activities and Related
Regulatory Actions (Letter Report, 10/26/94, GAO/OSI-95-5).
In response to congressional concerns about fraud and abuse within the
insurance industry, GAO investigated the business practices of Ferrell
Travis Riley. Before September 1994, no federal statutes directly
prohibited insurance fraud, and states having statutes prohibiting fraud
are often reluctant to investigate and prosecute insurance fraud cases
because of budget and jurisdictional problems. By taking advantage of
this environment, Mr. Riley and his related companies have continued to
operate in a questionable manner by moving from state to state. In
little more than a decade, Mr. Riley and his associates have engaged in
insurance activities in at least 18 states. This report presents a
chronology of Mr. Riley's activities, his methods of operation, and
regulatory actions taken by state regulators against him and his
companies.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: OSI-95-5
TITLE: Insurance Industry: Chronology of F.T. Riley's Activities
and Related Regulatory Actions
DATE: 10/26/94
SUBJECT: Insurance regulation
Law enforcement
Fraud
Crimes or offenses
Insurance companies
Jurisdictional authority
State/local relations
State law
White collar crime
IDENTIFIER: New Mexico
Texas
Louisiana
Wyoming
Missouri
Nebraska
Maryland
Delaware
Kansas
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce, House of Representatives
October 1994
INSURANCE INDUSTRY - CHRONOLOGY OF
F.T. RILEY'S ACTIVITIES AND
RELATED REGULATORY ACTIONS
GAO/OSI-95-5
Insurance Practices of Ferrell T. Riley
(600305)
Abbreviations
=============================================================== ABBREV
GAO - General Accounting Office
GGD - General Government Division
NAIC - National Association of Insurance Commissioners
OSI - Office of Special Investigations
RICO - Racketeer Influenced and Corrupt Organizations
Letter
=============================================================== LETTER
B-255978
October 26, 1994
The Honorable John D. Dingell
Chairman, Subcommittee on
Oversight and Investigations
Committee on Energy and Commerce
House of Representatives
Dear Mr. Chairman:
Your March 23, 1993, letter expressed concern about the prevalence of
fraud and abuse within the insurance industry. In that letter and
subsequent discussions with your office, you asked that we conduct an
investigation to describe the business practices of Ferrell Travis
Riley. As represented by your office, he is a known associate of
James Wining, a subject of the Subcommittee's February 1990 report
entitled "Failed Promises," who had pleaded guilty on March 13, 1992,
to conspiracy to commit wire fraud, mail fraud, and interstate
transportation of property obtained by fraud. As discussed with your
office, our report presents a chronology of Mr. Riley's activities,
his methods of operation, and regulatory actions taken by state
regulators against him and his associated companies.
In developing this chronology, we relied on statements made by
insurance regulators familiar with Mr. Riley's activities and court
documents related to civil and criminal actions that have been filed
against Mr. Riley and his related companies. We did not
independently investigate the basis for the various charges against
Mr. Riley. While Mr. Riley has been indicted in a number of
instances, he has never, to our knowledge, been convicted of a
criminal act. Because Mr. Riley's attorney declined a request by
your office for an interview with Mr. Riley, we did not obtain Mr.
Riley's response to the charges.
Prior to September 13, 1994, no federal statutes directly prohibited
insurance fraud.\1 State regulators and others informed us that
states having statutes prohibiting fraud are reluctant to investigate
and prosecute insurance fraud cases because of budget and
jurisdictional problems. By taking advantage of this environment,
Mr. Riley and his related companies have continued to operate in a
questionable manner by moving from state to state. In a little more
than a decade, Mr. Riley and his associates have engaged in
insurance activities in at least 18 states.
Mr. Riley's career in the insurance business has spanned nearly 2
decades. Over the years, Mr. Riley, his associates, and the
companies with which he has been connected have been the subject of
charges which alleged selling insurance without state approval,
diversion of funds belonging to insured or insurer, misrepresentation
of company assets, and theft.
Mr. Riley's practice was to locate an insurance company in one state
but sell insurance in another state. He then claimed exemption from
home state regulation on the grounds that he was a foreign insurer
(an out-of-state insurer) and was not doing the business of insurance
in the state of domicile. For example, in response to an attempt by
the New Mexico Insurance Department to regulate Meadowlark Insurance
Company (a Riley-related company), Mr. Riley's attorney stated that
Meadowlark was exempt from New Mexico state regulation. In fact, it
was Meadowlark's position that it was not subject to the jurisdiction
of any state. Further, when a state of domicile strengthened its
laws, Mr. Riley moved the company to another state with weaker
regulations.
Appendix I summarizes Mr. Riley's insurance business activities from
1976 to 1993. The chronology shows that some state regulators had
limited success in keeping Mr. Riley from continuing operations in
their respective states. Attempts to regulate Mr. Riley's insurance
activities in the companies with which he was associated date from at
least 1986. Mr. Riley currently controls an insurance company in
Kansas.
Appendix II describes "nonadmitted" insurers, who sell excess and
surplus lines insurance--the insurance Mr. Riley sold in most of the
states in which he operated.
--------------------
\1 On September 13, 1994, the Violent Crime Control and Law
Enforcement Act was signed into law, which makes insurance fraud a
crime if it affects interstate commerce. (Title 18 U.S.C. � 1033
and � 1034)
---------------------------------------------------------- Letter :0.1
Our investigation took place between March and November 1993. We
interviewed representatives of various state insurance commissions;
state enforcement personnel; and liquidators, conservators, and
auditors representing state insurance departments to obtain
information about what they knew of Mr. Riley's business practices.
We also interviewed an attorney representing a private insurance
company affected by Mr. Riley's operations and analyzed its records.
As arranged with your office, unless you publicly release its
contents earlier, we will not make this report available to others
until 30 days after the date of this letter. If you have any
questions concerning this information, please contact me or Assistant
Director Donald Fulwider of my staff at (202) 512-6722. Major
contributors to this report are listed in appendix III.
Sincerely yours,
Richard C. Stiener
Director
CHRONOLOGY OF FERRELL TRAVIS
RILEY'S INSURANCE ACTIVITIES
=========================================================== Appendix I
We prepared this chronology on the basis of statements and documents
received from various state regulators, auditors, and investigators
who had knowledge of Mr. Riley's operations. In addition, we
obtained information from public documents, which included
indictments, transcripts, cease and desist orders, and injunctions.
We also interviewed a representative of an insurance company affected
by Mr. Riley's operations. We did not independently investigate the
allegations raised by these sources. Because Mr. Riley's attorney
declined a request by your office for an interview with Mr. Riley,
we did not obtain Mr. Riley's response to the charges. The
following summarizes attempts by some state regulators and others to
keep Mr. Riley and his related companies from operating in their
respective states.
TEXAS
--------------------------------------------------------- Appendix I:1
In 1976, Mr. Riley owned the Sheldon Agency located in Houston,
Texas. In 1983, he organized and financed the Riley Insurance Agency
on behalf of his son, Frank Riley. According to court documents, Mr.
Riley obtained an agency appointment with Dexter Lloyds Insurance
Company of Houston, Texas, in May 1982\2 and in 1983 began acquiring
stock in this company. By February 1986, Mr. Riley had become the
sole owner of the company. In August 1986, the Commissioner of the
Texas State Board of Insurance ordered Dexter Lloyds to be placed
under regulatory supervision. According to a 1988 civil complaint
filed in U.S. District Court, Mr. Riley secretly obtained control
of Dexter Associates, the parent company for Dexter Lloyds. However,
the Texas State Board of Insurance was not informed that he had
purchased the company, even though state law required such
disclosure.
In October 1986, the Commissioner of the Texas State Board of
Insurance placed Dexter Lloyds in temporary receivership; and in
December 1986, the Texas Attorney General obtained a temporary
injunction against Dexter Lloyds. (In the fall of 1986, Mr. Riley
moved his operation to Louisiana when he acquired/created North
American Underwriters Insurance Company located in Lake Charles,
Louisiana.) In January 1988, Dexter Lloyds and Dexter Associates were
placed in permanent receivership when the court found that they were
insolvent by an amount in excess of $3.5 million.
While Dexter Lloyds was in receivership, the Texas receiver attempted
to secure corporate assets to pay policyholders of the failed
company. In this regard, the Texas receiver filed a civil complaint
in 1988 in U.S. District Court against Ferrell Riley, the Sheldon
Agency, Frank Riley, the Riley Insurance Agency, and individuals
associated with Dexter Lloyds. The complaint was filed under the
Racketeer Influenced and Corrupt Organizations (RICO) Act of 1970.
This complaint made numerous assertions, including (1) concealment of
ownership in Dexter Lloyds, (2) misappropriation/diversion of Dexter
Lloyds' moneys, and (3) misrepresentation of the financial condition
and soundness of Dexter Lloyds.
On April 11, 1990, at the request of the state of Texas, the court
dismissed the RICO complaint because the defendants had filed for
bankruptcy. According to the Texas Liquidation Division's former
Director of Legal Services and Receiverships, the expense to the
receiver did not justify the continued prosecution of the case.
In September 1989, the Texas Commissioner of Insurance revoked
Mr. Riley's Texas insurance licenses. This revocation was based on
the Commission's determination that Mr. Riley had illegally withheld
money belonging to insured and insurer, had demonstrated a lack of
trustworthiness or competence to act as an insurance agent, was
guilty of fraudulent and dishonest practices, and had unreasonably
failed and neglected to pay over to an insurance company or its agent
any premium or part thereof collected on a policy or application for
insurance.
In July 1990, a federal grand jury indicted Mr. Riley and his son
Frank Riley on charges of mail fraud, false statements, and aiding
and abetting. The indictment stated that these individuals had
violated criminal statutes while doing business as insurance agents
for the Sheldon and Riley agencies. On April 15, 1991, the
indictment was dismissed by motion of the government after Mr. Riley
reimbursed the victims.
--------------------
\2 According to Texas state insurance authorities, an insurance sales
firm grants an agency appointment when it vouches for the credentials
and integrity of the appointee and allows that appointee to sell
insurance for the company.
LOUISIANA
--------------------------------------------------------- Appendix I:2
In 1986, Mr. Riley and his associates moved their insurance business
to Louisiana and acquired and/or created North American Underwriters
Insurance Company.
In March 1987, North American Underwriters' name was changed to
Louisiana Underwriters Insurance Company. According to the Louisiana
Insurance Commission examiner, Mr. Riley was listed as a consultant
to Louisiana Underwriters. Had he been listed as an officer or
stockholder, his previous record of insurance abuse in Texas would
have disqualified the Louisiana Underwriters application. Further,
Mr. Riley received no salary or consultant fees, but Louisiana
Underwriters paid his expenses. The examiner added that Mr. Riley
had made all major policy and operating decisions for Louisiana
Underwriters.
According to the Louisiana Insurance Commission examiner who examined
the business records of Louisiana Underwriters, fraudulent activities
had taken place at Louisiana Underwriters in 1987. For example,
Louisiana required that assets of an insurance company be located in
that state in order for the company to be licensed to do business.
The principal asset listed for Louisiana Underwriters--mortgage loans
on condominium property--was located in Park City, Utah.
Further, the examination found that Mr. Riley had misappropriated
hundreds of thousands of dollars that should have been deposited for
future claims. For example, in 1987, Louisiana Underwriters
contracted to manage an insurance risk pool of $1 million for a group
of amusement park owners for a $100,000 management fee. Mr. Riley
did not maintain the $1 million in a required escrow account to pay
policyholder claims. The examination concluded that at least
$200,000 had been spent to pay for a trip Mr. Riley made to Monte
Carlo. Another $50,000 had been used to purchase rugs, paintings,
vases, scrolls, and sculpture for personal use.
In August 1988, a short time after the state of Louisiana had begun
an on-site insurance examination of Louisiana Underwriters, Mr.
Riley was alerted (the Louisiana state examiner believes it was
through a wiretap of the examiner's office space at Louisiana
Underwriters) that the state examiner had preliminary findings of
fraud and misappropriation of Louisiana Underwriters' funds. The
remainder of Louisiana Underwriters' liquid assets was transferred to
Wyoming 1 day before the funds could be seized under a Louisiana
state conservation order filed in August 1988. In April 1989, the
court transferred the assets of Louisiana Underwriters to Meadowlark
Insurance Company--a Wyoming company controlled by
Mr. Riley--and, as a result, the conservation order was canceled.
In 1989, a federal grand jury in Louisiana indicted Mr. Riley and
his associates for allegedly transporting cashier's checks, obtained
through alleged conspiracy and fraud, to Louisiana. According to
this indictment, in order to meet Louisiana insurance licensing
requirements, Mr. Riley obtained a $1.7-million unsecured loan in
February 1987 from the First State Savings Bank of San Antonio,
Texas. The bank president had the loan disbursed in the form of 17
cashier's checks, payable to North American Underwriters, which were
converted to 17 separate certificates of deposit issued to North
American Underwriters. On the basis of the $1.7 million in 17
certificates of deposit that Mr. Riley presented as unencumbered
assets for North American Underwriters, Louisiana granted it a
license to sell insurance. Shortly after the license was granted,
the $1.7 million in certificates of deposit was returned to the Texas
bank that had made the original unsecured loan. According to the
Louisiana Insurance Commission, Mr. Riley had failed to disclose the
existence of the $1.7-million loan. On May 3, 1990, Ferrell Riley
and his associates at Louisiana Underwriters were tried and acquitted
of all charges. Mr. Riley claimed that the funds used to purchase
the certificates of deposit had been borrowed, not obtained by fraud.
WYOMING
--------------------------------------------------------- Appendix I:3
In August 1988, Mr. Riley and his associates began the move to
Wyoming. They incorporated Meadowlark Insurance Company on August
30, 1988, in Wyoming but were not licensed to sell insurance in
Wyoming. Mr. Riley was listed as a consultant to Meadowlark but not
as an officer, director, or stockholder. According to its corporate
charter, Meadowlark was in the business to sell property, casualty,
marine transportation, fidelity and surety, and other insurance. On
November 16, 1988, the Wyoming Insurance Commissioner, gave formal
approval for Meadowlark to write excess and surplus lines insurance
in the state of Wyoming.\3
As a result of pending legal matters in Texas and Louisiana, on April
26, 1990, Meadowlark was deemed ineligible as a Wyoming insurance
company by the Wyoming Insurance Commissioner. Insurance brokers
were forbidden to do business with Meadowlark.
--------------------
\3 Excess and surplus lines insurance is property/casualty coverage
that is not available from insurers licensed by the state--called
admitted insurers--and must be purchased from a "nonadmitted"
carrier. Excess and surplus lines is coverage that often is sold by
only a few nonadmitted insurers. A brief discussion of nonadmitted
insurers is found in app. II.
MEADOWLARK OVERSEAS
--------------------------------------------------------- Appendix I:4
Some states require an alien corporation (a non-U.S. corporation) to
have several years of insurance experience as part of the criteria
for writing surplus lines insurance in that state. In 1989, Mr.
Riley acquired a dormant shell corporation in the Turks and Caicos
Islands, British West Indies, that had been incorporated as Arabian
Additives, Ltd. in 1982. On October 5, 1989, the name Arabian
Additives, Ltd. was changed to Meadowlark Insurance Company in the
Turks and Caicos. Meadowlark now appeared to have a history going
back to 1982, allowing Mr. Riley to meet states' criteria for
surplus lines insurance. However, the Turks and Caicos insurance
administrator stated in a letter to the National Association of
Insurance Commissioners\4 in 1992 that Meadowlark was never licensed
as an insurer in that jurisdiction. Yet, in 1989, Meadowlark, which
was physically located in Albuquerque, New Mexico, distributed
brochures that said
" . . . Meadowlark Insurance Company is a worldwide casualty,
property and bond insurer and reinsurer. . . . The company
has a full administrative office in Albuquerque, New Mexico,
U.S.A. . . . The company was incorporated in the Turks and
Caicos Islands, British West Indies in 1982. In 1989 the name
was changed to Meadowlark Insurance Company."
In May 1990, Mr. Riley formed Meadowlark Insurance, S.A. in the
Dominican Republic and moved Meadowlark from the British West Indies,
which was tightening its regulation of insurance companies. James
Wining\5 assisted Mr. Riley in this endeavor. Although Meadowlark
Insurance, S.A. was a legitimate corporation in the Dominican
Republic, it never had a license to sell insurance in the Dominican
Republic, according to a memorandum dated August 4, 1992, from the
Superintendent of Insurance there.
--------------------
\4 The National Association of Insurance Commissioners consists of
the heads of the insurance departments of the 50 states, District of
Columbia, and 4 U.S. territories. While it has no regulatory
authority, the association serves as a clearinghouse for information
concerning unlicensed non-U.S. insurers, especially those operating
in the U.S. surplus lines market. It provides a structure for
interstate cooperation in examinations of multistate insurers and
distributes model insurance laws and regulations for consideration by
state insurance departments.
\5 On July 6, 1991, James Wining was indicted concerning an unrelated
transaction on federal charges of conspiracy and interstate
transportation of stolen goods. On March 13, 1992, he pleaded guilty
to those and other charges.
EXPANSION OF MEADOWLARK
COMPANIES INTO OTHER STATES
--------------------------------------------------------- Appendix I:5
Mr. Riley has expanded his activity throughout the United States
since 1989. Six states--New Mexico, Missouri, Nebraska, Delaware,
Maryland, and Kansas--deserve special mention, as they highlight Mr.
Riley's method of operation.
NEW MEXICO
------------------------------------------------------- Appendix I:5.1
In November 1989, Mr. Riley met the New Mexico Superintendent of
Insurance to request approval to sell property and casualty insurance
in New Mexico on a surplus lines basis. In negotiations with the
state of New Mexico, Mr. Riley was the lead spokesperson and
principal decisionmaker, according to New Mexico insurance
authorities; however, the New Mexico Superintendent of Insurance did
not grant Meadowlark authority to sell insurance in New Mexico.
According to the New Mexico Superintendent of Insurance, Meadowlark
could not conduct the business of insurance in New Mexico, given that
it was not licensed in New Mexico or any other state. Further, the
New Mexico Superintendent was concerned that
Mr. Riley had moved Meadowlark from the West Indies to the Dominican
Republic to avoid having his (Mr. Riley's) insurance practices
scrutinized.
In early 1990, the New Mexico Superintendent of Insurance received
information from other regulators indicating that Meadowlark was
transacting insurance business from its Albuquerque office with
consumers in other states. In February 1990, the New Mexico
Superintendent of Insurance issued a cease and desist order against
Meadowlark to stop it from transacting business in that state without
a license. In March 1990, the Department of Insurance began a formal
examination of Meadowlark's operations, financial condition, and
business affairs to determine its eligibility for certification. Mr.
Riley and his associates continued to expand their business base in
New Mexico and elsewhere. In April 1990, the Wyoming-based M & M
Management Company (a Riley-related company) received its New Mexico
corporate charter.
The New Mexico Insurance Commission, through the Superintendent of
Insurance, identified several violations of New Mexico insurance law
by Meadowlark in 1990 and concluded that Meadowlark had transacted
$1.6 million of insurance business while located in New Mexico
without the required authority from the Superintendent of Insurance.
Mr. Riley's lawyer contended that Meadowlark was an alien
corporation and pure surplus lines company and therefore no state had
the authority to examine its operations, financial condition, and
business affairs. He further asserted that Meadowlark was not
transacting the business of insurance in New Mexico because it was
selling to residents in other states.
In July 1990, Meadowlark applied for placement on New Mexico's
approved list of alien surplus lines insurers. But regulators denied
Meadowlark's application, citing the company's trust fund
deficiencies, inadequate loss reserves, incorrect valuation of
assets, and false representations. The New Mexico Superintendent of
Insurance issued a second cease and desist order against Meadowlark
on August 23, 1990.
Because of ambiguities in the New Mexico Insurance Code on the
definition of the transaction of insurance business and the
regulation of alien insurance companies like Meadowlark, the state
legislature changed the law on March 16, 1991, despite intense
lobbying against the bill by Meadowlark. That legislation became
known as the "Meadowlark Bill." It increased state regulatory powers
over alien insurance companies operating in that state, increased
insurers' requirements for capital surplus and funds held in trust,
and extended the oversight authority of the New Mexico Superintendent
of Insurance. Shortly after this legislation was passed, Meadowlark
left New Mexico. The New Mexico Superintendent of Insurance referred
Mr. Riley and Meadowlark to the Office of the New Mexico State's
Attorney and the U.S. Attorney's Office for investigation.
MISSOURI
------------------------------------------------------- Appendix I:5.2
During 1990, although Meadowlark was not licensed to sell insurance
in Missouri, Meadowlark contracted with a Missouri insurance broker
to sell commercial general liability policies. Complaints received
by the Missouri Department of Insurance indicated that (1) Meadowlark
Insurance Company and M & M Management Company (as manager of
Meadowlark's affairs in the United States) were selling insurance and
adjusting claims and (2) M & M was collecting premiums from agents
who were producing the business. In response to these complaints,
the Missouri Department of Insurance obtained a temporary restraining
order against Meadowlark in December 1990, prohibiting it from
writing insurance in Missouri. In June 1991, the state obtained a
permanent injunction prohibiting Meadowlark from transacting any
insurance business with Missouri residents until Meadowlark obtained
a Missouri license. In August and September 1991, Meadowlark
Insurance Company and M & M moved their offices from Albuquerque, New
Mexico, to Kansas City, Missouri.
From April through September 1991, Meadowlark and M & M transferred
$300,000 to Mr. Riley's lawyer, Mr. Kevin Hare. According to Mr.
Hare, the moneys were from Mr. Riley and were meant to bribe
Missouri regulators to grant Meadowlark a license to sell insurance
in Missouri. However, the attorney said that he kept the money
instead. In 1994, Mr. Hare was convicted in the Western District of
Missouri of schemes to defraud and criminal money laundering.
According to evidence entered in Mr. Hare's trial, part of the
$300,000 in M & M funds was to pay claims to insureds in the western
United States.
NEBRASKA
------------------------------------------------------- Appendix I:5.3
In 1990, while Mr. Riley was operating without licenses in New
Mexico, Missouri, and Kansas, he was also active in Nebraska.
According to the Nebraska Department of Insurance, Meadowlark
Insurance Company sold liability insurance to Nebraska residents
without a Nebraska insurance license and without maintaining the
required adequate guaranty deposits in the United States for the
protection of policyholders. The state of Nebraska obtained a
temporary cease and desist order in February 1990, a permanent cease
and desist order in April 1991, and a permanent injunction and
restraining order on June 19, 1991, against the company. However,
the district court of appeals reversed the April 1991 order on March
31, 1992, because the term "adequate" in Nebraska statutes was
unconstitutionally vague. The Nebraska legislature subsequently
rewrote its statutes on surplus lines insurance, following the model
provided by the National Association of Insurance Commissioners, to
clearly define adequately guaranteed deposits. As a result,
Meadowlark stopped selling insurance in Nebraska.
DELAWARE
------------------------------------------------------- Appendix I:5.4
In early 1990, the Delaware Department of Insurance learned that
Meadowlark was insuring Delaware residents but was not licensed in
that state or elsewhere. The Department of Insurance also found
Meadowlark's annual report to be of doubtful authenticity. Asked if
a cease and desist order had been issued to Meadowlark, the regulator
said that he had found that issuing cease and desist orders to
companies such as Meadowlark ". . . is like giving Willie Sutton a
parking ticket." He had found that it was more effective to
concentrate on the agents issuing the policies. This strategy was
effective in the case of Meadowlark, as the agent who was writing
Meadowlark policies in Delaware has stopped writing them.
MARYLAND
------------------------------------------------------- Appendix I:5.5
In 1991, Mr. Riley and Meadowlark began doing business in Maryland.
Although the Baltimore City School Bus Contractors Association was
self-insured under the Maryland self-insurance program,
transportation companies were required to provide evidence of
additional security, such as a surety bond with an approved insurance
company, for payment of liability claims. Maryland law required that
only companies that have been approved by the Maryland Insurance
Commissioner to do the business of insurance in that state may bid on
the transportation surety bond business.
According to court documents, the manager of the self-insurance
program for Maryland, Austin Evans, contrary to Maryland law,
approved applications submitted by transportation companies to become
self-insured through surety bonds issued by Meadowlark, although
Mr. Evans knew that Meadowlark was not licensed in Maryland. Mr.
Evans also used his position to illegally influence self-insured
transportation companies to buy surety bonds from Meadowlark.
Meadowlark, as part of its contract with the Baltimore City School
Bus Contractors Association, also provided insurance coverage for
Baltimore City school children bused to extracurricular activities,
such as field trips and athletic events, and for busing the elderly
and handicapped after school.
In April 1992, prior to a grand jury's discovery of Mr. Evans'
involvement, the Maryland Department of Insurance issued a cease and
desist order to Meadowlark because it had discovered that Meadowlark
had no license to operate as an insurance company in Maryland. In
June 1992, Meadowlark entered into a consent agreement with the state
of Maryland and ceased insurance activities in that state.
In September 1993, Mr. Evans was convicted of a scheme to defraud
the state of Maryland and for accepting a $17,000 bribe from
Meadowlark Insurance Company in return for steering payments of over
$400,000 to Meadowlark from companies that comprised the Baltimore
City School Bus Contractors Association and others. An examination
of trial testimony reveals that while Mr. Evans was under
investigation, Mr. Riley paid his plane fare to Kansas City, put him
on the payroll of Consolidated Claim and Financial Services (a
Riley-related business) at between $2,500 and $3,500 per month, and
paid his attorney's fees.
KANSAS
------------------------------------------------------- Appendix I:5.6
Mr. Riley also conducted business in Kansas in 1991. According to
officials of the Kansas Department of Insurance, Kansas regulators
held hearings in early 1991 to shut down Town and Country Fire and
Casualty Insurance Company, a small company in Hutchinson, Kansas,
which was nearly insolvent. In early 1991, Town and Country
negotiated with 8 to 10 investors to solve its financial problems.
Mr. Riley, representing Meadowlark and M & M, met with Kansas
regulators concerning M & M's investment in Town and Country stock.
Kansas regulators agreed to allow Mr. Riley, representing Meadowlark
and M & M, to provide $400,000 cash to Town and Country, pending
further investigation and regulatory approval of M & M by the Kansas
Department of Insurance.
By November 1991, the Kansas Department of Insurance investigation
had raised concerns over Mr. Riley's running Town and Country, but M
& M by then had provided funds totaling $855,000, making Town and
Country solvent. In April 1992, M & M began the process of
transferring all its Town and Country stock into Prairie Star, (a
Riley-related company). By January 1993, Mr. Riley had provided
$1.4 million in capital through M & M, Magnolia Acceptance Finance
Company (a Riley-related company), and his lawyer to Town and Country
to maintain company solvency. Through Prairie Star, Inc., Mr. Riley
currently controls Town and Country, a domiciled insurance company in
Kansas. Kansas regulators are aware of Mr. Riley and his
relationship to Town and Country. They said that they are closely
monitoring the company's business practices and operations.
COMMERCIAL INDEMNITY ASSURANCE
COMPANY
--------------------------------------------------------- Appendix I:6
In late 1991, Meadowlark Insurance Company was winding down its
affairs in the United States.\6 Meadowlark transferred its premiums
to, and became known as, Commercial Indemnity Assurance Company.
Commercial Indemnity was purportedly organized under the laws of the
Dominican Republic in 1991. M & M Management Company compiled
Commercial Indemnity's balance sheet as of December 30, 1991, which
showed over $5 million in assets and zero liabilities.
--------------------
\6 In August 1991, Meadowlark Insurance Company reported $10 million
in sales and a net worth of $11.9 million.
LATEST ACTIVITIES
--------------------------------------------------------- Appendix I:7
As of November 1993, Town and Country Fire and Casualty Insurance
Company was operating in Hutchinson, Kansas. Ferrell Travis Riley, M
& M Management Company, and Magnolia Acceptance Finance Company were
still operating from Kansas City, Missouri. Unlike New Mexico
regulators who have regulatory authority under the "Meadowlark Bill,"
Missouri regulators say that they do not have regulatory authority
over an insurance company located in Missouri but doing the business
of insurance outside the state. As of the close of our inquiries,
Mr. Riley, Meadowlark Insurance Company, and Commercial Indemnity
were under investigation by the federal grand jury in the Western
District of Missouri.
NONADMITTED INSURERS AND SURPLUS
LINES INSURANCE
========================================================== Appendix II
Insurers are licensed by the states. States call insurers that they
have not licensed--but which may be licensed in other
states--"nonadmitted" insurers or carriers. Each state has its own
rules for nonadmitted insurers.\7
Nonadmitted insurers range from long-established and well capitalized
entities such as Lloyds of London to small, offshore carriers with
little, if any, capitalization. Some states permit nonadmitted
insurers to sell coverage that is unavailable from licensed insurers
within their borders. This kind of coverage is called "surplus lines
insurance," according to the Insurance Information Institute's
Handbook.
Historically, policyholders bought surplus lines insurance for such
purposes as covering corporate kidnap ransom demands or insuring rock
concerts. Now, as some standard kinds of insurance have become more
expensive, nonadmitted insurers have found customers for basic
coverage. For example, nonadmitted carriers sold millions of dollars
of worthless insurance to property owners in the Los Angeles area
after the 1992 riots.
Although surplus lines laws vary by state, the states use three
methods to screen unlicensed insurers for eligibility as surplus
lines insurers. First, a state may maintain a "white list" of
approved surplus lines insurers. Domestic insurers licensed in other
states and unlicensed non-U.S. insurers (alien insurers) both must
apply and undergo regulatory scrutiny to determine whether they meet
that state's standards for operating as a surplus lines insurer.
Second, a state may maintain a "black list" of unlicensed domestic
and non-U.S. insurers prohibited from operating in that state's
surplus lines market. In these states, any unlicensed insurer not on
the black list can sell insurance to the public on a surplus lines
basis without meeting any other criteria. Third, rather than
maintain a list of approved or prohibited surplus lines insurers, a
state may require only that unlicensed domestic and non-U.S.
insurers meet certain reporting requirements, such as surplus lines
premium data and types of coverage provided.
--------------------
\7 Information in this appendix has been adapted from the following
sources: Lynn Brenner, The Insurance Information Institute's
Handbook for Reporters (New York: The Information Institute, 1993)
and NAIC Screening of Non-U.S. Insurers (GAO/GGD-94-69R, Jan. 18,
1994).
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
OFFICE OF SPECIAL INVESTIGATIONS,
WASHINGTON, D.C.
Gary W. Carbone, Deputy Director for Investigations
Donald G. Fulwider, Assistant Director for Financial and Economic
Crimes
Jim Locraft, Special Agent
Barbara W. Alsip, Reports Analyst
Shelia A. James, Senior Evaluator
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
Lawrence D. Cluff, Assistant Director for Financial Institutions
and Markets Issues
Marylynn Sergent, Senior Evaluator
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Glenn G. Wolcott, Assistant General Counsel
Leslie J. Krasner, Attorney Adviser
*** End of document. ***