James T. Wharton has told a federal jury that he instructed Edward S. Digges Jr.'s secretary, four days before a critical deadline, to send an insurance agent a $6,999 check for professional liability coverage.
Wharton also testified last week that in April 1988, St. Paul Fire and Marine Insurance Co. had set the May 5, 1988, deadline for partners in the Annapolis law firm of Digges, Wharton & Levin to decide whether they wanted to buy the policy that now is the focus of a civil trial in U.S. District Court in Baltimore.
The May 5 date is critical because it is also when Digges asked his partners, Wharton and David A. Levin, to help him re-create timesheets to justify part of what became a massive billing fraud against Dresser Industries Inc., a major client.
That, Wharton said, is when he became suspicious of Digges' activities.
St. Paul is trying to convince the jury that it should not have to pay $3.6 million in negligence judgments against Wharton and Levin under terms of the policy.
The insurer claims that the two partners knew of Digges' billing fraud before they obtained the policy. St. Paul also claims that the partners participated in the fraud, benefited from it, and lied about it on their insurance application to obtain coverage that would protect them if Digges were caught.
Dresser Industries is the defendant in the civil case because it is trying to collect the judgments from the law firm's insurer. Dresser won the judgments in an earlier case.
Wharton and Levin are involved in the trial as "interested parties." Their interest is that they will be personally liable for paying Dresser the $3.6 million if St. Paul wins a jury verdict. They have denied knowledge of Digges' billing fraud before the insurance policy was issued.
Wharton, who testified for 2 1/2 days last week, said the insurance agent told him in February 1988 that St. Paul wanted to carry the law firm's professional liability policy, and offered rates that were half of what another insurer would charge.
At the time, Wharton said, the law firm was "going bare," without coverage, because rates from other companies had radically
increased. So, he said, he discussed the rates
with his partners and applied for the policy in March.
In mid-April, the agent called him and said St. Paul's rate offer would expire May 5. The agent also sent him a letter April 29 to remind him of the deadline.
Wharton said that on May 1, 1988, after receiving the agent's letter, he sent a note to Digges' secretary telling her to mail a check for the first policy installment by May 5. He said he did so because he knew of the May 5 deadline from St. Paul's own insurance agent, and because Digges controlled the law firm's money.
Wharton testified that before he signed the application, he, Digges and Levin discussed a clause in the policy which required them to certify they knew of no acts they had committed which could lead to claims against them.
"We had an interchange and talked to the other lawyers in the firm," Wharton said, "and there was no hint of any potential claim." So he certified the application and sent it to St. Paul.
From then on, things went downhill quickly.
On May 5, the same day the check was mailed to St. Paul's agent, Digges asked Wharton and Levin to help him re-create time sheets that Digges said he couldn't find, so that he could show them to Dresser's auditors the next day. Wharton said that was when he became suspicious of Digges' activities.
Those suspicions were confirmed May 26, when Dresser officials confronted the law partners with startling evidence of Digges' billing fraud.
In mid-February 1989, Dresser filed a civil suit against the partnersthat charged Digges with fraud and charged Wharton and Levin with negligence. This lawsuit eventually led to the negligence judgments.
A week later, Wharton said, he and Levin discovered a hidden checkbook which revealed that Digges had stolen partnership money to pay for $1 million worth of renovations to his Eastern Shore estate.
And before long, the two partners learned that Digges also had borrowed another $1 million against the law firm's credit at local banks. The money was nowhere to be found, and the partners and their wives were responsible for the debts.
When Wharton and Levin confronted Digges about the missing money, Wharton testified, Digges simply said, "No comment."
"We said, 'Get out of here. We never want to see you again,' " Wharton told the jury.