Ex-Blues officials indicted

March 30, 1994|By Patricia Meisol and Marcia Myers | Patricia Meisol and Marcia Myers,Sun Staff Writers

A federal grand jury yesterday charged two former executives xTC of Blue Cross and Blue Shield of Maryland with defrauding the company by directing more than $1 million to businesses in which they secretly held financial interests.

The three-count indictment of Edward T. Zimmerman of Cockeysville and Claude H. Holemon of Scottsdale, Ariz., shed light on some of the financial troubles that have rocked Blue Cross in recent years.

Problems at Maryland's largest insurer triggered a shake-up of top executives and the ouster of the state's insurance commissioner.

The company, which insures or administers health insurance for 1.4 million Marylanders, lost millions of dollars through gross mismanagement and hid its financial problems from the public, a U.S. Senate subcommittee found in 1992.

The indictment involves some of the dozens of Blue Cross subsidiaries that were set up in the 1980s but failed because of poor management and oversight.

Mr. Zimmerman, 49, was chief operating officer of Blue Cross and later president of Diversified Business Group Holdings Inc., a division that oversaw a collection of subsidiaries. Mr. Holemon, 59, is former president of Pertek, a Blues subsidiary.

Mr. Zimmerman and Mr. Holemon, who are charged with mail fraud and wire fraud, are accused of having concealed their holdings by filing false conflict-of-interest statements and by setting up sham stock transfers. Neither could be reached yesterday for comment.

The case came to light when a decade of records of the Maryland Blues was subpoenaed by the U.S. Senate Permanent Subcommittee on Investigations.

The company knew about inside deals by Mr. Zimmerman, problems with the companies he oversaw, and loans he owed.

According to the indictment, Mr. Zimmerman and Mr. Holemon set up several companies in the 1980s and launched a scheme to enrich themselves:

Alleged scheme detailed

In addition to their positions with Blue Cross, they became part-owners of a Pennsylvania-based computer company called Northern Digital Corp., between them owning a majority of the shares.

Beginning in September 1987 and into 1989, they arranged for Pertek to buy more than $300,000 in goods and services from Northern Digital.

In addition, Mr. Holemon founded two other companies: Claude H. Holemon Enterprises and Medical Payment Services of Maryland Inc., known as MedPay MD.

Prosecutors say the men spent about $110,000 of Blue Cross' money in 1988 to set up Holemon Enterprises and buy a license for it from a Virginia medical finance company. They also authorized Pertek to lend more than $595,000 to MedPay MD, prosecutors say.

Both men are accused of participating in sham stock sales to disguise their interests in the companies.

In annual statements to Blue Cross, they denied having any financial holdings that would pose a conflict of interest, according to the indictment.

If convicted, each man could receive up to five years' imprisonment and a $250,000 fine on each of the three counts.

The insurer knew of some of the problems since at least March 1989, when a former Blues treasurer expressed concern about Mr. Zimmerman's "trying to run [Diversified Business Group] as his own banking preserve," according to a report by the Senate subcommittee.

Both men left the company in the summer of 1989, after an internal report questioned the way Diversified Business Group was operated and the executives' interest in companies with which it did business.

By 1991, Treasurer Rosemary Schwartz recommended setting aside a $7 million reserve for bad loans for the HealthLine subsid

iary alone.

A private consultant concluded that 50 percent of the loans were bad and that, as a result, the entire insurer could be legally insolvent. The Senate panel estimated that companies overseen by Mr. Zimmerman lost at least $15 million.

Blue Cross officials yesterday declined to give a final loss figure for the subsidiary or to comment on the investigation, other than to say the company has been cooperating with the U.S. attorney for 15 months.

Blues on mend

Meanwhile, the company's financial situation appears to have improved markedly -- it reported an 8 percent rise in earnings last year to $79.8 million -- and it is suing to recover some of its money.

The indictment is the latest in a series of criminal charges against top Blue Cross executives across the country.

The president of the Mississippi plan recently was indicted on charges of bribing the state insurance commissioner.

The chief operating officer of the Colorado plan was fired for giving contracts to board members.

And the Michigan Blues plan was barred from handling Medicare payments because of alleged fraud.

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