Documents detail sale to IWIF

Purchase of company made to avert lawsuits, lawyers say

$2.6 million payment found

Contract extension not advised by board, session notes showed

October 05, 1999|By Walter F. Roche Jr. | Walter F. Roche Jr.,SUN STAFF

When the board of the state Injured Workers Insurance Fund (IWIF) voted by phone April 22 to buy the assets of a private company for $6.5 million, the two-page news release touting the sale told only a small part of the story.

What was unsaid was that the sales agreement followed a series of nasty legal threats, and that it was the culmination of a highly unusual relationship between the public agency and a private contractor.

A review by The Sun of records obtained under the state public records law and interviews with IWIF board members and officials show:

The agreement included an unusual provision eliminating the threat of personal libel and slander suits against the same board members who voted on the sale.

An additional payment of $2.6 million was approved with the purchase, boosting the cost to more than $9 million.

An audit shows that IWIF paid $2 million to the former owners of Statutory Benefits Management Corp. (SBMC) for an agreement not to compete against IWIF for business in other states. IWIF was created to serve Maryland companies and cannot sell its insurance in other states.

In a series of interviews, board members and IWIF's legal counsel acknowledged that a key element of the overall agreement with SBMC was a five-page document, finalized May 12, in which SBMC owners agreed to drop a series of threatened multi- million-dollar legal claims against IWIF and its board members.

Created in 1914 by an act of the General Assembly, IWIF is governed by a board appointed by the governor. It sells workers compensation insurance to private businesses.

Lawsuits avoided

IWIF and its lawyers say that, without the overall settlement, including the $9 million payment, the agency faced the nearly certain prospect of a long and costly legal battle from SBMC and its former owner, Louis J. Nicholas.

"It was clear to me there was going to be a lawsuit," said David M. Funk, a private attorney who advised IWIF on the sale. "This was a very real threat. There were a lot of bad things about to happen."

Nicholas agreed to an interview on the negotiations, but later canceled it.

Additional payment made

The records reviewed by The Sun show that in addition to the publicly disclosed purchase price of $6.5 million, IWIF agreed to pay SBMC another $2.6 million for services the firm had provided to IWIF since June 1996.

The documents show that the additional $2.6 million was included as part of the original purchase price of more than $9 million under a preliminary agreement dated April 30. But after an audit set SBMC's assets at only $6.5 million, the $2.6 million was redefined and listed as a payment for services rendered.

Clause to `not compete'

The records also show that the audit by Arthur Andersen LLP credits $2 million of the $6.5 million total for an agreement by SBMC owners not to compete with IWIF for business in other states. IWIF was created to provide workers' compensation insurance to Maryland companies and cannot legally sell the product out of state.

Asked to explain the "noncompete" agreement, IWIF officials acknowledged they can't sell insurance outside Maryland, but said there were plans to sell computer software used to handle workers compensation claims to other states. IWIF paid for the software and allowed SBMC to use it during the contract. Records provided by IWIF show two prior efforts to sell the software were unsuccessful.

Auditors also were apparently uncertain about the $2 million figure. A footnote to the report states, "If covenant not to compete is not contained in the purchase agreement, this amount will be allocated to excess of purchase price over fair value of assets."

Threats against board

Funk said SBMC's attorneys were threatening to initiate personal legal actions against board members because, under state law, IWIF itself is immune from most legal claims.

In a letter to an IWIF official, Nicholas complained of "legal foot dragging" and added that "someone needs to be hit over the head with a public baseball bat to get everyone's attention. Wake up before they throw you under the bus."

Funk and IWIF board chairman Daniel E. McKew, the letter's recipient, also stressed that the agency was under a rapidly approaching deadline to select a new managed care contractor or find a way to take that operation in-house. SBMC's contract expired June 30.

Changing relationship

The relationship between IWIF and SBMC dates to 1996, when the state agency issued an invitation for private firms to submit proposals to provide managed-care services. Eventually, in a decision sparking prolonged internal debate and a critical review by an outside auditor, IWIF threw out all the bids only to negotiate a $21 million agreement with SBMC.

Late last year, after public disclosures about the original SBMC contract, the IWIF board voted to reject a proposal to extend the SBMC contract for another year, ordering the staff to put the pact out to bid.

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