On May 1, 2009, a husband and wife Michael Vincent Petronella (also known as Michael Constantine) and his wife Devon Lynn Kile were arraigned in Orange County Superior Court on a total of 106 felony counts relating to the alleged commission of $38 million in workers' compensation premium fraud relating to their 3 construction companies. The DA's Office was touting this case as "the largest known Workers’ Compensation Insurance fraud case in California’s history" and issued press releases relating to the couple's lavish lifestyle. Remember that felony complaints contain only allegations against these two individuals and all defendants must be presumed innocent unless and until proven guilty.
Alleged Facts In This Premium Insurance Fraud Case
Mr. Petronella is a roofing and general building contractor. Mr. Petronella and Ms. Kile own three businesses including Petronella Corporation, Western Cleanoff, Inc., and The Reroofing Specialists, Inc. (also known as Petronella Roofing). The businesses are located in Costa Mesa and Cathedral City, Riverside County, and have clients primarily in Southern California which include the Ocean Institute in Dana Point, Pacific Amphitheater in Costa Mesa, and other commercial properties.
Beginning in 2000, Petronella and Kile are accused of obtaining Workers’ Compensation Insurance for their three companies through State Compensation Insurance Fund (SCIF), a quasi-governmental non-profit insurance company established by the California State Legislature. Between 2000 and 2008, Petronella is accused of fraudulently submitting 42 claims for uninsured injured workers and underreporting $29 million in payroll to SCIF in order to avoid paying his Workers’ Compensation Insurance premiums. They are accused of engaging in a scheme that resulted in SCIF incurring more than $253,000 in uncovered injured worker claims and insurance premium losses exceeding $38 million. Petronella and Kile are accused of reporting $2.9 million in payroll to SCIF, while having an actual payroll of $29 million, ten times more than reported. The $38 million premium due includes the $29 million in loss history plus penalties and assessments for inaccurate reporting.
Beginning in 2000, SCIF performed annual audits of Petronella and Kile’s companies, during which they are accused of providing false employee and payroll records. It is alleged that they kept 2 sets of books and that between 2000 and 2008, Petronella and Kile are accused of fraudulently reporting a $2.9 million payroll to SCIF for The Reroofing Specialists, Inc., while reporting $16.6 million in payroll to EDD for the same company during the same time period.
Beginning in 2003, Petronella and Kile are accused of fraudulently reporting no payroll to SCIF for Western Cleanoff, Inc., while reporting in excess of $13.9 million in payroll to EDD for the same company between 2000 and 2008. Between 2007 and 2008, they are accused of paying unreported payroll in excess of $1.6 million in cash to day laborers.
In order to avoid paying Workers’ Compensation Insurance for all of his employees, Petronella and Kile are accused of underreporting the number of workers employed at each business, including claiming none for Western Cleanoff, Inc. Petronella is accused of fraudulently filing 42 claims for employees injured while working for The Reroofing Specialists, Inc. to obtain insurance coverage for the injured employee without paying for the insurance. The injured employees have since been identified as Western Cleanoff, Inc. and Petronella, Inc. employees.
How This Investigation Began
This investigation arose after March 2006 when an employee of Petronella fell from a roof and sustained injuries. A payroll stub was submitted to SCIF listing his employer as Western Cleanoff, Inc., which SCIF did not insure. SCIF reported the suspected fraudulent claim to the Department of Insurance and the Orange County D.A.'s Office. The investigation took 2 years and this is when the 2 sets of records were discovered. This case also turned into a tax fraud case since Petronella and Kline are accused of underreporting their income on their individual state income tax returns. Petronella is accused of underreporting his income between 2005 and 2007 on his tax returns by more than $2.3 million. He is accused of owing the state more than $632,600 in taxes, fines, penalties, and the cost of the investigation. Kile is accused of underreporting her income by more than $1.7 million during the same time and owning the state more than $530,000. Between 2005 and 2007, Petronella and Kile are accused of claiming less than $290,000 of income on their tax returns, but spending more than $2.1 million on their American Express credit card for personal items.
The Charges
Petronella and Kile are charged with 106 felony counts including conspiracy to commit a crime, grand theft, insurance fraud, filing a false tax return, willfully failing to file or filing fraudulent tax returns, misrepresenting facts to State Compensation Insurance Fund, making fraudulent statements, making false statements to discourage an injured worker from claiming benefits, misrepresenting facts to workers’ compensation insurance company, and failing to file a return with the intent to evade tax. They both face sentencing enhancements and allegations for aggravated white collar crime over $2.5 million, $500,000, and $100,000. If convicted on all counts, the defendants each face a sentence ranging from five years and four months up to 102 years in state prison. Petronella and Kile are being held on $3 million bail each and must prove the money is from a legal and legitimate source before posting bond. They are expected to be arraigned on May 15, 2009.
Attorney Comments: We note several things about this case. First, since the State Compensation Insurance Fund is a quasi-state agency, this alleged premium fraud was given high priority. Second, there is funding in the DA's Office for these cases by the workers' compensation companies. Third, the DA focused extensively on the defendants' lifestyles and used it in press releases and conferences. Fourth, note that the individuals were charged and not the corporations. The DA's Office has little interest in prosecuting corporations.
Fifth, the investigation began in 2006. However, there were audits back since 2000 which were the basis for these charges. Audits by workers' compensation carriers should be taken seriously. We represented one construction company that had 2 sets of books -- one for EDD and one for the insurance company and both the husband and wife were charged. In our case, there was full restitution made and the husband was able to receive a misdemeanor and neither the husband or wife served any time in custody. We expect to see an increase in these cases and further coordination between EDD and workers' compensation insurers.
Sixth, all businesses should understand what constitutes premium insurance fraud so they understand the risk if they or their employees under or non-report. This can include as classifying employees as 1099s rather than W-2 employees. It can include paying employees cash under the table or misrepresenting their job classifications to get lower rates.
California law requires that all employers maintain Workers’ Compensation Insurance for their employees. Payroll records showing the number of employees and their income must be submitted to both the insurance company and EDD, who oversee the audit and collection of payroll taxes and employment records for workers in California. Workers’ Compensation Insurance rates are determined by a formula, which takes into consideration the factors above and the company’s loss history on claims.
Premium insurance fraud is committed when an employer intentionally misrepresents to the State or his/her insurance company the number of employees, the nature of work performed by certain employees, the amount of payroll, and the loss history. These misrepresentations allow employers to purchase Workers’ Compensation Insurance at a significantly lower rate, or to avoid purchasing the insurance at all. This practice also places their competitors at a disadvantage because it forces them to compete against a company with lower operating costs.
From a policy standpoint, the government contends that deception in under or non-reporting drives up the cost of insurance premiums for legitimate businesses, which pay higher rates for their employee’s Workers’ Compensation Insurance. These legitimate businesses are less competitive against under or non-reporting companies who are able to under-bid their competitors due to lower business costs resulting from insurance fraud. This also endangers injured employees who may be denied the workers’ compensation benefits intended to meet their physical, psychological, and financial needs for a work-related injury.
Any questions or comments should be directed to: tgreen@greenassoc.com. Tracy Green is a principal at Green and Associates in Los Angeles, California. They focus their practice on the representation of licensed professionals, individuals and businesses in civil, business, administrative and criminal proceedings and have handled numerous premium fraud cases involving workers' compensation.
