Fraud Worms Into the Big Apple

Copyright held by The John Cooke Fraud Report. Reprint rights are granted with attribution to The John Cooke Fraud Report with a link to this website.

 

By Leslie Kim

It is the largest scale insurance fraud investigation in the history of New York State, compared by some to an octopus. Grab onto a tentacle and start leading up toward the body – just when you think you are getting close, you find that you have hold of the end of another tentacle, then another, and then yet another.  The current investigation began over five years ago and there is no end in sight – just more tentacles.

The octopus reared its first tentacle in 1987. New York Postal Inspector Martin T. Biegelman started working a case involving a well-known New York figure, in fact, almost a folk hero.

David Greenburg had been a police officer and detective in the late 1960’s and early 1970’s. He and his partner, Robert Hantz, were known throughout the community for their daring pursuits.  Affectionately referred to as “Batman and Robin,” they were the two cops that the Starsky and Hutch TV series was patterned after. Greenburg was Starsky.

His personal popularity and fine police record helped launch him into the political arena. In 1974, after he left the police force, he was elected a state assemblyman. There seemed to be no end to the upward spiral he was on.

In the early 1980’s Greenburg became involved with Video USA, a franchise operation of small ma-and-pa video rental stores, a forerunner to the Blockbuster chain. He made a lot of money, but he wanted more.

That was when he started to augment his income with phony insurance claims. Lots of phony claims, from Video USA locations throughout the country.

In May of 1987, Greenburg’s business partner, James Brown, met an untimely demise. He was found, murdered, just a few days prior to a scheduled examination under oath arranged to be performed as part of the investigative efforts on a suspicious Chubb claim.

The murder was never solved, but another partner in the operation, in fear for his life, came to the US Attorney to trade secrets for protection. “Help me and I’ll tell you what’s going on,” he said.

Biegelman began working the investigation and learned some very quick lessons. One, fraud is easy to do. Two, almost nobody ever gets caught. Three, there’s lots of money involved and four, insurance companies are easy targets. Too easy.

The case resulted in the conviction of Greenburg, his brother, a company controller, a public adjuster, their company attorney and a few others. The victims identified were insurers: Chubb, Cigna, Kemper and Atlantic Mutual. The M.O.s included burglaries, water damage and arsons.

Biegelman realized, however, that the case he’d just worked was only a small part of a bigger problem of systemic insurance fraud. Between 1987 and 1990 he teamed up with former NYPD detective Arthur Harding, then employed by the ICPI as a special agent. Together they went searching for the body of the octopus.

Each tentacle extended through murkier and murkier waters.  Their investigation revealed that the problem was not new. It had been going on for many years and involved all segments of the settlement process. From insurance brokers to salvors, from public adjusters to inside adjusters, from staff to management – no area seemed immune to the ongoing crime.

Cases involved inflations of otherwise legitimate claims, grossly inflated damages, paper-only files and staged accidents.

To begin what was to become one of the lengthiest investigations in insurance history, they had to pick a starting
point. They chose to start with a few insurance companies and review suspicious claims files.

The process was time consuming and tedious. Thousands and thousands of files. Thousands and thousands of index cards. Who was the adjuster? Who was the supervisor? Who was the public adjuster? What kind of damages were alleged? Who was the broker? Who was the salvor? Who was the claimant? What were the patterns?

Slowly, the puzzle pieces began to meld into a hazy picture.  Clarification was a difficult task and the man hours were extensive. When the fuzziness began to melt, the resulting picture got uglier and uglier.

Biegelman, Harding and Thomas Kiernan, an agent with the criminal investigation division of the IRS assigned to assist in the investigation, stepped up the search. The payoff came in the fall of 1991 when the picture began to take a clear and recognizable form.

The index cards began to fit together into neat little piles. Each pile represented a person, now a suspect in a massive, far reaching scam that was to rock the industry.

The next step was to go out and interview the insureds. The investigators reasoned that the homeowner would be the easiest to get to “roll-over” and reveal the next step up the ladder of crime. It worked. Usually the claimant would roll the same night – or appear the next morning, attorney in tow. Invariably, they named the public adjuster.

When confronted with the often damning evidence, the subjects would decide to cooperate fully with the authorities and hope that those same authorities remembered that cooperation when sentencing time approached.

Some of the roll-overs provided dozens of names: company adjusters, company supervisors, insureds, other public adjusters, appraisers, salvors and more. Sadly, many of the people caught up in the criminal whirlwind were otherwise stars in their respective companies. Some were considered the brightest of the bright, others has long and distinguished insurance industry careers and were nearing retirement. They shared just one commonality: their spotless histories were now tarnished and the pain their families endured lay heavy on their souls.

In one case, a public adjuster, attempting to cooperate with investigators, wore an undercover wire and proceeded to stage a burglary with an insured that he’d worked with before. All was captured on videotape.

In order to pursue mass prosecutions, the task force approach was necessary so that more manpower and resources could be made available. Two more agents joined the hunt: William Johnson and Angela DiBella, both special agents with the Federal Bureau of Investigation.

Bodies were falling fast. The case went public in December of 1992 when six search warrants were executed at the offices of five public adjusters and one independent adjuster. Shortly thereafter the first 23 indictments were unsealed in what was to become known as the first wave.

And still the tentacles kept appearing.

The count today is 127 people charged and according to Biegelman the case is far from over. There are far more pieces to the puzzle that have not yet been put into place.

“There is not a person that we arrested that would do it all over again,” said Biegelman. “At the time, even though they knew it was wrong, they didn’t see it as criminal. It was a practice that was just accepted as routine in the insurance industry. It had been going on for years and years and nobody thought it would end.”

“The people apprehended were well known in their communities.  They were little league coaches, church elders, homeowners and community leaders. They were the kind of people who’d never think about robbing a bank, but they didn’t think twice about committing insurance fraud. They’d steal with pen, paper and a camera – not a gun,” said Biegelman.

The massive numbers involved sent shock waves throughout the industry. The investigation revealed the ease which an insider could, and did, steal from the insurers. Some claims were padded only a few thousand dollars; most monetary add-ons amounted to significantly more. The largest thus far uncovered was a phony claim in the amount of $19 million.

It was too easy. The perpetrators were like the guy who starts out with the intention of eating just one potato chip. But in this case, the chips were bribes and each bribe got just a little easier to swallow. Bi-weekly salary checks became pocket change.  It was the money in the white envelopes that paid for the fancy houses, fast cars and lavish life styles.

The task force continues to expand their dig sites and push to prosecute unearthed criminals to the fullest extent of the law.  They are also expanding their own numbers, now including New York State Insurance Frauds Bureau Investigator Lynette Bush and Special Agent Jesse Weaver from the Federal Emergency Management Agency. FEMA was working on cases involving some of the same people, filers of fraudulent claims with that organization, so Weaver’s expertise is proving invaluable.

The road to adequate sentencing is rocky. The same judge is hearing each case and he has made comments alluding to the insurance industry being lax in the bird dogging of its own people. Some industry professionals believe they see the writing on the wall: eventual light sentences that send a clear message that ripping off insurance companies is a victimless crime and won’t draw much of a penalty.

Continental Insurance Company had three employees caught with their hands in the company coffers, two adjusters and one supervisor. And while the story is far from over, initial estimates place the company’s losses in the range of $7 million.

“In every file we pulled,” said Jack Craig, the AVP of Continental’s Corporate Security Division, “the files looked perfect. Everything was complete: statements, pictures, appraisals, invoices, receipts, draft copies, all of it.

“The very first file we looked at, as a result of a call from Marty (Biegelman), was absolutely perfect. Later, after
reviewing two or three dozen files and finding each of them seemingly the same, we decided that perhaps a new “red flag fraud indicator” might be a perfect file.”

Each of the three involved Continental employees was a trusted member of the staff. The shortest tenure was nine years, the longest 24 years. “There is a point where companies can only do so much to bird dog employees,” offered Craig. “Here we had a supervisor who had been promoted up through the ranks of our company for over 24 years, and he was responsible for signing off on the files that these two equally trusted adjusters were handling. The involved files were letter perfect.”

Continental has stepped up its reinspection program, hoping to avoid any unfortunate repeat criminal performances by staff.  “Even that,” laments Craig, “is an imperfect solution. People who have worked together for years tend to build trusting relationships with one another. This same supervisor could steer the reinspector toward legitimate claims and keep him real busy.  And the guy doing the reinspections, who has worked with our supervisor for two decades, is going to trust his judgment implicitly.”

The investigations revealed a series of “marriages” in the adjusting process, long-term relationships nurtured through the years. In some cases investigated, there were at least six people taking a piece of the fraud pie.

A popular site for a bogus claim was a well insured electronics store. The public adjuster would arrange the claim with the policyholder; “We can break a pipe. Get you four, maybe five million.” It was an attractive option to some businessmen. And in many instances it was a saving grace to a financially troubled business on the verge of collapse.

Sometimes there was a broker involved. His services proved invaluable in the general scheme of things. He could place the risk with a particular company, one that had open-handed adjusters and supervisors in place. In some instances, claims were planned a year or more in advance; long into the policy period so as to minimize suspicion.

Once the adjuster got the claim, the paperwork was completed as a result of work performed by still additional participants. The appraiser and salvor got their shares, too, and the supervisor who signed off also had his palm greased with cash.

Not all of the files were perfect like those reviewed at Continental. At some companies, the files contained only a sketchy accord form and a copy of the draft. There was no reason to do any of the work because everyone, all the way up the line, was in on the scam. The shape of the claims files patterned exactly with the bottom line of how far up the ladder the sharing of the graft occurred.

“I’d like to say that the problem is completely under control,” said Craig, “but who is to say that the reinspector can’t be bribed. Where does it end? They could conceivably get everybody because they’re waving some big money around, untaxed money.  Nowhere have I ever seen an income tax form that has a line item for bribes.”

Evo Riguzzi, the AVP of Internal Security for the Home Insurance Company, recalls the claim file that sparked their internal review of a particular adjuster-public adjuster marraige. The policyholder was a member of a religious sect and reported a homeowner theft loss for $80,000 in rare Polish books.  “‘Who steals books?’ was the question the SIU investigator asked,” said Riguzzi, “maybe jewelry, silver, or other religious artifacts. But books?”

The appraisal turned out to have been done by Manny Krausz, a leading figure in the same secular religious community. To lend authenticity to the phony appraisal, he had signed it with someone else’s name. Interestingly, the very same Krausz spent half of his time as a … public adjuster.

As is internal procedure, files were pulled that involved Krausz. The connection to the inside adjuster quickly became evident. Careful comparison of files revealed a pattern of fraud. In one case, nearly identical pictures of stolen items were used for two different claims at two different locations.

Krausz stuck close to his community and every claim processed involved members of his temple. Riguzzi attributed this to the ease with which one person can usually steal from another person of the same ethnic background. “Krausz would take a simple claim of three thousand dollars and tell the policyholder that he (Krausz) would take care of him. He was trusted. After all, he was a congregation leader. And a few weeks later he would hand the policyholder a check for a few hundred dollars more than his actual loss. The policyholder thought Krausz had taken care of him well. What he usually didn’t know, though, was that Krausz had taken care of himself even better. In many cases we reviewed, we found that he’d inflated the loss to fifty, sixty thousand dollars or even higher, and then he pocketed the difference.”

The Home adjuster was in it up to his eyeballs, in each case getting a kickback from Krausz. He later pled to $6.2 million in fraud, all accomplished in a 15-month period of time. Charges included two counts of mail fraud and one count of tax evasion.

In the majority of cases, the adjuster never had to leave the office. Krausz would fill out all the forms and send the “loss” into the company complete with photographs, receipts, appraisals, everything. The adjuster would just dummy up the file and cut the check. Days later he’d be rewarded with yet another envelope – white on the outside, green on the inside.

The losses suffered by USF&G were slim by comparison. One small fire loss of $139 thousand was paid along with a series of small burglaries. Frank Agan, the AVP of Internal Audit, relies heavily on the ongoing USF&G practices that immediately flag certain situations.

“In our case, the problem only extended to a single outside adjuster,” Agan stated, “and we noticed that the claim file just didn’t look right. We knew about the Biegelman investigation and we got in touch with him. Fast action saved us almost a million dollars in additional claims payouts.”

The claim first questioned was a fire loss in a commercial building. There was a huge inventory that the business records didn’t support.

“Marty Biegelman’s unit was a blessing as far as getting somebody to take these cases. Prior to this investigation, it was almost a practice in futility to get anybody interested,” said Agan. “We need legitimate support for this type of crime from the US Attorney’s Office and State Prosecuter’s officers.”  But he is quick to add that the cases are often labor intensive, they tend to bore juries, insurance companies do not make good victims and government does not like to spend their limited resources trying these kinds of cases.

“There is nothing new about this kind of fraud,” says Joseph Forman, AVP of the Corporate Investigation Department for Fireman’s Fund Insurance Company. “We addressed a similar internal problem back in the mid 1980’s in Long Island. At that time we had three employees involved in a very similar issue and it was prosecuted through the Suffolk County District Attorney’s Office. It was different people – but the same scam. Two of the three pled guilty to commercial bribery and the third pled guilty to perjury before the grand jury.”

Fireman’s Fund takes a tough stance on fraud. They also cover the subject well in their internal publications and keep employees constantly informed on corporate fraud-fighting efforts.

Forman considers the recent wave of indictments as a wake-up call to the insurance industry. “Fraud is a business risk of the 1990’s. You have to build it into your business plan and make a decision about how much you’ll spend to manage that piece of your business risk. Those who do a better job of managing that component will have a business advantage.

“Most importantly, we can no longer sit around and wait for fraud to be detected after the fact. Fraud happens everywhere in America – it’s not just a big city problem. Our efforts and our dollars need to be invested in fraud prevention.”

It is precisely this after-the-fact uncovering of fraud that Biegelman thinks is the crux of an industry-wide problem.  “Companies pay their experts to tell them what is right and what is wrong, but there should have been a system of checks and balances designed to avoid internal corruption. Some of these companies didn’t check up on their own employees and the company pockets were cleaned out. It was a feeding frenzy. Some of them were just asleep at the wheel – they just didn’t want to see what was right in front of them all along.

“This investigation is far from over. Postal Inspectors, FBI agents and IRS agents around the country are ready and willing to devote resources to investigating and prosecuting those individuals who break Federal Mail Fraud Statutes in the process of committing insurance fraud. Each case is different and, naturally, we are most interested in those instances where prosecution appears to be likely, but the actual amount of the claim is not at issue. This investigation was built by starting with small dollar claims.”

Biegelman has no estimate on when his people will get their first glimpse of the body of the octopus. Right now, they’re being kept very busy dealing with the ever-surfacing tentacles.

INSIDER FRAUD “RED FLAG” LIST

Direct reporting from the public adjuster to the company adjuster, bypassing the broker. (Most insureds first call their broker in the event of a loss).

Claims occurring shortly after the inception of a policy may be staged.

A history of prior claims. When fraud is easy, it will be repeated.

Loss report narrative portion – compared to photos – is inconsistent. Where’s the beef?

The claim photos offer many clues to fraud. If a pipe breaks in a corner, water drips in a certain way. A bucket of water thrown on the ceiling will leave a different pattern of damage.

Some public adjusters had “trademarks.” With a good eye, one can sometimes identify the public adjuster who helped stage the loss just by looking at the damage shown in the photos.

The claims photos showing the origin of the damage were often blurry so the pipe damage was unclear. These same files contained perfect pictures of the other damages resulting from the loss.

Some claims had photos duplicated from different files. Some of the marriages would get together and make up a claim. If everyone was on board, who’d be the wiser?

Desk drawers full of odd photos in an adjuster’s desk. Company supervisors need to ask themselves why such collections would be kept if they happen upon them?

Some files had no photos. Those were files that were within adjuster authority. They also had no other supporting documentation. This indicates involvement of supervisors or others who might routinely check the files.

Repeating marriages.

Cleaning contractors who repeatedly claim items cannot be cleaned and must be replaced.

Claims settled consistently just under authority of adjuster.

Field drafts routinely used.

Adjusters often settled under the reserve amount. This made them appear as a hero (on staged losses).

No one is immune. 25-year employees, 25-day employees. It makes no difference.

Claims paid within days of the reported occurrences.

Mistakes in file. Crossing out things rather than re-doing the pages.

Avoiding the US mail. Prior to the change in the mail fraud statute, they’d use Fed-Ex and other messengers.

Public adjusters who refuse to use the US mails are a “red flag”.

Files were deep sixed, missing.

Merchandise claimed in losses was old or discontinued.

Company adjusters living well beyond their means, making 50 thousand and spending many times that.

Phony invoices and phony bills.

Pat geographic situations – an adjuster adjusting only a certain area can more easily be involved.

© Copyright 1995 Alikim Media