U.S. dropped Enron-like fraud probe
Prosecutor who built case against Virginia insurer was replaced.
By Marisa Taylor - Mcclatchy Washington Bureau
Last Updated 12:14 am PDT Monday, July 23, 2007
Story appeared in MAIN NEWS section, Page A1
WASHINGTON -- Two years into a fraud investigation, veteran federal prosecutor David Maguire told colleagues he'd uncovered one of the biggest cases of his career.
Maguire described crimes "far worse" than those of Arthur Andersen, the accounting giant that collapsed in the wake of the Enron scandal. Among those in his sights: executives from a subsidiary of Berkshire Hathaway, the investment empire overseen by billionaire Warren Buffett.
In May 2006, he felt strongly enough about his case that he prepared a draft indictment accusing executives from a Virginia insurer, Reciprocal of America, of concocting a series of secret deals to hide its losses from regulators. Although he didn't name anyone from Berkshire Hathaway's subsidiary, he described the company as a participant in the scheme.
But Maguire never brought those charges.
Months after preparing the draft, he was removed as the lead prosecutor on the case and reassigned.
His replacement, a prosecutor who hadn't been involved in the case until then, soon announced that the Berkshire Hathaway subsidiary, General Reinsurance, would not be indicted. By April of this year, the entire investigation, which the Justice Department once hailed as one of the largest insurance-fraud cases in Virginia history, had fizzled.
Former employees and policyholders of the Richmond-based insurer were astounded. Why had the Justice Department spent upward of $2 million to investigate the case only to decline to prosecute? Maguire and his team of investigators had secured two related guilty pleas, interviewed dozens of witnesses and gathered 7,000 boxes of documents.
At the Justice Department, some whispered that Maguire and his team had overreached and had been knocked down. Others heard that the government needed resources for terrorism investigations.
Lawyers for the two companies had another explanation: Prosecutors realized they didn't have evidence of a crime.
"It was a black and white decision," said Stanley Twardy Jr., one of General Reinsurance's attorneys and a former U.S. attorney. "They just called it like they saw it."
But Tom Gober, a certified fraud examiner who worked on the case, thought investigators had gathered plenty of evidence.
Gober, a government-contracted investigator, concluded that the Justice Department had buckled under pressure from defense lawyers. Shortly before Maguire was removed, his supervisors were urging him to drop the case against General Reinsurance, Gober said.
Gober's suspicions were fanned by allegations of politicization in the Justice Department after nine U.S. attorneys were fired. He took his complaints to the Office of Professional Responsibility, which investigates Justice Department misconduct. That investigation is under way.
"It just stinks," he said. "You don't come in out of nowhere and in no time kill three years of sophisticated effort."
Maguire and officials with the U.S. attorney's office and the FBI in Virginia declined to respond to questions about the decision.
Justice Department spokesman Bryan Sierra said he wouldn't comment, either.
Internal documents obtained by McClatchy Newspapers show that Justice Department lawyers in Washington had become locked in an intense debate with Maguire over the case until he was removed from it.
Five years after Enron collapsed and tough measures aimed at white-collar crime were enacted, federal officials struggled with questions of corporate accountability: Who should be held responsible when fraud leads to a company's demise? How far should federal prosecutors go in pursuing corporate suspects? In the Reciprocal of America case, the fallout was clear.
More than 80,000 lawyers, doctors and hospitals in 30 states lost their malpractice coverage. As they couldn't expect new insurers to cover them for past cases, some who were sued have claimed losses of hundreds of millions of dollars.
A company under siege
A team of state insurance auditors arrived at Reciprocal of America's headquarters in January 2003 to launch their investigation. They shepherded the company's 300 employees into a conference room and locked the doors.
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