RICHMOND, Va. - In what is being considered the largest case of insurance fraud in Virginia history, a federal judge has sentenced two executives associated with Reciprocal of America (ROA), a malpractice insurance company for acupuncturists and other health care providers. On June 28, Kenneth R. Patterson, former president and CEO of Reciprocal, and Carolyn B. Hudgins, former executive vice president, were sentenced to prison terms of 12 1/2 years and 5 years, respectively, after pleading guilty to several charges, including conspiracy and mail fraud.
Reciprocal was placed into receivership in January 2003. Shortly thereafter, three other companies that were re-insured by ROA were also placed into receivership, resulting in unpaid liabilities totaling more than $450 million.
An investigation of Reciprocal's financial records found that from early 1995 until 2001, Reciprocal management fraudulently "wrote down" reserves for future losses and backdated such write-downs. Reserves are an insurance company's estimate of the amount of insurance claims the company will be responsible for paying pursuant to its policies. Such reserves are considered a liability, and reduce the company's net worth. Writing down reserves increases an insurer's net worth, and gives the company the appearance of being in better financial condition than it actually is.
In court, Patterson admitted that in November 2001, he arbitrarily reduced case reserves by approximately $18 million. He also backdated the changes to individual case reserves from Nov. 8, 2001 to Sep. 28, 2001, resulting in an overstatement of capital surplus by approximately $25 million.
According to a statement from the U.S. Attorney's Office for the Eastern District of Virginia, Patterson and Hudgins also admitted to transferring $10 million in ROA's capital to the trust of an offshore reinsurer that had common management with ROA. Reducing that amount of capital would have damaged ROA's financial condition. Instead, Hudgins and Patterson fraudulently characterized the transfer as an asset on ROA's books and reports by labeling it a prepayment of insurance premiums.
"The defendants took extreme measures to circumvent systems that protect subscribers and insured individuals," said Paul McNulty, U.S. attorney for the Eastern District of Virginia. "In doing so, they destroyed one of the largest insurance companies in Virginia."
The Department of Justice has created a special Web site for acupuncturists and other health care providers who may have been insured by Reciprocal. Interested parties are encouraged to visit it online for more information. They may also visit www.reciprocalgroup.com, or contact the United States Attorney's Office at (866) 378-0527.
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