Court Freezes Assets Of California Health Program

Archived News Release — Caution: Information may be out of date.

The U. S. Department of Labor has obtained a temporary restraining order freezing the assets of Novato, California-based Interstate Services, Inc. (ISI), Thorndyke International, Inc. (TI), and numerous other fiduciaries and service providers to health plans operated by ISI after more than $ 1 million in health benefit assets were diverted to them and others affiliated with a health care scheme known as The ERISA Advantage program.

The temporary restraining order also placed The ERISA Advantage program under the control of an independent fiduciary, William J. Kropkof of Kropkof, Kingsley & Associates, Inc., and removed defendants John B. Hyde, his daughter Mary King, Kenneth Ruff, Patricia Tyler, and her firm Security National Corp. (SNC) from their positions with the program. Other defendants include Hyde’s wife and son — Margaret Ann Hyde and John Hyde — insurance consultants Billie Gannaway, Herbert Robert Brown and Lawrence R. Sellars, and staff leasing executive Malcolm Cordell Hull.

ERISA Advantage-Self-Insured Retention/Single Employer Trust Program, a nationwide multiple employer welfare arrangement (MEWA), was created in 1994 by Hyde. Hyde, who has a history of involvement with failed health care schemes, was barred by a New York federal court in 1997 from serving a health plan known as the International Brotherhood of Trade Union Local 122 Trust.

TI served as the plan administrator to enrolled health plans until it was replaced by ISI, which purchased TI in August 1997. ISI is majority owned by the Hyde family. SNC, of Washington, D.C., serves as trustee and ISI is the designated plan administrator of the individual trusts created by participating employers to fund the health benefits of employees.

TI served as the plan administrator to enrolled health plans until it was replaced by ISI, which purchased TI in August 1997. ISI is majority owned by the Hyde family. SNC, of Washington, D.C., serves as trustee and ISI is the designated plan administrator of the individual trusts created by participating employers to fund the health benefits of employees.

ERISA Advantage purportedly provided administrative services to hundreds of single- employer trusts governed by the Employee Retirement Income Security Act (ERISA). As of June 1998, the program served over 300 individual trusts covering at least 15 states, including Texas, Oklahoma, Virginia, Florida, Georgia, South Carolina, North Carolina, New Jersey, Alabama, Kentucky, Indiana, Michigan, Mississippi, Wisconsin, and Louisiana. The program was implemented through a network of consultants, insurance agents and related professionals, employee leasing companies, health provider associations, and other professional organizations who market the program to employers nationwide.

The department’s lawsuit alleges that Hyde and other defendants violated ERISA by diverting a substantial portion of employer contributions targeted to pay health benefits of participants and beneficiaries. Instead of paying benefits, the department alleges that the money was used to pay administrative fees, marketing fees, commissions and other non-benefit expenses.

The department’s lawsuit further alleges that Hyde and other defendants violated ERISA by:

• allowing assets of the individual health trusts to be commingled in direct contradiction of a commitment to maintain separate trusts to fund promised benefits of enrolled employers;
• diverting an excessive amount — $888,382.31 or 45% of contributions — of plan funds to pay for administrative fees, marketing fees, commissions and other non- benefit expenses;
• failing to follow the program funding plan, albeit an unsound plan;
• failing to obtain “stop loss” insurance as represented by the program and purchasing reinsurance from an unlicensed offshore insurance carrier — Colonnade Insurance Co., A.V.V. — a company which is not subject to any state solvency or reserve requirements;
• using persons affiliated with other failed health plans to act as insurance intermediaries even though they had been previously barred from serving plans governed by ERISA;
• paying an array of insurance intermediaries who sole purpose was to collect commissions from the premium payments financed with plan assets; and
• collecting reinsurance premiums after the program terminated its reinsurance with Colonnade.

According to an expert retained by the Labor Department, the ERISA Advantage program is not financially viable. As of June 1998, program owes at least five individuals approximately $400,000 in unpaid health claims, which continue to mount.

The lawsuit seeks to require the defendants to restore any losses and return any illegal profit they received. The department also asked the court for injunctive relief against the defendants to remove them from service to the program and barring them from future service to ERISA plans and to appoint an independent fiduciary to manage plan assets.

This case resulted from an investigation conducted by the San Francisco Regional Office of the Department’s Pension and Welfare Benefits Administration into alleged violations of ERISA. The temporary restraining order and lawsuit were filed in U. S. District Court in San Francisco on Aug. 4. The order was entered by Judge Thelton E. Henderson on Aug. 5. A hearing on the department’s request for a preliminary injunction is scheduled for Aug. 21.

(Herman v. Hyde)
Civil Action No. C98-3019

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Archived News Release — Caution: Information may be out of date.

Contact Name: GLORIA DELLA
Phone Number: 202.219.8921