Fraud Inquiry Target Wins a Round in Court : Insurance: The government agrees not to force the seizure of $2.8 million from an attorney suspected of participating in the Alliance case.

Attorney Lynn B. Stites, the focus of a criminal investigation in the “Alliance” insurance fraud case, has won a skirmish in his battle with the federal government, which bungled an attempt to seize $2.8 million it says Stites owes in unpaid taxes, according to papers filed in federal court in Los Angeles.

In a notice filed Friday, government lawyers conceded defeat, saying they would not defend an extraordinary move by the Internal Revenue Service to seize bank accounts, real estate and other assets belonging to Stites and his former wife, Erma Stites.

The IRS action--known as a jeopardy assessment, and most often used to tax cash seized in drug raids--was taken last November. Attorneys for the Stiteses moved to void it on legal grounds. A hearing scheduled for Friday on the dispute was called off when the U.S. attorney’s office in Los Angeles said the government “agrees that the . . . jeopardy assessment should be abated.”

Stites could not be reached for comment and his attorneys would not discuss his whereabouts. But one of them, Thomas A. Mesereau Jr., called the decision an “emotional lift” for the embattled Stites, who has been described in nationwide media coverage as the alleged mastermind of an insurance scam involving a ring of Los Angeles-area lawyers that prosecutors have called the “Alliance.”

Lawyers in the U.S. attorney’s office in Los Angeles could not be reached, and an IRS spokeswoman declined comment on the case. An IRS official admitted that the agency has obtained little of value from the Stiteses. “Let’s just say it was insignificant,” he said.

Court papers and other records show the government botched the effort to tie up Stites’ assets, allowing him to withdraw at least $2 million of a legal settlement from a bank, and to sell his former home in Bell Canyon in eastern Ventura County for more than $500,000.

In October, Stites settled bitter litigation with former client Leonard M. Ross for a total of $3.8 million. Stites got $2.3 million of the insurance-funded settlement, and Ross $1.5 million. In late October, Stites withdrew at least $2 million of the money from a bank in Beverly Hills, including more than $1 million in $100 bills that was stuffed in a flight bag, according to a knowledgeable source who would not speak if identified.

The IRS then tried to seize Stites’ share of the settlement, but showed up nearly a month too late.

In a sworn declaration filed in court this week, Stites attorney Mesereau said IRS official Sharon Lavenberg served a notice of the levy at his Century City law office on Nov. 15. Mesereau said Lavenberg told him an informant monitoring the Ross-Stites case was to tip off authorities when the settlement was imminent, but that the plan got “screwed up.”

Authorities “were very distressed that they had not received immediate word of the settlement,” Mesereau said Lavenberg told him.

Lavenberg could not be reached for comment.

The Stiteses sold their Bell Canyon home for about $544,000 on Nov. 22, seven days after the jeopardy assessment, according to records at the Ventura County clerk and recorder’s office.

Records show that the IRS prepared a notice of lien on the home on Nov. 16, but did not record the lien until Nov. 28.

The IRS can make a jeopardy assessment if it decides it is in jeopardy of losing taxes owed because assets may be hidden or dissipated.

The Stiteses’ lawyers attacked the assessment as illegal and as an attempt to deprive Stites of funds for an effective defense against criminal charges that may be filed against him and as many as 15 to 20 others in the Alliance case.

George D. Hardy, the assistant U.S. attorney in San Diego heading up the Alliance investigation, said depriving Stites of money to defend himself was “absolutely not a strategy” in the jeopardy assessment.

Despite voiding the jeopardy assessment, the IRS still can take Stites to court over the $2.8 million it claims he owes in unpaid taxes for 1987.

According to court papers, the claim is based on allegations that another lawyer in the insurance fraud ring paid Stites $5 million in 1987 that he did not declare as income. This was dismissed as a “foolish . . . theory” by lawyers for Stites.

Stites and other alleged Alliance lawyers took part in cases in Los Angeles, Orange and San Diego counties in which insurance companies paid legal fees for numerous defendants. The ring is accused by insurance companies and federal authorities of conspiring to prolong and expand the cases to increase each attorney’s workload and subsequent billings to insurers.

Four lawyers, two law firm employees and one client have pleaded guilty to mail fraud in the case, and two other attorneys have been indicted on charges of lying to the federal grand jury investigating the case.

About 15 to 20 other lawyers, law firm employees and associates recently received letters from the U.S. attorney in San Diego, informing them that they may be indicted on racketeering charges.

Times staff writer Carlos Lozano contributed to this story.