How Lawyers’ ‘Alliance’ Came Unglued : Fraud case: Persistent free-lance investigations brought 25 people, most of them attorneys, to face accusations that they manipulated suits to extract huge legal fees from insurance firms.

It was the big case that nearly got away.

Left for dead by federal authorities in Los Angeles, the “Alliance” insurance fraud and legal corruption case was kept alive by several informants and free-lance investigators whose persistence helped make the case one of the largest criminal prosecutions of lawyers in U. S. history, interviews and depositions show.

The U.S. attorney in Los Angeles began the investigation but folded it after a few months, despite obtaining incriminating evidence in secretly taped conversations. But the independent operatives stayed on the trail until authorities in San Diego took over and broke the case. So far, 25 people, most of them attorneys, have been accused or convicted on charges they manipulated complex civil lawsuits to bleed insurance companies of huge legal fees.

The free-lance operatives included several insurance company attorneys who were investigating the lawyers on their own. And they included Leonard Radomile, a San Diego lawyer who proclaimed his undercover role last year on the television news program “60 Minutes,” only to end up indicted with the others on April 24.

“They’ve used me, they misled me,” Radomile says bitterly. “They wouldn’t have had a case without me.”

Radomile, everyone agrees, started it all three years ago by going to Los Angeles authorities and offering himself as an informant.

Wired for Sound

Radomile, 43, a La Jolla resident, is a graduate of the prestigious University of Chicago Law School. He is a man of intellect and polish who concentrated his law practice on securities work. He also was briefly married to television-evangelist Terry Cole-Whittaker, who coined the slogan, “Prosperity, Your Divine Right.”

Radomile told federal authorities he had been introduced to members of the Alliance in 1985 when he was sued in a Los Angeles case. Several Alliance lawyers represented co-defendants in the case.

Radomile and some of the others became friendly and soon were appearing together as defense lawyers in other complex cases in Los Angeles, Orange and San Diego counties. Radomile even referred clients to some of the lawyers, helping them get a foothold in the cases.

In all of these cases, insurance companies were paying the lawyers to defend policyholders. But as time went on, Radomile said, it seemed the other lawyers were trying to prolong and expand the lawsuits in order to boost their fees.

He said there were also hints of collusion between lawyers whose clients had sued each other.

Radomile said he took his suspicions to attorney Lynn B. Stites, the alleged organizer of the Alliance, who warned him to keep quiet. Radomile said Stites told him, in essence, that he controlled the other Alliance lawyers and could “get them to swear to anything that I want. . . . You open your mouth, and I’ll bury you.”

Shocked and outraged, according to his account, Radomile went to federal authorities in Los Angeles in the spring of 1987. He did not ask for immunity. They were interested in his story and asked him to keep his ears open. The case was assigned to assistant U.S. Atty. Jim Sanders, since appointed Los Angeles regional administrator for the Securities and Exchange Commission.

Radomile said he then made it a point of patching things up with Stites. But he was feuding with Stites’ lieutenant, Marc I. Kent, 41, a Studio City lawyer. Kent was trying to steal Radomile’s clients, which proved to be a pivotal event.

Radomile’s clients were being offered kickbacks from the insurance money paid to defend them if they would fire Radomile and hire Kent or other Alliance lawyers.

But two of Radomile’s clients told him, and he recruited them to help him as secret informants in the federal investigation. Radomile and those clients were wired by postal inspectors and taped conversations with Stites, Kent and others.

One of the clients, San Diego County businessman John Naslund, recorded the boldest admissions of all.

Pearls at Oyster Bar

A hulking former college football player, Naslund is a 38-year-old insurance agent and financial planner. He once steered clients to a racehorse venture that went bust. As a result, he was sued in late 1986 in what was called the North American Thoroughbreds case.

Naslund hired Radomile as his defense lawyer on the advice of an acquaintance, Jim McBeth, whom Radomile was representing in another case. But McBeth fired Radomile, and he began urging Naslund to do the same. Among other things, Naslund testified in a deposition last summer, McBeth complained that Radomile was stingy and wouldn’t share with his clients.

Naslund always thought it was bad to be sued, but McBeth knew how a person could benefit from it. “He felt there would be a way that I could make money off this also,” Naslund said. McBeth urged Naslund to learn all about it by meeting with a lawyer named Marc Kent.

Naslund agreed to meet Kent but also told Radomile, who introduced him to federal prosecutors and postal inspectors in July, 1987. A few days later, Naslund entered the back door of the Solana Beach Post Office, where a miniature tape recorder was strapped to his chest. From there it was a short drive to the Fish Market Restaurant across from Del Mar Race Track for a get-acquainted lunch with members of the Alliance.

McBeth had gone to the airport to pick up Kent, leaving a Kent client, businessman Gar May, to greet Naslund at the restaurant.

While awaiting Kent’s arrival, May led Naslund to the oyster bar, unwittingly sitting next to two undercover postal inspectors who were there to protect Naslund if anything went wrong.

May was not one for beating around the bush. He was speaking to a perfect stranger yet was remarkably blunt. He told Naslund about the Alliance, describing it on tape as “a mastermind group of about . . . 20 different law firms,” according to people familiar with the tape.

“All they do is run these lawsuits round and round and round and they just clean up,” May said. The “lawsuits are nothing but one big game, OK? The idea is to make money.”

Naslund said he was astonished. He had just met May and was being treated like a made member.

Over lunch that day with Kent and May, and in subsequent conversations, he was offered $500 a month if he would fire Radomile and make Kent his lawyer. For each additional defendant he delivered to the ring, he would get another $500 per month, Naslund testified.

“We’ll call you a consultant,” Naslund said he was told. “That’s how we’ll get you the money. The more people you recruit, the more money you’ll get.”

Naslund was to find other defendants with liability insurance, or people with insurance who might conceivably be dragged into the suits over the racehorse venture.

Once insured people were targeted, it would be a cinch to have them sued because the plaintiff’s lawyer in the thoroughbreds case was also an Alliance member, Naslund said he was told.

When Naslund seemed skeptical, Kent offered a demonstration of proof. When the plaintiff’s lawyer, Kathleen Phipps, filed the thoroughbreds lawsuit in 1986, she had waived the normal deadline for Naslund’s response. One word from Kent and Phipps would revoke the waiver and demand an immediate response to the suit.

Sure enough, within a week she canceled the waiver.

Kent brandished both carrot and stick. Naslund could make a bundle by playing ball, but he would have a target on his back if he didn’t. The litigation would be focused on him, and he would spend endless days in law offices having his deposition taken, he said he was told.

Phipps could even amend the suit so Naslund’s insurance wouldn’t pay for his defense and Naslund would end up paying his huge legal fees himself.

The threats cemented Naslund’s commitment to the investigation. If he cooperated with the Alliance, he would be breaking “all the laws that they’ve broken.” If he refused, they could break him financially. As Naslund saw it, he had no choice but “to do what was right and expose these people.”

Through the summer of 1987, Naslund held off Kent and May. He would ask for more time to think or say his wife was skittish.

May tried forcing the issue, showing up unannounced one day at Naslund’s office in Encinitas. According to Naslund, May laid $4,000 in cash and substitution-of-attorney forms on his desk. May “seemed disappointed” when he refused--but took the cash and left, Naslund said.

Later that summer, Kent had May bring Naslund a signing bonus of $2,000. Standing in front of the Seasons Restaurant in Del Mar in broad daylight, May counted and handed Naslund 20 $100 bills. Fingerprints were taken and serial numbers recorded, Naslund said. The money was returned a few weeks later when Naslund told Kent he wouldn’t work with him.

There were some anxious moments. There was a bomb threat an anonymous caller left on Naslund’s answering machine. It turned out to be a hoax.

Leaving work one day to meet with Kent and May, Naslund was asked by a passing colleague if he’d injured his back. He quickly detoured to a restroom mirror and was horrified to see the band securing the tape recorder clearly visible through his white dress shirt. Naslund rushed home to change. As he stared in the mirror, buttoning the new shirt, he wondered what he had gotten into.

Toward the end of 1987, Naslund and Radomile learned federal investigators in Los Angeles would no longer pursue the case. They had put themselves at considerable risk, apparently for nothing. After “having me play Stites’ lieutenant and a crook,” Radomile said, the government had abandoned him.

Radomile said Sanders told him the case could be better prosecuted under state laws, and would be referred to the Los Angeles County district attorney’s office. But there was never a formal “referral from the U.S. attorney’s office” or “rejection of such a case by the DA’s office that we can determine,” Sandi Gibbons, spokeswoman for the district attorney’s office, said Friday.

Sanders declined to say who he spoke to in the DA’s office or discuss other aspects of the case. He said he could not “comment on anything to do with anything I might have worked on at the U.S. attorney’s office.”

Richard Drooyan, former chief assistant to U.S. Atty. Robert Bonner, said he remembered being told by Sanders and another prosecutor that the case was being dropped, but not the reasons.

“They did not feel that it was worthwhile for our office to pursue it,” said Drooyan, now in private practice in Los Angeles. “And that’s where the matter ended.”

Bonner, now a U.S. District Court judge in Los Angeles and the Bush Administration’s nominee to head the Drug Enforcement Administration, said it would be improper to comment on a pending case and that he didn’t know the details anyway.

A government investigator familiar with the case, who would not speak if identified, said the case was revived in San Diego because the U.S. attorney there was “considerably more gutsy” than his Los Angeles counterpart and “willing to roll up his sleeves and work.”

A popular theory among insurance industry lawyers involves the limited jury appeal of the case. It was a case of enormous complexity that would be hard to explain to jurors. It also lacked sympathetic victims. Jurors weren’t likely to be moved by the plight of insurance companies.

Whatever the reason, the government dropped out, leaving others to enter the breach.

Doughnut Shop Deal

On a Saturday afternoon in July, 1988, two red Porsches entered the empty parking lot of the courthouse in Norwalk. The rendezvous was midway between Granada Hills, where Marc Kent lived, and the Orange County home of the man in the other car.

A stranger to Kent, he had called on Kent’s “secure” line, a number known only to a few close associates. Kent had seemed depressed in recent weeks. He seemed to be cracking under pressure from insurers, who had stopped paying his bills and were suing him for fraud. When the stranger urged that they meet, Kent was sufficiently rattled, or intrigued, to agree.

The two men walked to a doughnut shop. Kent was offered a deal. Then he broke down and cried.

The stranger was Brad Miller, attorney for New Hampshire Insurance, which had paid millions of dollars to lawyers in the network. For a year or two, he and several other insurance company attorneys had been investigating ties between Alliance lawyers, unaware of the federal investigation. They went on stalking Stites, Kent and the others after Los Angeles authorities threw in the towel.

Miller’s client had taken a particularly heavy hit in a Los Angeles case known as Willow Ridge, paying more than $30 million in defense fees and other costs. This was the case in which Radomile met the Alliance lawyers in 1985.

The case involved claims by hundreds of investors against investment promoter Barry Marlin, his companies and ex-associates. Unfortunately for New Hampshire Insurance, it had sold a number of policies to Marlin and his companies and had to pay legal fees for most of the defendants.

Miller hoped to settle Willow Ridge and end the hemorrhage of legal fees. By 1985, Marlin’s investor-clients had agreed to drop their claims in return for money from the insurers. This would have ended any normal case.

But to the chagrin of the insurers, Willow Ridge defendants began pressing cross-claims--or secondary lawsuits--against one another and others linked to Marlin, including people such as Radomile who weren’t originally sued by the investors.

Miller persuaded a judge to order settlement meetings on the cross-claims in August, 1987. Several cross-claims were settled, including one filed by Radomile, for which he received about $585,000. And it was at one of these sessions that Radomile approached Miller, suggesting they meet over lunch. “It might prove interesting,” Miller recalled him saying.

Miller had suspected Willow Ridge was a scam, not just because it was huge and never-ending. One time, a lawyer in the case told Miller his client asked to be paid for being a defendant “like he heard was going on with some of the other defendants.”

Moreover, Miller knew that Willow Ridge lawyers had begun showing up together again and again in complex civil cases in which insurers were paying defense fees.

But Miller had no proof. If he attacked the integrity of the lawyers, he could be accused of undermining the defense of New Hampshire’s policyholders.

At the same time, Miller knew a scheme would be nearly impossible to crack without help from the inside. So he felt a ripple of excitement when Radomile suggested they talk.

They met for the first time about October, 1987. According to Miller, Radomile intimated he “was worried about his reputation for having been involved in litigation with these people.” He wanted “to put an end to this thing in a manner that made it clear that he was not involved improperly in what they were doing.” But Radomile said nothing about the federal investigation, then winding down.

Miller asked another insurance company law firm to help him to debrief Radomile. About March, 1988, they met with former U.S. Atty. Bonner to tell him what they were up to.

Without mentioning Radomile by name, they told Bonner they were working with someone who might have proof of a scheme among the lawyers. Would Bonner like to see what they might dig up?

The meeting had been set up with the help of William French Smith, attorney general under President Ronald Reagan and now a partner with Gibson, Dunn & Crutcher in Los Angeles. New Hampshire had hired the firm as Miller’s co-counsel.

When they thanked Bonner for his time, Miller said he replied: “Don’t worry, when my ex-boss . . . asks me to meet with somebody, I usually can find the time.”

But Bonner was helpful only to a point. He said he would be interested in hard evidence of mail fraud, Miller recalled. He did not so much as hint that his office already had investigated and dropped the case.

Meanwhile, Miller was pressing Radomile for solid evidence. About three months after Miller’s meeting with Bonner, Radomile suddenly turned over copies of tapes and transcripts bearing official government stamps.

Miller was surprised and angry. He had spent months assembling a package to present to the government. It turned out to be a package the government already had.

Radomile defended his secretiveness as a necessary precaution. After all, he told Miller, he had already been a victim of the government’s indifference and didn’t know if he could trust the insurers.

Now Miller and a colleague called directly on Jim Sanders. They informed him they were working with Radomile, had seen the tapes and transcripts and knew what Sanders had in his files. It was good stuff, they said, and they couldn’t understand why he wasn’t moving forward.

As he had told Radomile, Sanders told Miller the case was better prosecuted under state laws. He said no hard evidence of mail fraud had been obtained, a feeble argument in Miller’s eyes. The tapes, Miller said, were “evidence of a significant conspiracy that had to have used the mails, if you only looked under a few rocks.”

Miller went away empty-handed. But Radomile soon provided a promising lead. Kent, he reported, was coming unglued.

Kent was being squeezed by insurance companies, which had begun disputing his bills and uncovering the truth of his suspicious dealings. In one case, an arbitrator ruled Kent had overcharged insurers by hundreds of thousands of dollars and had to pay it back. In another case involving Kent’s billings to defend Gar May, insurers discovered Kent was paying kickbacks to May. Kent was talking of killing himself or telling all he knew. If anyone was vulnerable to make a deal, it was Kent.

On a Friday in July, 1988, Miller called Kent and arranged the meeting in Norwalk. “Marc, this doesn’t need to take long,” Miller recalled saying over a table in the doughnut shop. If Kent would tell what he knew about the ring, Miller would help him square things with the insurers.

“I have the friends who can solve your civil problems,” Miller said he told Kent. “But my friends’ friendship has one big string attached, and that’s 100% cooperation by you.”

Would it mean testifying on the record, Kent wanted to know. Miller said it would, whereupon Kent broke down in tears and said, “He’s hurt others, he’ll hurt me,” Miller said.

Miller assumed Kent meant Stites, but didn’t ask.

Miller pointed out that Kent’s cronies had noticed his distress and undoubtedly were worried he would crack. At this point, if talking was dangerous, not talking was too, he argued.

Miller said Kent agreed to meet him the following Monday at a Los Angeles hotel, where a court reporter would take a statement. But on Sunday afternoon, a lawyer for Kent called to say he’d reconsidered and that the meeting was off.

Soon afterward, Miller decided to make a pitch to authorities in San Diego, where the Alliance was also busy. Miller drafted a memo to prosecutors and enlisted the help of Radomile’s attorney, John R. Heisner, a former prosecutor in San Diego, in presenting it to authorities.

About the same time, two lawyers for Fireman’s Fund Insurance Cos. were pitching the case to David L. Westberg, chief fraud investigator for the U.S. Postal Inspection Service in San Diego.

Westberg, 41, had been marginally involved in the Los Angeles investigation, attending a meeting or two. His role was so limited that the insurance lawyers, James Schratz and Rich Edwards, were well into their briefing before Westberg realized they were describing the same case.

Westberg had a huge caseload, including dozens more frauds than he could ever properly investigate. But he was known as a workaholic who felt a reflexive twinge of guilt at the thought of rejecting a worthwhile case.

The Alliance case put him in a quandary. For an overworked investigator, it was the worst sort of nightmare: a sinkhole of energy and time with no assurance of success. With lawyers the targets, there were sure to be a million legal theories why their conduct had been proper. At the same time, Westberg knew it was an important case if the allegations were true.

Excited one moment and repelled the next, Westberg found himself blaming his dilemma on the Los Angeles authorities. Ultimately he made his involvement a virtual coin flip. If the investigation piqued the interest of an assistant U.S. attorney named Patrick Coughlin, Westberg would champion the case. Otherwise he would not.

Coughlin, 34, was a no-nonsense prosecutor with a strong work ethic and “a knack for cutting through and getting right to the meat of something,” Westberg said. In the past, they had been a good team, and with the enormous time and sacrifice demanded by this case, Westberg was not keen on working it with anyone else.

Westberg ordered the files from Los Angeles, and dumped them on Coughlin’s desk. “You’ve got to look at this,” Coughlin recalled his saying. Coughlin read the files and met with Miller and others. He was skeptical of the insurers and skeptical of Radomile. Above all, Coughlin did not want the government used to resolve disputes that belonged in the civil courts. However, the more Coughlin looked, the more convinced he became that it was a significant criminal case.

Although Coughlin left for private practice shortly after the investigation began, the case stayed on track. It was taken over by Assistant U.S. Atty. George Hardy, regarded as more cautious than Coughlin but as an able and experienced prosecutor. The son of a retired Air Force general, Hardy, 39, had never had a case involving manipulation of the judicial system to commit fraud. He found this element of the case “fascinatingly depressing.”

A breakthrough came in February, 1989, when Suzanne Rubin pleaded guilty to mail fraud and agreed to assist the government. Rubin had run a court reporting service in which Stites allegedly had an interest. The service, which had charged unusually high rates, had been used by Alliance lawyers in hundreds of depositions paid for by insurers.

After a second guilty plea by a minor Alliance player, Kent pleaded guilty to mail fraud in October, 1989, resigned from the bar and began implicating others. Kent told the court that Stites had recruited him and other Alliance lawyers, had given some of them money to start their own law offices and even assigned them insured clients, in return for a split of their insurance company billings. Some of the lawyers met periodically to plot litigation strategy, despite having clients with adverse interests.

Kent became the star witness. Following his plea and debriefing by the government, the dominoes began to fall.

Radomile had delivered Kent to the government, but that proved his own undoing.

Much to the displeasure of San Diego authorities, Radomile had reached out to “60 Minutes,” and appeared in a May, 1989, segment on the Alliance in which he proclaimed his undercover role. As the investigation unfolded, Radomile gloated about the fate of his former associates. When the indictments come down, “you can have your underwear changed,” he taunted two of the lawyers last summer as they took his deposition.

But Radomile had never sought immunity, and the government believed he was part of the scheme before he became an informant. They apparently believed they couldn’t ignore his conduct before he blew the whistle.

“They offered us a kind of take-it-or-leave-it proposition, . . . which would have required him to admit guilt to a felony,” his lawyer Heisner said.

Radomile would have none of that. He had pushed hard for the case to be brought. Would he have done so had he committed a crime? “I mean, that’s so patently insane,” he said.

But when the indictment came down, the last of the 18 names was Radomile’s. The case had begun with Radomile, and ended with him, too.