News: 2009 Press Release
For Release: April 30, 2009
Media Calls Only: 916-492-3566
Husband and Wife Arrested and Charged with California's Largest Premium Insurance Fraud Scam
Over $500,000 in jewelry recovered along with application for “Real Housewives of Orange County
||Susan Kang Schroder
||Public Affairs Counsel
||Orange County District Attorney
||Orange County District Attorney
||California Department of Insurance
||Franchise Tax Board
SANTA ANA - A husband and wife accused of living a lavish lifestyle of high-end cars, vacations, and shopping which was financed by committing more than $38 million in premium insurance fraud were arrested yesterday. This is the largest known Workers' Compensation Insurance fraud case in California's history. This case was investigated by the Orange County District Attorney's Office (OCDA) and the Orange County Premium Fraud Task Force, a collaboration of investigators from the OCDA, Department of Insurance (DOI), California Employment Development Department (EDD), Franchise Tax Board, and Contractors State License Board.
Michael Vincent Petronella, also known as Michael Constantine, 50, and his wife Devon Lynn Kile, 44, both of Laguna Hills, are charged with 106 felony counts including conspiracy to commit a crime, grand theft, insurance fraud, filing a false tax return, willfully failing to file or filing fraudulent tax returns, misrepresenting facts to State Compensation Insurance Fund, making fraudulent statements, making false statements to discourage an injured worker from claiming benefits, misrepresenting facts to workers' compensation insurance company, and failing to file a return with the intent to evade tax. The defendants both face sentencing enhancements and allegations for aggravated white collar crime over $2.5 million, $500,000, and $100,000. If convicted on all counts, the defendants each face a sentence ranging from five years and four months up to 102 years in state prison. Petronella and Kile are being held on $10 million bail each and must prove the money is from a legal and legitimate source before posting bond. They are expected to be arraigned tomorrow, Friday, May 1, 2009, at 9:00 a.m. at the Central Justice Center in Santa Ana. The Department is to be assigned.
"Unfortunately, this episode may be titled "The Real Insurance Fraud of Orange County'. The `Real citizens of Orange County' are struggling to keep their houses, put food on the table, and pay for necessities. This husband and wife team was living a lavish lifestyle. How? By committing more than $38 million in premium insurance fraud and not paying their taxes," said District Attorney Tony Rackauckas. "I want to send a message out there that these types of fraud hurt our economy, our infrastructure, and our workers. I want to send a message that if you commit these crimes, you may be looking at the "Real jail cell of Orange County."
"Employees deserve to be taken care of when they are injured on the job, and this type of workers comp fraud jeopardizes this vital protection," said Insurance Commissioner Steve Poizner. "We will work tirelessly with our partners like the Orange County District Attorney's office to track down all types fraud. I want to remind potential criminals out there that no matter how bad the economy is, no matter how enticing it is, if you commit insurance fraud, we will work day and night to bring you to justice."
"This is about all the honest roofers, plumbers and other contractors who can't possibly compete against a business operating in the underground economy," said John Barrett, FTB Public Affairs Spokesman. "This isn't about leveling the playing field. It's about pulling those operating in the underground into the light of compliance."
WHAT IS PREMIUM INSURANCE FRAUD?
California law requires that all employers maintain Workers' Compensation Insurance for their employees. Payroll records showing the number of employees and their income must be submitted to both the insurance company and EDD, who oversee the audit and collection of payroll taxes and employment records for workers in California. Workers' Compensation Insurance rates are determined by a formula, which takes into consideration the factors above and the company's loss history on claims.
Premium insurance fraud is committed when an employer intentionally misrepresents to the State or his/her insurance company the number of employees, the nature of work performed by certain employees, the amount of payroll, and the loss history. These illegal misrepresentations allow deceitful employers to purchase Workers' Compensation Insurance at a significantly lower rate, or to avoid purchasing the insurance at all. This practice also places their competitors at a disadvantage because it forces them to compete against a company with lower operating costs.
This deceptive under or non-reporting drives up the cost of insurance premiums for legitimate businesses, which pay higher rates for their employee's Workers' Compensation Insurance. These legitimate businesses are less competitive against crooked companies who are able to under-bid their competitors due to lower business costs resulting from insurance fraud. This also endangers injured employees who may be denied the workers' compensation benefits intended to meet their physical, psychological, and financial needs for a work-related injury.
CIRCUMSTANCES OF PREMIUM INSURANCE FRAUD CASE
Petronella is a roofing and general building contractor. Petronella and Kile own three businesses including Petronella Corporation, Western Cleanoff, Inc., and The Reroofing Specialists, Inc. (also known as Petronella Roofing). The businesses are located in Costa Mesa and Cathedral City, Riverside County, and have clients primarily in Southern California which include the Ocean Institute in Dana Point, Pacific Amphitheater in Costa Mesa, and other commercial properties.
In March 2006, an employee of Petronella fell from a roof and sustained injuries. A payroll stub was submitted to SCIF listing his employer as Western Cleanoff, Inc., which SCIF did not insure. SCIF reported the suspected fraudulent claim to the OCDA and DOI.
Following a 2-year investigation by the OCDA with assistance from several agencies (listed above), Petronella and Kile were arrested at approximately 7:00 a.m. yesterday, April 29, 2009, at their Laguna Hills home. A search of six locations including two residences, two businesses, a storage unit and a Certified Public Accountant's office turned up more than $500,000 in jewelry, $51,000 cash, and an application from Kile to be featured on the Bravo series Real Housewives of Orange County.
The investigation, which began in 2006, revealed the following:Beginning in 2000, Petronella and Kile are accused of obtaining Workers' Compensation Insurance for their three companies through State Compensation Insurance Fund (SCIF), a quasi-governmental non-profit insurance company established by the California State Legislature. Between 2000 and 2008, Petronella is accused of fraudulently submitting 42 claims for uninsured injured workers and underreporting $29 million in payroll to SCIF in order to avoid paying his Workers' Compensation Insurance premiums. They are accused of engaging in a scheme that resulted in SCIF incurring more than $253,000 in uncovered injured worker claims and insurance premium losses exceeding $38 million. Petronella and Kile are accused of reporting $2.9 million in payroll to SCIF, while having an actual payroll of $29 million, ten times more than reported. The $38 million premium due includes the $29 million in loss history plus penalties and assessments for inaccurate reporting.
Beginning in 2000, SCIF performed annual audits of Petronella and Kile's companies, during which they are accused of providing false employee and payroll records. Between 2000 and 2008, Petronella and Kile are accused of fraudulently reporting a $2.9 million payroll to SCIF for The Reroofing Specialists, Inc., while reporting $16.6 million in payroll to EDD for the same company during the same time period. Beginning in 2003, Petronella and Kile are accused of fraudulently reporting no payroll to SCIF for Western Cleanoff, Inc., while reporting in excess of $13.9 million in payroll to EDD for the same company between 2000 and 2008. Between 2007 and 2008, they are accused of paying unreported payroll in excess of $1.6 million in cash to day laborers.
In order to avoid paying Workers' Compensation Insurance for all of his employees, Petronella and Kile are accused of underreporting the number of workers employed at each business, including claiming none for Western Cleanoff, Inc. Petronella is accused of fraudulently filing 42 claims for employees injured while working for The Reroofing Specialists, Inc. to obtain insurance coverage for the injured employee without paying for the insurance. The injured employees have since been identified as Western Cleanoff, Inc. and Petronella, Inc. employees.
UNDER-REPORTING AND TAX FRAUD CHARGES
The defendants are accused of underreporting their income on their individual state income tax returns. Petronella is accused of underreporting his income between 2005 and 2007 on his tax returns by more than $2.3 million. He is accused of owing the state more than $632,600 in taxes, fines, penalties, and the cost of the investigation. Kile is accused of underreporting her income by more than $1.7 million during the same time and owning the state more than $530,000.
The couple, who live in Laguna Hills, own five properties in California and Texas, and multiple luxury vehicles including a Bentley, two Ferraris, and a Range Rover. Between 2005 and 2007, Petronella and Kile are accused of claiming less than $290,000 of income on their tax returns, but spending more than $2.1 million on their American Express credit card for personal items. They are accused of spending thousands of dollars on jewelry, shoes, clothes, and other personal items at stores including Balenciaga, Bloomingdale's, Chanel, Christian Louboutin, Gucci, Kitson, Neiman-Marcus, Nordstrom, Yves Saint Laurent, and others.
Anyone with additional information is encouraged to contact Supervising District Attorney Investigator Baden Gardner at (714) 648-3667. Deputy District Attorney Debbie Jackson of the Workers' Compensation Insurance Fraud Unit is prosecuting this case.