Commonwealth v. Gall

Citations: 58 Mass. App. Ct. 278; 789 N.E.2d 586; 2003 Mass. App. LEXIS 634Docket: No. 01-P-5

Court: Massachusetts Appeals Court; June 10, 2003; Massachusetts; State Appellate Court

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The defendant was convicted after a jury-waived trial for one count of larceny by false pretenses exceeding $250, and twenty-five counts of uttering forged instruments, related to his operation of Employee Staffing of America, Inc. (ESA). The charges stemmed from the defendant's submission of false, understated payroll information to obtain a reduced premium for a workers' compensation policy and from creating and distributing forged insurance certificates. On appeal, the court affirmed the larceny conviction based on sufficient evidence but reversed the uttering convictions, finding that the Commonwealth did not prove the documents involved met statutory criteria for the crime.

The evidence presented showed that the defendant was the president of ESA, which provided employee leasing services, effectively becoming the legal employer for client companies’ workers. ESA promised clients significant cost savings on workers' compensation by obtaining coverage at a lower rate due to its comparatively favorable loss history. ESA maintained a workers' compensation policy with National Union Fire Insurance Company, covering workers from 150 to 200 client companies in Massachusetts, until the policy expired on April 1, 1991. After learning of the nonrenewal, the Massachusetts Department of Industrial Accidents (DIA) warned ESA of potential stop work orders for its clients unless replacement coverage was secured. ESA's attorney communicated with the DIA, asserting that ESA was using an ERISA plan to meet its workers' compensation obligations, claiming entitlement under ERISA’s preemption of state law.

The manager of the Division of Insurance (DIA) and the general counsel informed ESA's attorney that ESA had two main options for workers' compensation coverage in Massachusetts: obtaining an insurance policy or becoming a licensed self-insurer under G. L. c. 152. 25A. ESA's attorney countered by suggesting that an ERISA plan was suitable, although no plan documents were provided, and indicated willingness to apply for an insurance policy temporarily. Subsequently, ESA sought coverage through the assigned risk pool managed by the Workers’ Compensation Rating and Inspection Bureau (WCRIB), which assists employers unable to secure insurance from voluntary markets.

WCRIB is funded by assessments from licensed carriers in Massachusetts and assigns a private insurer to manage the policy once an employer is approved for pool coverage. To qualify, an employer must show rejections from two insurers and must not have outstanding premiums. Accurate underwriting data, including payroll and job classifications, is required for risk assessment and premium calculation.

From May to August 1991, ESA submitted four applications for pool coverage through an inexperienced insurance broker, Salvatore Cantone. The applications underwent scrutiny by Ralph Bowdridge, WCRIB's vice-president of operations, who returned the first application for lack of necessary details regarding ESA's business relationships and employee leasing. The second application was rejected due to inadequate payroll breakdown and omitted ownership information. After the second rejection, Cantone, under ESA's direction, adjusted ESA's reported payroll from a quarterly figure to an annual one, claiming it to be $7,496,504.48. However, the accompanying payroll report inaccurately reflected ESA’s Massachusetts payroll as it misleadingly reported some payroll under an inactive affiliate's name to lower unemployment insurance costs. The third application still lacked specifics, as ESA maintained the annual payroll figure without providing necessary details about its client companies.

Bowdridge sought a complete understanding of risk by requesting additional information about each client company from Cantone, who relayed these requests to the defendant. ESA submitted its final coverage application to WCRIB on August 21, 1991, which included a false DET report and information on thirty-two client companies. Accompanying the application was a misleading letter from ESA’s sales manager, Keith Trapasso, stating that some clients were considering their own workers’ compensation coverage, which was untrue. Trapasso testified that the defendant intentionally withheld details about ESA’s client companies and payroll to minimize the upfront premium. Although aware that all employees in Massachusetts would be covered by the policy, the defendant disclosed only a limited number of clients to secure a policy and maintain low premiums for ESA's profitability. WCRIB accepted the application on August 22, 1991, and issued a policy with an initial premium of $770,468, based on the false payroll estimates. After the policy's inception, ESA managed claims differently based on client disclosure, forwarding claims from disclosed clients to API, while internally adjusting claims from undisclosed clients, despite lacking legitimate authority to self-insure. This led to API having to pay claims for undisclosed companies, particularly in cases of significant exposure, while ESA attempted to obscure discrepancies by reporting errors to API regarding the claims.

API threatened to cancel its insurance policy unless ESA disclosed its complete list of client companies and provided payroll records, revealing 245 clients, with 164 having payroll prior to the policy's start. This led to an estimated premium increase to approximately $5.5 million, largely due to these undisclosed clients. Concurrently, the defendant orchestrated a scheme to produce and distribute fraudulent certificates of insurance, falsely indicating coverage for ESA's client companies. This was done by having a technician create a template for certificates, which were then filled with fictitious details and provided to clients as proof of insurance, including during a period when ESA had no coverage at all. Eventually, in June 1992, API canceled ESA’s policy due to nonpayment, subsequently auditing ESA's payroll and billing a premium balance of $4,206,219.83, which ESA disputed, claiming an incorrect experience modification factor was used. However, even using ESA's figures, approximately $2.7 million in additional premium was owed for the undisclosed clients, which ESA did not pay.

In relation to the larceny conviction under G. L. c. 266, § 30, the Commonwealth demonstrated that the defendant knowingly submitted a false application for workers' compensation coverage, intending for WCRIB and API to rely on these inaccuracies, which they did, resulting in them providing a policy and services at a significantly lower premium than warranted.

The defendant argues that his larceny conviction lacks evidence of false statements because a letter from Trapasso to Cantone disclosed that not all of ESA’s client companies were identified and that ESA did not intend for the insurer to cover those not disclosed. However, the judge rejected this interpretation based on Trapasso's testimony, which asserted that the letter was false and that the defendant was aware the pool policy would cover all Massachusetts employees regardless of disclosure. Additionally, the defendant submitted a false DET report to understate ESA’s payroll, satisfying the false statement requirement.

The defendant contends there was insufficient evidence that WCRIB or API relied on any falsehoods in the application or suffered property loss as a result. He argues that the application was not used for final premium calculations, which were to be based on actual payroll figures. Despite this, the final audit revealed a multimillion-dollar bill largely due to ESA’s undisclosed clients. The defendant claims that if the premium had been calculated correctly, ESA would owe nothing beyond what it had already paid. However, Bowdridge testified that he relied on the application’s representations in binding coverage and setting the initial premium, indicating reliance and a property loss.

Under Massachusetts law, an insurance policy is considered property for larceny by false pretenses. The defendant's false statements deprived WCRIB and API of timely access to funds, as the difference between the initial premium and a properly computed premium constitutes a loss. Even if there were disputes over the final premium, the judge’s restitution order indicated that the defendant’s claim of no further premium owed was not accepted. Evidence showed that ESA owed additional premiums for risks concealed by the defendant, exceeding the $250 threshold for larceny. Lastly, the defendant's argument that he should be relieved of liability due to his later disclosure of information is dismissed; his eventual compliance did not negate the prior wrongdoing.

The crime of uttering false instruments under Massachusetts law requires proof that the defendant, with intent to injure or defraud, disseminated a false, forged, or altered document identified in the forgery statutes. The Commonwealth aimed to demonstrate that the defendant’s false certificates were "policies of insurance," which includes not just the policy itself but also integral documents related to an insurance contract. The defendant contends that the certificates provided cannot be classified as insurance policies, thus challenging the validity of the uttering convictions. 

The Commonwealth asserts that, per case law, a certificate of insurance is an integral part of an insurance contract. The cited case, Kirkpatrick v. Boston Mut. Life Ins. Co., illustrates this point by emphasizing that ambiguities in group insurance certificates may favor the insured and that both the certificate and the master policy together constitute the contract. 

However, the distinction between employee group insurance certificates and certificates used to demonstrate liability or workers’ compensation coverage is critical. The latter is merely a confirmation of an insurance policy and does not confer rights to the holder, supported by various precedential cases. These confirmatory certificates often include disclaimers to clarify that they do not form part of the insurance contract, reinforcing the defendant's argument against the classification of the false certificates as policies of insurance.

The documents presented by the defendant were identified as falsified certificates of insurance, lacking authenticity and not representing any actual contract rights or insurance coverage for client companies under a master policy. The court noted that the nature of these documents makes it questionable whether they qualify as "a policy of insurance" under G. L. c. 267.1. Emphasizing the strict construction of criminal statutes in favor of the defendant, the court found that the Commonwealth failed to provide a viable basis for the defendant's "uttering" convictions, leading to the reversal of those judgments and the setting aside of the findings. However, the conviction for failure to provide workers’ compensation insurance was not challenged on appeal. The defendant was acquitted of ten other larceny counts and twenty-five counts of forgery were dismissed due to jurisdictional issues. Concurrently, the defendant faced federal charges for conspiracy and fraud, resulting in convictions upheld by appellate courts. Legislative reforms were subsequently enacted to address the issues of insurance premium calculations for employee leasing companies and to impose penalties for deceptive practices. The court concluded that no other applicable document categories under forgery statutes were evident in this case, leading to the dismissal of the defendant's other arguments regarding the uttering convictions.