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The State Compensation Insurance Fund sued Select Staffing, Select Chairman and CEO D. Stephen Sorensen and others in federal court claiming violation of the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The act is known for its use in criminal court, but the filing on Nov. 7 by State Fund took place in federal civil court.
The suit also names as defendants Koosharem Corp. and other related companies as well as two key employees — Fred Pachón, Select’s senior vice president, risk and insurance, and Laurie Maxwell, vice president of operations.
State Fund is California’s largest provider of workers’ comp insurance.
Allegations stem from another lawsuit earlier this year when State Fund received a judgment of approximately $51 million against a subsidiary of Select in state court. Select is appealing the judgment, but the $51 million is not yet paid.
In a telephone interview Monday, Sorensen said the RICO suit is essentially a repackaging of the earlier state lawsuit. However, the new lawsuit names him as well as other affiliated Select companies and key employees to maximize recovery leverage, he said.
“Because of the size of the judgment, we can’t bond it pending an appeal,” Sorensen said. “That leaves them free to pursue their collection action, which is what they are doing.”
The appeal process for the state lawsuit could last 18 to 24 months. If the appeal is successful, the RICO lawsuit could also go away.
“Our hope is we can get the finding overturned on appeal or come to a fair settlement that will bring the matter to conclusion,” Sorensen said.
The $51 million judgment in state court was made Sept. 1, 2011. The amount is made up of approximately $30.2 million in damages, $2 million in punitive damages and approximately $18.6 million in interest.
State Fund accused Select of misleading State Fund into believing employees of Select were actually employees of a company called Onvoi Business Solutions, according to reports in the Staffing Industry Daily News. This gave Select a lower workers’ comp costs than it otherwise would have, according to State Fund. Workers’ comp insurance premiums are based in part on a firm’s past experience with unemployment claims and companies with higher experience pay more. Onvoi had a lower experience rating than Select, according to State Fund. The incidents allegedly took place in 2002 and 2003 in a business relationship that lasted less than 15 months.
Select reported the affiliation with Onvoi was sanctioned by financial and legal consultants before proceeding.
In the new RICO suit, State Fund also claims Select improperly transferred $80 million to Sorensen, the Sorensen Trust and others, and that Select was insolvent at the time or became insolvent because of the transfer. The lawsuit seeks to void that transfer.
Sorensen said the transfer didn’t total $80 million and that it was structured as a loan although it was actually a dividend. In addition, some of the funds were returned to the company during the recession.
A filing with the U.S. Securities and Exchange Commission on Dec. 11, 2009, reported the company agreed in July 2007 to allow Par Alma Alliance LLC, a wholly owned entity of The Sorensen Trust, to borrow up to $80 million, of which the largest amount of principal outstanding at any time was $70 million. The filing reported $33.5 million in principal payments and $4.6 million in interest payments were made during Select’s 2008 fiscal year. However, plans called for the loan to ultimately be forgiven, according to the filing.
Both Par Alma Alliance and The Sorensen Trust are defendants in the RICO lawsuit.
The RICO lawsuit seeks three times the amount of damages as well as punitive damages, attorney’s fees and prejudgment interest.
The Select Family of Staffing Companies ranks No. 8 on Staffing Industry Analysts 2011 list of largest U.S. staffing firms.
Recently, Select also made news when Standard & Poor’s lowered the firm’s rating, in part because of the judgment in the state lawsuit.