A Marin County judge has blocked an insurance company from continuing to pay for the criminal defense of Gary Armitage and James Koenig, who have been accused of masterminding a massive Ponzi scam.
Judge Michael Dufficy issued the order Friday, a day after attorneys sparred over whether the men or their alleged victims should have access to a $5 million insurance policy.
Attorneys for National Union Insurance Co. argued that it was the insurance company’s right to decide how to pay out on the policy.
But attorneys representing investors who claim the two men defrauded them out of more than $160 million claimed the Pennsylvania insurer was breaking a California law that bars insurance companies from paying criminal defense costs.
They argued the victims were being “double-fleeced,” first by losing their investments and then by watching the only pot of money available for restitution to be emptied defending Armitage and Koenig from criminal charges.
State prosecutors say the two men, both of whom are in a Redding jail awaiting trial, and a Santa Rosa man, former Armitage partner Jeffrey Guidi, orchestrated a real estate Ponzi scheme the caused more than 2,000 people to lose in excess of $200 million.
How the ruling will impact the Feb. 24 preliminary hearing in the case is unclear.
Attorneys representing more than 100 alleged victims asked Dufficy on Thursday to block the insurance company from continuing to pay for the lawyers defending the two men against fraud charges they face in Redding.
“They’re turning this insurance policy into a criminal defense fund,” said George Donaldson, a Berkeley attorney representing 22 people who lost their savings in the alleged scam. “This is unheard of!”
Armitage, co-owner of Santa Rosa-based AGA Financial before its 2007 collapse, and James Koenig, owner of the related Redding-based Asset Real Estate and Investment, are accused of masterminding one of the largest financial frauds in state history.
State prosecutors say the men, both of whom are in jail in Shasta County awaiting trial on fraud charges, and a third man, former Armitage partner Jeffrey Guidi of Santa Rosa, orchestrated a real estate Ponzi scheme that caused more than 2,000 people to lose in excess of $200 million.
Hundreds of those investors have sued the men and their companies in civil court in the hopes of recovering some of their losses, either from the men directly or from insurance policies covering their firms’ actions.
Last summer, the various civil actions against the men were moved to Marin County, with an eye toward streamlining litigation costs and increasing the chance of a settlement that might return some money to the alleged victims.
Soon thereafter, however, attorneys for the alleged victims realized that Armitage and Koenig had convinced National Union Fire Insurance Co. not only to fund their civil defense, but their criminal defense as well.
The move shocked both the plaintiffs’ attorneys and the court, who assumed the $5 million policy would only be used for the civil case.
“I’ve never heard of an insurance company paying for a criminal defense,” Dufficy told attorneys representing the Pittsburgh, Pa., insurer.
Dufficy told the attorneys he was “painfully aware” of the likelihood that the criminal defense team would eat up the entire $5 million, leaving nothing for the victims to recover if they win their civil cases.
Richard Miller, an attorney representing more than 100 plaintiffs including several from Sonoma County, said he understood that Koenig alone had spent $750,000 on his defense, $250,000 each for three attorneys.
The civil plaintiffs, many of whom are retired folks who lost their life savings and homes, have claimed losses of $160 million combined, Miller said.
Even though its only a fraction of their losses, the insurance policy “should remain for the people who have lost it,” Miller said.
One of Koenig’s attorneys, Steven Kimball, declined to say how much his Sacramento law firm had been paid to date. His firm, Stevens, O’Connell & Jacobs, specializes in white collar and business crime cases.
He said it would be “unduly harsh” to Koenig to “pull the plug” on the defense team just a month before the preliminary hearing in the case.
Armitage’s attorneys did not attend the hearing and could not be reached for comment, but they are also being paid for by National Union and would be subject to any ruling on the matter.
Kimball argued the civil plaintiffs had no right to interfere in the contractual relationship between an insurance company and its policy holders. It was within the insurance company’s discretion to decide to fund the criminal defense.
“This is a judgment call left solely to the insurer,” Kimball said.
Donaldson disagreed. He said National Union first refused to pay for the criminal defense, but then changed its position only after getting a threatening letter from Koenig’s attorney.
National Union “bowed” to the threat because it offered “the path of least resistance” for the company, Donaldson said.
But California law specifically prohibits insurance policies from being used to fund criminal defenses, he said.
“I don’t think it could be any clearer. You just can’t do it,” Donaldson said.
Allowing the policy to be drained was an “outrageous scenario” that amounted to a “double-fleecing” of the victims, Donaldson argued.
The judge seemed to agree. He issued a preliminary ruling in the case on Tuesday granting the temporary injunction against the insurance company. He also sounded skeptical of the insurance company’s position Thursday.
He agreed to research the matter further but vowed to rule swiftly on the matter in light of the fact his decision might impact the upcoming criminal action, he said.
The impact such an injunction might have on the preliminary hearing is unclear. The hearing is set to start Feb. 24 in Redding and is expected to last several weeks, with dozens of alleged victims testifying.
Before they hired private attorneys, Koenig was represented by the Shasta County Public Defender’s Office, while Armitage was represented by an independent attorney hired by Shasta County.
But Kimball said the case was such a large, complex one that the public defender’s office didn’t have the resources to adequately defend the two men.
Shasta County Public Defender Jeffrey Gorder agreed that the case is an exceptionally large one, with more than a million pages of documents generated so far. While his office doesn’t have much experience with such complex white-collar crime cases, it is capable of defending Koenig, Gorder said.
“It’s inaccurate to say we can’t handle it,” he said.
If the case is returned to the Public Defender’s Office, the attorneys would probably need to seek a delay in the start of the preliminary hearing, Gorder said.
The debate does not affect the defense of Guidi, Armitage’s longtime partner in AGA Financial. The Santa Rosa resident, who is out on bail, has hired his own private attorney.
