California: State attorney general sues association to block fraudulent comp scheme
Attorney General Edmund G. Brown Jr. filed a lawsuit to stop the Contractors Asset Protection Association from engaging in, what he called, a scheme to cheat the state comp system. The lawsuit alleges that the association sought to cynically exploit a legal exception to the state's workers' comp law, where directors of a corporation -- who are also the sole shareholders -- can exempt themselves from coverage.
Under this scheme, Brown said ConAPA marketed and advertised an unlawful business plan urging employers to misclassify rank-and-file employees as "corporate officers" and issue them nominal shares of company stock so as to avoid paying workers' comp premiums. For example, housekeepers, cooks, security guards, maintenance men, roofers, and construction laborers were named as "vice presidents" and issued worthless shares of nonnegotiable stock. Despite the titles, many workers were not assigned any managerial or administrative duties and performed the same duties for the same pay that they performed prior to their "promotion."
"This company falsely promised its clients that if they gave their employees empty titles and worthless shares of stock they could avoid tens of thousands of dollars in workers' compensation premiums," Brown said. "But you can't simply call a security guard a vice president and avoid complying with the law through a sophisticated and fraudulent scheme."
According to the suit, ConAPA ensured that its clients were able to prevent their new "officer-shareholders" from gaining control over the business. Employees were also required to sell their shares back to the company if they left the company.
Brown said some ConAPA clients created "dummy" corporations populated by "officer-shareholders" that held no real assets, and existed solely for the purpose of offering their officers back to the original client company as rank-and-file workers who were ostensibly exempt from workers' comp.
The association, according to the suit, told its clients that its business model was legal and implied that the program had been scrutinized and approved by several state authorities, which it had not. Brown said ConAPA has approximately 40 active clients and has had as many as 200 clients in the past that employed their business model.
This lawsuit seeks a permanent injunction barring the association and its founder-president, Eugene Magre, from engaging in unfair and deceptive business practices in violation of sections 17200 and 17500 of the California code. The lawsuit also seeks restitution and civil penalties of no less than $300,000.
March 26, 2009
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