Feds accuse leader of Spokane’s Associated Industries of bilking $3 million from trust fund

Federal regulators accuse a pair of Spokane business leaders of secretly transferring $3 million from a trust fund set up to lower health insurance costs for 800 local businesses to enrich their own company.

The U.S. Department of Labor has filed a civil complaint ordering James DeWalt and Robert G. Bakie to return millions they charged as “administrative fees” starting in 2009 from the trust fund set up by business members of Associated Industries of the Inland Northwest.

DeWalt categorically denied the claims filed in U.S. District Court in Spokane.

DeWalt serves as both CEO of the nonprofit Associated Industries, formed 107 years ago, and as the CEO and president of Associated Industries Management Services (AIMS), which is a for-profit corporation formed in 1992 that collects fees to manage health care plans and to oversee the trust fund collectively owned by all the businesses that form the association.

Government attorneys allege that DeWalt and Bakie, AIMS’s chief financial officer, began “prohibitive self-dealing,” or dipping into the trust fund.

“As a result of (DeWalt’s and Bakie’s) actions, the trust paid AIMS millions of dollars of additional fees, which were largely taken from financial reserves held by the trust, without disclosing to the employers or employees that AIMS’s fees had been increased or that money to pay for the increased fees was being taken out of the Trust’s reserve funds,” court records state.

DeWalt said it’s frustrating for a small business association in Spokane to take on the federal government.

“We have one of two choices: Go out of existence, or when we are being wrongfully accused, defend ourselves,” DeWalt said. “We are going to vigorously defend it.”

He noted that the association successfully defended itself against state officials in 2007, which targeted Associated Industries and other similar associations for their business practices.

However, Washington State Insurance Commissioner Mike Kreidler on Wednesday applauded the recent federal action against Associated Industries to root out any possible conflicts of interest.

“I’ve long been concerned about the level of protection consumers get when they buy health insurance from associations, and if they pay fair rates,” Kreidler said in a written statement. “There’s a lot of money at play inside associations and their trusts, but very little transparency and oversight of their operations.”

Associated Industries was founded in 1910 to provide unionization and collective bargaining services to its members. In 1954, the association began offering health plans. It now has 13 employees on staff who provide a wide spectrum of consulting and human resource services for companies too small to afford them, DeWalt said.

In exchange for those services, the companies pay a monthly fee to retain membership. From 2009 until Wednesday, the membership fluctuated from as low as 600 members to about 1,200 companies, he said. Those companies have about 5,000 employees who now have insurance purchased under the association’s plans.

“This program was set up in its entirety for the benefit of association members,” DeWalt said.

The for-profit Associated Industries Management Services provides everything from record keeping, providing insurance documents to the policy holders and privacy.

The Department of Labor started probing the business dealings some four years ago. DeWalt said he was frustrated because he had provided all the information that federal officials had requested.

According to court records, government attorneys claim that DeWalt and Bakie began charging ever increasing fees for their services with the knowledge of fellow fund trustees Jack L. Fallis, Jr. and Jeffrey A. Barton. However, those fees, which increased from 2 percent to 7 percent, weren’t passed onto the members. Instead, DeWalt and Bakie paid for their services by taking the higher administrative fees from the association’s trust fund.

“DeWalt, Bakie and Fallis therefore failed to act in accordance with the documents and instruments governing the plans, and they caused AIMS to receive payments based upon a fee increase that violated the trust agreement’s provisions,” court records state.

The Labor Department attorneys also said that DeWalt and Bakie did not research whether their fees were reasonable or whether other businesses could provide the same services at a lower cost.

But DeWalt also denied those charges. Asked if he mismanaged the trust fund, DeWalt replied: “No. That is my contention and it is my absolute assurance that there hasn’t been any. (Labor attorneys) have read our bylaws and extrapolated what suits their interpretation. But it simply isn’t factual.”

He pointed out that every year Associated Industries has a certified public accountant review the entire program and they also have a consultant review all the business dealings along with in-house attorneys.

“We’ve also consulted outside counsel. We consulted our board of directors and our board of trustees,” DeWalt said. “To allege that didn’t take place simply is not accurate. It’s not even close.”

Associated Industries board member Bill Robinson, who has been a part of the organization for decades, said he doesn’t think the Labor Department’s court action will turn out to be a big deal. And he discounted the claim that DeWalt was somehow enriching himself through the higher fees.

“DeWalt refused a bonus this year because it was not profitable,” Robinson said. “There are huge swings in that kind of business that is leveraged on the whims of insurance companies.”

During the same time DeWalt and Bakie are accused of the secret transfers, DeWalt filed a $4.2 million personal bankruptcy.

He denied the bankruptcy was tied in any way to the higher fees he began collecting.

“My wife and I were victims of fraud in real estate,” he said, explaining why he filed the bankruptcy. “We were wronged. This is now eight or nine years, and it’s being brought up in this context. It had nothing to do with this business. Nothing.”

DeWalt said he will hire an attorney to defend himself against the allegations.