forensic analysis of the transportation industry … · crm was subsequently acquired by crm...

BST

An Independent Member of the RSM McGladrey Network

FORENSIC ANALYSIS

of

THE TRANSPORTATION INDUSTRY WORKERS’ COMPENSATION TRUST

for

THE NEW YORK STATE WORKERS’ COMPENSATION BOARD

by

BOLLAM, SHEEDY, TORANI & CO. LLP, CPAs

May 22, 2010

BST


FORENSIC ANALYSIS

of

THE TRANSPORTATION INDUSTRY WORKERS’ COMPENSATION TRUST

for

THE NEW YORK STATE WORKERS’ COMPENSATION BOARD

by

BOLLAM, SHEEDY, TORANI & CO. LLP, CPAs

CONTENTS

Page

EXECUTIVE SUMMARY 1 I. INTRODUCTION 5 A. Background 5 B. Methodology 7 C. Chronology of Key Events 7 II. OBSERVATIONS 14 A. Trust Formation 14

B. Board of Trustees 25C. Compensation Risk Managers, LLC (CRM) D. SGRisk, Inc E. UHY, LLP F. Marketing G. Underwriting H. Discounts I. Payroll Audits J. Safety Programs K. Renewal Process L. Member Deficit M. Claims Handling Procedures/Practices N. Miscellaneous

37 49 55 60 67 70 73 73 77 81 82 84

EXHIBITS

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EXECUTIVE SUMMARY The New York State Workers’ Compensation Board (WCB) regulates and monitors programs that offer workers’ compensation insurance to employers in New York State, including group self-insurance trusts. WCB regulations require the WCB to ensure that the group self-insured trusts are financially viable and have remediation plans in the event a trust’s financial stability needs to be restored. Primarily as a result of financial concerns regarding several group self-insured trusts, the WCB began a process of seeking an independent assessment of the financial and operational aspects of certain trusts, and the entities responsible for the administration and management of the trusts. The WCB retained BST through a competitive procurement process during June 2008 to provide an independent assessment of the Transportation Industry Workers’ Compensation Trust (TIWCT) and several additional trusts.1 TIWCT was created on December 27, 2000, and was governed by a Board of Trustees and managed by Compensation Risk Managers, LLC (CRM) - the Trust Administrator whose activities were overseen by the Board of Trustees. CRM was subsequently acquired by CRM Holdings, Ltd. through a stock exchange during December 2005.2 CRM voluntarily surrendered its New York license to represent group self-insurers on September 8, 2008, and the WCB thereafter assumed control of TIWCT’s assets. This report addresses the issues and circumstances surrounding TIWCT and its $5,735,694 audited member deficit as of December 31, 2006. A separate report involving the financial reconstruction of TIWCT’s financial position as of December 31, 2008, and at a later roll-forward date will be issued within the next few months. Our independent assessment of TIWCT’s operation began with a review of documents provided by the WCB, including the documents relating to TIWCT’s formation, e.g., Trust Agreement, Service Agreement, and By-Laws. We subsequently read and analyzed thousands of documents, met with and/or interviewed certain members of TIWCT’s Board of Trustees, certain Trust member representatives, and a sample of insurance brokers. We also read and analyzed TIWCT’s 2001 through 2006 audited financial statements prepared by TIWCT’s financial statement auditor, and we engaged an independent actuary to provide an independent assessment of TIWCT’s claim liabilities.

1 The term audit is used throughout this report and is the term chosen by the WCB to describe the services it requested. BST did not conduct the type of attestation work commonly associated with an audit of financial statements. The services provided by BST were essentially an independent assessment of the duties, responsibilities, and actions of the Trust Administrator and the Trustees, and a financial analysis of TIWCT’s assets and liabilities. We did not provide any attestation services with regard to TIWCT and/or the WCB. 2 The owners of CRM became the new owners of CRM Holdings, Ltd.

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We did not meet with and/or interview CRM officials, TIWCT’s actuary (SGRisk, Inc.), and the independent accounting firm that audited TIWCT’s financial statements (UHY, LLP), all of whom declined our request to be interviewed or voluntarily furnish documents. Only three Trustees agreed to be interviewed or voluntarily provided information. The remaining Trustees declined to be interviewed by BST or did not return our telephone calls, emails, or respond to our letters. We contacted a sample of the members and insurance brokers, primarily because the Trustees would not voluntarily cooperate with our operational analysis of TIWCT. We were not provided with access to the actuary’s work papers, and we had limited access to CRM’s financial and administrative records relating to TIWCT. As a result of the impairments noted above, additional information may become available. Accordingly, we reserve the right to modify the report. Based on our inquiries, observations, document analysis, and discussions to date, we have determined that 1) CRM may have engaged in a series of transactions on behalf of TIWCT which constitute a conflict of interest, 2) one of CRM’s owners was also a Trustee of TIWCT, 3) TIWCT was essentially run by CRM and/or individuals appointed by CRM, 4) the Board of Trustees did not effectively oversee the operations of the Trust Administrator (CRM) or TIWCT, and 5) CRM and/or the Trustees did not take sufficient measures to ensure that TIWCT remained in a fully (or adequately) funded condition. The failure of CRM to recognize adequate reserves and maintain sufficient contribution rates eventually resulted in the acceleration of TIWCT’s deficit and the ultimate dissolution of TIWCT. Furthermore, CRM’s failure to recognize adequate reserves resulted in the understatement of liabilities and may have distorted the actual financial condition of TIWCT and several other trusts concurrently managed by CRM, thereby creating a false perception of CRM’s management capabilities and CRM’s continued financial viability prior to CRM Holdings, Ltd.’s initial public offering during December 2005.

Observations:

1. CRM’s extensive role in the formation of TIWCT, preparation of the initial Trust Agreement, Service Agreement, and By-Laws, and control-oriented management of TIWCT could be perceived as a conflict of interest and raises questions as to whose interests CRM was serving, its own or those of the member organizations.

2. CRM may have prepared, or caused to be prepared, and submitted documents to the WCB which falsely represented the founding Trustee of TIWCT. The documents induced the WCB to approve the formation of TIWCT to legally conduct business in

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New York State as a group self-insured trust, and may have induced other firms to join TIWCT.

3. CRM engaged in other possible self-serving conduct with TIWCT members and Trustees, including advising TIWCT members of alternative workers’ compensation insurance options offered by a CRM affiliate just prior to the dissolution of TIWCT, and by providing other services through its affiliates.

4. CRM controlled the activities of the Board of Trustees, and the Board of Trustees played no substantive oversight role during the period of TIWCT’s existence.

5. From December 27, 2000 to on or about October 1, 2001, CRM may have conducted the

affairs of the TIWCT without the existence of a duly appointed Trustee and Board of Trustees.

6. CRM and its affiliates may have engaged in a series of transactions that conflicted with

their fiduciary role as Trust Administrator, and CRM failed to promptly disclose these transactions or certain relationships to TIWCT’s Trustees and Trust members.

7. CRM did not set aside adequate claims reserves and failed to prudently adjust reserves in

light of the information provided.

8. TIWCT’s independent auditor may not have considered the annual differences between the estimated loss reserves and actual claim amounts sustained by TIWCT, and may not have seen or considered the actuarial reports prepared by other independent actuaries.

9. The actuary retained by CRM consistently applied actuarial methodologies that

understated TIWCT’s loss reserves despite the fact that concurrent analysis by another independent actuary showed that his estimates were insufficient.

10. CRM did not undertake sufficient remedial action to mitigate the eventual losses

sustained by TIWCT, even after they were identified and brought to CRM’s attention.

11. CRM may have understated TIWCT’s claims reserves in an effort to portray a misleading picture of TIWCT’s financial condition and to avoid the scrutiny of the WCB.

12. CRM may not have provided the audit firm retained by TIWCT with information that

may have altered the auditor’s opinion on the reasonableness of TIWCT’s financial statements.

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13. There was insufficient and/or inadequate exchange of information between CRM and the Trustees with the members of TIWCT regarding the status of TIWCT’s financial condition and the relationship between CRM affiliates and TIWCT.

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I. INTRODUCTION A. Background Every employer in New York State is required by the laws of New York to secure workers’ compensation coverage for its employees. Employers essentially have four options: joining a group self-insured trust, obtaining insurance from the New York State Insurance Fund, individually self-insuring, or obtaining insurance from a private insurance carrier. With regard to the formation of group self-insured trusts, each group of employers must establish a trust fund that is financed by contributions from and assessments of its members. Title 12, Chapter 5, Subchapter B of the New York Codes, Rules and Regulations (NYCRR) establishes the procedures, qualifications, and responsibilities for any group of employers that wishes to become, or which has been approved by the WCB to operate as a group self-insurer. Every group self-insurer must also have a set of documents that govern all aspects of the group’s existence, which may include a trust agreement and by-laws. The rules applying to the group self-insured trusts were originally covered under NYCRR Title 12, Chapter 5, Subchapter B, Section 316. Beginning January 31, 2001, the rules were modified and expanded. Prior to June/July 1999, Daniel Hickey, Jr. actively worked for Hickey-Finn & Co., Inc., an insurance brokerage firm. Prior to June 1999, Martin Rakoff was employed by and part owner of Consolidated Risk Services (CRS), a foreign business corporation that registered with the New York State Department of State - Division of Corporations on October 21, 1997. CRS is a trust administrator that provided management type services to group self-insured trusts in New York from at least 1996 to 2004, and Hickey-Finn & Co., Inc. through Hickey, Jr., was the primary firm that identified employers to join the group self-insured trusts formed by CRS.3 Board of Trustees meeting minutes obtained from closed group self-insured trusts reveal that Rakoff was still employed by CRS as of March 23, 1999, and other documents indicate that Rakoff left CRS either in late May or early June 1999. Hickey, Jr. also stated during an August 18, 2008, deposition (relating to the Automobile Dealers WC Self Insurance Trust) that he stopped actively working at Hickey-Finn & Co., Inc. in the “June/July” timeframe of 1999.4 On May 26, 1999, Compensation Risk Managers, LLC (CRM) registered as a domestic limited liability company with the New York State Department of State - Division of Corporations. Hickey, Jr. and Rakoff served as CRM’s President and Chief Executive Officer, respectively,

3 Hickey-Finn & Co., Inc. had a marketing services agreement with CRS. 4 Documents obtained also indicate Hickey, Jr. was an officer of CRS.

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since CRM’s inception to at least 2006.5 CRM was formed by Rakoff, Hickey, Jr., Daniel Hickey, Sr., and Robert Finn (the latter two were principals of Hickey-Finn & Co., Inc.). Beginning August 1999, CRM executed Trust Agreements creating numerous group self-insured trusts in New York. During early November 2000, CRM submitted to the WCB TIWCT’s Application for Group-Self Insurance and its Agreement and Undertaking of Employer Group as a Self-Insurer. A Trust Agreement and an Administrative Service Agreement (Service Agreement) between TIWCT and CRM were submitted to the WCB around December 27, 2000. Both agreements are dated December 27, 2000, and more clearly define the duties of the Board of Trustees and CRM (the Trust Administrator), and the responsibilities of the initial Trustee. On January 8, 2001, based on the aforementioned documents and the representations made therein by CRM, the WCB granted self-insured status to TIWCT effective December 27, 2000, pursuant to Section 50, Subdivision 3-a, Part 316 (Group Self Insurance) of the New York State Workers’ Compensation Law. TIWCT was established to provide workers’ compensation coverage through a self-insurance program to employers engaged in the transportation industry. CRM, through a network of independent insurance brokers across New York State, began soliciting eligible transportation-related employers to consider joining TIWCT. Since December 27, 2000, approximately 830 such employers joined TIWCT, including one member whose owner (Mark Bottini) was both an owner of CRM and a Trustee of TIWCT. CRM Holdings, Ltd., a Bermuda exempted holding company that incorporated on September 7, 2005, completed an initial public offering on December 27, 2005, and acquired CRM and its affiliates through a share exchange by CRM Holdings, Ltd. CRM’s owners, including Hickey, Jr., Rakoff, and Bottini became three of the primary owners of CRM Holdings, Ltd. Bottini’s shares, and those of his brothers, who were also owners of CRM and now CRM Holdings, Ltd. were distributed to Village Holdings, LLC, a domestic limited liability corporation ostensibly formed by the Bottini’s and located at 2785 West Main Street, Wappinger Falls, New York.6 Louis Viglotti, CRM’s General Counsel, was also an owner of Village Holdings, LLC. TIWCT reported a combined net income of approximately $31,000 during the fours years ended December 31, 2004, but reported a combined net loss of $6,144,980 during the two-year period ended December 31, 2006. The Trust members’ cumulative deficit as of December 31, 2006, was $5,735,694. Primarily as a result of large member deficit issues involving trusts managed

5 They were also partial owners of CRM since CRM’s inception. 6 The address is the same address of Bottini Fuels, a member of TIWCT.

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by CRM, CRM voluntarily surrendered its New York State license to act as a third party administrator on September 8, 2008.7 CRM charged TIWCT $12.59 million for its management services during the six-year period ended December 31, 2006. This amounted to approximately 19% of TIWCT’s members’ premium contributions ($65,167,972) during the same period. In addition, CRM apparently charged the Trust for numerous other fees provided by its affiliates. The WCB engaged Bollam, Sheedy, Torani & Co. LLP, CPAs (BST) during June 2008 to perform an operational assessment of TIWCT and to assist the WCB in the financial reconstruction of TIWCT’s financial position as of December 31, 2008, and a roll-forward date that has yet to be determined. Since then, BST and other parties have assisted the WCB in its efforts to identify the reason(s) for TIWCT’s deficit financial condition and to determine whether CRM and TIWCT’s Trustees prudently exercised their fiduciary and legal responsibilities, including actions to preserve the integrity of TIWCT’s funds. Our methodology and observations are detailed on the following pages. B. Methodology BST staff began their analysis by meeting with WCB officials to gain an overview of TIWCT’s financial condition and its history. We also met with members of Safe, LLC, the third-party administrator hired by the WCB when it assumed control of the Trust’s assets. BST engaged an independent actuary, a legal consultant, and a claims auditor to assist in our analysis of the loss reserves, legal responsibilities, and claims handling process, respectively. BST subsequently reviewed thousands of Trust documents, including but not limited to the member files, trust formation documents, New York State Department of State records, audit reports, actuarial reports, Trustee meeting minutes, and correspondence. In addition, we interviewed approximately twenty-three individuals to date. C. Chronology of Key Events March 31, 1993 - The United States District Court for the Eastern District of Pennsylvania orders Martin Rakoff to pay $15,000 in punitive damages to his former employer for tortuous interference relating to a prospective contractual arrangement. Rakoff was working for Consolidated Risk Services, a company located in Pennsylvania.

7 The WCB previously notified CRM of its intent to revoke CRM’s license to act as a third party administrator during April 2008, primarily because of CRM’s failure to pay awards on a timely basis, failure to file proper forms with the WCB, failure to set adequate claim reserves, and CRM’s failure to cooperate with agents hired by the WCB.

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January 13, 1995 - Panichi Holding Corp. of Hopewell Junction, New York legally assumes the name of Royal Carting Service Company. October 21, 1997 - Consolidated Risk Services (CRS) registers with NYS as a foreign business corporation. Martin Rakoff and Daniel Hickey, Jr. are employees of and/or affiliated with CRS. May/June 1999 - Martin Rakoff leaves CRS and joins Compensation Risk Managers (CRM). May 26, 1999 - CRM registers with NYS as a limited-liability company. Daniel Hickey, Jr., and Martin Rakoff are owners and officers of CRM. August 1999 - CRM begins executing Trust Agreements creating numerous group self-insured trusts in New York State. October 2000 - Panichi purportedly signs an Agreement and Undertaking of Employer Group as a Self-Insurer. November 15, 2000 - The WCB receives CRM’s application for group self-insurance for TIWCT and an Agreement and Undertaking of Employer Group as a Self-Insurer to the New York State Workers’ Compensation Board. November 21, 2000 - The WCB denies the Trust’s application and requests additional information from CRM relating to TIWCT’s application. December 7, 2000 - The WCB grants conditional approval of the formation of TIWCT. December 15, 2000 - Village Holdings, Inc., a company ostensibly owned by a TIWCT member firm and Louis Viglotti, CRM’s general counsel, is formed. The member firms’ owners are also part owners of CRM and one of the part owners later becomes a TIWCT Trustee. December 27, 2000 - TIWCT is created; a Trust Agreement and the CRM Service Agreement are executed. Emil Panichi DBA Royal Carting Service Company purportedly becomes the initial TIWCT Trustee. Eight employers reportedly join TIWCT, four of which are companies affiliated with Panichi. January 1, 2001 - Seven employers reportedly join TIWCT. January 4, 2001 - The WCB receives a letter from CRM indicating that Emil Panichi, Royal Carting Services, Inc., and Joseph M. Winter, Winter Brothers Recycling Corporation, are Chair and Secretary of TIWCT’s Board of Trustees, respectively.

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January 8, 2001 - The WCB grants TIWCT group self-insured status, effective December 27, 2000. January 16, 2001 - Eimar, LLC registers with NYS as a domestic limited liability company. Eimar is a CRM affiliate that provides medical claims services for TIWCT and other group self-insured trusts managed by CRM. October 1, 2001 - Mark Bottini, a principal of TIWCT member Morgan Fuel and Heating d/b/a Bottini Fuels,becomes Chair of the TIWCT Board of Trustees. (Records suggest he may not have attended his first Board meeting until March 30, 2004.) December 5, 2001 - Counsel for Emil Panichi requests information from Hickey, Jr. relating to TIWCT. December 14, 2001 - Emil Panichi, Panichi’s counsel, and insurance broker meet with Rakoff and Hickey, Jr. and are provided with miscellaneous TIWCT information and documents, excluding TIWCT’s audited financial statements. Panichi’s counsel has a subsequent meeting with Rakoff at which time Rakoff explains that the Trust’s audited financial statements were not yet completed. December 19, 2001 - Panichi’s counsel sends a letter to Hickey, Jr. indicating Panichi’s interest in joining TIWCT with some pre-conditions. January 18, 2002 -The WCB sends a letter to Panichi indicating that he (Panichi) was TIWCT Chairman and that Royal Carting Services Co. was a member of the Trust. Letter also sent to Joseph F. Winters indicating that the WCB was advised that he (Winters) was the Trust’s Secretary and that Winter Brothers Recycling Corporation was a TIWCT member. January 24, 2002 - Panichi’s counsel sends a letter to Hickey, Jr. requesting an explanation of how Panichi was identified as TIWCT’s Chairman without his (Panichi’s) knowledge. January 28, 2002 - Hickey, Jr. leaves Panichi’s counsel a message noting that Panichi and his companies were never members of TIWCT and that this was not a CRM error. January 29, 2002 - The first documented Board of Trustees meeting held. First Board By-laws were adopted sometime during 2002. April 1, 2002 - Joseph Dotterweich (Ficel Transportation) and Fred DiGiovanni (Island Charter) are appointed as Trustees by Bottini or CRM. Dotterweich subsequently is appointed Chair. April 3, 2002 - UHY concludes that TIWCT's financial statements for the period ended December 31, 2001, were presented fairly in all materials respects.

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April 10, 2003 - UHY concludes that TIWCT's financial statements for the period ended December 31, 2002, were presented fairly in all materials respects. July 9-10, 2003 - CRM sponsors “2003 Broker Bash” in Cooperstown. Awards are given to various brokers. July 16, 2003 - Richard Riccelli (Riccelli Enterprises) is appointed as Trustee. Resigns January 1, 2008. October 22, 2003 - Mangi-Vanner Insurance Group, LLC is incorporated on October 22, 2003, in Erie County, New York. December 2003 - CRM establishes Twin Bridges (Bermuda), Ltd. to provide reinsurance coverage. March 4, 2004/August 4, 2004 - PricewaterhouseCoopers (PwC) issues a report to the WCB noting that the loss and loss expense reserves held by TIWCT as of December 31, 2002, were below a range of reasonable values, and was approximately $93,000 less than the low end of PwC’s range of reasonable reserves. PwC also concluded that the loss development factors utilized by SGRisk deviated from industry benchmarks and that there was no “strong evidence” to support the deviation. April 12, 2004 - UHY concludes that HITNY's financial statements for the period ended December 31, 2003, were presented fairly in all materials respects. November 11, 2004 - Bottini resigns as Chairperson of the TIWCT Board of Trustees. March 15, 2005 - Michael Diati (Speed Motor Express of WNY) appointed Trustee. He resigns August 15, 2007. April 4, 2005 - UHY concludes that HITNY's financial statements for the period ended December 31, 2004, were presented fairly in all materials respects. September 7, 2005 - CRM Holdings, Ltd. is incorporated in Bermuda. September 19, 2005 - CRM Holdings, Ltd. discloses in its securities registration statement, “We derive a significant amount of our income from our reinsurance business.” and “We may be deemed to have a conflict of interest in concurrently managing groups and placing excess coverage for these groups with a U.S. admitted insurer that cedes a part of this excess coverage to Twin Bridges.” (Statement reveals that the New York State group self-insured trusts

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accounted for 78.95% of CRM’s (and CRM’s California’s) management fee and commission income and 66.46% of CRM’s total revenues as of June 30, 2005). December 27, 2005 - CRM Holdings, Ltd.’s Initial Public Offering (IPO) completed. CRM Holdings, Ltd. became the owner of CRM after an initial public offering and share exchange. Daniel Hickey, Jr. and Martin Rakoff exchanged their shares of CRM and its affiliates (Eimar and Twin Bridges) for 9,457,115 common shares (and 790,000 Class B Shares) of CRM Holdings, Ltd. CRM Holdings, Ltd. raised $68,700,000 by selling 6,000,000 shares of CRM Holdings, Ltd. common stock. CRM’s former owners effectively owned 61.18% of CRM Holdings, Ltd. after the exchange and IPO. The owners of Bottini Fuels, a TIWCT member, transfer their shares of CRM Holdings, Ltd. to Village Holdings, Inc. December 31, 2005 - CRM Holdings, Ltd.’s 10-K states that CRM Holdings, Ltd. depends on its reinsurance business for a substantial portion of revenues and profits, and that CRM Holdings, Ltd. could be adversely affected if it is not able to maintain or increase this portion of its business. April 4, 2006 - UHY concludes that HITNY's financial statements for the period ended December 31, 2005, were presented fairly in all materials respects. May 12, 2006 - CRM sends a letter to at least one of its TIWCT brokers stating “As you are aware, CRM is now a publicly traded company. As such, the growth expectations are higher and it is even more critical that CRM adheres to its business development plan.” July 6, 2006 - The NIA Group announces that CRM has selected NIA and its affiliate, Korneich-NIA, to serve as the official Managing General Agent (MGA) of its New York State Transportation Workers’ Compensation Trust. Scott Mangi, believed to be a principal of Mangi-Vanner, is listed as one of the NIA contact persons. November 2, 2006 - CRM advises the TIWCT Board of Trustees at a meeting that it has acquired Majestic Insurance. November 14, 2006 - CRM Holdings, Ltd. acquires Majestic Insurance. CRM later offers Majestic to TIWCT members as an alternative insurer for workers’ compensation during July of 2008. December 18, 2006 - Majestic Insurance becomes authorized by the New York State Insurance Department to write workers’ compensation insurance in New York State. December 28, 2006 - Martin Rakoff leaves CRM Holdings, Ltd. and receives $3,300,000 as part of his separation package.

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May 22, 2007 - UHY concludes that HITNY's financial statements for the period ended December 31, 2006, were presented fairly in all materials respects. Financial statements note that TIWCT is under-funded and may be subject to regulatory action, and cites a $5,735,694 member deficit. May 22, 2007 - Dan Hickey, Jr. sells 13,600 shares of CRM Holdings, Ltd. and receives $116,418. Dan Hickey, Sr. and Lou Viglotti also sell shares of CRM Holdings, Ltd. and receive $118,104 and $122,161, respectively. May 24, 2007 - Lou Viglotti sells 34,800 shares of CRM Holdings, Ltd. and receives $282,920. June 2007 - PwC issues its Tier I report indicating that the Trust’s reserves were significantly below the actuarial indications. August 31, 2007 - Craig Vorselen (Sterling Ambulette) appointed as Trustee. He resigns January 1, 2008. September 20, 2007 - Dan Hickey, Jr. sells 216,454 shares of CRM Holdings, Ltd. and receives $1,298,724. November 2007 - PwC issues its Tier II report noting that their ultimate losses are $7.27 million greater than those selected by SGRisk. December 4, 2007 - Lou Viglotti sells 100,000 shares of CRM Holdings, Ltd. and receives $685,000. December 31, 2007 - The WCB dissolves TIWCT due to its financial condition. January 1, 2008 - A number of TIWCT members cancel coverage and move to Majestic Insurance, a CRM affiliate, for their workers’ compensation coverage. April 15, 2008 - The WCB notifies CRM of its intent to revoke CRM’s license to represent group self-insured employers and/or carriers. July 18, 2008 - The WCB sends a letter to Panichi companies indicating the firms’ membership in TIWCT. July 30, 2008 - In a phone conversation between CRM counsel Viglotti and Emil Panichi’s counsel, Viglotti suggests CRM probably saw Panichi’s firms as “proposed core” members. Panichi’s counsel sends a letter requesting Viglotti to acknowledge in writing that Panichi’s firms were never members of the Trust.

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August 14, 2008 - A letter is sent from Hickey, Jr. to Panichi’s counsel confirming that Panichi’s firms were never members of TIWCT. September 8, 2008 - CRM surrenders NYS license to act as a third party administrator. March 13, 2009 - Hickey, Jr. resigns as CEO of CRM Holding, Ltd. and receives a $3.3 million severance package. March 25, 2009 - CRM Holdings Ltd. announces that certain senior managers may have instructed a public relations firm to post contrived statements about CRM online. CRM reports that its internal investigation could have a “material adverse effect on our business, financial condition and results of operations.”

(Intentionally left blank)

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II. OBSERVATIONS A. Trust Formation The New York State Laws governing the formation of group self-insured trusts indicate that the group self-insured trust be formed by a group of employers in a similar industry. However, and as noted in more detail below, the Trust that is the subject of this report was not formed by a group of employers, rather the Trust was essentially formed by the trust administrator for the sole purpose of generating revenues for the trust administrator’s owners. The TIWCT was formed during late 2000 through a reported relationship between CRM and Emil Panichi - the owner of several companies located in Poughkeepsie, New York. A CRM letter dated November 12, 2000 (see Exhibit 1), indicates that on said date Martin Rakoff, the CRM CEO, submitted documents to the WCB relating to the formation and acceptance of TIWCT as a group self-insurer. The WCB received the letter and other trust formation documents on November 15, 2000, including TIWCT’s Application for Group Self-Insurance and TIWCT’s Agreement and Undertaking of Employer Group as a Self-Insurer. The Application for Group Self-Insurance (see Exhibit 2) contains the signature of Martin Rakoff, CEO of CRM, the notary stamp of Daniel Hickey, Jr., and is dated November 13, 2000. The TIWCT Agreement and Undertaking of Employer Group as a Self-Insurer (see Exhibit 3) was purportedly signed by Emil Panichi on October 31, 2000, and the document was purportedly notarized by Daniel Hickey, Jr. in the presence of Mr. Panichi on November 13, 2000. The TIWCT Trust Agreement and Service Agreement were also included with the November 12, 2000, letter forwarded by Rakoff. Both agreements (see Exhibit 4) state the agreements were made December 27, 2000, six weeks subsequent to the November 12, 2000, letter forwarded by Rakoff, although it appears these documents may have been pre-signed by CRM in anticipation of the Trust being approved effective December 27, 2000.8 On November 21, 2000, the WCB responded to Rakoff and advised him that CRM officials needed to provide the WCB with a new application for Group Self-Insurance, as the trust name noted on the documents submitted by CRM was similar to another group self-insured trust recently qualified by the WCB (see Exhibit 5). In addition, the WCB required CRM to provide WCB with a listing of the Trust’s current members, as the documentation submitted by CRM indicated that only one member was listed as being in the Trust - Panichi’s firm.9

8 The documents could not have been signed on December 27, 2000, as they were received by the WCB during November 2000. 9 Group self-insured trusts must consist of more than one member.

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The Trust name was effectively changed to TIWCT via Amendment #1 to the Trust Agreement (see Exhibit 5A). The Amendment is purportedly signed by Emil Panichi and Patricia Pettyjohn-Jordan, a Key Bank Relationship Manager. The Amendment notes that the Amendment was done at the suggestion of the TIWCT Board of Trustees, however, this cannot be accurate, for as detailed below, the TIWCT was not granted formal approval to operate as a trust until December 7, 2000, at which point a Board of Trustees did not exist. On December 7, 2000, conditional approval was granted by the WCB (see Exhibit 6) for the formation of the TIWCT, subject to certain qualifications, including a corrected application; and on January 8, 2001, the TIWCT was granted self-insured status (see Exhibit 7), effective December 27, 2000. As noted above, the Trust Agreement creating the TIWCT was submitted to the WCB on November 12, 2000, but was purportedly signed by Emi Panichi, DBA Royal Carting Service Company and Rakoff on or before December 27, 2000. However, subsequent discussions with Panichi’s counsel, James Constantino, and an examination of the documents indicate the documents may not be authentic. For example:

As explained in more detail below, Constantino stated that he and Panichi did not meet with CRM until December 2001, approximately one year after the Trust Agreement was purportedly signed by Panichi;

Constantino stated neither he nor Panichi have any recollection of Panichi signing any documents relating to the formation and creation of the TIWCT;

Panichi’s first name is Emil, not Emi as noted in the Trust Agreement; Records provided by Panichi’s insurance broker and conversations with the broker reveal

Panichi and his related companies have continuously purchased workers’ compensation insurance through private insurance companies (Exhibit 29A);10

Constantino said neither he nor Panichi ever met with Patricia PettyJohn-Jordan, the Key Bank employee whose purported signature appears on the Trust Agreement and the Amendment;

Emil Panichi, DBA Royal Carting Service Company, the entity noted in the Trust Agreement did not exist as of December 27, 2000. Emil Panichi DBA Royal Carting Service was succeeded by Panichi Holding Corporation effective January 1, 1995 (see Exhibit 8);11

10 Accordingly, there is no incentive or logical reason for Panichi to form and/or be a Trustee of a group self-insured workers’ compensation trust. Furthermore, Panichi insofar as he never obtained coverage through the Trust could not serve as a Trustee pursuant to the provisions of the Trust Agreement. 11 An on-line search of the New York State Department of State corporate filings do not reveal any filings for Royal Carting Service Company, thereby suggesting such entity never existed. Panichi Holding Corporation was formed

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Panichi’s purported signature appears to be inconsistent when compared to other documents which also purportedly bear his signature, and

The font size and salutations noted on the TIWCT Trust Agreement are inconsistent with the other Trust Agreements between CRM and other Group Self-Insured origination Trustees.

Constantino stated that he and Panichi first learned about TIWCT through Panichi’s insurance broker, Todd Brinkerhoff. He said Brinkerhoff felt ambivalent about CRM’s insurance product but suggested Constantino and Panichi meet with CRM because of the potential costs savings cited by CRM to Brinkerhoff. Constantino stated he spoke with Hickey, Jr., on or around December 5, 2001, at which point Hickey, Jr., stated that TIWCT was already in existence.12 Constantino stated that one of the big selling points of possibly joining TIWCT was Mark Bottini and Bottini Fuel’s involvement in TIWCT.13 He noted that he understood that Bottini had an equity interest in CRM, although he could not recall when he learned this. Constantino stated that on December 5, 2001, he mailed and faxed a letter (see Exhibit 9) to Hickey, Jr., requesting a schedule of TIWCT’s members, the members’ experience modification rates, a copy of TIWCT’s audited financial statements, and TIWCT’s most recent interim financial reports. He mentioned (and pointed out in his letter) that one of conditions for considering TIWCT was that all of the Bottini companies would be participants in TIWCT. Constantino stated that on December 14, 2001, he, Panichi, and Brinkerhoff met with Rakoff and Hickey, Jr. He said that at this meeting, he and Panichi were presented with the following documents:

Prospective client application forms (see Exhibit 10); An unsigned joinder and indemnification agreement (see Exhibit 11); A blank WCB application for participation in a group self-insurance plan (see Exhibit

12); Power point slides relating to CRM’s December 14, 2001, presentation (see Exhibit 13); TIWCT’s membership roster as of November 12, 2001 (see Exhibit 14);14 Another undated membership roster (see Exhibit 14A);15

on December 22, 1994, and according to a January 13, 1995 Certificate of Assumed Name, Panichi Holding Corporation assumed the name of Royal Carting Service Company. 12 According to official WCB documents, TIWCT was granted approval to operate as a group self-insured trust effective December 27, 2000. 13 Membership in the Trust is under Morgan Fuel and Heating, dba Bottini Fuels. 14 Includes one of the Bottini firms. The TIWCT trustee form submitted by CRM reveals Mark Bottini was a TIWCT Trustee as of October 1, 2001, and records independently obtained also reveal that Mark Bottini and his brothers were also owners of CRM.

17

BST


TIWCT’s manual premium report as of October 23, 2001 (see Exhibit 15); A TIWCT workers’ compensation insurance quote for Royal Carting Service for the year

ended January 1, 2003 (see Exhibit 16), and A CRM marketing booklet which contained numerous documents, including:

o A listing of Board members of other trusts that were effectively created and managed by CRM, including a reference to the HITNY Trust and Trustee - who upon being interviewed by BST, indicated he was not even aware he was a Trustee of HITNY (see Exhibit 17), and

o A copy of a pro-forma Trust and Service Agreement relating to TIWCT (see

Exhibit 18).16 With regard to the undated membership roster (Exhibit 14A) that CRM provided to Constantino, BST determined that only twenty of the forty members listed were actually members of TIWCT; and six of the twenty members noted on the membership list provided by CRM did not join TIWCT until December 2002 or thereafter. Accordingly, we question the accuracy and veracity of the information contained in the membership list and other documents provided by CRM to Constantino.17 The pro-forma trust and service agreements (see Exhibit 18) are essentially the same documents submitted by CRM to the WCB during November 2000 (see Exhibit 4), except the pro-forma documents are not completed, the pro-forma documents do not contain any signatures, and the description below the signature lines on the service agreements are inconsistent and in a different font size, i.e., the pro-forma service agreement lists Emil Panichi DBA Royal Carting Service Co., while the Service Agreement submitted by CRM to the WCB during November 2000 lists Emil Panichi, President. Constantino produced a copy of another Trust Agreement that was in his files (see Exhibit 19). The Trust Agreement is virtually the same as the other two Trust Agreements noted above, with the following exceptions:

The line spacing is different, and the font size is different on the signature page. This copy closely replicates the pro-forma copy provided by CRM at the December 14, 2001, meeting, and the font sizes on the signature section appear to be identical, and

Constantino’s copy contains the signature of Emil Panichi.18

15 The roster would have to have been dated prior to December 14, 2001, as this was the date of the meeting between CRM and Panichi. 16 It is interesting that CRM would reportedly provide a pro-forma Trust and Service Agreement on December 14, 2001, if they apparently already had Panichi sign the same agreements during November 2000. 17 WCB records indicate that ninety other entities were members of the TIWCT as of December 2001; however, these members were not reflected on the undated list provided by CRM to Constantino. 18 This Trust Agreement is not signed by anyone other than Panichi.

18

BST


Constantino stated he was not sure why Panichi signed the document or how he came into possession of the signed document, although he speculated that Panichi may have signed it and kept it in contemplation of joining TIWCT. He stated that he does not have the original of this document and that Panichi has no recollection of signing any documents, although he noted that the signatures appear to be Panichi’s handwriting. Regardless, a comparison of the signatures on the Trust Agreement copy in Constantino’s files with the original on file at the WCB reveal that one is not a copy of the other, therefore, both must have been signed by Panichi or one or more of the signatures is not authentic.19 Constantino stated that he had a follow-up meeting with Rakoff prior to December 19, 2001, and that Rakoff was accompanied by another CRM colleague whose name he could not recall. He said Rakoff told him that KPMG was TIWCT’s auditors and that TIWCT’s audited financial statements were not completed as of yet.20 Constantino stated that at one of the meetings there was a suggestion that he (Constantino) become a TIWCT Trustee. He also stated there was never any discussion about Panichi becoming a TIWCT Trustee. Constantino stated he also spoke with Mark Bottini during December 2001, and he said that Bottini told him that the self-insured groups were a great concept. He said he subsequently learned Bottini was an owner of CRM, although he could not recall when he first learned of this information. Constantino stated he sent a letter dated December 19, 2001 to Hickey, Jr. thanking him for the December 14, 2001 meeting, and he expressed Panichi’s desire to join TIWCT, provided that unlimited B coverage was secured and subject to TIWCT receiving an unqualified opinion from its independent auditors (see Exhibit 20). He pointed out that his December 19, 2001, letter to Hickey, Jr. clearly indicates that the transition from Panichi’s private workers’ compensation insurance carrier to TIWCT would take place sometime before the end of the second quarter of 2002, provided CRM complied with Constantino’s request. Constantino said he started to become concerned about CRM and TIWCT because he was not getting satisfactory answers from Rakoff about the audit reports and unlimited B coverage. As a result, he, Panichi, and Brinkerhoff made the decision to not join TIWCT. He stated, and other documents provided indicate, the Panichi companies continued to purchase workers’ compensation insurance through a private carrier (see Exhibit 29A).21

19 Members of another trust administered by CRM indicated that their purported signatures on certain trust related documents were not authentic. 20 TIWCT’s financial statements were actually audited by UHY. 21 Brinkerhoff, Panichi’s insurance broker, confirmed that the Panichi companies have continuously secured workers’ compensation insurance through a private carrier.

19

BST


Constantino stated that at no point was he aware of Panichi signing any documents relating to TIWCT, including membership in TIWCT. However, he produced a copy of an original WCB Agreement and Undertaking of Employer Group as a Self-Insurer which contains the signature of Panichi (see Exhibit 21). He suggested that Panichi signed this in contemplation of joining the TIWCT, but added that this document (with Panichi’s signature) was never submitted to CRM.22 BST compared Panichi’s signature on this document with Panichi’s purported signature on the Agreement and Undertaking of Employer Group as a Self-Insurer filed by CRM and submitted to the WCB during November 2000 (thirteen months earlier) and noted that the signatures appear to be substantially different (see Exhibits 3 and 21).23 Constantino stated that on or around January 18, 2002, Panichi received a letter from the NYS Workers’ Compensation Board indicating that Panichi was Chairman of TIWCT and that Royal Carting Service Company was a member of TIWCT (see Exhibit 22). He said Panichi saw the letter and was furious, and that he (Constantino) subsequently wrote a letter to Hickey, Jr. (dated January 24, 2002) indicating that he was very disturbed that Panichi was listed as Chairman of TIWCT (see Exhibit 23). Constantino stated that Hickey, Jr. called him on January 28, 2002, and left a message with his secretary. He provided a copy of the message slip which contained the following reported comments about Panichi’s companies from Hickey, Jr. (see Exhibit 24):

Not have been nor never been a member; Not an error of CRM; Benefit of the doubt; Will follow-up to substantiate, and 452-4100 (the telephone number for CRM).

Constantino stated he never saw the letter dated January 4, 2001, sent to the WCB by CRM indicating Panichi was the Chairman of TIWCT (see Exhibit 25). He thought that the letter was incorrectly dated, as he stated that CRM could not have sent a letter to the WCB on January 4, 2001, since he and Panichi did not meet with CRM until twelve months later on December 14, 2001. Constantino stated he never heard back from Hickey, Jr. after his January 24, 2002, letter and that this was the last exchange regarding CRM and TIWCT until July 2008 when he received a letter (dated July 18, 2008) from the WCB indicating that Panichi’s firm had been a member of TIWCT. He and Panichi’s insurance broker reiterated that Panichi and his companies have always been insured through a private carrier.

22 Constantino has the original copy. 23 BST and its employees are not handwriting experts and recognize that individuals may write differently on occasion.

20

BST


Constantino stated that he had a telephone conversation with CRM’s counsel, Louis Viglotti, on July 30, 2008, and questioned him about why Panichi’s companies (Royal Carting of Dutchess County, Inc. and Panichi Holding Corp.) were being considered TIWCT members by the WCB. He said Viglotti told him that the WCB probably saw Panichi listed as a “proposed core member” with the original paperwork and thought Panichi was a member. Constantino noted that Panichi could not have been a “proposed core member” as suggested by Viglotti because Constantino was told by CRM officials during the December 2001 meeting that TIWCT already existed, therefore, the core members should have already existed. Indeed, the documents reveal TIWCT was approved during January 2001 (effective December 27, 2000), one year before Constantino and Panichi met with CRM, and other documents filed by CRM with the WCB reveal TIWCT had Trustees (including Bottini) and a number of members as of October 2001 -two months before CRM met with Constantino and Panichi (see Exhibit 26). Constantino stated that he thereafter sent a letter dated July 30, 2008, to Viglotti (which made reference to their telephone conversation on the same date) and asked that Viglotti send him a letter confirming that Panichi’s companies were never members of TIWCT (see Exhibit 27). Constantino provided to BST an August 14, 2008, letter from Hickey, Jr. to Constantino indicating that Panichi’s companies were never members of TWICT (see Exhibit 28).24 BST noted that two termination notices relating to Panichi’s companies were attached to the letter, and both of termination notices indicate that Panichi’s companies were terminated from TIWCT effective December 27, 200025. However, the termination notices are dated February 20, 2008, and clearly indicate a copy was to be sent to Panichi’s companies (by CRM). Constantino stated Panichi never received a copy of these termination notices until August 2008, and he noted that Panichi should not have received these letters if the Panichi companies were never members in the Trust – as per Hickey’s August 14, 2008 letter. Constantino stated he heard nothing further from CRM or the WCB until around February 2009, when he received a notice from the WCB indicating that two other Panichi companies (Watch Hill Holding Corp. and Valley 82 Holding Corp.) were members of TIWCT (see Exhibit 29). He said Watch Hill is a Sanitation Company and Valley Hill is a Real Estate company, neither of which has anything to do with the transportation industry. He also noted that the latter two companies also had private workers’ compensation insurance (see Exhibit 29A).26 As a result, he sent a February 24, 2009, letter to Hickey, Jr. asking for clarification (see Exhibit 30).

24 Interestingly, Hickey, Jr., not Viglotti, responded to Constantino’s July 30, 2008, letter to Viglotti. 25 The question remains why would Panichi’s companies have received termination notices if they were never members of the Trust (according to the August 14, 2008, letter from Hickey, Jr.). 26 Constantino provided a copy of a letter from Panichi’s insurance broker which indicates that Panichi Holding Corp., dba Royal Carting Services Co. et al. has workers’ compensation insurance through a private carrier (see Exhibit 29A).

21

BST


Constantino stated that neither he nor Panichi drafted or prepared the Trust Agreement and that he and Panichi never met Patricia Pettyjohn-Jordan, the Key Bank representative noted on the Trust Agreement. Pettyjohn-Jordan stated to BST that she was a Relationship Manager at Key Bank prior to leaving their employ around 2002 and that she did not recall this trust. She stated that she did not set up TIWCT or draft the documents. She stated she was not familiar with the name CRM, although she stated that she was familiar with the name Dan Hickey, Jr. She believed he owned an insurance company.

Pettyjohn-Jordan stated that she could not recall the circumstances surrounding her signing these agreements and that Hickey, Jr. was not present when she signed the documents. She stated she does not believe she ever met Panichi. She stated that she most likely signed these agreements after being asked to do so by another Key Bank employee.27 Documents provided by the WCB reveal Pettyjohn-Jordan wrote a letter to the WCB on December 15, 2000, indicating that TIWCT had an active account with Key Bank. Attached as Exhibit B to the TIWCT Trust Agreement is a Service Agreement between TIWCT and CRM (see Exhibit 4). The Service Agreement is also dated December 27, 2000, and indicates the Service Agreement was signed by Panichi and Rakoff. The Service Agreement also contains the notary stamp and signature of Daniel G. Hickey, Jr. We attempted to contact Hickey, Jr. and inquire about the documents he allegedly notarized; however, CRM’s counsel (Kramer Levin Naftalis & Frankel) advised us that we could not speak with Hickey, Jr. or other CRM representatives, nor receive documents we specifically requested from CRM. BST determined CRM was also the trust administrator for seven other group self-insured trusts in New York, including at least four that have trust agreements that are virtually identical to that of the TIWCT Trust (with the exception of the trust name and trust formation dates). Evidence shows that a number of different brokers were involved in brokering the insurance for the other seven group self-insured trusts in which CRM was the trust administrator. Accordingly, it appears the TIWCT trust documents (Trust Agreement and Service Agreement) were prepared by or at the request of CRM. There is no evidence that any of these documents were reviewed by an attorney acting on behalf of TIWCT, its Board of Trustees, or its members prior to execution. In addition, in the case of TIWCT and other trusts managed by CRM, it appears the trusts were created by CRM, without any input from the groups of employers. Indeed, most if not all of the trusts managed by CRM were executed by a single Trustee and Key Bank, neither of whom had any apparent experience in forming group self-insured trusts for workers’ compensation

27 Key Bank officials did acknowledge that CRM was a Key Bank client prior to the formation of TWICT.

22

BST


purposes. Instead, CRM solicited members to join the Trust after they convinced an initial Trustee to sign the Trust documents CRM prepared. Furthermore, and as explained in much greater detail below, the financial incentive to CRM in establishing and/or brokering these group self-insured trusts suggests that the aforementioned documents may not have been executed in the best interest of TIWCT and/or the members seeking workers’ compensation coverage. It is clear from a review of the TIWCT Trust and Service Agreements, and other TIWCT-related documents that the genesis of TIWCT began with CRM. Specifically:

Rakoff had been involved in the formation of other group self-insured trusts in prior years when he was employed by and part owner of Consolidated Risk Services, Inc. (CRS); and Hickey Jr.’s insurance brokerage firm was responsible for marketing the services provided by CRS;

Pettyjohn-Jordan previously signed other trust documents for CRM group self-insured trusts;

The application and letter to the WCB for the TIWCT Trust (see Exhibit 5) was submitted by Rakoff without copies to the initial Trustee who purportedly signed the Trust Agreement;

CRM had an existing relationship with Key Bank, and Key Bank was not independently chosen or selected by the initial Trustee;

Panichi’s companies secured workers’ compensation insurance through a private carrier during the life of TIWCT, therefore, there was no incentive for them to start a group self-insured trust or be a trustee of a group self-insured trust, and

CRM provided pro-forma and incomplete copies of these documents to Panichi when they met with him during December 2001.

As detailed below in Section B, CRM’s extensive role in the formation of TIWCT and its apparent desire to dictate the Board of Trustees’ agenda is further illustrated by the fact that CRM organized the Board of Trustees meetings, set the meetings’ agendas, ran the meetings, appointed the Trustees, and maintained the meeting minutes. It is unclear how Hickey, Jr. could have appropriately notarized the signatures of both Key Bank and Panichi representatives on the same date, particularly when Panichi, Constantino, and Panichi’s insurance broker indicated that they never met with the Key Bank official and that they have no recollection of Panichi signing the Trust or Service Agreements. Section 317.17 (Solicitation of New Members) of the New York State Workers’ Compensation Rules and Regulations requires that:

23

BST


“Group administrators, trustees of the group and insurance brokers and consultants shall make a good faith effort to fully disclose to prospective group members both the rights and responsibilities of participating (sic) in the group. No party shall make a material misrepresentation or omission of a material fact in connection with the solicitation of a prospective group member.”28

However, as delineated below, the relationships among CRM, the purported initial Trustee, Key Bank, and TIWCT were not arms’-length or within the bounds of prudent business practices; and not all material representations were communicated to the purported initial Trustee prior to the purported signing of the documents. For example:

Evidence strongly suggests that CRM authored the Trust Agreement which provided for a single trustee responsible for the appointment of the Trust’s Administrator (CRM), and this information was not orally communicated to the Trustee by CRM;

CRM did not suggest that Panichi appoint the Board of Trustees before signing any documents;

The initial Trustee (who denies ever being a Trustee, let alone a member of TIWCT) did not appoint the seven-member Board of Trustees before purportedly selecting CRM as TIWCT’s Trust Administrator. In fact, the purported Trustee was not even a participating member of the Trust, and the purported signing of the Trust and Service Agreements left little, if any, time for the purported Trustee to appoint a seven-member Board of Trustees as required by the Trust Agreement;

The appointment of CRM as the Trust’s Administrator, which is one of the most critical actions to be undertaken in the operation of a trust, was never subject to the approval by a broad-based and representative Board of Trustees;

CRM or its representatives ostensibly authored the Service Agreement and the provisions contained therein. As detailed later in this report, these provisions were extremely self-serving for CRM and its officials;

The Service Agreement ostensibly authored by CRM, allowed CRM or its duly licensed designee, to act as a broker for the purpose of procuring and maintaining excess insurance and a workers’ compensation surety bond as required by the Trust Agreement. This arrangement certainly constitutes a conflict of interest in appearance, if not in fact, as CRM subsequently purchased TIWCT’s excess insurance through a carrier with which a CRM related entity had a revenue sharing agreement. This observation is compounded by the fact that the Service and Trust Agreements specify that the procurement of the excess insurance shall be approved by the Board of Trustees. As delineated later in this report, the purported initial Trustee has no recollection of signing these agreements, never

28 The rules became effective January 31, 2001.

24

BST


knew he was a Trustee, never attended any Board of Trustees meetings, and it appears that the Board of Trustees did not formally exist until after October 2001;29

The first official Trustee appears to have been Mark Bottini, who also happened to be a owner of CRM - which appears to constitute a conflict of interest, and

CRM had an existing relationship with Key Bank, and presumably selected Key Bank on behalf of TIWCT.

CRM’s virtual, all-encompassing control over the formation of TIWCT and its subsequent operation raises the question as to whether TIWCT was truly independent or merely an extension of CRM. The inclusion of an owner of CRM on the TIWCT Board of Trustees in the person of Mark Bottini also seems to suggest a blatant conflict of interest. Furthermore, CRM’s extensive involvement in the formation of TIWCT and other CRM group self-insured trusts are not isolated incidents. As previously noted, both Rakoff and Hickey, Jr. (CRM’s principals) were affiliated with CRS, a trust administrator which was instrumental in drafting other trust/service agreements and similarly exercised virtual, complete control over the formation of two group self-insured trusts formed during 1997.30 The Trust Agreements prepared by CRS were also executed with Key Bank of New York and the Service Agreements had a renewal clause that automatically and contractually bound the trusts to retain CRS except under certain conditions which were favorable to CRS. Specifically, the Service Agreement could not be terminated by the Board of Trustees for CRS’s incompetence, negligence, excessive fees, or failure to abide by other terms of the Service Agreement.31 Similar provisions are included in the TIWCT Service Agreement, ostensibly prepared by CRM. Again, the common denominators between CRS and CRM are Hickey, Jr. and Rakoff. BST was not able to ascertain whether the signatures on the Trust and Service Agreements were Panichi’s and/or why Panichi would have signed these documents when he apparently was never a member of TIWCT, and maintained private coverage through his insurance carrier. However, the timing of the purported signatures (November 2000) is in direct conflict with the documentation provided by Panichi’s attorney and insurance broker - which suggests that Panichi did not even meet with CRM until one year later (December 2001). If this is true, then the authenticity of the documents submitted by CRM to the WCB relating to the formation of TIWCT may be in serious question, and consequently, the WCB may have made its decision to approve TIWCT’s formation on these questionable documents.

29 This is the date records show that Mark Bottini, an owner of CRM, was appointed Chair of the Board of Trustees. Records further show he may have served as the only Trustee until April 1, 2002. 30 The Trust and Service Agreements for The Provider Agency Trust for Human Services contains the name and signature of Daniel Hickey, and the Trust Agreement for the Manufacturing Industry Workers’ Compensation Self-Insurance Trust is signed by Martin Rakoff (Senior Vice President - CRS). The WCB assumed control of these trusts due to the size of the trusts’ member deficits. 31 The WCB assumed control of these two CRS trusts during 2006, primarily because of their combined $26.6 million member deficit.

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BST


The possibility remains that CRM may have wanted future members to believe that Panichi was involved in an effort to encourage them to join TIWCT. For example, as of August 2002, the indemnity agreements signed by the TIWCT members noted that TIWCT was formed by Emil Panichi. It is also unclear why CRM, according to Constantino and the documents provided would have met with Panichi, Constantino, and their broker during December 2001, about joining the Trust and provided them a pro-forma copy of the Trust Agreement if they already had Panichi’s signature on the same documents from one year earlier (December 2000). B. Board of Trustees BST attempted to interview the Trustees about their roles; interactions with CRM; and understanding of their fiduciary duties. BST identified eight TIWCT Trustees, six of whom were noted on the Designation of Trustees form completed by CRM and provided to the WCB (see Exhibit 31) and two of whom were reported as Trustees but apparently never served in that capacity.32 Trustee Richard Riccelli granted extensive interview time and furnished related documentation. Trustees Craig Vorselen and Mark Bottini provided limited information, Trustees Joseph Dotterweich (Chairman, Board of Trustees), Michael Diati, and Joseph Winters did not provide any information, and Trustee Fred DiGiovanni’s son was not inclined to let us speak with his father. His son stated that Trustee DiGiovanni retired and that his business was only in the TIWCT for one year. 33 We attempted to contact Trustee Diati on five occasions and were finally successful in briefly speaking with him on March 19, 2009, whereupon he agreed to review a list of our questions for the Trustees. We subsequently emailed him on two other occasions in follow-up; however, he still has not provided any responses with regard to his role as Trustee or indicated whether he will respond to the questions. We also attempted to contact Trustee Winters on at least three occasions, however, he has not responded to our telephone calls or our letter, and his office staff were not inclined to take our messages. Trustee Winters is not listed on the Designation of Trustees form submitted by CRM to the WCB, however, he is listed as one of the initial Trustees on a January 4, 2001, CRM letter to the WCB (see Exhibit 25); and documents obtained from CRM indicate his firm, Winters Brothers Recycling Corporation, was a member of TIWCT. We have not been able to ascertain

32 One was Panichi, the other was Joseph Winters, an individual whose multiple firms were members of TIWCT. 33 Trustee meeting minutes previously provided by CRM reveal DiGiovanni only attended one Board of Trustees meeting during his approximate eleven month tenure as a Trustee.

26

BST


whether Winters knew he was listed as a TIWCT Trustee, as he will not speak with us, and there is no indication that he was ever present at a TIWCT Board of Trustees meeting. Trustee Riccelli spoke with BST candidly about his role as a TIWCT Trustee. Unlike the other Trustees, he wanted to cooperate fully. Riccelli stated that the Board of Trustees met annually, sometimes twice a year and that the meetings were lead by CRM. He noted that the Board of Trustees had little communication from CRM in between meetings. He stated that the Board of Trustees meeting minutes also accurately reflect what was discussed at the Board of Trustees meetings. Riccelli stated that he did not recall TIWCT’s financial statement auditors or the actuary being present at the meetings.34 He said that CRM established underwriting guidelines and that these guidelines were used by CRM to select new members. We also made numerous written, electronic, and telephonic attempts to contact Trustee Dotterweich, Chief Financial Officer of Ficel Transport, and Mark Celani, the President of Ficel Transport. Dotterweich’s input is critical as:

He was the second Chairman of the TIWCT Board of Trustees;35 He apparently was the second Trustee, and he had extensive involvement in the Trust;36 He was present for six of the seven Board of Trustees meetings for which Board of

Trustees meeting minutes were available to BST, and37 On each occasion in which he was present at the Board of Trustees meetings, only one

other Trustee was present, including three instances in which the same Trustee (Riccelli) was present.

BST briefly spoke with Mark Celani, the President of Ficel Transport, during March 2009. He stated that either he or his attorney would respond to BST, however, neither he, Dotterweich, nor their attorney has contacted us as of the date of this report, and contrary to Celani’s representation, there is no indication that he has any intention of responding. Dotterweich’s refusal to at least contact BST is disconcerting given the fact that he was present at most, if not all, of the documented Board of Trustees meetings and that he usually initiated most of the motions during the meetings. He was the longest tenured Trustee at almost six years and executed numerous documents on behalf of TIWCT. 34 The Board of Trustees meeting minutes indicate that the auditors and actuary were not present at the meetings. 35 This assumes that Panichi was never a member of the Board of Trustees. 36 According to the Designation of Trustees form submitted by CRM, his involvement as Trustee began on April 1, 2002, and was preceded only by former Chairman Mark Bottini - who was also an owner of CRM. 37 The TIWCT Board of Trustees meeting minutes make reference to another Board of Trustees meeting on March 3, 2004.

27

BST


Trustee Vorselen became a Trustee on August 31, 2007. He stated he participated in two to three teleconferences along with Dotterweich, and noted that he never received a copy of the TIWCT By-Laws or any other documents pertaining to the Trust, including TIWCT’s audited financial statements. He stated that he received notice of the teleconferences from CRM and that Hickey, Jr. did most of the talking during the teleconferences. He stated that he did not recall any conversations regarding TIWCT’s actuarial reserves and that Hickey, Jr. offered TIWCT members with good loss runs the opportunity to obtain workers’ compensation insurance from Majestic Insurance, CRM’s affiliate. Mark Bottini is listed as the first Trustee and the first Chairperson of the TIWCT Board of Trustees (see Exhibit 31) as of October 1, 2001, although this appears to conflict with the January 4, 2001, CRM letter (see Exhibit 25) to the WCB which indicates that Panichi was a Trustee and Chairman of the Board of Trustees as of January 4, 2001. Despite being the Board Chairperson and a Trustee, the TIWCT Board of Trustees meeting minutes obtained indicate that Bottini was only present at one Board of Trustees meeting, and that this meeting took place two and a half years after he reportedly became a Trustee.38 Bottini was very vague during the brief telephone conversation when he spoke to us. In most cases, when asked a question, he stated he “couldn’t recall” or “I’m not sure.” For example, when asked the following questions, he responded “I don’t recall”:

How did you come to be a TIWCT Trustee?; Were you given a copy of the Trust Agreement?; Did the Trustees retain legal counsel?; Were underwriting guidelines used to evaluate new members?, and Were you given a copy of the Service Agreement?

Bottini confirmed that he was a Trustee for approximately three years; however, he stated he was not sure, but that he may have been the Chairperson of the Board of Trustees. He said his broker recommended TIWCT to him and that he did not have a lot of knowledge regarding group self-insured trusts. Given the Designation of Trustees form filed by CRM (see Exhibit 31) listing Bottini as an officer of the Trust, it would appear that Bottini was either less than truthful when asked about being an officer or that CRM mislead the WCB when they noted that Bottini was the Chairperson of the TIWCT Board of Trustees. Additionally, Bottini’s admitted lack of knowledge regarding group-self insured trusts raises the question as to whether he was appointed a Trustee to oversee the operation of TIWCT or report to CRM about the actions of the other Trustees.

38 The meeting occurred on March 30, 2004.

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BST


Bottini stated that he only attended one TIWCT Board of Trustees meeting and noted that CRM ran the meeting. When asked about what he understood his role to be as a Trustee, he stated he “didn’t think about it.” This may explain why he only attended one of three known Board of Trustees meetings during his approximate three year tenure as Trustee.39 Despite being the Chairperson and a member of the Board of Trustees for three years, Bottini did not even know the name of the accounting firm that audited TIWCT’s financial statements or the name of the actuary who conducted annual actuarial services for TIWCT. When asked about potential conflicts between Trustees and/or other third parties hired by CRM, Bottini indicated he was not aware of any. His response to this question is particularly disconcerting given the fact that Bottini was not only the Board Chairperson, but was also an owner of CRM during at least a portion of the period when he was Chairperson or a Trustee. In fact, documents obtained from the Securities Exchange Commission’s website reveal that Bottini and his brothers were owners of CRM and then CRM Holdings, Ltd.40 This situation would appear to constitute a conflict of interest in appearance, if not in fact, and accordingly it is not clear how Bottini could have exercised his fiduciary duties in the best interest of TIWCT while also being an owner of CRM, the firm that managed TIWCT for a fee.41 Equally disturbing is the fact that Hickey, Jr. and CRM’s counsel, Lou Viglotti, knew or should have known that Bottini was an owner of CRM and a Trustee of a Trust managed for a fee by CRM. Certainly Viglotti’s apparent knowledge of the situation appears to have been either a flagrant disregard for the ethical ramifications of Bottini having conflicting fiduciary duties or a complete lack of understanding over what constitutes a conflict of interest. Bottini’s involvement as the TIWCT Board Chairperson and Trustee must also be questioned in light of the fact that he only attended one Board of Trustees meeting during the three-year period he was a Trustee and claimed he was not even aware of the names of the TIWCT financial statement auditor or actuary, two independent parties who were engaged to purportedly provide critical and independent feedback with regard to TIWCT’s financial condition, which ultimately was the primary reason why the WCB assumed control of this and other group self-insured trusts managed by CRM. Assuming Bottini’s assertions to BST are true, Bottini’s official position as Trustee without any substantive knowledge of or involvement in Board activities might suggest that he merely served

39 Records show that Bottini executed numerous documents as “Trustee” on behalf of the Trust such as a Surety Bond dated December 27, 2001, and Bond Binders dated March 28, 2002, and April 12, 2002. 40 Documents reveal that Bottini’s shares in CRM Holding, Ltd. were transferred to Village Holdings, LLC, a company ostensibly owned by Bottini, his brothers, and Lou Viglotti - CRM’s counsel. 41 Rakoff also confirmed during a hearing involving another CRM administered trust that Village Holdings was owned by the “Bottini brothers and Lou Viglotti.”

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as an instrument for CRM to manipulate the Trust for its own benefit. Certainly, Bottini benefited as well from this arrangement as a CRM shareholder. Of the two other Trustees who responded to our questions, one was not aware that Bottini was an owner of CRM. We did not ask the other Trustee this question as we were unaware of Bottini’s involvement with CRM when we first interviewed this Trustee, and the Trustee later refused to answer additional questions. Bottini’s involvement with CRM and the Hickey’s may be more extensive. For example, Bottini’s wife (Kimberly) is on the Board of Directors of New Horizons Resources, Inc. (NHR) with Dan Hickey, Sr. and Regis Obijiski.42 Obijiski was the former initial trustee of a group self-insured trust created by and managed by CRS, a firm which previously employed Rakoff and the firm of which Hickey, Jr. was indirectly involved.43 This trust also came under scrutiny, and the WCB later took control of the Trust and its finances. Joseph Kirchhoff, another NHR Board Member, previously contacted the WCB with regard to TIWCT or another trust. We attempted to speak with him; however, after leaving a voice mail message, he failed to respond to our follow-up telephone messages or an email. On-line documents also reveal that Kirchhoff’s company was the developer of a plaza where CRM is located. As detailed above, the TIWCT Trust Agreement was apparently executed before December 27, 2000. Section III of the Trust Agreement states it is the obligation of the (initial) Trustee to appoint certain entities to assist in the oversight of TIWCT.44 The first obligation required the Trustee to appoint a Board of Trustees, consisting of no more than seven individuals, each of whom shall be an authorized employee of an active participating member of TIWCT. As noted above, Emil Panichi, whose purported signature appears on the Trust Agreement, stated through his attorney that he was not a member or Trustee of TIWCT. As a result, he did not appoint a Board of Trustees or notify the WCB as required by the Trust Agreement. On or around January 7, 2008, CRM submitted a Designation of Trustees form to the WCB (see Exhibit 31) indicating that Bottini was the Chairperson of the TIWCT Board of Trustees beginning October 1, 2001. UHY audit work papers indicate there was a Board of Trustees meeting on January 29, 2002, at which point there was only one Trustee, Mark Bottini. It remains unclear who selected the remaining Trustees, i.e., whether they were selected by CRM 42 Key Bank is also a sponsor of NHR. 43 The trust was the Provider Agency Trust for Human Services. 44 Upon completion of these duties, the remainder of the Trustee’s duties resided with the Board of Trustees and its designees.

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or Bottini, who was also an owner of CRM. The Board of Trustees meeting minutes provided by CRM make no reference to the identification of potential Trustees, nomination of potential Trustees, and selection or confirmation of TIWCT Trustees, although Article V Section 7 of the By-Laws indicate that the Trustees shall vote on Board vacancies.45 In total, the documents provided by CRM indicate that there were only ten Board of Trustees meetings during the period December 2000 through September 2008, and that in at least eight of these meetings, no more than two Trustees were in attendance.46 Accordingly, we question how the Trustees could have effectively exercised their fiduciary responsibilities given the infrequency of the meetings and/or the lack of attendance at the meetings. For example:

Trustee Diati only attended two meetings during the two-year period he was a Trustee; According to the meeting minutes provided to BST, Trustee and Chairman of the Board

of Trustees Bottini only attended one meeting during the two and a half year period he was on the Board of Trustees, and

At no point in time during the life of TIWCT were there more than three Trustees on the Board simultaneously.

In all cases, the number of CRM representatives greatly outnumbered the number of Trustees present at the meetings. For example, there were at least six CRM employees present at each Board of Trustees meeting and only two Trustees. The Board of Trustees meeting minutes also suggest that CRM, not the Trustees called the meetings, dictated the agenda, and presided over the meetings. The Trustees present seemed to merely act as an audience and appeared to have offered little if any input, make any decisions on behalf of or in the best interest of TIWCT. A review of the Board of Trustees meeting minutes reveal that the Trustees never met TIWCT’s auditors or actuary, and/or approved or saw a budget concerning TIWCT’s operations and finances. Title 12 NYCRR 317.4(a)(4)(ii) states that the Trust should provide the WCB with the names of the Trust’s Board of Trustees. As previously noted, the WCB’s first record of the initial Trustees is dated January 4, 2001, however, at least one of these individuals stated they were never a member of TIWCT or a Trustee, and neither reported Trustee ever attended a Board of Trustees meeting.47 It remains unclear why CRM selected the Trustees given the fact that it was not its responsibility, although as discussed in more detail throughout this report, CRM may have done so in an effort to direct and control the activities of TIWCT. For example, the April 2005 minutes note that 45 The minutes also make no reference to the resignation of any Trustees. 46 BST does not have copies of the January 29, 2002 and July 10, 2003 minutes, however, UHY’s audit work papers indicate that Board of Trustees meeting were held on those dates. 47 These rules became effective in January 2001. Although not effective until then, a draft was made available to group self-insurers.

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CRM will make a sincere effort to try and get new Board members. As discussed in more detail below, it was the Board of Trustees responsibility to nominate and appoint Trustees, not CRM’s. The second obligation of the initial TIWCT Trustee involved the appointment of a financial institution for TIWCT. Information obtained from interviews and documents suggest that CRM, not the initial Trustee, selected Key Bank as the financial institution to be used by TIWCT. For example:

CRM had a pre-existing business relationship with Key Bank of New York; Key Bank of New York was also the financial institution used by other group self-insured

trusts in which CRM was the Trust Administrator; CRS, the firm with which Hickey, Jr. and Rakoff were previously associated, also used

Key Bank of New York as its financial institution for group self-insured trusts; Panichi stated he did not meet with Key Bank representatives regarding the formation of

TIWCT, and The Key Bank representative interviewed stated she did not author the TIWCT Trust

Agreement, and she did not meet the Trustees of TIWCT. Accordingly, it appears the initial Trustee’s second obligation was also performed by CRM. The initial Trustee’s third obligation involved the appointment of an administrator for TIWCT. Panichi stated he has no recollection of signing the Trust Agreement or Service Agreement, which appointed CRM as the Trust Administrator. Furthermore, and as noted earlier in the report, it is still uncertain as to whether Panichi actually signed the documents which created the Trust or the document which appointed CRM as the Trust Administrator. Section 317.17 (Solicitation of New Members) of the New York State Workers’ Compensation Rules and Regulations requires that with regard to the Group Administrator:

“No party shall make a material misrepresentation or omission of a material fact in connection with the solicitation of a prospective group member.”48

However, Panichi stated he has no recollection of signing the Trust Agreement and the documents suggest he did not meet with CRM until one year after the documents purportedly bearing his signature were forwarded to the WCB. Assuming he did sign the Agreement, Panichi was reportedly not advised he was signing a document creating a Trust or appointing CRM as its administrator. As such, it appears CRM may have made a material omission by not disclosing to Panichi that he was creating a trust and appointing CRM as TIWCT’s Trust Administrator. However, if Panichi did not sign the Trust Agreement and was not a participating

48 These rules became effective January 31, 2001.

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member of TIWCT, then it appears the WCB may have authorized the establishment of a group self-insured trust based on inaccurate or misleading documents submitted by CRM. Interviews with Trustees and documents provided from CRM suggest that CRM organized the initial TIWCT Board of Trustees meetings and maintained the minutes. Consistent with Trustees’ recollection, Hickey, Jr., Viglotti, and/or Rakoff were usually present at the meetings. According to the documents provided by CRM, the first Board of Trustees meeting may not have been held until thirteen months after TIWCT was formed. Section IV of the Trust Agreement states that all investment decisions shall be made by the Board of Trustees and that the Board of Trustees shall have the authority to reasonably and prudently invest the assets of the Trust, provided that they do not contrast with any policy promulgated by the WCB. However, and according to documents provided by CRM, TIWCT did not even have a Board of Trustees until April 2002.49 Furthermore, the Board of Trustees meeting minutes provided to BST do not make any mention of an investment policy, and there are no references in these minutes that the Trustees inquired about an investment policy. It is interesting that an investment policy may not exist or was not approved by the Board of Trustees, especially given the fact that millions of dollars in members’ premiums had been received by CRM during the life of TIWCT. On July 16, 2003, Bottini and Dotterweich introduced and approved a Trust Resolution (#2) which charged CRM with the placement of investments as approved by the Board of Trustees and designated two investment advisors. The Board of Trustees meeting minutes reflect that CRM played an active role in deciding how TIWCT’s funds were invested. The first reference to investments at the Board of Trustees meetings occurred during the March 2004 Board of Trustees meeting during which time an investment consultant from Wachovia Securities discussed investment issues with Bottini and Dotterweich. Other investment consultants were present at the April 2005 Board of Trustees meeting, however, there is no indication as to how these latter investment advisors were chosen, and/or if the decision to use them was approved by the Board of Trustees. TIWCT’s audited financial statements reveal that despite receiving over $5 million in member premiums during the two-year period ended December 31, 2002, CRM did not invest TIWCT’s assets in stocks or bonds until at least two years after it was formed. Instead, the funds remained in a bank account or were used to purchase liquid cash equivalents that had maturities of 90 days or less. 49 Dotterweich and DiGiovanni were Trustees as of April 2002. Although Panichi and Winters were listed as Trustees during 2001, it does not appear as though they were Trustees, as they either denied being a Trustee, did not know they were listed as Trustees, and the records reviewed reveal they never attended any Board of Trustees meetings.

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As noted above, TIWCT’s audited financial statements reveal that TIWCT did not have any assets classified as investments prior to January 2003, and that its cash equivalents consisted of government obligations with maturities of three months or less, which resulted in nominal interest income. The failure of the Board of Trustees to establish an investment policy combined with CRM’s failure to suggest, encourage, or promote such an investment policy during the first three years of TIWCT’s existence, may have deprived TIWCT of substantial investment income that could have been used to partially offset TIWCT’s subsequent net members’ deficit.50 With regard to the Trust Agreement, Chairperson Bottini stated he never received a copy, and Trustee Riccelli stated he received a copy. BST is not certain Riccelli read the document. Therefore, it is not clear if any of the Trustees fully understood their fiduciary responsibilities, especially since they never retained counsel. These observations, combined with CRM’s coordination and control of the Board of Trustees meetings, and Bottini’s dual role as Chairperson and CRM owner, may have obfuscated the roles and obligations of the Board of Trustees. Accordingly, we were unable to determine whether the entire Board of Trustees was aware, at least in the early years of TIWCT, of their fiduciary responsibilities relating to investment and other decisions. Clearly, their failure to retain independent counsel or apparently consider retaining counsel must be questioned in light of their lack of experience with regard to group self-insured trusts. Section IV of the Trust Agreement also delineates additional Board of Trustees responsibilities, including the discretion:

To hold regular meetings; To call special meetings; To commence or defend litigation, and To elect one of its members to act as a Chairman of the Board of Trustees.

Our review of the Board of Trustees meeting minutes indicate that the Trustees were not diligent in attempting to exercise their fiduciary responsibilities and did not hold regular meetings or elect a member to act as Chairperson of the Board of Trustees. For example, the first reported meeting of the TIWCT Board of Trustees did not occur until January 29, 2002, almost thirteen months after the Trust’s formation.51

50 At least two other trusts managed by CRM did not purchase substantial investments until two years after the trusts were formed. 51 The audit work papers prepared by TIWCT’s auditor indicate a meeting took place on this date, although the meeting minutes were not in the work papers. Therefore, we were unable to ascertain if any of the purported Trustees attended this meeting.

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Title 12 NYCRR Section 317.4(a)(4)(i) requires group self-insured trusts to submit their By-Laws with their application to operate as a group self-insured trust. The TIWCT Board of Trustees meeting minutes do not make any mention of By-Laws and the Trustees interviewed stated they were not sure whether they received a copy (Riccelli) or could not recall (Bottini) whether they received a copy of the By-Laws.52 Despite being unable to reportedly recall whether he (Bottini) received a copy of the By-Laws, Bottini’s signature appears on the bottom of the By-Laws, indicating that they were approved and adopted by at least Bottini and Dotterweich during 2002 (see Exhibit 32). The By-Laws also appear to have been signed by Dotterweich (as Secretary/Treasurer). As noted above, TIWCT apparently did not have By-Laws prior to 2002; possibly because the initially reported Trustees (Panichi and Winters) did not form TIWCT or did not realize that they were Trustees. In either event, it appears the By-Laws may have been drafted by CRM during 2002, as the Trustees interviewed did not recall drafting the By-Laws. The By-Laws more clearly defined the roles of the Trustees and Article V, Section 1 states that the Board of Trustees shall administer the business and affairs of the Trust. However, as detailed throughout this report, it appears the Trustees either were not aware of their responsibilities, did not care whether they carried out their responsibilities, or thought CRM was responsible for running the business and affairs of TIWCT. Article V, Section 4 of the By-Laws noted that the Board of Trustees should consist of at least three Trustees. However, it was not until April 2002 that the TIWCT Board consisted of three Trustees. Within a year, Trustee DiGiovanni apparently resigned, and the TIWCT Board once again operated with less than the required three Trustees for the next four months.53 Article VI of the By-Laws states that the Chairman of the Board of Trustees shall be charged with organizing and running the Board meetings. However, as noted above, former Chairman Bottini apparently only attended one Board of Trustees meeting, and CRM ran the meetings. Trustee Riccelli also stated that CRM ran the Board of Trustees meetings. Of all the Trustees, Chairman Bottini should have been aware of these responsibilities given the fact that he signed the By-Laws. He and former Chairman Dotterweich’s abrogation of these responsibilities is further indication of their apparent failure to exercise their fiduciary responsibilities as they related to TIWCT. Article VII of the By-Laws states that the Board of Trustees shall meet at least twice a year. Contrary to these requirements, and according to the Board of Trustees meeting minutes 52 These rules became effective January 31, 2001. 53 The By-Laws also note that the address of the TIWCT is 112 Delafield Street, Poughkeepsie, NY 12601, which according to the internet, is one of the addresses used by CRM - further suggesting that CRM, not the Trustees, was the author of the By-Laws.

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provided to BST, the Board of Trustees did not meet twice a year, in fact they apparently did not meet during 2001 and only met once during 2003. In total, it appears the Board of Trustees only met three times during the first thirty-six months of the Trust’s existence. Article XI (Conflicts of Interest) of the TIWCT By-Laws states that no Trustee shall vote, attempt to influence Board action, or be present during any Board discussion concerning any matter which is likely to result in direct financial benefit to that Trustee, and no Trustee shall use information or knowledge not readily available to participating members for the financial benefit of the Trustee. As detailed above, Chairman Bottini was an owner of CRM and a Trustee of TIWCT, and one of CRM’s affiliate’s reinsured the TIWCT, which indirectly benefited Chairman Bottini. Not only did Bottini apparently fail to disclose this information, but his signature approving the By-Laws, which addressed conflicts of interest, seems to be in direct conflict with his ownership position in CRM. Section XI of the Trust Agreement states that TIWCT could be terminated by order of the Chairman of the WCB or by the Board of Trustees, if two-thirds of all participating employers deliver a written notice to terminate to the Board of Trustees. This clause of the Agreement essentially prevents the TIWCT Trustees from voluntarily terminating the Trust without the approval of other members. Accordingly, TIWCT is subject to the terms of the Service Agreement, which appears to be extremely favorable toward CRM, with essentially little recourse. This is a non-cancellable contract, and CRM may have had Panichi sign this Service Agreement even though he was not a Trustee (and his firm was not a Trust member). Dan Hickey, Jr. confirmed in an August 2008 letter to Panichi’s attorney (see Exhibit 28) that Panichi’s companies (the companies listed on the Trust and Service Agreement) were “never members of the Transportation Industry Workers Compensation Trust.” The members may not have been in the best position to terminate TIWCT, as it does not appear they were fully cognizant of its financial operations, and certainly there was no incentive for Board Chairman Bottini to suggest the same since he was also an owner of CRM and directly benefited from CRM’s management of the TIWCT. The termination of the TIWCT Trust would have negated the Service Agreement and allowed TIWCT to form a new trust with another administrator or CRM, albeit, with more favorable terms. The failure of the Trustees to terminate the Trust, or at least to earnestly explore this option, is disconcerting. The apparent failure of the Trustees to exercise their fiduciary responsibilities falls primarily on Dotterweich, as he was Chairman of the Trust, the longest serving Trustee and attended more meetings than any of the other Trustees. Certainly, his failure to speak with us may have to do more with his concern for his personal liability than his concern for the Trust.

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As will be discussed below, evidence suggests that the Trustees’ firms may have received preferential treatment with respect to discounts, retention, and safety services. BST found no direct evidence of a “quid pro quo” between CRM and the Trustees in this regard. However, the Trustees gave CRM tremendous autonomy that allowed CRM (and CRM Holdings, Ltd.) to maximize profits from managing the Trust while CRM offered the firms of certain Trustees special considerations that greatly reduced their costs with respect to premium payments. Whether this was by design or happenstance remains unclear. In summary, the documents reviewed and the interviews conducted show that:

The initial Trustee who purportedly signed the Trust and Service Agreements was not a participating member of TIWCT, and never became a participating member of the Trust and was not aware he was listed/reported as being a Trustee;

The selection of CRM as the Trust Administrator may not have been properly executed as the reported initial Trustee was never a participating member of the Trust;

The circumstance under which the reported original Trustee committed TIWCT to CRM’s Service Agreement does not meet the measure of an arms’-length, good faith business transaction;

The Board of Trustees did not exercise its fiduciary responsibilities and/or act as a reasonably prudent person would have in a similar situation;

The Trustees were not appointed by the initial Trustee member as required by the Trust Agreement or by the existing Trustees as required by the By-Laws;

The Trustees never met with the Trust’s financial statement auditor or actuary; The Trustees never retained independent legal counsel to provide advice with regard to

their fiduciary responsibilities; The Board of Trustees did not always have the required minimum number of Trustees; The Chairman of the Board of Trustees (Bottini) was also an owner of CRM, and his

ownership interest may not have been disclosed to the other Trustees; Lou Viglotti, CRM counsel, knew or should have known that the Chairman of the Board

of Trustees (Bottini) was also an owner of CRM and that his dual interests most likely represented a conflict of interest – as Bottini and Viglotti also were part owners of another entity;

The Trustees may not have been independently selected by the Board of Trustees; The Trustees did not organize and run the Board of Trustees meetings; The Trustees rarely held or attended Board of Trustees meetings; The Trustees did not have By-Laws until 2002;54 The Trustees did not have an investment policy prior to January 2003 and may not have

formally adopted an investment policy thereafter;

54 By-Laws were required pursuant to Section 317.4(A)(4)(i) of the New York State Rules & Regulations of the Workers’ Compensation Law - effective January 31, 2001.

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CRM and the Trustees did not invest TIWCT’s assets in stocks or bonds until at least January 2003, thereby depriving the TIWCT of a substantial amount of investment income;

Neither the Board of Trustees or CRM apparently provided TIWCT members with copies of the Trust’s annual financial position, and

Some of the Trustees may not have been aware of the details of the Trust and/or Service Agreements.

C. Compensation Risk Managers, LLC (CRM) Prior to December 27, 2000, Emil Panichi reportedly entered into a Service Agreement with CRM to primarily oversee the daily management of the Trust on behalf of the TIWCT Board of Trustees. The agreement is purportedly signed by Panichi and CRM’s Chief Executive Officer, Martin Rakoff, and was notarized by CRM President, Daniel G. Hickey, Jr. The opening section of the Service Agreement states:

“WHEREAS, on the 27th day of December, 2000, the Trustees of the Transportation Industry Trust of New York formed a Workers’ Compensation Trust, pursuant to Section 50 of the New York State Workers’ Compensation Law, for the purpose of compliance with each participating employer’s Workers’ Compensation obligations; and” (emphasis added) “WHEREAS, it is the intention of the governing body of said Trust to appoint, engage, and employ the Administrator for the purpose of administering said Trust in accordance with the terms herein.”

The opening section, as written, suggests that the TIWCT Trustees (not Panichi) formed TIWCT. However, Panichi’s attorney stated that Panichi’s companies were not members of the Trust, and he provided an August 14, 2008, letter from Hickey, Jr. indicating that Panichi’s companies were never members of TWICT (see Exhibit 28). Other documentation reviewed reveals that a Board of Trustees did not exist as of December 27, 2000, and it appears that the first Trustee did not exist until at least October 1, 2001. Therefore, the opening section of the Service Agreement appears to be inaccurate and may have been misleading to the WCB, and Trust members or future Trustees who were later asked by CRM to join the Trust. The Trust Agreement was also purportedly signed by Panichi prior to December 27, 2000, and also suggests that Panichi’s companies were participating members of the Trust. However, as noted above, Panichi’s companies never joined the TIWCT, and Panichi was not aware that he was a Trustee - as reported by CRM to the WCB.

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The Service and Trust Agreements were purportedly signed on the same date and directly benefited CRM, as the provisions for terminating the Service Agreement and the automatic renewal did not have the benefit of review by independent legal counsel or a Trustee who was a member of the Trust. For example, the Terms of Agreement section of the Service Agreement addresses CRM’s term, the basis for CRM’s termination, and the consideration to be paid to CRM. The initial term of the Service Agreement commenced on the date the Service Agreement was signed and expired five years thereafter. However, the Service Agreement automatically renewed for successive five-year periods at the sole discretion of CRM, unless terminated by the Board of Trustees in accordance with Part 2 of the Terms of Agreement section of the Service Agreement. Part 2 of the Term of Agreement section of the Service Agreement states that:

During the term of this agreement, the Board of Trustees may, by a duly authorized vote in accordance with the terms of the Trust Agreement, terminate this Service Agreement, based upon the express and specific events listed below: 1) The Trust Agreement is terminated in accordance with its terms and conditions; 2) The Administrator discontinues its business organization and files for bankruptcy

protection under Chapter 7 of the United States Bankruptcy Code; 3) The Administrator is disallowed by operation of law, administrative act or regulation,

from fulfilling the terms of the Agreement; 4) The Administrator is convicted in a criminal court of a criminal act directly related to

its administration of the Trust.55 CRM ostensibly authored the Service Agreement and in doing so, created a requirement whereby they (CRM) could not be terminated by the Board of Trustees for incompetence, negligence, excessive fees, or failure to abide by other terms of the Service Agreement. The renewal clause, which automatically and contractually binds TIWCT to engage CRM, appears on its face to be inequitable, especially since the Service Agreement addresses all critical aspects of the Trust’s operations, and the renewal does not require the Board of Trustees’ approval.56 This is further complicated by the fact that the Agreements were purportedly signed by an individual who was not a member of the Trust, and therefore, had no incentive to scrutinize the documents being signed - assuming he actually signed the documents. A reasonably balanced agreement would have provided TIWCT with the ability to terminate the

55 These four events are virtually the same events that CRS included in its Service Agreements with group self-insured trusts when Hickey, Jr. and Rakoff were employed at CRS. 56 The term and renewal also guaranteed a potential source of income for CRM for the five year period.

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Service Agreement for other operational reasons after possibly giving ninety or one-hundred twenty days notice. Despite knowing that TIWCT did not have a Board of Trustees until at least late 2001 (when TIWCT reportedly had two Trustees – Bottini and Winters), no evidence has been found indicating that CRM reminded and/or encouraged TIWCT to form a Board of Trustees as of December 2000. By not doing so, CRM fostered a situation whereby a Trustee vote could not be taken to terminate the Trust in accordance with the Trust Agreement, which would have then negated the Service Agreement with CRM. Furthermore, the first Trustee listed on the Designation of Trustees form filed with the WCB by CRM, was Mark Bottini, an owner of CRM (albeit undisclosed) who had no incentive to form a Board of Trustees since CRM was apparently already controlling virtually every aspect of the Trust’s operations from inception. CRM failed to advise the reported initial Trustee (Panichi) that they (CRM) authored the Trust and Service Agreements, and failed to fully explain the terms and condition of the Agreements to the reported initial Trustee, and/or the reported second Trustee (Winters).57 This, combined with the manner in which this proposal was brought to Panichi may have constituted a conflict of interest, as the reported initial Trustee (Panichi) was not aware he was forming a Trust (assuming he signed the agreements) and did not know that the author of the two Agreements was CRM or that CRM had chosen Key Bank of New York (to act as the custodian), ostensibly because of its prior business relationship with CRM. BST identified another potential conflict of interest regarding the purchasing of insurance through a CRM affiliate, and from Twin Bridges, another CRM affiliate, who participated in providing the reinsurance coverage.58 Beginning in 2004, and as disclosed in the Trust’s 2004 audited financial statements, reinsurance for the TIWCT was purchased through and partially provided by CRM’s affiliates (Agency Captive and Twin Bridges).59 It is unclear whether CRM ever obtained quotes from other excess coverage providers during this period. CRM initially had its group self-insured groups use New York Marine and General Insurance Company (NYMAGIC), a third-party insurance company, for excess insurance coverage because CRM and its affiliates were not yet a licensed insurance company in the United States. During December 2003, CRM set up Twin Bridges, a licensed Bermuda insurance company to reinsure the excess coverage provided by NYMAGIC.

57 Winters never attended one Board of Trustees meeting, and he refused to speak with us. We are not certain whether he knew CRM reported to the WCB that he was a Trustee. However, signatures purported to be that of Joseph Winters as Secretary appear on a number of official Trust documents. 58 Reinsurance (excess coverage) is required by Section 317.10 of the WCB Group Self-Insurance Laws. 59 The names of CRM affiliates were not disclosed in TIWCT’s audited financial statements.

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During 2004 and 2005, Twin Bridges reinsured only a small percentage of NYMAGIC’s excess coverage, as it did not have enough capital to reinsure more. However, when CRM Holdings, Ltd. went public during late 2005, the proceeds were used to increase Twin Bridges’ (CRM’s affiliate) capital, thereby allowing Twin Bridges to reinsure a greater percentage of NYMAGIC’s excess coverage.60 Twin Bridges eventually reinsured 50% of NYMAGIC’s excess coverage during 2006 and 70% of their excess coverage during 2007. There was no guarantee for Twin Bridges to keep providing the excess coverage for NYMAGIC; therefore, to possibly eliminate this uncertainty, CRM purchased Majestic Insurance Company (Majestic), a California insurance corporation, during November 2006.61 CRM Holdings, Ltd. eventually terminated the reinsurance agreement between Twin Bridges and NYMAGIC on December 31, 2006, and began offering its own excess insurance coverage through Majestic. As a result, CRM’s and CRM Holdings, Ltd.’s profitable reinsurance business now had a guaranteed customer via Majestic. In doing so, CRM was also able to shift a large portion of their insurance business income into Twin Bridges, its tax-free Bermuda domiciled company.62 The transition to providing more reinsurance is extremely important, as this segment of CRM Holdings, Ltd.’s operations was more profitable than its fee-based management services. For example:

CRM Holdings, Ltd.’s, December 31, 2005, 10-K states that CRM Holdings, Ltd. depends on its reinsurance business for a substantial portion of revenues and profits, and that CRM Holdings, Ltd. could be adversely affected if it is not able to maintain or increase this portion of its business. The reinsurance premiums derived from Twin Bridges amounted to 19% and 16% of the total CRM Holdings, Ltd. revenues during the years ended December 31, 2005 and 2004, respectively.

According to a May 2007 article, the revenue derived from Twin Bridges’ reinsurance was “far more profitable” than CRM’s management fee.

CRM Holdings, Ltd.’s affiliates provide reinsurance for twelve of the fourteen self-insurance groups CRM oversaw during 2006.63

CRM Holdings, Ltd.’s December 31, 2006 and 2007, 10-K’s reveal that CRM Holdings, Ltd.’s primary insurance segment was moving from the management of group self-

60 The success of the public offering was due in part to the reported favorable financial position and results of earnings for the group self-insured trusts managed by CRM. 61 New York State Insurance Department records reflect that Majestic was licensed in New York State, effective December 18, 2006. 62 TIWCT’s fees for excess coverage were approximately $17 million during the five-year period ended December 31, 2006. 63 This includes the California group self-insured trusts that CRM managed.

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insured trusts to underwriting of workers’ compensation insurance offered through Majestic. 64

However, and as discussed in greater detail below, it was primarily through its management of the group self-insured trusts and CRM’s reporting of favorable financial results for the trusts which systematically benefited CRM (and its principals) when its parent company, CRM Holdings, Ltd. had its initial public offering. BST determined that in a number of cases, the purchase of the reinsurance through and by CRM’s affiliates was not always disclosed to the Boards of Trustees of these trusts. The May 3, 2006 Board of Trustees meeting minutes note that CRM went public on December 21, 2005, and that this was done to raise capital for their reinsurance entity (Twin Bridges) so they could be a “player” in the excess insurance market, and that this could benefit the Trust because Twin Bridges will offer reinsurance to them (TIWCT). The November 2, 2006, meeting minutes also note that CRM acquired Majestic Insurance and that this will be an outlet for their excess insurance and should bring down the costs of excess insurance. What remains unclear is whether the full extent of this relationship was previously disclosed to the Board of Trustees or members, and/or whether competitive insurance quotes were sought or received from other vendors. Trustee Riccelli stated that CRM advised the Board of Trustees at some point that they (CRM) had received a lower reinsurance quote from their affiliate and asked the Board of Trustees to approve the transaction. Riccelli also recalled that CRM noted that Majestic could provide an alternative for their insurance and asked the Board of Trustees to vote on this.65 Riccelli said the Board of Trustees approved this, although there is no mention of a motion or vote in the November 2006 Board of Trustees meeting minutes.66 It is surprising that the Trustees, if they all knew about the reinsurance of the excess coverage from a CRM affiliate, did not question the propriety of doing so. BST determined the Service Agreement provision allowed CRM or its duly licensed designee, to act as a broker of record for the purpose of procuring excess insurance. It is clear that the provision authorizing CRM to also provide the excess insurance as well as broker the transaction was extremely beneficial toward CRM and may not have benefited TIWCT. As explained in more detail below, CRM and/or its designee not only received a brokerage fee, but they apparently effectuated the purchase of excess insurance from a carrier with which a CRM affiliate had a reinsurance arrangement without initially disclosing the affiliation to the Board of

64 The overview section in the 2007 10-K (page 2) does not mention CRM Holdings’ fee based management fees relating to group self-insured trusts. 65 By this point, CRM’s affiliates had already been providing excess coverage with NYMAGIC for almost two years. 66 At least one hundred forty of the approximate three hundred and seventeen active members went to Majestic when TIWCT dissolved.

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Trustees. It is possible, and perhaps likely, CRM disclosed the affiliation to Trustee Bottini who was already an owner of CRM, with a financial incentive to approve these transactions. According to documents reviewed, CRM’s affiliate, Twin Bridges, received approximately $1.95 million during 2005 and approximately $2.4 million 2006 for reinsurance premiums related to TIWCT. The financial incentive to CRM to not only broker, but secure excess insurance from an entity with which they had a reinsurance relationship, is best exemplified by the following statement that appears in CRM Holdings, Ltd., September 19, 2005, securities registration statement:67

“We derive a significant amount of our income from our reinsurance business...”

CRM also recognized the potential conflict of selling reinsurance through affiliates by stating in the CRM Holdings, Ltd. September 19, 2005, securities registration statement that:

“We may be deemed to have a conflict of interest in concurrently managing groups and placing excess coverage for these groups with a U.S. admitted insurer that cedes a part of this excess coverage to Twin Bridges.”68

The brokering of this excess insurance was also allowed via the execution of the Trust Agreement which was ostensibly drafted and prepared by CRM and was not approved by the Board of Trustees. The Trust Agreement states:

“The Administrator, or its duly licensed designee, shall act as broker of record for the purpose of procuring and maintaining excess insurance”

And “The cost of the excess insurance and the brokerage commissions payable to the Administrator for placing the same, shall be borne by the Trust.”

The brokering of this excess insurance policy appears to have been executed through Compensation Risk Managers Agency Captive, LLC (Agency Captive), the firm that holds the agency license that CRM uses to place excess coverage on behalf of the self-insured groups CRM managed. Agency Captive received the brokerage commissions that were then remitted to CRM. The brokerage license is owned by Daniel G. Hickey, Jr.69

67 CRM Holdings, Ltd. became the owner of CRM after an initial public offering and share exchange on December 27, 2005. 68 Twin Bridges is the CRM affiliate that reinsured the TIWCT. 69 Bermuda Law also recognizes that the CRM Board of Directors owes a fiduciary duty to avoid conflicts of interest.

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We determined that CRM paid broker commissions to Hickey-Finn, an insurance brokerage firm, for business placed with several group self-insured trusts that CRM managed, including TIWCT.70 Daniel G. Hickey, Sr., the President of Hickey-Finn and the father of Hickey, Jr. was also on the Board of Directors of CRM and/or CRM Holdings, Ltd. since September 2005, and also served as a Director of Twin Bridges, Ltd. (Twin Bridges), the firm that reinsured the TIWCT and other group self-insured trusts administered by CRM.71 BST determined through a review of CRM Holdings, Ltd.’s Form S-1 that CRM paid broker commissions of approximately $1.1 million during the forty-five month period ended September 30, 2006 to Hickey-Finn for business placed with several group self-insured trusts managed by CRM. Despite CRM procuring reinsurance and other insurance through and from its affiliates beginning 2004, and as noted above, there is no mention of this in the TIWCT Board of Trustees minutes provided to BST until May 2006, and this was only a reference to the fact that Twin Bridges would offer insurance to the TIWCT. Therefore, it appears that CRM did not disclose to the Trustees that CRM’s affiliate, Twin Bridges, began reinsuring a portion of excess coverage provided by NYMAGIC until at least 2006, or that Hickey-Finn was also paid commissions for the brokering of insurance.72 Rakoff and/or Hickey, Jr. who were present at a majority the TIWCT Board of Trustees meetings during 2004, 2005 and 2006, were also officers with CRM and Twin Bridges. As such, it is inconceivable that they could have been acting objectively when they knowingly allowed CRM to purchase excess insurance through and from CRM’s affiliates, including Twin Bridges. CRM also used another affiliate (Eimar)73 to provide medical claims administrative services since 2004, and according to TIWCT’s 2006 audited financial statements, the annual fee charged by CRM’s medical claims affiliate approximated $502,000. The TIWCT Board of Trustees meeting minutes do not make any mention of CRM using Eimar to provide these services, although there is a reference to Eimar in the November 2, 2006, meeting minutes. Furthermore, there is only one instance in which the Board of Trustees meeting minutes indicate that the audited financial statements were distributed to the attendees (May 3, 2006).74 Accordingly, it does not appear this relationship was disclosed to all of the Board of Trustees, or that it was disclosed to them during 2004 when TIWCT reportedly began using Eimar.

70 The brokerage fee collected is not detailed in TIWCT’s audited financial statements. 71 Twin Bridges, Ltd., a Bermuda company, was incorporated during 2003. 72 As previously noted, there are references to unnamed affiliates in the 2004 audited financial statements, however, these statements were not issued until November 2004, and apparently were not distributed to the Trustees until the March 2005 Board meeting or thereafter. Furthermore, the references in the 2004 financial statements only address CRM’s medical claims affiliate. It is not until May 2006 when the 2005 financial statements are issued that the reinsurance relationships with unnamed affiliates are noted. 73 Eimar is a domestic limited liability company incorporated in New York State on January 16, 2001. 74 Dotterweich was present along with Diati.

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As previously mentioned, Eimar has been registered in New York State since January 2001; and CRM Holdings, Ltd.’s December 31, 2005, 10-K states that Eimar provided medical bill review and case management services to CRM’s group self-insured trusts in New York and California since 2002. However, there is no mention in TIWCT’s audited financial statements of any CRM affiliate providing medical claims services to TIWCT prior to 2004. We have yet to determine whether the Board of Trustees was fully aware of the Eimar relationship or the collective fees paid to Eimar during the fiscal years ended December 31, 2005 through December 31, 2006, although TIWCT’s respective audited financial statements state the fees paid to CRM’s medical claims affiliate for medical services amounted to approximately $863,000 for the two-year period ended December 31, 2006.75 We were unable to ascertain whether the potential conflict involving Eimar, Hickey-Finn, Majestic or Agency Captive was ever disclosed to the TIWCT Trustees by CRM. The failure to adequately disclose these relationships is disturbing given the fact that a significant amount of CRM’s and CRM Holdings, Ltd.’s business is dependent on a relatively small number of group self-insured trusts. Furthermore, and as explained in the claims section of this report, independent analysis by an independent claims specialist indicates that CRM may have ordered too many or unnecessary medical exams, thereby possibly enriching its coffers at the expense of TIWCT. The drafting of the Trust Agreement not only allowed CRM to place the excess insurance and surety bonds, but it also allowed them to charge a premium that was not in the best interest of the Trust. BST determined through a review of CRM Holdings, Ltd.’s Form S-1 (for the nine months ended September 30, 2006) that CRM paid broker commissions of approximately $1.1 million to Hickey-Finn during the forty-five month period ended September 30, 2006, for business placed with several group self-insured trusts managed by CRM. However, and more importantly, the relationship between CRM and Hickey-Finn is not disclosed in TIWCT’s audited financial statements or the fact that one of CRM’s Board members was also the owner of Hickey-Finn.76 We were unable to determine the brokerage fees or commissions paid by TIWCT to CRM’s affiliates as a result of reinsuring the TIWCT or whether TIWCT’s financial statement auditors were fully aware of the relationship prior to 2004. TIWCT’s pre-2004 audited financial statements do not make any mention of these fees/commissions to CRM-related parties, however, as noted above, we determined at least $257,355 of fees/commissions were paid to CRM’s affiliates during the fiscal year ended

75 Eimar is not mentioned by name in the TIWCT audited financial statements. 76 TIWCT’s financial statements did mention two other CRM affiliates (Eimar and Agency Captive), but not by name.

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September 30, 2003.77 This was not disclosed in TIWCT’s audited financial statements, of which CRM was ostensibly responsible for drafting and compiling.78 The possibility also remains that some CRM affiliates did not engage in these related-party transactions prior to 2004. An analysis of TIWCT’s 2004, 2005, and 2006 audited financial statements reveals that UHY referred to certain unnamed CRM affiliates, but UHY never specifically identified Eimar or Agency Captive by name in the financial statement footnotes, although their audit work papers do indicate the affiliates’ names. CRM Holdings, Ltd.’s December 31, 2005, 10-K states that CRM Holdings, Ltd. depends on its reinsurance business for a substantial portion of revenues and profits, and that CRM Holdings, Ltd. could be adversely affected if it is not able to maintain or increase this portion of its business. The reinsurance premiums derived from Twin Bridges amounted to 19% and 16% of the total CRM’s revenues during the years ended December 31, 2005 and 2004, respectively. The reinsurance commissions received by CRM must also be questioned in light of the fact that there was no financial incentive for CRM to look for competitive quotes, nor did we find any evidence that CRM solicited quotes from carriers other than NYMAGIC, Twin Bridges or Majestic, the latter two being affiliated with CRM. These potential conflicts of interest were not an isolated instance, as the Board Chair of another group self-insured trust managed by CRM received a loan from CRM, and the loan was not disclosed to the Trust’s Trustees or its members. Potential conflicts aside, CRM had certain responsibilities that are delineated in the Trust and Service Agreements. Our analysis of these agreements revealed that the language detailing CRM’s obligations and responsibilities is exactly the same. The Agreements state that CRM’s responsibility to diligently perform its duties continues throughout the term of the Trust and Service Agreements. Two of CRM’s duties include the hiring of a firm to audit TIWCT’s financial statements, and an actuary to review TIWCT’s outstanding claims liabilities. CRM retained UHY and SGRisk to provide audit and actuarial services, respectively. As discussed in more detail in Section D below, SGRisk, Inc. (SGRisk) provided actuarial services for all eight self-insured groups managed by CRM in New York State. All of the eight group self-insured Trusts managed by CRM have since been terminated due to funding issues and large member deficits, a majority of which, if not all, appear to relate to the apparent failure of CRM and SGRisk to provide realistic 77 This amount may relate to commissions paid to Hickey-Finn for other types of insurance provided to the group self-insured trusts managed by CRM. 78 The Trust Agreement indicates that all reports required to be filed with the WCB shall be gathered and submitted by the Administrator (CRM).

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estimates of the group self-insured trusts’ liabilities, and the possible failure of UHY (who audited all these trusts) to critically question the validity of the actuarial estimates submitted by SGRisk - given the estimates provided by other actuaries. These issues are discussed in more depth in Sections D and E of this report. As also explained in more detail in Section D, CRM’s financial incentive to suppress the reserve liabilities is of paramount importance, as it allowed them to avoid more stringent oversight by the WCB. For example, the WCB allows the group self-insured trusts to grow and use discounts they deem appropriate if the trust has a trust equity ratio of 90% or more. Otherwise, the group self-insured trusts became subject to greater scrutiny, and membership and discounts would be restricted. Therefore, limited membership and lower discounts would result in fewer new members and limit the potential revenue and growth opportunities for CRM. Consequently, it was imperative that CRM ensure that the trust equity ratio remain at 90% or higher. These issues are discussed in more depth in Sections D and E of this report. The importance of the relationship among these three parties – administrator, auditor and actuary is extremely critical, since CRM’s financial future, and the potential personal financial opportunities for Hickey, Jr., Rakoff, Bottini, and other CRM owners, depended heavily on the financial condition of the group self-insured trusts CRM managed, the actuarial estimates of the trusts’ reserves provided by SGRisk, and the unqualified opinion of trusts’ financial statements by UHY. As noted above, CRM and its then owners, including Hickey, Jr., Rakoff, and Bottini exchanged their shares of CRM and its affiliates (Eimar and Twin Bridges) on December 27, 2005, for 9,457,115 common shares (and 790,000 Class B Shares) of CRM Holdings, Ltd. CRM Holdings, Ltd. also completed an initial public offering (IPO) on said date and raised $68,700,000 by selling 6,000,000 shares of CRM Holdings, Ltd. common stock.79 CRM’s former owners effectively owned 61.18% of CRM Holdings, Ltd. after the exchange and IPO.80 BST determined that $47,000,000 of the IPO proceeds was contributed to Twin Bridges to support the growth of its reinsurance business. It would seem that at least one of the more critical factors contributing to the success of the IPO would be the financial viability of the group self-insured trusts managed by CRM in New York State. This fact cannot be overemphasized, as CRM Holdings, Ltd.’s September 19, 2005, securities registration statement reveals that the New York State group self-insured trusts accounted for 78.95% of CRM’s (and CRM California’s) management fee and commission income and 66.46% of CRM’s total revenues as of June 30, 2005. The registration statement also states that CRM derives a significant amount of its income from CRM’s reinsurance business with its managed groups (which could be terminated or restricted by the WCB if the trust equity ratio fell significantly below 90%).

79 The shares which were initially offered at $13/share are currently trading at less than $1/share. 80 The percentage owned does not include the Class B shares owned by CRM former owners (Hickey, Jr., et al).

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Therefore, it was incumbent upon CRM (and its affiliates) to ensure that they continue to manage these groups, and that these groups remain financially viable, or apparently so. The continued management of these groups was immediately assured when CRM executed the Service Agreement, as the Service Agreement virtually guaranteed CRM’s continued role as the Trust Administrator. As detailed later, and as subsequently proven, the financial viability of CRM’s self-insured groups was not guaranteed, as all of the eight New York based self-insured groups represented by CRM were eventually terminated by the WCB for financial reasons. Therefore, there was a strong financial incentive for CRM to influence, control, and manipulate the actuarial estimates - the largest expense and liability on TIWCT’s (and the other trusts’) financial statements, as there was a direct correlation between the reported financial results of the group self-insured trusts managed by CRM and the CRM Holdings, Ltd. IPO proceeds.81 PricewaterhouseCoopers (PwC), in its September 3, 2003, report to the Boards of Trustees of another trust managed by CRM offered similar observations when they noted that the disadvantage of group self-insured trusts is that the administrator “does not always have the best interest of the Trust in mind.” The IPO proceeds of $68,700,000 certainly provided a financial windfall to its former and current owners, including Hickey, Jr. and Rakoff. A September 9, 2009, newspaper article noted that Hickey, Jr. and Rakoff eventually sold some of their shares of CRM Holdings, Ltd. and collected $8.1 and $6.6 million, respectively, during the period 2005 through 2007.82 The article also noted that Viglotti and Daniel Hickey, Sr. collected $2.4 and $8.4 million, respectively, during the same period. Some of the IPO proceeds, according CRM Holdings, Ltd. officials cited in the article, was used to pay taxes relating to CRM Holdings, Ltd. move to Bermuda. We attempted to interview Hickey, Jr. and Rakoff about these and other matters, however, Hickey, Jr.’s counsel said we could not speak with him, and we have been unable to successfully contact Rakoff.83 We determined that TIWCT also paid CRM more than $12.59 million for managing TIWCT during the six-year period ended December 31, 2006. While CRM may have been more concerned with reporting favorable operating results, we did not find any budgets or short or long-term fiscal plans for the TIWCT during at least the first two years of the Trust’s existence. In addition, and as reported by PwC in their 2003 report of CRM (see Exhibit 33), CRM did not consistently report or record TIWCT’s financial transactions,

81 Rakoff admitted during a hearing regarding another trust his former employer administered that there was a tendency to under-reserve claims, and that it was “hard to sit in front of” the Trust members and suggest a reserve amount that is higher than the amount suggested by the Trust member. 82 Rakoff also collected $14.5 million after he left CRM Holdings, Ltd. 83 We determined Rakoff separated from CRM Holdings, Ltd. effective December 28, 2006, and received $3,300,000 as part of his separation package. Public documents indicate Rakoff is the President of MDR Consulting Services, Inc., however, during an April 1, 2008, deposition, Rakoff stated that he was retired.

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CRM did not utilize the Trust’s general ledger software effectively or consistently, and monthly accrual-based financial statements were not being prepared. Accordingly, the failure to implement these basic internal controls and performance benchmarks would have made it difficult for CRM to effectively manage the operations of the Trust. As noted above, and upon assuming control of the CRM trusts, the WCB requested that CRM provide them with copies of the Board of Trustees meeting minutes. BST has so far determined that despite having these records, CRM did not provide copies of at least two Board of Trustees meeting minutes to the WCB. For example, the audit work papers provided by the firm that conducted TIWCT’s financial statement audits included a summary of the January 29, 2002, and July 10, 2003, minutes. These Board of Trustees meeting minutes were apparently never provided to the WCB. In summary, the documents reviewed and the interviews conducted show that:

CRM’s involvement in the drafting of the Trust and Service Agreements may have been a conflict of interest in appearance, if not in fact;

CRM signed the Service Agreement knowing that the initial reported Trustee had not appointed the Board of Trustees and knowing that the initial reported Trustee was not even a member of the TIWCT;

CRM drafted and created the language in the Trust and Service Agreements which essentially precluded CRM from being dismissed as TIWCT’s administrator;

CRM did not obtain the approval of the initial Trustees when appointing new Trustees; CRM apparently did not advise the Trustees that Trustee Bottini was an owner of CRM; CRM’s Bottini apparently did not advise the Trustees that he was an owner of CRM; CRM may not have prepared budgets, or short or long-term fiscal plans during the first

two years of the Trust’s existence; The reporting of favorable operating results for TIWCT and other group self-insured

trusts represented by CRM contributed to the success of the CRM Holdings, Ltd. IPO, and thereby financially benefited Rakoff, Hickey, Jr., and the other owners of CRM;

CRM essentially ran the Board of Trustees meetings; CRM and its management engaged in numerous conflicts, including the brokering of

insurance through its affiliate to TIWCT, the reinsurance of excess coverage through its affiliate for TIWCT, and the provision of medical-claims services through another affiliate;

CRM may not have fully disclosed the nature and extent of its relationship with its affiliates (Eimar, Twin Bridges, Majestic, Agency Captive, Hickey-Finn) to the Board of Trustees, and

There was a disincentive to ensure that the fees paid to CRM’s affiliates were competitive.

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Of further interest, the success of the IPO, which raised millions of dollars for CRM’s owners, could not have been timed more perfectly, as within twelve months of the IPO, TIWCT had a $5,735,694 member deficit and was for all intents and purposes, insolvent. As noted in more detail below, the possible suppression of contradictory actuarial liabilities/expenses estimates may have hidden a more accurate and dire picture of TIWCT’s financial condition, and may have been a good indication that CRM would no longer be managing TIWCT, as subsequently evidenced by CRM’s voluntary surrender of its license to act as a third-party administrator during September 2008.84 Furthermore, the possible suppression of the claims reserves may have hidden the true value of the CRM Holdings, Ltd. shares on the date of its IPO. Consequently, investors may have been intentionally deceived and may have purchased the IPO shares at an inflated cost. D. SGRisk, Inc. 12 NYCRR Section 317.19 requires, in part, all Trusts to submit on an annual basis an actuarial report certified by a qualified actuary verifying claims as defined in 12 NYCRR Section 317.2(c) and the method of calculating such claims be based upon accepted actuarial standards of practice. The actuarial reports provided an estimate of TIWCT’s liabilities and expenses, which then allowed CRM to evaluate the reasonableness of the premiums (and discounts) it charged its members. The cost of the member premiums directly influences which members join TIWCT, as employers seeking coverage tended to select the carrier offering the lowest premium.85 Furthermore, the cost of the member premiums also have a direct impact on CRM’s revenues, as lower premiums will result in more members, which will result in more revenues for CRM. There exists a financial incentive for CRM to solicit more employers to join TIWCT, as CRM’s administrative fee was 15% of the total members’ stated manual premium.86 Therefore, an increase in the Trust’s membership allows CRM to better cover its fixed overhead costs and increase its revenues, regardless of the members’ contribution to the Trust. Pursuant to WCB policy, so long as a trust is at least 90% funded, the WCB does not implement remediation procedures for that trust. These remediation procedures include limitation or elimination of the amount of allowable discounts provided to existing members and/or the restriction or elimination of the number of new members allowed to participate in the trust. These procedures are designed to restore the trust to a funded position and/or limit the exposure of additional members to an under-funded trust. This fact was known to CRM and is important for several reasons. 84 Four other group self-insured trusts being managed by CRM had combined member deficits of approximately $83 million as of December 2006. 85 This was confirmed through interviews with certain members and insurance brokers. 86 The 15% fee was based on the manual premium not the amount of member’s actual contribution.

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First, in the event that the WCB implemented these procedures for a CRM administered trust, such as TIWCT, they would have had the effect of substantially reducing the fees generated by CRM. This is because CRM earned its administrative fees based upon the number and size of participants in the trust and if the trust was precluded from accepting new members, or was effectively priced as unattractive to current members by virtue of the reduction or elimination of discounts, CRM's fee base would dramatically decrease. Second, CRM earned its fees based upon the “manual premium” for a particular member, which is exclusive of whatever discount CRM may have provided to that member. As CRM would receive the exact same fee regardless of whether or not a particular member received a large discount or no discount whatsoever, there existed no economic disincentive for CRM to provide the greatest possible discounts to members regardless of whether or not the ensuing premiums collected were sufficient to meet the actuarially determined necessary reserves. Thus, there was a financial incentive for CRM to have TIWCT appear to be at least 90% funded and for reserves to be set as low as possible. As detailed in Section L of this report, a claims consultant noted that CRM was “artificially” reducing claims reserves in an effort to improve another trust’s financial position, and that the suppression of the reserve liabilities without supporting documentation was “negligent.”87 Clearly, the possibility also exists that CRM may have also been suppressing TIWCT’s reserve liabilities, and as detailed below, it was eventually determined that the reserve liabilities estimated/reported by CRM were materially understated. CRM, pursuant to its Service Agreement with TIWCT, was responsible for engaging professional actuarial services. Partially at the suggestion of UHY (TIWCT’s auditors), CRM selected SGRisk, Inc. (SGRisk), a New Jersey-based actuarial firm, which performed these services from the Trust’s inception through December 2006. The President of this firm is Charles Gruber. SGRisk also performed actuarial services for seven other group self-insured trusts administered by CRM. As detailed below, Gruber declined to meet with us and/or be interviewed, therefore, we had to rely on the documents provided. SGRisk prepared independent actuarial reports on behalf of TIWCT for the fiscal years ended December 31, 2000 through December 31, 2006. During 2003, the WCB retained PwC to conduct a Level II analysis of TIWCT, which included an analysis of the reasonableness of the Trust’s reported loss reserves. PwC conducted their review and issued two reports to the WCB on March 4, 2004, and August 4, 2004 (see Exhibits 34 and 35). PwC’s review concluded that the loss and loss expense reserves reported by TIWCT as of December 31, 2002, were below a range of reasonable values,

87 CRM was the trust administrator for the other group self-insured trust and also reported its financial position and results to the WCB.

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and were approximately $93,000 less than the low end of PwC’s range of reasonable reserves.88 PwC also concluded that the loss development factors utilized by SGRisk deviated from industry benchmarks and that there was no “strong evidence” to support the deviation.89 PwC indicated that SGRisk’s estimated claim-related losses appeared to be low. As detailed later in our report, the ultimate losses experienced by TIWCT were significantly above the estimates provided by SGRisk. Interestingly, it does not appear that the Trustees had any role in the approval of the loss estimates reported on the TIWCT by CRM. Furthermore, the Board of Trustees meeting minutes provided to BST reveal the Trustees did not question CRM about the loss estimates noted on the financial statements. PwC also noted other findings, and these are detailed in the appropriate sections of this report. Mary Ellen Coggins, the author of the PwC reports, said she reviewed SGRisk’s work for another trust and had similar findings. She felt Gruber did apply professional standards and had a methodology, but she disagreed with Gruber’s judgment factors as they related to his use of loss development rates. WCB prepared Level I reports for the years ended December 31, 2004 through December 31, 2006. Their reports, which are included as Exhibits 36-38, note that:

Reinsurance is purchased through a CRM affiliate, and TIWCT Trustees should obtain more information regarding the purchase of insurance, and the Trustees need full disclosure of the relationship that exists between CRM and its affiliate, to ensure the best possible terms were obtained relating to the purchase of this insurance;90

TIWCT’s loss reserves as of December 31, 2005, were 7.2% less than the best estimate provided by SGRisk;

The TIWCT contribution rates are insufficient to cover the fixed and variable expenses of the Trust;

TIWCT was under-funded as of December 31, 2005, and The Trust is experiencing a shortfall of $932,000 for 2007, and CRM significantly under-

estimated the actuarial reserves for the 2006 operating year. Primarily as a result of the latter findings, PwC was commissioned by the WCB to conduct a Level II analysis during 2007 (see Exhibits 39 and 40). As detailed in the reports, PwC determined that:

88 The inclusion of low, medium, and high estimates is consistent with the approach used by actuaries when providing actuarial estimates. 89 The report also detailed a number of findings with regard to the Trustees and their responsibilities. 90 A copy of the reports were also provided to the existing Trustees, however, the minutes suggest the Trustees never questioned CRM about this relationship.

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No support was provided for certain loss development factors or expected loss ratios utilized by SGRisk when estimating the actuarial based loss reserves;

The loss development factors utilized by SGRisk may produce optimistic results and may understate the loss reserves;

No data was included in SGRisk’s actuarial report to validate whether the TIWCT was eligible for discounting;

The payment patterns used by the actuary to determine the discount rate are not appropriate;

There was significant actuary runoff (negative) during the last year and the two-year and three-year runoff was also unfavorable, suggesting that the key parameters used by SGRisk were optimistic;

The recorded reserves for 2005 were significantly below the actuarial indications; Some of SGRisk’s key parameters were not supported; SGRisk made judgments that were not well documented, not supported by actual

experience, or inconsistent with the strength/weaknesses of the method; The reserve reported on the audited financial statements was less than SGRisk’s best

estimate, and there were no valid reasons supporting the use of a lower estimate, especially given prior year’s adverse runoff;

PwC’s estimated reserve calculation losses were approximately $10 million higher than those estimated by SGRisk as of December 31, 2006, and

PwC had credibility concerns with regard to the claim data reported to them by CRM. Alan Hines, the author of the PwC Level II report, stated that he found it unusual that SGRisk started incorporating anticipated recoveries in their analysis since there was no history to suggest that such recoveries were received in the past. He noted it was up to CRM to establish the correct reserves and that it was questionable when CRM changed the way it recovered dollars from one year to the next. He also noted that PwC was unable to determine whether these purported recoveries were optimistic or conservative. Hines stated that he told the WCB that CRM could be manipulating its reserves so that SGRisk would underestimate their reserve estimate. He said he also found SGRisk’s workpapers to be inadequate. At the request of the WCB, Hines also conducted a review of thirteen group self-insured trusts that used SGRisk for actuarial services, and he noted that he had under-reserving issues with six of these group self-insured trusts - all of which were managed by CRM.91 He said he recommended second tier reviews of these six trusts.

91 The other seven trusts were not managed by CRM, but had their actuarial estimates done by Gruber’s associate.

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Hines also stated that he graded these trusts on a scale of 1 to 5, with 5 being “big problems.” Six of the eight CRM trusts had an average rating of 4, while the other non-CRM trusts had an average rating of 1.93. The under-funded status of TIWCT does not appear to have been significantly discussed at Board of Trustees meetings or brought to the attention of the Board members by CRM until the November 2, 2006, Board of Trustees meeting.92 As discussed earlier, CRM may have had substantial monetary incentive to misrepresent TIWCT’s loss reserves, and possibly its other group self-insured trust financial forecasts, because of its planned IPO during December 2005 - in which CRM Holdings raised $68,700,000. Surprisingly, CRM did not advise the Board of Trustees of the initial public offering or the formation of CRM Holdings until the May 3, 2006, Board of Trustees meeting during which time CRM officials noted that CRM “went public” to raise capital for their reinsurance affiliate (Twin Bridges), and that this will benefit TIWCT and other trusts because Twin Bridges will offer reinsurance to TIWCT. Clearly, no evidence exists in the Board of Trustees minutes provided to BST that the TIWCT Trustees (or members) were unhappy with their current reinsurer. Furthermore, and more importantly, CRM’s unilateral decision to offer and subsequently provide reinsurance to the TIWCT was ostensibly done to enrich CRM and its owners, including Trustee Bottini, who apparently never advised the other Trustees or TIWCT members that he and his brothers were owners of CRM and had an ownership interest in Village Holdings, Inc. - which owned 23.75% of CRM Holdings, Ltd.93 As noted earlier in the report, it was CRM’s responsibility and duty to prudently manage TIWCT’s operations and select TIWCT’s actuary. The failure to select a new actuary despite the critical reports by PwC raises the question as to whether CRM was more concerned about protecting a positive, albeit misleading representation of its (CRM’s) financial future or preserving TIWCT’s actual financial viability, and therefore, CRM’s continued ability to sustain its fee based revenues.94 The deterioration of TIWCT’s financial viability under CRM’s management is not an isolated instance. Most of the other trusts managed by CRM during this period were also experiencing funding issues, and CRM also retained SGRisk as actuary for these trusts. Accordingly, it would seem irresponsible for CRM to continue with SGRisk, given SGRisk’s inability to project realistic estimates. In fact, after receiving the PwC Tier II reports, CRM commissioned EMB America to review TIWCT’s reserves in light of the disparity between PwC and SGRisk, however, EMB’s estimated loss reserves were substantially the same as PwC’s. 92 The under-funding issue was the result of a letter from the WCB. 93 Bottini is listed as the Managing Member of Village Holdings. 94 As previously noted, CRM would be able to avoid WCB’s remediation steps if the Trust remained at a 90% funding level. Otherwise, membership would have been limited, thereby reducing CRM’s potential revenues.

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While PwC did not conduct a financial statement audit of TIWCT, it is clear that it had certain reservations about the quality of Gruber’s work, to the point that they told the WCB that the CRM managed trusts (which used SGRisk) needed another level of review. While UHY, TIWCT’s auditor, is not as large as PwC, it is still an international accounting and auditing firm with similar resources. It is not clear why UHY, despite being intimately familiar with SGRisk and Gruber, did not arrive at these conclusions earlier, especially given the fact that the loss reserve trends experienced by TIWCT were consistent with trends of other group self-insured trusts that UHY audited. The Board of Trustees meeting minutes provided to BST reveal that Gruber was not present at these meetings, and they also do not note significant discussion about the reserve amounts appearing on the financial statements. The April 27, 2005, Board of Trustees meeting minutes indicate that CRM representatives told the two Trustees that SGRisk is using “most conservative methods” and that there is a lot of buffer on top of the case reserves, although it does not appear there was further discussion about which amounts to include in the financial statements.95 BST determined the SGRisk reports were addressed to either CRM or UHY; therefore, we were unable to ascertain whether all of the actuarial reports were ever delivered to or seen by the Board of Trustees. Consequently, it appears that the loss estimates noted on the financial statements were provided by CRM. As previously noted, CRM’s monetary incentive to continue retaining SGRisk may have helped ensure a successful IPO for CRM Holdings, Ltd. (CRM’s parent company), as the higher loss estimates previously suggested by PwC would have significantly impacted the pre-IPO reported operating results of TIWCT and may have raised the question of whether CRM would have viable solvent trusts to manage in the future. We attempted to interview Gruber about his reports and relationship with CRM, however, his written response suggested BST issue a subpoena to SGRisk’s attorney.96 Interestingly, according to WCB officials, after the Section 111 hearing97, Gruber changed his methodology to use the 2003 loss development factors - which significantly changed his reserve estimates. Possibly as a result of the adverse claims runoff experienced by this Trust and other trusts it was managing, CRM engaged Employee Benefits Consulting Services (of Oakland, New Jersey) during 2007 to conduct an actuarial review of TIWCT and four other trusts managed by CRM.98 A copy of the report was not noted in the UHY work papers we reviewed.

95 According to the Board of Trustees meeting minutes, the two Trustees present at this meeting received SGRisk’s actuarial report. There were seven CRM representatives at this meeting. 96 One of the questions asked of Gruber was whether he owned any stock in CRM Holdings, Ltd. 97 The January 2003 hearing held pursuant to Workers Compensation Law Section 111 at which Gruber testified related to the Healthcare Industry Trust of New York, another CRM managed trust. 98 UHY’s website identifies Employee Benefits Consulting Services of Oakland, New Jersey, as UHY’s affiliate.

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BST engaged an independent actuary to review the reports prepared by Gruber. Overall, they concluded that the loss reserve amounts appearing on the year ended 2004, 2005 and 2006 TIWCT’s audited financial statements were significantly understated, and a subsequent analysis prepared during 2010 revealed that the ultimate losses for 2005 and 2006 were $19 million and $24 million higher, respectively, than that reported by Gruber. In summary, the documents reviewed and the interviews conducted by BST suggest that:

The loss development factors used by Gruber were not the best predictors for estimating TIWCT’s loss reserves in certain years;

CRM may have suppressed TIWCT’s loss reserves and reported lower loss reserve amounts on TIWCT’s financial statements;

Despite contradicting reports from at least two other independent actuaries, CRM chose to rely on the estimates provided by SGRisk and did not alter the actuarial loss reserve amounts reported on TIWCT’s financial statements;

Despite similar actuarial concerns with SGRisk and other trusts managed by CRM during the same period, CRM chose not to replace SGRisk, and

SGRisk’s loss reserve estimates may have been instrumental in creating the false perception that the group self-insured trusts managed by CRM were not in dire financial condition, and this false impression may have helped CRM’s future parent company (CRM Holding, Ltd.) and CRM’s owners to raise at least $68 million during its December 2005 initial public offering.

E. UHY, LLP CRM, by virtue of its administrative role, was responsible for preparing TIWCT’s financial statements and the corresponding financial statement footnotes. The largest liability and expense appearing on TIWCT’s financial statements related to its estimated unpaid claims and claims incurred (loss reserves); accordingly, these account balances at any point in time are material to the overall fairness of the financial statements.99 The loss reserves were initially established by CRM upon notification and examination of the injury claims filed by its members. The loss reserve amounts established by CRM are, in turn, relied upon by TIWCT’s actuary when estimating loss reserves that are used as the basis for the claim liability and expense on the financial statements. 12 NYCRR Section 317.19 requires, in part, all Trusts to submit audited financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) and certified by an independent certified public accountant. CRM, pursuant to its Service Agreement with

99 The loss reserves represent the amount that CRM believes TIWCT will have to pay out as a result of injury claims.

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TIWCT, was responsible for engaging a certified public accountant for the purpose of preparing an audit of the Trust. CRM eventually engaged UHY to conduct an audit of TIWCT’s financial statements.100 UHY advised CRM that TIWCT needed an actuary and told CRM about SGRisk, an actuary with which UHY had a prior professional relationship. CRM subsequently engaged SGRisk to provide an estimate of the claim liabilities and expenses to be reported on TIWCT’s balance sheet and income statement. Inherent within GAAP is the principle of conservatism, which requires the preparers of financial statements to make evaluations and estimates, to deliver opinions, and to select procedures, and to do so in a way that neither overstates nor understates the affairs of the business or the results of operations. While CRM had the responsibility to apply the concept of conservatism, it was UHY’s responsibility to determine whether the claims liability/expense amounts reported by CRM were not materially misstated and opining on the overall fairness of the TIWCT financial statements. During the periods ended December 30, 2000, through December 30, 2006, UHY concluded that TIWCT’s financial statements were presented fairly, in all material respects. In conducting its audit, UHY was obliged to follow Generally Accepted Auditing Standards (GAAS). Statements on Auditing Standards (SAS) provide guidance to auditors on GAAS in regard to auditing an entity and preparing a report. SAS 73, Using the Work of a Specialist, requires the auditor to evaluate whether the specialist’s findings support the assertions in the financial statements. SAS 73 applies to various specialists, including actuaries such as SGRisk. Accordingly, if UHY believed SGRisk’s findings (claims reserves) were unreasonable; UHY should have applied additional audit procedures, which may have included obtaining the opinion of another actuary. Documents obtained by BST reveal that UHY recognized that the claim-related liabilities/expenses are significant risks based on their dollar amounts and that there may be pressure to understate these amounts to meet WCB funding ratios. Therefore, it seems that UHY recognized the potential risk associated with the understatement of the claims liabilities/expenses and the potential impact on the overall fairness of TIWCT’s financial statements. As detailed earlier in this report, beginning June 2003, PwC prepared a report indicating that SGRisk’s reserve estimates were below PwC’s reserve estimate, thereby suggesting that the financial statements could be misleading. It is our understanding that UHY was provided and

100 CRM also engaged UHY to audit the financial statements for seven other New York State group self-insured trusts administered by CRM.

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had access to TIWCT’s Board of Trustees meeting minutes and other relevant documents during its audits of TIWCT, and therefore, they should have been aware of the actuarial reports prepared by PwC. We have been unable to determine whether UHY received a copy of this report, however, CRM should have provided UHY with a copy of this report, and the failure of UHY to consider this report may have violated GAAS. The WCB provided BST with copies of the Board of Trustees meeting minutes provided by CRM, however, we determined that other meeting minutes existed. For example, UHY’s audit work papers also revealed two additional Board of Trustees meetings which were not known to BST.101 By December 31, 2005, the TIWCT members’ deficit was $627,261, which was due in large part to the claims-related liabilities and expenses appearing on the financial statements.102 By December 31, 2006, the members’ deficit had grown to $5,737,694 and again was due in large measure to the claim-related liabilities and expenses estimated by SGRisk and reported by CRM, and the fact that Gruber had applied a different methodology after being criticized during the Section 111 hearings. The significant increase in the TIWCT’s members’ deficit (and claims reserves) - and that of other groups CRM managed, should have been an indicator that the loss reserves were developing quicker than the member premiums, and that there may be a strong financial incentive for CRM to under-report reserves, as the continued member deficit could impact the continued financial viability of TIWCT and, therefore, the revenues of CRM. This is especially interesting given the fact that the large increase in the members’ deficit coincidentally occurred immediately after CRM Holdings, Ltd. went public (December 2005). This is consistent with a statement made by another consultant (Jeff Kadison) who provided services for another group self-insured trust managed by CRM, and who stated to BST that Hickey, Jr. wanted him to make sure the trust appeared solvent. WCB’s 2005 and 2006 Level I reports note that CRM reported loss reserve estimates that were below the best estimates selected by TIWCT’s actuary - SGRisk. The differences in estimates do not appear to have a material impact on the TIWCT financial statements. Regardless, the difference in estimates should have been of future concern to UHY, as the reports seem to suggest that the estimates reported by CRM (and the amounts reported on TIWCT’s September 20, 2003, financial statements) could be misleading. Maryellen Coggins of PwC said she was not contacted by UHY and was not aware of anyone at PwC being contacted by UHY despite the differences in the loss reserves estimates. WCB 101 The UHY work papers make reference to Board of Trustees meeting minutes for January 29, 2002, and July 10, 2003. 102 The claims-related liabilities represented 84% of the liabilities, and the claims expenses represented 67% of the total expenses.

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officials stated that they met with UHY and challenged the UHY partner about the actuarial amounts reported on the Trust’s financial statements and that UHY defended the audited amounts. It is possible that CRM did not advise UHY about the PwC or EMB reports, however, UHY was aware or should have been aware that other CRM managed trusts were experiencing significant funding shortfalls primarily due to under-reserving of losses. As a result, UHY should have at least contacted and inquired about the nature of the services provided by PwC. Had they done so, they possibly would have found out about the reports (assuming they did not already have them). An examination of UHY’s audit work papers revealed that CRM completed and signed representation letters (to UHY), a document in which CRM affirmed that they provided UHY with:

All financial records and related data, and Actuarial reports prepared during the year.103

Therefore, CRM should have provided UHY with a copy of the PwC report, and the failure of UHY to consider these reports may have violated GAAS if UHY read the PwC report.104 The CRM signed representation letters for TIWCT indicate that there are no estimates that may be subject to material change in the near future that have not been properly disclosed in the financial statements, and that they (CRM) have no knowledge or belief that such actuarial methods or assumptions are inappropriate in the circumstances. Therefore, it would have been incumbent upon CRM to provide the PwC report to UHY, TIWCT’s auditor, as they did have in their possession actuarial reports that reported reserves that were significantly if not materially different than reserve amounts provided by SGRisk. Any failure to provide UHY with the PwC actuarial reports may have resulted in UHY rendering an inappropriate financial statement audit opinion. Clearly, there was a financial disincentive for CRM to provide these documents, as the success of the CRM Holdings, Ltd.’s IPO could have been adversely impacted if it was determined that the trusts that CRM was managing were having financial difficulties and/or were unable to continue as going concerns, thereby most likely depriving CRM of a future revenue stream. We have been unable to determine whether CRM provided PwC’s report to UHY or whether UHY requested this report from PwC, as neither UHY nor CRM responded to our inquiries. 103 This copy was provided to the WCB prior to BST’s involvement with these trusts. BST subsequently saw the signed representation letters for the TIWCT in UHY’s work papers; however, UHY would not provide BST with copies of these representation letters. 104 Failure to do so could have resulted in a qualification in the audit reports, of which none were noted.

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BST reviewed UHY’s audit work papers relating to the TWICT audits, however, we did not see any reference to the PwC reports nor did we see a copy of the PwC reports in the audit work papers.105 Of equal importance, and assuming UHY received the documents, the failure to consider and evaluate the PwC reports may not have been in accordance GAAS, as PwC’s loss estimates are higher than the estimates provided by SGRisk, and could have impacted the decisions made by individuals (including the Trustees) and members who may have relied on the audited financial statements. Certainly, UHY should have seriously considered the validity of SGRisk’s future estimates given the fact that the actuaries hired by the WCB and CRM both seem to indicate that they had issues with SGRisk’s actuarial reserves, and a claims consultant hired by another group self-insured trust managed by CRM (of which UHY audited) concluded that CRM was suppressing the Trust’s reserves.106 Despite being aware of significant actuarial differences relating to other trusts managed by CRM, it appears that UHY may not have taken the appropriate steps to question the methodology and/or estimates reported by CRM and estimated by Gruber/SGRisk. UHY’s audit work papers and their interrogatories with the WCB indicate that they tested the mathematical computations in Gruber’s reports, and determined that the data appeared reasonable and that Gruber’s assumptions were reasonable based on UHY’s history with Gruber. Their work papers also noted the following:

We read the SGRisk report; The discount rate was consistent with prior years; The reserves reported on the financial statements were within the range estimated

by the actuary;107 The actuary is experienced and independent; Examined and tested some claims, and Determined the actuary was independent.

By September 30, 2006, the financial statements of another CRM trust (Healthcare Industry Trust of New York - HITNY) audited by UHY cited a $76,068,287 member deficit, which was primarily related to the $64,000,000 retro-active adjustment to all prior periods which increased that trust’s audited actuarial reserves. Clearly, the approximate $64 million increase in the HITNY reserves from 2005 to 2006 is material and suggests that Gruber’s previous estimates

105 SGRisk’s report was in UHY’s work papers. 106 GAAS’s third standard of field work requires the auditor to obtain sufficient, competent evidential matter to afford a reasonable basis for an opinion regarding the financial statements under audit. 107 The amounts reported on the 2005 and 2006 financial statements were actually below the estimates provided by Gruber (the 2006 amount should reflect the reinsurance recoverable).

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with regard to HITNY were inadequate, and that the audit procedures performed by UHY in the past may not have been properly designed to detect material differences with regard to the loss reserve estimates reported by CRM. UHY must have had some inkling by 2007 that CRM had some concerns about the actuarial estimates provided by SGRisk, for as detailed in the SGRisk section, CRM engaged UHY’s affiliate - Employee Benefits Consulting Services, during 2007 to conduct an actuarial review of TIWCT and four other trusts managed by CRM. However, by this time the financial viability of TIWCT and some of the other trusts managed by CRM was already being questioned. We were unable to determine whether UHY’s prior professional relationship with Gruber/SGRisk may have influenced UHY’s planned audit approach, however, if UHY failed to inquire about and/or obtain the other actuary reports, its failure to do so may have constituted a breach of its audit responsibilities to obtain sufficient, competent evidential matter. Of further interest, BST determined that UHY was not present at any of the TIWCT Board of Trustees meetings which we are aware of. Since CRM ran and organized these meetings, it appears there may have been a concerted effort by CRM to isolate the Trustees from any independent outside experts and deny the Trustees the opportunity to speak with and/or question UHY or SGRisk. A concern which does not appear to have been addressed by the Board of Trustees or UHY is whether or not there might have been some lack of economic independence on the part of SGRisk because of the significant amount of business that CRM gave to SGRisk. Even if not directly spoken, SGRisk would understand that the lower the loss liability was, the better the impression created for the Trust, and therefore for CRM. In summary, the documents examined and the interviews conducted reveal that:

Considering the materiality of the reserve amounts on the financial statements, UHY may not have exercised proper due diligence when auditing the Trust’s actuarial reserves in light of information available to them, and

CRM may not have provided UHY with all documents and/or information relating to UHY’s financial statement audit of TIWCT.

F. Marketing The success of any group self-insurance plan relies, in part, on its ability to attract and differentiate itself from its competitors and to offer favorable discounts to members with good loss histories. Like other self-insured trusts, TIWCT was “broker-driven” in that the primary source of marketing was licensed insurance brokers. Brokers typically receive commissions ranging from 4% to 8% for each member they place with a trust. Certain brokers, designated as

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Managing General Agents (“MGA”), could receive higher commissions for achieving certain insurance placement thresholds. A document found in WCB files reflected a listing of over fifty (50) separate brokers servicing CRM’s TIWCT accounts. CRM’s marketing activities were discussed at the Trustees’ meetings, and CRM’s use of brokers was reflected in various Trustees’ meeting minutes. For example, the minutes for the March 30, 2004, meeting stated, “Spreading business amongst a lot of brokers” and “We are trying to incentivize a small group of brokers.” The minutes for April 27, 2005 state, “Finding new brokers has helped this program grow.” CRM marketing material obtained by BST identified the Mangi-Vanner Insurance Group, LLC as the primary contact for those seeking information about the Trust.108 NYS Department of State records show Mangi-Vanner was incorporated on October 22, 2003, in Erie County, New York. A news release dated July 6, 2006, issued by The NIA Group109 (“NIA”) announced that CRM “elected” NIA and its affiliate, Korneich-NIA, to “serve as the official Managing General Agent (MGA) of its New York State Manufacturing and Transportation Workers’ Compensation Trusts.” Scott Mangi, believed to be a principal of Mangi-Vanner, is listed as one of the NIA contact persons.110 Insurance brokers interviewed by BST relating to a prior BST trust review suggested that an MGA might receive a commission of 10%. Mangi-Vanner’s and NIA’s commission arrangements with CRM could not be ascertained. The current relationship between CRM and these two firms is unknown at this time. The CRM website’s News Achieves (http://www.trustcrm.com/about_news_archives.php) references a “2003 BROKER BASH” held on July 9th and 10th, in Cooperstown, New York at The Otesaga Hotel and Resort. It was CRM’s 2nd Annual Broker Bash, honoring its “dedicated network of Brokers.” The piece noted:

“Awards were given in recognition for overall premium volume and retention. There were three categories: Platinum, Gold and Silver Level Agents. The winners are as follows”:

Platinum Level Agent: Hirsch Wolf & Co., Inc.

108 Mangi-Vanner is located in Poughkeepsie, NY. The Vanner Insurance Agency, located in Amherst, NY, was the MGA for CRM’s Healthcare Industry Trust of New York and other CRM trusts. Former TIWCT Board Chair and CRM shareholder, Mark Bottini, advised BST that Mangi-Vanner recommended TIWCT membership to him. 109 The NIA Group is among the largest privately-held insurance and financial services brokerage firm in the United States. 110 Scott Mangi is identified as Vice President of NIA’s Newburgh office in a 2007 NIA e-newsletter.

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Gold Level Agent: RMI Consulting, Inc., The Rampart Group, Oxford Coverage

Silver Level Agent: Buckingham Badler Associates, Marshall & Sterling, Ralph J. Vanner & Associates, The Treiber Group

Section 4.1 of a 2003 CRM Trust Marketing Agreement111 provided to BST by a cooperating broker stipulated that the Trust Agent (broker) would receive a commission of 5% of manual premium for writing up to $3,000,000 of manual premium and a commission of 6% of manual premium written of $3,000,001 and higher of manual premium. Pursuant to Section 3.1 of the Trust Marketing Agreement, the Trust Agent (broker) agreed to perform the following duties:

a) Develop and implement, in conjunction with the Administrator an annual Marketing Plan for the Trusts;

b) Use its best efforts to generate new members for the Trusts through both direct production and through the development of producing sub-agents and brokers, and

c) Submit to the Administrator, either directly or through its sub-agents or brokers all the necessary underwriting data required by the Administrator for each applicant to the Trusts so that the Administrator can properly underwrite each such applicant and decide whether to approve or reject each such application. (sic)

The cooperating broker also furnished to BST a Broker Manual provided to his firm by CRM’s Vice President of Marketing, Sean McDonnell. The document was undated but its contents reflect material produced as of May 2002. The Manual contained information on all CRM trusts. The data provided for TIWCT showed total members - 127; total manual premium to date - $4,312,400.67; minimum premium required - $10,000; SIC (Standard Industrial Classification) Codes accepted - 41,42,49; and accepted experience modification factor limit - 1.10. Concerning CRM’s marketing activities, Trustee Riccelli told BST that CRM had meetings saying it wanted to grow membership. CRM promoted how all companies needed workers’ compensation coverage, and that CRM could “cherry pick” the “good companies” to become members. Riccelli said that he suggested that CRM join the NYS Motor Truck Association, which it did. He noted that CRM advertised in the Association’s publications and may have attracted new members from that group. Based on broker and member interviews, it is apparent that employers joined the Trust on the strength of the brokers’ recommendation.

111 The terms of this Agreement applied to CRM’s multiple group workers’ compensation trusts managed by the broker.

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One broker explained that at the time a number of his transportation clients were having trouble with the State Insurance Fund (SIF), particularly with respect to service, audit, and claims settlement issues, and wanted to find an alternative provider. He said there were not many alternatives out there, and TIWCT was a good option. He said his clients were less concerned about cost than they were about level of service. His office would send the Joinder and Indemnity Agreements to their clients for signature and they would sign the documents in two places. He said the joint and several liability provision should have been clear to the clients upon signing the documents. A second broker with ten clients in the TIWCT stated that CRM took on her higher risk clients. She said CRM was interested in new venture companies as well as established firms. She noted that CRM did reject some clients she referred to them based on loss history or classification concerns. CRM would look at a potential client’s work history, dollar amount of losses, and multiple losses. She said new clients were given an “automatic” 15% “deviation” or discount, and this was applied across the board. She did not receive any complaints from her clients about CRM until the Trust was disbanded and the WCB assessment notices were sent out. A third broker advised BST that following a CRM presentation, he began putting some of his clients into the TIWCT. He said CRM offered about a 15% discount for members with a good claims history. He stated that he primarily moved clients to the TIWCT who were dissatisfied with the State Insurance Fund which charged a 15% assessment fee. He noted that his clients in the debris removal business are typically hard to place for workers’ compensation coverage with regular carriers, and CRM filled this niche. All members interviewed confirmed that they joined TIWCT based on their brokers’ recommendation, and largely on the basis of cost savings. One member indicated that TIWCT offered “great rates at the time.” This member added that in retrospect, he “got screwed by the Trust and broker” and added that his broker did not tell him of the joint and severally liability provisions. With respect to marketing, Section 317.18 of the NYCRR states that:

“All marketing materials disseminated or communicated by or on behalf of a group self-insurer, group administrator or trustee shall be strictly factual in nature and shall be truthful and accurate in all respects, and shall not contain any statements which cannot be measured or verified, or which are in any way deceptive, misleading or coercive.”

In a letter to the WCB dated April 26, 2004, the New York State Insurance Fund (“SIF”) cited “misrepresentations and inaccuracies” on CRM’s website - www.trustcrm.com. SIF said the materials on the website “…purposefully obfuscate, distort and confuse the reader.” The letter

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stated, among other things, that “CRM glosses over the risks of joint and several liability, the underpinning of trust participation, where liability remains with the members.” In addition, SIF noted that it had alerted the WCB four years’ previous “regarding material misrepresentations made by CRM, some based on a required three year trust membership.” BST also identified a CRM power point presentation that intimated that member liability was limited due to the excess insurance purchased by CRM. WCB officials stated that CRM immediately removed those representations when questioned by the WCB about the contents of CRM’s website. As discussed above, CRM Holdings, Ltd., a Bermuda exempted holding company that incorporated on September 7, 2005, completed an initial public offering on December 27, 2005. Marketing material regarding the newly-formed entity appears to have been sent to CRM’s brokers’ network. A cooperating broker furnished BST with an undated112 CRM Holdings marketing brochure, entitled “CRM Holdings, Ltd. - Meet the New Face of Insurance.” One of the testimonials in the document is attributed to Thomas Vanner, Ralph J. Vanner & Associates and reads as follows:113

“The response from everyone in the company - loss control, underwriters, claims managers-is immediate. You feel like you’re being taken care of from the very first phone call.”

Vanner’s comments are interesting in that BST reached out to him on numerous occasions regarding his involvement with TIWCT and another CRM managed trust, yet he refused to return our telephone calls or indicate that he would not speak with us. His comments must also be evaluated in light of the manner in which he ostensibly solicited the first Trustee to join another CRM managed trust.114 Contemporaneous with this new marketing initiative, a letter dated May 12, 2006, was transmitted to the aforementioned cooperating broker having the Trust Marketing Agreement with CRM, from CRM Regional Vice President of Sales, Sean Mc Donnell, and Chief Operating Officer, Chet Walczyk, that stated, in part,

“As you are aware, CRM is now a publicly traded company. As such, the growth expectations are higher and it is even more critical that CRM adheres to its business development plan.”

112 The document is likely dated after November 14, 2006, the date that CRM Holdings, Ltd. acquired Majestic Insurance, as Majestic is referenced in the brochure. On December 18, 2006, Majestic became licensed by the New York State Insurance Department. 113 Previous misleading advertisements were noted on the Vanner Insurance Agency website during August 2001. The Vanner Insurance Agency had significant involvement with CRM and a number of group self-insured trusts administered by CRM. 114 Mangi-Vanner is also the Managing General Agent of TIWCT, so Vanner’s comments appear to be self-serving.

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The letter went on to say establish a new business goal for the broker “…to achieve the overall completion of the growth expectations.” In addition, the broker was advised, “…as January 1, 2007 approaches, we must firmly review our agent relationships and will concentrate on supporting those agents which have met expectations.” Clearly, CRM was seeking more production from this broker and, logically, the remainder of its broker network likely received similar correspondence from CRM. As noted above, CRM Holdings, Ltd. acquired Majestic Insurance on November 14, 2006. Interviews and documents indicated that CRM began to offer Majestic to Trust members as an alternative insurer for workers’ compensation and that a substantial number of Trust members moved their workers’ compensation coverage to Majestic, effective January 1, 2008, according to the WCB and member records. One broker informed BST that he was told by his MGA115 that he had to move his three TIWCT clients from CRM to Majestic Insurance. He did not recall being told that Majestic was affiliated with CRM. The broker added that the MGA had advised him recently that the MGA was looking to move all of their Majestic clients to Travelers.116 Another broker also confirmed that upon the TIWCT’s dissolution, some of his clients went to Majestic, some returned to SIF, and some went elsewhere. He stated that Majestic provides good service, and he has received no complaints about Majestic from his clients. A third broker similarly indicated that a number of his clients moved to Majestic from TIWCT and noted that Majestic has a new underwriting team in place, different from that previously handling CRM’s underwriting. CRM’s marketing efforts appear to have been very successful in attracting new members to TIWCT, although as detailed in the Underwriting Section of this report, the incentive to do so may have had to do more with the increased revenue due to CRM, and not the quality of members. According to a Level II report (requested by the WCB) issued by PwC during August 2004, CRM’s marketing efforts may have misled some members. For example, PwC noted that CRM literature stated:

115 Attempts to speak to the senior MGA representative handling this account were unsuccessful. 116 An underwriter for the MGA confirmed to BST that the MGA was recently informed by Majestic Insurance that they would not be renewing any clients with premiums of less that $10,000 annually. Majestic sent out non-renewal notices directly to the insureds. The MGA was told of this when the notices were sent out to their clients, and the MGA is now trying to find alternate placements for these clients.

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“A licensed administrator provides all group service to, including underwriting, claims management, loss control, administration, and coordination of independent accounting and actuarial services” and that this statement implies that the license held by CRM relates to all of the services listed, when in fact it only relates to the claims management aspect. And “The documentation reviewed includes statements that “members enjoy significant savings when compared to the traditional insurance product”, and PwC noted that savings can not be guaranteed. And “The documentation reviewed states that “the contributions and claims are overseen by a member based Board of Trustees, the Group Administrator, the Claims Administrator and the State of New York Workers’ Compensation Board.” However, PwC noted that the WCB is involved only when there is some degree of under-funding, and to imply that the contributions are regularly overseen by the WCB is inappropriate. And “The website (www.crmtrust.com) states that for “practical purposes, joint and several liability can be mitigated if not eliminated through reinsurance. However, PwC noted that the reinsurance will limit the overall exposure of the trust, but to imply that each and every member is virtually protected from any joint and several liability as a result of the reinsurance is misleading.”117

The integrity of CRM’s marketing materials must also be considered in light of the fact that a recent internal probe at CRM Holdings, Ltd. revealed that certain “senior managers” at CRM may have instructed their public relations firm to post favorable information about CRM on a Yahoo website, and that the outcome of the internal investigation could have a “material adverse effect” on CRM’s business, financial condition, and results of operations.118 Hickey, Jr., possibly as a result of the internal CRM probe resigned or was terminated, and received a $3.3 million severance package and welfare benefits for the next three years. In summary, the documents examined and the interviews show the cooperative marketing strategy employed by CRM and its brokers resulted in a dramatic growth in Trust membership. The Mangi-Vanner Agency, apparently an affiliate of the Vanner Insurance Agency with long-

117 PwC also cited three additional marketing references that may have been misleading. 118 The Yahoo posting failed to disclose that the source of the favorable postings was CRM’s agent.

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standing links to CRM and its principals, played a key role in the Trust. This relationship appears to have migrated to NIA, with the movement of Scott Mangi to that firm in 2006. The documentation also suggests that members joined TIWCT essentially on the basis of cost considerations and/or their unhappiness with their existing workers’ compensation insurance provider. Lastly, CRM’s marketing materials could, in some respects, be construed to have been misleading and, in fact, were deemed as such by the NYSIF. Members relied on their brokers for professional advice concerning their workers’ compensation coverage and provider. It could be argued that any misleading information offered by CRM should have been identified and questioned by the professional brokers working on their clients’ behalf, and not the clients themselves who typically lacked the insurance acumen and expertise. G. Underwriting Section VII of the Trust Agreement stipulates that:

“The sole authority to accept or reject a participating employer’s application for participation in the Trust shall be with the Administrator subject to the approval of the New York State WC Board. Every application for acceptance will be reviewed by the Administrator in furtherance of the underwriting guidelines contained within the Trust Agreement. And “No application to the Trust can be can be accepted by the Administrator, if the applicant does not meet the minimum guidelines established unless said application is first approved by the Board of Trustees, in accordance with its voting requirements enumerated in the Trust Agreement.”

BST’s review of the Trust Agreement and the Service Agreement revealed that there are no underwriting guidelines contained in these agreements; therefore, it is not clear what underwriting guidelines CRM was referring to in Section 7 of the Trust Agreement. Prudent business practices dictate that underwriting criteria be established, documented, and re-evaluated over time. We examined limited materials provided by CRM and other parties, and determined CRM modified their underwriting guidelines to conform to the underwriting requirements for the policy periods by the excess reinsurance providers. The underwriting guidelines during this period, in part, are as follows:

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1. The experience modification factor cannot exceed 1.1 for 2002 and 2003, any mod above 1.1 must be approved by Tom Spendly (Senior Vice President for Operations);

2. Minimum manual premium is $5,000; 3. Any account with a loss over $50,000, a description must be obtained from the Agent,

and 4. An account with 2 losses where the Total Incurred is over $150,000 per claim will be

automatically declined.

CRM revised their underwriting guidelines during 2004 to additionally require that:

1. Minimum manual premium is $10,000, with ambulette services having a minimum manual premium of $25,000, and bus companies of $15,000, and

2. All new prospects must be in business for three or more years. The TIWCT Board of Trustees meeting minutes reveal that the Trustees were not involved in reviewing and/or approving TIWCT’s underwriting criteria, therefore, it appears all underwriting decisions were made by CRM. The March 2004 Board of Trustees minutes reveal that TIWCT had two hundred seventy seven (277) total members, eight (8) of which had experience modification rates greater than 1.2 during their first year of Trust membership.119 However, there is no record in the Board of Trustees meeting minutes to indicate these members were ever approved by the Board of Trustees in accordance with Section VII of the Trust Agreement. A 2003 audit of TIWCT by Midlands Claim Administrators, Inc. (Midlands), an entity hired by TIWCT’s excess insurance carrier, included a review of CRM’s underwriting department, and recommended/noted the following:

Special scrutiny of members whose experience modifiers are trending higher, and “We believe it will be beneficial to the ongoing viability of the entities and

relationships if the Underwriting Department makes it more obvious in regard to some of their agents that underwriting controls are being utilized as member applications are submitted regardless of those agent’s possible relationship or ownership or other involvement with CRM. Perhaps a code of ethics statement for each of the functions at CRM could keep the need to be objective and fully compliant with required underwriting standards would help in this regard.”

Industry experts interviewed (including an actuary) stated that it is not an industry practice to keep the same experience modification rate for several years. However, our analysis of the member files, member experience modifications rates, and loss runs during this period revealed the following underwriting observations:

119 Trustee Riccelli’s firm was one of the eight members.

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At least one hundred and fifty-nine (159) of approximately eight hundred twenty-four (824) members had experience modification rates that did not change during a three-year period;

Trustee Winter’s firm (Winters Brothers Recycling) had the experience modification rate of 1 for five consecutive years. Their experience modification rate decreased to .86 and below for the next three years despite the fact that their net negative contribution during the latter three years was $511,615;

Nine (9) members had net negative contributions exceeding $500,000 during the period they were in the TIWCT;

Two hundred ninety-five (295) members with experience modifications in excess of 1 or equal to 1 were allowed to join the Trust. The total net negative contributions relating to these members were $22,000,000;

Eleven (11) members with experience modification rates in excess of 1.2 were allowed to join the Trust. The loss runs attributable to these eleven members exceeded the members’ contributions by approximately $7 million, and

There were 31 instances in which a member’s experience modification rate decreased despite the fact that their losses increased. For example:

1. One member’s losses increased by approximately $300,000, yet their experience modification rate decreased to 1.24 from 1.38.

2. One member’s losses increased by approximately $370,000, yet their experience modification rate decreased to .87 from .9.

3. Another member’s losses increased by approximately $380,000, yet their experience modification rate decreased to .92 from 1.07.

Accordingly, it appears that allowing members whose experience modifications approximated 1.0 into the Trust greatly contributed to the Trust’s deficit financial condition, but allowed CRM to collect thousands, if not millions of dollars in additional administrative fees, and raises the question as to whether the experience modifications were accurate. The efficacy of CRM’s underwriting and renewal procedures must also be evaluated in light of the following observations:

One hundred and thirteen members (113) had average loss ratios exceeding 100% during the period they were in the Trust;

One (1) member had an average loss ratio of 839.21% during the three years the member was in the Trust;

One (1) member had an average loss ratio of 1,347.54% during the six years the member was in the Trust;

Twenty-five (25) members had loss ratios exceeding 500% during their first year in the Trust;

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Thirteen (13) members had loss ratios exceeding 1,000% during their first year in the Trust, including one member who had a loss ratio exceeding 7,000%;

Trustees Bottini and Riccelli’s firms both received generous discounts despite having collective net negative contributions of approximately $5.2 million, and

Eleven (11) members had average loss ratios exceeding 183% during their time in the Trust, resulting in a net negative contribution of approximately $26 million.

Underwriting concessions appear to have been made to Trustees. For example, a November 3, 2007, email between CRM employees in which one of the employees is questioning the renewal of a former Trustee’s (Bottini) account which consistently has been a “poor performer” with a loss ratio above 50%. The employee was hesitant to not renew this account, unlike other accounts in which the members were not Trustees. The recipient of the email notes that Trustee Bottini’s account is “political” and indicates that she will have to “think about that risk,” ostensibly because of the large member premium associated with the account and the fact that the member was a Trustee. In summary, the documents reviewed and the interview results show that:

CRM admitted members whose experience modification rates exceeded that of the reinsurance carriers and possibly its own internal guidelines;

The admittance of members with significant loss ratios substantially contributed to the Trust’s member deficit;

There did not appear to be a financial disincentive for CRM to offer insurance to members with risky experience modifications or poor loss histories, as CRM collected its fee up front regardless of the subsequent performance of the new member;

The failure of CRM’s management to adjust the experience modification rates for members which had increasing and adverse loss runs may have contributed to the worsening financial condition of the Trust, and

The members’ experience modification rates were not always changed to reflect increasing losses.

H. Discounts Discounts were one of the methods used by CRM’s management via its brokers, to lure potential members into the Trust. Given the highly competitive market for workers’ compensation insurance, it was imperative that CRM’s management offer competitive discounts to prospective members and current members, especially those members with low loss rates. The success of any group self-insured trust is, in part, due to the ability to attract and maintain members with low loss rates with the hope that the discounts will be offset with efficiencies realized over the long-run, provided the members’ cumulative loss rates do not materially increase.

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Theoretically, larger discounts should be offered to applicants with low experience modification rates and/or loss runs, and smaller discounts should be offered to marginal applicants. Section 317.7 of the NYCRR (effective January 31, 2001) states the following:

“The contribution rates utilized by a group self-insurer shall not be inadequate or detrimental to the solvency of the group.”

The Trust and Service Agreements do not specifically mention member discounts, however, prudent business practices dictate that CRM should have developed criteria to assign discounts given the substantial financial impact these discounts would have on the Trust’s net income/losses. We were unable to determine whether CRM had a written plan or metric which equated a range of discounts with certain experience modification rates (or loss histories), as CRM officials declined to speak with us. Therefore, we were unable to ascertain whether member discounts were arbitrarily assigned or rationally applied. However, as detailed below, the substantial size of some of the initial member discounts may have contributed to the overall losses experienced by TIWCT. The Trustees interviewed were not intimately familiar with TIWCT’s discount policy, and the Board of Trustees meeting minutes indicate that the TIWCT Trustees did not set or approve member discounts. The Trustees interviewed stated that CRM set the discounts, and the Board of Trustees meeting minutes do not make any mention of individual discounts. PwC, in their August 2004 report stated that TIWCT’s discount factor is determined by CRM’s underwriting department and is a function of the member’s overall loss experience, adherence to safety programs, type of exposure, and the size of the premium. The 2003 Midlands audit of TIWCT, an entity hired by TIWCT’s excess insurance carrier, noted the following with regard to CRM discounting process/policy:

Discounts should be significantly reduced when the experience modifiers increase, and

Initial discounts should be tied to first year performance on new business and to current year performance on a retro/reimbursement process rather than given as a discount at the initiation of a new member’s policy.

BST’s analysis of the discounts offered to TIWCT members revealed the following:

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A majority of the discounts offered by CRM ranged from 0% to 40%;120 One member’s experience modification rate remained the same at 1.47 for three

consecutive years yet they were still offered a 25% discount; Trustee Riccelli’s firm had a net negative contribution of approximately $3 million and

an average experience modification rate of 1.07, yet received average discounts of 25% during the last four years they were in the Trust;

Trustee Bottini’s firm (Morgan Fuels) received discounts ranging from 25% to 30%, yet they had net negative contributions to the Trust of approximately $2.3 million, and

One member had an average discount of approximately 9% during the term of their membership in the Trust, yet the member had an annualized average experience modification rate of 1.46, and their net negative contribution to the Trust was approximately $650,000.

BST’s analysis of the discounts offered to TIWCT Trustees revealed the following:

During 2002, Ficel Transportation (“Ficel”) and Woodland Leasing (“Woodland”) were the only members with 40% discounts. Woodland’s President is Daniel Celani. Woodland is located at the same address as Ficel, whose President is Mark Celani. Ficel’s John Dotterweich was also a Trustee of TIWCT and the Board Chairperson;

During 2003 Ficel (Mark Celani) and Woodland (Dan Celani) were two of three firms receiving the highest discount of 35%, and Morgan Fuels (Mark Bottini) was one of nine firms receiving the next highest discount of 30%;

During 2004, Ficel (Mark Celani) and Woodland (Dan Celani) were two of three firms receiving the highest discount of 35%, while Morgan Fuels (Mark Bottini) was one of eight firms receiving the next highest discount of 30% - despite combined losses of $212,125 during 2003, and losses of $873,064 during 2004; and

During 2005 Ficel (Mark Celani) was the only firm receiving a discount of 35% or more. Woodland (Dan Celani) and Morgan Fuels (Mark Bottini) were two of the three firms receiving a 30% discount, despite combined losses of $873,064 and $1,173,427 during 2004 and 2005, respectively.

As detailed in other sections throughout this report, member losses did not develop as expected and some experience modifications were not consistent with loss data. Consequently, the failure to appropriately adjust the members’ discounts most likely contributed to the member deficit as of December 31, 2006. However, the Trust still might have realized a significant deficit even if CRM had not offered any member discounts during the last few years of the Trust’s existence, as the apparent lack of due diligence during the underwriting and renewal process more than likely contributed significantly to the cumulative member deficit.

120 Seventeen (17) members received discounts in excess of 40% during the first three years of the Trust’s existence.

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In summary, the documents reviewed show that the discounts provided were occasionally inconsistent with member loss runs or experience modifications, and the discounts seemed especially large for certain firms, and/or Trustee member firms. I. Payroll Audits Standard industry practices require audits of the Trust members’ payroll to reconcile the members’ premiums that were previously based on an estimate of the members’ payroll. The performance of these audits is imperative because of the direct correlation between the member premiums billed and the payroll reported. As such, there exists a financial incentive for the members to misclassify the payroll for the riskier job positions in order to reduce their annual premiums. Section VII of the Trust Agreement required CRM to engage someone to conduct a payroll audit annually for each of the members. Our analysis of the member files revealed that payroll audits were regularly performed and that the corresponding adjustments were made to the members’ manual premium, and that litigated adjustments were vigorously pursued. J. Safety Programs The implementation of a robust safety program is generally recognized as an insurance industry best practice and an effective method in which group self-insured trusts, and any insured organization, can potentially reduce their exposure to losses due to employee accident or injury. At the time of the Trust’s formation in December 2000, there was no statutory requirement for CRM to identify their safety program when they submitted the Trust’s application to the WCB.121 Section VIII(c) of the Trust Agreement dated December 27, 2000, makes no reference to safety programs other than noting that a Participating Employer could be terminated by the Board of Trustees for failing to “cooperate and participate in the safety policies as promulgated by the Board of Trustees…” Both CRM’s Service Agreement also dated December 27, 2000 and the Trust’s December 2000 By-laws are silent with respect to CRM’s safety program duties and responsibilities. Therefore, in the absence of specific requirements, the safety program could be implemented at CRM’s sole discretion, and therefore, there are no benchmarks against which CRM’s safety program can be

121 Section 317.4 (a)(2) of the NYCRR effective January 31, 2001, requires that trusts provide a description of the safety program, if any, proposed for the employer group with the Trust’s application to the WCB.

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assessed from a compliance perspective in such areas as loss control, data collection and reporting, consultation with members, and site visits.122 However, in its marketing material, CRM emphasized its safety and loss control program and expertise. For example, one undated marketing brochure contained the following:

Experienced, service driven safety professionals with over 120 years of combined insurance experience

Comprehensive expert services o On site safety needs assessments for every member o Annual service plans created for effective follow through o Safety score card program to evaluate progress o OSHA Compliance Reviews o “Train the Trainer” programs o Overall site safety, Return to work, Post job offer assessment

Heavy emphasis on training Free access to 5,000 safety video titles Specialized loss control training programs will be offered free of charge to members CRM Website: www.trustcrm.com (Loss Control page)

o Streaming Video for 24/7 training on core safety programs o Safety programs available for download o Links to safety reference sites o Bi-lingual training programs o Regular column on pertinent topics

We were unable to speak directly with CRM’s Loss Control personnel or review related internal CRM files. However, BST found evidence that CRM did administer a substantive safety and loss control program for TIWCT. Interviews and documentation from available sources indicated that CRM loss control personnel performed risk assessments, conducted site inspections, completed visit summaries, assigned risk scores, and made recommendations for improvement. Training and training materials were also provided to member facilities. However, interviews and records also show that the program was not implemented consistently among the members. For example, all members were not visited by safety personnel with the same level of frequency. Documents indicate that site visit frequency could be determined “as requested by underwriting.”

122 These activities were specified in Section 3 of CRM’s revised Service Agreement for the Healthcare Industry Trust of New York, dated April 1, 2005.

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Trustees’ businesses may have received special attention by loss control staff. Member records for the firms represented by Trustees Riccelli, Bottini, and Diati reflect site inspections at least annually, and in some instances, multiple inspections were performed each year. Trustee Riccelli told BST that CRM operated a “very good safety program” and visited his business on a quarterly basis for a safety review. He said CRM had an “excellent” driver training program and that two of his drivers were trained as driver training instructors.123 He noted that his business received 2 to 3 page written inspection reports from CRM. Trustee Bottini also confirmed that CRM made periodic site visits to his company and issued written reports. Trustee Vorselen also confirmed site visits and safety presentations by CRM. Members interviewed confirmed periodic site visits. One member belonging to the Trust for almost four years said CRM made an initial site visit but never came back again. Records, however, indicate that CRM site visits were made in 2004 and 2006. CRM’s safety program activities were discussed regularly at the Board of Trustees meetings as reflected in the minutes. For example, the minutes for December 7, 2004, contained the following comments:

We are visiting small and large accounts. Safety report card update. In a 9 month period we have conducted 190 loss control visits

o Visit is approximately 5 hours with follow up. Using conservative billing rate of $150 (very conservative, number closer to $200).124

New website up and running. DCC (defensive driving training) 8 hours certification - actual program 6-8

hours teaching defensive driving techniques. The minutes for October 26, 2005, contained the following comments:

Overall, accident frequency is slightly higher, but severity is lower. Loss Control feels that training will reduce claims. Would like to do more driver

training. The report card total Trust average is 3.2, which is above the 3.0 average. A loss control goal is to achieve as high of a rating as possible.

123 This was confirmed in Riccelli’s member file. 124 It is not clear whether CRM billed the Trust for these services or if they were included as part of CRM’s management fee.

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The custom, Trust specific quarterly newsletter is attached. As reflected in these minutes, CRM portrayed to the Board a very pro-active and robust safety program. CRM’s representations to the Board appear to comport in large measure with documentary evidence in such areas as informational newsletters, training programs, CRM’s website, and site visitations. One point of concern, however, is CRM’s representations about the Trust’s safety program wherein each member was purportedly rated on a scale of 0-5125 on the following criteria:126

1. Management Leadership 2. Claims Management 3. Driver Training 4. Pre-employment Screening 5. Vehicle Maintenance 6. Accident Analysis and Corrective Action 7. Driver Supervision

As noted above, all members were not visited by safety personnel with the same level of frequency. As a result, CRM’s representations concerning the Trust’s average report card rating may be misleading as members were not visited at uniform intervals. Moreover, CRM’s assertions that the ratings were used by their underwriting staff as a renewal tool may be overstated as all members were not visited on an annual basis, though renewals were done annually. Businesses represented by Trustees may have received safety ratings that were not reflective of their loss histories. For example, Risk Analysis Summaries prepared by CRM showed that Riccelli Enterprises received safety ratings of 4.0 for inspections performed in 2005 and 2006 while average member ratings as reported in the minutes reflected above were 3.2 and 3.3, respectively. Interestingly, Riccelli Enterprises losses were $2,402,373 during 2005, and $2,928,461 during 2006. In addition, member files indicate that Morgan Fuel and Heating, a firm for which Trustee Mark Bottini is a principal, received a safety rating of 3.0 in 2004, 2006, and 2007127 that would seem to suggest an “average” safety performance.128 However, an internal CRM email to Chet Walczyk regarding the Morgan Fuel account, dated September 13, 2007 states, in part:

125 0-2.5 below average; 2.5-3.5 average; 3.5-5 above average. 126 These criteria appear to have been instituted in 2005. Previously, a set of 8 criteria were used for evaluative purposes. 127 A 2005 rating was not in the member file. 128 Morgan Fuel and Heating received a premium discount of 30% from 2004-2007 despite losses of $515,584 in 2004, $772,807 in 2005, $1,776,577 in 2006, and $107,625 in 2007.

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As you are aware, they have been with the trust since it’s (sic) inception…..There have been continuous issues with non-compliance of loss control recommendations along the way, which I’m sure, has lead to consistently high loss ratios.

As previously noted, a November 3, 2007, email between CRM revealed that a CRM employee was questioning the renewal of a former Trustee’s (Bottini) account which consistently has been a “poor performer” with a loss ratio above 50%. The recipient of the email notes that Trustee Bottini’s account is “political” and indicates that she will have to “think about that risk,” In summary, the documents reviewed and the interviews conducted show that:

The Trust Agreement, Service Agreement, and By-Laws did not specify the Trust’s or CRM’s responsibilities with respect to implementing a safety program;

CRM did implement a safety program and related services to members to mitigate member losses, but the program was not consistently implemented on behalf of all members;

Trustees may have received favorable consideration in terms of disproportionately more loss control services being provided to them by CRM and higher safety ratings being assigned than may have been warranted, and

CRM reported its safety program activities to the Board of Trustees at the Trustees meetings, though some of the representations made by CRM may have been misleading or overstated.

K. Renewal Process Prudent business practices dictate that a member’s loss runs and loss history should be reviewed and evaluated prior to accepting and/or renewing the member. In addition, a thorough and complete analysis of the Trust’s cumulative member deficit, if any, should be considered before member discounts are offered to the member. The Trust Agreement does not specifically address the renewal process; however, it does state that:

The Board of Trustees, in its sole and absolute discretion, may terminate the membership of a Participating Employer, if any of the following events shall occur:

(c) Failure of the Participating Employer … to meet any criteria or supply information required including underwriting criteria to the Board of Trustees.

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In addition, Article III Section I (7) of the Trust’s By-Laws authorizes the Trust to “Terminate the membership of a Participating Employer.” And, a 2003 Amendment to the Trust Agreement signed by Bottini states that:

“A participating employer’s membership in the Trust Fund is deemed continuous unless resignation or termination is affected pursuant to the terms herein.”

Evidence indicates that despite the Board of Trustees’ defined role in member termination, documents and interviews show that CRM controlled this process with minimal Board involvement. Trustee meeting minutes reflect discussions relating to member renewals and terminations, but these discussions largely represent general information being presented by CRM to the Board. There are no apparent dialogue or Trustee votes or approvals regarding the non-renewal of specific members. The following meeting minute excerpts reflect information given by CRM to the Board regarding member termination/cancellation issues: March 30, 2004:

Always ahead, cancellation penalty charged; Cancellations are all for non-payment; Day #1 we collect 20% of earned; 90% of people remain unless go out of business, and We now have a “dedicated renewal department in underwriting.”

December 7, 2004:

CRM enforces a very strict cancellation policy; Most turn out to be reinstated but we cancel right away- scares them into paying, and It institutes a cancellation date so we can cut off claims 30 days later.

The minutes for April 27, 2005, indicated that the Trust renewed “98% of members” and the minutes for November 2, 2006, indicated that CRM “cancelled 21 policies mostly for non-payment.” Member files reviewed by BST reflected a structured renewal process of the members by CRM. The files generally contained the following completed standardized forms:

Claim Listing, Paid Loss History, Modification Calculation Summary (includes expected losses, actual losses and computed factors), Renewal Underwriting Worksheet (includes loss control activity, loss history and renewal pricing), Renewal Profitability Calculation, UTA Renewal Checklist, Underwriting Alert Form, Payroll Audits, Loss Control Summary (safety visits, results, assessment/analysis of risk), and Renewal quotes.

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Insurance brokers confirmed to BST that members sometimes would not be renewed by CRM. One cooperating broker furnished to BST a Broker Manual provided to his firm by CRM’s Vice President of Marketing, Sean McDonnell. The document was undated, but its contents reflect material produced as of May 2002. The Manual contained information on all CRM trusts. Section 6 of the Manual is entitled Customer Renewals and contains a brief, two-step renewal process for brokers to follow along with a sample renewal letter from CRM to the brokers alerting them of the renewal and requesting certain information. The two step process is described as follows: Step One: First Contact with the Brokers and Customers for Trust Renewal

Approximately 120 days prior to the renewal date of the client, CRM mails Customer Renewal Requests to each of it brokers

Broker is required to complete renewal form with estimated payrolls Broker is required to submit four years of currently valued loss runs, on behalf of the

client, so we can calculate an experience modification factor Step Two: CRM’s Underwriting and Administrative Internal Renewal Process

Underwriting reviews all customer information and recalculates experience modification factor

Underwriting will release a quote to the agent to present to insured Agent will be required to submit a Renewal Order to Bind Account is billed based on Annual Premium and broken down into a deposit and 10 equal

payments of the remaining Annual Premium Despite the existence of a formal renewal process, replete with instructions and forms, it remains unclear what specific “underwriting” criteria CRM used to terminate Trust membership beyond non-payment of premium. As reflected in the Trustee meeting minute excerpts above, non-payment of premiums was cited by CRM as the predominant basis for member termination. We selected a judgmental sample of 32 members terminated from the Trust, excluding those terminating as a result of the Trust’s dissolution. We reviewed the Notice of Termination of Employer’s Participation in Group Self-insurance Plan form for each of these members and found the following with respect to the reason for termination as stated on the form: Reason for Terminating Number % Non-payment of Premium 15 47 Per Insured’s Request 10 31

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Underwriting Reasons129 5 16 Out of Business 2 6 One broker opined that “every risk is individual” and that CRM looked at a client’s loss history, including dollar amount of losses and multiple losses. While it may be true that limited discretion by underwriters might be appropriate in evaluating a member’s suitability for renewal, and certainly initial membership, there must be certain benchmarks that limit this discretion to prevent completely arbitrary underwriting decisions based on purely subjective factors such as size of annual premium, representation on Board, etc. As noted in the Safety section of this report, CRM represented that safety issues were used in making annual renewal decisions, however, BST found that site visits were not made annually to all members. Losses incurred typically are considered for renewal, and it would seem that loss ratios (losses/contributions) should be a significant factor in making renewal decisions. However, a review of member data revealed instances where members were renewed despite having consistently high loss ratios.

Morgan Fuel remained in the Trust for seven years with an average loss ratio of 280.31%, with a net negative contribution of $2,276,771. The owner was Mark Bottini, a Trustee, and part owner of CRM.

Riccelli Enterprises remained in the Trust for five years with an average loss ratio of 183.39%, with a negative contribution of $2,953,740. The owner was Richard Riccelli, a Trustee.

One member (with a total contribution of $8,049,994) remained in the Trust for five years with an average loss ratio of 182.96%, with a net negative contribution of $6,678,625.

One member remained in the Trust for four years with an average loss ratio of 301.71%, with a net negative contribution of $2,194,494.

One member was in the Trust for seven years with an average loss ratio of 201.57%, with a net negative contribution of $1,056,409.

CRM’s failure to establish and apply uniform renewal procedures, combined with the observations noted in the underwriting and discount sections, and the size of the member deficit as of September 30, 2006, suggests that CRM appears to have been in violation of NYCRR 317.8, which required that CRM make every effort to preserve the integrity, strength, and liquidity of the fund so as to permit the timely and complete payment of all claims and liabilities. In summary, the documents reviewed and the interviews conducted show that:

129 The underwriting reason was not specified on the forms. A letter from CRM to one of the employers terminated indicates that the policy is being cancelled for “Underwriting reasons” and that “your operations do not fit the guidelines of the trust due to Underwriting reasons.” No further specificity is provided in the letter.

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The Board of Trustees performed no active role in determining if existing members were suitable for annual policy renewal;

CRM failed to establish and apply uniform, written criteria to determine members’ suitability for renewal, and

The continuation of members whose claims consistently exceeded their annual premiums contributed to the members’ deficit.

L. Member Deficit Each of the TIWCT members is jointly and severally liable for the expenses and obligations of the Trust during the period the member was in the Trust. The members’ obligations are expressly noted in the Joinder and Indemnity Agreements as well as the Trust and Service Agreements. Section 317.9 (b) (7) of the NYCRR (effective January 31, 2001) stipulates that a group self-insurer may be required to levy an assessment upon a group or its members (if the group is under-funded) to make up the deficiency, i.e., if the assets of the Trust are determined to be insufficient to enable the Trust to discharge its legal liabilities. A significant member deficit reportedly did not exist until December 31, 2006, at which point the audited member deficit was $5,735,694. However, this appears to be primarily due to the fact the reserve estimates may have been suppressed by CRM during the prior years, as beginning around this time, the WCB had begun questioning SGRisk about their estimates, and Gruber started making adjustments to his calculations, including the use of New York State loss development factors and more current loss development factors. Interestingly, as part of our analysis of another group self-insured trust for which CRM was the administrator, another claims consultant determined that CRM was artificially reducing claims reserves in an effort to improve the trust’s financial position, and that the suppression of the reserve liabilities without supporting documentation was “negligent.” When asked by BST whether these claims management practices were specific to this other trust, the consultant replied that it would be very difficult for CRM to have different claims processes for each separate trust, and that the same claims handling processes and approval procedures would have been similar “across the board.” Based upon these statements and other observations, it appears that CRM may have been reducing reserves to maintain the 90% trust ratio which would have allowed them to expand the membership and maintain current discount levels, both of which would have monetarily benefited CRM. The consultant also believed that CRM’s Claims Department was not independent and that too much control was being exerted by CRM’s Underwriting Department on claims issues, which he felt was inappropriate.

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In summary, CRM may not have taken the appropriate measures to reduce the Trust’s eventual losses and may have engaged in potential conflicts to the detriment of the Trust. Despite the statutory requirements to levy an assessment, we determined that the Trustees and CRM apparently did not have a pro-active written plan to address member deficit assessments. However, it appears that assessments did not have to be seriously considered until December 31, 2006, at which point the Trust’s under-funded status was significant. It does not appear that a remediation plan was developed to address the member deficit. As of December 31, 2006, TIWCT levied a special 8% assessment of net member contributions/premiums which was reported as revenue, and subsequently billed to the members on their invoice for the 2007 policy year. The Board of Trustees passed a resolution on May 18, 2007, making the assessment effective January 1, 2006. The assessment was reported as a receivable on the December 31, 2006 audited financial statements; however, the recording of this assessment as a year end receivable appears to have been done to shift a portion of 2007’s income into 2006, as there was no separate billing for this assessment, and according to the audited financial statements, member payments through March 31, 2007, appear to have been deemed payments on the assessment – which therefore qualify as a regulatory asset and would help TIWCT meet the regulatory 90% funding threshold. M. Claims Handling Procedures/Practices The handling and processing of claims is an integral part of the administration process. Section VII of the Trust Agreement indicates that CRM is responsible for the claims handling process. BST hired a third-party claims vendor to review the TIWCT claim files and determine whether claims were handled in accordance with written policy and industry standards, whether benefits were paid in a timely manner, and whether claims were appropriately reserved and adjusted as the cases matured. The 2000 TIWCT Trust and Service Agreements noted that CRM:

Shall administer all Worker’s (sic) Compensation claims and provide Risk Management Services on behalf of the participating employer.

Must determine the amount and duration of any benefit to be paid under the Trust, and all reserves established and maintained must be done so by the Administrator and communicated immediately to the participating employee.

Shall, on a monthly basis, provide to the Board of Trustees, a report, which indicates the number of claims and the amounts paid on each claim for the preceding month. During the life of any claim made against the Trust, the Administrator shall maintain a separate claim file.

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BST retained KBM Management, Inc. (KBM) to conduct a claims audit of TIWCT and other trusts managed by CRM. As part of their audit, KBM examined twenty-eight TIWCT claims files. Their analysis of these claims resulted in the following findings (see Exhibit 41):

Many of the large dollar files reviewed did not include stop loss notification, potentially exposing the Trust to unlimited risk.

The files reviewed contained data indicating multiple independent medical examinations (IME’s) were ordered by Eimar, CRM’s affiliate. In many cases the documentation of disability and treatment contained in the files did not warrant this action. The frequency of IME’s appeared high relative to the conditions of the claimants and that many of the results of the IME simply parroted the findings of the attending physician.

KBM opined that it appears “unscrupulous” to order excessive IME’s in fairly short time frames when the company providing the IME service has common ownership with the Administrator ordering the exams. There is at least the appearance of a conflict of interest in an Administrator owning service providers to whom they are referring.

There were several instances where the C-250 form was not filed timely by CRM or that CRM did not obtain the medical records to substantiate a potential claim for reimbursement. The failure to do so prohibits the Trust from receiving potential reimbursement for previous injuries.

Of the claims reviewed, sixteen (16) contained financial errors. Claim costs were inflated as a result of poor administration through the payment of penalties for late filings, loss of other party payments, ill advised file settlements, and unnecessary or excessive administrative costs.

The transfer of information to the new TPA by CRM was haphazard and unorganized. The improper scanning of files creates a significant problem relating to future examination of the Trust.

KBM’s audit of other CRM administered trusts also found that CRM failed to provide quality claims processing on behalf of those trusts. KBM also cited possible conflicts of interest with regard to CRM engaging Eimar, its affiliate, to assist CRM in the claims process. BST also examined the relationship between the claims filed and the recoveries emanating from the reinsurance polices. According to TIWCT audited financial statements, there were no reinsurance proceeds received as of December 31, 2006. The audited financial statements also reveal the reinsurance premiums for the six-year period ended December 31, 2006, amounted to approximately $17,125,000, of which approximately $13,320,000 was paid to NYMAGIC (New York Marine and General Insurance Company), and Twin Bridges during the three-year period ended December 31, 2006. The latter observation is especially intriguing given the fact that CRM told the Trustees at the May 2006 Board of Trustees meeting that their IPO would allow Twin Bridges to offer reinsurance to the group self-insured trusts. However, Twin Bridges had been indirectly providing coverage to the TIWCT and other CRM administered group self-

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insured trusts for at least two years prior. CRM’s unilateral decision to provide reinsurance to the TIWCT through CRM’s affiliate clearly benefited CRM and its owners.130 As noted in the Member Deficit section, another consultant determined CRM was artificially reducing claims reserves with regard to another trust in an effort to improve the trust’s financial position, and the consultant indicated that the same claims handling processes and approval procedures for TIWCT would have been similar to that of the other trusts. He also believed that CRM’s Claims Department was not independent and that too much control was being exerted by CRM’s Underwriting Department on claims issues, which he felt was inappropriate. The aforementioned Midlands’ 2003 audit of TIWCT also included a review of the claims handling area. Their comments/recommendations are as follows:

“We believe a captioned reporting document which is part of the paperless claim file

and which is comprehensive as to the entire claim, but which includes the most current status of claim, would be helpful. We believe it will be a challenge to CRM Claims Department to maintain the quality level which they have already reached while watching the different Trust programs go through significant growth”;

All adjusters should be licensed and continuing education requirements for licensing should be completed annually;

Flags should be installed in the claims system to alert claim handlers to the category injuries, to nine months or more of disability payments, and to 50% of Retention Reserve levels. This would help ensure that excess reporting will be accomplished on a timely and ongoing basis, and

Loss run capabilities should be enhanced to allow production of loss runs with at least the following variables: files reportable to excess carriers, and a different level of total incurred dollars.

In summary, CRM may not have taken the appropriate claims handling measures to reduce the Trust’s eventual losses and may have engaged in potential conflicts to the detriment of the Trust. N. Miscellaneous In analyzing CRM’s ability to effectively manage TIWCT’s operations, BST examined the extent to which the WCB imposed penalties upon CRM due to CRM’s failure to file certain documents, including reports, late awards, and form C-8. Our analysis revealed that CRM

130 It is unclear whether the price the Trust paid for the excess insurance was competitive in relation to the prior coverage.

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incurred penalties of $31,982.80 relating to their failure to file these forms/documents as they related to TIWCT.131 New York State Workers’ Compensation Rules and Regulations 317.8e notes that a group self-insurer, its trustees, its group administrator or other agent(s) shall not distribute dividends or excess earnings if such distribution reduces total assets below total liabilities, and that prior written notification shall be provided to the WCB Chair at least thirty days prior to the issuance of any such distribution. The April 27, 2005, TIWCT Board of Trustees meeting minutes indicate that CRM told the Trustees that the TIWCT members would be receiving a $175,000 dividend, apparently so the Trust did not have to pay $70,000 in taxes. After listening to CRM’s discussion, Trustee Ricelli made a motion to declare a dividend. The motion was seconded by Trustee Diati and approved via a vote by Trustees Diati and Riccelli. There were no other Trustees present at the meeting. WCB records and a newspaper article reveal that during July 2005, CRM produced dividends of $175,000 for the TIWCT.132 However, the dividend payout was not previously approved by the WCB. CRM officials subsequently provided the WCB with a schedule of the planned TIWCT dividends on August 10, 2005, and noted that the dividends had not been paid as of that date. CRM officials indicated in their correspondence to the WCB that the dividends would be issued within a week. Approximately $172,000 of dividends were issued to the members during December 2005. The failure to appropriately notify the WCB of the planned dividend must also be questioned in light of the fact that less than six months later, CRM reported that the TIWCT had a members’ deficit of approximately $950,000, which more than likely was understated due to the reserving practices and questionable actuarial reserve estimates reported by CRM on the Trust’s year end financial statements. BST also examined TIWCT’s Trust and Service Agreements to determine whether CRM has, or may have, the obligation to provide administration services for the life of any claim made against the Trust. CRM's obligations under the Service Agreements included the following:

1. “Upon admission to the Trust, the Administrator, or Administrator's duly qualified subcontractor, shall administer all Workers' Compensation claims and provide Risk Management Services on behalf of the participating employer.”

2. “In furtherance of the administrative claim services provided by the Administrator, the Administrator shall, upon notice of an injury to an employee of a participating employer,

131 They include but are not limited to 25(3)(E), 25(3)(F), 25(1)(D) and 25(1)(E) penalties. 132 This appeared in the July 25, 2005, edition of the Poughkeepsie Journal.

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make a determination as to whether the employee's injury or illness is compensable.... Upon determining that said injury or illness is compensable, the Administrator must then determine the amount and duration of any benefit to be paid under the Trust. ...All claims paid by the Trust will be documented by the Administrator who shall establish, document and file said claims....”

3. “During the life of any claim made against the Trust, the Administrator shall maintain a separate claim file. Upon closure of any claim, the Administrator shall maintain a closed claim file for a period not less than forty-eight months.”

Section VII of the Trust Agreement sets forth the “Administrator's Responsibilities”, which are identical to those set forth in the Service Agreement. However, these responsibilities are prefaced by the statement: “The Administrator's obligation to perform hereunder continues throughout the term of this Agreement...” The term of the Trust Agreement is not expressly set forth, but Section XI of the Trust Agreement sets forth specific provisions in the event the Trust is terminated. According to Section XI of the Trust Agreement, “In the event that this Trust is terminated...the Trust Fund shall guarantee benefits as prescribed by the New York State Workers' Compensation Law to all member employers [sic].” This section further provides, “All balances remaining in the Fund shall be utilized to fulfill the New York State Workers' Compensation Law obligation of the Participating Members for the fiscal year during with the Fund existed. Not until all claims for the fiscal year during which self-insurance applied are satisfied, may the remaining balance in the Trust be distributed to the Participating Employers by pro-rata fashion determined by the Administrator. Upon payment to the Participating Members of the remaining balance and after divesting itself of the assets of the Trust Fund, the Board of Trustees and Administrator shall be relieved from all further liability.” Since the Trust has a deficit, distributions to the members could not have occurred because the claims could not be satisfied first. This fact arguably reinforces the last sentence of Section XI in that CRM is not relieved of further liability because (1) claims remain unsatisfied. Therefore, the Trust Agreement arguably remains in effect until this event occurs. CRM is not a signatory to the Trust Agreement; however, CRM had agreed and consented to act “pursuant to the terms and provisions” of the Trust Agreement in the Trust Agreement's recitals. Regardless, the Service Agreement, to which CRM is a signatory, notes that there are automatic renewal provisions, but the Service Agreement can be terminated by CRM upon 90 days written [notice] to the Board of Trustees. It does not appear CRM ever gave written notice to the Board of Trustees.

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As described above, the Trust Agreement apparently remains in effect until claims are satisfied. In addition, while CRM surrendered its license, it does not appear that the Board of Trustees ever voted to terminate the Service Agreement because of that. In other words, because these bases for termination require affirmative action of the Board of Trustees, and because the Board of Trustees did not so act, the Service Agreement seemingly remains in effect. As noted, CRM was required under the Service Agreement to maintain claim files for the life of claims. Inherent in maintaining those files is providing administration of those claims. CRM was paid in advance for those services by receiving fees charged against the manual premiums when paid into the Trust (subject to the discounts). Therefore, it appears that CRM would have the obligation to provide or pay for administration services for the life of any claim made against the Trust. Accordingly, the WCB should consider seeking restitution from CRM for the costs associated with the continuing administration of claims made against the Trust before CRM surrendered is license. Interestingly, SGRisk’s March 22, 2004, actuarial report of TIWCT notes that:

The cost of handling the life of a claim is included in the annual fee paid by the Trust to its Administrator.

The same statement was noted in SGRisk’s April 17, 2006, actuarial report of TIWCT - which was delivered to CRM, and was most likely relied upon by the WCB and UHY (the Trust’s auditors) when they obtained copies of these documents. However, Gruber, the President of SGRisk, noted in his May 22, 2007, actuarial report of TIWCT, that it was his past understanding that CRM’s claims administration fees were on a “life of claim basis” but CRM now asserts that its administrative fees are on a life of contract basis,” thereby suggesting that CRM is not responsible for the administration of claims beyond its contract with the Trust, which if renewed in accordance with the terms of the Service Agreement, would suggest the contract was in effect at least until December 2010.133 It is interesting to note that despite Gruber’s statements in the 2004 and 2006 TIWCT actuarial reports, neither CRM nor UHY refuted Gruber’s assertion that “The cost of handling the life of a claim is included in the annual fee paid by the Trust to its Administrator.” Furthermore, it is unclear how Gruber, a credentialed actuary, could have misinterpreted CRM’s claims handling responsibilities for TIWCT and other trusts administered by CRM, especially since he had been providing these services for TIWCT and other trusts since at least 2001.

133 The Service Agreement was dated December 27, 2000, and provided for successive and automatic five-year renewals.

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Of further interest, and assuming Gruber misunderstood and was not mislead, it is unclear why CRM did not accrue any unallocated loss adjustment expenses or recognize that Gruber did not estimate any unallocated loss adjustment expenses. BST attempted to perform additional procedures as they related to the collateral posted on security deposits, TIWCT accounts receivables, dividends, cash transfers, excess claims and recoverables, and the dissolution of TIWCT’s assets. However, the limited documents available, the timing of the receipt of certain documents, and the inability to interview CRM officials prevented us from conducting an in-depth analysis. Accordingly, we were unable to provide any substantive input with regard to these issues.

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SCHEDULE OF EXHIBITS EXHIBIT # DESCRIPTION

1 CRM letter dated November 12, 2000 to WCB re Trust formation 2 Application for Group Self-Insurance

3 Agreement and Undertaking of Employer Group as a Self-Insurer

4 TIWCT Trust & Service Agreement, December 27, 2000

5 WCB Letter to Rakoff, November 21, 2000

5A Amendment #1 to the Trust Agreement

6 WCB Conditional Approval letter, December 7, 2000

7 WCB approval of TIWCT self-insured status, January 8, 2001

8 Panichi Holding Corp. incorporation documents, January 1995

9 J. Constantino, Esq. letter to Daniel Hickey, Jr., December 5, 2001

10 TIWCT Prospective Client Form

11 Joinder and Indemnification Agreement (unsigned)

12 Application for Participation in a Group Self-insurance Plan (unsigned)

13 CRM TIWCT Presentation Slides

14 TIWCT Membership Roster as of November 12, 2001

14A Undated TIWCT Membership Roster

15 TIWCT Manual Premium Report as of October 23, 2001

16 TIWCT Workers’ Compensation Insurance Quote for Royal Carting

Service for the year ended January 1, 2003

17 CRM Trusts’ Board of Directors List

18 “Pro-forma” Trust and Service Agreements (unsigned)

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19 Trust Agreement from J. Constantino, Esq. with Emil Panichi’s signature

20 J. Constantino, Esq. letter to Daniel Hickey, Jr. re Panichi’s desire to join TIWCT, December 19, 2001

21 Agreement and Undertaking of Employer Group as a Self-Insurer with Emil

Panichi’s signature (undated)

22 WCB letter to Emil Panichi and Joseph Winters re TWCT membership, January 18, 2002

23 J. Constantino, Esq. letter to Daniel Hickey, Jr. questioning Panichi’s

TIWCT membership, January 24, 2002

24 Message slip re Daniel Hickey, Jr. acknowledging Panichi not a TIWCT member, January 28, 2002

25 Martin Rakoff letter to WCB identifying Panichi and Winters as TIWCT

Trustees, January 4, 2001

26 TIWCT Membership Roster - 12/27/00-10/31/01

27 J. Constantino, Esq. letter to L. Viglotti Esq. requesting confirmation of Panichi not being a TIWCT member, July 30, 2008

28 Daniel Hickey, Jr. letter to J. Constantino, Esq. confirming Panichi not ever

member of TIWCT, August 14, 2008

29 February 2009 letter to Panichi from the WCB

29A March 2009 letter from Panichi’s broker 30 February 24, 2009 letter from Constantino to Hickey, Jr.

31 Designation of Trustees as of 1/17/08

32 TIWCT By-laws (undated)

33 PwC Report – 2003

34 PwC Report on Rates and Reserves as of 12/31/02, March 4, 2004

35 PwC Level II Review as of 12/31/02 (Draft), August 4, 2004

36 WCB Level I Report 2004

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39 PwC Actuarial Analysis - June 2007

40 PwC Level II Report - November 2007

41 KBM Claims Report