An ongoing federal investigation in North Carolina has revealedthat a small reinsurance broker and confederates scammed twoself-insurance groups and a captive insurer out of $39 million inworkers' compensation premiums, according to governmentofficials.

The broker--Thomas Gerard Reitz, of Alpharetta, Ga.--two weeksago pleaded guilty in U.S. District Court in Charlotte, N.C., tomail fraud and money-laundering charges that carry a maximum termof more than 20 years.

The FBI said the investigation is ongoing, and Mr. Reitz' pleaagreement calls for him to testify "against any co-defendants"charged by prosecutors. The probe may go on four months "or more,"noted Suellen Pierce, a representative for the Charlotte U.S.Attorney's office.

According to the plea document and a federal bill of informationfiled against Mr. Reitz, the broker and otherconspirators--including a third-party administrator for workers'comp insurance funds and an executive of a wireless data solutionsfirm--operated their scheme from 2003 to about October 2006.

The victimized companies, according to the documents, were twoworkers' comp self-insured employer groups based in NorthCarolina--Phoenix Fund and the North Carolina Chamber of CommerceSelf-Insurers Fund.

Mr. Reitz, who operated Reitz Group, along with confederatesmanufactured phony reinsurance contracts for those two companies"and others," the documents stated. It was learned that one of theothers was the National League of Cities Mutual Insurance Company,a Vermont captive based in Washington, D.C., which is owned by 26state pools.

Bill Heberton, president and chief executive officer of NLC-MIC,confirmed his company was involved in the case. He said he believedhis firm was actually the only other insurance concern hit by Mr.Reitz' activity. As a result of being notified by the FBI, his firmhas reviewed its base of claims. "We haven't found anything thatcould damage us," he said.

From speaking with the FBI, Mr. Heberton said he believed theauthorities might make a substantial recovery. In his pleaagreement, Mr. Reitz has agreed to make restitution.

NLC-MIC originally dealt with Mr. Reitz as part of a largebrokerage, and because of that past relationship, he was given ameasure of trust when he approached the captive a few years lateroffering to place their coverage.

Through the brokerage he had created in his name, Mr. Reitz madelegitimate placements for NLC-MIC for a number of years, and thenafter a one-year hiatus, the fraud began, Mr. Hebertonexplained.

He said that when the company learned of Mr. Reitz' activity inwhat he called "a very high-level program," they had contacted theVermont Insurance Department, which notified the NationalAssociation of Insurance Commissioners.

According to a source, the Vermont Insurance Department's annualaudit failed to pick up Mr. Reitz' fraud because they checked onthe captive's reinsurance coverage by sending a letter to Mr.Reitz.

Mr. Heberton confirmed that the state audit failed to findanything, but pointed out that two private firms during annualaudits also failed to reveal a problem. The Vermont InsuranceDepartment had no comment on whether the case would result in anychange in their operational procedures.

Jeff Trendell, North Carolina's deputy insurancecommissioner--whose agency uncovered Mr. Reitz' activity during anormal audit--said they had gone "beyond the intermediary" to checkon reinsurance. He said the Phoenix Fund has been taken over by thestate and is under rehabilitation by his department.

A North Carolina Insurance Department representative, ChrissyPearson, said Mr. Reitz' broker's license has not been renewed. AnFBI representative in Charlotte, while confirming the case iscontinuing, would say nothing more.