The policyholders who sued State Farm Mutual Automobile Insurance Co. and its in-house counsel for racketeering have cleared a major hurdle after a federal appeals court denied State Farm's petition to block the class action.
The appellate judges on Dec. 8 also ordered to be released several documents that had been under seal, including an expert's 145-page report that tracks a multimillion-dollar money trail at the heart of the racketeering charge. The trail traces the dark money from the company through various groups and then allegedly into the campaign of a state Supreme Court justice who eventually ruled in State Farm's favor on a billion-dollar case.
In denying to hear State Farm's appeal of class action certification, the U.S. Circuit Court of Appeals for the Seventh Circuit returned the case to U.S. District Court in East St. Louis, Illinois, to proceed with trial.
State Farm spokesman Justin Tomczak issued this statement: "We respect the court's decision … We will continue to vigorously defend against this case, which improperly and erroneously attacks not only State Farm, but also the integrity of our legal system."
"Under plaintiffs' theory, any company that contributes to any organization could be deemed solely responsible for any contribution that organization makes to others, " says Tomczak. " This assault on the First Amendment would have a far reaching, chilling effect on corporate and institutional philanthropy, sponsorship and partnership."
What's behind the case
The story of why the policyholders accuse State Farm of violating the Racketeer Influenced and Corrupt Organization Act was detailed in Corporate Counsel magazine last month, titled "Is Justice for Sale in Illinois?"
According to the suit, State Farm manipulated the 2004 election of Lloyd Karmeier to the Illinois Supreme Court so that he could allegedly help overturn a $1 billion state court verdict against the company. State Farm denies the allegation.
The newly released documents say Karmeier originally planned to abstain on State Farm's appeal of the state judgment, but changed his mind when the state Supreme Court deadlocked, which would in effect have affirmed the verdict. He then refused the plaintiffs' request to recuse himself, and voted in State Farm's favor, overturning the judgment.
The new documents lay out more completely the roles of State Farm in-house counsel William Shepherd, and of Edward Murnane, the man Shepherd helped hire to, in effect, recruit Karmeier and direct his campaign for the judgeship. Shepherd and Murnane are co-defendants with the company in the class action racketeering suit.
The documents also discuss roles played by then-State Farm general counsel Kim Brunner and in-house counsel David Hill. At the time Brunner was working with the U.S. Chamber's Institute for Legal Reform (ILR), serving on its three-person audit committee task force overseeing the ILR budget. State Farm contributed some $2 million to the ILR in 2003-2004—money which the plaintiffs claim was funneled back to the Karmeier campaign.
The documents contain numerous emails, although some remain under seal. In one that was released, Murnane advises Intel Corp. to pass its campaign contribution to Karmeier through the U.S. Chamber to maintain secrecy about its donation. "There are some other options for contributions in Illinois, and I know you have had some discussions with the U.S. Chamber and they certainly are being helpful to us in the overall cause," Murnane writes.
State Farm's Hill was appointed to the ILR elections task force, the documents say, to "provide recommendations as to important judicial races to be funded by the ILR." He also served on the board of directors of the American Tort Reform Association, which also allegedly funneled money to Karmeier's campaign.
Forensic accountant's report follows the money
But perhaps the most damning of the documents, as far as State Farm is concerned, is the report filed by forensic accountant Thomas Myers, a nationally known expert who trains government employees on fraud and other financial white-collar crime.
"The results of my research and analysis in this matter overwhelmingly support the allegation that defendants played a critical, albeit clandestine, part in nearly every facet of Justice Karmeier's campaign," Myers writes. "Despite this, State Farm was so confident that it had hidden its extensive involvement in the Karmeier campaign that it brazenly remonstrated to the Illinois Supreme Court, 'State Farm, itself, made no contribution to the campaign.'"
Myers' report graphically displays a money trail showing State Farm paid out over $3.5 million through nine organizations that eventually made major contributions to the Karmeier campaign. The organizations included the Illinois Republican Party; Illinois Chamber and its political action committee; U.S. Chamber's Institute for Legal Reform; Illinois Jobs Coalition; Civil Justice Reform Group; American Tort Reform Association; Illinois Civil Justice League, which Shepherd founded and Murnane headed, and its political action committee JUSTPAC.
One example from many in the report: State Farm made three $50,000 contributions to the Illinois Jobs Coalition during the peak of the Karmeier campaign between May and September 2004. Each was invoiced to then-State Farm CEO Edward Rust Jr., approved by in-house counsel Hill, and made reference to in-house counsel Shepherd.
The final contribution was accompanied by a letter from Shepherd stating that the contribution could not be used for political purposes. However, on the same day that State Farm wrote its final $50,000 check, for a total of $150,000 to the coalition, the group transferred $150,000 to JUSTPAC, which in turn transferred the same amount to Karmeier's campaign. Myers includes copies of the cancelled checks with names and dates.
But State Farm's Tomczak remains optimistic. "Plaintiff's unsuccessful assertion and reassertion of these allegations should not obscure the fact that State Farm conducts business with integrity, in the best interests of our customers," he says. "Numerous courts of law have rejected these allegations, and we trust they will be rejected again when this case is resolved."
It is true the Illinois Supreme Court repeatedly rejected allegations that State Farm manipulated Karmeier's election. But no court has yet ruled on the racketeering claim, which is supported by the new money trail evidence in Myers' report.
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