SENATE JUDICIARY COMMITTEE March 6, 1998 1:35 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Drue Pearce, Vice-Chairman Senator Sean Parnell MEMBERS ABSENT Senator Mike Miller Senator Johnny Ellis COMMITTEE CALENDAR SENATE BILL NO. 201 "An Act relating to prohibiting recovery of damages and prohibiting a remedy to a person in a civil action." - HEARD AND HELD CS FOR HOUSE BILL NO. 7(JUD) "An Act authorizing establishment of community dispute resolution centers to foster the resolution of disputes between juvenile offenders and their victims, and providing immunity from civil suits for youth courts and for members of the boards of directors, employees, volunteers, and members of youth courts." - HEARD AND HELD PREVIOUS SENATE COMMITTEE ACTION SB 201 - See Judiciary minutes dated 10/10/97 and 1/28/98. HB 7 - See Judiciary minutes dated 2-4-98 and 3-4-98. WITNESS REGISTER Mr. Joel Loundsbury Staff to Rep. Brian Porter State Capitol Juneau, Ak 99801-1182 POSITION STATEMENT: Commented on HB 7 Ms. Sharon Leon Anchorage Youth Court PO Box 102735 Anchorage, Ak 99510 POSITION STATEMENT: Supported HB 7 Ms. Linda Johnson Anchorage Youth Court PO Box 102735 Anchorage, Ak 99510 POSITION STATEMENT: Supported HB 7 Mr. Scott Calder PO Box 75011 Fairbanks, Ak 99707 POSITION STATEMENT: Commented on HB 7 Ms. Virginia Espenshade PO Box 1752 Homer, Ak 99603 POSITION STATEMENT: Supported HB 7 Ms. Pat Davidson Acting Auditor, Legislative Audit PO Box 13300 Juneau, Ak 99801 POSITION STATEMENT: Commented on SB 201 Mr. Merle Jensen Legislative Audit PO Box 113300 Juneau, Ak 99801 POSITION STATEMENT: Commented on SB 201 ACTION NARRATIVE TAPE 98-14, SIDE A Number 001 CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to order at 1:35 p.m. and announced SCS for CSHB 7(JUD) as the first order of business. HB 7 - VICTIM/JUVENILE OFFENDER MEDIATION CHAIRMAN TAYLOR noted that the newest version of HB 7 limits immunity to those who work in a quasi-judicial capacity, mediators, and those performing a discretionary function. SENATOR PARNELL moved the adoption of SCS for CSHB 7, judiciary version "L." Without objection, it was so ordered. SENATOR PARNELL briefly touched on the two sections of immunity that remained within the bill and provide discretionary immunity to the board of directors and mediators. SENATOR PARNELL asked MR. JOEL LOUNDSBURY if state employees were held liable for discretionary or non- discretionary functions. MR. LOUNDSBURY did not know and CHAIRMAN TAYLOR explained that discretionary functions are the decision making, designing and planning phases of any given thing. Non- discretionary functions are the resulting actions implementing the policy or decision of the discretionary function. CHAIRMAN TAYLOR said there is always debate in the process of determining whether any given thing falls under the category of a discretionary act. MS. VIRGINIA ESPENSHADE testified via teleconference from Homer. MS. ESPENSHADE, the coordinator of the Kenai Peninsula Youth Court, stressed the court's reliance on a small paid staff and lots of volunteers. She expressed concern that limited immunity will not cover these volunteers and will not protect the bulk of the work that the court does. Ms. ESPENSHADE mentioned that not all youth courts are run by nonprofit corporations and those that are not have boards of directors who are the least involved in the actual operations of the court. She mentioned that out of eight or nine attorneys present at any given court hearing, only three or four are acting in a quasi-judicial function. She wanted to be sure the committee understood how limited the new immunity provisions are. CHAIRMAN TAYLOR replied that he clearly understood this dilemma, but knew that discretionary functions are still immunized even if the blanket immunity previously in the bill no longer exists. MS. ESPENSHADE asked if the immunity was qualified and CHAIRMAN TAYLOR said it was qualified by the terms wanton and willful, but negligence was not included and he believes immunity from negligence is not good public policy. MS. ESPENSHADE asked the committee to consider defining the breadth of the immunity in terms of an individual's actions as they relate to their job at youth court. CHAIRMAN TAYLOR responded by saying police officers, for example, are not immunized for negligence. Accidents happen and fair compensation should be required. MS. ESPENSHADE said youth court's activities are limited to certain hours and again she wanted to convey how limited this immunity is. She expressed concern that this limited immunity may be interpreted as an explicit exclusion of immunity for those not covered. She stressed that youth court is run on volunteers and hopes the state can find some way to support them. CHAIRMAN TAYLOR said he did this type of work as a judge, with the help of volunteers, and he could not escape the potential of civil liability. He said if an accident occurs, it would be almost impossible to explain this immunity to the family of the injured victim. MS. ESPENSHADE indicated that the highest potential for this type of accident would be in the work service component. She suggested perhaps this component could be excluded and immunity cover youth court workers only up until the point of sentencing. She emphasized they were just hoping for more coverage. CHAIRMAN TAYLOR said they have tried to break it down to the extent that the board and any quasi-judicial members are covered. He said if her logic was extended, it would mean all community service workers on probation should be covered. MS. ESPENSHADE replied that, as she reads the immunity now, there is no immunity outside of the courtroom setting. CHAIRMAN TAYLOR asked for an example of what type of liability might be incurred in these other phases and MS. ESPENSHADE could not. MS ESPENSHADE suggested that because she was unable to come up with a single hypothetical case of liability, CHAIRMAN TAYLOR should not worry about granting the requested immunity. MR. SCOTT CALDER testified via teleconference from Fairbanks and made some general comments on youth courts and said he feels there may be too much immunity granted now. MS. SHARON LEON, Executive Director of the Anchorage Youth Court, testified via teleconference from Anchorage and said all youth court activities are supervised by carefully chosen volunteers who would not be covered until they actually arrive at work. CHAIRMAN TAYLOR commented that these on-site volunteers would be covered by worker's compensation and a private insurance policy. CHAIRMAN TAYLOR asked if they carry liability insurance. MS. LEON replied yes, and mentioned they also carry Directors and Officers insurance and auto insurance for employees driving personal vehicles when on youth court business. MS. LINDA JOHNSON, a contract attorney for the Anchorage Youth Court, said the bill's new version was distressing in that the youth court is not covered as an entity and discretionary activities by youth court staff are also not covered. MS. JOHNSON mentioned that the board does not engage in day to day court activities and do not carry out many of the discretionary functions of the court. She mentioned that the youth court has all the components as well as the confines of the legal system. She believes that excluding the staff does a disservice to the youth court, which is carrying out the state's work. CHAIRMAN TAYLOR asked if MS. JOHNSON is aware of any immunity enjoyed by court system staff and volunteers. MS. JOHNSON replied that court employees are covered by immunity for discretionary functions and CHAIRMAN TAYLOR said that was still covered in the bill; the committee was trying to get at the discretionary functions of the courts as opposed to the support activities surrounding these decision-making functions. MS. JOHNSON asked how the discretionary functions of the board of directors would be different from those of a staff member. CHAIRMAN TAYLOR said that staff would probably be covered, along with the person who directed their actions, by the doctrine of respondeat superior, to the extent that they were carrying out a legitimate discretionary function as authorized by the board of directors. MS. JOHNSON explained that her complaint was specifically that only board members, and exclusively board members, would be covered by discretionary immunity. SENATOR PARNELL commented that maybe they should give the bill some more thought. CHAIRMAN TAYLOR agreed. CHAIRMAN TAYLOR announced that SB 201 would be discussed next. SB 201 - PROHIBIT RECOVERY BY WRONGDOER CHAIRMAN TAYLOR noted that representatives from Legislative Budget and Audit were in attendance to present their report on the World Plus scheme. MS. PAT DAVIDSON, Acting Auditor, presented to the committee a verbal overview of the memorandum detailing the critical events in the World Plus scheme. She said the request she received was for a time line detailing the financial arrangements of World Plus and she provided the committee with this time line as well as letters sent to the Division of Banking, Securities and Corporations (BSC). CHAIRMAN TAYLOR asked if the letters, received by BSC, were in response to inquiries made by BSC. MS. DAVIDSON did not believe that these letters were solicited by BSC but that the owner of the company or her attorney may have directed these individuals to submit them. CHAIRMAN TAYLOR asked if, to the best of her knowledge, these letters were unsolicited by BSC and they were motivated by someone else. MS. DAVIDSON said yes. PAT DAVIDSON mentioned that, due to the ongoing civil and criminal litigation surrounding this case, only public information was used in the compilation of this report. She said they used information from the Department of Commerce and Economic Development, court documents and newspaper accounts for this report. MS. DAVIDSON identified Ms. Raejean Bonham as the owner/operator of World Plus Inc. (WPI) and Mr. Hompesch as her attorney as well as attorney to WPI. MS. DAVIDSON stated that the memorandum had one recommendation, that being that the Attorney General (AG) should consider asking a special prosecutor to determine if any additional state, civil or criminal charges should be pursued. She said the AG has left the prosecution of these matters to the federal U.S. Attorney due to the involvement of some of his own staff, and to avoid any conflict of interest. She said the auditor's office believes that someone at the state level should also look at the case and determine if the charges that have been filed in this matter are sufficient. MS. DAVIDSON explained that a ponzi scheme is a type of structure that uses money from subsequent investors to pay off the initial investors. She said these schemes can be kept up for a while but generally fall apart under their own weight. MS. DAVIDSON explored the time line, beginning in April 1991 when a certificate of incorporation for WPI was issued to Ms. Bonham, and gave the following testimony: In September 1992, Ms. Bonham contacted BSC, saying she did not know that her program notes were considered securities. She stated at this time that she had 15-20 investors who seldom changed. However, according to court documents at that time, she continued to sign investment contracts. In November 1992, Mr. Hompesch submitted a letter to BSC requesting a notice of exemption, he enclosed a list of contracts and identified 35 active investors with a total investment amount of $560,000. According to court records, at that time, WPI had approximately 500 contracts with an outstanding aggregate balance of $8.6 million. Mr. Hompesch also submitted 24 letters to BSC expressing satisfaction with WPI. These letters comprise attachment B of the report. MS. DAVIDSON commented that a copy of WPI's tax returns would have provided a better picture of their financial situation. In February 1993 another schedule was provided by Mr. Hompesch to BSC intending to demonstrate that all investors as of 1992 had been paid off or were in the process. Court records indicate that, in fact, there were 259 investors with contracts totaling $4.8 million outstanding. Again Mr. Hompesch indicated to BSC sales of new contracts worth $300,000, within the limit of $500,000 imposed on WPI by BSC by that time . Again, court document indicate outstanding contract total about $16 million. MS. DAVIDSON noted that BSC had taken steps to limit WPI's contracts by May of 1994, reducing the number of allowed investors to 15 with contracts to total no more than $250,000. Again, court records show contracts far exceeding these limits. In January 1995, the IRS seized the records of WPI. In July 1995, Mr. Hompesch again submitted records to BSC showing WPI was within their limits. Again, court records showed this to be false. December 1995 found Mr. Hompesch notifying BSC that he was withdrawing his representation of WPI. WPI was dissolved in the same month and entered into bankruptcy, initially trying to claim chapter 11, but having that claim rejected, moved to chapter 7 bankruptcy. In February 1996 Attorney General Bruce Bothelo indicated he was going to allow the federal prosecutor to pursue the criminal aspects of this investment scheme. In April 1996, the federal Securities and Exchange Commission (SEC) filed a civil suit against Ms. Bonham and WPI for $2.1 million. By September 1996, the bankruptcy trustee had begun filing cases against investor seeking the return of illegal profits. In October 1997 the Attorney General stated a potential conflict of interest and declined prosecution of the case. In this same month, Ms. Bonham was indicted by a federal grand jury on 53 counts of mail fraud, 8 counts of money laundering, and 18 counts of monetary transaction violations. MS. DAVIDSON reported that this is the picture to date. She said that on page 4 of the report, they identify the lawsuits that have been filed against Ms. Bonham, Mr. Hompesch and certain WPI investors. Additionally, a lawsuit has been filed against the state, specifically BSC, regarding actions taken or not taken on behalf of some investors, according to MS. DAVIDSON. SENATOR WARD commented that the presentation was very thorough. He asked if the Attorney General had put in writing why he was not pursuing the case. MS. DAVIDSON repeated that, due to ongoing litigation, she could not talk about some things. She did say that the AG stated publicly that, due to a conflict of interest, he was allowing the federal court to pursue legal action. CHAIRMAN TAYLOR noted that the federal U.S. Attorney had recused some of their people ho had been involved in the scheme and put new people on to pursue the investigation. CHAIRMAN TAYLOR said it apparently went even further than that when the Justice department took over the prosecution form the U.S. Attorney. MS. DAVIDSON agreed and introduced MR. MERLE JENSEN for further comment. MR. JENSEN also agreed with CHAIRMAN TAYLOR, saying the U.S. Attorney's office started the investigation but, because they had a staff attorney who was involved with the scheme, the Department of Justice recused everyone on the case and began their own investigation. CHAIRMAN TAYLOR was glad someone had followed the required ethics. He asked why the state, through either the Attorney General or the Division of Banking, Securities and Corporations could not do the same thing as the Justice Department, meaning recruse the people involved and bring in new prosecuting district attorneys. MR. JENSEN said he would feel uncomfortable addressing that issue in its entirety, but could say there was no reason why it couldn't have been done, in his opinion. He was not able to comment on what had been done, but did say what the U.S. Attorney did was the appropriate thing to do. CHAIRMAN TAYLOR asked MS. DAVIDSON to review violations of state laws. MS. DAVIDSON pointed to page eight of the report and enumerated several violations to title 11 and title 45 of the state statutes. she said it appears these charges could be brought against Ms. Bonham. CHAIRMAN TAYLOR interjected that testimony he heard from Fairbanks alleged she had written at least $1.5 million in bad checks and she had not even been brought up on a bad check charge. MS. DAVIDSON indicated that Mr. Hompesch might possibly be liable for knowingly providing false information to BSC. CHAIRMAN TAYLOR clarified that Mr. Hompesch was the person who sent the unsolicited letters and the one who was continually submitting information to BSC saying WPI was within it's established limits. MS. DAVIDSON replied yes. CHAIRMAN TAYLOR commented that someone must have relied upon this information or would have done a more thorough investigation. MERLE JENSEN noted that it is the practice of BSC to rely on counsel for information regarding securities. PAT DAVIDSON said other people providing endorsements could be open to prosecution and any of these people who are state employees may be subject to ethics violations as well. Attorneys involved might be subject to actions by the bar association. She said none of this has been done to date and they believe that if the AG had obtained a special prosecutor, and their decision making process could be made public, a lot of questions could be cleared up. CHAIRMAN TAYLOR noted that several state employees had provided written support to BSC, which may be a violation under the ethics act in addition to title 45, yet no public accusations have been filed with the Alaska Personnel Board. He asked how these people could supply these apparently fraudulent endorsements to BSC and escape even a mention of it in their personnel files. MS. DAVIDSON said, to the extent that an investigation had uncovered anything, it would have been filed with the personnel board, but that has not occurred. CHAIRMAN TAYLOR remarked that he was initially shocked by the scope of this fraud, and more so after holding a hearing in Fairbanks and listening to people who had sought help from the district attorney and troopers to no avail. CHAIRMAN TAYLOR stated he has never seen an audit like this that recommends, "the Attorney General is not sufficiently independent to make this determination and therefore should obtain assistance from a independent prosecutor to make recommendations." CHAIRMAN TAYLOR thanked the auditors for the thoroughness of their work and asked if they were aware of other confidential information the committee should see in reviewing this matter. CHAIRMAN TAYLOR replied that this was simply a time line, an audit had not yet been conducted but could be and would afford access to all materials. She suggested the committee would want to talk to Mr. Kirkpatrick (Director of BSC) and either Attorney General Bothelo or a member of his staff, who might be able to provide a more comprehensive picture. She indicated that because of ongoing lawsuits, this likely would have to be done in executive session. CHAIRMAN TAYLOR again thanked the auditors for their excellent work and mentioned he would speak with Mr. Kirkpatrick and Mr. Larry Carroll and, to reassert some level of public trust in our judicial system and the banking and securities division, take the necessary steps to find out what happened here. CHAIRMAN TAYLOR concluded that if their recommendation proves to be the bottom line, it is incumbent upon the committee to notify the Attorney General he should appoint an independent prosecutor because he is too conflicted to do the work. With no further business to come before the committee, they were adjourned.