Consumer Protection

San Diego -- Attorney General Edmund G. Brown Jr. today filed a lawsuit to stop the Contractors Asset Protection Association, Inc. from engaging in a “sophisticated and fraudulent scheme” to cheat the state workers compensation system.

“This company falsely promised its clients that if they gave their employees empty titles and worthless shares of stock they could avoid tens of thousands of dollars in workers compensation premiums,” Attorney General Brown said. “But you can’t simply call a security guard a vice president and avoid complying with the law through a sophisticated and fraudulent scheme.”

This lawsuit seeks a permanent injunction barring Contractors Asset Protection Association, Inc. (ConAPA) and its founder-president, Eugene Magre from engaging in unfair and deceptive business practices in violation of sections 17200 and 17500 of the California code. The lawsuit also seeks restitution and civil penalties of no less than $300,000.

The lawsuit alleges that ConAPA sought to cynically exploit a legal exception to the workers compensation law, where directors of a corporation who are also the sole shareholders can exempt themselves from workers’ compensation coverage.

Under this scheme, ConAPA marketed and advertised an unlawful business plan urging employers to misclassify rank-and-file employees as “corporate officers” and issue them nominal shares of company stock so as to avoid paying workers’ compensation insurance premiums. For example, housekeepers, cooks, security guards, maintenance men, roofers, and construction laborers were named as “vice-presidents” and issued worthless shares of non-negotiable stock.

Despite the titles, many workers were not assigned any managerial or administrative duties and performed the same rank-and-file duties for the same pay that they performed prior to their “promotion.”

ConAPA ensured that its clients were able to prevent their new “officer-shareholders” from gaining control over the business. Employees were also required to sell their shares back to the company if they left the company.

Some ConAPA clients created “dummy” corporations populated by rank-and-file “officer-shareholders” that held no real assets, and existed solely for the purpose of offering their officers back to the original client company as rank-and-file workers who were ostensibly exempt from workers’ compensation.

ConAPA told its clients that this business model was legal, and implied that the program had been scrutinized and approved by several state authorities, which it had not.

The company has approximately 40 active clients, and has had as many as 200 clients in the past that employed their business model.

A copy of the complaint is attached.

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Sacramento–Attorney General Edmund G. Brown today announced that a coalition of 18 states and cities have won reversal of controversial Bush-era pollution standards “justified by nothing more than junk science” and which threatened to undermine public health.

"This dangerous air pollution causes thousands of premature deaths each year. Yet the Bush Administration callously ignored the facts and put forward a standard justified by nothing more than junk science,” Attorney General Brown said. “Today, the DC Circuit Court cleared the way for the Obama Administration to right this wrong.”

Fine soot pollution (also known as fine particulate matter pollution or “PM 2.5”) comes from diesel vehicles, power plants and other sources, and is prevalent in urban areas. Because fine soot can lodge deep in the lungs, it can cause numerous harmful health effects, including premature death, chronic respiratory illness, decreased lung function, cardiovascular disease and asthma. Children, senior citizens, and people with existing lung and heart diseases are especially susceptible to harm from fine soot pollution.

That is why EPA’s scientists and scientific advisory committee recommended strict new standards for fine soot in 2005. However, the Bush Administration rejected their advice and chose a weaker, less protective standard. Today’s decision clears the path for the Obama Administration to issue new, stronger standards.

Today’s decision, issued by the federal Court of Appeals for the D.C. Circuit, agreed with the coalition that the Bush EPA had acted illegally in issuing weak air pollution standards for fine soot, acting against the advice of EPA professional staff and EPA’s own scientific advisory committee. The court found that the Bush EPA had also erred by not taking into account the special sensitivity to air pollution of children, elderly people and other vulnerable populations. The Court remanded the standards to the new Obama EPA to issue new, more protective air pollution standards for fine soot that will better protect public health.

The states, cities and other state agencies joining in the challenge that led to today’s victory are: California, Connecticut, Delaware, Illinois, Maine, New Hampshire, New Jersey, New Mexico, New York, Oregon, the Pennsylvania Department of Environmental Protection, Rhode Island, Vermont, the District of Columbia and the South Coast Air Quality Management District. The States of Arizona, Maryland and Massachusetts also joined as friends of the court.

FOR IMMEDIATE RELEASE
February 20, 2009
Contact: Christine Gasparac (916) 324-5500

Brown Files Criminal Charges Against Broker who Masterminded Elaborate Real Estate Scheme

NEVADA COUNTY – Attorney General Edmund G. Brown Jr. and Nevada County District Attorney Cliff Newell today announced that criminal charges were filed against a hard-money real estate broker who “brazenly deceived” investors and borrowers, embezzled fees, and filed false paperwork.

“This man brazenly deceived investors and borrowers, promising high returns and easy loans, ripping off his customers for his own personal enrichment,” Attorney General Brown said. “Ultimately, this criminal scheme collapsed when many of these loans failed, costing hundreds of people more than $20 million.”

Seventy-three criminal counts were filed against Thomas Hastert in the Nevada County Superior Court this morning for embezzlement, securities fraud, and filing false documents.

Hastert brokered over 270 hard-money loans in Nevada, Sacramento, Sutter, Butte, Placer, and Yolo Counties between September 2004 and September 2007 for real estate development projects. Hard-money loans typically provide high returns for private investors and are secured through collateral such as real estate.

In this case, Hastert secured $20 million from several investors, using the funds to broker hard-money loans to borrowers seeking to develop homes on real estate.

In the criminal complaint, Hastert is alleged to have:

• Misled investors. Hastert told investors that borrowers had excellent credit scores and were capable of repaying the loans. This proved to be untrue. Many borrowers had poor credit scores, did not make regular payments on the loans, and held properties that were in foreclosure.

o The loans that Hastert brokered were required by law to be placed into a special trust account overseen by a third-party escrow firm. The firm had to verify whether funds being withdrawn by borrowers were being used for construction projects. Despite telling investors he had established such a trust account, Hastert never did, and the money was regularly withdrawn and misused by borrowers with no oversight.

o Hastert told investors he would personally oversee the development of the land. In one instance, he was asked by investors to drive them to a particular property that was supposedly under development. Hastert could not locate the property.

• Set up fake investors, known as “straw men,” to keep concerned investors at bay. Hastert filed documents with a county recorder’s office saying that his secretary owned a majority interest in the investment, despite the fact that she had never invested a single dollar. If a legitimate investor tried to initiate foreclosure proceedings, Hastert would contend that the supposed majority owner opposed the action.

• Embezzled fees. Hastert was entitled to collect a 3% fee on loans he brokered. However, he took all his fees up-front as if the loan were fully funded. In fact, some loans never fully funded, and others took more than a year to fully fund.

If convicted, he could face up to 11 years and 4 months in prison. Bail was set at $540,000. A warrant was issued for his arrest today.

The complaint and declaration are attached.

Sacramento—Attorney General Edmund G. Brown Jr. today issued a Consumer Alert to California homeowners about a “blatant and costly scam” targeting homeowners with declining property values.

“This blatant and costly scam holds out hope to homeowners that their property taxes will be reduced if they pay hundreds of dollars to a middleman to have their property re-evaluated,” Attorney General Brown said. “In point of fact, homeowners can seek relief directly from their county assessor free of charge. Homeowners should be on high alert.”

Companies are sending deceptive mailers to homeowners offering help in reducing property tax assessments, if the homeowner pays the company hundreds of dollars in fees. The companies use official-sounding names such as “Tax Adjusters,” “Tax Readjustment” or “Tax Review” to make victims believe the company is a government agency.

Property tax reassessment is a free service provided by county tax assessors. If homeowners believe their property value has declined and they are paying too much in property taxes, the local tax assessor will review the property value for free for a possible downward assessment.

To avoid becoming a victim, homeowners should:

• Never pay money for something they did not ask for.
• Avoid a middleman—they should contact their local tax assessor’s office for property value reassessment.

Homeowners who believe they are a victim of this scam should contact the Attorney General’s Office by either calling 1-800-952-5225 or by writing to P.O. Box 944255 Sacramento, CA 94244.

RANCHO CUCUMONGA— Attorney General Edmund G. Brown Jr. today announced that charges were filed against Dr. Lisa Barden of Rancho Cucumonga, who broke the law and “wrecked havoc” on the lives of patients whose identities she stole to obtain highly addictive pain killers.

“This physician wrecked havoc on the lives of dozens of patients, violating her oath and abusing her position as a doctor,” Attorney General Brown said.

In November 2007, the California Department of Justice’s Bureau of Narcotic Enforcement began an investigation of Dr. Barden, who illegally obtained prescription drugs on 131 separate occasions from more than 43 different pharmacies. Barden obtained more than 30,000 tablets of prescription painkillers, including hydrocodone (Vicodin) and oxycodone (Oxycotin). Dr. Barden was arrested on Thursday, January 29.

The Riverside District Attorney’s Office filed 276 felony counts including: commercial burglary, forgery, obtaining a controlled substance by fraud, possession of a controlled substance, insurance fraud and identity theft. Agents recovered from her home multiple prescription pads for 12 different doctors, as well as the personal information of 93 people who are alleged victims of identity theft.

The investigation was led by the Riverside Regional Pharmaceutical Narcotic Enforcement Team, which is a cooperative effort with the California Department of Insurance, Fraud Division and the U.S. Drug Enforcement Administration.

This initiative is part of the Attorney General’s plan to address prescription drug abuse in the state and make it easier for doctors to keep track of prescription drug records.

Prescription drug abuse can have serious public safety consequences, as many abusers hold down critical jobs including truck drivers, transit operators and medical practitioners. The Attorney General has been working in cooperation with the Troy and Alana Pack Foundation, founded by Bob Pack, whose 7 and 10-year old children were killed by a driver who was under the influence of prescription drugs obtained from multiple doctors, to make tracking prescription drug records easier.

Last year, Attorney General Brown unveiled a plan to provide doctors and pharmacies with real-time Internet access to patient prescription drug histories. Under Brown’s proposal, health professionals will have computer access to the drug histories of patients, replacing the current outdated system that required mailing or faxing written requests for information. Each year, more than 60,000 such requests are made to the California Department of Justice.

The state’s database, known as the Controlled Substance Utilization Review and Evaluation System (CURES), contains 86 million entries for prescription drugs dispensed in California, giving healthcare professionals the technology they need to fight the prescription drug abuse currently burdening California’s healthcare system.

According to the latest Department of Justice “Drug Trends” report, Valium, Vicodin, and Oxycontin are the most prevalent pharmaceutical drugs obtained fraudulently. Vicodin and Oxycontin are the two most abused pharmaceutical drugs in the United States.

FOR IMMEDIATE RELEASE
Wednesday, February 2, 2009
Contact: Christine Gasparac (916) 324-5500

Brown Sues Drug Makers that Conspired to
Keep Generic Testosterone Supplements off Shelves

LOS ANGELES – California Attorney General Edmund G. Brown Jr. and the Federal Trade Commission today filed an antitrust lawsuit against four pharmaceutical companies that conspired to monopolize the sale of a testosterone supplement in a “predatory move” to reap huge profits at the expense of consumers.

“The companies plotted to keep cheap generic drugs off the market, costing consumers millions,” Attorney General Brown said. “This was a predatory move pure and simple, increasing drug company profits at the expense of critically ill patients.”

Testosterone supplements like AndroGel can prevent muscle loss, fatigue or erectile dysfunction in critically ill patients suffering from HIV/AIDS, diabetes, and advanced age.

The lawsuit contends that Solvay Pharmaceuticals illegally colluded with three other pharmaceutical companies -- Watson, Par and Paddock Laboratories -- to keep the three companies from producing generic alternatives to its testosterone supplement.

In return, Solvay agreed to pay Watson and the other drug manufacturers millions of dollars over several years. With this agreement, the drug companies sought to protect the monopoly position of AndroGel, forcing consumers to pay artificially high prices for the drug while the companies shared the extraordinary profits. Solvay Pharmaceuticals manufactures and distributes a testosterone supplement called AndroGel with annual sales exceeding $400 million in 2007.

Background
In 2003, Watson Pharmaceuticals and Par Pharmaceutical Companies, Solvay’s competitors, sought approval from the Food and Drug Administration to make and sell generic versions of AndroGel. These companies received final approval from the FDA. If they had begun to sell generic alternatives, Solvay would have seen a significant reduction in its profits from AndroGel sales. Typically, when generic alternatives are introduced in the market, the prices of brand name drugs are reduced by 50% to 80%. The price for AndroGel is $225.01 for a box of 150 individual units.

Without generics on the market, consumers and health insurance programs must pay more for branded medications. Pharmaceutical monopolies cost the state, its citizens and private insurers millions of dollars each year.

Attorney General Brown and the Federal Trade Commission filed a lawsuit in the U.S. District Court for the Central District of California in Los Angeles against the following pharmaceutical companies:

• Solvay Pharmaceuticals, Inc.
• Paddock Laboratories, Inc.
• Par Pharmaceutical Companies, Inc.
• Watson Pharmaceuticals, Inc.

Today’s lawsuit alleges that Solvay and the three pharmaceutical companies violated U.S. and California antitrust laws and laws banning unfair competition. The lawsuit seeks to:

• Declare the agreements between Solvay, Paddock, Par and Watson illegal and void.
• Permanently enjoin the defendants from similar and related conduct in the future.
• Fine the defendants $2500 for each prescription and user of AndroGel in California under the California Unfair Competition Act.

The lawsuit is attached.

FOR IMMEDIATE RELEASE
January 23, 2009
Contact: Christine Gasparac(916) 324-5500

Attorney General Brown Files Criminal Charges in $52 Million Ponzi Scheme

ORANGE COUNTY – Attorney General Edmund G. Brown Jr. yesterday filed 89 criminal charges against 6 men who “callously conned” more than a thousand people, including retired senior citizens, out of $52 million through sham real estate projects, using the investors’ money to buy planes, expensive cars and lavish vacations.

“These six men callously conned hundreds of people into investing $52 million into a company that they treated as their personal bank account,” Attorney General Brown said. “They fraudulently took investors’ money and spent it on an array of luxury items, relying on a Ponzi scheme to keep investors at bay.”

From 2001 to February 2006, Irvine-based Carolina Development Company peddled $52 million worth of stock to more than a thousand investors. The company claimed the proceeds would be used to buy and develop luxury resorts and upscale communities adjacent to golf courses designed by Arnold Palmer, Jack Nicklaus, and Greg Norman. Investors bought anywhere from $15,000 to $1 million in stock, including senior citizens who invested their retirement funds. The company bought some land, but did nothing to develop it, despite its claim that 85% of the $52 million invested would be used for land acquisition and development.

To persuade investors to buy shares of Carolina Development Company, the defendants claimed that Arnold Palmer had partnered with them. The defendants promised that investors would reap huge dividends and assured those who invested a minimum of $100,000 that their investment would be secured by deeds to specific parcels of land. None of these claims were true.

The defendants diverted more than $24 million for extravagant bonuses, personal medical bills, airplanes, fancy meals, BMWs, concert tickets and luxury vacations. To keep investors at bay, the defendants engaged in a Ponzi scheme, paying some investors “returns” on their investment using money from the new investors.

Department of Justice agents served arrest warrants against the following six defendants, who were charged with grand theft and securities fraud in Orange County Superior Court:

Lambert Vander Tuig, 50, of Santa Margarita, currently held in the Orange County Sheriff’s Department.

Jonathan Carman, 45, of Laguna Hills, currently held in the Orange County Sheriff’s Department.

Mark Sostak, 50, of Ladera Ranch, currently held in the Orange County Sheriff’s Department. Bail is set at $4.5 million.

Scott Yard, 47, of Costa Mesa, remains at large.

Soren Svendsen, 43, of Coto De Caza, is currently being held in the Orange County Sheriff’s Department. Bail is set at $2.2 million.

Robert Waldman, 48, is scheduled to turn himself in to authorities.

On Wednesday, representatives of the Attorney General’s Office obtained arrest warrants from Orange County Superior Court Judge Selim Franklin.

These criminal charges were preceded by civil actions brought by the U.S. Securities and Exchange Commission (SEC). The SEC in 2007 won a $29.2 million judgment against Lambert Vander Tuig, the president of the company, and a $2.1 million judgment against Jonathan Carman, vice president of the company.

If convicted, defendants Vander Tuig and Carman could receive sentences in excess of 10 years in state prison. The remaining defendants would be subject to lesser prison sentences.

The criminal complaint and affidavit are attached.

Sacramento – Attorney General Edmund G. Brown Jr. today urged a federal appeals court to block the court-appointed Receiver from “commandeering $8 billion” from the shrinking California Treasury for extravagant prison construction.

“Federal law does not allow the Receiver to commandeer the finances of the state to spend $8 billion for unaccountable and extravagant prison construction,” Attorney General Brown said. “The court should rein in the Receiver, who is now spending more than $2 billion per year on inmate health care. This is almost $14,000 per inmate and nearly double what it was just three years ago.”

In a reply brief filed today with the United States Court of Appeals for the Ninth Circuit, Attorney General Brown describes the fundamental legal errors that the court-appointed Receiver has made in attempting to force the state to fund his prison construction program against its will.

Brown argues that the Prison Litigation Reform Act, signed into law in 1996, bars federal judges from ordering the construction of new prisons and that any relief must involve the least intrusive means necessary.

A just-released draft of the Receiver’s plan, however, demonstrates the unbridled scope of the Receiver’s plan.

The plan calls for the construction of 7 new prisons with 10,000 new beds -- the size of 70 Walmarts. It envisions yoga rooms, regulation basketball courts with electronic bingo boards, music and art therapy, horticultural therapy, and landscaping which shields fences from inmates’ view. While some details have been deleted in a subsequent draft, the fundamental structure and many of the extravagant amenities remain.

Brown argues that to force such an $8 billion plan on California against its will—particularly at a time when the state must make huge budget cuts to programs including health care, infrastructure, and schools—violates federal law and the state’s sovereign immunity under the 11th Amendment to the Constitution.

The appellate court, therefore, should reverse the District Court’s order of a $250 million down-payment toward the $8 billion plan.

The State of California has acknowledged the need to provide health care that meets Constitutional standards, and has taken a series of steps to improve prison health care. This includes increasing the numbers of qualified medical staff at prisons and improving the process by which inmates are assessed and how they are treated.

Under the Receivership, healthcare spending has increased from $7,601 per inmate in 2005-2006 to $13,778 per inmate in 2007-2008. That’s far more than the average citizen in California pays for healthcare coverage.

Background
In August of this year, the court-appointed Receiver filed a motion seeking to compel Governor Arnold Schwarzenegger and Controller John Chiang to allocate $8 billion from the California Treasury over the next 5 years, including $3 billion in this fiscal year, for prison healthcare facility construction. Attorney General Brown has argued that the federal court does not have the authority to mandate state prison construction, nor has the Receiver justified the massive sums called for in his plan.

Sacramento—Attorney General Edmund G. Brown Jr. today reached a $4.85 million settlement with H&R Block, which prohibits the company from marketing refund anticipation loans as early tax refunds.

“This settlement prevents H&R Block from marketing high-cost loans as early tax refunds,” Attorney General Brown said. “This is especially important because often these loans go to those who can least afford them.”

The California Attorney General filed suit against H&R Block in early 2006 regarding its marketing and sale of income tax refund anticipation loans and a related product called refund anticipation checks.

H&R Block continues to deny any wrongdoing. During the course of the investigation, Block has worked with the Attorney General to improve its practices.

A refund anticipation loan is a short-term loan secured by a taxpayer's anticipated income tax refund. The complaint alleged a variety of deceptive practices by H&R Block including:

• Deceptive advertising designed to disguise refund anticipation loans, which carry fees and other costs, as tax refunds, which the IRS provides without charge; and

• Unfair debt collection practices by which customers' refund proceeds were garnished to pay off debts they supposedly owed.

The settlement provides for up to $2.45 million in restitution for consumers who purchased a
“Refund Anticipation Loan” or a “Refund Anticipation Check” through H&R Block between
January 1, 2001 and December 31, 2008. In addition, H&R Block will pay $500,000 in penalties and $1.9 million in fees and costs.

In addition. H&R Block will be prohibited from marketing these loans and related products in a deceptive or misleading manner and will be required to make clear and conspicuous disclosures to consumers prior to their purchase of these products. Terms of the settlement are limited to three years.

A settlement administrator will be contacting eligible consumers directly. Eligible consumers may also write to the Attorney General’s Public Inquiry Unit at P.O. Box 944255, Sacramento, CA 94244-2550, or may send an e-mail at http://ag.ca.gov/contact/.

Attorney General Brown previously settled claims against Jackson Hewitt and recently concluded a trial against Liberty Tax Service, the second and third largest tax preparation companies in the country, respectively. All three lawsuits involved refund anticipation loans and related products.

FOR IMMEDIATE RELEASE
December 18, 2008
Contact: Christine Gasparac (916) 324-5500

Attorney General Brown Reaches Agreement with MillerCoors to Ban Sale of Alcoholic Energy Drinks

SAN FRANCISCO– California Attorney General Edmund G. Brown Jr. today announced that 13 states and the City of San Francisco have forged an agreement with MillerCoors to stop “the growing and widespread use” of caffeine-spiked alcoholic beverages, often marketed to young adults.

“With this agreement, we’re shutting down 90% of the market in caffeine-spiked alcoholic beverages,” said Attorney General Brown. “The growing and widespread use of caffeine mixed with alcohol can distort judgment, weaken inhibitions and encourage risky behavior, especially in young people.” Brown added.

Alcoholic energy drinks mix alcohol with ingredients like caffeine, guarana, taurine or ginseng. The alcoholic content in these drinks range from 6-12% per volume, more than most beers. Together, the stimulating effect of caffeine in the beverage mixed with the alcohol can mask how intoxicated the drinker actually is. A drinker may feel alert, but will still suffer the debilitating effects of alcohol consumption, including diminished reaction times and basic motor skills.

Sparks currently has 90% of the market share for alcoholic energy drinks. Last June, Attorney General Brown and other attorneys general announced that Anheuser-Busch had signed an agreement to stop producing its alcoholic energy drinks. With today’s agreement, most of the alcoholic energy drinks that were available in the beginning of the year will now be taken off the market. California and the other states will continue to investigate the smaller companies that continue to sell alcoholic energy drinks.

Young people are most vulnerable to the effects of alcoholic energy drinks like Sparks because they are prone to engage in risky behaviors such as binge-drinking and are less experienced in gauging the debilitating effects of alcohol. They are also more at risk of acute alcohol problems, including traffic crashes, violence, sexual assault, and suicide.

A study by researchers at the Wake Forest University School of Medicine found that students who consumed alcoholic energy beverages were twice as likely to be involved in alcohol-related accidents and injuries. They were also more likely to be involved in sexual assaults or drunk driving.

After an investigation into the product, Attorney General Brown and the participating attorneys general alleged that Sparks was unsafe, MillerCoors was making false or misleading health-related statements about Sparks’ energizing effects, and much of the marketing was directed toward youth, a violation of California laws on marketing tobacco or alcoholic products to minors.

Under today’s settlement agreement, MillerCoors will:

• Cease manufacturing and marketing all caffeinated alcoholic beverages, including Sparks,

• Reformulate Sparks so that it does not contain stimulants, including caffeine, guarana, taurine or ginseng, and eliminate the use of images that suggest an energizing effect,

• Not promote the mixing of caffeinated products with alcoholic beverages,

• Inform distributors and retailers that reformulated Sparks contains alcohol, but no caffeine, and Sparks should be displayed separate from non-alcoholic energy drinks. The company will also immediately discontinue its current Sparks website without directing visitors to a new site.

California was joined in this settlement by Arizona, Connecticut, Idaho, Illinois, Iowa, Maine, Maryland, Mississippi, New Mexico, New York, Ohio, Oklahoma, and the City and County of San Francisco.

The agreement is attached.