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Legal Commentary

: FORTUNE Legal Pad

Scruggs updates, Part I: Key witness will finally testify

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[This part of a series. See the introduction here.]

In a little noted filinglast week State Farm revealed that one of its claims-adjusting supervisors, Alexis (?Lecky?) King, is now available to testify in a handful of Hurricane Katrina-related civil suits that are still being waged against the insurer by plaintiffs originally represented by Dickie Scruggs.

Though King?s name may still be unfamiliar to many, she was a pivotal figure in Scruggs’ post-Hurricane Katrina assault upon State Farm and other insurers. Again, my earlier feature story explains this in greater detail, but the whirlwind summary is this:

Scruggs’ litigation began as an audacious, full-frontal attempt to simply nullify the insurers? standard flood-exclusion language as ?unconscionable.? That effort went nowhere in the courts.

In October 2005, however (about a month-and-a-half after the hurricane hit), Scruggs nimbly switched gears and his suits gained traction after a supervisor in State Farm?s Gulfport cat (for ?catastrophe?) office ordered an engineering firm to re-inspect a number of Katrina-damaged homes. That supervisor was Lecky King.

While King told the engineering company that two of previous reports had been unconvincingly, if not incompetently, performed, two claims adjusters working in the cat office ? sisters Kerri and Cori Rigsby ? interpreted King?s order as sinister and began secretly working with Scruggs. Scruggs and the Rigsbys would later argue that the supervisor had really been ordering the engineers to redo reports in order to fraudulently mischaracterize wind damage, for which State Farm was liable, as flood damage, which was excluded from coverage and would be paid, if at all, only by the federal government?s National Flood Insurance Program. The Rigsbys, working as secret insiders at the State Farm cat office, eventually collected thousands of confidential State Farm documents which they gave to Scruggs, as well as to state attorney general Jim Hood and U.S. Attorney Dunn Lampton.

Whether or not State Farm played fair with its engineering reports, in almost all cases both the original and revised reports were preserved in State Farm?s files, with no one having made any attempt to destroy anything. The lone possible exception was the document that started the whole ball rolling ? an October 12, 2005, engineering report performed on the property of one Thomas McIntosh.

Lecky King thought the McIntosh report reached such outlandish and unsupportable conclusions that she threatened to fire the engineering firm that had performed it. Its engineer had found no flood damage at all ? only wind damage — even though experienced State Farm adjustors (including, ironically, Kerri Rigsby herself) had already documented in photographs extensive apparent flood damage there and had, accordingly, already okayed payment to McIntosh of the policy limits on his federal flood policy — $350,000.

Kerri had been in the process of routinely filing the McIntosh report away in the appropriate file cabinet when, she has testified, she noticed that it had a sticky-note on it saying ?Put in Wind file. Do NOT pay bill. Do NOT discuss.? Kerri became suspicious that something fraudulent was going on. She has claimed that she then photocopied the document, took the original back to King, and said something like, “I guess I wasn?t supposed to see this.” According to Kerri, King allegedly responded, “No, you weren’t,” and took it.

The original of the report has never been located.

So, when (bigtime-Scruggs-campaign-fund-recipient) Mississippi attorney general Jim Hood commenced a criminal investigation (at Scruggs? prompting) and issued a document subpoena to State Farm in March 2006, State Farm didn?t produce that McIntosh report, because it wasn?t in their files. Since Kerri and Scruggs had a photocopy of that original report, they could, and did, argue that State Farm was concealing and ?shredding? documents in an apparent effort to criminally hide damning evidence.

State Farm has all along suggested that it didn?t produce the October 12 McIntosh report for the simple reason that Kerri Rigsby improperly took it (or “stole it”) rather than filing it away the way she was supposed to. State Farm has theorized that Scruggs knew this and, indeed, that this was the whole reason Scruggs seemed so preternaturally certain all along that State Farm wouldn?t produce the McIntosh report in response to subpoenas. It is true, for instance, that in April 2006, long before State Farm had had a chance to respond to Hood?s subpoenas, attorney general Hood seemed to anticipate that State Farm wouldn’t be able to produce it. In a court proceeding concerning that document subpoena he told a state judge, ?See, we already have these documents. . . . We?re just going to see if they [State Farm] actually give us what is written on them and stuck to them and so forth.?

It does seem odd to me that Hood already suspected State Farm would fail to provide what he was nominally looking for. But State Farm?s never been able to substantiate its theory, in part because, once Hood commenced his grand jury investigation, Lecky King?s lawyers instructed her to invoke her Fifth Amendment privilege against self-incrimination rather than provide any testimony about any of the pertinent events.

Now it?s not unusual for criminal defense lawyers, out of an abundance of caution, to advise clients ? regardless of innocence or guilt ? to broadly invoke the Fifth if they are implicated in any way in a criminal inquiry. Scruggs? own criminal lawyers are now instructing him to do exactly the same thing. At a depositionof Scruggs taken just last month by State Farm lawyer James Robie, Scruggs took the Fifth in response to every question except: What is your name?

But when King took the Fifth, things took a grim turn for State Farm, and the settlement value of Scruggs? civil cases against State Farm skyrocketed. State Farm could not go before a jury and have a supervisor take the Fifth Amendment. A jury would assume the worst and hit the company with punitive damages. (Though invoking the Fifth can?t be used against you in a criminal case, it can be used against you in a civil case.)

Over the last month, State Farm finally got a speck of corroboration for its theory that the original McIntosh report disappeared because Kerri Rigsby took it, rather than because Lecky King deep-sixed it. In July it deposed two former Rigsby colleagues who were also close social friends of the Rigsbys as well: claims adjuster Tammy Hardison and her assistant, Dana Lee.

Lee testified that she remembered Kerri actually showing her the original McIntosh report, at Kerri’s or Cori’s home, with the original ?yellow? sticky note still attached to it (thus, not a mere photocopy).

?She showed me . . . an engineer report,? Lee testified, ?that had a sticky note on it. . . . And she said, well, what do you think of the note. And . . . I flipped it over and looked at the underside and I said, well, I don?t know who wrote it. They didn?t sign it. . . . I don?t think that?s unusual for a sticky note like that to be in the file.?

One of the Rigsbys’ current counsel, Scott Gilbert, declined to comment on any of the contents of the Hardison and Lee depositions (which I’ll be returning to in subsequent parts of this series) except to say that the Rigsbys ?have a very different view? of events. Gilbert notes that his firm has just entered the case recently, so it is not fully prepared to comment, but also that, in any case, the firm ?intends to try the case in front of [U.S. District Judge L.T. Senter , Jr.] instead of in the newspapers.? He also notes that the Rigsbys were not present or represented at the Hardison and Lee depositions and, accordingly, were unable to probe or challenge the deponents? recollections. (Obviously, this represents a dramatic change in tack for the Rigsbys; Scruggs had had Kerri appear in a Scruggs Katrina Group television ad and had had both sisters star in a 10-minute ABC “20/20″ episode in August 2006 that very bluntly accused State Farm of systematically “cheating” Katrina victims out of millions of dollars due them.)

The Rigsbys mother, Pat Lobrano (whose role in the whole matter is discussed in Part II) is more outspoken in denouncing the Hardison and Lee depositions. “Obviously, State Farm put a great deal of pressure on them to deliberately misrepresent the truth under oath,” she says in an interview, suggesting that Hardison and Lee are afraid of losing their State Farm jobs if they don’t provide helpful testimony.

In any case, I frankly think that Lee?s testimony falls short of proving that Kerri took the originals of the McIntosh report. Though I don’t question her good faith, memory plays too many tricks on all of us, and it?s just too easy to misremember these sorts of then-insignificant, now-crucial details almost three years after the events took place.

Personally, I?d still rather hear from Lecky King than from Dana Lee. Fortunately, as State Farm revealed in that unheralded filing earlier this month, I’m going to get that opportunity, as will the rest of the world. (Presumably King’s lawyers think there’s no longer any realistic chance that either state or federal prosecutors would go forward with a criminal case.)

Full post as published by FORTUNE Legal Pad on August 25, 2008 (boomark / email).

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