For 2 years, absent
exec got salary

His tale is part of the tangled trail
that helped lead to the collapse
of isle health insurer PGMA

By Ian Lind
Star-Bulletin

The president of the company that processed claims for the failed Pacific Group Medical Association was paid $6,000 a month for two years -- and told to stay away from the office.

Donald Wakeman Jr.'s paid absence shifted day-to-day control of Pacific Benefit Services Inc. to Peter P. Wong.

This contributed to the collapse of PGMA, which once provided health coverage to more than 28,000 people in Hawaii, court records show.

PGMA was seized by state regulators in March 1997, leaving an estimated $18 million in unpaid debts to doctors, hospitals and other creditors.

Wong set up a network of companies, including Pacific Benefit Services, that improperly profited through higher-than-market fees, "kickbacks" and other manipulations of the nonprofit insurer, according to allegations in court proceedings by Thomas E. Hayes, special assistant to Insurance Commissioner Rey Graulty, the court-appointed liquidator of PGMA.

Federal and state tax laws generally prohibit such insider deals by nonprofit organizations, but a quirk in Hawaii law allowed PGMA to avoid these restrictions. The association was set up as a mutual benefit society, a type of organization considered "nonprofit" but not required to seek tax-exempt status from federal or state tax authorities, which would trigger the ban on insider transactions.

Wakeman confirmed this week that Pacific Benefit was contracted by PGMA to provide services as a third-party administrator but instead turned control back to Pacific Equity Growth & Management, an insurance agency run by Wong.

"I paid Peter Wong and PEGM a management fee to run Pacific Benefit Services on a day-to-day basis," Wakeman said this week.

"He was my only client," Wakeman said about Wong. "I couldn't say no to just about anything he wanted to do."

"It made sense," Wakeman said, referring to the arrangement. "Peter and his organization had all the necessary resources, human resources, administration and management resources, to manage PBS on the daily basis."

Wong and PEGM also had exclusive control over PGMA's marketing and administration through a separate agreement that reduced the insurer's officers and directors to minor roles.

"The preliminary review of the records has confirmed that Peter Wong looted PGMA, using PBS and PEGM as conduits for the diversion of money," attorneys representing Graulty and Hayes charged in court last year.

Court action by Graulty and Hayes is limited to efforts to identify and recover assets, including insurance payments, that can be used to cover PGMA's outstanding debts. However, Wong has been under continuing IRS scrutiny, according to Hayes and Graulty, and last year Wong and his wife were hit with $4 million in federal tax liens.

Attorney General Margery Bronster's office also opened a criminal probe of PGMA's collapse last year. Larry Goya, head of the criminal division, said this week that he could not comment on the status of that investigation.

Wong, who now lives and works in California, has not responded to repeated messages left at his office.

Wakeman set up Pacific Benefit Services in February 1994 but had not been in the company's office for two years prior to PGMA's collapse, Hayes stated in an affidavit. Records show Wakeman held 40 percent of the stock, with the majority of stock split equally between Wong and his wife, Susan.

"He (Wakeman) said that because Peter Wong's mother did not get along with him, Peter Wong asked him to stay away from the office. Mr. Wakeman continued to receive a salary at a rate of $72,000 per year, even though he did not come to the office or do any work," Hayes said in the affidavit.

Wakeman told the Star-Bulletin he did retain responsibility for the company's network of medical providers and resolving problems that arose. "Peter couldn't do that, because he really didn't understand the health-care industry professionals," he said.

Wakeman is not among the former officers and directors of PGMA, who are targets of a lawsuit by Graulty alleging they failed to prevent mismanagement, misappropriation and other wrongdoing.

"There was no fiduciary relationship between PBS and PGMA," Wakeman said. "We did not handle PGMA monies. I just billed PGMA for our services."

Millions of dollars in excessive fees were paid by PGMA to the firms controlled by Wong, Hayes and Graulty have alleged.

"Peter engaged in many different types of deals through different companies," Wakeman said. "If I drew a diagram, it would be very convoluted. No one really had the overall picture of the internal operations of PGMA and PEGM except Peter Wong. I never knew, nor was Peter about to tell me."

Assets and business operations of the insurer and other companies controlled by Wong were "inextricably intermingled," court records show.

Hayes said five corporations shared offices, a single computerized list of fixed assets, and used the same computer system for business records and accounting.

According to Hayes, "distributions were made to or for the benefit of the Wong family and its investors. The fact that PBS was taking part of the fee and transferring it to related entities for no apparent business purpose indicates that the 'Fee' was really a means to extract money from PGMA."