State Farm Settlement Lets ‘Dark Money’ Remain in Shadows

Sept. 13, 2018, 4:19 PM

Policymakers missed a rare chance to examine how moneyed interests influence state judicial elections when State Farm agreed last week to pay $250 million to settle a civil racketeering case, lawyers involved in the case and academic observers told Bloomberg Law.

The unprecedented lawsuit alleged State Farm and a web of trade associations secretly conspired in 2004 to elect Illinois Supreme Court Chief Justice Lloyd A. Karmeier in the most expensive state supreme court contest in U.S. history, and then lied about the scheme so the justice wouldn’t have to recuse himself from the appeal of a $1.05 billion judgment against the auto insurer.

The day-of-trial settlement meant “a lost opportunity for a hearty discussion in our country about what’s going on with the use of dark money,” Robert A. Clifford, the plaintiffs’ co-lead counsel in the case, told Bloomberg Law. “That is especially true with judicial elections, where we learned in this case that the U.S. Chamber of Commerce and its Institute for Legal Reform operates an extraordinarily well organized and financed machine that identifies every contested legislative and judicial election in America and is making decisions with their cronies on whether to jump in and help fund.”

Karmeier and State Farm Mutual Automobile Insurance Company were expected to play lead roles in a courtroom drama that would have shone a light on judicial campaign finance. During the course of a six-week trial in a federal courthouse in East St. Louis, Ill., plaintiffs in the case captioned Hale v. State Farm would have tried to prove allegations that the auto insurer funneled millions through intermediaries and into Karmeier’s campaign coffers. The plaintiffs say they also would’ve shown Karmeier was aware of the alleged “money laundering” scheme—something the justice has strenuously denied for 14 years.

“A trial in this case would have shined a spotlight on a host of concerns we see with judicial elections,” said Alicia Bannon, who directs the judicial fairness project at the Brennan Center for Justice at New York University School of Law. “Across the country they have attracted millions of dollars in spending, often from interests appearing before these very judges. Frankly, states have been really slow to respond to a real threat to the integrity of state courts.”

No Bang, All Whimper

But as T.S. Elliot, a native son from across the Mississippi River, might have said, Hale ended Sept. 4 “not with a bang but a whimper.”

On the day reserved for opening arguments, State Farm agreed to pay $250 million to 4.7 million policyholders to settle the class action.

Clifford described the settlement as an excellent result for his clients, but he lamented the loss of a soapbox for a spirited debate about judicial ethics and elections. Clifford said he had looked forward to an opportunity to cross examine Karmeier, State Farm executives, and witnesses from trade associations, alleged to be co-conspirators.

“This was a lost opportunity on judicial ethics, a lost opportunity on judicial recusal policies, a lost opportunity on the role of money in judicial campaigns, a lost opportunity on dark money and how 501(c)(6) organizations are operating, and a lost opportunity on lawyer ethics,” Clifford said.

The U.S. Chamber of Commerce and its Institute for Legal Reform did not immediately respond to Bloomberg Law’s request for comment on Clifford’s allegations. The chamber and the institute were never defendants in the lawsuit, but were characterized as “unnamed co-conspirators” in the scheme to elect Karmeier.

The Hale case, originally filed in 2012, alleged State Farm violated the Racketeering Influenced Corrupt Organization Act by secretly flooding the Karmeier campaign with cash and then lying about its conduct. The 2004 race broke all previous and current records for judicial campaign spending. Karmeier’s campaign collected $4.8 million from donors and his Democratic opponent Gordon Maag followed with $4.5 million. A significant portion of Maag’s war chest came from trial attorneys and labor unions.

Nine months after winning the election, Karmeier was part of a 4–2 supreme court majority that struck down a $1.05 billion judgment in Avery v. State Farm. The 1999 jury verdict in Avery awarded damages to customers who claimed the insurer improperly used non-original equipment manufacturer parts for vehicle repairs. Had Karmeier recused himself and a tie resulted, the intermediate appellate court decision upholding the judgment would have stood.

The Hale case never alleged that State Farm’s campaign contributions were illegal. Rather, the plaintiffs contended the insurer violated RICO by filing court briefs denying its financial support of Karmeier. Those denials ensured Karmeier wouldn’t be disqualified from hearing the appeal in Avery.

Karmeier was never a defendant in the Hale case. Citizens for Karmeier was initially listed as a defendant, but the campaign committee was later dismissed.

‘Laundering’ Campaign Donations

Clifford said his side’s witnesses would’ve described State Farm’s scheme to funnel millions of dollars to the Karmeier campaign through co-conspirators including: the U.S. Chamber of Commerce and its Institute for Legal Reform; the Illinois Coalition for Jobs, Growth and Prosperity; the American Tort Reform Association; the Illinois Republican Party; the Illinois Civil Justice League and its JUSTPAC political action committee; and the Illinois Business Roundtable.

Moreover, Clifford said the plaintiffs were prepared to show Karmeier was aware that State Farm was a significant donor.

“Karmeier denied knowing who his funders were. He was in total denial about this,” Clifford said. “Whether that is believable or not, that was up to the jury to decide. We certainly thought the evidence spoke to him knowing a lot more than he owned up to.”

Thomas A. Myers, a Denver-based forensic accountant with experience auditing complex money-laundering schemes, was expected to be a critical witness. According to a pretrial report, Myers said he had reviewed extensive financial evidence and communications between State Farm and the co-conspirators. Myers was prepared to testify that State Farm understood that direct contributions to Citizens for Karmeier were reportable under the Illinois Campaign Disclosure Act, so it laundered the funds through the co-conspirators.

“The intermediary donors provided layers of obfuscation that enabled State Farm to anonymously contribute at least $3.52 million to its Affiliated Organizations, who would then pass the money on to the Karmeier campaign,” Myers wrote. “This is equivalent to more than 74% of the campaign’s total funding.”

Myers estimated damages of $8.4 billion in the case based on a calculation of simple interest on the initial $1.05 billion Avery judgment, plus treble damages available to the plaintiffs under RICO.

Corroborating Testimony

Richard Means, a Chicago attorney with 50 years of experience in campaign finance and election law, was expected to corroborate Myer’s expert testimony during the trial. Means described State Farm’s strategy as an elaborate “money-laundering” scheme.

“The Karmeier campaign was this web of non-reporting entities,” Means said in an interview with Bloomberg Law. “So some of the money went directly to the campaign, but sometimes it was spun off through 501(c)(4) or (c)(6) organizations. Sometimes it was money that was funneled through the state Chamber of Commerce to the state Republican Party. So the money was reported, but it was never reported as to its true original source.”

At trial, State Farm would have disputed this testimony and presented a defense asserting the plaintiffs had failed to prove a viable racketeering conspiracy. But State Farm was also expected to assert any trial in federal court was improper.

In its final pre-trial brief, State Farm argued the court lacked jurisdiction under the Rooker-Feldman doctrine, which holds federal courts generally should not sit in direct review of state court decisions. Moreover, State Farm would have argued it could not be held liable for any of the alleged misconduct under the Noerr–Pennington doctrine, which provides immunity to entities for their attempts to influence legislative bodies, administrative agencies and courts.

But all the preparations were set aside on the eve of trial in favor of a $250 million settlement. As part of the proposed resolution, State Farm said in a statement that it “denies liability, that it considers the claims to be without merit, that it considers that it is settling under the unjust enrichment claim, and that the settlement is made simply to bring an end to the entire litigation.”

Judicial Fairness

Bannon said a trial featuring testimony by Karmeier would have provided an unprecedented vantage point for an examination of at least three problems affecting the fairness of state courts.

  • Dark Money. Judicial elections are becoming increasingly expensive due in part to an influx of money from outside groups and flimsy campaign finance standards. Until recently, Bannon said, expensive supreme court races were rare, but at least 20 states have seen contests crossing the $1 million threshold.
  • Recusal Rules. Most state judicial systems administer vague recusal standards, giving judges wide discretion governing their participation in cases before the court. However, the potential for at least the perception of impropriety has grown as litigants, business interests and trial attorneys spend freely to elect their preferred candidates.
  • Judicial Selection Methods. Currently 38 states elect their judges, but policymakers are increasingly concluding the process is infected with potential legal and ethical landmines. Many reformers are demanding merit-based selection processes.

“This trial would have been an opportunity to bring all of these issues to light,” Bannon said. “The facts underlying Karmeier’s election raised all of these questions.”

Little Media Attention

Michael LeRoy, a professor at the University of Illinois College of Law and an advocate for judicial reform, said the State Farm case and the underlying ethical questions got surprisingly little media attention in Illinois. The settlement, he predicted, would only serve to bury the dispute.

“It’s really a national story, but even the local press didn’t pick up on it,” LeRoy said. “It’s remarkable because the case within the case involves millions of policyholders who are being defrauded. This didn’t involve some abstract principle of justice. This involved whether consumers were getting what the paid for in an insurance contract.”

LeRoy conducted his own review of the Karmeier/Maag race in a recent article for the Journal of Law and Public Affairs and recommended significant reforms to Illinois’ judicial selection process. LeRoy recommended the state abolish partisan judicial elections and establish public commissions for merit-based judicial selection and retention. In addition, LeRoy called for revisions to the Illinois Code of Judicial Ethics, calling the current code woefully out of date.

The case is Hale v. State Farm Mut. Auto. Ins. Co., S.D. Ill., No. 12-0660-DRH, settlement 9/4/18.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bloomberglaw.com

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