Questionable payroll stub led to probe of injured worker insurance claims.

By John Gittelsohn
The Orange County Register
May 1, 2009

Two Ferraris and a Bentley parked in the driveway. Closets stuffed with luxury gowns, handbags and shoes by Chanel, Gucci and Yves Saint Laurent. A stash of jewels valued at $500,000, including a 10-carat diamond ring. A safe with $50,000 in cash.

Prosecutors said the goods - seized this week from a Laguna Hills villa, a Costa Mesa office and other properties - were purchased with ill-gotten gains from a $38 million Workers' Compensation insurance fraud scheme, the largest fraud scheme of its kind in California history.

Orange County District Attorney Tony Rackauckas called it: "The Real Insurance Fraud of Orange County."

What did the husband and wife, owners of a modest Costa Mesa-based roofing company, do to live so lavishly? How did their alleged scheme work?

Michael Vincent Petronella, 50, and his wife Devon Lynn Kile, 42, were charged with 106 felony counts, including grand theft, lying on their tax returns and insurance fraud. They remain in jail until they each post $3 million in bail - and prove the bail money is from legitimate sources.

Petronella's attorney, Joe Angelo, said the husband and wife both intend to enter pleas of not guilty at their May 13 arraignment. Angelo said his clients are simple people who ran three roofing companies - Petronella Corp., Western Cleanoff Inc. and The Reroofing Specialists also known as Petronella Roofing - according to the norms of California small business operators.

"If there's an insurance fraud claim here, it's small and it's not atypical," Angelo said. "This case will pare down when everything comes out."

Soaring Premiums
Workers' Compensation insurance has been required under California law since 1913. Over the past decade, the high cost of premiums has become one of the most burdensome expenses for businesses in the state.

From 1998 to 2003, average premiums for all jobs tripled to $6.45 per $100 in payroll, according to the Workers' Compensation Insurance Ratings Bureau. Following reforms passed in 2004 under Gov. Arnold Schwarzenegger, average rates dipped to $2.25 per $100 in payroll by the end of last year.

But those rates are poised to rise again. The Workers Compensation Insurance Ratings Bureau proposed a 24 percent increase beginning in July.

Rates for construction workers, such as roofers, are more than 10 times the state average, because of numerous on-the-job accidents. The State Compensation Insurance Fund, a quasi-public company that is California's largest Workers' Comp insurer, currently charges $47.80 per $100 in payroll to cover roofers. In 2003, the rate was $99.68 per $100 in payroll.

Just as auto insurance rises for drivers with poor records, individual companies reporting high injury rates can see their premiums soar. When workers' comp rates peaked earlier this decade, premiums in the construction industry were sometimes double or triple the payroll.

A key factor behind the high rates was fraud: Employers under-reported the number of insured workers to reduce their payments, thereby driving up premiums for the industry which looked like it had a high accident rate for a small pool of workers.

Investigators said Petronella and Kile told insurers their payroll was $2.9 million from 2000 to 2009, the period under scrutiny. But their actual payroll totaled $29 million. According to the district attorney, the $38 million fraud allegation consists of $29 million in unpaid premiums plus penalties and assessments for inaccurate reporting.

"The $38 million is conservative," said Debra Jackson, the deputy district attorney prosecuting Petronella and Kile.

A Red Flag
Petronella, 50, founded Western Cleanoff in 1991 and Petronella Roofing in 1992. Also in 1992, Petronella and Kile met and joined as business partners. They married in 1995 and have two children ages 11 and 14, Angelo said.

As business partners, Kile handled the finances while Petronella managed the roofing jobs, which ranged in size from individual homes to the Pacific Amphitheater in Costa Mesa, according to prosecutors.

In early 2003, as workers' comp premiums reached their peak, Kile wrote the State Compensation Insurance Fund, saying that Western Cleanoff had no payroll and therefore did not need coverage, according to the indictment. But papers filed with the state Employment Development Department show that from 2003 through 2008, Western Cleanoff had a payroll of $10 million, the indictment said.

The deception came to light after March 2006, when Jose Morales fell off a roof and collected $6,000 in Workers' Comp coverage from the state insurance fund. Morales told insurers he was working for Petronella Roofing, the indictment said, but investigators with the state insurance fund turned up pay stubs showing he was on Western Cleanoff's payroll.

"When our claims adjuster noticed that, it was a red flag," said Gina Simons, a spokeswoman for the State Compensation Insurance Fund.

The indictment cites 41 other instances of employees who filed Workers' Comp claims while on the payroll of uninsured companies run by Petronella and Kile.

"They engaged in a shell game of shuffling payrolls to make fraudulent claims for uncovered injured worker claims," Rackauckas said.

Personal Piggy Bank
Prosecutors said Petronella and Kile used their companies as personal piggy banks to support their lavish lifestyle. The indictment says Petronella and Kile owe the state more than $1.1 million in back taxes for under-reporting their personal incomes from 2005 to 2007.

Between 2005 and 2007, they said, the couple reported $290,000 income on their tax returns while spending $2.1 million for personal items - designer shoes, clothing and jewels - on a company credit card.

"Their company American Express Black card, which by law should only be used for legitimate business purpose, became a passport to personal excess," Rackauckas said, "almost $440,000 on jewelry alone from 2005 to 2008, more than $425,000 spent on shopping sprees at luxury stores in 2008."

Among the items seized during a raid on their Laguna Hills home was an application for Kile to appear on the "Real Housewives of Orange County." Playing on the tie to the reality TV series, Rackauckas said: "If you commit these crimes, you may be looking at the 'Real Jail Cell of Orange County.'"