Army General Had Business Deal
By Nathaniel Heller
(Washington, April 27) Lt. Gen. Claudia J. Kennedy, the first female three-star general in the history of the U.S. Army and the accuser in a sexual harassment scandal, was in business with controversial Democratic money man Terence McAuliffe for almost two years, The Public i has learned.
Kennedy's position as a board member of three of McAuliffe's Florida companies might violate Defense Department ethics regulations that prohibit military officers from taking private positions that are offered because of the individual's role in the military.
Army spokesman Lt. Col. William R. Oaks issued a statement Thursday afternoon saying that the Army had approved Kennedy's "business arrangement," provided "no compensation was received and her official position in the Army was not identified in reference to her position as a board member."
Kennedy never received compensation, as the companies never obtained the necessary funding and never got off the ground. A company listing of board member biographies obtained by The Public i shows Kennedy using her "title" ("major general" at the time) as well as listing her military history as her professional experience. However, Oaks said that neither her "title" or "history" qualify as her "position," which he defined as "the duty one pulls," as in "deputy chief of staff for intelligence."
Kennedy refused comment for this report, saying, "I consider this my personal business." Asked whether she told Army officials the identities of her fellow board members, she replied, "I went through the proper channels at the Army."
Two of the companies on whose board Kennedy sat were holding companies; the third was a property-and casualty-insurance company. The firms, two of which were incorporated in May 1997 and the other in October 1997, were voluntarily dissolved in September 1999 after McAuliffe failed to secure a loan in time for the insurance company to begin operations.
McAuliffe has been the financial angel of the Clinton administration, by his own estimates raising close to $275 million for everything from the Clinton-Gore election campaigns to inaugural festivities, the millennium celebration, President Clinton's library and Hillary Clinton's campaign for the U.S. Senate.
A businessman with interests ranging from venture capital to home building, McAuliffe is also credited with conceptualizing the coffee klatches and Lincoln Bedroom sleepovers that raked in millions in soft money for the Democratic Party during the 1996 campaign. Vice President Al Gore, whose presidential campaign also relies on McAuliffe's fund-raising prowess, has called McAuliffe "the greatest fund-raiser in the history of the universe."
McAuliffe did not return repeated calls.
Kennedy recently made headlines when the Washington Times disclosed that she had filed a sexual harassment complaint against another high-ranking general in the Army, Maj. Gen. Larry G. Smith, alleging that he groped her in October 1996. Recent revelations about the complaint have rocked the Army at a time when the promotions of female officers such as Kennedy were breaking the glass ceiling for female members of the armed forces. Kennedy is only the third woman to achieve three-star general rank in the U.S. military, and the first in the Army.
The Public i began examining McAuliffe's business dealings and was aware of Kennedy's board positions before the Times article appeared.
Kennedy's role as a board member of a commercial entity while still on active duty raises ethical questions. Department of Defense Joint Ethics Advisory 5500.7-R does allow active officers to hold private positions in a "personal," as opposed to an "official," capacity. However, the regulations expressly prohibit DoD employees from serving as "an officer, member of the Board of Directors, or in any other similar position in any non-Federal entity offered because of their DoD assignment or position."
Kennedy, along with most of the companies' other board members, has no experience in property and casualty insurance. She is a career military officer, having served for more than 30 years, and has never held a position in the private sector. According to her official Army biography, she has never lived in Florida.
In company documents obtained by The Public i, Kennedy's professional biography (listed as part of a "Plan of Operation") consists entirely of her achievements as an active military officer, and refers to her as "Major General Claudia Kennedy" (the biography was prepared before she secured her three-star appointment). Additionally, Richard Swann, McAuliffe's father-in-law who was helping McAuliffe set up the companies, told The Public i that her military experience was "certainly one element of [bringing her on the board]." Without it, he acknowledged, she would not have been chosen.
Kennedy also failed to accurately list her board positions on her personal financial disclosure reports for the last two years. In her reports covering 1997 and 1998, Kennedy lists all of her private board positions as beginning in October 1997, when in fact two of the three companies filed incorporation papers on May 15, 1997, five days before she was confirmed for three-star rank by the Senate. Kennedy is listed as a director in those two companies' articles of incorporation, and it remains unclear why she did not list May on her disclosure report as the start of her involvement with the companies.
Army spokesman Oaks said that the discrepancy was "due to an administrative oversight based on information provided by Jefferson Capital Holding."
In addition, internal company documents obtained by The Public i show Kennedy signing a notarized "Authority for Release of Information" form on May 13, 1997, authorizing the Florida Department of Insurance "to conduct an investigation of my background." Such investigations are standard procedure for companies applying for insurance licenses in the state. Kennedy also submitted fingerprints to the Florida Department of Insurance as part of that procedure, as well as providing biographical information.
The Army ethics attorney who approved Kennedy's most recent disclosure report told The Public i that federal regulations require reviewers only to analyze what information is provided by the reporting individual on the disclosure report, as opposed to auditing the information to verify its accuracy. Kennedy makes no mention of McAuliffe's involvement in the companies in any of her disclosure reports, although it remains unclear whether she was required to do so.
In her most recent such report, Kennedy included a memo acknowledging that she had a "financial interest" in the three Florida companies but was not receiving compensation. Company bylaws and other documents obtained by The Public i indicate that Kennedy did not have equity in any of the McAuliffe companies.
In 1996, the deputy secretary of defense issued a memorandum prohibiting flag officers in the military (one-star generals and up) from receiving "compensation for serving as an officer or member of the board of any non-Federal entity other than, on an exception basis, professional associations and closely-held family entities." In that memo, Deputy Secretary John White cited the "unique personal requirements placed on [flag] officers . . . by the President, Congress, the senior leadership of this Department, and the American public."
While Kennedy correctly indicated that she did not receive compensation from the companies, it appears that it would have been the companies' intention to pay her had Jefferson Capital Insurance gotten off the ground and turned a profit. According to Swann, McAuliffe's father-in-law, the companies planned to pay their directors "board fees" as soon as they turned a profit. Swann indicated that he had expected that to happen as soon as the companies had begun operations, which would have been in late 1997 or early 1998. "She would have been aware of the likelihood that she would be paid," Swann told The Public i. But when reminded of the 1996 Defense Department prohibition against taking compensation from non-federal entities, Swann said that, yes, he thought he remembered Kennedy being aware of the issue.
Kennedy sat on the boards of Jefferson Capital Holdings, Inc., Jefferson Capital Group, Inc., and Jefferson Capital Insurance Co., all incorporated in Florida. The first two companies were holding entities, while Jefferson Capital Insurance Co. was set up to engage in selling property and casualty insurance. (See accompanying diagram.)
Besides McAuliffe, Kennedy was initially joined on two of the boards of directors in May 1997 by Jack F. Moore, Monsignor William A. Kerr, Charles H. Lydecker and George I. Pollack. Moore is the former international secretary of the International Brotherhood of Electrical Workers, and is currently being sued by the U.S. Department of Labor, which charges that he mismanaged the union's pension funds to bail out Swann in the early 1990s, when Swann's Florida savings and loan went belly up.
In an interview with The Public i, Moore indicated that he did not know the identities of the other board members of the McAuliffe companies, although he remembered meeting Kennedy at a "social-political function" in 1996. At that event, Moore said, Kennedy appeared to be with McAuliffe's father-in-law, Swann, who he said was single. Moore also recalled meeting Kerr, although he could not specify the time or setting.
Moore stepped down from the board of Jefferson Capital Group in the summer of 1997 and said he received no compensation for his involvement with the company. He declined to comment on whether he felt Kennedy's involvement with McAuliffe constituted a conflict of interest, saying, "I wouldn't touch that with a 10-foot pole."
Kerr is the president of La Roche College, a small Roman Catholic school near Pittsburgh. Prior to coming to La Roche, Kerr was a vice president of Catholic University in Washington, D.C., and a rector of a Tallahassee, Fla., parish. McAuliffe runs several companies in Florida, including Orlando's second-largest home building company, American Heritage Homes, and attended undergraduate school at Catholic. He has also served on the board of regents at La Roche.
Kerr did not return repeated calls from The Public i.
Lydecker is chairman of the Florida Housing Finance Corp., a state agency that funds low-income housing projects. According to agency records examined by The Public i, none of McAuliffe's companies has ever received contracts from Lydecker's agency. Lydecker is a vice president at Brown & Brown Insurance of Daytona Beach, and is a director of two other McAuliffe companies in Florida, Columbia Financial Holding Co. and Jefferson National Title Insurance Co..
Lydecker could not be reached for comment.
George Pollack is president of Florida Health Care Management Corp., a health care management company that runs a variety of health care facilities in Florida. Pollack told The Public i that the McAuliffe companies never got off the ground and that no board meetings were ever held. A manager of health care facilities, Pollack said he had no experience in insurance, and knew only Lydecker and McAuliffe.
Jefferson Capital Insurance Co. was set up in May 1997 (although not officially incorporated until October 1997) to buy insurance policies from the Florida Residential Property and Casualty Joint Underwriting Association, known as the JUA. The JUA was created by the Florida Legislature in December 1992, after Hurricane Andrew devastated the state and its insurance industry, causing $16 billion in insured losses. The goal of the JUA is to provide residential property insurance to Florida applicants who are unable to obtain it through the voluntary market.
At one time holding more than 1 million policies, the JUA has slowly "depopulated" its policies over the years by selling them off to private insurers, often encouraging such privatization by offering cash royalties for each policy purchased by a private insurer. Such incentives led to the creation of what became known as "takeout companies," essentially insurance companies started for the explicit purpose of buying out JUA policies and reaping the large royalties.
Shortly after two of the McAuliffe-Kennedy companies filed their incorporation papers on May 15, 1997, Jefferson Capital Insurance Co. applied for a certificate of authority from the Florida Department of Insurance to qualify as an approved buyer of JUA policies. By July, the company had been approved to take out a total of 100,000 JUA policies over 15 months, and estimated its take-out royalties at $2.5 million for the first year of operations.
Yet, according to Florida Department of Insurance files obtained by The Public i, the company never actually went into the business of selling property and casualty insurance. The documentation indicates that McAuliffe was unable to come up with a $7 million loan necessary for funding the company. At no point in the lengthy application file does he or the company's attorney identify the potential lender.
Swann confirmed that the company was never capitalized in time. When the loan (actually in the form of "preferred stock interest") came through, all of the profitable JUA policies had been handpicked by other takeout companies. Remaining were the high--risk coastal policies, a circumstance that prompted the company to abandon its venture. Swann declined to identify the "private party" that eventually did put up the money for McAuliffe.
- UPDATED: APRIL 27, 5:00 PM EDT
Nathaniel Heller is the James R. Soles Fellow at the Center for Public Integrity.
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