Archive for May, 2010

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Click here for a copy of the complaint filed by the NRA.

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The National Rifle Association’s lawsuit could be the first of several legal actions taken against Delaware housing authorities with active gun bans.

By Lee Williams

WILMINGTON, Del. – The National Rifle Association filed a civil rights lawsuit today against the Wilmington Housing Authority (WHA) and its executive director Frederick S. Purnell, Sr., seeking to force the WHA to allow its residents to possess firearms within their homes.

The civil rights lawsuit was filed in the Delaware Court of Chancery by Wilmington Attorney Francis Pileggi, the founding partner of Fox Rothschild LLP’s Wilmington office.

Francis Pileggi

The question before the court, Pileggi said, is “whether or not residents of a public housing authority can be deprived of their Constitutional right to bear arms for self defense.”

“I think it’s important to remember that the Second Amendment rights being championed here are the first example of civil rights dating from the time of the Civil War,” Pileggi told the Caesar Rodney Institute. “The Second Amendment is just as important as any other amendment in the Bill of Rights.”

Pileggi first learned the WHA banned its residents from owing firearms after reading a special report by the Caesar Rodney Institute titled “Delaware Public Housing: Disarmed by Decree.”

CRI’s report revealed that many public housing residents feel trapped in their homes because of crime in their communities, yet they are prohibited from owning firearms for self-defense.

Pileggi filed the suit on behalf of a WHA resident identified only as “Jane Doe.” He said this was done to protect the individual from possible retaliation by WHA officials.

“We are going to be very vigilant,” Pileggi said. “If [retaliation] occurs, we will react properly.”

Doe told the Caesar Rodney Institute she became involved in the lawsuit “to benefit this generation and the generations to come.”

“My generation is about gone,” she said. “The current generation needs the help.”

This is not the first time the NRA – the nation’s oldest civil rights organization – has sued a public housing authority for a gun ban it believed violated the residents’ Second Amendment rights.

The NRA recently settled a lawsuit against the San Francisco Housing Authority, forcing them to remove a firearms ban that was very similar to the bans on the books in Delaware. Several years ago, another NRA suit forced a public housing authority in Portland, Maine to remove their firearms prohibitions.

Dover attorney John Sigler is a CRI board member, immediate past president of the NRA, and a current NRA board member.

“I am deeply saddened to learn that Delaware’s public housing authorities have continued to so steadfastly refuse to restore their law-abiding public housing residents to full citizenship under either the Second Amendment of the United States Constitution or Delaware’s own Constitution, thus making such litigation necessary,” Sigler said. “It is, indeed, a sad day when law-abiding citizens are forced to turn to the courts for vindication of constitutionally-protected rights, and to seek the protection of the courts from the wrongful conduct of governmental authorities who should know better, and who have been repeatedly warned to reform their conduct and their misguided and clearly illegal policies.”

WHA executive director Purnell was not willing to be interviewed for this story.

The Argument

According to documents filed with the court, Doe is described as a WHA resident and as a “responsible law abiding adult who is qualified to own firearms in her home for lawful self defense and other lawful purposes. But for the lease provision, she would forthwith lawfully possess a firearm in her home without the threat of eviction.”

“We’ve conducted a background check and other due diligence to satisfy ourselves she would qualify to purchase a firearm,” Pileggi said.

In the complaint, Doe is asking the court for a declaratory judgment forbidding the housing authority from banning firearms because the action violates the Second and Fourteenth Amendments to the U.S. Constitution, as well as Article 1 Section 20 of the Delaware State Constitution. In addition, the complaint states the gun ban is preempted by existing Delaware law, and exceeds the statutory authority granted to a public housing authority.

That the WHA’s gun ban violates the state constitution, Sigler said, is obvious.

“Article I Section 20 of the Delaware Constitution states: ‘A person has the right to keep and bear arms for defense of self, family, home and State, and for hunting and recreational use.’ It says nothing about the right of governmental agencies and self-important bureaucrats having the right to deprive the poor, the elderly, the disabled, or the socially disadvantaged of their rights simply because of their social and economic status,” Sigler said. “On the contrary, the courts have, time and again, held such social and economic discrimination to be illegal and unconstitutional.”

History of the Delaware gun bans

The Caesar Rodney Institute first revealed that every housing authority in the state prohibited its residents from owning firearms in its special report published Feb. 1.

The report included interviews with public housing residents, a mere handful of the thousands of Delaware’s most vulnerable residents who are forced by their socio-economic status to live in some of the state’s most dangerous neighborhoods, several of which are open-air drug markets.

Violating the gun ban, the residents told CRI, could result in immediate eviction. For many families, an eviction from public housing would leave them with nowhere to go but the streets.

There are already plenty of guns in public housing, these residents said, but they’re in the hands of criminals who pay no heed to state law, much less housing authority rules or regulations.

CRI’s report included copies of leases that clearly banned firearms at all four of the public housing properties.

After CRI’s initial report was published, NRA General Counsel Robert Dowlut sent letters to the executive directors of the housing authorities, warning them litigation was likely if they did not rescind their bans.

“It has been brought to our attention by members of the National Rifle Association and by the Caesar

Rodney Institute that the Dover Housing Authority, Newark Housing Authority, and Wilmington Housing Authority contain lease provisions that prohibit a resident from possessing a firearm. Such a restriction is unconstitutional,” Dowlut wrote.

After receiving Dowlut’s letter, the Newark Housing Authority announced they were rescinding their gun ban. However, the Dover Housing Authority, Delaware State Housing Authority and the Wilmington Housing Authority did not respond to Dowlut’s warning. Instead, they implied they were merely following a federal directive from the U.S. Department of Housing and Urban Development (HUD).

On Feb. 9, however, CRI published a story quoting senior HUD officials, in which they said gun bans were a local decision. HUD, the officials said, never ordered or even implied that local housing authorities should prohibit guns.

The housing authorities then turned to their lawyers for advice. Their lawyers passed, and asked Delaware Attorney General Beau Biden for an AG’s opinion on the constitutionality of the gun bans. In other words, the housing authorities wanted to know whether the individual right to keep and bear arms guaranteed in the Delaware and U.S. Constitutions applied to people living in public housing.

Meanwhile, a bipartisan group of state lawmakers introduced legislation that would limit the authority of public bodies to regulate firearms, absent specific authorization from the General Assembly.

Delaware Gov. Jack Markell strongly opposed the bill, and lobbied against its passage.

The aptly named House Bill 357, however, is languishing in the Delaware House Majority Leader’s desk.

Neither passage of HB 357 nor a decision by Biden will likely have much impact on the outcome of the NRA lawsuit.

“I see this litigation and the legislation currently pending before the Delaware General Assembly as mutually exclusive matters,” Sigler said. “This newly filed litigation is about the vindication of constitutional rights which have been denied to the residents of the Wilmington Housing authority, generally, and denied to this particular plaintiff, specifically; whereas, I see the currently pending legislation being about clarifying and/or expanding Delaware’s firearms preemption laws to apply to all of Delaware’s Housing Authorities and placing the power to enact firearms regulations where it belongs with the General Assembly. In other words, while to the uninformed there might appear to be a confluence of issues, the issues presented in the litigation and the legislation are, indeed, separate and distinct.”

Said Pileggi: “I would respect any opinion the Attorney General would provide, but having said that, the opinion would not be binding on the court.”

Contact investigative reporter Lee Williams at (302) 242-9272 or lee@caesarrodney.org

The Caesar Rodney Institute is a 501(c)(3) non-partisan research and educational organization and is committed to being a catalyst for improved performance, accountability, and efficiency in Delaware government.

© Copyright May 26, 2010, by the Caesar Rodney Institute

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Complainant wants the Delaware Public Integrity Commission to sanction Delaware’s insurance commissioner for unethical conduct and no-bid contracts.

By Lee Williams

A Lewes businessman has filed a complaint with the Delaware Public Integrity Commission accusing Insurance Commissioner Karen Weldin Stewart of violating state law.

Christian Hudson, a real estate entrepreneur, said he filed the complaint after reading the ongoing special report published by the Caesar Rodney Institute titled “Delaware Dept. of Insurance: Not in the Public Interest.”

“I don’t know if there’s a culture of corruption in Dover, but it clearly seems some of these allegations need further investigation,” Hudson said. “And if there’s wrongdoing, she should be held accountable.”

CRI’s 10-month investigation found that Delaware taxpayers might not be getting their fair share of the millions of dollars the department receives in fees and taxes from insurance companies it regulates.

Based on numerous interviews, court records and nearly a dozen Freedom of Information Act (FOIA) requests, CRI uncovered questionable hiring practices, questionable contracts for campaign donors, failure to comply with state law and millions of dollars paid to out-of-state consultants in no-bid contracts.

In his complaint, which was filed with the Commission earlier this month, Hudson alleges Stewart violated several areas of the Delaware Code including: contracting and procurement regulations, the Code of Conduct for elected officials, and rules regulating the use of state-owned vehicles.

Stories published by CRI have shed light on the commissioner’s penchant for issuing no-bid contracts to out of state firms, as well as using a state-owned vehicle on evenings, weekends and holidays.

Hudson was most troubled by a $700,000 no-bid contract Stewart awarded to a New Mexico financial services firm to conduct pre-tax audits of insurance companies based in Delaware.

“To give out $700,000 to people in New Mexico, when there’s clearly firms in Delaware that can do the same work is wrong,” Hudson said. “She needs to bid these things out.”

Hudson included copies of several stories published by CRI to buttress his allegations.

Stewart was not willing to be interviewed for this story.

Duties and powers

According to its Web site, the Delaware Public Integrity Commission “administers and implements Delaware’s ethics law (Code of Conduct) for the Executive Branch; its financial disclosure law for all three branches; and its lobbyists’ registration and expense reporting laws.”

After receiving a sworn complaint, the commissioners have several options, according to the agency’s attorney Janet A. Wright.

If the complaint is found to be frivolous or outside the Commission’s jurisdiction, it will be dismissed, Wright said.

“In general, if a violation is found, first there will be a probable cause determination, and then it goes through a full-blown trial procedure,” Wright told the Caesar Rodney Institute.

If the complaint involves an elected official, Wright said the only administrative penalty the Commission can issue is a formal public reprimand.

“We can’t remove them from office,” she said. “Other people, not elected officials, can be removed.”

The Commission can, however, refer a case for prosecution.

“If it rises to the level where the commission suspects criminal laws were violated, we can refer it to the Attorney General or any appropriate federal government agency,” Wright said.

Contact investigative reporter Lee Williams at (302) 242-9272 or lee@caesarrodney.org

The Caesar Rodney Institute is a 501(c)(3) non-partisan research and educational organization and is committed to being a catalyst for improved performance, accountability, and efficiency in Delaware government.

© Copyright May 25, 2010, by the Caesar Rodney Institute

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HB 413 will require the Delaware Department of Insurance to seek competitive bids for all contracts, including personal services contracts.

By Lee Williams

Delaware’s Insurance Commissioner believes she is exempt from following the state’s rigid procurement and contracting laws.

In testimony last month before the House and Senate insurance committees, Commissioner Karen Weldin Stewart was questioned about several no-bid contracts she has awarded, including one given to Steve Kinion, who she appointed as director of her agency’s Captive Insurance Bureau.

Kinion receives $16,000 per month even though he lives and works in Illinois.

Stewart defended her penchant for issuing lucrative no-bid contracts by telling lawmakers she is not required to solicit competitive bids.

“As a statewide elected official, according to Title 18, section 307 of Delaware Code, I have the authority to hire experts as they’re warranted,” she told the lawmakers.

House Bill 413, which was introduced Thursday, will curb the commissioner’s ability to circumvent the state’s procurement laws by amending Title 29 of the Delaware Code by adding the Insurance Department – by name – to a list of agencies that must also follow the law.

HB 413 was sponsored by Rep. Greg Lavelle, R-Sharpley and Senate Minority Leader Sen. F. Gary Simpson, R-Milford.

“It seems to make sense, given the size and scope of these contracts, that the Insurance Department should be subject to the public bidding process,” Lavelle said. “Commissioner Stewart has said she’s exempt because she’s an independently elected official, so I checked with the Auditor’s Office. They follow the state’s procurement laws. The Treasurer follows the states procurement laws, and last time I checked the Governor’s Office follows them as well.”

An ongoing investigation by the Caesar Rodney Institute has revealed that the DOI has awarded many no-bid contracts, which were then paid for by an after-the-fact purchase order begrudgingly approved by the Office of Management and Budget (OMB).

The Caesar Rodney Institute has obtained five memos from OMB Director Ann S. Visalli to Stewart’s chief of staff Elliott Jacobson concerning purchase orders for five other vendors, which were submitted by the DOI for payment from OMB.

All five memos were sent June 11, 2009. All were titled: “AFTER-THE-FACT PURCHASE ORDERS.”

The wording of the memos is identical. Only the names of the vendors were changed.

“Our offices are in receipt of your request for a waiver from the State accounting policy that requires a purchase order for any obligation over $2,500, prior to the purchase of a good and/or service.  As you know, the State is not liable for goods or services unless and until proper compliance of accounting procedure has been met. To avoid the loss of a good faith vendor, and per your written request dated May 14, 2009, the

After-the-Fact Purchase order 2000581 for $96,000 to Zack Stamp Consulting is hereby approved,” one of the e-mail states.

Visalli wrote that submitting purchase orders after contracts have been signed places a burden on her office and the DOI, “so your future compliance is strongly encouraged.”

“In the event of non-compliance, the vendor may look for payment to the employee who wrongfully purported to obligate the State,” Visalli wrote.

Added together, the five purchase orders cost Delaware taxpayers more than a half-million dollars in payments.

Stewart was not willing to be interviewed for this story.

Contact investigative reporter Lee Williams at (302) 242-9272 or lee@caesarrodney.org

The Caesar Rodney Institute is a 501(c)(3) non-partisan research and educational organization and is committed to being a catalyst for improved performance, accountability, and efficiency in Delaware government.

© Copyright May 13, 2010, by the Caesar Rodney Institute

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Regulatory Insurance Services receives $1 million per month from the Delaware Department of Insurance, but former staffers say the well-connected firm has been misclassifying its employees to avoid paying federal and state taxes for more than 16 years.

By Lee Williams

John Tinsley III is known as the “shadow commissioner” of Delaware’s Department of Insurance.

He’s been the behind-the-scenes shot caller for two of the last three insurance commissioners.

Tinsley is a principal at INS Regulatory Insurance Services (InsRis), a Pennsylvania-based financial services firm whose name has morphed over time, while its power and political connections have grown.

Three of the four InsRis principals, including Tinsley, have all at one time been employed by the Delaware Department of Insurance.

At a joint hearing of the House and Senate insurance committees held last month, Delaware Insurance Commissioner Karen Weldin Stewart introduced Tinsley to the lawmakers as her “special deputy for examinations” even though he is a contractor and not a state employee – a fact Stewart omitted from her testimony, until she was questioned about the relationship by lawmakers.

Tinsley is copied on nearly every significant issue at the Department of Insurance – even issues that do not involve his contract – according to e-mails obtained by the Caesar Rodney Institute through a Freedom of Information Act (FOIA) request. He often accompanies Stewart and her staff on trips to law firms in New York and elsewhere.

Stewart’s department pays InsRis more than $1 million per month to audit insurance companies based in Delaware, a requirement paid for by the insurance companies themselves. The costs of the audits vary depending upon the size of the firm and the complexity of the probe. The larger firms can pay more than $1 million per audit. InsRis, their examiner and the insurance department divide the fees according to set rates.

Several former InsRis examiners told the Caesar Rodney Institute that the firm intentionally misclassified them as independent contractors rather than actual employees, to avoid paying payroll taxes, operating costs and other benefits, including state taxes.

The practice, which they say first began in 1993, has already cost taxpayers, and could cost InsRis millions in penalties, back taxes and interest.

Neither Stewart nor Tinsley were willing to be interviewed for this story.

Going after firms that intentionally misclassify their workers to avoid paying their fair share of taxes is one of the top investigative priorities for the Internal Revenue Service, according to Special Agent Shauna Frye, spokesperson for the agency’s Philadelphia Field Office’s criminal investigation unit, which oversees Delaware.

It’s an investigative priority that can result in lengthy prison sentences.

“From a criminal standpoint, the sentences are generally guided by the amount of tax loss,” Frye told the Caesar Rodney Institute. “If you’re talking about an employer who has tax evasion, the number of years the illegal act has been occurring, and the amount of taxes evaded, are the driving force in determining the length of the sentence.”

The IRS has a responsibility to clearly establish willfulness – knowledge of the difference between an employee and an independent contractor, Frye explained.

“An individual purposefully misclassifying an employee as a contractor would definitely result in some sort of jail time,” she said. “We really only work cases that have potential of jail.”

Nationally, firms that intentionally misclassify their staff to save money are seeing increased scrutiny from both the IRS and the U.S. Department of Labor.

The “Misclassification Initiative”

U.S. Department of Labor Secretary Hilde L. Solis said her agency’s FY 2011 budget request “makes new investments in programs that protect workers’ rights, safety and health in the new economy.”

Solis’ $117 billion budget includes $25 million for the “Misclassification Initiative,” which will allow the Department of Labor to hire 100 additional enforcement personnel to target firms that willfully misclassify their workers as independent contractors, and provide grants and incentives for the states to address the problem.

“When employees are misclassified as ‘independent contractors,’ they are deprived of benefits and protections to which they are legally entitled,” Solis said in a written statement. “For example, independent contractors do not receive overtime and are ineligible to receive unemployment benefits.”

Delaware has made some effort to prevent intentional misclassification of some workers, but only those employed in the construction industry. Meanwhile, other more lucrative industries were ignored.

In July 2009 Gov. Jack Markell signed the Workplace Fraud Act into law.

The Act states: “An employer shall not improperly classify an individual who performs work for remuneration provided by an employer as an independent contractor.”

It provides civil penalties of up to $5,000 for every violation, but it applies only to the construction industry.

The test

The IRS uses an 11-point test to determine whether a worker is an independent contractor or an actual employee. According to the former InsRis staffers, it is a test their former firm fails miserably.

The criteria for the test consist of establishing the amount of control a firm has over their workers: behavioral, financial and relationship control.

Nicholas A. Mirkay is an associate professor at the Widener University School of Law. Mirkay received his J.D. from University of Missouri – Columbia School of Law in 1992, and an LL.M. in Taxation, with distinction, from Georgetown University Law Center in 1996. He spent two years in the IRS’ Office of Chief Counsel. His private practice has focused on federal, state and local taxation of business.

Misclassification, Mirkay said, is an issue the IRS has been fighting for decades, but one that’s relatively simple to understand.

“The issue is all about control – how much control the purported employer has over the purported employee,” Mirkay said. “The more control the employer has over their time, manner and work product, the more likely they’re an actual employee.”

The former staffers said InsRis controlled nearly every aspect of their job.

InsRis, they said, hired them, brought their names to the commissioner and scheduled all of their audits. The firm told them where to be, who to contact and even what type of dress was appropriate for the workplace.

The firm provided paid training and once a year scheduled an annual conference for all of the examiners. They were directed to contact an InsRis principal if they had questions, and were warned against going outside the company’s chain of command.

No aspect of their job was as rigidly controlled as their audit reports. The examiners submitted them to InsRis, and their supervisors went over them in great detail before submitting them to the insurance department. Sometimes these reviews could take several months.

InsRis reimbursed their expenses, and paid them with company checks. The examiners were paid based on an hourly rate. In theory, they said their time was broken into daily/eight-hour blocks. In practice, this amounted to an hourly rate of pay.

The employees said InsRis had strict rules about the amount of time they could spend on each audit, and questioned them when they exceeded this limit. They were also questioned if they finished an audit early, because the firm would receive less money.

Once hired, their relationship with InsRis was one of permanence. They went from one audit to another, indefinitely, without signing new contracts. The contracts themselves do not specify an end date, and can only be terminated by both parties in writing.

The Caesar Rodney Institute obtained a copy of a contract signed by one of the former staffers and InsRis. The first line of the document states, “Examiner is engaged as an ‘Independent Contractor,’ and not as an employee or agent…”

Published guidance from the IRS, however, suggests that the existence of a contact proves little when weighed against the other criteria in the test: “Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status.”

Mirkay said misclassification-related issues are found in more industries than just the construction trade.

“Ten years ago, the biggest abusers were accounting firms and law firms,” he said. “It’s not just your lower-paid employees. We see big service providers involved, because it triggers fewer taxes.”

Mirkay pointed out that the IRS is not the only agency likely to be interested in this possible misclassification.

“The State of Delaware’s withholding tax could be being skirted here as well,” he said. “The Delaware Department of Revenue should be interested in seeing their withholding taxes collected.”

CRI research fellow Sara Clark contributed to this story. Contact investigative reporter Lee Williams at (302) 242-9272 or lee@caesarrodney.org

The Caesar Rodney Institute is a 501(c)(3) non-partisan research and educational organization and is committed to being a catalyst for improved performance, accountability, and efficiency in Delaware government.

© Copyright May 11, 2010 by the Caesar Rodney Institute

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