The state Department of Insurance has begun a criminal investigation of The Castleton Group, the human resources management company that left clients in the lurch last month when it went out of business.
Insurance Department spokeswoman Chrissy Pearson said Tuesday that investigators are working with the State Bureau of Investigation. Wake County District Attorney Colon Willoughby had asked the agency to investigate the bankrupt Raleigh company.
The Insurance Department will focus on possible violations of state insurance law. Willoughby requested the SBI investigation after a Wake County judge notified him that Castleton's lawyers couldn't account for as much as $8 million.
Castleton provided human-resource services such as payroll and health insurance to more than 100 small and midsize companies that employed 3,500 workers.
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Pearson said that Commissioner Jim Long intends to ask the legislature to beef up the state law that governs regulation of Castleton and other professional employee organizations or PEOs. Long hasn't determined what he will recommend.
"I think the Castleton situation demonstrated to us that there are some holes in the legislation we need to address," Pearson said. In 2005, the Insurance Department was given licensing authority over professional employee organizations; the department can deny operating licenses to companies with inadequate finances.
Castleton stunned its clients last month by pulling the plug on its operations, triggering a scramble to find other companies that could provide essential services. Castleton's clients didn't even know whether their employees' health insurance remained in effect when Castleton went out of business.
The Insurance Department denied Castleton a license and ordered it to cease operations in December after finding it was insolvent, noting that Castleton owed the IRS $8 million in payroll taxes. The company was fighting that order in court when it abruptly shifted gears and shut down. It filed for bankruptcy Dec. 23.
Some Castleton clients are criticizing state regulators for not giving them advance notice of the problems. But Pearson said the Insurance Department publicized the Castleton situation as soon as it was permitted under state law -- after the application process was completed.
The law allowed Castleton to continue operating and soliciting clients as long as the application process was continuing, Pearson said.
Insurance Department officials said one issue that the criminal investigation will explore is whether Castleton deliberately misled clients about the type of health insurance it provided to clients' employees.
Castleton provided the health coverage itself -- in industry parlance, it was self-insured -- but claims were administered by Cigna, the giant health insurer.
"A lot of clients thought they had a Cigna policy," Pearson said.
Tony Riddick, the deputy insurance commissioner, said the question is: Did these clients misunderstand the situation, or did Castleton mislead them?
State law requires that companies such as Castleton let clients know whether they are self-insured or providing insurance underwritten by a licensed insurer. The distinction is important, because licensed insurance companies are required by the state to pay into a fund that can be used to pay claims if the insurer becomes insolvent; self-insured companies face no such requirement.
Castleton had no immediate comment on the Insurance Department investigation.
On Monday, Castleton's lawyer asked the bankruptcy court for more time to file required financial statements. The company was supposed to file them Monday, but it wants a delay until Jan. 28.
Castleton's transactions "are voluminous and inscrutable," and the company needs at least an additional 21 days to complete and file its schedules, the filing read.
(Staff writer Jonathan B. Cox contributed to this report.)