Multimillion-dollar bonuses and severance payments for CareFirst BlueCross BlueShield executives - which stunned legislators when they became public in March - are illegal and "not reasonable," a consultant to Maryland's insurance commissioner concluded in a report released yesterday.

The consultant, former Missouri insurance commissioner Jay Angoff, singled out a $9.1 million bonus for Chief Executive Officer William L. Jews, which, he wrote, "serves no other purpose than to enrich Jews."

CareFirst's board members failed in their legal duties when they approved the executive payouts, Angoff said.

The report could give Insurance Commissioner Steven B. Larsen legal ammunition to block millions of dollars in severance payments if the proposed acquisition of CareFirst goes through - or to veto the deal because the board hadn't acted properly.

Larsen is expected to rule on the deal in February. The legislature then will have 90 days to review his action. WellPoint Health Networks Inc.'s plan to acquire CareFirst must also be approved by regulators in the District of Columbia and Delaware, who might not act until later next year.

CareFirst immediately challenged the report. Board members issued statements defending their actions, and a memo from CareFirst lawyers condemned the report as "unfounded, unfair and unreliable; and its unsparing condemnation of the Board and Compensation Committee is unnecessary, unwarranted and inflammatory."

The "merger incentive bonuses" - a total of $33.2 million to Jews and other executives - were to be paid if CareFirst completed its proposed deal to convert to a for-profit operation and sell itself to WellPoint, of Thousand Oaks, Calif., for $1.3 billion.

When news of the bonuses became public, the state legislature moved decisively - the House of Delegates voted 137 to 0 - to ban them.

1998 state law cited

Angoff argued in the report that the bonuses were illegal even before the legislative action, because a 1998 state law on conversions of nonprofit insurers and hospitals prohibits individuals from profiting from such transactions, and long-standing law on nonprofits prevents excessive compensation. Angoff said the payoffs were excessive.

Large chunks of another $48.9 million, including $18.9 million for Jews, in severance payments owed the executives if they leave CareFirst upon a "change of control" are also excessive and illegal, Angoff said. These payments would also trigger $30.7 million in taxes - in part because the federal Internal Revenue Code levies an excise tax on "excess parachute payments" - and the acquirer would have to pick up that cost as well.

Angoff criticized CareFirst's board for approving the payments and for not seeking legal opinions on them, despite indications - including a previous legal challenge to a Maryland Blue Cross severance payment, a case in Ohio and U.S. Senate hearings on Blue Cross compensation a decade ago - that the payments might be questionable legally.

Noting the board had set the size of bonuses after receiving a study looking at payments involving companies such as Banc One, Bell Atlantic, CBS, Chase Manhattan and ExxonMobil, Angoff wrote, "Using the compensation of executives of these corporations - which include some of the largest corporations in the United States and the world - as the reference point for compensating the CEO of a non-profit, three-state health insurance company is not reasonable."

Angoff also said that in an interview with him, "WellPoint confirmed that it had objected to the merger incentives, and emphasized the strength with which it objected." A WellPoint spokesman declined comment on the report yesterday.

Because a purchaser would have to bear the cost of the executive payouts, he wrote, they "prevented the board from negotiating as high a price with a purchaser as it could have." That's significant because if the deal is approved, the purchase price would be paid to foundations or other public entities in Maryland, Delaware and the District of Columbia, where CareFirst operates.

The report has already provided political ammunition for opponents of the transaction.

"The expert's report on CareFirst compensation confirms what has been said by everyone familiar with the situation except folks who happen to work for the Blues," said A.G. Newmyer, chairman of the Washington-based Fair Care Foundation. "CareFirst managers and their rubber-stamp board appear to have cooked up a disgraceful scheme to abandon their 'charitable and benevolent' charter in exchange for Enron-like personal riches."

CareFirst responds

CareFirst's lawyers for the Maryland regulatory review, David M. Funk and Ren L. Tunderman, argued in a "memorandum of law" released yesterday that Larsen "must reject" the report because Angoff is not a qualified compensation consultant.

However, Larsen said yesterday: "Mr. Angoff was not hired to be a compensation expert. He was hired as a lawyer to evaluate whether CareFirst acted in compliance with applicable legal standards."

Funk and Tunderman also said in their memo that the compensation packages provided a public benefit "by helping to retain critical executives and providing incentives to top management to secure full market value in a transaction."

Joseph Haskins, chairman of the CareFirst board's compensation committee, said in a statement issued by the company yesterday that "to conclude that the Board was not diligent in carrying out its fiduciary responsibilities can only be described as reprehensible."

In the same statement, Daniel J. Altobello, the board chairman, said his board "engaged in a careful and deliberative process over many months and relied on the assistance of a number of expert outside consultants."

Neither Haskins nor Altobello would answer questions. Jews was attending an out-of-town meeting and was unavailable, according to CareFirst spokesman Jeffery W. Valentine.

Valentine added that CareFirst's officials and consultants were looking forward to presenting their case more fully at three days of hearings Larsen has scheduled for mid-December.

While Angoff's report focuses on the board's actions, he does touch on the roles of others:

Jews. The CEO testified in a deposition that he had little to do with discussions about his bonuses, that "this was a board-driven process. So I was, in essence, a potted plant in many instances."

Reviewing minutes, memos and drafts, however, Angoff said that "documentary evidence also indicates that Jews had substantial involvement in developing and defending the bonuses. ... Jews may have driven the process."

CareFirst's compensation consultants, the Hay Group. Angoff said that comparing the bonuses with those of giant national corporations "is particularly troubling because Hay evaluates the performance of CareFirst executives only against other Blue Cross plans, most of which are non-profit."

He also noted that the annual incentive bonuses CareFirst gives its executives - Jews made $904,333 in base pay and nearly $1.8 million in incentives last year - were based on performance targets so low that it "virtually guarantees a substantial payout each year." In 2000, executives qualified for bonuses if enrollment increased 0.3 percent and earnings equaled at least 50.6 percent of the previous year's.

Gene E. Bauer, the Hay Group's managing director, could not be reached yesterday.

The lawyers advising CareFirst's board, Piper Rudnick. Angoff wrote that Piper would have been expected "to exhaustively research" the question of whether "excess parachute" payments by a nonprofit constitute "inurement," or improper benefits. "The Piper lawyers, however, appear to have reacted in exactly the opposite way: They appear to have bent over backward to avoid confronting not only the inurement question but also the question whether CareFirst's non-profit status limited CareFirst in any way."

Jay Smith, head of the corporate securities group at Piper, said yesterday, "We worked with the board throughout the process, and we did advise them as to legal issues involved in the compensation plans."

CareFirst executive payouts

Jay Angoff, a consultant to Insurance Commissioner Steven B. Larsen, compared what CareFirst executives would receive in merger bonuses, severance pay, tax payments and other benefits if CareFirst were sold to WellPoint Health Networks with what they would get if they were terminated without a deal. The difference, he said, would constitute an illegal payment under Maryland law.

.......................Termination.........Termination

...........................with....................without

Executive.........Wellpoint deal......Wellpoint deal........Difference

William L. Jews, CEO....$39,430,550....$13,622,179....$25,808,371

Executive vice presidents:

David Wolf....$13,295,073....$4,978,449....$8,316,624

Leon Kaplan....$10,422,449....$3,583,350....$6,839,099

Gregory Devou....$10,321,241....$3,894,515....$6,426,726

Mark Chaney....$10,050,036....$3,300,828....$6,749,208

John Picciotto....$8,941,468....$3,339,765....$5,601,703

Sharon Vecchioni....$7,878,904....$2,361,690....$5,517,214

Mike Felber....$4,624,548....$3,459,117....$1,165,431

All other executives....$14,684,936....$11,223,059....$3,461,877

TOTAL....$119,649,205....$49,762,952....$69,886,253