Big fines compound false fraud claims in Michigan

Jonathan Oosting
Detroit News Lansing Bureau

Lansing — When the state of Michigan wrongly accused Kevin Grifka of unemployment insurance fraud, he was hit with a $12,000 bill and a sobering question from his wife: Do we have to return the Christmas presents we just bought for our kids?

“Are we even going to have Christmas? Are you going to prison?” Grifka recalls her asking through tears in December 2014. “The mental stress over it was pretty enduring.”

The Chelsea resident and father of four, who had $9,000 in income tax refunds seized by the state after he started working again, was among thousands of Michiganians falsely flagged for fraud by an automated computer system between 2013 and 2015.

The Michigan Unemployment Insurance Agency has since overturned 20,965 of the “robo-fraud” determinations made during that period, including Grifka’s. The initial assessment revealed a 93 percent error rate, and the agency is now reviewing another 28,000 cases representing about 19,000 individuals.

In addition to demanding repayment of the original benefits, the state automatically slapped many claimants a 400 percent penalty, plus interest. Attorneys suing the state on behalf of various victims say Michigan’s financial penalties for unemployment fraud are the largest in the nation, adding injury to insult to those who were erroneously flagged.

“We’ve seen people who were wrongly accused of fraud suddenly confront a $100,000 bill from the state, saying they’re going to seize your property unless you join a payment plan or something like that,” said David Blanchard, Grifka’s attorney and lead counsel on a federal lawsuit.

“There’s a fundamental injustice in that kind of Draconian punishment. That’s baked into the system, and it’s something we hope the legislators will look at in the future.”

A review by The Detroit News confirmed Michigan’s financial penalties are the steepest in the Great Lakes region, allowing the agency to levy fines equal to 400 percent if fraudulent benefit payments exceed $500. In smaller cases, the maximum fine is 200 percent.

Indiana, which has the second toughest penalties among surrounding states, assesses up to a 100 percent fine — for a third offense. Blanchard said federal labor law requires a 15 percent penalty.

Grifka’s lawsuit is one of two against Michigan, including a class-action case filed in state court. His federal complaint alleges he and other plaintiffs had their property seized without due process and were subjected to the kind of “excessive fines” prohibited under the Michigan Constitution.

State softens stance

Attorney General Bill Schuette’s office, representing state officials in the case, initially argued U.S. District Judge Robert Cleland should dismiss the claim because the civil penalty outlined in state law “is not excessive and the amount of the penalty is not discretionary.”

More recent filings allege the state processes for asking claimants about potential fraud and determining guilt violate the U.S. Constitution.

While the state vigorously fought the case, it has recently softened its stance. It agreed last week to a court order prohibiting collections from individuals accused of unemployment fraud between Oct. 1, 2013, and Aug. 7, 2015, “unless and until individually reviewed by agency staff and affirmed with new notice to claimant.”

Talent Investment Agency Director Wanda M. Stokes has also promised a “top-to-bottom review” of the Unemployment Insurance Agency and announced this month that Director Sharon Moffett-Massey had been reassigned.

“The agency wants to make sure people are treated as fairly as possible, and it is working to review all cases that were determined to be fraud,” spokesman Dave Murray said in an email.

“In many of the cases, when additional information was received, it was determined that a claimant received benefits to which he or she was not eligible, but did not intend to commit fraud. In those cases, a person is asked to make restitution, but not pay penalties.”

To date, Murray said the state has refunded claimants about $5.4 million. The agency is expected to complete additional reviews within the next six months.

“We’ve done a lot of work, but we’re continuing to look at that,” said Gov. Rick Snyder, whose administration has been sharply criticized over the unemployment agency failures. “We’ve made a lot of progress, … But again, we’re gonna stay on top of that and follow through.”

A life-savings move

Grifka, a 39-year-old unionized electrician, was back at work in December 2014 when he opened his mail to find a $12,000 restitution bill warning him the state could garnish his wages, seize his tax refunds or otherwise seek reimbursement for benefits it said he was not entitled to.

He quickly did two things: Grifka went to an Unemployment Insurance Agency office to attempt an appeal and took “everything” he had out of the bank, which amounted to about $6,000 in life savings.

The appeal didn’t work because he didn’t receive the state notice — which he maintains was the first warning he received — until after a 30-day appeal window had expired. But Grifka said he believes pulling his life savings was crucial, allowing him to stay above water even as the state went after his earnings.

“If I didn’t take that money out, I wouldn’t have been able to pay the bills I had for Christmas gifts,” Grifka said. “I would not have had money for property taxes, which then I would have had to pay penalties and fines and back taxes on. Luckily had just enough money to pay for insurance.”

Grifka eventually got his income tax refund back from the state, which ultimately determined he did not commit fraud. But he said the months-long battle caused him “mental stress” and “anguish” he may not have been able to handle without a strong and supportive family.

The federal lawsuit alleges the initial fraud determination against Grifka was “based solely on an egregious error” by the Michigan Integrated Data Automated System, software the state had relied on to make fraud determinations without any human review.

The state began using the software in 2013 after completing what an official report called “the fastest integrated unemployment system modernization in history.” The system was expected to make the unemployment agency “more responsive and efficient,” saving the state $2 million to $4 million a year.

The agency had been using a 30-year-old mainframe system, according to the report, and “manual and paper intensive work processes” for fraud investigations and other functions had proven “time consuming.” Additionally, a 2011 state audit estimated the agency may have made up to $26 million in erroneous benefit payments between 2007 and 2010, suggesting potential fraud had gone undetected.

But the new computer system erroneously spread Grifka’s pre-layoff earnings across the entire first quarter of 2014, his attorney said in court documents, and “this error alone was enough to find (him) ineligible for benefits and assess hefty restitution penalties on him.”

The state notice that he owed more than $12,000 came “out of the blue,” Grifka said. Since he was no longer unemployed, he wasn’t checking an email account he had been asked to link to the state computer system. If any earlier warnings were sent, he said, he didn’t receive them.

Two days after receiving the notice, Grifka went to an agency “problem resolution office” and filed an appeal, which the state rejected because he had missed the 30-day appeal window prescribed in state law.

He tried again in March 2015, but again the agency rejected what state attorneys called “a second late protest.” One month later, after Grifka said he had discussed his case on a local television station, the agency decided to re-examine the case and reversed its earlier fraud determination.

“It was like, ‘Be quiet. We don’t want you to talk too loud,’ ” Grifka said.

Separate lawsuit

A separate class-action lawsuit filed in state court seeks to prohibit the unemployment agency from seizing tax refunds or garnishing wages “without due process” and requests cash damages for those who were wrongly accused.

Court of Claims Judge Diane Stephens rejected a motion to dismiss the class-action case in May, but the state appealed. Lead attorney Jennifer Lord expects the Michigan Court of Appeals to schedule oral arguments in the near future.

In the federal case, state attorneys have argued Grifka does not have standing in the lawsuit because the agency returned his seized tax refunds. The suit seeks repayment for other victims and policy changes to ensure the state has effectively minimized the potential for false accusations in the future.

The agency says it stopped relying solely on the computer system to make fraud determinations in late 2015, and a new law Snyder signed last month requires human verification for any new cases.

“We look forward to getting to discovery and figuring out what went wrong and how it went wrong, or if we can reach a reasonable resolution with the state, we look forward to that as well,” Blanchard said of the federal case.

“That’s up to the state but we’ve seen some really reassuring signs and a change of direction, now let’s just see how quickly they can act to fix things for all the people caught up in this.”