Suit alleges crude sexual remarks, wasteful spending at Kentucky workers’ comp agency

Oct. 9--The former chief financial officer of Kentucky Employers' Mutual Insurance is suing the agency, alleging he was fired in March for trying to blow the whistle on wasteful spending, mismanagement and sexually crude comments made about women by the chief executive officer.

In workplace settings with men and women present, KEMI CEO Jon Stewart bragged that "he had taken his wife to the 'headboard hotel,' in reference to having sexual intercourse," former CFO Scott McConnell alleged in his lawsuit.

Talking about a female job applicant, Stewart appraised her chest size and quipped that she would have to pass "the elbow test," McConnell said in the lawsuit. Speaking of another woman, Stewart said "she has legs all the way up to the snack bar," McConnell alleged.

Some of the financial allegations made by McConnell, who was KEMI's CFO for four years, were independently verified in April by state Auditor Mike Harmon, who found a lack of competitive bidding and cost controls, inaccurate reporting of contracts and business funds used for expensive meals, liquor, gifts and entertainment for insiders' personal benefit, including Stewart's.

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The auditor did not mention any sexual remarks in his report on KEMI.

In response to Harmon's stinging audit, the KEMI Board of Directors recommended that Stewart take a salary cut and lose his long-term job contract in favor of year-to-year probation so his performance can be regularly reviewed.

Lexington-based KEMI is Kentucky's largest issuer of workers' compensation insurance, collecting money from 23,000 policyholders in all 120 counties, including most school districts. The General Assembly created it as an independent nonprofit in 1994 to serve as an insurer of last resort, staking it with a $7 million public loan. Its board members are state cabinet secretaries and gubernatorial appointees.

Stewart declined to comment on the suit Tuesday. In a prepared statement issued by the nonprofit's general counsel, Tim Feld, KEMI said it is "thankful for the years of service Mr. McConnell provided," but it does not believe his allegations are true. It noted that KEMI has filed a motion in Fayette Circuit Court to dismiss the suit. A hearing in the case is scheduled for next month.

"KEMI takes pride in our positive work culture and workforce that diligently operates the state's premier workers' compensation carrier," the nonprofit said.

In his lawsuit, McConnell said he spent three years raising many of the same concerns uncovered by the state auditor, only to be ignored by Stewart and other top KEMI officials, frozen out of day-to-day business decisions and finally fired. McConnell is asking for unspecified financial damages and protection under the Kentucky Whistleblower Act.

By firing McConnell just ahead of the state auditor's report, Stewart both unfairly punished him and prevented him from telling the Board of Directors what he uncovered, McConnell said in his suit, filed in August in Fayette Circuit Court.

McConnell joined KEMI in 1999 and worked his way up through the internal audit division.

In his suit, McConnell said he repeatedly tried to report many problems he uncovered inside the agency.

Apart from Stewart's sexual remarks, which he reported to the human resources director, McConnell said, he also:

-- criticized the performance of several employees in the business development and marketing departments who did little work but received "substantial salaries," one of whom was a close, personal friend of Stewart's;

-- questioned KEMI spending on golf tournaments, sporting events and a hunting trip, all apparently intended for the enjoyment of Stewart and other top KEMI officials;

-- asked why those same KEMI officials watched golf games during the day when they should have been working;

-- urged KEMI leaders to stop paying for liquor as a business expense;

-- and requested more information on Stewart's decision in 2017 to switch a KEMI contract for credit card transactions to a new vendor, a company owned by a college friend of his son.

KEMI ratepayers suffered because of the way Stewart ran the agency, McConnell said. In particular, top KEMI officials showed an obsession with golf that distracted them from their duties, he said.

"There was no reliable indication that the expenses incurred for its sponsorship of numerous golf tournaments and sponsorship of select staff to participate in numerous golf tournaments resulted in any business development or benefit to KEMI's policyholders," McConnell said.

Furthermore, he added, "there was resentment among KEMI employees who did not participate in the 'golf culture' and golf tournaments, which negatively effected employee morale and productivity."

In its motion to dismiss McConnell's suit, KEMI said that he was fired because he lacked the financial expertise necessary to do his job, sometimes requiring other people, including Stewart, to perform some of his duties. KEMI denied that his firing was a reprisal for raising any concerns about wrongdoing within the agency.

KEMI also said McConnell should not be eligible for protection under the Kentucky Whistleblower Act. Among the several reasons it cited, it denied that it is a public employer, as the law requires for whistleblower status, because KEMI does not receive governmental funding. Also, KEMI said, McConnell's allegations do not involve the fraudulent use of public funds, another requirement.

"Even the offensive comments McConnell claims the CEO made about women do not constitute an actual or suspected violation of the law," KEMI said in its motion.

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