[This part of a series. See the introduction here.]

In a little noted filinglast week State Farm revealed that one of its claims-adjusting supervisors, Alexis (“Lecky”) King, is now available to testify in a handful of Hurricane Katrina-related civil suits that are still being waged against the insurer by plaintiffs originally represented by Dickie Scruggs.

Though King’s name may still be unfamiliar to many, she was a pivotal figure in Scruggs’ post-Hurricane Katrina assault upon State Farm and other insurers. Again, my earlier feature story explains this in greater detail, but the whirlwind summary is this:

Scruggs’ litigation began as an audacious, full-frontal attempt to simply nullify the insurers’ standard flood-exclusion language as “unconscionable.” That effort went nowhere in the courts.

In October 2005, however (about a month-and-a-half after the hurricane hit), Scruggs nimbly switched gears and his suits gained traction after a supervisor in State Farm’s Gulfport cat (for “catastrophe”) office ordered an engineering firm to re-inspect a number of Katrina-damaged homes. That supervisor was Lecky King.

While King told the engineering company that two of previous reports had been unconvincingly, if not incompetently, performed, two claims adjusters working in the cat office – sisters Kerri and Cori Rigsby – interpreted King’s order as sinister and began secretly working with Scruggs. Scruggs and the Rigsbys would later argue that the supervisor had really been ordering the engineers to redo reports in order to fraudulently mischaracterize wind damage, for which State Farm was liable, as flood damage, which was excluded from coverage and would be paid, if at all, only by the federal government’s National Flood Insurance Program. The Rigsbys, working as secret insiders at the State Farm cat office, eventually collected thousands of confidential State Farm documents which they gave to Scruggs, as well as to state attorney general Jim Hood and U.S. Attorney Dunn Lampton.

Whether or not State Farm played fair with its engineering reports, in almost all cases both the original and revised reports were preserved in State Farm’s files, with no one having made any attempt to destroy anything. The lone possible exception was the document that started the whole ball rolling – an October 12, 2005, engineering report performed on the property of one Thomas McIntosh.

Lecky King thought the McIntosh report reached such outlandish and unsupportable conclusions that she threatened to fire the engineering firm that had performed it. Its engineer had found no flood damage at all – only wind damage — even though experienced State Farm adjustors (including, ironically, Kerri Rigsby herself) had already documented in photographs extensive apparent flood damage there and had, accordingly, already okayed payment to McIntosh of the policy limits on his federal flood policy — $350,000.

Kerri had been in the process of routinely filing the McIntosh report away in the appropriate file cabinet when, she has testified, she noticed that it had a sticky-note on it saying “Put in Wind file. Do NOT pay bill. Do NOT discuss.” Kerri became suspicious that something fraudulent was going on. She has claimed that she then photocopied the document, took the original back to King, and said something like, “I guess I wasn’t supposed to see this.” According to Kerri, King allegedly responded, “No, you weren’t,” and took it.

The original of the report has never been located.

So, when (bigtime-Scruggs-campaign-fund-recipient) Mississippi attorney general Jim Hood commenced a criminal investigation (at Scruggs’ prompting) and issued a document subpoena to State Farm in March 2006, State Farm didn’t produce that McIntosh report, because it wasn’t in their files. Since Kerri and Scruggs had a photocopy of that original report, they could, and did, argue that State Farm was concealing and “shredding” documents in an apparent effort to criminally hide damning evidence.

State Farm has all along suggested that it didn’t produce the October 12 McIntosh report for the simple reason that Kerri Rigsby improperly took it (or “stole it”) rather than filing it away the way she was supposed to. State Farm has theorized that Scruggs knew this and, indeed, that this was the whole reason Scruggs seemed so preternaturally certain all along that State Farm wouldn’t produce the McIntosh report in response to subpoenas. It is true, for instance, that in April 2006, long before State Farm had had a chance to respond to Hood’s subpoenas, attorney general Hood seemed to anticipate that State Farm wouldn’t be able to produce it. In a court proceeding concerning that document subpoena he told a state judge, “See, we already have these documents. . . . We’re just going to see if they [State Farm] actually give us what is written on them and stuck to them and so forth.”

It does seem odd to me that Hood already suspected State Farm would fail to provide what he was nominally looking for. But State Farm’s never been able to substantiate its theory, in part because, once Hood commenced his grand jury investigation, Lecky King’s lawyers instructed her to invoke her Fifth Amendment privilege against self-incrimination rather than provide any testimony about any of the pertinent events.

Now it’s not unusual for criminal defense lawyers, out of an abundance of caution, to advise clients – regardless of innocence or guilt – to broadly invoke the Fifth if they are implicated in any way in a criminal inquiry. Scruggs’ own criminal lawyers are now instructing him to do exactly the same thing. At a depositionof Scruggs taken just last month by State Farm lawyer James Robie, Scruggs took the Fifth in response to every question except: What is your name?

But when King took the Fifth, things took a grim turn for State Farm, and the settlement value of Scruggs’ civil cases against State Farm skyrocketed. State Farm could not go before a jury and have a supervisor take the Fifth Amendment. A jury would assume the worst and hit the company with punitive damages. (Though invoking the Fifth can’t be used against you in a criminal case, it can be used against you in a civil case.)

Over the last month, State Farm finally got a speck of corroboration for its theory that the original McIntosh report disappeared because Kerri Rigsby took it, rather than because Lecky King deep-sixed it. In July it deposed two former Rigsby colleagues who were also close social friends of the Rigsbys as well: claims adjuster Tammy Hardison and her assistant, Dana Lee.

Lee testified that she remembered Kerri actually showing her the original McIntosh report, at Kerri’s or Cori’s home, with the original “yellow” sticky note still attached to it (thus, not a mere photocopy).

“She showed me . . . an engineer report,” Lee testified, “that had a sticky note on it. . . . And she said, well, what do you think of the note. And . . . I flipped it over and looked at the underside and I said, well, I don’t know who wrote it. They didn’t sign it. . . . I don’t think that’s unusual for a sticky note like that to be in the file.”

One of the Rigsbys’ current counsel, Scott Gilbert, declined to comment on any of the contents of the Hardison and Lee depositions (which I’ll be returning to in subsequent parts of this series) except to say that the Rigsbys “have a very different view” of events. Gilbert notes that his firm has just entered the case recently, so it is not fully prepared to comment, but also that, in any case, the firm “intends to try the case in front of [U.S. District Judge L.T. Senter , Jr.] instead of in the newspapers.” He also notes that the Rigsbys were not present or represented at the Hardison and Lee depositions and, accordingly, were unable to probe or challenge the deponents’ recollections. (Obviously, this represents a dramatic change in tack for the Rigsbys; Scruggs had had Kerri appear in a Scruggs Katrina Group television ad and had had both sisters star in a 10-minute ABC “20/20″ episode in August 2006 that very bluntly accused State Farm of systematically “cheating” Katrina victims out of millions of dollars due them.)

The Rigsbys mother, Pat Lobrano (whose role in the whole matter is discussed in Part II) is more outspoken in denouncing the Hardison and Lee depositions. “Obviously, State Farm put a great deal of pressure on them to deliberately misrepresent the truth under oath,” she says in an interview, suggesting that Hardison and Lee are afraid of losing their State Farm jobs if they don’t provide helpful testimony.

In any case, I frankly think that Lee’s testimony falls short of proving that Kerri took the originals of the McIntosh report. Though I don’t question her good faith, memory plays too many tricks on all of us, and it’s just too easy to misremember these sorts of then-insignificant, now-crucial details almost three years after the events took place.

Personally, I’d still rather hear from Lecky King than from Dana Lee. Fortunately, as State Farm revealed in that unheralded filing earlier this month, I’m going to get that opportunity, as will the rest of the world. (Presumably King’s lawyers think there’s no longer any realistic chance that either state or federal prosecutors would go forward with a criminal case.)

[This is part of a series. The introduction is here.]

The newly available Tammy Hardison and Dana Lee depositions also shed light on an arcane question that I have posted on before, and that State Farm has been aggressively trying to answer: was there a third insider? The question stems from an isolated interview Scruggs gave to a Bloomberg reporter on March 30, 2006, in which he claimed to have made a trip to Bloomington, Illinois (State Farm’s headquarters) where he met with an insider and picked up a trove of incriminating documents that he was about to turn over to attorney general Hood. Scruggs never again referenced a Bloomington insider, leaving Scruggs-ologists to wonder: Had he just made this story up out of whole cloth and, if so, why?

Hardison and Lee said that, according to the Rigsbys and Lobrano at least, Scruggs did fabricate the story, and that he did so, indeed, with a gusto that even jaundiced Scruggs-watchers might not have imagined.

By March, Hardison said, colleagues at the Gulfport cat office were beginning to suspect the Rigsbys of being moles for either Scruggs or attorney general Hood. Accordingly, Hardison testified, Scruggs wanted to “throw suspicion off” the Rigsbys and send it, instead, to State Farm’s central office in Bloomington. Here’s what he allegedly did:

“So he either flew a jet, flew his jet out there,” Hardison testified, “hired some guy to meet him at the airport, called Bloomington and tipped them off and said that Dickie is there to meet somebody. And Pat [Lobrano] kept going, he loves all this. . . . And I was going, what was in the package? They were, like, oh, probably nothing. . . . They were laughing about it. . . . He loves cloak and dagger, you know.”

In an interview with me, Lobrano says she remembers “the whole Bloomington thing” but not any specifics of what was said. “I don’t know if [Scruggs] did that, if it was true. If he did, he would’ve been trying to protect the girls and we would’ve appreciated that.”

Yesterday morning, an extraordinary lawsuit — in which State Farm had gone to Mississippi federal court to enjoin a Mississippi state criminal investigation of the insurer — ended in an extraordinary way.

After Mississippi Attorney General Jim Hood endured three hours of tough questioning by a State Farm attorney (who said, when court adjourned at 5 p.m., that he still had another hour left to go), attorneys for both sides huddled for hours until they struck a settlement. It was finalized Wednesday morning, before Hood’s testimony was to resume.

Most details of the settlement were sealed, including the all-important question of whether Hood would be permitted to continue his criminal inquiry. It appears that Judge David C. Bramlette wrestled the agreement out of the parties after making an important, though not necessarily determinative, legal finding in State Farm’s favor. His order is available here.

Nevertheless, my very subjective reading of the spectacle (I’d gone down to the Natchez, Mississippi, federal court to watch the hearing) was that it had ended rather like that infamous Roberto Duran-Sugar Ray Leonard bout in which Duran failed to answer the eighth-round bell, mumbling, “No más, no más.”

The case, which State Farm brought last September, is an instance of one of the rarest species of lawsuit, and one of the most difficult to win: a suit by the target of a state criminal investigation asking a federal court to halt the inquiry in its tracks.

Generally, the law forbids federal courts from interfering in this situation, because the federal courts are supposed to assume that state courts will adequately protect the federal civil rights of the target.

There is a narrow exception to that rule, however, if the target can show that the state prosecution is being brought in “bad faith” or for purposes of “harassment” — an extremely difficult thing to prove. Nevertheless, under the unusual facts of this case, State Farm, in fact, won a temporary restraining order against Hood last September, which was still in effect as of Wednesday, and it is hard to believe that State Farm would have settled the case without keeping that ban in place.

State Farm’s statement on the outcome reads: “Judge Bramlette has ruled that our contract with the attorney general is valid, unambiguous and enforceable and we are very pleased with the outcome.”

Hood’s office, on the other hand, emailed this comment: “Thanks to Judge Bramlette, who has the patience [of] Job, this case has been dismissed. I am glad I had an opportunity to rebut the allegations against our office. The Office of Attorney General will continue to fight for the policy holders [of] Mississippi. As for the criminal investigation, as with any case, I cannot comment.”

In February 2006 Attorney General Hood commenced a criminal investigation into whether State Farm had engaged in fraudulent practices to avoid paying money it owed policyholders for wind damage sustained in Hurricane Katrina. (A thirty-foot storm surge had demolished many homes on the coast, leaving nothing but slabs of concrete; that made it hard to determine the degree to which the homes had suffered damage from hurricane-force winds, which was covered under homeowners policies, before they were washed away by the later storm surge, which was not.)

Hood had agreed to drop his criminal inquiry in a letter agreement dated January 23, 2007. On that same date State Farm agreed to settle a civil case Hood had brought against State Farm in state court; a federal private class action brought for 32,000 policyholders by a group of lawyers headed by Richard F. (“Dickie”) Scruggs; and 640 individual cases also brought by Scruggs’ group. The Scruggs attorneys stood to make $10-20 million in fees from the class action, and another $26 million from the 640 individual cases. Scruggs and other members of his group are major campaign contributors to attorney general Hood.

While the settlement of the 640 individual cases did become final, a federal judge refused to approve the class action deal as proposed. Then, before that judge’s qualms could be addressed, the Scruggs group lawyers withdrew from the deal, and the case was dismissed. There is evidence that the Scruggs group withdrew from the deal at least in part because they were infuriated that State Farm had failed to pressure a subcontractor into dropping its suit against two former employees who had, for many months, been secretly assisting both the Scruggs group and the Hood investigation by supplying them with internal, confidential State Farm documents — allegedly in violation of their employment agreements. Scruggs himself was the main party on the hook in the case against the whistleblowers, since he was paying their attorneys fees and had agreed to indemnify them for any judgment ultimately entered against them.

After the class action deal fell apart, State Farm says it nevertheless honored the deal’s substantive terms — reevaluating slab claims and offering to pay a minimum of 50% of the policyholders’ policy limits for structural damages — albeit in the more informal setting of mediations supervised by the Mississippi Department of Insurance. (The Scruggs group attorneys don’t make any money off these mediations.) The company claims to have already paid out more than $70 million to policyholders in those mediations in a process that is ongoing.

In August 2007 Hood served State Farm with a new criminal grand jury subpoena seeking documents nearly identical to those that had been sought during his earlier criminal inquiry, prompting State Farm to sue the following month in federal court in Jackson, Mississippi, to stop Hood from reopening the criminal inquiry. State Farm claimed that Hood was violating its January 2007 letter agreement and unethically colluding with the Scruggs group, using the criminal proceeding as a way to pressure State Farm into paying lucrative settlements that would benefit the Scruggs lawyers — Hood’s campaign contributors.

Hood responded that his January 2007 agreement had only been a “gentleman’s agreement”; that, in any case, State Farm had failed to honor its terms in that the deal had contemplated federal court supervision; and that the criminal inquiry was, in any event, not covered by the letter agreement because it was a new inquiry focusing no longer upon a fraud upon policyholders (withholding payments for wind damage) but fraud upon the National Flood Insurance Program (improperly deflecting State Farm’s wind damage liability to the federally-funded National Flood Insurance Program.)

Even before State Farm filed its suit on September 13, 2007, the plot had begun to thicken. On August 21, 2007, Scruggs was indicted in federal court in Birmingham for criminal contempt for failing to obey a court order in the case brought by State Farm’s subcontractor against his whistleblowers. Scruggs has pleaded not guilty. The order he is charged with defying had required him to return to the subcontractor documents that had been “purloined” by Scruggs’s whistleblowers; instead, Scruggs had turned the documents over to Hood’s office (even though Hood’s office already had a set).

In June 2007, Judge William Acker Jr. had recommended that criminal contempt charges be brought against Scruggs. He had found that the night after Acker issued his order, Scruggs had called Hood and had prompted him to have a subordinate email instructions to Scruggs to send the documents to him. He noted that he could not understand why Scruggs and Hood would have behaved as they had unless they had “teamed up to bully State Farm into civil and criminal settlements.”

Then in late November 2007, Scruggs and four associates were indicted by federal prosecutors in Oxford, Mississippi for allegedly trying to bribe a state judge to influence litigation stemming from an intra-Scruggs-group squabble over the $26 million in fees received from State Farm’s settlement of the 640 Katrina cases. Scruggs has pleaded not guilty to those charges, too.

At Wednesday’s hearing, attorney general Hood professed very vague memories of what, if anything, Scruggs had asked him to do in the days immediately following Judge Acker’s order, stating only that his understanding had been that there was a “law enforcement exception” to the order and referring all more specific inquiries to the line prosecutor handling the inquiry, Courtney Schloemer. He said he’d never seen the letter Schloemer emailed to Scruggs instructing him to send the documents to her, though he’d had “some communication” about it with her before she sent it.

Schloemer had been subpoenaed to testify at this week’s hearing, so had the proceeding not been settled, she presumably would have done so. It would have been a ticklish task. She either would have had to accept sole responsibility for aiding conduct that Judge Acker has said he considers contemptuous, or she would have had to testify that her boss played a more active role than he now recalls. (In his testimony Wednesday, Hood also maintained that he had still never read any of Judge Acker’s orders, including the one that had all but labeled Hood a co-conspirator in Scruggs’ alleged contempt.)

But the emotional high point of Wednesday’s hearing came when State Farm attorney James R. Robie posed a certain highly specific question to Hood, the very asking of which suggested that State Farm might have somehow gained access to sources who were once quite close to Scruggs.

An attorney’s questions do not constitute evidence. On the other hand, an attorney is not supposed to ask an inflammatory question without a good-faith basis. Accordingly, it was a bombshell when State Farm’s Robie began the following line of inquiry:

Q. Mr. Hood, before Scruggs settled with State Farm … the case with 640 plaintiffs, which generated a fee in excess of $20 million for Mr. Scruggs and his partners, did they dispatch Mr. [Timothy] Balducci and Mr. [Steven] Patterson to have dinner with you in a restaurant in Jackson to talk about that?” [Balducci and Patterson are associates of Scruggs who have each pleaded guilty to bribing a state court judge in connection with one of the two federal criminal cases that Scruggs now stands accused of.]

A. I don’t know.

Hood’s counsel, J. Lawson Hester, objected on relevance grounds, but Judge Bramlette overruled and allowed Robie to press further.

Q. I’m asking you whether or not Mr. Scruggs sent Mr. Balducci and Mr. Patterson to have dinner with you here at a restaurant in Jackson to talk about settlement of that case.

A. I don’t know what Mr. Scruggs did with Balducci and Patterson.

Q. Did you have dinner with Mr. Balducci or Mr. Patterson at Crechale’s restaurant where they discussed Scruggs’ desire to settle that case?

A. No, sir. I haven’t been to Crechale’s in a long time.

Q. You did not have dinner with them where they discussed –

A. When are you talking about? And you said “Crechale’s.” I haven’t been to Crechale’s so I know I didn’t have dinner with anybody at Crechale’s.

Q. My real question is: Did Mr. Patterson or Mr. Balducci have dinner with you and tell you that if you did not participate or assist Mr. Scruggs in settling that mass tort action which was going to generate a 20-million-dollar-plus fee, that he would fund an alternative candidate to run against you for attorney general?

A. If you’re asking me did somebody come to me and threaten me, the answer is no. Now, out of all candor in this, I don’t want to mislead you. I remember having dinner on one occasion with Mr. Balducci and Mr. Patterson, but that conversation was about they were leaving the firm that they were presently — that Mr. Balducci was presently with. They didn’t convey any threats to me about settling the case or anything like that. [Balducci left the firm of Joey Langston in about January 2007 to start his own firm, bringing nonlawyer Patterson, who had also worked with Langston, with him as a business associate. (Last month Langston pled guilty to participating in yet another bribery attempt, in 2006, allegedly intended to aid Scruggs in a different state-court fee-dispute litigation. Scruggs has denied involvement in any wrongdoing there, too.)]

Q. They never suggested that if you didn’t participate in dropping your criminal investigation that Dickie Scruggs would fund an alternate candidate and [former Mississippi attorney general] Mike Moore would support that?

A. No, sir. Absolutely not.

Well, Hood denied it, so that’s where things stand. But had the proceeding continued, we might have learned what Mr. Robie’s basis was for asking the question, and we might have heard some other interesting questions he thought he had a good-faith basis for asking.

Between the pending federal prosecutions of Scruggs and the multiple ongoing litigations between State Farm and the remnants of Scruggs’s group, now known as the Katrina Litigation Group, it seems likely that we will eventually be hearing more about the evidence that prompted Mr. Robie’s question.