A Maryland health-insurance firm run by Tom Knox was fined $125,000 by state regulators in 2004 for hiring a convicted embezzler, in violation of federal rules - and for keeping him on the payroll after promising to remove him.

Knox, a Philadelphia mayoral candidate who has pledged to end corruption and cronyism at City Hall, hired the felon in 2000 as a compliance officer for Fidelity Insurance, which Knox had bought the previous year.

As compliance officer, David S. Fishbone was responsible for making sure Fidelity acted within the law.

Fishbone had been sentenced to four years in federal prison in 1995 after pleading guilty to looting six estates of more than $1 million when he was a bankruptcy lawyer in Philadelphia.

He and Knox are longtime friends and former neighbors, and Fishbone previously did legal work for Knox, Knox's campaign manager, Josh Morrow, said yesterday.

Knox, Morrow said, "has a history of giving people second chances." Morrow said Fishbone had no role in Knox's campaign. Knox was not available for comment last night.

When Fidelity agreed to pay the fine, in 2004, Maryland officials said Fidelity had hired Fishbone despite a federal law that prohibits such a felon from working in the insurance field unless the state insurance commissioner grants a waiver. Fishbone had no such waiver.

The federal statute specifically bars health insurers from hiring people convicted of felonies involving "dishonesty or breach of trust."

State regulators also said that Fidelity promised to remove Fishbone in 2003 but continued to employ him, "notwithstanding the assertions" made to regulators by the company, according to a consent order signed by Fidelity and by Maryland officials.

In the consent order, Fidelity said it agreed with the factual statements about the case made by Maryland officials.

Yesterday, however, Morrow said that Fishbone had not continued in his Fidelity job, but had instead handled other legal work for Knox.

Fishbone, now 57, yesterday released a statement through the Knox campaign that said: "I can only say that Tom Knox was one of the few people who I knew that was willing to help me when I got out of prison. He was willing to give me a good job when no one else would."

The 2004 consent order notes that Fishbone had applied for a state waiver to permit him to hold the job despite his felony conviction - but his application was rejected. Fishbone appealed that denial. That appeal was still pending when Fidelity signed the consent order, agreeing to remove him.

The Maryland officials made no allegation that Fishbone had done anything wrong in his role as a Fidelity executive.

Knox was not available for comment last night, Morrow said.

Knox bought Fidelity Insurance in 1999 for about $3 million. He then invested several million more into it and more than doubled its customer list. In 2004, he sold it to a larger HMO, UnitedHealthcare, netting $20 million.

Darlene K. Frank, a spokeswoman for the Maryland Insurance Administration, which oversees insurers, said yesterday the Fishbone hiring was "probably the most egregious" of three instances in which Fidelity paid penalties for conduct during Knox's tenure.

In 2002, the agency issued a 95-page report faulting the firm for 29 violations and imposed a penalty of $70,000.

However, Frank described the report as "fairly typical" for insurers subjected to such review in Maryland.

Among other violations, the report said that Fidelity was routinely late in paying for medical care and hadn't fully informed customers about which procedures were excluded from coverage.

In one violation that has surfaced over the last few days in the Philadelphia mayoral campaign, the Maryland agency said a statement on Fidelity's Web site in 2001 wrongly instructed customers that they needed authorization from their primary doctor before they could go to an emergency room.

U.S. Rep. Bob Brady, one of Knox's rivals in the Democratic mayoral race, has pointed to this violation twice in the last four days of campaigning.

Morrow said the wording on the health firm's Web site had been posted in error and didn't reflect company policy.

In 2005, Fidelity paid a $10,000 penalty for other violations that Maryland regulators said began in 2003, when Knox still owned the firm. Regulators said the firm improperly cut payments to health-care providers without giving them notice.

The largest fine was extracted in reference to Fishbone's 2000 hiring.

A lawyer for more than 20 years who specialized in bankruptcy cases, Fishbone admitted stealing money over four years from the estates of six bankrupt clients, among them the now-defunct St. Mary Hospital in Fishtown - money that would have been shared by the clients' creditors.

At the time, federal prosecutors said it was the largest embezzlement case ever brought against a bankruptcy attorney.

Fishbone pleaded guilty to his crime and voluntarily gave up his law license. He was sentenced to four years and five months in prison in 1995; it could not be learned last night how much of this sentence he served before his release.

At the time of his sentencing, Fishbone told the judge he had stolen the money to pay for a big house, expensive cars, and other luxury items, as well as big family therapy bills.

"I didn't intend to hurt anyone," Fishbone told the judge. "It was to maintain my lifestyle."

The judge said: "The reason it's so dastardly is because he was in a position of trust."

With Knox ahead in polls of the mayor's race, his rivals have tried to seize upon missteps in his business background. Fishbone mentioned this yesterday in his statement.

Knox "gave me responsibility and his trust, despite what I had done," Fishbone said. "He is not at all the way he is being negatively portrayed by his opponents. I know him very well and I know that he gave me a chance when no one else would do that."