Investigations Newsletter: California Man Convicted in $27 Million PPP Fraud Scheme

ArentFox Schiff

ArentFox Schiff

Headlines that Matter for Companies and Executives in Regulated Industries

California Man Convicted in $27 Million PPP Fraud Scheme

After a trial before a federal jury, a California man was convicted of bank fraud, making false statements to a financial institution, and money laundering for submitting fraudulent applications seeking money from the federal Paycheck Protection Program (PPP).

According to documents presented at trial, the defendant submitted 27 PPP loan applications to four banks between April and June 2020, seeking $27 million in PPP loans on behalf of eight companies that the defendant solely owned. The defendant’s loan applications falsely represented that each company had 100 employees and average monthly payroll expenses of $400,000. The defendant also submitted falsified IRS documents claiming that his companies had annual payrolls amounting to $4.8 million.

In reality, these companies had no employees or payroll. As a result of the defendant’s fraudulent applications and supporting documentation, three of his companies received $3 million in government funds. The evidence presented at trial showed that the defendant did not use these funds for payroll and other business expenses as directed but instead used them for personal expenses, including payments on his personal credit cards and rent for an oceanfront apartment in Santa Monica. The defendant also made significant cash withdrawals, including a withdrawal of $248,000 of PPP funds in cashier’s checks, which he then transferred to other accounts he controlled.

The defendant is scheduled to be sentenced on June 27 and faces a maximum 30-year prison sentence for each of the bank fraud and false statement charges and up to 10 years for each count of money laundering.

Read the press release here.

Medical Director Convicted in $112 Million Addiction Treatment Fraud Scheme

After a fifteen-day trial, the Medical Director of two addiction treatment facilities was convicted of conspiracy to commit health care fraud and wire fraud and eight counts of health care fraud for his role in a scheme to fraudulently bill approximately $112 million for substance abuse services that were never provided or were medically unnecessary.

The evidence presented at trial demonstrated that the defendant and others admitted patients for detox services that were not medically necessary and were the most expensive treatment the facilities offered. Patients allegedly received kickbacks from recruiters to attend the programs, and the recruiters also gave the patients illegal drugs to ensure the patients would be admitted. Court documents showed that the defendant submitted false claims for excessive and medically unnecessary urinalysis drug tests that were never used in the treatment and that defendant was aware that others would use his credentials to sign electronic medical files to make it appear as if he had provided treatment that he did not actually provide. The government also showed that the defendant repeatedly re-admitted a group of patients for unneeded treatment and shuffled them between the two facilities in order to bill as much as possible. The defendant also prescribed some patients a “Comfort Drink” to sedate them and ensure that they stayed at the facility and would seek readmission.

The defendant faces up to 20 years in prison for the conspiracy count and up to 10 years in prison for each health care fraud count.

Read the press release here.

DC Circuit Set To Rule on Pro Tanto Damages in False Claims Act Case

The DC Circuit heard an oral argument on Thursday, March 30, 2022, on appeal by Honeywell International, Inc. (Honeywell), challenging a district court order requiring Honeywell to pay $35 million to the government, despite the fact that the government had already been made whole through settlements with other defendants. The Department of Justice (DOJ) sued Honeywell in 2008, asserting that Honeywell concealed from law enforcement agencies information about Z shield, a material used for bulletproof vests, including information about how Z Shield degraded in high heat and humidity. During the course of the years-long litigation, DOJ recovered approximately $36 million from other parties in the Z Shield supply chain, representing the government’s actual damages plus the treble damages to which it is entitled under the False Claims Act (FCA). The district court nevertheless applied the “proportionate share” approach to damages in FCA suits involving multiple defendants to support its $35 million awards against Honeywell, reasoning that it “would be wholly inequitable to permit Honeywell to escape damages liability altogether.”

Honeywell’s position on appeal is that, under the pro tanto—or dollar-for-dollar—approach to damages, it has no monetary liability because the government has already recovered its treble damages through settlements with other parties.

Proponents of the “proportionate share” approach have argued that the pro tanto methodology encourages defendants to drag out litigation in order to reduce their liability in the hopes that smaller players with less risk tolerance will settle early, and the government further argued before the D.C. Circuit that a pro tanto approach doesn’t further the purpose of the FCA to deter fraud. Nevertheless, Honeywell pointed out that defendants still face the threat of civil penalties under the FCA and other non-monetary penalties such as debarment.

Read Bloomberg Law’s coverage of the appeal here and here.

Physician Receives Two-Year Prison Sentence For Health Care Fraud Scheme

A Florida-based physician was sentenced to two years in prison for a health care and wire fraud scheme involving the submission of false and fraudulent claims to Medicare and a financial services company.

The defendant allegedly conspired with a now-deceased chiropractor, the owner of Dynamic Medical Services, to defraud Medicare, individual patients, and a financial services company that granted consumer loans to patients for out-of-pocket medical expenses. The defendant allegedly opened a merchant account in his own name and allowed the chiropractor to use the account in exchange for paying kickbacks and bribes to the defendant. The government alleged that through the account, the chiropractor applied for loans on patients’ behalf for medical services that were never provided.

According to court filings, from November 2019 through July 2020, the two men allegedly submitted more than $193,000 in fraudulent loan applications to the financial services company, which paid out approximately $165,000, and they also submitted approximately $19,000 in false claims to Medicare.

The defendant pleaded guilty on June 1, 2021, to one count of conspiracy to commit wire fraud and one count of health care fraud. The chiropractor was charged with several counts, but the criminal complaint was dismissed after he passed away and, accordingly, remains presumed innocent.

Read the press release here.

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