Investigations Newsletter: Medical Technology Company President Charged in $69 Million COVID-19 Testing Fraud Scheme

Arent Fox

Medical Technology Company President Charged in $69 Million COVID-19 Testing Fraud Scheme

A complaint in the Northern District of California was unsealed on June 9, 2020, charging the president of Arrayit Corporation, a California-based medical technology company, with one count of securities fraud and one count of conspiracy to commit health care fraud. The complaint alleges that the defendant misled investors to manipulate the company’s stock price and participated in a scheme to submit to Medicare over $69 million in false claims for allergy and COVID-19 testing. This complaint marks the Department of Justice’s first criminal securities fraud prosecution related to the COVID-19 pandemic.

The defendant allegedly represented that Arrayit was the “only laboratory in the world” offering “microarray technology” that could test for allergy and COVID-19 based on a drop of blood 250,000 times smaller than that advertised by Theranos. Between 2018 and early 2020, the defendant also allegedly paid kickbacks and bribes to recruiters and doctors for allergy screening on every patient regardless of medical necessity and misrepresented to potential investors the company’s allergy test sales, financial condition, and future prospects.

Beginning in March 2020, the complaint alleges that the defendant made false claims concerning Arrayit’s ability to provide accurate, fast, and inexpensive COVID-19 tests and made misrepresentations to potential investors about the company’s testing. The defendant analogized the switch from allergy to COVID-19 testing to “a pastry chef” who switches from selling “strawberry pies” to selling “rhubarb and strawberry pies.” There was, however, no disclosure of the uncertainty surrounding the accuracy of the company’s testing.

A complaint is merely an allegation and the defendant is presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

Read the press release here.

Four Individuals Charged in $54 Million Compound Pharmacy Kickback Scheme

In an unsealed indictment filed in the Middle District of Florida, four Florida-based individuals were each charged with one count of conspiracy to defraud the United States and to pay or receive health care kickbacks for their roles in an alleged compound pharmacy kickback scheme. Other charges in the indictment include (i) offering or paying health care kickbacks; (ii) possession with intent to deliver ketamine, a controlled substance; and (iii) soliciting or receiving health care kickbacks. The defendants will be arraigned at a later date.

The indictment alleges that the defendants participated in a scheme to defraud the TRICARE program, which provides health care coverage for active duty service members, retirees, and their families and survivors. One of the defendants owned and operated Florida Pharmacy Solutions Inc. (FPS), which allegedly targeted TRICARE beneficiaries, and through illegal kickbacks, procured prescriptions for expensive compound drugs on behalf of TRICARE beneficiaries. Between November 2012 and September 2015, the defendants allegedly caused the submission of more than $54 million in false claims to TRICARE, of which TRICARE paid approximately $41 million. These claims concerned TRICARE beneficiaries living in approximately 30 states and several foreign countries. The indictment further alleges that one defendant paid more than $20 million in kickbacks to the others, in exchange for referrals and procurement of these prescriptions for TRICARE beneficiaries to be filled by FPS.

Read the press release here.

Engineering Company Pleads Guilty and Agrees to Pay $68.4 Million for Defrauding US Army

South Korea-based engineering company, SK Engineering & Construction Co. Ltd. (SK), pled guilty to one count of wire fraud arising from a scheme to obtain US Army contracts through payments to a US Department of Defense contracting official.

Pursuant to SK’s plea agreement with the government, the US District Court for the Western District of Tennessee sentenced SK to pay $60,578,847.08 in criminal fines — the largest fine ever imposed against a criminal defendant in that court — and $2,601,883.86 in restitution to the US Army. SK must also serve three years of probation, during which it may not pursue federal government contracts. SK also entered into a False Claims Act settlement to pay $5,200,000 in civil penalties to the United States, which will be credited against the criminal fine. The government alleged, and SK admitted, that SK and its employees obstructed the government’s investigation by burning large numbers of documents related to US Army contracts and attempting to persuade an individual not to cooperate with US investigators.

In 2008, SK admitted that it paid millions of dollars to a fake company named S&Teoul, which subsequently paid a contracting official with the US Army Corps of Engineers. In turn, SK obtained a US Army construction contract at Camp Humphreys, South Korea worth hundreds of millions of dollars. To cover up those payments, SK submitted false documents to the US Army. In November 2018, two SK employees, Hyeong-won Lee and Dong-Guel Lee were indicted by a federal grand jury for conspiracy, major fraud against the United States, wire fraud, money laundering conspiracy, and obstruction of justice for their alleged roles in the scheme. Hyeong-won Lee and Dong-Guel Lee are currently fugitives from justice.

Read the press release here.

Government Contractor Resolves $1.25 Million General Services Administration Fraud Claims

Alutiiq International Solutions LLC (AIS), a subsidiary of Afognak Native Corporation (Afognak), has entered into a non-prosecution agreement (NPA) and agreed to pay over $1.25 million in victim compensation payments to resolve allegations concerning a kickback and fraud scheme relating to a contract with the General Services Administration (GSA). AIS is an Alaskan Native Corporation, within the meaning of the Alaska Native Claims Settlement Act, which performs construction work on government contracts.

According to the NPA, beginning in approximately June 2010, an AIS project manager was assigned to a multi-million dollar GSA contract to modernize the Harry S. Truman Federal Building in Washington, DC. AIS admitted that the project manager began receiving kickbacks, in the form of meals, vacations, and eventually large cash payments, in exchange for steering work to a subcontractor on the project. The AIS project manager billed the GSA for on-site superintendent services despite that there was no superintendent on-site, and illegally inflated estimated costs from the subcontractor when submitting contract modification requests, collectively causing the GSA to improperly pay more than $1.25 million to AIS.

The government’s resolution with AIS included consideration of AIS’s full cooperation as soon as it became aware of the conduct, commitment to paying full restitution, and agreement to provide its profits from the relevant contracts to Afognak, which supports Alaskan Native shareholders in severely economically disadvantaged villages. As part of the NPA, AIS and its parent company, Afognak, agreed to cooperate in the government’s continued investigation and enhance their compliance programs to better detect fraudulent activity.

Both AIS and Afognak implemented remedial measures, including enhancements to their compliance program and internal controls by separating contract procurement and contract execution functions; conducting annual government contracting risk assessments and regular audits of procurement files; requiring higher levels of management oversight to approve contract awards and budget changes; and requiring additional Anti-Kickback Statute trainings.

In May 2019, the project manager was indicted by a federal grand jury with conspiracy to violate the Anti-Kickback Statute and four counts of wire fraud. Trial is currently scheduled for Dec. 7, 2020, before US District Court Judge Amy Berman Jackson.

Read the press release here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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