HEALTHCARE FRAUD DEFENSE JOURNAL
The Department of Justice has already started investigating and even filed charges against individuals who acquired Paycheck Protection Program (“PPP”) loan funds under false pretenses. In most of the cases charged so far, the individuals all claimed to have employees at various businesses when in fact there were allegedly no employees working for any of the businesses. These cases are just the tip of the iceberg. Once the dust settles, and Congress evaluates the amount of money loaned, more enforcement initiatives will surely follow.
As such, it is important that borrowers make sure that they are in compliance with all requirements of the PPP, including eligibility and the loan amount calculation. Although there are few certainties with the PPP, applicants can at least substantiate their processes for determining their eligibility and loan amount, thereby minimizing the risk that the Small Business Administration (“SBA”) denies loan forgiveness or imposes any penalties for false certifications.
The CARES Act provides that to be eligible, the applicant must either be a qualifying “small business concern” or “business concern” as defined in the Act. An applicant also must have been in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or must have paid independent contractors. Sole proprietors, independent contractors, and self-employed individuals may also be eligible for PPP loans.
The basic size tests for eligibility are:
- A “small business concern” that satisfies the small business size standard for the industry in which the applicant is primarily engaged and, combined with its affiliates, satisfies the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher;
- A “small business concern” that satisfies the SBA’s “alternative size standard”; or
- For all other applicants eligible under the CARES Act, a “business concern,” qualifying 501(c)(3) nonprofit organization, 501(c)(19) veteran organization, tribal business concerns, or other business concerns, that employ, when combined with their affiliates, not more than the greater of (i) 500 employees whose principal place of residence is in the United States; or (ii) the maximum number of employees permitted by the applicable SBA’s size standard for the primary industry in which the applicant is primarily engaged.
The SBA requires small business concerns to count every employee of the applicant and all domestic and foreign affiliates of the applicant, regardless of full-time or part-time status. The existing SBA regulations on 7(a) loans do not limit employees to only employees who reside in the United States.
On May 18, 2020, the SBA released an Interim Final Rule concerning the Treatment of Entities with Foreign Affiliates under the PPP. According to the new rule, all employees of affiliates are to be counted for purposes of determining if the SBA’s employee size standards are met for purposes of PPP eligibility. The principal place of residence of the employee is not relevant for purposes of this headcount. If an applicant, together with its domestic and foreign affiliates, does not meet the Existing SBA Size Tests or the CARES Act Size Test, it is not eligible for a PPP loan. Because there was confusion based on prior guidance, the SBA agreed that this rule would not apply to borrowers who applied for their PPP loan prior to May 5, 2020 and did not include non-U.S. employees in their headcount determinations.
Determining the Amount of the PPP Loan
Once an applicant has determined it is eligible for a PPP loan, it must then calculate the maximum amount of the loan for which it is eligible. The amount of the loan is limited to the lesser of (i) $10,000,000 or (ii) 2.5 times an applicant’s eligible “payroll costs” plus the amount of any Economic Injury Disaster Loan (“EIDL”) originated on or after January 31, 2020 being refinanced with PPP proceeds (less the amount of any advance received under an EIDL). An applicant must only consider its own payroll costs and not those of its affiliates, even though it had to consider its affiliates’ employees when determining eligibility. “Payroll costs” are defined as:
- Salary, wage, commission, or similar compensation;
- Payment of cash tips or equivalent;
- Payment for vacation and parental, family, medical, or sick leave;
- Allowance for dismissal or separation (e.g. severance pay);
- Health insurance premiums and other payments for provision of healthcare benefits;
- Retirement benefits; and
- State/local taxes on employee compensation.
The required exclusions include:
- Any compensation for each individual employee in excess of an annual salary of $100,000 as prorated for the Covered Period (between February 15, 2020 and June 30, 2020);
- Federal taxes for payroll, railroad retirement, and income;
- Compensation of each employee with a principal residence outside United States;
- Qualified sick and family leave wages where credit is allowed under Families First Coronavirus Response Act.
Permissible Uses of PPP loan funds
Borrowers are permitted to use PPP loan funds for payroll costs, interest on mortgage, and other debt, rent, and utilities (provided the mortgage, other debt, rent, and utilities are in place or in service before February 15, 2020). Proceeds that are used for permissible uses between February 15, 2020 and June 30, 2020 that are not forgiven will become a loan.
It is still unknown what will happen if borrowers use loan proceeds other than for the permitted uses identified by the CARES Act. The first Interim Final Rule states that “[i]f you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.”
Risks of Accepting a PPP Loan
- Audits and interviews by government regulators and/or CARES task force
- Subpoenas from Office of Inspector General
- Criminal prosecution
- Disgruntled employee could bring a qui tam (whistleblower) action
Practical Tips to Ensure Compliance
- Application. Make sure you understand the questions on the application and that your answers are accurate. Make sure to record your rationale for your responses. Particularly, record your rationale and analysis of how you calculated the loan amount.
- Record keeping: Organize and keep all records related to the application, use of the loan proceeds, steps taken to secure funds, and any advice received in obtaining the funds. Keep those records for a minimum of two years.
- Use of Funds: Deposit loan proceeds in a separate bank account. Use the account for permissible expenses and document all expenses.
Consult a Professional: If you are contacted by a law enforcement agency regarding your PPP application or use of funds, hire a lawyer before responding to the inquiry.
The Department of Justice Criminal Division Fraud Section has quietly created a new privilege team. This is a departure from the traditional practice of using so-called “taint teams” – assigned agents and prosecutors not involved in the investigation — to review materials that may have been subject to a privilege. While it is unknown why the privilege team was formed, it is likely a consequence of a series of judicial opinions wherein the DOJ has been criticized for its handling of privileged materials, including in United States v. Philip Esformes, where the Court found that the government’s taint protocol had serious deficiencies. A designated privilege review team may have benefits for the defense. It certainly will benefit the Government and potentially help it to avoid further criticism from the courts as to its handling of privileged materials.
Traditionally, the DOJ used taint teams to review potentially privileged materials. These taint teams were made up of agents and prosecutors not working on the underlying investigation. The taint teams were usually assigned to review materials seized or obtained that likely contained privileged materials, such as materials from corporations, law offices, and/or email servers. The prosecutors handling the underlying matter were tasked with instructing the taint teams, who in turn were supposed to isolate the privileged material for discussions with counsel representing the privilege holder and potential litigation related to the privilege. The remaining materials were then turned over to the Government.
Defense attorneys have always been opposed to the use of taint teams. Because the relationship between prosecutors handling the underlying case and taint team is so closely connected, it provides good cause to believe the sanctity of the privilege would not be respected. Moreover, the close relationship between the prosecutors and taint teams often led the teams to make very narrow privilege decisions.
In recent years, the DOJ Fraud Section has come under increasing scrutiny in high profile cases for its handling of privileged materials. Particularly, in United States v. Esformes, agents seized materials from a lawyer’s office during the execution of a search warrant. U.S. v. Esformes, Case No. 16-20549-CR, 2018 WL 5919517 (S.D. Fla. Nov. 13, 2018). Despite being warned that agents were searching a lawyer’s office, agents proceeded in the search without the use of a taint team. Case agents – not taint agents – placed some privileged materials in taint boxes. However, hundreds of documents marked privileged and confidential were turned over to the prosecution team. The Court declined to dismiss the case, but ruled that the prosecution team’s “execution of their duties was often sloppy, careless, clumsy, ineffective, and clouded by their stubborn refusal to be sufficiently sensitive to issues impacting the attorney client privilege.”
United States v. Esformes is not the only case wherein the Government’s handling of privileged materials has been criticized. When the Government raided the law offices of Michael Cohen – President Trump’s longtime personal attorney and “fixer” – pursuant to the investigation of Russian interference in the 2016 election, the Parties litigated whether a taint team could review the seized records and devices. In the end, the Government agreed to appoint a special master to review the materials seized for privilege.
Now, the use of a dedicated privilege review team will possibly create more experience in spotting privileged materials that may have been missed in the past by taint teams. Additionally, a dedicated team might not be as worried about deadlines on other cases and can focus on a thorough review. However, the dedicated team works still for the Government and will likely have close relationships with prosecutors handling underlying cases. As such, defense attorneys should remain vigilant. If you believe the Government has seized privileged materials, notify the Government immediately and object. This notice should be memorialized in writing. Defense counsel should also identify what materials are privileged, assert the privilege, and demand to review the documents before any single document is turned over to case agents or prosecutors. If prosecutors do not respond, seek relief from the court.
A blow to the attorney-client communications privilege and a warning to accountants and lawyers engaging in asset protection and estate planning.
The Fifth Circuit Court of Appeals has upheld an order enforcing an Internal Revenue Service summons directed at a law firm. (Attorney-Client Privilege) The case is styled as Taylor Lohmeyer Law Firm PLLC v. the United States, No. 19-50506 (5th Cir. 2020).
The case involves a law firm that provides tax and estate planning services to its clients. In October 2018, the IRS served a John Doe summons on the firm asking for, among other things, information regarding the identity of firm clients that used its services to create and maintain foreign bank accounts. The firm filed a petition in federal court to quash the summons, asserting–among other things that the documents were protected by the attorney-client privilege. The firm claimed that despite the general rule that a lawyer’s clients’ identities are not covered by the privilege, an exception to the general rule applies when “a client’s identity is protected by the attorney-client privilege if its disclosure would result in the disclosure of confidential communication.” The District Court dismissed the petition and supported the enforcement of the summons.
The firm appealed. The Fifth Circuit upheld the District Court’s enforcement of the subpoena, reasoning that the disclosure of the identities of the clients would inform the IRS that the clients participated in one of the numerous transactions described in the summons to the firm. The Fifth Circuit further found that of the identities of clients would not reveal confidential advice received from the attorneys and was therefore not protected by the attorney-client privilege.
This ruling can have serious implications in criminal investigations and the powers of law enforcement. It further forces attorneys to make the uncomfortable choice between protecting clients’ identities and not revealing the information or facing contempt.
Yesterday, the Department of Health and Human Services (“HHS”) announced that the CARES Act has procured $100 billion in funding for health care providers. Some of the money will be allocated to providers treating uninsured patients for COVID-19 at Medicare rates. The rest of the funding is divided into four categories: (1) general allocation; (2) targeted allocation; (3) rural allocation; and (4) tribal allocation.
At the media briefing to announce the procurement of funds, HHS Secretary Alex Azar promised that the allocation of funds will be closely monitored and that there would be “significant anti-fraud and auditing work by HHS.” He also stated that the “terms and conditions of receiving these allocations include measures to help prevent fraud and misuse of the funds.” Key requirements include certifications that payments will only be used for medical expenses or lost income attributable to COVID-19, which triggered the widespread cancellation of non-emergency surgeries that are lucrative sources of hospital revenue. Recipients must also limit expenses for out-of-network coronavirus patients to in-network rates.
The terms and conditions tied to receipt of the funds can be found here. These terms and conditions are not final.
Pandemic Response Accountability Committee
The CARES Act also creates the Pandemic Response Accountability Committee that will be tasked with performing oversight of CARES Act funds. The members of the Committee include:
- the Inspectors General of the Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor, and the Treasury;
- the Inspector General of the Small Business Administration;
- the Treasury Inspector General for Tax Administration; and
- any other Inspector General, designated by the chairperson from any agency that expends or obligates covered funds or is involved in the coronavirus response.
Duties of Accountability Committee
The Committee’s specific duties include:
- auditing or reviewing covered funds . . . to determine whether wasteful spending, poor contract or grant management, or other abuses are occurring;
- making referrals for investigation to the Inspector General for the agency that disbursed the covered funds, including random audits to identify fraud; and
- reviewing whether competition requirements applicable to contracts and grants using covered funds have been satisfied.
This makes it clear that doctors and hospitals receiving funds will be under the government’s microscope.
On April 3, 2020 the Office of Inspector General (OIG) issued a Policy Statement to notify health care providers and other parties subject to the Anti-Kickback Statute (AKS) that the OIG will not impose administrative sanctions for potential AKS violations for COVID-19-related arrangements that are covered by some of the Blanket Waivers of the Physician Self-Referral (Stark) Law issued on March 30.
The OIG has decided to exercise its enforcement discretion to enable the health care industry to focus on delivering needed patient care during the COVID-19 emergency. The OIG will not pursue sanctions for certain financial arrangements that implicate the Physician Self-Referral Law and might otherwise implicate the AKS, if such arrangements are covered by one of the first 11 Blanket Waivers described by the Centers for Medicare and Medicaid Services in Section II.B HERE
OIG’s Policy Statement
The OIG’s Policy Statement applies to certain types of remuneration between hospitals and physicians, including below-FMV rental charges for lease of space or equipment, or nonmonetary compensation or incidental medical staff benefits in excess of regulatory limits, but does not apply to all of the types of remuneration covered by the Blanket Waivers. For instance, a hospital may provide free use of medical office space on its campus to allow physicians to provide timely and convenient services to patients who come to the hospital but do not need inpatient care. The OIG is encouraging parties to email the OIG with questions about the potential applicability of administrative sanctions to ‘other’ types of remuneration covered by the Blanket Waivers but not the Policy Statement.
OIG’s Policy Statement applies to conduct occurring on or after April 3, 2020, whereas the Blanket Waivers of the Physician Self-Referral Law were retroactive to March 1, 2020. The OIG Policy Statement and Blanket Waiver will terminate on the same date. However, OIG reserved the right to reconsider the Policy Statement, and terminate or modify it, at any time.
A developer accused of defrauding foreign investors in an alleged EB-5 visa scheme has filed a motion to dismiss his indictment, or in the alternative, a request for a Kastigar hearing in United States v. Quiros. The defendant is alleging that prosecutors reviewed communications with his counsel.
SEC Investigation by Attorney David Gordon
The developer, Ariel Quiros, was indicted in May 2019. Prior to the indictment, Quiros was represented by attorney David Gordon in response to an SEC investigation. As part of the investigation, an SEC receiver turned over Quiros’s laptop and other materials in his office to prosecutors in the criminal case., The prosecutors hired a third-party vendor to divide the privileged emails from other documents, however, despite these controls, the vendor turned over at least 2,000 emails between Quiros and Gordon.
All parties were well aware that Gordon represented Quiros; in fact, Gordon accompanied Quiros to one interview with the SEC.
Quiros alleges in his motion to dismiss that the government reviewed the privileged emails and relied on them in bringing its indictment against him.
Quiros also accuses the government of executing a search warrant on his email account without assigning a taint team to review and segregate privileged emails.
Quiros has threatened filing additional motions to suppress evidence.
The District of Vermont’s order on Quiros’s motion will be telling. The government would be well advised to institute taint protocol when reviewing emails to avoid potentially fatal flaws in its prosecutions.
In the highly contested Theranos prosecution, U.S. District Court Judge Davila dismissed three counts from the indictment.
About Theranos Company
Theranos is a health care and life sciences company founded by CEO Elizabeth Holmes. Theranos’ mission was to revolutionize medical laboratory testing through innovative methods of drawing blood, testing blood, and diagnosing patients. Theranos sought to develop a device termed the Theranos Sample Processing Unit, Edison, or minilab that could quickly and accurately analyze blood samples.
The Indictment charges Holmes and her COO Ramesh Balwani with eleven counts alleging that they defrauded doctors, insured patients, and investors about the viability of Theranos’ blood testing technology. The government claims that the promises of the devices were never realized and that the device created “consistently” produced inaccurate and unreliable results. The government further claims that despite these failures, Theranos began a publicity campaign to promote the technology and sold the tests at Walgreens in California and Arizona.
After hearing oral argument on defendants’ motions to dismiss, Judge Davila issued an order directing the government to clarify in a bill of particulars the specific fraudulent representations at issue and to detail who made the misrepresentations to doctors and patients and how they were made. Judge Davila stated that he wanted to avoid the defense team facing surprise at trial. Judge Davila also held that the government had failed to allege how Holmes and Balwani had a “specific intent” to defraud doctors and patients whose insurance paid for the test because the indictment doesn’t specify how those patients and doctors were deprived of money or property. As a result, the judge dismissed one conspiracy count and two wire fraud counts involving insured patients and doctors.
Judge Davila, however, rejected defendants’ argument that they never misrepresented the accuracy and reliability of the blood tests to patients. The judge stated that it was clear from the indictment that patients did not receive the benefit of the bargain.
Even though defendants will face trial on the eight remaining counts, Judge Davila’s order will provide them with better tools to fight. Particularly, the bill of particulars will provide a roadmap of the government’s case and permit Holmes and Balwaini to strategize a defense case.
About Two Telemedicine Companies
Yesterday, prosecutors in New Jersey unsealed an Indictment against a husband and wife owned two telemedicine companies. The Indictment alleges a $56 million fraud. Prosecutors claim that Reinaldo and Jean Wilson orchestrated a national kickback scheme involving unnecessary prescriptions for orthotic braces that were submitted to Medicare for reimbursement.
The Indictment alleges that the Wilsons solicited and received bribes from patient recruiters and pharmacies for patient referrals. Wilsons companies – Advantage Choice Care LLC and Tele Medcare LLC – hired doctors to order the braces.
The Indictment can be found here.
This Indictment comes on the heels of Operation Brace Yourself. That prosecution involved an investigation and prosecution of an alleged $1.2 billion telehealth scheme that involved similar allegations, but charged doctors and business executives of Durable Medical Equipment companies, among others.
If the recent Insys prosecution taught us anything, it is that sometimes it pays to go to trial. The defendants in that case were facing life sentences before trial.
Insys prosecution in 2019
The Insys prosecution started in 2019. The government brought the cases under the Controlled Substance Act and the RICO statute against doctors and corporate executives. The most closely watched case was the one involving the executives of Insys Therapeutics. In that case, the government alleged that seven executives at Insys Therapuetics conspired to violate the RICO statute by paying kickbacks to doctors who heavily prescribed Subsys, a fentanyl spray manufactured by Insys, and by making false statements to insurance companies.
Defendants Went to Trial
Two defendants – Babich and Burlakoff – decided pled guilty and cooperate right before trial. Five defendants went to trial.
After a 10-week trial and nearly four weeks of deliberations, the jury found that the defendants had committed predicate acts of illegal distribution of a controlled substance, honest services fraud, and mail and wire fraud. After trial, the court granted the defendants’ motion for acquittal as to the CSA and honest services fraud predicates, concluding that there was insufficient evidence to prove that the defendants “specifically intended … that healthcare practitioners would prescribe Subsys to patients that did not need it or to otherwise abdicate entirely their role as healthcare providers.
At the sentencing hearing for the cooperators, the Government requested a 20-month sentence for Burlakoff and a 24-month sentence for Babich.
The final sentences ordered by the Court for each defendant are outlined below:
When sentencing the cooperators, Judge Burroughs stated that she worried about sending the message that you can “do the very worst thing and then erase it by cooperating.” She also stated that “I worry about the message that you can be at the top of the criminal food chain, recruit all of these people into the operation, maximize your profits, and then turn around and cooperate against all of those people as if that conduct never happened.”
Given the ultimate sentences and the likely exposure to a life sentence pre-trial, the Insys case is a good example that it sometimes pays to go to trial.
Big Players Arrested In Drug Recovery Industry
Yesterday, Palm Beach State Attorney Dave Aronberg spoke to a reporter from the Sun Sentinel, announcing that his office will be making arrests in the next 30 to 45 days in the drug recovery industry. These arrests are related to investigations by the Sober Home Task Force, which has been investigating the drug recovery industry since 2016.
The State Attorney further stated that the arrests will target big players such as pharmacies, physicians, and laboratories because all the “low hanging fruit” have been arrested.
The Sun Sentinel article can be found here.
The Sober Home Task Force investigation has been aggressive and far reaching. Worse, the State Attorney has sought to eliminate any defenses available to defendants by filing motions in limine to preclude the advice of counsel defense. The inability to assert an advice of counsel defense in these cases, wherein legal advice was sought and followed for the most part, makes the charges against defendants akin to a strict liability charge. As a result, the State Attorney has been largely successful in obtaining plea agreements from those arrested thus far. However, this might change if the State Attorney does in fact arrest bigger players with more resources to fight these cases through motion practice and trial.