Rulings Obtained by Preet Bharara Highlighted Insurance Fraud Problem

May 4, 2017 | Appeals

Over nearly eight years as U.S. Attorney for the Southern District of New York, Preet Bharara became recognized as a powerful prosecutor in many areas, including government corruption and white-collar crime. Another subject for which he certainly deserves mention is his strong record helping to fight insurance fraud in New York.

Much can be learned from the numerous insurance fraud cases prosecuted by his office. They included what he has referred to as the “largest single no-fault automobile insurance fraud scheme ever charged” because it defrauded automobile insurance companies of more than $100 million by, among other things, creating and operating medical clinics that provided unnecessary and excessive medical treatments in order to take advantage of New York’s no-fault law. See, e.g., “Brooklyn Doctor Found Guilty in Manhattan Federal Court in Connection with Massive No-Fault Insurance Fraud Scheme,” Press Release, available at https://www.justice.gov/usao-sdny/pr/brooklyn-doctor-found-guilty-manhattan-federal-court-connection-massive-no-fault. Charges were brought against 36 people, and most of them were convicted or pleaded guilty.

This column discusses some of the more notable appellate rulings on insurance fraud obtained by Bharara and his office during his tenure.

No-Fault Fraud

Consider U.S. v. Gabinskaya , 829 F.3d 127 (2d Cir. 2016), one of the prosecutions arising from the no-fault investigation mentioned above. The case involved Tatyana Gabinskaya, a licensed physician who held herself out as the owner of a medical services professional corporation, Clearview of Brooklyn Medical P.C., and who represented herself as such on insurance claims submitted by Clearview.

Prosecutors in the Southern District indicted Gabinskaya, charging that she was a participant in a broad scheme involving a number of medical services professional corporations (PCs) to defraud insurance companies in connection with claims submitted under New York’s no-fault insurance law, N.Y. Ins. Law §5102 et seq. New York law requires medical PCs to be owned by licensed physicians, see N.Y. Bus. Corp. Law §1507(a), and provides that a medical provider that is not properly licensed is ineligible to receive reimbursement under the no-fault insurance regime, see N.Y. Comp. Codes R. & Regs. tit. 11, §65-3.16(a)(12).

Following a two-week trial, the jury found that Gabinskaya was the owner of the Clearview clinic only on paper and that the true owners of the clinic were non-physicians Mikhail Zemlyansky and Michael Danilovich, who actually controlled and operated Clearview, took the profits from its operation, and bore the risk of loss.

Gabinskaya was found guilty of conspiracy to commit health care fraud in violation of 18 U.S.C. §1349, health care fraud in violation of 18 U.S.C. §1347, conspiracy to commit mail fraud in violation of 18 U.S.C. §1349, and mail fraud in violation of 18 U.S.C. §1341, and she was sentenced to one year and one day in prison.

On appeal to the Second Circuit, Gabinskaya principally contended that the jury should have been instructed, in determining the question of ownership, to consider only the formal indicia of ownership, and not the economic realities.

The Second Circuit rejected her argument, reasoning that New York law was “clear” that ownership for purposes of New York insurance law was based on actual economic ownership. The Second Circuit then held that, as in the civil context, a factfinder in a criminal case could properly consider factors beyond formal indicia of ownership in determining ownership under New York’s no-fault insurance laws.

Accordingly, the circuit court rejected Gabinskaya’s arguments and affirmed the district court’s judgment.

Health Care Fraud

U.S. v. Karlov , 448 Fed. Appx. 109 (2d Cir. 2011), reached the Second Circuit when Alexandre Karlov appealed from his conviction, after a jury trial, for conspiracy to commit mail fraud and making false statements to federal agents. Prosecutors alleged that he was part of a fraudulent scheme involving a medical clinic in Brooklyn that treated individuals professing exaggerated injuries or injuries from staged accidents in order to receive unwarranted payments from insurance companies.

Karlov contended that the evidence was insufficient to show his membership in the conspiracy because it was “uncertain and episodic” and did not place him at the “heart” of the conspiracy. The circuit court was not persuaded.

It ruled that a rational jury could have found that Karlov had knowingly joined and participated in the charged conspiracy. Among other things, it pointed out that, in his post-arrest statement, Karlov had admitted knowing that “patients” attending the clinic were largely participants in staged auto accidents. Despite this knowledge of fraud, the circuit court added, Karlov also had admitted performing various delivery services for the clinic, including transporting patients and supplies, for which he was paid $400 to $450 per week. “This was sufficient by itself” to find that Karlov had joined the conspiracy, the circuit court decided.

STOLI Policies

Insurance brokers Michael Binday, James Kevin Kergil, and Mark Resnick, the defendants in U.S. v. Binday , 804 F.3d 558 (2d Cir. 2015), were convicted of conspiracy to commit mail and wire fraud, 18 U.S.C. §1349, mail fraud, 18 U.S.C. §1341, and wire fraud, 18 U.S.C. §1343, and Kergil and Resnick also were convicted of conspiracy to obstruct justice through destruction of records, 18 U.S.C. §1512(k). The convictions arose from an insurance fraud scheme involving “stranger-oriented life insurance” (STOLI) policies. A STOLI policy is one obtained by the insured for the purpose of resale to an investor with no insurable interest in the life of the insured—essentially, it is a bet on a stranger’s life.

According to prosecutors, the defendants had induced insurers to issue life insurance policies that they sold to third-party investors by submitting fraudulent applications indicating that the policies were for the applicants’ personal estate planning. In particular, the indictment alleged that the defendants had defrauded insurers by causing them to issue STOLI policies through misrepresentations regarding the applicants’ financial information; the purpose of procuring the policy and the intent to resell the policy; the fact that the premiums would be financed by third parties; and the existence of other policies or applications for the same applicant. According to the indictment, these misrepresentations “concerned essential elements of the agreements”—both the agreements between the insurers and the straw buyers with respect to the policies, and those between the insurers and Binday “with respect to commissions” received by the defendants—because the representations “significantly informed the [insurers’] financial expectations with respect to universal life policies.” Consequently, deceiving the insurers into issuing STOLI policies, when they believed they were issuing non-STOLI policies, “harmed [the insurers] in several ways” by “caus[ing] a discrepancy between the benefits reasonably anticipated by the [companies] and the actual benefits received.”

On appeal, the defendants primarily argued that the government had not demonstrated that they had contemplated harm to the insurers that was cognizable under the federal mail and wire fraud statutes.

The Second Circuit affirmed the convictions, finding that there was sufficient evidence that the defendants had contemplated a cognizable harm under the mail and wire fraud statutes. Among other things, the circuit court ruled that the government did not have to prove that the STOLI policies the defendants procured in fact had lower lapse rates or insureds with shorter life-spans than expected by the insurers. Rather, the Second Circuit held, it was sufficient that the misrepresentations “were relevant to the insurers’ economic decision-making because they believed that the STOLI policies differed economically from non-STOLI policies” and, as a result, the defendants’ misrepresentations had deprived the insurers of “potentially valuable economic information.”

Auto Accidents

In U.S. v. Jean , 647 Fed. Appx. 1 (2d. Cir. 2016), Maxo Jean appealed his conviction and sentence of 120-months’ imprisonment followed by three years’ supervised release. He had been charged with conspiracy to commit mail fraud, wire fraud, and health care fraud, in violation of 18 U.S.C. §1349, in connection with a scheme to deliberately cause car accidents and defraud insurance companies.

Jean claimed that the district court had erred by computing his offense level under the Sentencing Guidelines using an intended loss based on the total amount of fraudulent claims submitted. He argued that his intended loss was lower than the full amount because insurance companies were unlikely to pay the full claims.

The Second Circuit rejected this argument, explaining that the Sentencing Guidelines defined “intended loss” to include harm “that would have been impossible or unlikely to occur (e.g., as in a government sting operation, or an insurance fraud in which the claim exceeded the insured value).” U.S.S.G. §2B1.1 cmt. n.3(A)(ii). Accordingly, the Second Circuit ruled, the district court had not erred in its intended loss calculation.

Disability Fraud

U.S. v. Rutigliano , 790 F.3d 389 (2d Cir. 2015), involved what prosecutors contended was a disability insurance fraud scheme concerning employees of the Long Island Railroad (LIRR). According to the government, the LIRR pension plan allowed employees with 20 years or more of service to retire at age 50 with a pension equal to half of their pre-retirement income, but many LIRR employees doubled their pensions by making false disability claims to the Railroad Retirement Board (RRB) at the time of their planned retirement. Ultimately, 33 individuals pleaded guilty or were convicted.

Those convicted included Joseph Rutigliano, a former LIRR conductor and president of the union local, Peter J. Lesniewski, an orthopedic physician, and Marie Baran, a former RRB employee. A jury convicted them of (variously) conspiracy to commit mail fraud, wire fraud, and health care fraud, as well as substantive counts of these offenses, and one count of making false statements.

The three defendants appealed, but the Second Circuit affirmed. Among other things, the circuit court rejected Rutigliano’s contention that he had been prosecuted for conduct outside the statute of limitations period. It ruled that the receipt of profits from an economically motivated conspiracy (here, disability pension payments) constituted an overt act in furtherance of the conspiracy, and that other conduct “arguably constituting additional overt acts” had been committed within the limitations period.

Fraud at the LIRR, the circuit court concluded, “was epidemic.” It noted that the evidence showed that “a whopping 79 percent of LIRR employees retired on disability” contrasted with 21 percent for employees of Metro-North, a commuter railroad generally comparable to the LIRR.

Conclusion

Insurance fraud remains a significant problem in New York and elsewhere around the country. Some of the cases brought by Bharara and his office certainly helped to end large frauds, and to highlight the scope of the insurance fraud problem in the region. One can hope that his successor also will consider insurance fraud a subject worthy of attacking.

Reprinted with permission from the May 4, 2017 issue of the New York Law Journal.

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