Fraudulent Incorporation Confirmed as Basis for Criminal Healthcare Fraud Charges

The U.S. District Court for the Southern District of New York has denied defense motions to dismiss federal healthcare fraud conspiracy charges predicated on allegations that the defendants falsely represented to no-fault automobile insurance carriers that five medical professional corporations were owned, operated, and controlled by physicians in accordance with New York law.

The decision in United States v. Pierre, 22 Cr. 19 (PGG); 22 Cr. 20 (PGG) (S.D.N.Y. July 12, 2023), by Judge Paul G. Gardephe, makes clear that where defendants obtain payments for medical services based on any such misrepresentations, they commit fraud actionable under federal criminal fraud statutes.

Plainly, those who commit no-fault automobile insurance fraud using illegally owned and controlled medical corporations no longer have to be concerned solely about potential civil liability – they also should fear criminal prosecution.

The Government’s Allegations

The case began in January 2022 when the U.S. Attorney’s Office for the Southern District of New York charged numerous individuals in two indictments with, among other things, conspiracy to commit healthcare fraud in violation of 18 U.S.C. § 1347. In general, Section 1347 makes it a crime to knowingly and willfully execute, or attempt to execute, a scheme (i) to defraud any healthcare benefit program, or (ii) to fraudulently obtain money or property from a healthcare benefit program in connection with the delivery of or payment for healthcare benefits.

A superseding indictment in one of the cases that was filed on June 26, 2023, described the scope of the alleged fraud. According to the government, from about 2008 to 2021, Bradley Pierre, Dr. Marvin Moy, and other defendants sought to defraud no-fault insurers. According to the superseding indictment, Pierre – who was not a licensed medical practitioner – fraudulently owned, operated, and controlled five medical professional corporations, including medical clinics and an MRI facility (collectively, the No-Fault Clinics), by paying licensed medical professionals to use their licenses to incorporate the professional corporations. The No-Fault Clinics allegedly engaged in fraudulent billing for unnecessary and excessive medical treatments and falsified MRI findings.

Among other things, Dr. Moy allegedly conducted unnecessary and excessive medical treatments. (Interestingly, approximately 10 months after being charged, Dr. Moy allegedly disappeared in a “dead of the night” boating accident; to date, his body has not been found and he has not been located. See “Marvin Moy, NYC doctor charged by feds, vanishes after alleged LI boat accident,” https://nypost.com/2022/10/30/manhattan-md-charged-by-feds-vanishes-in-li-boat-accident/; “The Mysterious Case of the Doctor Who Disappeared at Sea,” https://www.nytimes.com/2022/12/22/nyregion/marvin-moy-boat-missing.html.)

The superseding indictment alleged that the defendants paid hundreds of thousands of dollars to co-conspirators, referred to as “Runners,” who paid bribes to 911 operators, hospital employees and others for confidential motor vehicle accident victim information. The Runners then allegedly used this information to contact the victims, lie to them, and induce them to seek medical treatment at, among other places, the No-Fault Clinics.

The defendants billed insurance companies for more than $100 million in fraudulent medical treatments, prosecutors asserted. According to the government, others who played a role in the scheme included personal injury lawyers as well as an accountant who filed false tax returns on behalf of certain of the defendants.

New York No-Fault Insurance Law

New York requires every vehicle registered in the state to have no-fault automobile insurance providing coverage for “basic economic loss.” Under the state’s no-fault insurance law, automobile accident victims may assign their right to recover for basic economic loss from their no-fault insurance company to others, including clinics that provide medical services to treat their injuries.

Importantly, however, a medical professional corporation must be in compliance with licensing laws, including being incorporated, owned, operated, and controlled by a licensed medical practitioner, to be eligible for reimbursement under New York’s no-fault law.

Nearly 20 years ago, the New York Court of Appeals issued its decision in State Farm Mutual Automobile Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005), a case in which my firm represented the insurance carrier. In Mallela, the Court of Appeals held that no-fault insurers may withhold payment for medical services where a medical professional corporation fails to meet applicable licensing requirements that prohibit non-physicians from owning or controlling professional service corporations, even if the professional service corporation was established under the facially valid cover of physician-ownership recorded on licensing documents. Since Mallela, the law in New York has been clear: Insurance carriers may deny no-fault payments to so-called fraudulently incorporated medical service corporations owned or controlled by non-physicians.

In October 2022, the Pierre defendants moved to dismiss the healthcare fraud conspiracy charges insofar as they relied on the defendants’ alleged misrepresentations about the ownership and control of the No-Fault Clinics. In essence, they argued that Mallela applied only in the civil context, and not in the criminal context.

The court rejected that argument.

The Court’s Decision

In its decision, the court explained that the indictments alleged that the insurers – the victims of the alleged healthcare fraud conspiracy – participated in New York’s no-fault insurance program; that the insurers provided coverage to policyholders for basic economic loss; and that New York law excluded from the meaning of basic economic loss payments made to unlicensed or fraudulently licensed healthcare providers.

The court observed that the government alleged that the No-Fault Clinics with which the defendants were affiliated “were not owned, operated, and controlled by licensed medical practitioners as required by law” but, instead, were owned, operated, and controlled by the non-physician defendants. The court pointed out that the prosecutors alleged that the No-Fault Clinics “purport[ed] to be legitimate medical care clinics” – i.e., physician-owned and physician-operated – and that the clinic owner-operators persuaded licensed physicians to lie under oath to insurers when asked “whether the[ir] medical practice[s] [were] under the control of nonphysicians.”

In sum, the court said, the government alleged that the defendant physicians and defendant owner-operators conspired to misrepresent that their clinics were not subject to the New York law excluding expenses incurred at non-physician-owned clinics from the definition of “basic economic loss.” The court added that the defendants’ alleged purpose in making these misrepresentations “was, of course, to obtain payments from the insurers.” Because the defendants allegedly knew that “[i]nsurance companies would deny all billings for medical treatments from a medical clinic that was not actually owned, operated, and controlled by a licensed medical practitioner,” the defendants had to misrepresent the ownership status of their clinics in order to obtain payment from the insurers, the court said. Accordingly, the court decided that claims for medical services provided by the No-Fault Clinics – when submitted by the No-Fault Clinics to the insurers for reimbursement – were not claims for basic economic loss under New York law.

According to the court, this case presented “straightforward allegations of insurance fraud.” It then denied the defendants’ motions to dismiss.

Other Decisions

Although Pierre is the most recent case to apply Mallela analysis to criminal defendants, it is not the only court to have done so.

For example, in United States v. Zemlyansky, 945 F. Supp. 2d 438 (S.D.N.Y. 2013), the government charged defendants with conspiracy to commit healthcare fraud by, among other things, falsely representing in no-fault claims to insurers that their medical clinics were physician-owned and physician-operated. The defendants moved to strike portions of the indictment insofar as those portions were based on the government’s theory of fraudulent incorporation, arguing that the theory was legally insufficient to support a conviction for mail fraud or healthcare fraud. In particular, the defendants argued that the fraudulent incorporation theory was legally insufficient because it did not establish any intent to cause injury to the insurers.

The court rejected this argument and denied the defendants’ motion to dismiss, citing to Mallela and explaining that the Court of Appeals held in that case that “fraudulently incorporated professional corporations” were “not entitled to reimbursement” by insurers. A misstatement about a professional corporation’s ownership, if made with the intent to deceive an insurer into making payments it would otherwise withhold, was “a misstatement made with the intent to cause injury to the insurer,” the court added. It reasoned that the fact that Mallela was a civil case was “simply beside the point” because New York law was relevant “to determine whether a material misrepresentation has been made and whether it was made with the intent to defraud.” On those issues, the court said, Mallela was “crystal clear.”

Notably, Dr. Tatyana Gabinskaya, one of the defendants in Zemlyansky, was convicted at trial, and her conviction was affirmed by the U.S. Court of Appeals for the Second Circuit. See United States v. Gabinskaya, 829 F.3d 127 (2d Cir. 2016). The Second Circuit reasoned that the evidence adduced at trial was sufficient for a rational jury to find Gabinskaya’s knowing and willful participation in the scheme as the straw owner of an allegedly fraudulent clinic. The circuit court stated, “Gabinskaya signed the necessary paperwork in order for her coconspirators to open and operate [the clinic], but did not exercise any control over its operations, or participate in its business or medical decisions. Gabinskaya did not see patients or supervise employees. Rather, the clinic was controlled and operated solely by [non-physicians] Zemlyansky and Danilovich. Nor did Gabinskaya fund [the clinic’s] operations or share in the profits or the risk of loss, instead receiving a fixed payment of $1,500 per week.”

The Second Circuit concluded that Gabinskaya’s knowledge of the fraudulent nature of the scheme was also “sufficiently proved,” observing that she falsely testified during an examination under oath conducted by an insurance company that she worked at the clinic two to three times per week, supervised employees, and interviewed patients. “Such false testimony permits a reasonable jury to infer consciousness of wrongdoing,” the circuit court ruled.

Conclusion

As Pierre and other decisions make clear, courts in the Second Circuit support the federal government’s argument that a medical clinic that is unlawfully licensed (i.e., “fraudulently incorporated”) under Mallela and its progeny commits a fraud actionable under federal criminal fraud statutes. Where federal prosecutors bring charges in appropriate cases, pressure on fraudsters (both actual and potential) increases, to the benefit of policyholders, insurers, and government budgets.

Reprinted with permission from the September 1, 2023, issue of the New York Law Journal^©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.