Municipal Fraud in Focus as Local Governments Face Budget Woes

Nearly a decade ago, in October 2011, Preet Bharara, then serving as U.S. Attorney for the Southern District of New York, announced pension disability fraud charges against a number of individuals associated with the Long Island Railroad (LIRR). The complaint estimated a potential loss to the Railroad Retirement Board of more than $1 billion in unwarranted disability benefits. See https://archives.fbi.gov/archives/newyork/press-releases/2011/manhattan-u.s.-attorney-announces-pension-disability-fraud-charges-against-11-defendants-associated-with-the-long-island-railroad-that-could-cost-1-billion.

The charges, and the guilty pleas and criminal convictions that resulted, see, e.g., U.S. v. Rutigliano, 790 F.3d 389 (2d Cir. 2015), apparently were followed by a decline in the number of LIRR employees being awarded disability benefits. See, “LIRR disability claims down since fraud scandal,” available at https://www.newsday.com/long-island/lirr-disability-fraud-anti-fraud-scandal-1.21193814.

A review of federal, state, and local government actions filed during 2020 reveals, however, that significant fraud against local municipalities, government agencies and departments, and government insurance funds continues, to the detriment of government coffers and, ultimately, of all taxpayers. This is especially troublesome in a COVID-19 pandemic world, with elected officials facing severe budgetary shortfalls.

Health Care Fraud

In many instances, the charges appear to reflect a kind of fraud that is all too common. For instance, in July, the authorities reached a $49 million settlement with a biotech testing company over claims that it fraudulently billed government healthcare programs for prenatal tests and provided kickbacks to physicians to induce to them to order its tests for their patients. See https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-49-million-settlement-biotech-testing-company.

Then, in August, a former Queens cardiologist agreed to pay $1,370,294.50 to the federal government and $629,705.50 to New York to settle civil claims that he paid kickbacks to other physicians for referrals of patients insured by Medicare, Medicaid, and the Federal Employees’ Health Benefits Program. See https://www.justice.gov/usao-edny/pr/former-queens-cardiologist-settles-civil-fraud-allegations.

In September, two doctors, two licensed physical therapists, a pharmacist, and four pharmacy owners and operators were charged in Brooklyn for their alleged roles in fraudulently billing the Medicare and Medicaid programs for more than $15 million. See https://www.justice.gov/usao-edny/pr/two-doctors-two-licensed-physical-therapists-pharmacist-and-four-pharmacy-owners-and.

And, in October, a physical therapist was sentenced to two years in prison for participating in a $30 million scheme to defraud Medicare and Medicaid. See https://www.justice.gov/usao-sdny/pr/physical-therapist-sentenced-2-years-prison-participating-30-million-scheme-defraud.

Over the year, allegations of fraud have reached well beyond health care and insurance fraud, as the examples discussed below illustrate.

Police Charity

In January, a Staten Island woman, Lorraine Shanley, was sentenced to two years in prison for bank fraud and subscribing to false and fraudulent individual income tax returns, in connection with fraudulently obtaining over $400,000 from Survivors of the Shield, a charity providing support to the families of New York City Police Department (NYPD) officers killed in the line of duty.

According to prosecutors, from 2010 to 2017, Shanley served as a volunteer treasurer for Survivors of the Shield. During that time, Survivors of the Shield received approximately $1.9 million in donations, over 99 percent of which came from NYPD employees.

Shanley was an authorized signatory on Survivors of the Shield’s bank account and credit card, and was authorized to use them for Survivors of the Shield’s operations. The government asserted that Shanley also used the bank account and credit card to benefit herself and her family members. According to the government, from 2010 to 2017, Shanley fraudulently obtained over $400,000 from Survivors of the Shield, which she used to pay for various personal expenditures such as landscaping, dental bills, event tickets, airfare, hotels, and shopping at high-end retailers.

In addition to the prison term, Shanley was sentenced to three years of supervised release and was ordered to pay restitution of $406,851 to the charity. See https://www.justice.gov/usao-sdny/pr/staten-island-woman-sentenced-2-years-prison-defrauding-police-charity-over-400000.

Two Authorities

Two cases resulted in guilty pleas for defrauding the Dormitory Authority of the State of New York (DASNY) and the New York City School Construction Authority (SCA).

In the first case, prosecutors explained that Shirley Boone was the chief of staff at NEAD, a not-for-profit neighborhood tax-exempt organization in Rochester that was governed by a volunteer board of directors with day-to-day operations overseen by an executive director. Volunteers and staff worked with city officials and agencies to revitalize and stabilize a neighborhood in the city’s northeast quadrant. Boone’s duties included securing grants for NEAD.

The government asserted that, on February 23, 2018, NEAD paid $45,000 to Freedom Community Enterprise Inc. – a for-profit subsidiary of NEAD – to make it appear that Freedom Community had replaced NEAD’s roof and had worked on other rehabilitation projects.

According to prosecutors, Boone subsequently sent documentation to DASNY indicating that Freedom Community had replaced NEAD’s roof and had performed other rehabilitation services, when it had not done so; Boone also sent documentation of the $45,000 payment. As a result, NEAD fraudulently received a $45,000 grant from DASNY. Boone pleaded guilty to conspiracy to commit wire fraud. See https://www.justice.gov/usao-wdny/pr/rochester-not-profit-employee-pleads-guilty-federal-court-defrauding-nys-dormitory.

In the second case, the government alleged that Rakesh Kumar, the owner of Orba Construction Company, a public school construction company, had submitted false certified payrolls to the SCA for work performed by Orba employees on SCA-funded projects. According to the indictment, these payroll forms falsely stated that Orba had paid its employees the prevailing wage as required by New York State labor law and labor agreements with the SCA when, in fact, the employees had been paid far less. The effect was that Orba underpaid contributions to a union affiliated benefit plan by submitting false remittance reports.

Kumar pleaded guilty to conspiracy to commit mail fraud for orchestrating a scheme to defraud the SCA by failing to pay the prevailing wage to Orba’s construction workers. As part of the plea agreement, Kumar agreed to pay $666,219 in restitution to six Orba employees and their unions. See https://www.justice.gov/usao-edny/pr/construction-company-executive-pleads-guilty-defrauding-new-york-city-school.

A Workers’ Comp Case

A case brought in October involved allegations of workers’ compensation fraud.

Here, Darquis Wright, a Sing Sing Correctional Facility correction officer, was charged with submitting fake medical documentation over the course of 16 months to obtain more than 100 days in workers’ compensation leave and at least $16,000 in wages.

If injured on the job, employees of the New York State Department of Corrections and Community Supervision (DOCCS) may go on leave and collect workers’ compensation benefits by submitting appropriate medical documentation to their facility and to the Workers’ Compensation Board. According to prosecutors, between March 2018 and September 2019, Wright claimed multiple separate injuries while on duty and submitted applications for workers’ compensation leave benefits.

To support his claims, the government asserted, Wright repeatedly submitted medical documentation to Sing Sing purportedly from a Staten Island-based orthopedic surgeon and another Staten Island-based physician. As alleged, the documentation falsely stated that, based on medical examinations allegedly performed by the physicians, Wright was unable to work. This enabled Wright to obtain workers’ compensation leave and to collect wage benefits for multiple periods. In fact, according to the authorities, the examinations were never performed and the orthopedic surgeon and the physician later confirmed to the New York State Inspector General that the documentation was fraudulent. See https://www.westchesterda.net/october-2020/6599-sing-sing-prison-guard-arrest-for-falsifying-documents-to-get-more-than-three-months-in-workers-comp-leave.

The MTA, Redux

Two notable instances of alleged fraud involving the Metropolitan Transportation Authority (MTA) – including one allegedly involving the LIRR – help to round out the year in fraud.

The first case involved subway rehabilitation work following Superstorm Sandy. As the government explained, the MTA awarded construction management contracts for MTA managers to oversee post-Sandy subway projects. To prevent self-dealing and the appearance of corruption, the MTA bars MTA employees from participating in the selection, award, or administration of a contract if the employee, his or her family member, or an organization that employs the employee or one of the employee’s family members has a financial interest in any of the companies that propose or bid on, or are awarded, such a contract.

Paresh Patel, a former MTA manager, was responsible for awarding contracts and exercising oversight of Superstorm Sandy-related subway repairs. As alleged, in June 2014, Patel and another MTA employee set up an engineering consulting firm named Satkirti Consulting Engineering LLC that they registered in the names of their children; they subsequently transferred the ownership to a friend of Patel, who, according to the government, played no substantive role in the management of Satkirti.

In February 2015, Satkirti was awarded a contract as a subcontractor on the Joralemon Tube subway rehabilitation project, which project Patel would oversee in his role at the MTA. The government contended that Patel directed the operations of Satkirti and its employees while concealing his involvement with the company. Then, after Patel learned that the MTA’s Office of Inspector General had launched an investigation into the contract, Patel deleted the Satkirti company email account, asked others to destroy evidence, and encouraged others to lie to obstruct the investigation.

This past March, Patel pled guilty to obstructing a federal investigation into bid rigging and fraud. See https://www.justice.gov/usao-sdny/pr/former-mta-supervisor-pleads-guilty-obstructing-investigation-bid-rigging-and-fraud.

In early December, in the second case, four current or former longtime LIRR employees and one longtime employee of the New York City Transit Authority were charged with overtime fraud for allegedly submitting time reports that falsely claimed that they worked hundreds of hours of overtime that they did not in fact work. The government contended that the overtime pay the defendants claimed led to significant increases in their salary and led to them being among the highest-paid MTA employees – with one of the defendants being the highest-paid MTA employee in 2018 as a result of an additional approximately $344,000 in overtime (for 3,864 overtime hours) on top of his $117,000 base salary. The government pointed out that if this defendant had worked every single calendar day in 2018, it would average out to approximately 10 hours of overtime every day, in addition to his regular 40 hour work week.

Prosecutors asserted that the defendants frequently volunteered for overtime and then claimed to have been working lucrative overtime shifts at times when they were in fact at home or at other non-work locations, such as, in the case of one defendant, a bowling alley, or, in the case of another defendant, on family vacations. The authorities said that, in their investigation, they compared the defendants’ time records with various records that established their true whereabouts, such as location information for their cellular phones, bank records, MTA building access card data, work and personal emails and social media records, and records from third parties such as the bowling alley.

The defendants each were charged with one count of federal program fraud, which carries a maximum sentence of 10 years in prison. See https://www.justice.gov/usao-sdny/pr/5-currentformer-mta-employees-charged-extensive-overtime-fraud.

Conclusion

The diverse allegations discussed above illustrate only some of the kinds of fraud that the authorities are faced with stopping on a regular basis. Attentive prosecutors, business owners, consumers, and others all help to limit the costs of fraud, and they must continue to do so as we move into the New Year.

Reprinted with permission from the December 31, 2020 issue of the New York Law Journal. © ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.