Former FBI Employee Sentenced In Manhattan Federal Court To 24 Months In Prison For Acting As An Agent Of China

Kun Shan Chun, a/k/a “Joey Chun,” Provided Sensitive FBI Information to the Chinese Government

   Preet Bharara, the United States Attorney for the Southern District of New York, Mary B. McCord, Acting Assistant Attorney General for National Security, and William F. Sweeney Jr., Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced that KUN SHAN CHUN, a/k/a “Joey Chun,” was sentenced to serve 24 months in prison and pay a $10,000 fine based on his conviction for acting in the United States as an agent of the People’s Republic of China (“China”), without providing prior notice to the Attorney General. CHUN pled guilty on August 1, 2016. U.S. District Judge Victor Marrero imposed today’s sentence.

Manhattan U.S. Attorney Preet Bharara said: “Kun Shan Chun, an FBI employee, was supposed to work to protect and serve the American people. But instead, he acted as a secret agent of China. For that betrayal, Chun has now been sentenced to federal prison.”

FBI Assistant Director-in-Charge William F. Sweeney Jr. said: “The FBI continues to be vigilant in an effort to warn American industries, businesses and institutions of the dangers posed by the insider threat. This investigation validates that we at the FBI are not immune to the threat of an insider. The FBI will continue to diligently protect its equities, and those of both our U.S. intelligence community partners and those in the private sector, from insiders looking to steal our information and use it against us.”

According to the Information filed against CHUN, other documents publicly filed in this case, and statements made during court proceedings, including today’s sentencing:

CHUN, a native of China and a naturalized citizen of the United States, began working at the FBI’s New York Field Office in approximately 1997 as an electronics technician assigned to the Computerized Central Monitoring Facility of the FBI’s Technical Branch. In approximately 1998, and in connection with his employment, the FBI granted CHUN a Top Secret security clearance, and his duties included accessing sensitive and, in some instances, classified information. As discussed in more detail below, in connection with a progressive recruitment process, CHUN received and responded to requests from Chinese nationals and at least one Chinese government official (“Chinese Official-1”), at least some of whom were aware that CHUN worked at the FBI.

On multiple occasions prior to his arrest in March 2016, while engaging in a prolonged and concerted effort to conceal from the FBI his illicit relationships with these individuals, CHUN disclosed to Chinese Official-1 – at minimum – information regarding the FBI’s personnel, structure, technological capabilities, general information regarding the FBI’s surveillance strategies, and certain categories of surveillance targets.

CHUN’s Purported Consulting for Zhuhai Kolion Technology Company Ltd.

Beginning in at least 2005, CHUN and certain of his relatives maintained relationships with Chinese nationals purporting to be affiliated with a company in China named Zhuhai Kolion Technology Company Ltd. (“Kolion”). CHUN maintained an indirect financial interest in Kolion, including through a previous investment by one of his relatives. In connection with these relationships, Chinese nationals asked CHUN to perform research and consulting tasks in the United States, purportedly for the benefit of Kolion, in exchange for financial benefits, including partial compensation for international trips as well as cash payments made to CHUN’s relative.

Between 2006 and 2010, CHUN’s communications and other evidence reflect inquiries to CHUN from purported employees of Kolion while CHUN was in the United States, as well as efforts by CHUN to collect, among other things, information regarding solid-state hard drives and printer cartridges.

CHUN’s Relationship with Chinese Official-1

CHUN was introduced to Chinese Official-1 in approximately 2007 and subsequently provided Chinese Official-1 with sensitive information from the FBI. During a trip to Italy and France in 2011, CHUN met with Chinese Official-1. Chinese Official-1 indicated that he worked for the Chinese government, and that he knew CHUN worked for the FBI. During subsequent private meetings conducted abroad between CHUN and Chinese Official-1, Chinese Official-1 asked questions about sensitive, nonpublic FBI information. During those meetings, CHUN disclosed, among other things, the identity and potential travel patterns of an FBI Special Agent.

In approximately 2012, the FBI conducted a routine investigation relating to CHUN’s Top Secret security clearance. In an effort to conceal his relationships with Chinese Official-1 and the other Chinese nationals purporting to be affiliated with Kolion, CHUN repeatedly lied on a standardized form related to the security clearance investigation. During the period between 2000 and CHUN’s termination, CHUN also reported to the FBI that he had traveled to the areas of Hong Kong and China approximately nine times, as well as additional trips to Canada, Thailand, Europe, Australia, and New Zealand. CHUN was required by FBI policy to disclose anticipated and actual contact with foreign nationals during his international travel, but he lied on numerous pre- and post-trip FBI debriefing forms by omitting his contacts with Chinese Official-1, other Chinese nationals, and Kolion.

Examples of CHUN’s Actions in the United States in Response to Requests from Chinese Official-1

Chinese Official-1 asked CHUN on multiple occasions for information regarding the internal structure of the FBI. In response to those requests, in approximately March 2013, CHUN downloaded an FBI organizational chart from his FBI computer in Manhattan. CHUN later admitted to the FBI that, after editing the chart to remove the names of FBI personnel, he saved the document on a piece of digital media and caused it to be transported to Chinese Official-1 in China.

Chinese Official-1 also asked CHUN for information regarding technology used by the FBI. In approximately January 2015, CHUN took photographs of documents displayed in a restricted area of the FBI’s New York Field Office, which summarized sensitive details regarding multiple surveillance technologies used by the FBI. CHUN sent the photographs to his personal cell phone, and later admitted to the FBI that he caused the photographs to be transported to Chinese Official-1 in China.

CHUN’s Admissions to an FBI Undercover Employee

In about February 2015, the FBI caused an undercover employee (the “UCE”) to be introduced to CHUN. The UCE purported to be employed by an independent contractor.

During a March 2015 recorded meeting, CHUN told the UCE about his relationship with Kolion and Chinese nationals. In a subsequent recorded meeting in March 2015, CHUN explained to the UCE that Kolion had “government backing,” and that approximately five years earlier a relative met a “section chief” who CHUN believed was associated with the Chinese government.

In June 2015, during a recorded meeting, CHUN told the UCE that he had informed his Chinese associates that the UCE may be in a position to assist them. CHUN said that he wished to act as a “sub-consultant” to the UCE and wanted the UCE to “pay” him “a little bit.” In July 2015, after coordinating travel in an effort to introduce the UCE to CHUN’s Chinese associates, CHUN met with the UCE twice. During one of the meetings, CHUN stated that he knew “firsthand” that the Chinese government was actively recruiting individuals who could provide assistance, and that the Chinese government was willing to provide immigration benefits and other compensation in exchange for such assistance. The UCE told CHUN that he had access to sensitive information from the United States government. CHUN responded that his Chinese associates would be interested in that type of information, but that CHUN expected a “cut” of any payment that the UCE received for providing information to the Chinese government.

CHUN’s Arrest by the FBI and Confession

CHUN was arrested by the FBI on March 16, 2016. He subsequently confessed to most of the foregoing activities, including having taken steps to collect sensitive FBI information in the United States in response to taskings from Chinese Official-1. CHUN explained that he was motivated in part by the financial benefits that he and others derived from these relationships, but also admitted that he understood that he had provided assistance to the Chinese government.

The Seizure of Additional Sensitive FBI Information from CHUN’s Residence

The FBI searched CHUN’s residence pursuant to a search warrant around the time of his arrest. Agents found a .40 caliber handgun and an AR-15 rifle in CHUN’s basement, neither of which was registered in New York. The FBI also seized from CHUN’s residence a thumb drive that contained three files with sensitive FBI information dating back to approximately 2006 and 2007. CHUN’s job at the FBI did not require him to work from home, and there is no legitimate reason for him to have possessed these files at his residence. One file – which had a “date modified” of January 19, 2007 – was marked with a security header that read “FBI SENSITIVE INFORMATION FOR OFFICIAL USE ONLY.” The document described technical details of FBI surveillance infrastructure, including specific information about networks used to store highly sensitive, classified data. The second file contained information relating to ways in which FBI employees could access raw intelligence information, and it included network details and unique usernames for ten FBI employees. The third file – which had a “date modified” of July 20, 2007 – contained a spreadsheet dated June 2, 2006, that included names and telephone numbers of FBI personnel with jobs similar to CHUN’s position, as well as telephone numbers for lines that Electronics Technicians such as CHUN would have used to configure or troubleshoot network issues with the FBI’s New York Office.

In addition to the prison sentence and fine, Judge Marrero also sentenced CHUN, 47, to one year of supervised release and to pay a $100 special assessment.

Mr. Bharara praised the outstanding investigative work of the FBI’s Counterintelligence Division. Mr. Bharara also thanked the Counterintelligence and Export Control Section of the Department of Justice’s National Security Division.

California Man Pleads Guilty In Manhattan Federal Court To Defrauding A Native American Tribe And Investors Of Over $60 Million

   Preet Bharara, the United States Attorney for the Southern District of New York, announced that JASON GALANIS pled guilty today to defrauding a Native American tribal entity and the investing public of tens of millions of dollars in connection with the issuance of bonds by the tribal entity. GALANIS pled guilty to conspiracy to commit securities fraud, securities fraud, and conspiracy to commit investment adviser fraud before U.S. District Judge Ronnie Abrams.

U.S. Attorney Preet Bharara said: “As Jason Galanis admitted today in his guilty plea, he and his co-conspirators cheated their tribal clients by urging them to issue bonds, and then siphoning off the proceeds for their own personal use. The defendants then sold these bonds to unwitting investors, resulting in tens of millions of dollars in losses.”

According to the allegations contained in the Indictment filed against JASON GALANIS and his co-conspirators and statements made in related court filings and proceedings[1]:

From March 2014 through April 2016, JASON GALANIS, along with his co-conspirators Gary Hirst, John Galanis, a/k/a “Yanni,” Hugh Dunkerley, Michelle Morton, Devon Archer, and Bevan Cooney, engaged in a fraudulent scheme to misappropriate the proceeds of bonds issued by the Wakpamni Lake Community Corporation (“WLCC”), a Native American tribal entity (the “Tribal Bonds”), and to use funds in the accounts of clients of asset management firms controlled by JASON GALANIS and his co-defendants to purchase the Tribal Bonds, which the clients were then unable to redeem or sell because the bonds were illiquid and lacked a ready secondary market.

Documents governing the Tribal Bonds specified that an investment manager would invest the proceeds of the Tribal Bonds in investments that would generate annuity payments sufficient to pay interest on the Tribal Bonds and provide funds to the WLCC to be used for tribal economic development purposes. In fact, none of the proceeds of the Tribal Bonds were turned over to the investment manager specified in the closing documents. Instead, significant portions of the proceeds were misappropriated by JASON GALANIS and his co-defendants for their own personal use.

Specifically, the proceeds of the Tribal Bonds were deposited into a bank account in the name of Wealth Assurance Private Client Corporation (“WAPCC”), an entity controlled by Dunkerley and Hirst. Dunkerley transferred more than $38 million from the WAPCC account to an account controlled by JASON GALANIS, who then misappropriated more than $8.5 million of the proceeds for his personal use, including for expenses associated with his home, jewelry and clothing purchases, travel and entertainment, and restaurant meals.

There was no ready secondary market for the Tribal Bonds. Nonetheless, without prior notice to their clients, Morton and Hirst, acting at the direction of JASON GALANIS, used funds belonging to clients of two related investment advisers, Hughes Capital Management, Inc. (“Hughes”) and Atlantic Asset Management, LLC (“Atlantic”) to purchase the Tribal Bonds, even though JASON GALANIS, Hirst, and Morton were well aware that material facts about the Tribal Bonds had been withheld from clients in whose accounts they were placed, including the fact that the Tribal Bond purchases fell outside the investment parameters set forth in the investment advisory contracts of certain Hughes clients and of the Atlantic pooled investment vehicle in which the Tribal Bonds were purchased. When Hughes and Atlantic clients learned about the purchase of the Tribal Bonds in their accounts, several of them demanded that the Tribal Bonds be sold. However, because there was no ready secondary market for the Tribal Bonds, no Tribal Bonds have been sold from any Hughes or Atlantic client accounts. In addition, JASON GALANIS and his co-defendants failed to apprise clients of Hughes and Atlantic regarding substantial conflicts of interest with respect to the issuance and placement of the Tribal Bonds before the Tribal Bonds were purchased on these clients’ behalf.

In addition, a portion of the misappropriated proceeds was recycled and provided by JASON GALANIS to entities affiliated with Archer and Cooney in order to enable Archer and Cooney to purchase subsequent Tribal Bonds issued by the WLCC. As a result of the use of recycled proceeds to purchase additional issuances of Tribal Bonds, the face amount of Tribal Bonds outstanding increased and the amount of interest payable by the WLCC increased, but the actual bond proceeds available for investment on behalf of the WLCC did not increase.

JASON GALANIS, 46, of Los Angeles, California, pled guilty to one count of conspiracy to commit securities fraud, which carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense; one count of securities fraud, which carries a maximum sentence of 20 years in prison and a maximum fine of $5,000,000 or twice the gross gain or loss from the offense; and one count of conspiracy to commit investment advisor fraud, which carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. Sentencing before Judge Abrams has been scheduled for May 5, 2017.

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentence for the defendant will be determined by the judge.

The guilty pleas in this matter represent JASON GALANIS’s second conviction in this District in the past year. On July 21, 2016, JASON GALANIS pled guilty before the Honorable P. Kevin Castel to manipulating the market for Gerova Financial Group, Ltd. (“Gerova”), a publicly traded company listed on the New York Stock Exchange, and to defrauding the shareholders of that company. JASON GALANIS is scheduled to be sentenced on February 15, 2017, in connection with his guilty plea in the Gerova matter.

Mr. Bharara praised the work of the U.S. Postal Inspection Service and the Federal Bureau of Investigation, and thanked the SEC.

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force. task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visitwww.StopFraud.gov.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Brian Blais, Aimee Hector, and Rebecca Mermelstein are in charge of the prosecution.

 

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[1] As for the defendants who have not pled guilty (Gary Hirst, John Galanis, Hugh Dunkerley, Michelle Morton, Devon Archer, and Bevan Cooney) the description of the charges set forth herein constitute only allegations.

EDITOR'S NOTE:

This case was handled by the the United States Attorney for the Southern District of New York, because it involved the New York Stock Exchange.

Former Portfolio Manager Stefan Lumiere Convicted on All Counts In Manhattan Federal Court

   Preet Bharara, the United States Attorney for the Southern District of New York, announced today that STEFAN LUMIERE, a former portfolio manager at Visium Asset Management, was convicted of conspiracy to commit securities and wire fraud, securities fraud, and wire fraud in connection with a scheme to mismark securities held in a particular fund from 2011 to 2013 in order to overstate the net asset value (“NAV”) of the fund that was reported to investors on a monthly basis. LUMIERE was convicted following a six-day jury trial presided over by U.S. District Judge Jed S. Rakoff.

U.S. Attorney Preet Bharara said: “In a swift verdict, a federal jury convicted Stefan Lumiere, a former portfolio manager at Visium, of securities and wire fraud. For years, Lumiere mismarked securities in his portfolio, using sham broker quotes and fake purchase prices to vastly overstate the value of his fund. The securities Lumiere traded may have been complex, but his criminal scheme was simple: lie and make up numbers to make more money. As the verdict reflects, the jury quickly saw Lumiere’s conduct for what it was, criminal fraud.”

According to the allegations in the charging documents and statements made in court proceedings:

Visium Asset Management

At all relevant times, Visium Asset Management (“Visium”) managed hedge funds specializing in healthcare-related investments. Visium managed a credit fund (the “Credit Fund”), which operated from in or about 2009 until in or about September 2013, and invested primarily in debt instruments issued by healthcare companies.

The Scheme to Mismark Securities

From June 2011 through September 2013, LUMIERE and others participated in a scheme to defraud the Credit Fund’s investors and potential investors by deceptively mismarking each month the value of certain securities held by the Credit Fund. The objective of the scheme was two-fold: (1) to inflate the Credit Fund’s NAV; and (2) to mislead investors about the liquidity of the Credit Fund’s holdings. Visium assessed performance fees to be paid by investors each year based on the Credit Fund’s profits and losses. LUMIERE’s mismarking was in violation of Visium’s internal valuation procedures and contrary to Visium’s representations to investors. The effect of the scheme was to overstate the Credit Fund’s NAV, often by tens of millions of dollars as calculated at the end of each month to investors.

In order to carry out the scheme, LUMIERE and others solicited, obtained, and relied on false and fraudulent price quotes from employees of broker-dealers in order to improperly override prices calculated by the Credit Fund’s administrator and artificially inflate the Credit Fund’s NAV each month. For each month-end valuation, LUMIERE and others would begin by reviewing an inventory of the Credit Fund’s investments and proposed valuations for each prepared by the Credit Fund’s administrator and Visium’s back office. LUMIERE and others would then identify those relatively illiquid securities as to which they disagreed with or disliked the proposed price, and create a list reflecting the prices at which they wanted each security to be marked for month-end valuation purposes. That price was often significantly higher or lower than the price available from public price data. LUMIERE and others would then contact one or two “friendly” brokers and dictate to the friendly brokers the price quotes that they needed. The brokers would then parrot back the price quotes from their Bloomberg email account, giving the price quotes the appearance that they had come from an independent broker, and thus were in compliance with the Credit Fund’s pricing methodology. The friendly brokers’ sham quotes were then submitted to Visium’s accounting department as purportedly independent bases for that security’s valuation, for the eventual submission to the Credit Fund’s administrator.

By obtaining these sham quotes, LUMIERE and others caused a number of the Credit Fund’s securities to be misclassified in order to mislead investors about the liquidity of the securities (i.e., how actively traded the securities were). Specifically, for a number of illiquid bonds, LUMIERE and others fraudulently caused Visium to assign a classification that led investors to believe that the bonds were relatively liquid, when in fact they were entirely illiquid. This was done contrary to disclosures to investors about the Credit Fund’s percentage of illiquid investments, in order to induce investors to invest in or keep their money in the Credit Fund.

As another method to carry out the scheme, LUMIERE purchased additional quantities of certain securities – in which the Credit Fund had an established position – at a deceptively inflated price, markedly higher than the prevailing market was offering that security, in a practice known as “painting the tape.” The inflated price was then reported to Visium’s accounting department for NAV purposes. In both cases – the sham broker quotes and the inflated purchase prices – it was LUMIERE’s intent to increase the price of certain securities in order to inflate the Credit Fund’s month-end valuation.

LUMIERE, 46, of New York, New York, was convicted of one count of conspiracy to commit securities fraud and wire fraud, which carries a maximum sentence of five years in prison; one count of securities fraud, which carries a maximum sentence of 20 years in prison; and one count of wire fraud, which also carries a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

Mr. Bharara praised the work of the FBI, and thanked the SEC for its assistance.

This case was brought in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visitwww.StopFraud.gov.

Manhattan Woman Pleads Guilty In Manhattan Federal Court To Commodities Fraud In Connection With Scheme To Defraud Investors Of More Than $23 Million

   Preet Bharara, the United States Attorney for the Southern District of New York, announced that HAENA PARK pled guilty in Manhattan federal court today to commodities fraud. The charge relates to PARK’s scheme to defraud more than 40 individual investors out of more than $23 million. PARK solicited investments for the purpose of trading in a variety of securities and commodities, including off-exchange foreign currency contracts, through the use of false and misleading statements about, among other things, her historical trading performance. PARK was arrested on June 2, 2016, in Manhattan, New York, and pled guilty today before United States District Judge Ronnie Abrams.

U.S. Attorney Preet Bharara said: “Through her guilty plea today, Haena Park has admitted to commodities fraud, lying about her rates of return and trading expertise to lure prospective investors to her fund and then losing almost all of the $23 million she raised through her lies. To keep her fraud scheme alive, Park sent fake account statements to her investors and used new investor money to pay back old ones.”

According to the Indictment and statements made at today’s plea hearing:

From September 2009 through June 2016, PARK raised more than $23 million from more than 40 individual investors, purportedly for the purpose of trading in a variety of securities and commodities, including equities, futures, and off-exchange foreign currency (“forex”) transactions, through the use of her firms, Phaetra Capital Management LP and Argenta Group, LLC. In connection with the scheme, PARK made a series of false and misleading representations to investors, including that PARK was an accomplished forex trading adviser earning annualized returns as high as 48.9 percent for her investors. In truth and in fact, PARK was not an accomplished forex trader, her trading was consistently unsuccessful, and the trading results emailed to investors by PARK were false and did not reflect the trading losses actually incurred by PARK. Rather, from September 2009 through June 2016, PARK lost approximately $19.5 million of the $20 million that she traded, including in commissions and fees, principally in highly leveraged futures and forex transactions.

To prevent or forestall redemptions by investors, and to continue to raise money from investors to fund her scheme, PARK generated fictitious account statements, which she sent to investors on a monthly basis. Instead of accurately reporting the trading losses PARK was suffering, the account statements indicated that the investors were making money nearly every month. To hide her trading losses, PARK used new investor funds to pay back other investors in a Ponzi-like fashion. In total, PARK distributed approximately $3 million back to investors from funds deposited by new investors.

PARK, 41, of Manhattan, New York, faces a maximum sentence of 10 years in prison and a maximum fine of $1 million, or twice the gross gain or loss from the offense. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge. PARK is scheduled to be sentenced by Judge Abrams on April 28, 2017, at 2:30 p.m.

Mr. Bharara praised the work of the Department of Homeland Security, Homeland Security Investigations and the El Dorado Task Force. He also thanked the Commodity Futures Trading Commission and the Securities and Exchange Commission for their assistance.

Manhattan U.S. Attorney Announces $50 Million Settlement With Walgreens For Paying Kickbacks

Manhattan U.S. Attorney Announces $50 Million Settlement With Walgreens For Paying Kickbacks To Induce Beneficiaries Of Government Healthcare Programs To Fill Their Prescriptions At Walgreens’ Pharmacies

   Preet Bharara, the United States Attorney for the Southern District of New York, Scott J. Lampert, Special Agent in Charge of the New York Office of the U.S. Department of Health and Human Services, Office of Inspector General (“HHS-OIG”), and Craig Rupert, Special Agent in Charge of the Northeast Field Office of the Defense Criminal Investigative Service, Department of Defense, Office of Inspector General (“DoD-OIG”), announced today a $50 million settlement in a civil fraud lawsuit against WALGREEN CO. (“WALGREENS”), a nationwide retail pharmacy chain that owns and operates thousands of retail pharmacies throughout the United States. The settlement resolves claims that WALGREENS violated the federal Anti-Kickback Statute (“AKS”) and False Claims Act (“FCA”) by enrolling hundreds of thousands of beneficiaries of government healthcare programs (“government beneficiaries”) in its Prescription Savings Club program (“PSC program”). Specifically, the Government’s Complaint alleges that Walgreens violated the AKS and FCA by providing government beneficiaries with discounts and other monetary incentives under the PSC program, in order to induce them to patronize WALGREENS’ pharmacies for all of their prescription drug needs. The Complaint further alleges that WALGREENS understood that allowing government beneficiaries to participate in the PSC program was a violation of the AKS, but that it nevertheless marketed the program to government beneficiaries and paid its employees bonuses for each customer they enrolled in the program, without verifying whether the customers were government beneficiaries. The settlement will also resolve numerous state law civil fraud claims.

U.S. District Court Judge J. Paul Oetken has approved a settlement agreement to resolve the Government’s claims against WALGREENS. Under the settlement, WALGREENS is required to pay approximately $46.21 million to the United States and has admitted and accepted responsibility for conduct alleged in the Government’s Complaint. Further, as part of the settlement, WALGREENS will pay approximately $3.79 million to resolve the state law civil fraud claims.

Manhattan U.S. Attorney Preet Bharara said: “Recognizing that it was a violation of the Anti-Kickback Statute to enroll government beneficiaries in its discount program, Walgreens nonetheless marketed the program to government beneficiaries and incentivized its employees to enroll customers in the program, regardless of whether they were government beneficiaries. As a result, Walgreens ended up unlawfully enrolling hundreds of thousands of government beneficiaries. With today’s settlement, Walgreens is being made to pay $50 million and has admitted to its conduct.”

HHS-OIG Special Agent in Charge Scott J. Lampert said: “The sheer scope of this nationwide kickback scheme is shocking. Walgreens admits to having paid bonuses to employees for enrolling customers in its prescriptions savings program without verifying whether the customers were Medicare or Medicaid beneficiaries, despite stated company policy against enrolling such beneficiaries based on federal statutes. Today’s settlement is a message to other retailers that there will be consequences for such conduct.”

DoD-OIG Special Agent in Charge Craig Rupert said: “This settlement is evidence of the continuing efforts of the Defense Criminal Investigative Service and our law enforcement partners to identify, investigate, and prosecute significant threats to the DoD health care system. DCIS will continue to aggressively investigate allegations of fraud and abuse harmful to U.S. taxpayers and the Department of Defense.”

As alleged in the Complaint and set forth in the parties’ Settlement Agreement, both of which have been filed in Manhattan federal court:

WALGREENS launched the PSC program in 2007. Throughout the period January 2007 through December 2010, the PSC program provided members with discounts on thousands of brand-name and generic drugs, as well as a 10 percent rebate on all WALGREENS’ branded products, including household products, baby-care products, most grocery items, and non-prescription medications. WALGREENS intended these lower drug prices and other monetary benefits to be an inducement to its existing and potential customers to cause them to patronize WALGREENS for all of their pharmacy needs. WALGREENS hoped that by offering these significant benefits to its customers, it would prevent them from taking their pharmacy business to WALGREENS’ competitors.

WALGREENS recognized that allowing government beneficiaries to participate in the PSC program would violate the AKS. Specifically, WALGREENS recognized that the features of the PSC program that made it attractive to its customers generally would constitute an illegal kickback when provided to government beneficiaries, as such features would induce government beneficiaries to patronize WALGREENS for all of their prescription medication needs, including those paid for in whole or in part by government healthcare programs. Accordingly, WALGREENS consistently maintained in its published materials regarding the PSC program that government beneficiaries were ineligible to participate in the program.

Notwithstanding WALGREENS’ understanding that allowing government beneficiaries to participate in the PSC program would violate the AKS, WALGREENS consistently marketed the PSC program to government beneficiaries. WALGREENS also incentivized its employees to enroll customers in the PSC program, regardless of whether they were government beneficiaries. For example, from May 2008 through August 2010, WALGREENS paid its employees from $1 to $5 for each customer they enrolled in the PSC program. In making these incentive payments, WALGREENS did not check whether the customers who had been enrolled were government beneficiaries.

Consequently, during the period January 2007 through December 2010, WALGREENS enrolled hundreds of thousands of government beneficiaries in the PSC program. These government beneficiaries included beneficiaries of the Medicare, Medicaid and TRICARE programs. Thereafter, from January 2011 through December 2015, while WALGREENS’ internal company policy continued to preclude the enrollment of government beneficiaries in the PSC program, WALGREENS continued to enroll such beneficiaries in the program.

As part of the settlement, WALGREENS admitted, acknowledged, and accepted responsibility for the following conduct:

• During the period January 1, 2007 through December 31, 2010, WALGREENS’ published materials regarding the PSC program stated that persons receiving benefits from the Medicare and Medicaid programs were not eligible to participate in the PSC program.
  
  
• In October 2007, WALGREENS identified approximately 13,000 PSC program members who it had determined were beneficiaries of the Medicare and Medicaid programs, and it removed those individuals from the PSC program. In an internal news release informing its employees of this removal, WALGREENS stated that “any customer who ha[d] any type of 3rd party coverage with a Medicare or Medicaid plan was removed from the [Prescription] Savings Club database,” and that “th[is] removal was necessary to comply with State/Federal regulations.”
  
  
• Subsequent to October 2007 and continuing through December 31, 2010, internal WALGREENS documents reflect that its stated policy to exclude Medicare and Medicaid beneficiaries from the PSC program was based on, among other things, the prohibition on offering inducements to beneficiaries of government healthcare programs reflected in the federal AKS and corresponding state anti-kickback laws.
  
  
• Notwithstanding its stated policy to exclude Medicare and Medicaid beneficiaries from the PSC program, subsequent to October 2007 and continuing through December 31, 2010, WALGREENS enrolled hundreds of thousands of Medicare and Medicaid beneficiaries in the PSC program.
  
  
• Between November 2007 and December 31, 2010, WALGREENS also enrolled more than 10,000 TRICARE beneficiaries in the PSC program.
  
  
• Prior to December 31, 2010, pharmacists at WALGREENS’ stores nationwide made tens of thousands of notations in WALGREENS’ internal customer database reflecting that specific Medicare, Medicaid, and TRICARE beneficiaries had been enrolled in the PSC program and were using the PSC program to purchase some of their prescription drugs.
  
  
• At various times between November 2007 and December 31, 2010, WALGREENS paid its employees a bonus of between $1 and $5 for each customer they enrolled in the PSC program. When paying these bonuses, WALGREENS did not verify that the customers its employees had enrolled in the PSC program were not government beneficiaries.
  
  
• Prior to December 31, 2010, WALGREENS did not have effective mechanisms in place to block government beneficiaries from enrolling in the PSC program or to monitor adequately whether government beneficiaries had been allowed to enroll in the PSC program, to ensure compliance with its stated policy to exclude such beneficiaries from the PSC program. As a result, hundreds of thousands of government beneficiaries were enrolled in the PSC program.
  
  
• Subsequent to December 31, 2010, and continuing through December 31, 2015, WALGREENS’ internal company policy continued to preclude the enrollment of government beneficiaries in the PSC program, and WALGREENS continued to enroll such beneficiaries in the program.
  
  

In connection with the filing of the lawsuit and settlement, the Government joined a private whistleblower lawsuit that had previously been filed under seal pursuant to the False Claims Act.

Mr. Bharara thanked HHS’s Office of the Inspector General, DOD’s Office of the Inspector General, and the Medicaid Fraud Control Units for Illinois and New York for their investigative efforts and assistance with the case.

Information Technology Chief And Consultant Charged With Multimillion-Dollar False Invoicing Scheme

   Preet Bharara, the United States Attorney for the Southern District of New York, and Philip R. Bartlett, Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service (“USPIS”), announced today the filing of a criminal complaint charging ENRICO RUBANO, a/k/a “Rick Rubano,” and SHIVANAND MAHARAJ with two counts of conspiracy to commit wire fraud in connection with a false invoicing scheme that defrauded health and retirement funds (the “Funds”) of millions of dollars. As alleged, over a period of six years, RUBANO, MAHARAJ, and their co-conspirators generated hundreds of invoices for work they had not performed, which RUBANO, in his role as co-head of information technology for the Funds, approved for payment. RUBANO and MAHARAJ were arrested this morning, and will be presented before U.S. Magistrate Judge Andrew J. Peck.

Manhattan U.S. Attorney Preet Bharara said: “As alleged, Enrico Rubano used his position as the co-head of IT for a health and retirement benefit fund to perpetrate a scheme to falsely invoice millions of dollars from the fund for consulting work never actually performed. Rubano allegedly had the fund make payments based on hundreds of fake invoices to Shivanand Maharaj’s company, not for IT work actually done by that company, but really in exchange for alleged kickback payments to Rubano. Money that should have gone to help pay retirement and health care benefits were instead allegedly diverted to Rubano and Maharaj.”

USPIS Inspector-in-Charge Philip R. Bartlett said: “These defendants devised a scheme to falsely bill their client for work that was never performed by allegedly using an ‘inside’ employee to approve bogus invoices. They went one step too far when they decided to use the US Mail to facilitate their criminal misdeeds. Postal Inspectors will resolutely pursue fraudsters who use the U.S. mail to facilitate fraud schemes.”

According to the Complaint[1]:

From 2008 through October 2015, RUBANO was the co-head of information technology for the Funds and had the authority to approve the payment of invoices from third-party vendors. Beginning in 2009, and continuing through 2015, RUBANO, MAHARAJ, and others devised a scheme in which companies they owned or controlled submitted to the Funds invoices for millions of dollars in information technology services that were never performed or that had, in fact, been performed by employees of the Funds or other vendors. RUBANO, in his position as co-head of information technology, approved these fraudulent invoices, and received kickbacks from MAHARAJ and other co-conspirators. Between 2009 and 2015, RUBANO, MAHARAJ, and their co-conspirators falsely billed and fraudulently received from the Funds at least approximately $3.4 million.

RUBANO, 48, of Tappan, New York, and MAHARAJ, 36, of Cresskill, New Jersey, were arrested this morning in Tappan, New York, and Cresskill, New Jersey, respectively. RUBANO and MAHARAJ are each charged with two counts of conspiracy to commit wire fraud, each of which carries a maximum sentence of 20 years in prison. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.

Mr. Bharara praised the efforts of the USPIS in this investigation. He added that the investigation is continuing.

This case is being handled by the Office’s General Crimes Unit. Assistant United States Attorneys Matthew Podolsky and Jacob Warren are in charge of the prosecution.

The charges contained in the Complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

 

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[1] As the introductory phrase signifies, the entirety of the text of the Complaint and the description of the Complaint forth herein constitute only allegations, and every fact described should be treated as an allegation.

A.G. Schneiderman Announces National Settlement With Anthem To Discontinue Pre-Authorization For Opioid Addiction Treatment Drugs

Following Agreement With Cigna, Anthem Is Second Settlement Attorney General Schneiderman Has Reached To Remove Barriers and Expand Access To Life-Saving Treatment For Opioid Use Disorder

Empire BlueCross BlueShield Will Also Launch Initiative In New York To Expand Access To Opioid Addiction Treatment Drugs

   Attorney General Eric T. Schneiderman today announced that Anthem, the second largest health insurer in the country, will end its policy of requiring prior authorization for medication-assisted treatment (“MAT”) for opioid use disorder. The agreement includes Empire BlueCross BlueShield (BCBS), which insures over 4 million New Yorkers, and resolves Attorney General Schneiderman’s investigation of prior authorization practices and network adequacy for MAT treatment. The agreement comes several months after Attorney General Schneiderman announced a similar agreement with Cigna.

MAT, when prescribed and monitored properly, has proved effective in helping patients recover from opioid use disorder, and is both safe and cost-effective to reduce the risk of overdose. This policy change will apply not only to most Anthem members in New York, but nationally as well. 

“We’re facing an opioid crisis in New York and around the country – and we should be doing whatever we can to make lifesaving treatments accessible to those suffering from addiction,” said Attorney General Schneiderman. “I am pleased that this is the second national settlement my office has reached with major insurers to remove hurdles to opioid addiction treatment. While we’ve made progress, there are too many still suffering. We’re committed to continue working with health insurers across the country to eliminate barriers to lifesaving opioid addiction treatments.”

Anthem required providers to submit a prior approval form for MAT coverage requests, which required the providers -- who had already received specific training regarding MAT and federal authorization to prescribe these drugs -- to answer numerous questions about the patient’s current treatment and medication history. The Attorney General’s investigation revealed that Empire BCBS denied nearly 8% of the overall requests for coverage of MAT in 2015 and the first half of 2016. This subsequently caused significant delays in patients obtaining treatment for addiction – or patients never obtaining the treatment at all.

In contrast to its policy for drugs to treat opioid use disorder, Empire BCBS does not require prior authorization for the majority of drugs it covers for medical conditions. In particular, Empire BCBS does not require prior authorization for powerful opioids, including fentanyl, morphine, tramadol, and oxycodone, when prescribed for pain. These disparities are not consistent with the New York and federal mental health parity laws, which require health plans to cover mental health and substance use disorder treatment the same way they cover treatment for physical conditions.

Under the agreement, Empire BCBS will also launch an initiative to expand access to MAT for members in its New York service area. Empire BCBS will conduct provider outreach and education regarding the benefits of MAT, informing qualified health care providers how they can obtain certification from the Substance Abuse and Mental Health Services Administration (“SAMHSA”) to prescribe buprenorphine and buprenorphine/naloxone as part of MAT for opioid dependence. Empire BCBS will provide the Attorney General with a list of MAT providers who have joined its network as a result of this initiative.

Unlike methadone treatment, which must be administered in a highly structured clinic, MAT medications, usually containing buprenorphine and naloxone, may be prescribed or dispensed in physicians’ offices to treat opioid use disorder, provided the treating physician has obtained the appropriate certification and has been issued a special DEA license. In addition to the medication component, psychosocial therapy and management of medical issues are also recommended components of MAT to treat opioid use disorder.

Buprenorphine is an opioid partial agonist, meaning that it has lesser euphoric effects than full opioid agonists such as heroin. At low doses, buprenorphine produces sufficient agonist effects to enable opioid-addicted individuals to discontinue the misuse of opioids without experiencing withdrawal symptoms. Buprenorphine carries a lower risk of abuse, addiction, and side effects when compared with full opioid agonists. Naloxone is an opioid antagonist that can be added to buprenorphine that will decrease the likelihood of diversion and misuse of the combination drug product. If the combination drug product is crushed and injected the naloxone and can bring on opioid withdrawal, which serves as a deterrent to diversion and misuse.

The Centers for Disease Control and Prevention considers MAT a proven, effective treatment for individuals with an opioid use disorder. MAT has been shown to increase treatment retention and to reduce opioid use. One study showed that for half the patients treated with buprenorphine/naloxone for addiction to prescription opioids, they were abstinent from the drugs 18 months after starting MAT, and after three and a half years, 61% of the patients reported abstinence from illicit opioids. MAT is supported and endorsed by the CDC, the Substance Abuse and Mental Health Services Administration (SAMHSA), the American Society of Addiction Medicine (ASAM), the New York State Office of Alcoholism and Substance Abuse Services (OASAS) and the New York City Department of Health and Mental Hygiene (NYCDOHMH) as a treatment for opioid addiction.

In a recently issued report, the Centers for Disease Control (CDC) reports that more than 33,000 people nationally died from opioid overdoses. In New York in 2015, there were almost 2,800 overdose deaths, with overdose deaths from synthetic opioids (such as fentanyl) increasing by 135% from 2014, and heroin overdose deaths increasing by 29% from 2014.

Addressing access barriers to MAT is just the latest step that Attorney General Eric T. Schneiderman has taken to address the opioid addiction crisis. In June of 2011, Attorney General Schneiderman introduced state legislation for I-STOP, an online Prescription Monitoring Program or a “PMP,” that enables doctors and pharmacists to report and track controlled narcotics in real time. I-STOP became effective in August of 2013, making New York State one of the first states to establish such a PMP, and has reduced “doctor-shopping” by 75%. The OAG has also aggressively enforced laws that require parity in health plan coverage of mental health and addiction treatment, reaching agreements with six companies, including Anthem, MVP Healthcare, EmblemHealth, Excellus, Beacon Health Options, and HealthNow. Most recently, in October 2016, the Attorney General announced a national agreement with Cigna, which agreed to remove prior authorization requirements for MAT. The Attorney General’s Office has prosecuted many individuals who have engaged in the illegal distribution and sale of narcotics as well as health care providers who illegally prescribed and diverted opioids. The OAG’s Community Overdose Prevention (COP) Program, which equips New York law enforcement agencies with a life-saving heroin overdose antidote, has saved more than 100 lives. The OAG has also reached agreements with Purdue Pharma and Endo Pharmaceuticals Inc., to ensure that these opioid makers engage in responsible and legal marketing. 

Anthem’s policy change follows efforts by both New York State and the federal government to increase access to MAT for opioid use disorder. New York State recently enacted legislation prohibiting insurers from requiring prior authorization for emergency supplies of MAT medications and also removed prior authorization for Medicaid members seeking MAT for opioid use disorder, while the federal government increased the maximum number of patients that MAT-certified providers can treat at one time from 100 to 275 and now permits qualified nurse practitioners and physician assistants to prescribe MAT drugs.

“ASAM welcomes Attorney General Schneiderman’s agreement with Anthem to discontinue the requirement of prior authorization requirements to cover buprenorphine containing medications.  We also applaud the agreement for Empire BCBS to actively work to improve access to effective opioid treatment with MAT for their network members and to provide evidence for that improved access. We hope to see other payers following the lead of Cigna and Anthem on this critical issue,” said Kelly J. Clark, President Elect of the American Society of Addiction Medicine.

“We applaud Attorney General Schneiderman for continuing to challenge discriminatory barriers to drug treatment.  Preauthorization requirements for addiction medication are not only discriminatory, but cost lives.  It is critical that all health insurers offer the full range of medications to treat substance use disorders, without imposing illegal barriers to these life-saving treatments,” said Sally Friedman, Legal Director, Legal Action Center.

“My son, Michael, was denied treatment he desperately needed,” said Avi Israel, President and Founder of Save the Michaels of the World. “This settlement removes the prior authorization obstacle for MAT that too many families have faced for too long. I thank Attorney General Schneiderman for his hard work.”

“Many individuals with mental illness also have a co-occurring addiction disorder. A significant impediment to getting medication—assisted treatment (MAT) for opioid use disorder in the pre authorization challenges that many individuals face. We applaud Attorney General Schneiderman and his staff for advocating strongly for individuals with behavioral health needs, by both working to highlight and eliminate these pre-authorization practices,” said Glenn Liebman, CEO, Mental Health Association in New York State.

Richard D. Blondell, MD, Professor and Vice Chair for Addiction Medicine in the Department of Family Medicine, University at Buffalo said, “this practice created a huge burden on the staff of medical offices and was associated with a delay in the treatment of patients. When a person who has an opioid use disorder decides to seek help, there is typically a small window of opportunity to engage that individual in effective treatment; waiting for days to treat this condition represents an unnecessary risk that can be deadly for some.”

Kevin Jones, the Executive Director of the Heroin Epidemic Action League (HEAL) of Auburn said, “this agreement with the Attorney General is a great step forward in the battle against opioid abuse. When an addict finally reaches the point where they are ready to do something about their problem, there is only a short window of time to get them treatment. Without immediate medical assistance, many return back to the streets, and it may never cross their mind again to seek help. People die every day from using drugs, while waiting for help. That was the case with my step daughter. This agreement will save thousands of lives.

“The Long Island Council on Alcoholism and Drug Dependence (LICADD) wishes to convey our debt of gratitude to NYS Attorney General Eric Schneiderman who continues to advocate for the rights of substance users to access evidence-based treatment modalities void of stigma and inequities often displayed in the excluding policies of insurance companies. In times of great crisis, there emerges individuals with a great sense of duty and responsibility. AG Schneiderman has demonstrated his willingness to engage in effective action in challenging these inequities demonstrated by insurance companies to insure all New Yorkers, and their families, afflicted with the disease of substance use disorders have equal access to the quality care and treatment afforded to individuals living with other diseases and conditions.  On behalf of the thousands of individuals and families we serve at LICADD, thank you Mr. Attorney General,” said Steve Chassman, LCSW, CASAC- LICADD Executive Director.

“Medication-assisted treatment can provide a path to recovery for those struggling with addiction,” said Jennifer Faringer, M.S.Ed., CPP, Director of the National Council on Alcoholism and Drug Dependence-Rochester Area (NCADD-RA). “The Monroe County Opioid Task Force is focused on eliminating barriers to treatment, and Attorney General Schneiderman’s continued push to end prior authorizations for MAT is crucial to this effort.”

Consumers with questions or concerns about this settlement or other health care matters may call the Attorney General’s Health Care Bureau Helpline at 1-800-428-9071.

Read the agreement with Anthem.