Crackdown on Fraud in the United States Erodes Private Equity’s Liability Shield

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THE BHARAT EXPRESS NEWS INSURANCE NEWS
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Insiders said a company pushed unnecessary pain relievers into the US military; another promoted an unproven treatment for children with cancer; and a third used unlicensed counselors to treat poor people with mental illness.

In all three cases, taxpayers footed the bill – and, before long, government officials sought out the owners of the companies: private equity.

Long isolated from the legal responsibilities of the companies they buy, these investment companies are increasingly drawn into disarray when their charges are in difficulty. One key reason: Private equity has grown in businesses that depend on taxpayer money, especially health care.

This has exposed them to so-called false allegations actions, in which corporate whistleblowers bring allegations of civil fraud to the attention of the federal government. So far, only a handful of cases have emerged. But experts expect more, given the vast potential for fraud in the vast federal relief programs put in place to help the economy weather the pandemic. They also expect the Biden administration to tackle the deep pockets of Wall Street.

“The ultimate guarantee you have is the threat of enforcement,” said William McSwain, who stepped down as Philadelphia’s chief federal prosecutor in January to join the Duane Morris law firm. “This will not change under President Biden; it will intensify. “

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The government is now tackling the bad actors after rushing billions of dollars to keep businesses and the healthcare system afloat during the pandemic. Among other things, he’s investigating whether companies have lied about the need for loans under the Paycheck Protection Program, a relief effort that largely tried to exclude private equity-backed companies. .

In June, Ethan Davis, then the second head of the Civil Division of the US Department of Justice, warned in a speech that private equity firms would be harmed if they knowingly participated in relief frauds.

The government has the option of joining whistleblowers under the Misrepresentation Act in holding the companies it does business with accountable for fraudulent billing.

In 2018, Massachusetts Attorney General Maura Healey filed a civil fraud complaint against private equity firm HIG Capital, alleging it played a role in allegations related to its behavioral health firm, Community Intervention Services Inc.

Christine Martino-Fleming, who worked as a training coordinator, said in her complaint that a member of HIG staff ignored her concerns about unsupervised and unauthorized therapists treating mental health patients.

“The pressure to increase was astronomical compared to what it had been” before HIG bought the company, another staff member said, according to the lawsuit.

Community Intervention Services have been settled for $ 4 million and HIG is in mediation. In court documents, the companies denied undue pressure to increase revenue. They said no false claims were filed, Martino-Fleming never alerted them and the care did not suffer.

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Lawyers and former regulators have warned the private equity industry that the more active they are in investments, the greater the legal risks.

The industry’s playbook is to review management, create efficiencies, and keep a close eye on finances so that investments can be sold for a massive profit over several years. Following the losses of the 2008 financial crisis, private equity has engaged even more with their companies to avoid similar accidents.

Yet in most cases, private equity owners manage to avoid scrutiny. Since 2013, at least 25 private equity-backed healthcare companies have paid $ 573 million in government fraud settlements, according to a report released Monday by the Private Equity Stakeholder Project, a non-profit advocacy group. lucrative that examines the sector. In only three have private equity firms agreed to pay money.

The industry remains concerned. Companies caught defrauding the government must pay triple the damages and up to $ 23,000 per claim.

In 2019, private equity firm RLH Equity Partners and pharmaceutical company Patient Care America reached a $ 21 million deal with the federal government. They resolved claims that the pharmaceutical company paid marketers to promote expensive pain creams to servicemen who did not need the treatment. Representatives from RLH and Patient Care America said they were cooperating fully with the government and affected employees were no longer with the company.

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Prosecutors said the private equity firm was involved because it approved the use of marketers, reviewed financial statements with payments made to them, and funded some of their commissions. RLH said the government has never proven to be aware of any suspected fraud.

“RLH has learned an important lesson,” Murray Rudin, RLH CEO, said in an email. “We are being more careful in our ongoing monitoring of legal compliance within our portfolio companies, especially those that provide healthcare services.”

In November, federal prosecutors announced another settlement. When Gores Group, a private equity firm run by billionaire Alec Gores, bought Therakos Inc., in 2013, the medical device company was abusively promoting a lymphoma treatment for children with transplants of bone marrow, the government said. Gores, who has denied any fraud, agreed to pay $ 1.5 million.

The deals set a precedent for private equity as a defendant, said Murad Hussain, partner at law firm Arnold & Porter Kaye Scholer. “The courts, case law and individuals who file most of these cases take note,” he said.

–With help from Peter Eichenbaum.

Copyright 2021 Bloomberg.

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