The final and most public phase of a complex Medicaid fraud case at WellCare Health Plans Inc. began in March with the criminal indictment of five top executives, including Thaddeus M.S. Bereday, the company's former general counsel.
The scandal came to light in October 2007, when the FBI and Florida state investigators raided WellCare's Tampa offices. In 2009, the company agreed to pay $80 million to avoid criminal prosecution. It also pledged to work with investigators in the criminal case against the executives, including the former CEO and CFO.
According to white-collar experts, the case is uncommon, both in the sophistication of the alleged fraud and the number of top people charged.
"It's a little bit different from what you normally see, mostly because the principals involved in the alleged conspiracy were at the very top of the organization," says Brian Heslin, a member in the white-collar defense practice at Moore & Van Allen.
A criminal scandal involving senior executives is a crisis for any company, but when the very top members get indicted, it can prove an existential threat to the organization. Overcoming the taint of top-level fraud is a massive challenge, especially when the general counsel is among the alleged culprits.
An Efficient Prosecution
Florida law requires health care providers to spend at least 80 percent of the money they receive from Medicaid on patient care for certain types of claims. If they spend less, they have to return the difference to the government.
Prosecutors allege that the WellCare executives engaged in a complex fraud scheme in which they submitted fake documents that inflated the company's expenditures on claims, then diverted the illegal proceeds to a subsidiary company called Harmony to hide the funds.
The alleged scheme could give rise to a broad spectrum of charges. Prosecutors have chosen to focus, however, on good old-fashioned conspiracy.
"Prosecutors in a case as complicated as this have a number of statutes that they could pursue, and generally they do make choices," says John West, a white-collar defense partner at Troutman Sanders.
Conspiracy can be easier to prove than, for example, accounting fraud, and it affords prosecutors a key efficiency in cases with multiple defendants.
"It allows the government to present evidence against all members of the conspiracy, even if the conduct was done by only one of them," West says. "As long as at least one member of the criminal conspiracy did an act, then all of the members of the conspiracy are considered to have committed that act in furtherance of the crime."
Proving conspiracy hinges on demonstrating that there was an agreement to commit crimes, that participation was voluntary and that overt acts were committed to further the conspiracy. The indictment lays out those exact elements, and given the nature of the fraud alleged, it presents a case that could be very difficult for the defense.
White-collar defense often turns on showing that individuals didn't know about the alleged conduct, that they were out of the loop. But the alleged fraud at WellCare, drafting top-level transactions between companies, could only happen in the corporate suite.
"This type of alleged conspiracy probably couldn't have been pulled off at layers below these folks," says Heslin. "And obviously the scope of the fraud here is enormous."
Given the way the investigation has played out to date, Bereday--the former GC--may be in particular jeopardy.
"If you're a prosecutor and you've got a general counsel involved, you're certainly going to target them," Heslin says. "We've seen it in other circumstances where they target the general counsel early to flip that person, get them to turn on the other co-conspirators. Because of their training, a lawyer who flips often is going to end up being a fairly good witness for the government, as long as their credibility is somewhat intact."
In this case, however, it looks like the government already has its star witness. Gregory West--a former WellCare executive who reported to Peter Clay, one of the defendants--pleaded guilty to defrauding the state of $20 million just two months after the 2007 raid (the plea remained sealed for almost a year). Presumably, West--whose sentencing has been postponed several times--has been working with prosecutors to build the case against his superiors.
If a general counsel doesn't have the option to flip, don't look for the government to pull any punches. Some experts feel that prosecutors actually hold corporate attorneys to a higher standard because of the special responsibilities and obligations they are expected to perform in the gatekeeper function.
"I do think there is some lawyer code that comes into play to a certain degree," Heslin says. "If they're helpful to the investigation, they may get a deal because it will help strengthen the government's case, but they certainly don't fall into a category of folks that get an easy out in these types of circumstances. Because really--ethically and just by the nature of their position--the general counsel's supposed to advise against this type of stuff, not be involved in it."
Righting the Ship
The indictment of several top executives presents enormous problems for a company, both in terms of repairing its reputation and the practical challenge of running a business that has effectively just had its head cut off.
"Usually the board has to take over and appoint a special committee, then work out some sort of interim management," says Chris Clark, who leads the white-collar defense group at Dewey LeBoeuf. "Often a board member becomes an interim CEO. In this case, you lose the CEO, the COO and the GC, so that's a big challenge."
The company must also demonstrate to regulators, shareholders and customers alike that the company is clean and corporate culture has changed.
"An important factor in this case is that WellCare has agreed to retain an independent monitor who will review the company's business operations," says West. "The monitor, selected by the U.S. attorney, will report on the company's compliance with federal and state health care regulations going forward. That demonstrates to the government that the company is committed to righting the ship."
Even so, restoring the reputation of a company that has been so compromised can be a long, uphill battle--one that many organizations do not survive.
Clark, who prosecuted the Adelphia case, another one where most of the top management was indicted at once, says it's tough for a company to survive, let alone move forward, when it has been so compromised at the top.
"I hate to say this, but a lot of them go bankrupt and a lot of them get sold," he says. "They just get absorbed by