Christopher D. Phillips, former managing director of Vicis Capital LLC, has pleaded guilty to conspiracy to commit wire fraud in connection with a scheme to collect on medical receivables that he and others knew to be fraudulent.
The hedge fund executive, who also was on the board of directors of two small public companies that had purchased the receivables, was sentenced to two years of probation and fined $250,000.
Vicis had invested millions of dollars in both of the companies that bought the receivables — Medical Solutions Management Inc. (Pink Sheets: MSMT.PK), and MDWerks Inc. (Pink Sheets: MDWK.PK).
The hedge fund’s activities, and its possible involvement with the insurance-fraud scheme, were the subject of a Sharesleuth investigation last year.
Phillips was sentenced Wednesday in federal court in New Hampshire, where a grand jury began hearing evidence in the fraud case after a tipster there reported the scheme to authorities.
Phillips’ plea agreement, the criminal information detailing the charges against him, and a statement of facts related to the scheme were filed under seal last January. They were made public for the first time last week, possibly because the government wanted to keep Phillip’s cooperation with prosecutors a secret from co-conspirators and others involved with Vicis.
Seth R. Aframe, the assistant United States attorney who prosecuted Phillips, said he could not comment “on any other investigations that may be ongoing as a result of any information Mr. Phillips may have provided.”
Phillips faced a maximum of five years in prison.
His plea agreement contained boilerplate language that said if he provided “substantial assistance” to the government in the prosecution or investigation of others, prosecutors would file a motion advising the court of his help and requesting a sentence reduction.
According to court documents, Vicis invested more than $7.5 million in Medical Supply Management so that it could buy receivables from a California company called Deutsche Medical Services Inc. Those receivables were connected to insurance claims for medicine-laden skin creams supposedly given to workers compensation patients in that state.
Vicis also provided MDWerks with roughly $790,000 to purchase additional receivables.
The two companies, however, had a hard time collecting on the $8.3 million in receivables. Medical Solutions Management hired a New Hampshire medical claims company to bill insurance companies, and put MDWerks in charge of filtering out bad claims.
In July 2008, according to court documents, the president of the New Hampshire billing company, Janine Boudreau, told the then-chairman and chief executive of MDWerks, Howard Katz, there were problems with the Deutsche Medical receivables and that many of the claims were probably fraudulent. Among other things, they listed incorrect dates of service, billed for charges on services that had never been provided and even claimed an expense for skin cream purportedly dispensed to a dead person.
Court documents say the Katz met with Phillips in August 2008 to tell him about what he’d been told by Boudreau. At some point, Boudreau contacted the FBI and they opened an investigation.
At the agency’s direction, Boudreau called Katz with a possible solution to their collections problem: they could backdate many of claims to obscure the problems with the dates of service. In late 2008, court documents say, Katz met with Philips at Vicis’ offices to get him to agree with the plan and to pay Boudreau’s expenses, which would ultimately amount to $260,000.
After that meeting, Phillips called Boudreau from New York and gave her the go ahead.
Eventually, the government says, Phillips wired Boudreau $260,000 for her expenses — an “overt act in furtherance of the conspiracy” that prosecutors would have proven at trial.
Katz pleaded guilty to one count of health care fraud in connection with the Duetsche scheme in May. Court documents show he started cooperating with the FBI in late 2008, shortly after he was indicted. Federal prosecutors described Katz’s assistance as “significant, useful, timely and reliable,” For his help, received three years of probation and 24 consecutive weeks of weekend prison time in addition to a $25,000 fine.
Vicis, which began 2009 with nearly $5 billion under management, received a wave of redemption requests after its performance faltered. It announced last year that it was winding down its funds.
Its most recent summary of its holdings, filed with the SEC in November, listed less than $25 million in assets.