Former Vicis Capital executive pleads guilty to conspiracy

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.

Houston American presses bet in Colombia

Houston American Energy Corp. — the subject of a recent Sharesleuth.com investigation – is boosting its stake in a Colombian oil prospect that it claims has 1 billion to 4 billion barrels of recoverable oil.

Houston American (AMEX: HUSA) said in a Securities and Exchange Commission filing that it agreed to take an additional 12.5 percent interest in the prospect, known as CPO-4, from SK Energy Group Ltd. of South Korea. That would give it 37.5 percent of the venture.

Another small, publicly traded company, Gulf United Energy Inc. (OTCBB: GLFE.OB), also announced a deal with SK Energy for a 12.5 percent stake in the Colombian venture.

The transfers would cut SK Energy’s interest in the CPO-4 prospect to 50 percent, from 75 percent.

As Sharesleuth previously reported, the numbers at the upper end of Houston American’s reserve estimate for the 345,452-acre prospect exceed the official proved and probable reserves for all of Colombia. SK Energy has never offered its own estimate of the site’s potential. 

ASSET SALE

Houston American also disclosed last week that Hupecol LLC, the majority owner of its 24 producing wells in Colombia, had agreed to sell most of them, along with the surrounding acreage, for roughly $281 million.

Houston American said it would get 12.5 percent of the proceeds, minus commissions and other expenses. Although the sales would likely bring the company a windfall of more than $30 million, they also would take away its share of the output from 19 wells, which account for the bulk of its revenue.

Houston American’s stock closed Thursday at $8.75, giving the company a market capitalization of $272 million.

(Disclosure: Mark Cuban, majority owner of Sharesleuth.com LLC, has a short position in Houston American’s shares. Chris Carey, editor of Sharesleuth, does not invest in individual stocks and has no position in Houston American’s shares.)

CPO-4 DEAL

Houston American and Gulf United did not put dollar values on their new 12.5 percent interests in the CP0-4 prospect. But it is clear from their respective SEC filings (here and here) that neither agreement required the buyer to pay SK Energy a substantial premium for its stake.

That strikes us as unusual, given that Houston American’s backers have said that the reserves under the land could send the company’s revenue and market capitalization into the billions of dollars.

Both of the farmout deals are scheduled to be completed by Oct. 29.

Houston American said that its agreement called for it to pay its proportionate share of future operating costs at the site, as well as 12.5 percent of certain past costs and 25 percent of all seismic expenses incurred between June 18, 2009 and July 19, 2012.

Gulf United’s deal carried the same terms. Gulf United added that, in return for Houston American waiving its right of first refusal on the interest in CPO-4 that Gulf United is acquiring, it agreed to pay Houston American 12.5 percent of its past costs and 25 percent of its seismic costs through July 31.Houston American said in its quarterly SEC filing that the expansion of its interest would add around $1 million to its spending at CPO-4 this year. The company said that, as of June 30, its projected acquisition and drilling budget for the remainder of 2010 would be $8.16 million.

GULF UNITED

Gulf United, which has headquarters in Houston, is a development-stage company that has been acquiring interests in oil and gas properties.

SEC filings show that it had just $92,219 in cash at the end of its most recent quarter, but subsequently received an additional $550,000 through the issuance of a promissory note.  The company said it would have to raise more money to pay for its end of the CPO-4 venture, as well as several other partnership agreements.

Houston American acquired its initial 25 percent stake in the Colombian prospect in October 2009. At about that same time, Gulf United signed a letter of intent with SK Energy to acquire its own stake in the venture.

Houston American’s public comments late last year and early this year about the property’s potential contributed to a sharp rise in its stock, which went from around $4 a share in November to a high of $20.36 on April 6.

Gulf United’s deal for a piece of the same prospect has produced no such gains for its stock. The company’s shares closed Thursday at 18 cents, down more than 30 percent from the day the acquisition was announced.

Gulf United has more than 233 million shares outstanding. At the current price, it has a market capitalization of $42 million.

EARNINGS AND BONUSES

Houston American announced last week that it turned a profit of $990,134 in the second quarter, on revenue of $7.63 million. That compares with earnings of $112,107 and revenue of $1.13 million in the same period last year.

Houston American attributed the increase to higher energy prices and higher production at the existing oil wells in Columbia, which it owns in partnership with  Hupecol.

Houston American earnings said its general and administrative expenses were up $1.76 million from the same period last year, reflecting $637,500 in bonuses for executives and $1 million in expenses for options the company granted to its directors during the quarter.

Houston American also noted that it increased the base salaries of its executives by 10 percent, effective June 15. SEC filings show that John F. Terwilliger Jr., chairman and chief executive, had a base salary of $315,000 in 2009.

Terwilliger got a $675,000 bonus in 2008, after the sale of some other Hupecol-Houston American wells in Colombia. He also got stock awards and options that brought his total compensation to $1.74 million. The company later revised the figure to $5.86 million, to reflect the increase in its share price.