A healthcare executive charged with indecent exposure; a drug manufacturer with fraudulent financials; and, a physician with a history of medical board violations for falsely administering drugs to patients. These are some of the things uncovered in our background checks in healthcare deals. It is a growing industry for investors where fraud is just as prevalent as any other field.
In October 2012, the Justice Department arrested and charged 91 people with varying degrees of healthcare fraud across the country. Hundreds of millions of dollars were allegedly bilked through money laundering, false billing and bribery. As the government continues its focus on this rampant form of healthcare fraud, investors in healthcare companies must exercise their tried and true protective efforts to avoid becoming unknowingly ensnared in these antics: background checks.
We know background checks have emerged as a reliable tool for investors to root out investment fraud in most industries in the marketplace: from Internet to real estate development and from manufacturing to biotech. But the need for intelligence in healthcare deals is just as critical as in other investments.
As referenced above background checks can discover vital information about healthcare executives and physicians that impact the success of a deal. The healthcare executive charged with indecent exposure: he had not disclosed to investors that he previously ran a company in Texas; it was when we found this information and ran criminal records in the area where the company was that the indecent exposure charge was revealed. Knowing how to analyze information is essential to any comprehensive background check.
In many industries, whether it is healthcare, technology or energy, investors often take comfort with their familiarity with the executives and companies. But there have been countless examples of investors getting duped because it is rare when an executive discloses a problematic background or penchant for fraud. Most recently, in May 2012, David Rosen, head of MediSys, was sentenced to prison for bribing legislators and lobbyists.
Having a criminal record is just one of the many red flags uncovered through background checks. When focusing on investment managers or others in the financial industry, we check regulatory agencies such as FINRA, NFA and the SEC. But when focusing on healthcare deals, you need to adjust the focus accordingly: medical boards in every state regulate the actions of licensed physicians; the Medicaid and Medicare divisions on the state and federal level keep copious records on the activities of healthcare facilities; and the DEA and FDA often maintain records that provide information on executives and firms and their histories. It was through searching these appropriate departments that illuminated the aforementioned physician’s disciplinary history where he had been charged with falsely administering drugs to patients on three separate occasions within two years before our client was looking to invest in the company.
In addition, reviewing corporate records and dba filings often leads to identifying sources of embezzlement and money laundering, as charged in the most recent sting by the government in healthcare. And of course, you cannot underestimate the importance of previous allegations of fraud and/or a pattern of malpractice suits as would be uncovered through a review of civil lawsuits.
Investors can never be too cautious. To keep healthcare deals healthy, it is essential to conduct rigorous background checks and appropriate due diligence efforts to avoid becoming victim to the myriad forms of fraud pervasive in the industry.
Ken Springer is President and Founder of Corporate Resolutions Inc., a business investigations firm and co-author of “Digging for Disclosure: Tactics for Protecting Your Firm’s Assets from Swindlers, Scammers and Imposters.” Opinions expressed here are his own.
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