In HDL Case, Judge Imposes Damages, Penalties of $114 Million

In DOJ and whistleblowers’ cases, latest order starts the clock on when defendants can appeal

LAST WEEK, A FEDERAL JUDGE in South Carolina issued an order imposing civil damages and penalties of more than $114 million on Tonya Mallory, the former CEO of Health Diagnostic Laboratory, in Richmond, Va., and two owners of the lab’s marketing partner, BlueWave Healthcare Consultants Inc. The damages and penalties were imposed on the defendants for violating the federal False Claims Act.

In January, a jury in Charleston, S.C., in U.S. District Court for the District of South Carolina, Beaufort Division, found the defendants guilty of civil fraud against Medicare and other federally-funded healthcare programs. (See “Insights from Jury Verdict in HDL, BlueWave Case,” TDR, Feb. 12, 2018.)

The defendants in the case are Mallory, Floyd Calhoun Dent III, and Robert Bradford Johnson. Dent and Johnson own BlueWave Healthcare Consultants Inc., a marketing company in Alabama.

Defendants Ordered to Pay

In his ruling on May 23, Judge Richard M. Gergel ordered the defendants to pay more than $111 million in treble damages and penalties for fraud relating to HDL’s arrangement with BlueWave to market HDL blood tests, in part by offering illegal kickbacks to physicians who ordered the tests, according to Peter W. Chatfield of the law firm Phillips and Cohen LLP of Washington, D.C.

The verdict and entry of judgment were the outcome of three whistleblower cases brought and litigated together.  One of the whistleblowers was Michael Mayes, MD, an internist in Hilton Head, S.C., who was the only whistleblower to testify in court, Chatfield said. The DOJ joined the whistleblowers’ case in which the plaintiffs alleged that the three defendants conspired to pay kickbacks to doctors in the form of unwarranted processing and handling fees for blood draws and testing referrals.

35,074 False Lab Test Claims

The payments provided a financial incentive to doctors to order expensive cardiovascular blood tests for federally-insured patients, Chatfield said. Often, the tests were unnecessary, he noted. The scheme by HDL and BlueWave involved paying doctors $20 in fees for processing and handling of specimens the physicians would send to HDL, Phillips and Cohen said in a press release. Under this scheme, HDL submitted 35,074 false claims, the government charged.

In a related kickback scheme, Dent and Johnson were found liable for paying a $10 processing and handling fee to physicians to encourage them to order unnecessary tests at another specialty blood lab,Singulex Inc., the law firm explained. That scheme resulted in the submission by Singulex of 3,813 false claims to federally insured healthcare programs that cost the government $467,935, the press release said. Dent and Johnson were assessed more than $3 million in damages and penalties for this scheme, the firm added.

The jury ruled that the defendants owed the federal government single damages totaling in excess of $17 million, which were tripled under the False Claims Act, making the total combined liability $51.2 million, plus approximately $78.5 million in civil penalties. The amount of the penalties was calculated by imposing the minimum $5,000 penalty assessable under the False Claims Act at the time of the earliest misconduct to just 11,600 of nearly 39,000 false blood lab claims for reimbursement that the jury found the defendants caused the government to pay, Phillips and Cohen said.

Defendants May Appeal

“What Judge Gergel is doing is cutting the time it will take to get this case into (and thus also through) the appeals process,” Chatfield explained in an email to THE DARKREPORT. “That helps limit the continued wasting of assets that could be used to repay the debt on unnecessarily prolonged appellate litigation.”

The judgment against the defendants entitles the government to collect all known assets of the defendants, he added.

In effect, the judge’s order starts the clock on the defendants’ right to give notice if they intend to appeal, he wrote. “He does that by declaring them to be ‘final’ judgments within the meaning of the Federal Rule of Civil Procedure 54(b), which controls when an appeal can be taken,” he added.

In a press release, Chatfield commented on Mayes’ role in the case. “Dr. Mayes’ strong sense of ethics compelled him to speak up, at a cost to his relationships with other doctors who had been enriching themselves by accepting the unlawful payments,” Chatfield commented. “Dr. Mayes brought this case out of concern for Medicare patients, knowing that healthcare fraud can drive up Medicare premiums and Medicare costs, putting patients at risk of cuts in Medicare-covered services.”

Former HDL CEO Sued HDL’s Former Law Firm

ALTHOUGH ONE COURT CASE involving executives from Health Diagnostics Laboratory, Singulex, and BlueWave Healthcare Consultants, Inc., now has a judge’s verdict, there is still ongoing litigation involving the former CEO of HDL, Tonya Mallory.

Last fall, Mallory sued the law firm that had provided HDL with legal advice at the time of HDL’s formation and in the following years. Mallory is seeking $603 million in damages from LeClairRyan, based in Richmond, Va.

In an interesting twist to the HDL story, after HDL filed for bankruptcy protection in 2015, the bankruptcy trustee wrested a settlement agreement from LeClairRyan. In its coverage of this story, the ABA Journal wrote, “The law firm agreed to pay $20.375 million to resolve claims related to its legal advice to a medical lab company [HDL] that filed for bankruptcy after a federal investigation into whether it paid kickbacks to doctors.”

Bloomberg Law reported that, in her lawsuit against LeClairRyan, “Mallory alleges LeClairRyan gave her ‘incorrect legal advice’ concerning processing and handling payments to physicians who sent testing samples to the now-bankrupt clinical testing provider.”

The multi-million-dollar settlement negotiated with LeClairRyan by HDL’s bankruptcy trustee, and Mallory’s lawsuit against that law firm, demonstrate that law firms providing legal opinions about how various clinical laboratory business, sales, and marketing practices meet federal and state compliance statutes should consider their own exposure, should these opinions later be challenged in lawsuits or by government prosecuters.

Contact Peter Chatfield at peter@phillip


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