HDL Founders, BlueWave, Shareholders Sued for $600 Million by Bankruptcy Trustee

Trustee also has collection agency dunning physicians who accepted inducements from HDL

CEO SUMMARY: Unlike federal prosecutors, who to date have shown little interest in seeking to recover money from either the physicians who accepted inducements from Health Diagnostic Laboratory or many of the shareholders, executives, and sales consultants of HDL, the trustee of the HDL bankruptcy is moving aggressively to attempt to collect money from all of these individuals. Just 10 days ago, the trustee filed a $600 million lawsuit that lists 76 counts against more than 100 defendants.

LEAVE IT TO THE PRIVATE SECTOR to police the clinical laboratory business in a way that federal prosecutors have failed to do. Creditors in the bankruptcy of Health Diagnostic Laboratory of Richmond, Va., just sued the company founders and their sales consultants for $600 million!

And that’s just part of the story about aggressive efforts by HDL’s creditors to recover hundred of millions of dollars from those associated with the troubled lab company. Over the past month, the law firm that represented HDL during its start-up and operating years agreed to a $20 million settlement with HDL’s creditors.

Also during the past month, it was learned that the HDL creditors engaged a law firm that is now working to collect money from physicians who accepted alleged kickbacks and other forms of illegal remuneration from HDL in exchange for referring patients to HDL for medically unnecessary or inappropriate lab tests.

Neither of these actions may have a precedent in the bankruptcy of a clinical laboratory company. But they indicate that lawyers, accountants, and client physicians who are willing to participate in schemes with a lab company that possibly violate federal and state laws now have a new source of risk and exposure, independent of the risk of criminal and civil actions by federal and state prosecutors.

Now, on top of these aggressive collection actions comes the latest chapter in the troubled HDL saga. In a 205-page lawsuit filed Sept. 16 in the U.S. Bankruptcy Court for the Eastern District of Virginia (Richmond Division), Richard Arrowsmith, trustee of the HDL Liquidating Trust, lists 76 counts against more than 100 defendants. Those defendants include HDL founders Tonya Mallory, Joseph McConnell, and Russel Warnick; its former sales contractor BlueWave Healthcare Consultants; and BlueWave executives Robert Bradford Johnson and Floyd Calhoun Dent.

‘Improper practices’

The 76 counts include conspiracy; fraud and intentional interference with contracts; breaches of fiduciary duty; and fraudulent transfers, according to reporting by Katie Demeria in the Richmond Times Dispatch. “The allegations focus on alleged kickbacks paid to physicians to induce them to use HDL’s services and in the process order medically unnecessary blood tests,” she wrote.

The lawsuit seeks to recover the more than $600 million in losses that the creditors suffered, court documents show.

From the founding of HDL in 2008, the lawsuit said HDL’s founders conspired with BlueWave to sell HDL’s tests through improper and illegal business practices. Mallory, Warnick, McConnell, Dent, and Johnson “collectively hatched a scheme to build and grow HDL through illegal and fraudulent business practices and to share the spoils with BlueWave, all for their personal gain,” the lawsuit said.

payments To BlueWave

Among the more than 100 defendants are what the lawsuit called BlueWave Transferee Defendants, who got tens of thousands of dollars to millions of dollars in transfer payments from HDL to BlueWave and then to the transferee defendants.

“The additional defendants include dozens of entities created to transfer payments from HDL to BlueWave, along with dozens of independent sales contractors hired by BlueWave to sell HDL blood tests,” Demeria wrote.

“Each of the BlueWave Transferee Defendants was actively engaged in the heavily-regulated healthcare industry, knew or should have known that the business practices they carried out as described herein were illegal and improper, but engaged in such business practices because they received financial benefits from them, including through transfers as a result of the BlueWave Agreement,” the court documents showed.

Companies operated by Dent, Johnson, and Jeffrey Cornwell were named as Major Sales Contractor Defendants who gave healthcare practitioners (HCPs), “gifts such as sporting event tickets, gift cards, electronics, and other items to induce HCPs to order tests from HDL, a violation of federal and state anti-kickback laws.”

Misrepresentations To payers

In addition, the major sales contractor defendants misrepresented facts to such insurers as Cigna Health and Life Insurance Company, Connecticut General Life Insurance Company, Aetna, and other private insurers about the true nature of those business practices, the court documents showed.

“The major sales contractor defendants falsely represented, among other things, that the amounts charged for the tests included a co-pay, co-insurance, or deductible amount that HDL intended to collect from patients (when HDL routinely did not collect such amounts), that HDL’s business and the sales of HDL tests by the Major Sales Contractor Defendants were conducted in accordance with the Anti-kickback Statute and other healthcare laws (when in fact they were not), and that the HDL tests that the Major Sales Contractor Defendants sold were medically necessary (when many times they were not),” the lawsuit said.

The major sales contractor defendants also regularly told HCPs that HDL did not intend to collect from patients for co-pay, co-insurance, or deductible amounts, the lawsuit said. In addition, these defendants sold HDL tests to healthcare practioners (HCPs) by promoting the fact that the HCPs would receive process and handling fees as a result of shipping patients’ specimens to HDL, court documents showed.

Tipton Golias, Owner of Helena Laboratories, Named in HDL Lawsuit as Largest Shareholder

ONE ELEMENT in the Health Diagnostic Laboratory case that has gone largely unreported is the name of the largest HDL shareholder.

Court documents filed in the HDL bankruptcy case this month showed that Tipton Golias was HDL’s largest stockholder and that he invested equity amounts in HDL that were mischaracterized as a loan. Golias is the founder, chairman, CEO, and director of Helena Laboratories Corp., a company in Beaumont, Texas, that makes clinical laboratory instruments and reagents. Its clients are medical centers, hospitals, reference laboratories, and private doctors’ laboratories. The lawsuit said Helena was an affiliate of HDL “at all relevant times.”

Golias owned 38.4795% of HDL’s stock and his son, defendant Joseph Golias, owned 5.21% of HDL’s stock; defendant Donald Golias, another son of Tipton Golias, owned 2.605% of HDL’s stock; defendant Karla Falgout, a daughter of Tipton Golias, owned 2.605% of HDL’s stock, court documents showed.

Also, Tipton Golias was the trustee of the Wyndell L. Golias Voting Trust, which owned 1.1164% of HDL’s stock, the lawsuit stated. Taken together, the Golias family shareholders, including Tipton, Joseph, and Donald Golias, Karla Falgout, and Tipton Golias as trustee of The Wyndell L. Golias Voting Trust, owned 50.02% of HDL’s stock, the court documents showed.

Medically Unneeded Tests

These efforts induced HCPs to order medically unnecessary tests for patients, causing Cigna and Aetna to pay inflated and fraudulent claims to HDL.

The process and handling fees were thinly-veiled kickbacks that induced physicians to order medically unnecessary tests and violated state and federal anti-kickback laws, the lawsuit explained.

“According to HDL’s bankruptcy estate, hundreds of millions of dollars are owed to HDL creditors because of those kickback practices. Creditors include the federal government, which is owed $94 million as part of the settlement, as well as private insurers including Aetna (owed $77 million), Cigna (owed $59 million) and United Healthcare (owed $96 million),” Demeria wrote.

In an unrelated development, the law firm of LeClairRyan agreed to a $20.4 million settlement with HDL’s creditors. Last fall, HDL’s trustee sent a letter to LeClairRyan outlining claims rooted in the legal services that LeClairRyan provided to HDL from 2008 until last year, Demeria reported. In that time, the U.S. Department of Justice began investigating allegations that HDL was providing kickbacks to physicians. The terms of the agreement are not an admission of guilt by LeClairRyan. LeClairRyan said, “As stated in the settlement, we do not believe LeClairRyan is responsible for the actions that led to the government investigation or bankruptcy of HDL.”

The other news of significance involves the HDL creditors’ use of law firm Wolcott Rivers Gates to send demand letters to physicians who accepted various forms of remuneration from HDL—such as fees for processing specimens. The letters request that these physicians return those payments.

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