Posts Tagged ‘fraud’

A Chilling Story of Fraud Targeting an Elderly Victim

JUNE 17, 2013 VOLUME 20 NUMBER 23
Last week a colleague told us a story that we think needs to be shared. Patricia Sitchler, a nationally-known San Antonio lawyer with the prominent Texas firm Schoenbaum, Curphy & Scanlan, P.C., described her client’s eye-opening experience with a fraudulent attempt to access her bank account. We asked Patty if we could share her client’s story. Patty wrote:

This is how I spent last Thursday. I thought it might be helpful information.

I spent most of last Thursday helping an elderly client who was scammed. Fortunately, “Doris” discovered the scam and we were able to avert disaster. Take a minute to see just how easy we have made it for the crooks.

The driver helped Doris put her packages in the car. Doris was still living independently, buying her own groceries and curtains and copy paper, writing her own checks, balancing her own checkbook. After putting the goods away in her apartment, it wouldn’t take long to balance the checkbook. She only wrote about 10 checks a month-the utility company, the phone bill, her rent and the few checks she wrote shopping at various stores close by. She was so lucky. She and her beloved deceased husband had planned well and she was comfortable knowing that although she wasn’t wealthy, she probably had enough to live out her life.

But in only a few minutes, Doris would find out just how vulnerable technology has made her. Balancing her checkbook she noticed that there were 13 cancelled checks, more than she realized she wrote. Looking more closely, Doris saw a new name: Josiah Klinger had signed three of her checks (fictitious name, of course). The bank must have made a mistake and applied his checks to her account. Then she looked even closer with the magnifying glass–the account number at the bottom of each check signed by Klinger was identical to her bank account even though his name and address were on the check. What was going on? As realization hit, Doris knew somehow her name had been eliminated from the check and John Klinger’s name was printed on her checks with her bank number, debiting her precious funds.

How could this be? Enter the world of technology. The bank fraud investigator assured Doris that because she reported the theft of over $1,500 so quickly, the bank could stop the fraudulent withdrawals and would replace the funds in her account. But, he pointed out, such fraud was as simple as buying $20 software for your computer and printing your own checks in your own name but inserting someone else’s account information in a magnetic strip at the bottom of the check. “But I have all of my checks,” Doris stressed. “No one has stolen my checks.” “They don’t have to,” the investigator told her. “All a crook needs is the bank identifier and account information at the bottom of your check-information that can be copied anytime you hand over your check to a stranger in payment for goods or services.”

Check out a compilation of ads from a business supply store and the internet: “Good check writing software should include several check design templates with options to customize the templates by changing font styles and colors and adding logos and graphics. Financial institutions require checks to include a magnetic ink character recognition (MICR) line, so software that includes a MICR font will save you money on check stock with pre-printed MICR lines. In addition, the MICR line must be printed with magnetic toner or your checks will be rejected. For example, MySoftware Checksoft Personal Pack costs just $19.99. Just a few of the features of this check printing software includes 900 personal checks, allows the user to print sequential check numbers, include the bank’s address and logo, and print the bank code line.”

So the next time you write a check and hand it over to a stranger, is your account safe? Do you balance your checkbook the same day you get your bank statement in the mail like Doris? Do you get photocopies of your checks with your bank statement? You may have just 30 days from the date of the bank statement to report theft in order to possibly recoup the funds.

Taken from FAQs on the Texas Banking website:

“What are my rights and responsibilities when a check has been forged on my account?”

Answer: Ultimately, the forging party is liable for items forged by them. However, banks do have a responsibility under Section 4.401 of the Business and Commerce Code to pay only authorized items from a customer’s account, and a forged check is not an authorized item. Most banks employ automated check processing techniques which do not verify the signature on each check to the signature on the deposit account. Under Section 4.406, the customer has a duty to discover and report unauthorized signatures or alterations with reasonable promptness. Typically, the depository contract will limit the discovery period to 30 days. Once reported, the bank generally must credit the item back to the account unless it can prove that the customer failed to comply with his or her discovery and reporting duties as imposed by the law. However, once a customer has notified a bank of a forgery incident, and has had at least 30 days to examine previous statements, he or she may not recover a loss on items previously forged by the same party and paid by the bank before it was notified. A customer can also be precluded from asserting against the bank if the customer was negligent in protecting his or her checks (Section 3.406).”

It could have been disastrous for Doris. Although only 6 checks showed up on her bank statement the check numbers that showed up on her statement indicated that at least 23 checks were written but only 6 had cleared when the bank statement was issued and she caught the fraud Technology can be so convenience but beware.

Postscript: Under Texas law the Bank must refund the money to Doris so long as she properly reports it to the bank. Based on my contact with Plano, Texas, attorney Keith E. Davis, however, the biggest vulnerability I see for people is use of a DEBIT card. Debit cards do not carry the protections of a credit card (limit on liability for theft if properly reported) or bank account. Once the scammer figures out how to access your debit card, your bank account can be in real jeopardy and you can only hope that your bank will be nice and help you try to recover.

Patty Sitchler
Patricia F. Sitchler, CELA
Schoenbaum, Curphy & Scanlan, P.C.
112 E. Pecan St., Suite 3000
San Antonio, Texas 78205

Thank you, Patty. Word to the wise.

Mother Sues Son Over Transfer of Home and Bank Accounts

MARCH 15, 2004 VOLUME 11, NUMBER 37

Louise Friar worried about what would happen to her modest estate if she ever needed to go into a nursing home. She owned her home, and she had two certificates of deposit that represented her life savings. Whether she got the idea from friends, professional advisors, her own analysis, or conversations with her two sons, she though she had come up with a surefire way to protect her assets from long-term care costs.

First Ms. Friar went to her bank, where she gave instructions that each of her two CDs was to be transferred into the name of one of her sons—but that the income payments should continue to be paid into her checking account. Then she visited her attorney and directed him to prepare a deed transferring the house to her sons, reserving a life estate.

By taking these two steps, Ms. Friar was assured that she would continue to have the use of her major assets for her life, but that her sons would automatically receive them on her death. After a while, however, she had second thoughts about the wisdom of her actions. She had, after all, given up control over all her assets. She had not just made them payable to her sons on her death, but had actually given them the CDs and an interest in her home.

Ms. Friar asked her sons to return her assets. After some discussion one son, Darrell, agreed and transferred property back to Ms. Friar. Her other son, J.D., refused to cooperate. So Ms. Friar sued J.D., alleging that he had coerced her into making the transfers, and that he had defrauded her.

A Georgia judge agreed with Ms. Friar and ordered J.D. to return her property even before a full hearing on her allegations. J.D. appealed, and the Georgia Court of Appeals reversed that order.

The appellate court did not decide that Ms. Friar could not get her property back, but it did decide that the issue was not as clear as the lower court had thought. The case was sent back to the trial court for a full hearing to determine whether J.D. Friar really had coerced or defrauded his mother. Friar v. Friar, Feb. 18, 2004.

Ms. Friar’s story is not unusual. Seniors frequently transfer assets to their children in order to “protect” them from nursing home costs. Sometimes those transfers actually result in protection, but sometimes they simply complicate the family situation. When transfers are made, whether they are well-advised or not, they are usually irrevocable. Ms. Friar will recover her assets only if she can show fraud or coercion by her son—and she will have paid significant legal expenses. Of course, she also will have had to sue her own son in order to undo the transfers.

Proponent of Invalid Will Must Pay Attorney’s Fees to Family


Edmond and Elma Crittell befriended Violet Houssien and, according to Ms. Houssien’s family, set about getting the older woman to write a new will. Some of the evidence in the later will contest proceeding indicated that they may have even forged her signature on the will and, in a bizarre twist, burglarized the office of the notary public in an attempt to hide their fraud. Even if Ms. Houssien actually did sign the will, the Alaska courts later ruled that she had lacked capacity to do so, and that the Crittells exercised undue influence over her.

After Ms. Houssien’s death the Crittells sought to have the will they had prepared admitted to probate. Not surprisingly, it would have left the bulk of her $1.59 million estate to Elma Crittell. Also unsurprising was the objection lodged by family members.

After a two-week trial to the court, the will was found to be a forgery and the Crittells to have exercised undue influence over Ms. Houssien. The court also ordered the Crittells to pay the attorney’s fees and costs for the family members.

On its first trip to the Alaska Supreme Court, the case resulted in a mixed holding. The trial court’s findings about the will’s invalidity were upheld, but the award of attorney’s fees was set aside and remanded. The state high court ruled that there is no automatic right under state law for a successful will contestant to recover attorney’s fees, though it did not rule out the possibility that fees could be awarded for “vexatious or bad faith conduct.”

After the appeal was completed the trial judge reconsidered his earlier award of attorney’s fees. Finding that the Crittells had acted vexatiously and in bad faith, he ordered that they pay fees totaling $338,668.35. The Crittells again appealed to the Alaska Supreme Court.

In its second review of the case, the state high court reviewed the history of the litigation and the positions of the parties before and during the trial. The justices found that there was considerable evidence that the Crittells had acted in bad faith, and that it was proper for the trial judge to consider their fraudulent acts.

The Crittells argued that the effect of the court’s ruling was to impose punitive damages against them, and that there is no provision for such awards in probate cases. The high court disagreed with this argument, as well, though it expressed concern about the imposition of “financially ruinous” fee awards. However, if litigants proceed in bad faith, the entire cost of opposing counsel can be charged against them. Crittell v. Bingo, January 2, 2004.

Daughter Who Took Mother’s Money May Owe Nursing Bills


Betty Budd spent the last years of her life at Presbyterian Medical Center, a nursing home in Oakmont, Pennsylvania. When she died she owed $96,000 to the facility, and only had $28,000 left in her estate. After collecting that amount, the nursing home filed suit against Ms. Budd’s daughter Elizabeth.

Using a power of attorney, Elizabeth Budd had handled her mother’s finances for the entire time she resided in the nursing home. At one point, with the unpaid bill mounting rapidly, the facility contacted Elizabeth Budd about the delinquency. She insisted that the money was almost gone, and promised that she would spend down the remaining money and make an application with the state Medicaid agency.

Elizabeth Budd never did apply for Medicaid for her mother. If she had her mother would not have qualified. She still had too much money available, even at the time of her death—generally speaking, single Medicaid applicants may not have more than $2,000 in available resources. Even if Elizabeth Budd had simply paid a portion of the nursing home bill her mother would not have qualified if, as the nursing home suspected, Elizabeth Budd had taken $100,000 of her mother’s money and put it into an account in her own name.

The nursing home sued Elizabeth Budd after her mother’s death. Their lawsuit made four different allegations against her. First, it charged that she had agreed to spend down the money and make a Medicaid application, and that she had breached her contract. Second, it alleged that she had defrauded the nursing home by misrepresenting her intentions. Third, the nursing home argued that Elizabeth Budd had fraudulently conveyed her mother’s property to avoid her creditors. Finally, the facility claimed that Elizabeth Budd had a duty to use her own funds to support her ailing and indigent mother.

The Pennsylvania Superior Court dismissed the nursing home’s claims for breach of contract, fraud and fraudulent conveyance. It found that any agreement Elizabeth Budd entered into with the nursing home was really between the home and her mother, and that Elizabeth Budd could not defraud the nursing home because she did not personally owe it any money.

The court did decide, however, that Elizabeth Budd might be liable. Pennsylvania law requires adult children to support their indigent parents, and the court ruled that the nursing home might be able to prove that Elizabeth Budd owed money on her mother’s bill—especially if it appears that the very reason her mother was indigent was that Elizabeth Budd took her money. The case was sent back to the trial court for further proceedings to determine her liability. Presbyterian Medical Center v. Budd, August 29, 2003.

Betty and Elizabeth Budd’s case is in some ways similar to an earlier case reported on in Elder Law Issues. Almost exactly two years ago we described a Connecticut case involving J. Michael Cantore, Jr., who was sued for failing to get Medicaid eligibility for his ward, Diana Kosminer. Because he had been appointed as conservator for Ms. Kosminer, the nursing home brought suit against Mr. Cantore’s bonding company for an unpaid $63,000 nursing home bill. While two cases probably do not amount to a national trend, nursing facilities regularly report problems with getting family members, agents and conservators to properly pay care bills, and at least occasionally must resort to litigation to secure payment.

Administrator’s Sentence For Medicare Fraud Not Reduced


Medicare, the federal health care program for seniors and the disabled, has very clear rules prohibiting providers from paying referral fees. The rules are in place to help prevent fraud and abuse of the giant Medicare program and its funding. Over the four decades the program has existed, however, many providers have tried to skirt—or have blatantly violated—the Medicare Antikickback Act.

Baptist Medical Center, in Kansas City, wanted to ensure that it had a steady stream of senior patients coming into the facility. One way to accomplish that would be to work out a regular relationship with Drs. (and brothers) Robert and Ronald LaHue, who operated a busy geriatric practice under the name Blue Valley Medical Group.

To encourage referrals to Baptist Medical Center, administrators hired the brothers as “Co-Directors of Gerontology Services,” for $150,000 per year. As expected, a steady stream of referrals for Medicare-reimbursed services flowed immediately to the hospital. The doctors, meanwhile, did little work to earn their fees.

One of the administrators involved in negotiating (and later renegotiating) the agreement with the Drs. LaHue was Senior Vice President Dennis McClatchey. He oversaw negotiations with the doctors in 1991 and 1992, when Baptist Medical was being bought out by Health Midwest. During those negotiations, if not earlier, he learned that the brothers were not providing $150,000 worth of service to Baptist, and that some staff members in fact wanted nothing to do with them. Still, he saw to it that their contract was renewed.

The LaHues and Mr. McClatchey were tried and convicted for violation of the Medicare Antikickback Act, and the convictions were upheld by a federal appellate court. At sentencing, the District Court decided to reduce Mr. McClatchey’s sentence. The trial judge determined that Mr. McClatchey’s 22-year-old son, who suffered from attention deficit hyperactivity disorder and a host of other psychiatric illnesses, required full-time care. The judge also found that Mr. McClatchey’s criminal behavior was totally out of character, based on his past history. His sentence was reduced to three years’ probation, home detention for six months, and a $30,000 fine.

The government appealed the sentence reduction, and the Tenth Circuit Court of Appeals agreed that a stronger sentence should be imposed. Although care of his son was a concern, his wife remained at home and could take that responsibility, said the court. As for his past good behavior, the court noted that his criminal behavior stretched over a period of several years. The case was remanded with instructions to eliminate the sentencing reduction. United States v. McClatchey, January 16, 2003.

The Medicare fraud case ended even more tragically for Dr. Robert LaHue. In February, 2002, just two days before he was to report to federal prison to begin serving his own 70-month sentence, Dr. LaHue was killed when the Chevrolet Metro he was driving drifted left of the center-line and struck an oncoming tractor-trailer. Dr. Ronald LaHue, meanwhile, was sentenced to 51 months in prison, as was Dan Anderson, the Chief Executive Officer of Baptist Medical Center.

Stockbroker Faces Both Criminal Charges and SEC In Theft

JUNE 10, 2002 VOLUME 9, NUMBER 50

Charles Zandford was a stockbroker working for Prudential-Bache Securities in 1987 when he first met William Wood. Mr. Zandford persuaded the elderly Mr. Wood to place over $400,000 in a brokerage account for investment. The money was intended to take care of not only Mr. Wood but also his developmentally disabled daughter, but when Mr. Wood died four years later it was all gone.

When he set up the brokerage account Mr. Zandford secured Mr. Wood’s authority to execute trades on the account directly, without having to get Mr. Wood’s approval on individual transactions. Over the next four years he systematically liquidated most of the account. On at least 25 occasions he transferred money from Mr. Wood’s account to other accounts for his own benefit.

The transfers were uncovered in the course of a routine examination of Prudential-Bache accounts by the National Association of Securities Dealers. Mr. Zandford was indicted on 13 counts of wire fraud, was convicted and sentenced to 52 months imprisonment and $10,800 in restitution.

The federal agency in charge of monitoring stockbroker activity, the Securities and Exchange Commission (the SEC), filed its own action after Mr. Zandford’s criminal charges were instituted. The SEC claimed that Mr. Zandford had violated securities laws as well as criminal laws, and requested that he be ordered to return $343,000 in ill-gotten gains. At the request of the SEC, the trial judge ruled that Mr. Zandford’s criminal conviction settled most of the issues in the securities violation case, and entered judgment against him.

On appeal Mr. Zandford argued that the SEC’s rules were not intended to deal with simple theft. Because the thefts had been properly dealt with as criminal actions, he insisted, there should be no further SEC enforcement proceeding. The Fourth Circuit Court of Appeals agreed and reversed the SEC’s victory.

It is not often that the United States Supreme Court gets involved in elder abuse matters, but the SEC’s petition for review in this case was granted. In a unanimous decision written by Justice Stevens, the high court reinstated Mr. Zandford’s SEC penalties.

The Supreme Court noted that the SEC’s regulations were adopted in the wake of the 1929 stock market crash, as part of a government plan to improve the general reliability and predictability of the markets. Even though Mr. Zandford’s actions really amounted to theft rather than manipulation of securities markets, they were subject to SEC regulation. The fact that the securities sales were conducted in the usual business manner did not deprive the SEC of jurisdiction, since the stockbroker’s purpose was improper. SEC v. Zandford, June 3, 2002.

Defendant In Medicaid Fraud Case Responds To Elder Law Issues

MARCH 25, 2002 VOLUME 9, NUMBER 39

On January 12, 2002, Elder Law Issues reported on the Medicaid fraud conviction of Massachusetts doctor Lorin Mimless (“States Vigorously Prosecute Medicaid and Medicare Fraud”). After his conviction Dr. Mimless filed an unsuccessful appeal with the Massachusetts Court of Appeals. Dr. Mimless read our report, and wrote to address some of the issues raised by his conviction and appeal. With his permission we reprint his letter:

“While I did appeal because of the manner in which the trial judge managed the jury over the newspaper article that appeared during the second day of jury deliberation, my appeal centered on prosecutorial misconduct and the judge stating that he would never talk to the jury without both sides present. The decision did not adequately address the issue of prosecutors purposefully leaking excluded material to the press during deliberation. No one else could have given the reporter the information in the article except the prosecution. They were not put under oath when they denied wrongdoing. What made it even more ironic is that I observed and overheard what the prosecutor told the reporter.

“Five jurors (not several) had the newspaper with them when they arrived at court. The judge read the article, perhaps on his way to work. Why would the jurors not do the same? What would five minutes have made to allow the defense to ask the jurors if they read the article. After a nineteen day trial, what juror is going to admit they read the article knowing if they admitted that to the judge, they would not be able to continue their deliberations.

“As far as willful blindness, the prosecution spent so much time creating stories about my lavish life style, would that have been enough to prove motive? Why the need for willful blindness? The expenditures described by the prosecution were contrived and flagrant lies. I never purchased any pornography nor did I own two homes in Rhode Island. I generated a lot of billings because I saw patients no one else would touch. Many were dual-diagnosed and needed to be seen briefly every week to control meds and prevent hospitalization. The times assigned to the codes were ridiculous and made-up just to make their spectacular claim, ‘Doctor bills for 50 hrs in one day.’ or ‘Dr bilks Medicaid while vacationing in the Carribean.’

“I had a busy psychopharmacological practice and worked many hours to see my patients. When the agents visited my office I told them if there were errors they mistakes in the billing but during trial much of that was excluded including business cards given to each of the secretaries “Do not bill on vacation”.

“I never trained anyone in billing. I hired a secretary initially because almost every bill I had submitted was being rejected. I hired my last secretary who made the most errors because she came highly recommended from an agency. After the first week I asked for a replacement. The agency begged me to keep her and waived the fee. She was friendly to my patients and insisted that she had experience in billing. I did not have the heart to fire her although I wish I had the brains.

“Doctors should be warned that if overzealous prosecutors can turn a civil case into a criminal one, they will do everything they can to get you convicted. They got me but I will continue to advocate for alternative mechanisms to determine fraud so that doctors who do not commit fraud but make errors do not get criminally prosecuted. Look at many of the cases like Patsy Vargo and others humiliated enough that they crawl away without realizing how they were railroaded.”

Dr. Mimless’ mention of Patsy Vargo refers to a Montana physician who was accused of “upcoding,” or charging for higher-priced services than those actually provided. Dr. Vargo’s criminal charges were dismissed by federal prosecutors without a trial.

Damages Upheld For Medicare “Whistle-Blower” Employee


When Illinois anesthesiologist Michael Brandon was fired he was sure it was in retaliation for his efforts to uncover possible Medicare fraud. He sued his employer, Anesthesia & Pain Management Associates, Ltd., and won a jury verdict. That was not, however, the end of the legal wrangling.

Dr. Brandon had worked for APMA for about three years when he began to suspect that the firm’s owners were falsifying Medicare reimbursement claims. With complicated Medicare reimbursement rules the opportunities for abuse were substantial.

Anesthesiologists and anesthetists work together, with the doctors overseeing the anesthesia. When one doctor supervises more than four anesthetists at a time, the doctor can not bill Medicare for his or her own services—Medicare assumes that the doctor is not able to directly supervise that many different procedures. When the doctor personally performs the work in a given surgery, there is no billing for an anesthetist. But if the anesthesiologist “medically directs” fewer than five anesthesia administrations at a time, both the anesthesiologist and the anesthetist can bill for the same procedure.

That Medicare policy explains what Dr. Brandon suspected was going on at his firm. He wondered whether some doctors might not be falsifying their records to indicate that they were “medically directing” procedures that they had actually performed themselves. Others might have altered records to indicate that they supervised fewer anesthesia administrations in order to bill for their own time as well as the anesthetists’.

When Dr. Brandon contacted Medicare to find out what the regulations provided, other doctors in the firm became upset that he might have given too much information to the government agency. A few weeks later Dr. Brandon was told his work was unsatisfactory (despite the fact that he had recently received a raise and promotion) and he was discharged.

Dr. Brandon sued his former employer for “retaliatory discharge,” a cause of action intended to protect so-called “whistle-blowers” from job actions. Illinois (like Arizona) is a “right to work” state, and ordinarily an employee can be discharged for any reason. Public policy, however, protects employees from being fired in retaliation for pointing out wrongdoing. The question in Dr. Brandon’s case was whether Illinois public policy protected him from discharge for pointing out violations of federal law and regulations.

The jury in Dr. Brandon’s case believed his side of the story and awarded him damages. The judge overseeing the trial, however, reversed the jury’s verdict, finding that Illinois public policy does not extend to protecting federal whistle-blowers. On appeal the U.S. Seventh Circuit Court of Appeals disagreed and reinstated the jury verdict; it also ordered a new trial on Dr. Brandon’s claim for punitive damages, which the trial judge had refused to submit to the jury. Brandon v. APMA, Ltd., January 18, 2002.

States Vigorously Prosecute Medicaid and Medicare Fraud


According to the federal government, as much as 10% of the funding for the joint federal/state Medicaid program is lost to fraud, mostly on the part of medical providers. The Medicare program is also deeply concerned about the possibility of fraudulent costs. Although both the Medicaid and Medicare programs aggressively investigate and prosecute fraud, few cases reach the appellate courts (and they are therefore seldom reported). The few trials that are reported can be attention-getters, as the case of Dr. Lorin H. Mimless illustrates.

Dr. Mimless was convicted in Suffolk County, Massachusetts on two counts of larceny and over 200 counts of Medicaid fraud. The charges were mostly based on overpayments as result of billings that indicated he saw patients for more than 14 hours a day. Last week, his convictions were upheld by the Massachusetts Appeals Court, Suffolk. Among other penalties, the doctor now faces one year in jail. He has also been disciplined by state medical boards in New York and Rhode Island, where his license has been suspended, as well as Massachusetts, where his license has been revoked.

Dr. Mimless appealed his Massachusetts convictions on several grounds, one of which was that trial publicity was mishandled by the trial court. Dr. Mimless claimed that Judge Vieri Volterra’s private communications with jurors regarding a story about the trial printed in the Boston Herald on its second day before the jury were improper because the judge acted in the absence of counsel, the parties, or a court reporter. The appellate court reasoned that the judge “could not be faulted for taking vigorous preventive action” by asking jurors about the Herald article, taking the paper from jurors who had copies and clipping out the trial piece.

Dr. Mimless also argued that ‘motive’ evidence regarding his personal expenditures — on luxury cars, expensive clothing, multiple homes — should have been excluded. Dr. Mimless claimed, too, that the judge’s “willful blindness” instruction to the jury — an instruction issued when a defendant appears to have purposefully avoided learning the facts of his situation — was improper. Evidence presented at the trial court demonstrated that while Dr. Mimless had in the past trained his staff in Medicaid billing procedure, he later hired secretaries with no billing experience and failed to correct staff billing errors. Commonwealth v. Mimless, January 9, 2002.

The Centers for Medicare and Medicaid Services (formerly HCFA) cites billing for over 24 hours in a day as one of the most common Medicaid rip-offs. Other common rip-offs include: billing for phantom patient visits; billing for goods and/or services not provided or old items as new; and paying kickbacks in exchange for referrals. For more information on Medicaid fraud, consider CMS’ website information at

In Arizona, there are some 44 statutes dealing with health care fraud. The Medicaid Fraud Control Unit is headed by Assistant Attorney General Pamela D. Svoboda, who can be reached at (602) 542-3881.

Note: Dr. Mimless has responded to this report. Read his comments in the March 25, 2002, Elder Law Issues.

“Trust Mill” Shut Down, But State Pays Parent Company


Fremont Life Insurance Company did a profitable business selling seniors living trusts. They used the usual pitch: avoid probate and the legal system, save on taxes and simplify your estate plan. Oh, and while we’re helping you plan your estate we think you should buy an annuity from our insurance company.

The State of California sued to stop Fremont Life and its parent company, Fremont General Corporation, from engaging in its deceptive business practices. The State alleged that agents of both Fremont Life and its parent practiced law without a license, and misled purchasers selling them insurance products without disclosing that there were substantial surrender charges.

California’s Attorney General argued that Fremont Life and Fremont General together operated an abusive “trust mill.” The practice is widespread throughout the country: seniors are lured to seminars about how to avoid probate and end up buying inappropriate and expensive annuities.

Fremont General acknowledged that it might lose the litigation, and offered to pay the State $2 million to avoid trial. The California Attorney General declined the offer and proceeded with the case. The State ultimately won a $2.5 million judgment against Fremont Life, along with an order that it return money to its annuity purchasers. The State’s claim against the parent company, however, failed; it did not show that Fremont General Corporation was really just another name for Fremont Life, or that Fremont General employees were involved in a conspiracy with Fremont Life agents.

Because the $2 million offer of judgment was more than the State recovered, court procedural rules permitted Fremont General to seek its court costs from the State. The reasoning behind the rules: when a plaintiff refuses what turns out to have been a reasonable offer of settlement the defendant should not be penalized by having to pay for unnecessary litigation. The effect in the Fremont General case was dramatic.

Court costs and expert witness fees incurred by Fremont General in its successful defense totaled over $880,000. The State of California was ordered to pay that amount, despite the fact that it had prevailed in its lawsuit against Fremont Life. The State appealed.

In its appeal the State argued that it would be against public policy to make the government pay for an action in which it sought to enforce rules against the unauthorized practice of law. The State also insisted that it could not have accepted the offer of settlement in any event, since it would not have known how much of the money should be repaid to the customers it alleged had been defrauded. Both arguments were rejected. People v. Fremont General Corp., June 14, 2001.

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