Former Executive of Assisted Living Provider Challenges $4.2 Million SEC-Enforced Penalty for Falsifying Occupancy Data.

Thursday, March 10, 2016
By Miles Indest, J.D./M.B.A candidate, and George F. Indest III, J.D., M.P.A., LL.M., Board Certified by The Florida Bar in Health Law


A former executive of a private equity-backed assisted living provider is aggressively protesting a $4.2 million penalty over an alleged healthcare-related fraud scheme, challenging the penalty in both administrative proceedings and the United States Supreme Court.


Falsifying Occupancy Data Results in $4.2 Million SEC-Enforced Penalty.


On December 3, 2014, the Securities and Exchange Commission (SEC) instituted administrative proceedings against Assisted Living Concepts Inc.’s (ALC) ex-CEO Laurie A. Bebo for falsifying occupancy data to meet minimum occupancy requirements. The false occupancy data allowed ALC to meet covenant requirements on its lease and avoid triggering a default. Bebo allegedly conducted this scheme with ALC’s ex-CFO John Buono, falsely portraying family and friends as senior housing occupants. According to the SEC, ALC allegedly included between 45 and 103 nonresidents in its compliance calculations, including a 7-year-old nephew of one of Bebo’s friends.


Buono settled with the SEC without admitting or denying wrongdoing.

The settlement required that Buono pay a $100,000 fine and prohibits him from acting as an accountant before the SEC or serving as an officer or director of a public company. In contrast, Bebo hotly contested the SEC’s allegations. On October 2, 2015, Administrative Law Judge Cameron Elliot determined that Bebo must pay $4.2 million in civil penalties and is barred from serving in officer and director positions. Thereafter, Bebo filed a petition for review of Judge Elliot’s decision with the SEC, while filing a separate constitutional challenge to the decision in a federal court.


Bebo’s Battles: SEC Rebukes Overlong Brief and Federal Court Denies Injunction.

Bebo has seen little success in challenging the $4.2 million penalty. The SEC recently rebuked Bebo for filing a 43,251-word motion for reconsideration, exceedingly longer than the SEC’s 7,000 word limit. This overlong filing occurred after the SEC had already granted Bebo an increased word limit for her opening brief of 21,000 words instead of 14,000.

Additionally, the federal court denied Bebo’s request for an injunction regarding her constitutional challenge of Judge Elliot’s decision, holding that it did not have subject-matter jurisdiction to hear the case. The United States Court of Appeals for the Seventh Circuit upheld this decision, and subsequently refused a rehearing in November 2015. On February 3, 2016, Bebo petitioned the Supreme Court to review her lawsuit challenging the constitutionality of the SEC administrative court, among other things. It is uncertain whether the Supreme Court will agree to review her case.


False Compliance with Private Contracts and Leases May Be Material To Investors.


These events raise important considerations for healthcare organizations and providers. First, the SEC may enforce significant penalties for fraud related to matters that hospitals and executives assume are private, contractual problems, such as lease obligations. For example, Bebo unsuccessfully argued that ALC’s lease was not material to investors. The SEC disagreed and determined that a reasonable investor would have considered the falsity of occupancy data and misrepresenting compliance with the lease to be important.


Healthcare Organizations Must Strengthen Internal Reporting and Compliance.

Second, healthcare organizations must have a reliable internal reporting and compliance program for two types of fraud: (1) fraud against the government; and (2) fraud against investors. While the False Claims Act provides the main legal authorization for whistleblowers to report healthcare- related fraud against the government, the Dodd-Frank Wall Street Reform and Consumer Protection Act provides a separate mechanism for promoting whistleblower activities, when the fraud affects investors. Pub. L. No. 111-203, 124 Stat. 1376 (2010). Examples like Bebo’s alleged occupancy scheme demonstrate that publicly traded healthcare companies are not immune from executives committing fraud. Healthcare organizations can mitigate the risk of SEC enforcement actions by proactively encouraging internal reporting and self-policing.


Contact Health Law Attorneys Experienced in Representing Health Care Professionals and Providers.


At the Health Law Firm we provide legal services for all health care providers and professionals. This includes physicians, nurses, dentists, psychologists, psychiatrists, mental health counselors, Durable Medical Equipment suppliers, medical students and interns, hospitals, ambulatory surgical centers, pain management clinics, nursing homes, and any other healthcare provider. We represent facilities, individuals, groups and institutions in contracts, sales, mergers and acquisitions.

The lawyers of The Health Law Firm are experienced in both formal and informal administrative hearings and in representing physicians in investigations and at Board of Medicine and Board of Osteopathic Medicine hearings. We represent physicians accused of wrongdoing, in patient complaints and in Department of Health investigations. To contact The Health Law Firm, please call (407) 331-6620 and visit our website at www.ThehealthLawFirm.com.


Sources:

Germaine, Carmen. “SEC Chastises In-House Challenger For Overlong Brief.” Law360 (February 18, 2016). Web.


About the Authors: Miles Indest, J.D./M.B.A. candidate, will graduate in May 2016 from Tulane University Law School and the Freeman School of Business. George F. Indest III, J.D., M.P.A., LL.M., is Board Certified by The Florida Bar in Health Law. He is the President and Managing Partner of The Health Law Firm, which has a national practice. Its main office is in the Orlando, Florida area. www.TheHealth Lawfirm.com The Health Law Firm, 1101 Douglas Ave., Altamonte Springs, FL 32714, Phone; (407) 331-6620.


KeyWords: Assisted Living Center, Chief Executive Officer, Chief Financial Officer Securities and Exchange Commission (SEC), fraud, falsifying occupancy rate, federal Administrative Law Judge (ALJ) attorney, federal, Whistleblower, Dodd-Frank Act, False Claims Act, defense lawyer, health law, Florida health law attorney, The Health Law Firm.

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3/10/2016

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