Consultant fabricates $30M in VA business, Rotech says

Wednesday, July 31, 2002

ORLANDO, Fla. - A rogue consultant at Rotech Healthcare allegedly lined his pockets with greenbacks - or intended to - by concocting an elaborate swindle that fabricated $30 million in non-existent sales of DME to the Veteran's Affairs.

The company's investigation is ongoing, but it appears the VA was never billed for any of the equipment and that Rotech was the only victim in the scheme, which took place over about 18 months, stretching back to late 2000, said Rotech CEO Steve Linehan.

The $30 million in non-existent VA business represents about $12 million in inventory ordered by the consultant. The company has recovered $8 million to $9 million of the inventory from warehouses around the country, where the consultant apparently stashed it. In many cases, the inventory is "brand new, shrink wrapped and probably, in many cases, capable of being returned to the manufacturer for credit," Linehan said.

The company, which did not name the consultant, is searching for the remaining inventory.

Rotech paid the consultant, a former employee, an annual fee in the "low six figures," and he received no bonuses or incentives based on the amount of business he brought in. As such, it's uncertain exactly how he profited from the scheme (For example, did he plan to sell the equipment?). Rotech officials declined to discuss that issue until completing the investigation, probably by mid August.

Because Rotech has already booked the $30 million in non-existent revenue, the company will probably take a one-time charge against this year's earnings or restate past financials to balance its books, Linehan said.

With Rotech recently emerging from bankruptcy and public concern about shady accounting practices at Enron, Worldcom and other companies, word of the scam comes at a bad time. However, since the fraud appears contained to bulk sales of DME to the VA, which represent only 3% of Rotech's business, there should be little if any long-term fallout for the company, say industry watchers.

"If the government never paid for anything, there is no federal fraud," said healthcare consultant Schuyler Hoss. "It sounds like Rotech did a good job coming forth and identifying the problem. It's not a killer."

Rotech uncover the fraud early this summer when it stumbled upon a forged $5.4 million check, following increased scrutiny of outstanding payments on phoney sales of bulk equipment to the VA, Linehan said.

The swindle apparently involves no other Rotech employees or the company's core Medicare, Medicaid or insurance business, which generates 92% of Rotech's revenue, Linehan said.

Rotech officials met with the alleged scheister for more than two hours in early July, but declined to say what they discussed.

"He is still in the country," Linehan said. "We've notified the VA and our employees that this person is no longer affiliated with us in anyway and directed people not to have communication with him."

He added that "we've got a lot of work to do to get to the end of this investigation. We may uncover another issue or two before this thing is completed. We don't' believe they will be huge or material."

Company officials declined to say if they would seek criminal charges against the employee.

"There is obviously a likely loss to the company, and we are trying to leave no stone unturned in finding ways to recover," said Rebecca Meyers, Rotech's chief legal officer. "We're checking every possibility, insurance coverage, deep pockets."

Analysts who participated in a July 3 conference call with Linehan and other company officials, appeared incredulous that it took Rotech 18 months to uncover the scheme. Analysts questioned whether Rotech possesses adequate internal safeguards.

Linehan countered by calling it a "very sophisticated fraud that included perjury and impersonation of government officials" as well as the production of invoices and receipts for VA storage space. He also said the Rotech would work to improve its internal controls to prevent such schemes from happening again. HME