Private Equity Loses Its Shield as U.S. Cracks Down on Fraud
23 Feb 2021

Insiders said one company pushed unnecessary pain medication to the U.S. military; another promoted an unproven treatment for children with cancer; and a third used unlicensed counselors to treat poor people with mental illness.

In all three cases, taxpayers footed the bill — and, before long, government authorities came looking for the companies’ owners: private equity.

Long insulated from legal liabilities at the companies they buy, these investment firms increasingly are being dragged into the mess when their charges get in trouble. A key reason: private equity has pushed into businesses that rely on taxpayer money, in particular, health care.

That has exposed them to so-called false-claims actions, where corporate whistle-blowers bring allegations of civil fraud to the attention of the federal government. So far, only a handful of cases have emerged. But experts expect more, given the vast potential for fraud in the expansive federal relief programs put in place to help the economy through the pandemic. They also expect the Biden administration to go after deep pockets on Wall Street.

“The ultimate safeguard you have is the threat of enforcement,” said William McSwain, who left his post as Philadelphia’s top federal prosecutor in January to join law firm Duane Morris. “That won’t change under President Biden; it will intensify.”

The government is now going after bad actors after rushing billions of dollars out the door to keep companies and the health-care system afloat during the pandemic. Among other things, it is investigating whether businesses lied about needing loans under the Paycheck Protection Program, a relief effort that largely attempted to exclude private equity-backed companies.

In June, Ethan Davis, who was then the second-ranking official at the U.S. Department of Justice’s civil division, warned in a speech that private equity firms would be taken to task if they knowingly participated in relief fraud.

The government has the option to join whistle-blowers under the False Claims Act to hold companies it does business with accountable for fraudulent billing.

In 2018, Massachusetts Attorney General Maura Healey filed a civil fraud complaint against private equity firm HIG Capital, alleging it had a role in allegations related to its behavioral-health company, Community Intervention Services Inc.

Christine Martino-Fleming, who worked as a training coordinator, said in her complaint that an HIG staffer ignored her concerns about unsupervised, unlicensed therapists that treated mental-health patients.

“The pressure to grow was astronomical compared to what it had been” before HIG purchased the company, another staffer testified, according to the lawsuit.

By Sabrina Willmer, Bloomberg, 22 February 2021

Read more at Bloomberg

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