Labs In Court: A roundup of recent cases and enforcement actions involving the diagnostics industry

Theranos & Its CEO Settle Stock Fraud Charges with SEC
Case: Having settled with CMS, Walgreen’s and the Arizona State Attorney General, Theranos has made peace with what may be the scariest of all its legal adversaries: the US Securities Exchange Commission. On March 14, it was announced that Theranos and its founder and CEO, Elizabeth Holmes, agreed to settle securities fraud charges for making false claims about its prickless blood analyzing technology to raise over $700 million in investment capital. False claims cited included predictions that the analyzer would generate over $100 million in 2014 revenues (actual revenues came in just $99.9 million short of those projections) and falsely stating that the product was used on the battlefield in Afghanistan and in medevac helicopters.

Significance: Under the settlement, Holmes will pay a $500,000 penalty, disgorge the 18.9 million shares in Theranos stock allegedly acquired via the fraud and give up her voting control over the company. Holmes has also been barred for serving as an officer or director of a publicly traded company for 10 years. Not included in the settlement is Theranos’s former President Ramesh Balwani who will get the chance to prove his innocence in a US California District Court.

Pain Management Doc Gets Jail + $8.7 Million Fine for Opioid Pill Mill Scam
Case: Another month, another physician busted for opioid prescription abuses. The 62-year-old physician caught up in this case ran his pain clinic as a pill mill to pay for a Florida condo, squash court and other accoutrements of his lavish lifestyle. One of Massachusetts’s leading oxycodone prescribers, the doctor falsely billed Medicare and private insurers for millions of dollars in opioid-related services, including urine drug tests, that were not provided, medically necessary, reliable or even safe over a three-year period. In addition to 27 counts of health care fraud, the doctor pleaded guilty to16 counts of money laundering and one count of mail fraud for good measure. He will have to pay restitution of $8.725 million and spend eight years in a presumably squash court-less prison.

Significance: While not necessarily the central part of the case, the urine drug testing abuses the doctor pleaded guilty to committing are particularly lurid, including causing urine samples to be stored for weeks and up to three months in an unrefrigerated sunlit space in his lab. Beyond the stench, the practice left the samples degraded and worthless. But the doctor still made his staff test the samples—and then billed Medicare for the test results. And questionable sample storage was just the tip of the iceberg. His other testing and Medicare billing violations included:

  • Ordering staff to run every patients’ urine sample on two machines, each of which used the same scientific testing methodology;
  • Causing every sample to be chemically confirmed even when he did not even know the results of the initial screening test;
  • Running tests on chemical analyzers that had not been properly calibrated and validated.

Precipio Inc. Settles Shareholders’ Suit for $1.9 Million
Case: Crede Capital Group invested $5 million in Transgenomic in exchange for stocks and warrants. In June 2017, Transgenomic merged with molecular DX firm Precipio and the surviving company, Precipio Inc., assumed Transgenomic’s debts. Crede then exercised its Transgenomic warrants. But when Precipio Inc. allegedly did not make the required cash payments and Crede sued for $2 million in damages. Rather than fight it out in court, the parties have agreed to settle the case for $1.925 million in cash, stock or a combination of both to be paid out over a 15-month period.

Significance: The settlement is just one of the things the newly merged firm has done to reduce Transgenomic’s roughly $19+ million pre-merger debt to $7 million. News of the debt reduction, which was included as part of Precipio Inc.’s most recent Securities Exchange Commission public filing, sent shares up nearly 30% to $.66.

38 and Counting. . . BLS Scandal Takes Down Another Physician
Case: A New Jersey internist is the latest physician convicted in the massive Biodiagnostic Laboratory Service (BLS) bribery scheme. The 57-year-old physician pleaded guilty to accepting over $104K in bribes from BLS employees over a three-year span in return for generating more than $1.3 million in illegal test referrals to BLS labs. The sentence: 18 months in prison, one year of supervised release and a relatively modest $7,500 in fines. Of course, he will also have to forfeit the $104,611 in bribes he took.

Significance: The most recent BLS “body count”: 53 convictions, including 38 physicians and $13+ million recovered via forfeiture. The latter total gains perspective when you consider that the BLS scandal resulted in over $100 million in illegal payments to Medicare and private insurers.


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