Feds Charge Silicon Valley Med Tech Executive with Massive COVID-19 Stockholder Swindle

The executive of a publicly traded Silicon Valley medical tech firm has been charged with swindling investors and insurers by misrepresenting the diagnostic capabilities of a test using finger stick blood collection. Hmmm. That sounds vaguely familiar. But while you’ve probably heard that plot line before, this case isn’t about Elizabeth Holmes and Theranos. It’s a brand new case, one that involves COVID-19 testing.

Theranos Meets COVID-19

The federal government has been sounding the warning on fraudulent coronavirus testing almost from the moment the pandemic started. (See, for example, “OIG Warns of COVID-19 Testing Scams,” LCA, March 30, 2020.) But while investigations and prosecutions were all but inevitable, the nature of this new federal case is somewhat surprising.

The defendant is Mark Schena, president of Sunnyvale, California-based Arrayit. According to a criminal complaint filed by the DOJ, Arrayit sought to cash in on the COVID-19 pandemic to sell more of its high-reimbursing allergy tests. Starting in March, the Schena and colleagues distributed marketing emails claiming that the company’s unapproved blood test based on finger prick technology, was capable of rapid novel coronavirus detection when used in combination with the allergies test kit.

But according to the DOJ, the test didn’t exist. It was only on the day that the emails were sent that Schena actually ordered the COVID-19 antigens. The company later developed and self-validated the test and submitted it the FDA for emergency use authorization (EUA). But the agency denied EUA clearance after finding the test’s performance was wanting.

The Market Falls for the Pitch

But, of course, investors didn’t know any of this. Nor did they know that Arrayit was actually broke. All they heard were the company’s claims that it was generating millions of dollars in billings for a rapid COVID-19 detection test. Thinking they had spotted a pearl in the midst of a pandemic, investors caused Arrayit’s stock price to double—albeit it remained a low-priced penny stock. The federal Securities and Exchange Commission (SEC) suspended trading for the stock for two weeks in April.

The DOJ Files Criminal Charges

On June 9, the DOJ dropped the hammer charging Schena with criminal securities fraud and conspiracy to commit healthcare fraud by transmitting email communications and marketing materials that misrepresented Arrayit’s ability to provide accurate, fast, reliable and cheap COVID-19 tests in compliance with applicable regulations and instructing its patient recruiters and medical clinics to add on or bundle Arrayit’s much more lucrative allergy test with its COVID-19 test regardless of medical necessity.

But there was more. The complaint also alleges that, as part of the scheme, Arrayit paid doctors kickbacks to use their provider numbers to charge insurance companies for patients the doctors had never seen. For example, one doctor told investigators that Arrayit used his provider identifier number to receive insurance reimbursement for allergy tests from patients the doctor had never treated. An Arrayit executive paid the doctor illegal kickbacks from the reimbursement in exchange. Investigators said Medicare paid Arrayit $290,000 and private insurance companies another $2 million for medically unnecessary tests generated as the result of kickbacks.

In a separate action, the SEC charged a penny stock trader with falsely claiming Arrayit had an approved COVID-19 test. SEC said the claim was made to drive up the share price of Arrayit, without disclosing his stake in the company. The trader allegedly made $137,000 in six weeks.

Takeaway

 COVID-19 detection tests don’t command very high reimbursement rates. That makes it tempting to bundle them with higher-paying assays. The fact that there’s also a global pandemic and crying need for tests capable of rapid and accurate COVID-19 detection creates the opportunity to take an otherwise “pedestrian” healthcare fraud scam to the level of Wall Street swindle and massive securities fraud a la Theranos.

SIDEBAR

Former Illumina Accountant Settles Insider Trading Claims with SEC

Speaking of alleged securities fraud committed by insiders at publicly traded lab companies, on June 5, the U.S. Securities and Exchange Commission (SEC) agreed to settle with a former Illumina accountant accused of insider trading. The SEC claimed that Jana Kiena shorted Illumina stock after receiving information from an accounting manager that the firm would post disappointing revenues in the second quarter of 2019. But because Ms. Kiena self-reported her trading within a month, she was able to cut a pretty good settlement deal, including disgorgement of the $249,228 she earned in profits from the trading but a relatively low civil penalty of $124,613.