DOJ Charges Healthcare CEO with Criminal Securities and Healthcare Fraud
In 2008, Rahm Emanuel, then-President Obama’s chief of staff, famously said, “You never want a serious crisis to go to waste. I mean, it’s an opportunity to do things that you think you could not do before.” However poorly phrased, generations of political and business leaders have understood the kernel of truth in his admonition.
So have scammers and rip-off artists.
We have been following the burgeoning industry of COVID-19 fraudsters and highlighting the efforts of law enforcement to drive them from their shady corners. The latest such corner to see the light of day is occupied by Arrayit Corporation, a medical technology company in Sunnyvale, California.
Arrayit CEO Misrepresentations and False Claims
On Tuesday, federal authorities unsealed charges against Arrayit’s president, Mark Schena, alleging that he attempted to mislead investors and inflate the company’s stock price with fraudulent claims about the company’s coronavirus and other testing capabilities. The SEC suspended trading in Arrayit in April; Schena now faces criminal charges of securities fraud.
In addition, Schena has been charged with one count of conspiracy to commit healthcare fraud arising from allegations that as far back as 2018, Schena was paying kickbacks to doctors and others to perform and submit claims for medically unnecessary allergy tests, claiming that Arrayit’s “microarray technology” allowed allergy testing for up to 120 allergens based only on a drop of blood – claims that are reminiscent of the discredited claims of Theranos.
At the same time, Schena allegedly tried to pump up Arrayit’s stock price by misrepresenting Arrayit’s allergy test sales, financial condition, and future prospects, using social media to promote partnerships with Fortune 500 companies, government agencies, and public institutions that did not exist or were of little value.
But when COVID-19 hit, Schena saw a crisis he couldn’t let “go to waste.” In March 2020, Schena began to claim Arrayit could test for the coronavirus, allegedly misrepresenting the company’s capabilities and prospects to potential investors regarding the tests. Schena allegedly likened the switch from allergy testing to coronavirus testing to a pastry chef who switches from selling “strawberry pies” to selling “rhubarb and strawberry pies.” The truth, however, was more bitter. Arrayit’s COVID-19 tests were unproven and questions lingered about their accuracy.
Still worse, though, was how Arrayit allegedly tried to marry its COVID-19 and allergy-testing business lines. Preying on the fears of those most vulnerable to COVID-19, Arrayit allegedly targeted the elderly and disabled for COVID-19 testing, only to turn around and use their insurance information to submit claims to Medicare for unrelated—and far more expensive—allergy tests.
Finance aficionados, of course, may be asking: OK, fraud’s no good, but did Schena’s scheme work? It did, sort of. Arrayit’s stock price doubled in mid-March—from $0.02 to $0.04 a share! And, for its fraudulent tests, the criminal case alleges that Schena and his confederates submitted $69 million in false and fraudulent claims for allergy and coronavirus testing, including $5.9 million in fraudulent charges submitted to the federal Medicare program.
Individual Charged in Arrayit Pump-and-Dump Scheme
Interestingly, though, Schena may have had some help in pumping up the stock price. On the same day DOJ announced the criminal charges against Schena, the SEC announced a separate lawsuit charging Jason C. Nielsen, a penny-stock trader in nearby Santa Cruz, California, with conducting a fraudulent pump-and-dump scheme in Arrayit’s stock. The SEC alleges that, starting in March 2020, Nielsen tried to drive Arrayit’s stock price up using online posts encouraging investors to purchase shares, repeating the false assertion that Arrayit had an approved COVID-19 test, and creating the false impression that the market had a high demand for Arrayit stock by “spoofing” the company’s stock (which means Nielsen placed and subsequently canceled several large share purchases).
DOJ’s criminal complaint does not mention Nielsen. And the SEC’s civil complaint does not mention Schena. But DOJ’s press release notes that DOJ “appreciates the assistance of the Securities and Exchange Commission.” Coordinated actions, perhaps?
Reporting Fraud Related to COVID-19
Fraud schemes related to COVID-19 will continue to be a fixture on the scene for the foreseeable future. With schemes so varied, and their details so often buried, whistleblowers are essential to rooting them out. With increased government enforcement, now is the time for would-be whistleblowers to speak up.
- Think you have a whistleblower case?
- Whistleblower FAQs
- Financial and Investment Fraud
- COVID-19 Fraud
- Contact us for confidential consultation
Tagged in: Catch of the Week, COVID-19, Criminal Proceedings, Financial and Investment Fraud, Healthcare Fraud, Laboratory and IDTF, Lack of Medical Necessity, Market Manipulation and Trading Violations, Misrepresentations, Securities Fraud,